-----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, EwLPKAVymKh4JiepbP9uQ6BhjY7bZZIBAIvWQ/Rl4UX1G5ThgHj40M3STkVWKHCN yhGc89RH/GCA6Ed/oapX0A== 0000950168-99-000930.txt : 19990330 0000950168-99-000930.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950168-99-000930 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WACHOVIA CORP/ NC CENTRAL INDEX KEY: 0000774203 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561473727 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09021 FILM NUMBER: 99576262 BUSINESS ADDRESS: STREET 1: 100 N MAIN ST STREET 2: P O BOX 3099 CITY: WINSTON SALEM STATE: NC ZIP: 27150 BUSINESS PHONE: 9107705000 MAIL ADDRESS: STREET 1: 100 NORTH MAIN ST STREET 2: P O BOX 3099 CITY: WINSTON SALEM STATE: NC ZIP: 27150 FORMER COMPANY: FORMER CONFORMED NAME: FIRST WACHOVIA CORP DATE OF NAME CHANGE: 19910603 10-K 1 WACHOVIA 10-K 1998 FORM 10-K United States Securities and Exchange Commission Washington, DC 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 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, 27150, (336) 770-5000 191 Peachtree Street NE, Atlanta, Georgia, 30303, (404) 332-5000 Securities registered pursuant to Section 12(b) of the Act: Common Stock-$5.00 par value, which is registered on the New York Stock Exchange. As of February 4, 1999, Wachovia Corporation had 203,240,721 shares of common stock outstanding. The aggregate market value of Wachovia Corporation common stock held by nonaffiliates on February 4, 1999 was approximately $17.241 billion and the number of shares held by nonaffiliates was 203,137,636. 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. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Wachovia Corporation's Proxy Statement for its 1999 Annual Shareholder's Meeting are incorporated by reference into Part III of this report. Portions of Wachovia Corporation's Annual Report to Shareholders (the "Annual Report") for the year ended December 31, 1998 (filed herewith as Exhibit 13) are incorporated by reference into Parts I and II as indicated below. Except for parts of the Annual Report expressly incorporated herein by reference, this Annual Report is not to be deemed filed with the Securities and Exchange Commission.
PART I PAGE Item 1 - Business: Description of Business 3, 26-59, 89-91, 95-96 Subsidiaries of Wachovia Corporation 93 Average Balance Sheets/Interest/Rates 84-85, 86-87, 88 Volume and Rate Variance Analysis 32, 59 Securities 34, 69 Loans 33, 40, 70, 83 Allowance for Loan Losses and Loan Loss Experience 41-43, 59 Deposits 35-36, 71, 84-85, 88 Return on Equity and Assets 26, 88 Short-Term Borrowed Funds 36 Item 2 - Properties 93 Item 3 - Legal Proceedings 77 Item 4 - Submission of Matters to a Vote of Security Holders None
PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 90-91 Item 6 - Selected Financial Data 26 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 26-59, 95-96 Item 7a - Quantitative and Qualitative Disclosures About Market Risk 37-39 Item 8 - Financial Statements and Supplementary Data 60-82 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10 - Directors and Executive Officers of the Registrant The names, ages and positions of the executive officers of Wachovia as of January 31, 1999 are shown below along with their business experience during the past five years and the year of their employment with Wachovia and subsidiaries. Officers are elected annually by the Board of Directors and hold office for one year or until their successors are chosen and qualified. There are no family relationships between any of them, nor is there any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The required information for the directors is included in the Proxy Statement.
Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ---------------------------- L. M. Baker, Jr., 56 Chairman of the Board of Wachovia Bank, N.A. since April 1998; President and Chairman of the Board Chief Executive Officer of Wachovia Bank, N.A. since June 1997; Chief Operating since April 1998; Officer of Wachovia Corporation, February-December 1993; Executive Vice Director, President since President of Wachovia Corporation until January 1993; President and Chief 1993 and Chief Executive Executive Officer of Wachovia Corporation of North Carolina, January 1990-March Officer since January 1994 1993. President and Chief Executive Officer of Wachovia Bank of North Carolina, N.A., January 1990-May 1993. Employed in 1969. Mickey W. Dry, 59 Executive Vice President of Wachovia Corporation, November 1989-October 1997; Senior Executive Vice Senior Executive Vice President of Wachovia Bank, N.A. since July 1997; President since October 1997 Executive Vice President of Wachovia Bank of North Carolina, N.A., October and Chief Credit Officer 1989-July 1997. Employed in 1961. since November 1989 Hugh M. Durden, 55 President of Wachovia Corporate Services, Inc. since July 1994; President of Executive Vice President Wachovia Trust Services, Inc., January -June 1994; Executive Vice President of since 1994 Wachovia Bank, N.A.; Western Division Executive, Wachovia Bank of North Carolina, N.A., 1991-1994; Employed in 1972. Stanhope A. Kelly, 41 Senior Vice President of Wachovia Corporation, 1996-1997; Regional Vice Executive Vice President President of Wachovia Bank of North Carolina, N.A., 1994-1996. Employed in 1980. since October 1997 Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ---------------------------- Robert S. Kniejski, 43 Executive in charge of Wachovia Corporation's Personal Financial Services Group Executive Vice President since 1995 (Chairman of Wachovia Investments, Inc. and Wachovia Insurance since October 1997 Services, Inc., Director and President of Wachovia Trust Services, Inc.); Senior Vice President of Wachovia Corporation, 1996-1997; Senior Vice President/Group Executive of Wachovia Investments, Inc., 1993-1995; Senior Vice President/Group Executive of Wachovia Bank, N.A. since 1991. Employed in 1987. Walter E. Leonard, Jr., 53 Executive Vice President of Wachovia Corporation, October 1988-October 1997; Senior Executive Vice Senior Executive Vice President of Wachovia Bank, N.A. since July 1997; President since October 1997 Executive Vice President of Wachovia Bank of Georgia, N.A. until June 1997; President of Wachovia Operational Services Corporation since 1988. Employed in 1965. Kenneth W. McAllister, 50 Executive Vice President of Wachovia Corporation, January 1994-October 1997. Senior Executive Vice Employed in 1988. President since October 1997 and General Counsel since 1988 Robert S. McCoy, Jr., 60 Executive Vice President of Wachovia Corporation, January 1992-October 1997; Senior Executive Vice Senior Executive Vice President of Wachovia Bank, N.A. since July 1997; President since October 1997 Executive Vice President of Wachovia Bank of North Carolina, N.A., 1992-1997; and Chief Financial Officer Chief Financial Officer of Wachovia Bank of North Carolina, N.A. since 1992. since September 1992. Employed in 1984. John C. McLean, Jr., 50 Executive in charge of Wachovia Corporation's capital markets and investment Executive Vice President banking activities since September 1997 (Director of Wachovia Capital Markets, since October 1997 Inc. and related subsidiaries since September 1997; President and CEO September 1997-April 1998); Senior Vice President of Wachovia Corporation, 1993-1997; Division Executive for Consumer Credit and Emerging Businesses, 1996-1997; Comptroller of Wachovia Corporation, 1993-1996; Senior Vice President of Wachovia Bank, N.A., 1990-1993. Employed in 1975. Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ------------------------------- G. Joseph Prendergast, 53 Executive Vice President of Wachovia Corporation, October 1988-October 1997; Senior Executive Vice Senior Executive Vice President of Wachovia Bank, N.A. since July 1997; Chairman President since October 1997 of Wachovia Bank of Georgia, N.A., January 1994-June 1997; Chairman of Wachovia Bank of South Carolina, N.A., July 1995-June 1997; President and Chief Executive Officer of Wachovia Bank of Georgia, N.A., January 1993-January 1995; President and Chief Executive Officer of Wachovia Corporate Services, Inc. until July 1994; President and Chief Executive Officer of Wachovia Corporation of Georgia, January 1993-March 1993; Employed in 1973. Donald K. Truslow, 40 Senior Vice President of Wachovia Corporation, April 1996-October 1997; Executive Vice President Executive Vice President, Wachovia Corporate Services, September 1995-April since October 1997, Comptroller 1996; Executive Vice President and Chief Credit Officer, Wachovia Bank of South since June 1996 and Treasurer Carolina, N.A., January 1992-Septermber 1995. Employed in 1980. since January 1998 Beverly B. Wells, 48 Manager of Consumer Lending and Emerging Businesses since September 1997; Executive Vice President President of Wachovia Bank Card Services, 1994-1997; Manager of Wachovia since October 1997 Treasury Services, 1993-1994; Employed in 1976.
During the past five years, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to an evaluation of the ability or integrity of any of Wachovia's executive officers, directors, or any persons nominated to become directors. Item 11 - Executive Compensation Proxy Statement Item 12 - Security Ownership of Certain Beneficial Owners and Management Proxy Statement Item 13 - Certain Relationships and Related Transactions Proxy Statement PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K Exhibits See Separate Index Financial Statement Schedules None Reports on Form 8-K 94 SIGNATURES Pursuant to the requirements to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on January 22, 1999. WACHOVIA CORPORATION ROBERT S. McCOY, JR. - -------------------- Robert S. McCoy, Jr. Senior Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on January 22, 1999.
L. M. BAKER, JR. - ---------------- The Directors of Wachovia Corporation (listed below) have executed a power of L. M. Baker, Jr. attorney appointing Kenneth W. McAllister, their attorney-in-fact, empowering Chairman of the Board, President and him to sign this report on their behalf: Chief Executive Officer ROBERT S. McCOY, JR. - ------------------- JAMES S. BALLOUN W. HAYNE HIPP Robert S. McCoy, Jr. JAMES F. BETTS ROBERT A. INGRAM Senior Executive Vice President PETER C. BROWNING GEORGE R. LEWIS and Chief Financial Officer JOHN T. CASTEEN, III ELIZABETH VALK LONG JOHN L. CLENDENIN JOHN G. MEDLIN, JR. LAWRENCE M. GRESSETTE, JR. LLOYD U. NOLAND, III DONALD K. TRUSLOW THOMAS K. HEARN, JR. SHERWOOD H. SMITH, JR. - ----------------- GEORGE W. HENDERSON, III JOHN C. WHITAKER, JR. Donald K. Truslow Executive Vice President, Comptroller and Treasurer KENNETH W. McALLISTER ---------------------- Kenneth W. McAllister Attorney-in-Fact
Exhibits - --------
2.1 Agreement and Plan of Merger, dated as of October 27, 1998 by and between Wachovia Corporation and Interstate/Johnson Lane, Inc. (Exhibit 2.1 to Form S-4 Registration Statement of Wachovia Corporation, dated December 14, 1998, File No. 333-68823*). 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 Form S-4 Registration Statement of Wachovia Corporation dated December 14, 1998, File No. 333-68823*). 4 Instruments defining the rights of security holders, including indentures - Wachovia Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of security holders that are not required to be filed. 4.1 Articles IV, VII, IX, X and XI of the registrant's Amended and Restated Articles of Incorporation (Included in Exhibit 3.1 hereto). 4.2 Article 1, Section 1.8, and Article 6 of the registrant's Bylaws (Included in Exhibit 3.2 hereto). 4.3 Indenture dated as of May 15, 1986 between South Carolina National Corporation and Morgan Guaranty Trust Company of New York, as Trustee, relating to $35,000,000 principal amount of 6 1/2% Convertible Subordinated Debentures due in 2001 (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*).
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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*).
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10.6** Form of Employment Agreement between Wachovia Corporation and 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*).
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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*) 10.28 Form 11-K of the Retirement Savings and Profit Sharing Plan of Wachovia Corporation, to be filed as an amendment to Form 10-K for the year ended December 31, 1998. 11 Computation of Earnings Per Share (Note P on page 79 of the 1998 Annual Report Exhibit 13 hereto*). 12 Statement setting forth computation of ratio of earnings to fixed charges. 13 Wachovia Corporation 1998 Annual Report with the Report of Independent Auditors therein being manually signed in one copy by Ernst & Young LLP. (Except for those portions expressly incorporated by reference herein, this report is not "filed" as a part of this Report on Form 10-K.) 21 List of subsidiaries (Page 93 of the 1998 Annual Report (Exhibit 13 hereto)*) 23.1 Consent of Ernst & Young LLP. 23.2 Consent of KPMG LLP. 24 Power of Attorney 27 Financial Data Schedule (for SEC purposes only). 99.1 Opinion of KPMG LLP, Independent Accountants, on the financial statements of Central Fidelity National Bank and subsidiaries, a wholly-owned subsidiary of Wachovia Corporation. 99.2 Opinion of KPMG LLP, Independent Accountants, on the financial statements of Central Fidelity Banks, Inc. and subsidiaries.
* Incorporated by reference. ** Management contract or compensatory plan or arrangement of the corporation required to be filed as an exhibit. 4 EX-12 2 EXHIBIT 12 EXHIBIT 12 WACHOVIA CORPORATION RATIO OF EARNINGS TO FIXED CHARGES
(A) Excluding interest on deposits 1998 1997 1996 1995 1994 ------------ ------------- ------------ ------------- ------------ Earnings: Income before income taxes $1,303,781 $869,119 $1,100,308 $1,023,290 $885,402 Less capitalized interest (593) (167) - (1,530) (362) Fixed charges 976,201 884,806 900,277 885,040 603,157 ------------ ------------- ------------ ------------- ------------ Earnings as adjusted $2,279,389 $1,753,758 $2,000,585 $1,906,800 $1,488,197 ============ ============= ============ ============= ============ Fixed charges: Interest on purchased and other short term borrowed funds $563,846 $478,162 $482,236 $527,765 $318,301 Interest on long-term debt 390,662 387,107 399,796 340,211 267,841 Portion of rents representative of the interest factor (1/3) of rental expense 21,693 19,537 18,245 17,064 17,015 ------------ ------------- ------------ ------------- ------------ Fixed charges $976,201 $884,806 $900,277 $885,040 $603,157 ============ ============= ============ ============= ============ Ratio of earnings to fixed charges 2.33 X 1.98 X 2.22 X 2.15 X 2.47 X (B) Including interest on deposits: Adjusted earnings from (A) above $2,279,389 $1,753,758 $2,000,585 $1,906,800 $1,488,197 Add interest on deposits 1,359,705 1,303,549 1,203,739 1,143,179 782,864 ------------ ------------- ------------ ------------- ------------ Earnings as adjusted $3,639,094 $3,057,307 $3,204,324 $3,049,979 $2,271,061 ============ ============= ============ ============= ============ Fixed charges: Fixed charges from (A) above $976,201 $884,806 $900,277 $885,040 $603,157 Interest on deposits 1,359,705 1,303,549 1,203,739 1,143,179 782,864 ------------ ------------- ------------ ------------- ------------ Adjusted fixed charges $2,335,906 $2,188,355 $2,104,016 $2,028,219 $1,386,021 ============ ============= ============ ============= ============ Adjusted earnings to adjusted fixed 1.56 X 1.40 X 1.52 X 1.50 X 1.64 X charges
EX-13 3 EXHIBIT 13 - -------------------------------------------------------------------------------- 1998 ANNUAL REPORT AND FORM 10-K [WACHOVIA LOGO APPEARS HERE] - -------------------------------------------------------------------------------- ------------------------------------------------------------------------------ Contents Financial Highlights ..............................................2 Wachovia Corporation ..............................................3 Selected Year-End Data ............................................3 Forward-Looking Statements ........................................3 Letter to Shareholders ............................................4 Special Section -- Continuous Relationship Management .............9 Management's Discussion and Analysis of Financial Condition and Results of Operations ...............26 Results of Operations -- 1998 vs. 1997 ...........................27 Year 2000 Discussion .............................................46 Shareholders' Equity and Capital Ratios ..........................50 Fourth Quarter Analysis ..........................................53 Results of Operations -- 1997 vs. 1996 ...........................57 Management's Responsibility for Financial Reporting ..............60 Report of Independent Auditors ...................................60 Financial Statements .............................................61 Six-Year Financial Summaries .....................................83 Historical Comparative Data ......................................89 Stock Data .......................................................90 1998 Form 10-K ...................................................92 Supervision and Regulation .......................................95 Directors and Officers ...........................................97 Shareholder Information ..........................................98 ------------------------------------------------------------------------------ 1 - ------------------------- Financial Highlights - -------------------------------------------------------------------------------- Percent 1998 1997 Change ------- -------- ------- Earnings and Dividends (thousands, except per share data) Net income (1) ........................................... $ 874,170 $ 592,806 47.5 Cash dividends paid on common stock ...................... 381,798 327,303 16.6 Payout ratio (total cash dividends / net income) ......... 43.7 % 55.2 % Net income per common share: Basic ................................................... $ 4.26 $ 2.99 42.5 Diluted ................................................. $ 4.18 $ 2.94 42.2 Cash dividends paid per common share (2) ................. $ 1.86 $ 1.68 10.7 Average basic shares outstanding ......................... 205,058 198,290 3.4 Average diluted shares outstanding ....................... 209,153 201,901 3.6 Return on average assets ................................. 1.37% 1.03% Return on average shareholders' equity ................... 16.92 13.08 Balance Sheet Data at Year-End (millions, except per share data) Total assets ............................................. $ 64,123 $ 65,397 (1.9) Interest-earning assets .................................. 56,537 57,335 (1.4) Loans -- net of unearned income .......................... 45,719 44,194 3.5 Deposits ................................................. 40,995 42,654 (3.9) Interest-bearing liabilities ............................. 48,558 50,100 (3.1) Shareholders' equity ..................................... 5,338 5,174 3.2 Shareholders' equity to total assets ..................... 8.32% 7.91% Risk-based capital ratios: Tier I capital .......................................... 7.99 8.43 Total capital ........................................... 11.34 11.11 Per share: Book value .............................................. $ 26.30 $ 25.13 4.7 Common stock closing price (NYSE) ....................... 87.44 81.13 7.8 Price/earnings ratio (3) ................................ 20.92 x 27.59 x Excluding Effects of Nonrecurring Items (1) (thousands, except per share data) Net income ............................................... $929,847 $799,929 16.2 Net income per diluted common share ...................... $ 4.45 $ 3.96 12.4 Return on average assets ................................. 1.45% 1.39% Return on average shareholders' equity ................... 17.99 17.65 Price/earnings ratio (3) ................................. 19.65x 20.49x
(1) Nonrecurring items in 1998 include merger-related charges of $85,312 and in 1997 include merger-related charges of $231,175, a personal computer impairment charge of $67,202 and securities losses of $4,639 resulting from restructuring the available-for-sale portfolio. (2) Cash dividends per common share in 1997 are those of Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc. (3) Price earnings ratio is based on end-of-year stock price and net income per diluted share. 2 - ------------------------------------------------------- Wachovia Corporation - -------------------------------------------------------------------------------- Wachovia Corporation is an interstate bank holding company providing financial services to consumers and corporations. At December 31, 1998, Wachovia's assets of $64.1 billion and market capitalization of $17.7 billion both ranked 16th among U. S. banking companies. Wachovia offers credit and deposit services, insurance, investment and trust products, and information services to consumers, primarily in Florida, Georgia, North Carolina, South Carolina and Virginia, and to corporations both in and outside the United States. Consumer products and services are provided through a network of retail branches, ATMs, Wachovia On-Call telephone banking, automated Phone Access and internet-based investing and banking at www.wachovia.com. In addition, Wachovia serves consumers nationwide through its credit card business. Wachovia provides global solutions to corporate clients through locations in Chicago, London, New York and Sao Paulo, through representatives in Hong Kong and Tokyo, and through worldwide strategic alliances. Founded in 1879, Wachovia maintains dual headquarters in Winston-Salem, North Carolina, and Atlanta, Georgia. - ------------------------------------------------------------ Selected Year-End Data - -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 --------- -------- -------- ------- ------- ------- Trust assets (millions): Discretionary management ..................... $ 42,025 $ 33,568 $ 26,161 $22,409 $18,122 $18,904 Total ........................................ $138,130 $129,079 $108,557 $97,952 $83,973 $97,451 Banking offices: North Carolina ............................... 198 201 220 219 216 223 Virginia ..................................... 263 341 242 242 228 228 Georgia ...................................... 131 130 123 124 127 129 South Carolina ............................... 120 125 145 146 150 157 Florida ...................................... 40 33 ---- ---- ---- ---- --------- -------- -------- ------- ------- ------- Total ..................................... 752 830 730 731 721 737 ========= ======== ======== ======= ======= ======= Automated banking machines: North Carolina ............................... 446 423 351 328 297 251 Virginia ..................................... 304 325 221 211 194 195 Georgia ...................................... 299 282 222 204 189 180 South Carolina ............................... 289 272 213 180 166 167 Florida ...................................... 34 6 ---- ---- ---- ---- --------- -------- -------- ------- ------- ------- Total ..................................... 1,372 1,308 1,007 923 846 793 ========= ======== ======== ======= ======= ======= Employees (full time equivalent) .............. 20,936 21,652 19,969 19,642 19,148 18,989 Common stock shareholders ..................... 53,971 55,681 47,892 42,868 43,503 45,838 Common shares outstanding (thousands) ......... 202,986 205,927 201,253 208,341 208,095 208,253
- ----------------------------------------------------------------------- Forward-Looking Statements - -------------------------------------------------------------------------------- The Annual Report and Form 10-K of Wachovia Corporation ("the corporation") 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 the anticipated results or other expectations expressed in the corporation's forward-looking statements. Risks and uncertainties that may affect future results include, but are not limited to, changes in 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 not to place undue reliance on forward-looking statements, which are subject to influence by the named risk factors and unanticipated future events. 3 Letter To Shareholders Dear Wachovia Shareholder Wachovia achieved strong performance in 1998 while strengthening its ability to serve customers. Once again, in a difficult and challenging environment, the considerable strengths of Wachovia stood out. For the full year, operating earnings were $4.45 per diluted share compared with $3.96 in 1997. Operating net income totaled $929.8 million versus $799.9 million. Operating earnings exclude merger-related expenses of $85.3 million, pretax, for 1998 and special charges in the 1997 fourth quarter totaling $303 million, pretax, primarily for merger integration expenses. Including the special charges, Wachovia's net income for 1998 was $874.2 million or $4.18 per diluted share compared with $592.8 million or $2.94 per diluted share for 1997. On an operating basis, Wachovia's return on shareholders' equity was 18 percent, and return on assets was 1.45 percent compared with five-year averages of 17.2 percent and 1.38 percent, respectively. Average common equity to assets was 8.08 percent for 1998. Net loan losses were .67 percent of average loans. Losses were .11 percent, excluding the credit card portfolio. At December 31, nonperforming assets were .40 percent of loans and foreclosed property and the corporation's reserve coverage of nonperforming loans was 349 percent. Wachovia's overhead or efficiency ratio on a core operating basis was 52.7 percent. A series of graphs depicting Wachovia's performance compared with the median for the 25 largest U.S. banks is presented on page 89. The total return on Wachovia's common stock, including price appreciation and reinvested dividends, was 10.2 percent for 1998. This compares with 8.3 percent for the Keefe, Bruyette & Woods Index of 50 money center and regional banks and 28.6 percent for the Standard & Poor's 500 Index. The five-year compound annual total return for Wachovia was 25 percent. For the KBW Index and the S&P 500 Index, it was 27.8 percent and 24.1 percent, respectively. 4 Letter to Shareholders Strong revenue growth drove Wachovia's 1998 financial performance. Total revenue advanced $468.8 million for the year, with fee-based income contributing 47 percent of the growth. This diverse and robust revenue stream reflects Wachovia's ability to achieve growth in key lines of business. A new story is being written at Wachovia. That story tells of an unwavering commitment to growth and excellent revenue gains. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] DIVERSE, ROBUST REVENUE STREAM At the end of 1998, Wachovia had relationships with 3.5 million households and 200,000 small businesses in the Carolinas, Florida, Georgia and Virginia. In addition, Wachovia had 28,000 large and middle market corporate relationships in its home markets, nationally and abroad. Wachovia's merger with Interstate/Johnson Lane, a leading regional securities firm in Charlotte, North Carolina, will add more customers and strengthen product and service capabilities for consumers and corporate capital markets customers. The merger is expected to be consummated in early April 1999. Expense growth during 1998 principally reflects investment spending to attract, motivate and retain high-performing people, strengthen service delivery, enhance products and strengthen capabilities in technology. The growth rate in expenses is expected to moderate. Wachovia's attractive results have been achieved even as the corporation has continued to invest. The ability of financial service companies to grow at an attractive rate while managing risk and costs will become more challenging as the structural change permeating our society accelerates. Four fundamental factors are propelling this change. They include lower nominal growth, forces at work favoring deflation, the transition to a global construct, and a revolution in technology and communication. America finds itself in an economy where nominal growth will be subdued. A nominal growth rate of about three to five percent is a dramatic swing from double-digit nominal growth experienced during the 1980s. Inflation will not provide the pricing buoyancy that helped many corporations 5 Letter to Shareholders sustain top-line growth in the past. In the future, the economy will perform well but at a more moderate pace, and many businesses in America may be hard pressed to achieve sustainable earnings growth. From time to time in the coming decade, price levels will be deflationary. In some cases, the cost of raw materials may moderate, reflecting new processing and extractive techniques influenced by technology. Labor costs will be kept subdued by an abundance of low wage talent from the emerging world. New capabilities arising from technology will make manufacturing more efficient. While investment in technology remains high, the cost of technology longer term is a moderating factor potentially helping to retard expense growth. Consumers are informed and aggressive in seeking discounts. They buy by telephone and computers. Corporations have new procurement efforts under way dramatically wringing costs from purchases of goods and services. The whole world is searching for bargains. The third major factor at work is the global construct. Today, the world is defined by capital, ideas and energy. These do not abide by artificial or political boundaries. New and exciting uses of information are changing traditional alignments. Many countries are experiencing difficulty adjusting to the new global economy. Their currency values are under extreme pressure as they struggle to compete. This has subdued the rate of growth in global economies but it does not alter the long-term attractiveness of emerging markets. Around the world millions of people are free and they will work hard to achieve a better life. Finally, the most significant factor is the rapid diffusion of technology throughout society and the ability to use information more productively. In history, major changes in products, processes and technology have evolved through gradual periods of development. For decades, computers and communication systems processed information for select audiences. Information was controlled by large entities such as governments, universities and large corporations. Now, useful technology and inexpensive information are available to everyone. Information is diffused throughout society and across the globe. 6 Letter To Shareholders For almost every purpose, large and small organizations and individuals have economical access to vast storehouses of knowledge. The lower cost and greater availability of information make it a trump card for innovators and, in the future, this incredible capability will destroy artificial, inefficient structures at all levels of society. This revolution threatens the existence of traditional distribution systems. The combination of lower nominal growth, deflationary pressures, the global construct, and the permeation of knowledge and technology places the world in an unprecedented period of revolution. America, the world's leader in innovation, is undergoing painful change. Financial service companies are at a critical juncture. How do they embrace change and continue to grow and generate earnings that reward investors? Wachovia is very optimistic about the future and the potential for meeting the financial needs of its customers. I have mentioned before and still believe that customers to a large degree remain poorly served by the financial service industry. They have a growing appetite for information, service and solutions from someone they trust. This is an ideal environment for Wachovia. Throughout Wachovia you will find people who possess integrity, professionalism and a passion for outstanding service to customers. They deliver a robust menu of consumer and corporate products supported by outstanding technology. Wachovia enjoys an enviable track record of risk management, strong capital and reliable earnings. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] IDEAL ENVIRONMENT FOR WACHOVIA In recent years, Wachovia has worked hard to aggressively prepare for this new world. We have rebuilt businesses to achieve sound growth. Existing products have been strengthened and new ones added. Technology investment has been deployed more directly to support sales and service. Mergers, acquisitions and alliances have allowed us access to new customers and capabilities. Our capital base, which is always strong, is being more effectively invested. 7 Letter to Shareholders Wachovia faces the future exceptionally well positioned to serve customers and generate attractive growth. The section following describes Wachovia's Continuous Relationship Management strategy. This effort is helping us grow. [GRAPHIC APPEARS ON LEFT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] WACHOVIANS SERVING CUSTOMERS, COMMUNITIES Wachovians across the company have been extraordinarily busy serving customers, strengthening capabilities and expanding into new markets. But as Wachovians, they also find time to serve fellow human beings. They devote countless hours to church, civic and charitable organizations. Their own citizenship is mirrored by the company. Wachovia's Community Development Corporation has increased its lending. A new affordable mortgage lending sales force has been deployed. Communities continue to benefit from Wachovia's financial support. As we address the exciting and demanding realities of a new environment, exemplary corporate citizenship remains a defining characteristic of Wachovia. Thank you for your loyalty and support. Your comments are always welcomed. Sincerely, /s/ L. M. Baker, Jr. L. M. Baker, Jr. Chief Executive Officer February 26, 1999 8 [GRAPHIC APPEARS BELOW WITH THE FOLLOWING INFORMATION:] A. BY ADDING VALUE TO CUSTOMER RELATIONSHIPS THROUGH A DISTINCTIVE CONTINUOUS RELATIONSHIP MANAGEMENT STRATEGY. 10 [GRAPHICS APPEAR BELOW WITH THE FOLLOWING INFORMATION:] ACQUIRING CUSTOMERS Attracting a larger share of excellent customers in current markets and through expansion into new territory. MANAGING CUSTOMER INFORMATION Managing information in a way that continually renews and revises intelligence about customers to better serve them. STRENGTHENING CUSTOMER RELATIONSHIPS Creating closer ties with and becoming more important to customers, resulting in a higher level of profitable business in each relationship. COST-TO-SERVE Continued emphasis on effective resource management. 11 [GRAPHIC APPEARS BELOW WITH THE FOLLOWING INFORMATION:] Q. HOW DOES WACHOVIA CREATE ENHANCED EARNINGS GROWTH? A. BY BUILDING ON WACHOVIA'S STRONG FOUNDATION TO SUCCESSFULLY EXECUTE CONTINUOUS RELATIONSHIP MANAGEMENT. On the threshold of the 21st century, Wachovia is well positioned to continue producing attractive financial returns. Current aspirations are for: o Annual earnings per share growth of 10 to 12 percent over time. o Return on equity of 18 to 20 percent. o Return on assets of 1.45 percent. o Continued dividend growth with a payout ratio of 40 percent. These targets are dependent on the continuation of an attractive economic environment and Wachovia's ability to successfully develop and implement strategies and initiatives, which allow the corporation to profitably add value for a growing number of customers. This performance will distinguish the corporation during a time when the environment will be exceptionally challenging. In the coming decade, the economy will grow more slowly but it will still grow. Global opportunities will influence the behavior of corporations. Consumers will demand more value. Knowledge distribution and service and sales delivery will be transformed by technology. Organizations that ignore or are unprepared for these issues will not prosper and some may not survive. Those anticipating and embracing dramatic change will offer exceptional value for shareholders. 12 We are optimistic about the outlook for Wachovia. The company has an enviable history of rewarding shareholders since its founding in 1879. We believe prospects for the future are bright and the company is well positioned. In the future, the solution for growing revenue and sustaining profitability lies in bringing value to customers. Wachovia has its customers' best interests at heart. We use information to identify needs, offer solutions to problems and deliver unparalleled service. This differentiating strategy is implemented by a process we call Continuous Relationship Management (CRM). Several essential and historic Wachovia characteristics form a strong foundation for CRM. They include outstanding risk management, exemplary service quality, knowledgeable and engaged employees, and a distinctive reputation for trust and integrity. CRM is extremely difficult to deliver and requires competence in certain critical capabilities: o Acquiring Customers - attracting a larger share of excellent customers in currently served markets and through expansion into new territory. o Strengthening Customer Relationships - creating closer ties with and becoming more important to customers. This results in a higher level of profitable business from each relationship. o Cost-To-Serve - continued emphasis on effective resource management. o Managing Customer Information - managing information in a way that continually renews and revises intelligence about customers in order to better serve them. This is a fundamental capability. It enables Wachovia to more effectively refine strategies, acquire and strengthen customer relationships, manage expenses and better focus on acquisition initiatives. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] WACHOVIA'S PROCESS FOR ENHANCED EARNINGS ACQUIRING CUSTOMERS MANAGING CUSTOMER INFORMATION STRENGTHENING CUSTOMER RELATIONSHIPS COST-TO-SERVE Some financial service companies are working on Continuous Relationship Management, but few have developed and aligned strategies across these elements. Even fewer, if any, are weaving them together across geography, distribution channels, product lines and customer segments. By executing CRM through a multitude of consumer and corporate initiatives, Wachovia has developed diverse streams of revenue from a variety of new and existing customers, across business lines and in markets with high potential for growth. This disciplined approach to markets helps Wachovia stand out in the minds of customers. 13 ACQUIRING CUSTOMERS The ability to attract the right new customer is the next horizon in revenue and earnings growth. As technology and competition neutralize service advantage and compress margins, it is vital to be in attractive markets and to find innovative ways to win relationships. [GRAPHICS APPEAR BELOW WITH THE FOLLOWING INFORMATION:] WHERE ARE YOU? A. BY ATTRACTING MORE CUSTOMERS IN EXISTING MARKETS WITH A SUPERIOR BLEND OF SERVICE, SOLUTIONS, CAPABILITIES AND CONVENIENCE. WE ARE HERE. Wachovia is in the heart of a rich economic area. The corporation serves 3.5 million households and approximately 200,000 small businesses with annual sales of up to $2 million in North and South Carolina, Georgia, Virginia and Florida. This region is outpacing the U. S. in population and household income growth, providing fertile ground for customer acquisition. Wachovia is the 11th largest credit card issuer among banks, with 2.4 million accounts across the country at December 31, 1998. Wachovia is a leading corporate bank with over 28,000 business relationships in 50 states and global activity in 40 countries. Corporate customers range from $2 million in sales to the largest multinational corporations. Key consumer and corporate initiatives are under way to increase the number of customers served by Wachovia. In 1998, Wachovia added more than 200,000 new households through a variety of Consumer Financial Services initiatives. One example is an innovative work site marketing strategy, which combines the convenience of banking where people work with an expanded, attractively packaged product line. In 1998, the program served more than 1,900 companies and 120,000 households, and contributed about $37 million to revenue. This strategy is a cost-effective, value-added approach to acquiring new customers LET'S GET STARTED(SM). 14 who tend to stay with Wachovia longer and buy more products over time. Other initiatives range from programs targeted to college students to products such as Wachovia Access Now,(sm) which provides low fees for customers who do all or most of their banking electronically. Another major ingredient of customer acquisition is the Market Network Strategy. The strategy is a comprehensive management process used to assess, plan and strengthen delivery channels in the existing geographic franchise and help identify new expansion opportunities. With 76 per cent of new Wachovia customers still opening initial accounts at a branch, the strategy ensures that Wachovia's 752 branches and 1,372 ATMs are effectively deployed in high growth markets. Wachovia plans to gain up to 300,000 additional households in 1999 by delving deeper into its rich geography and expanding efforts on new customer initiatives. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] ACQUIRING CUSTOMERS Consumer Financial Services also is pursuing an aggressive strategy to add more small businesses. A group of 102 bankers is focused on meeting the needs of the business itself, its owners and employees. The bankers provide technical capability, 15 rapid credit decisions and high quality sales and service delivery. A series of products has been developed, ranging from an extranet banking service designed for unique needs of small businesses to lines of credit and express loan packages. During 1998, this initiative contributed more than $89 million in revenue. Twenty percent of this revenue was from noninterest income. Opportunity with these customers is immense. There are over 720,000 small business companies with sales up to $2 million located in our home states. Wachovia Corporate Financial Services has a global perspective and reflects a combination of market segmentation, solutions-oriented sales and recognized product leadership. The corporate market ranges from Business Banking with sales starting at $2 million to Large Corporate with sales greater than $2 billion. Additional corporate areas, such as Commercial Real Estate, [GRAPHICS APPEAR BELOW WITH THE FOLLOWING INFORMATION:] A. BY CAPITALIZING ON STRATEGICALLY COMPELLING, FINANCIALLY REWARDING OPPORTUNITIES FOR MERGERS OR ACQUISITIONS. 16 Financial Institutions, Structured Finance and other specialized finance groups, support specific customer segments. Business Banking is a market segment with particularly attractive growth prospects. In the five states, more than 245 bankers are in contact with 19,000 customers to offer lending, capital solutions, financial advisory services, cash management and investment capabilities through a suite of services called the Wachovia Business Choice Account.(R) During 1998, Business Banking grew loans 31 percent, deposits 18 percent and fee income 45 percent. The area's profit contribution increased 32 percent. With 51,000 targeted companies in Business Banking's home markets, Wachovia anticipates continued opportunities for strong growth. Many businesses are seeking financial partners to help them understand and evaluate product and service capabilities available in today's competitive marketplace. At Wachovia, sales professionals in teams work closely with customers to understand their unique needs. They develop appropriate solutions and maintain regular contact to broaden and deepen the relationship as customers' needs evolve. The corporation's product leadership remains a major source of new business. Wachovia consistently ranks in the top tier of high quality cash management banks. Recently we were recognized in separate surveys as having one of the highest overall quality ratings in the nation, exceeding all competitors in customer satisfaction ratings for product leadership and innovation. During 1998, marketplace recognition of this expertise helped Wachovia's Treasury Services add $20 million from new sales alone. Wachovia has an excellent track record of adding new customers and building capabilities through mergers and acquisitions. Interstate/Johnson Lane, which is scheduled to become part of Wachovia in April 1999, had 175,000 active retail accounts and client assets of $17.8 billion at December 31, 1998. Wachovia added 210,000 credit card customers with the September 1998 purchase of $269 million of receivables. Accounts in 40 states are included in the purchase with 25 percent located in Wachovia's five core states. Acquisitions will continue to be studied. As industry performance pressure mounts, Wachovia believes there will be opportunities to expand in existing and new markets. As in the past, any mergers or acquisitions must be strategically compelling and financially rewarding. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] ACQUIRING CUSTOMERS 17 STRENGTHENING CUSTOMER RELATIONSHIPS Winning new customers is expensive if there is no commitment and process to grow and strengthen relationships. Wachovia's consumer and corporate areas are devoting considerable energy to this second component of the CRM process. Two key consumer growth projects are Consumer Financial Services' Profitable Relationship Optimization strategy, called PRO Banking, and Personal Financial Services' Financial Integration initiative. PRO is direct outreach to the most important 25 percent of retail customers. This comprehensive, [GRAPHICS APPEAR BELOW WITH THE FOLLOWING INFORMATION:] A. THROUGH GROWING AND STRENGTHENING RELATIONSHIPS WITH EXISTING CUSTOMERS. integrated process begins with a robust data base that provides targeted leads to sales professionals. Customer contact results are fed back into the system, enhancing knowledge about how to best serve customers. PRO has grown dramatically since a pilot phase in December 1996. In early 1999, 5,000 high-value customers will be contacted each day through 140 fully dedicated Personal Financial Advisors and 1,100 Personal Bankers in branches and the call center. These sales professionals engage customers in discussions about their financial situation, offering product ideas and solutions. This relationship-based approach is achieving a sustained sales rate of 20 percent. Most important, PRO is improving customer retention. As a result of PRO, the high-value household annual retention rate is virtually 100 percent compared with a normal annual retention rate in the mid-'90s for this customer segment. This increase is significant and accounts for millions of dollars of retained annual income. This retention is a leading indicator of momentum yet to be fully reflected in share of market gains and enduring loyalty to Wachovia. Wachovia's front-line sales professionals have never been more engaged in meeting customer needs and creating value for them. Customers feel the difference. Research verifies that the percentage of PRO customers expressing satisfaction has improved to 84 percent, up 11 percentage points since the program began. Progress to date is very pleasing but the strategy's potential is even more encouraging. Refinements to PRO are expected to deliver $10 million in improved revenue in 1999 alone, and new opportunities are consistently identified. PRO will continue to be a leading strategy with high-value customers. 18 Serving the affluent market is another key to profitability. The needs of these customers are complex and their service expectations are high. Relationship profit potential also is high. As a result of a new Financial Integration strategy launched in 1997 by Personal Financial Services, these customers now are served through sales teams by bankers known as Financial Advisors. Twenty-nine teams are in target markets across five states. Teams are linked by location, training, management, sales goals and compensation programs to concentrate on a full array of financial service needs for each client relationship. A major focus of these teams is developing integrated financial plans for certain households. During 1998, more than 5,300 relationship reviews and financial plans were conducted with private clients. Wachovia's Investment Counselor program grew profit contribution by 127 percent for 1998. Through this program, Wachovia Investment Counselors located in branches provide customers assistance with investments and insurance. Revenue from the Wachovia Funds, which had assets of $6.4 billion under management at December 31, 1998, grew 59 percent in 1998. This is important core growth from relationship customers. All these initiatives helped Personal Financial Services achieve a 27 percent increase in profit contribution for 1998. The area had increases of 31 percent in investment management business and 10 percent in estate planning business. Loan and deposit production grew 48 percent and 13 percent, respectively, in 1998 over 1997. Growth prospects for Personal Financial Services have been enhanced by Wachovia's merger with Interstate/Johnson Lane, which will provide Wachovia full-service brokerage capability supported by 466 financial consultants in 63 branches across the Southeast. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] STRENGTHENING CUSTOMER RELATIONSHIPS The Financial Integration strategy brings real talent to bear on customer needs. Current research indicates that a fully integrated, affluent customer is worth twice as much revenue as one not fully integrated. Financial Integration is delivered by professionals customers can trust. Across the company, capital markets and corporate bankers are teaming up with financial advisors and wealth strategists to broaden relationships by addressing both individual and corporate aspects of customers' lives. A typical example of this intracompany synergy occurred during 1998. A company that had a long relationship with Wachovia was being sold. 19 Wachovia's regional banking executive introduced the firm to Wachovia's Capital Markets group, which represented the sellers getting a price almost double competitive valuations. Wachovia's regional executive, local Private Financial Advisors manager and the Personal Financial Services' Wealth Strategy unit identified opportunities to assist the sellers with investment, estate planning, insurance and lending needs. In competition with area and money center banks and brokerage firms, Wachovia secured [GRAPHICS APPEAR BELOW WITH THE FOLLOWING INFORMATION:] A. THROUGH THE DAILY DELIVERY OF THE WACHOVIA PROMISE - HAVING THE CUSTOMER'S BEST INTEREST AT HEART - BY ALL WACHOVIANS. a $34 million investment management account, credit cards, bank lines, two mortgage loans, five brokerage accounts and ongoing estate planning work. This convergence of multiple opportunities with other business units increases our optimism about revenue and profit potential for Personal Financial Services. The key to strengthening corporate relationships is a sales team approach from Capital Markets, Global Services, Treasury Services, Institutional Trust and Risk Management disciplines. These teams of relationship management and specialized product expertise individuals enlarge our collective knowledge of customers and foster relationship planning and integrated solutions. These solutions are backed by a strong product line and superb execution. In Capital Markets, Wachovia expanded capabilities in financial advisory services, risk management products, commercial real estate, leasing and fixed- income distribution. Establishment of a Tier I, Section 20 securities subsidiary has enabled Wachovia to underwrite and deal in municipal revenue bonds, one-to-four family mortgage-backed securities, consumer receivable-related securities and commercial paper. When our merger with Interstate/Johnson Lane is completed, equity research and underwriting, investment banking and institutional equity and fixed-income distribution will strengthen Wachovia's ability to serve the complete debt and equity needs of corporate clients. Fee income from Capital Markets rose 163 percent for 1998 and good growth is expected in the future. Treasury Services continued to build processing capabilities. During 1998, Wachovia introduced image-based receivables solutions to streamline the application, research and resolution of payments received through corporate lockboxes. Wachovia's Integrated Payables service has been enhanced to accept and process instructions for international wires and foreign drafts. Wachovia Connection(R) Plus, introduced in 1998, is a browser-based platform that will host the exceptional Wachovia Connection family of products. With these new product developments, Treasury 20 Services is well positioned to accelerate revenue growth and outstanding service to customers. Institutional Trust and Retirement Services generated a record level of new business during 1998 while laying the foundation for future growth. The acquisition of Hunt, DuPree, Rhine and Associates Inc., allows Wachovia to respond more fully to the needs of corporate clients with expanded benefits consulting and actuarial services, advanced savings and pension plan administration, and flexible spending account administration. The division also introduced a new 401(k) plan service tied to outside families of mutual funds and the Wachovia Funds. New products and capabilities were added to the Executive Services Group, strengthening Wachovia's national leadership as consultant, trustee and administrator for nonqualified benefits plans. Revenues from this activity increased 57 percent in 1998 versus a year earlier. During 1998, Global Services continued to capitalize on its impressive international alliances, partnerships and capabilities. Among these are a full operating branch in London, Banco Wachovia in Brazil, The Hongkong and Shanghai Banking Corporation Ltd., alliance for Asian import letters of credit, the NAFTA partnership for cross-border cash management solutions and global information reporting for multiple foreign currency accounts. Another major capability strengthening customer relationships is Wachovia's asset management business. At December 31, 1998, assets under management totaled $42 billion, including $6.4 billion from the Wachovia Funds. A particularly unique Wachovia Asset Management product is timberland investment management for large institutional investors. Wachovia is a recognized leader in this asset class, which approximated $700 million at the end of 1998. Wachovia's investment results compare quite favorably with its competitors. With these consumer and corporate initiatives, Wachovia is building strong customer relationships and providing great value to customers. During 1999, these strategies will be refined and new learning will be applied to find more innovative customer solutions. Through each of these efforts, Wachovia is enhancing future revenue prospects. But it is not enough to work only on revenue. Exceptional companies must have an intense focus on efficiency. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] STRENGTHENING CUSTOMER RELATIONSHIPS 21 COST-TO-SERVE Wachovia continues to have one of the lowest overhead ratios (noninterest expense as a percentage of taxable equivalent net interest income plus fee income) in the industry. The CRM process, by providing better information about customer needs and behavior, directly affects our ability to manage the physical network and people, process and technology expenses. This information, combined with knowledge of local markets, helps Wachovia efficiently match resources with customer potential. Since implementing the Market Network Strategy in North Carolina, South Carolina and Georgia in 1996, Wachovia has been decreasing the number of higher-cost full-service branches. [GRAPHICS APPEAR BELOW WITH THE FOLLOWING INFORMATION:] A. BY CONTINUED EMPHASIS ON EFFECTIVE RESOURCE MANAGEMENT, REDUCING THE COST- TO-SERVE WHILE REWARDING CUSTOMERS. Resources have been deployed into more efficient delivery systems, including convenience centers, express offices, work site banking centers, ATMs, internet and telephone. These increased points of banking presence provide better service to more customers. The traditional bank staff has been trained to focus sales resources toward the most opportune customers. Increasingly, branch staff members are being reassigned into dedicated sales teams serving high value, affluent and small business segments. This redeployment is allowing a reduction in staff serving the mass market. During this transition, productivity and profitability are increasing. From 1996 through 1998, North Carolina, South Carolina and Georgia banking operations' combined compound annual growth rate for fee income was 14 percent; noninterest expenses, 2 percent; and pretax profit contribution, 13 percent. During the same period, the number of employees declined a total of 8 percent. And, in each of these states, Wachovia ranks first for deposits per branch against strong competitors. The Market Network Strategy also is being used in Virginia and Florida. Market Network will be a continuous process as Wachovia constantly calibrates its sales and service. More efficient management of Wachovia's consumer credit portfolios is strengthening returns while Wachovia continues to improve products. Wachovia Decision Now(sm) is an on-the-spot mortgage origination capability valued by time-starved mortgage shoppers who will pay for added convenience. Credit card's product array includes a broad range of interest rate and fee combinations exemplified by the highly successful Prime for Life(R) offering. The use of consumer credit scoring models and workflow alignment has supported process improvement. Sales finance improved the rate 22 of converting applications to loans to 32 percent in 1998 from 21 percent in 1997. The overall cost of creating a mortgage loan declined 32 percent. The total servicing cost of a credit card account decreased 7 percent from an already low base. Credit card net loan losses at 4.54 percent for 1998 continued to perform better than industry averages. The rate of automated loan decisions in retail branch lending grew to 24 percent from 13 percent in 1997. Prime Capture and Archive, a robust mainframe computer architecture, is the backbone of a company-wide integration of image technology. Its use will support new services and products for consumers and corporations. This system economically creates, indexes, stores and retrieves every paid or deposited check and related paper documents Wachovia receives. Speedy retrieval of these images keeps a tight rein on Wachovia's costs and offers customers easy access to essential information as they collect returns, monitor credit, field inquiries and reduce document storage expense. The multidiscipline corporate sales team is enhancing sales and service efficiency by focusing the right sales professional on the right activities at the right time. Supporting this capability are centralized processes such as Business Banking's loan documentation group, which allows relationship managers to spend more time addressing customer solutions. [GRAPHIC APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] COST-TO-SERVE 23 Managing Customer Information The foundation for Continuous Relationship Management is information. Wachovia has invested millions of dollars in building and upgrading data bases, and we are delivering timely and relevant information to the sales staff. Information from customers and sales staff is analyzed, refined and updated. Fresh, accurate information enhances decision making and facilitates cost control. Wachovia is consolidating and integrating consumer, credit card, trust and corporate information systems. To help the corporation better understand key drivers of earnings, an enhanced profitability measurement system is scheduled to become part of this comprehensive information resource in late 1999. These actions will strengthen the ability to sell the right products to the right customers at the right time. Raw information provides no advantage. The way financial service companies distinguish themselves is to competently process, distribute and use information to serve customers. At Wachovia, the goal of employees is to know and understand customers and their cares and concerns better than any other financial institution. Wachovia's brand campaign has played a central role in helping 21,000 Wachovians move toward the same vision. Recent quantitative research scored the campaign as more memorable, relevant A. BY COMPETENTLY PROCESSING, DISTRIBUTING AND USING INFORMATION TO SERVE CUSTOMERS BETTER THAN ANY OTHER FINANCIAL INSTITUTION. 24 and likeable than those of key competitors. Wachovia believes that a strong brand identity in financial service will become more important as individuals and businesses are confronted with a bewildering array of financial choices. Wachovia is committed to delivering the brand promise at every point of contact. The world ahead is going to be fascinating. In this new world, sustaining strong earnings growth will be challenging work. But Wachovians understand the formula for success in this demanding environment. The basic equation is simple - attract the right customers, sell them multiple services important to their lives, do the right things to keep their business, deliver as efficiently as possible and let them know that at Wachovia they have a friend they can trust. Determined and impassioned Wachovians are weaving these components together daily. They are defining Wachovia's future by addressing difficult questions and building answers that bring pleasure to customers. [GRAPHICS APPEARS ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFORMATION:] WACHOVIA'S PROCESS FOR ENHANCED EARNINGS ACQUIRING CUSTOMERS MANAGING CUSTOMER INFORMATION STRENGTHENING CUSTOMER RELATIONSHIPS COST-TO-SERVE 25 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Summary Table 1 - -------------------------------------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Summary of Operations (thousands, except per share data) Interest income ........................... $ 4,665,245 $ 4,262,385 $ 4,009,508 Interest expense .......................... 2,314,213 2,168,818 2,085,771 ----------- ----------- ----------- Net interest income ....................... 2,351,032 2,093,567 1,923,737 Provision for loan losses (1) ............. 299,480 264,949 193,776 ----------- ----------- ----------- Net interest income after provision for loan losses .............................. 2,051,552 1,828,618 1,729,961 Other operating revenue ................... 1,228,119 1,005,768 874,732 Gain on sale of mortgage servicing portfolio ................................ ---- ---- ---- Gain on sale of subsidiary ................ ---- ---- ---- Securities gains (losses) (2) ............. 20,442 1,454 4,588 ----------- ----------- ----------- Total other income ........................ 1,248,561 1,007,222 879,320 Personnel expense ......................... 1,055,353 905,157 796,932 Nonrecurring charges (3) .................. 85,312 287,532 ---- Other expense ............................. 855,667 774,032 712,041 ----------- ----------- ----------- Total other expense ....................... 1,996,332 1,966,721 1,508,973 Income before income tax expense .......... 1,303,781 869,119 1,100,308 Income tax expense ........................ 429,611 276,313 343,049 ----------- ----------- ----------- Net income (4) ............................ $ 874,170 $ 592,806 $ 757,259 =========== =========== =========== Net income per common share: Basic .................................... $ 4.26 $ 2.99 $ 3.70 Diluted (4) .............................. $ 4.18 $ 2.94 $ 3.65 Cash dividends paid per common share (5) ................................ $ 1.86 $ 1.68 $ 1.52 Cash dividends paid on common stock (6) ................................ $ 381,798 $ 327,303 $ 305,740 Cash dividend payout ratio (6) ............ 43.7 % 55.2 % 40.4 % Average basic shares outstanding .......... 205,058 198,290 204,889 Average diluted shares outstanding ........ 209,153 201,901 207,432 Selected Average Balances (millions) Total assets .............................. $ 63,949 $ 57,607 $ 55,584 Loans -- net of unearned income ........... 44,401 39,716 36,739 Securities ................................ 10,582 10,793 11,876 Other interest-earning assets ............. 1,579 1,446 1,629 Total interest-earning assets ............. 56,562 51,955 50,244 Interest-bearing deposits ................. 32,011 29,582 27,609 Short-term borrowed funds ................. 10,895 8,987 9,018 Long-term debt ............................ 6,279 6,122 6,693 Total interest-bearing liabilities ........ 49,185 44,691 43,320 Noninterest-bearing deposits .............. 7,803 6,934 6,491 Total deposits ............................ 39,814 36,516 34,100 Shareholders' equity ...................... 5,168 4,533 4,458 Ratios (averages) Net loan losses to loans .................. .67% .67% .53% Net yield on interest-earning assets ...... 4.24 4.14 3.98 Shareholders' equity to: Total assets ............................. 8.08 7.87 8.02 Net loans ................................ 11.78 11.57 12.31 Return on assets (7) ...................... 1.37 1.03 1.36 Return on shareholders' equity (7) ........ 16.92 13.08 16.99 Five-Year Compound 1995 1994 1993 Growth Rate ---------- ---------- ----------- ------------ Summary of Operations (thousands, except per share data) Interest income ........................... $3,790,110 $3,025,654 $ 2,738,164 11.2% Interest expense .......................... 2,011,155 1,369,006 1,128,709 15.4 ---------- ---------- ----------- Net interest income ....................... 1,778,955 1,656,648 1,609,455 7.9 Provision for loan losses (1) ............. 130,504 96,122 172,161 11.7 ---------- ---------- ----------- Net interest income after provision for loan losses .............................. 1,648,451 1,560,526 1,437,294 7.4 Other operating revenue ................... 757,115 690,099 669,469 12.9 Gain on sale of mortgage servicing portfolio ................................ 79,025 ---- ---- Gain on sale of subsidiary ................ ---- ---- 8,030 Securities gains (losses) (2) ............. (19,672) (21,972) 74,256 (22.7) ---------- ---------- ----------- Total other income ........................ 816,468 668,127 751,755 10.7 Personnel expense ......................... 733,790 691,512 685,623 9.0 Nonrecurring charges (3) .................. ---- ---- ---- Other expense ............................. 707,839 651,739 668,635 5.1 ---------- ---------- ----------- Total other expense ....................... 1,441,629 1,343,251 1,354,258 8.1 Income before income tax expense .......... 1,023,290 885,402 834,791 9.3 Income tax expense ........................ 315,377 261,480 239,779 12.4 ---------- ---------- ----------- Net income (4) ............................ $ 707,913 $ 623,922 $ 595,012 8.0 ========== ========== =========== Net income per common share: Basic .................................... $ 3.40 $ 3.00 $ 2.84 8.4 Diluted (4) .............................. $ 3.36 $ 2.96 $ 2.80 8.3 Cash dividends paid per common share (5) ................................ $ 1.38 $ 1.23 $ 1.11 10.9 Cash dividends paid on common stock (6) ................................ $ 282,517 $ 254,397 $ 230,430 10.6 Cash dividend payout ratio (6) ............ 39.9 % 40.8 % 38.7 % Average basic shares outstanding .......... 208,230 208,117 208,880 ( .4) Average diluted shares outstanding ........ 210,600 210,651 212,584 ( .3) Selected Average Balances (millions) Total assets .............................. $ 51,703 $ 46,542 $ 42,529 8.5 Loans -- net of unearned income ........... 33,510 29,533 25,776 11.5 Securities ................................ 11,977 11,238 10,993 ( .8) Other interest-earning assets ............. 1,257 1,025 1,379 2.7 Total interest-earning assets ............. 46,744 41,796 38,148 8.2 Interest-bearing deposits ................. 25,601 22,847 22,860 7.0 Short-term borrowed funds ................. 8,860 7,369 6,500 10.9 Long-term debt ............................ 5,695 5,154 2,530 19.9 Total interest-bearing liabilities ........ 40,156 35,370 31,890 9.1 Noninterest-bearing deposits .............. 6,234 6,292 6,199 4.7 Total deposits ............................ 31,835 29,139 29,059 6.5 Shareholders' equity ...................... 4,164 3,812 3,519 8.0 Ratios (averages) Net loan losses to loans .................. .38% .30% .56% Net yield on interest-earning assets ...... 4.04 4.23 4.50 Shareholders' equity to: Total assets ............................. 8.05 8.19 8.27 Net loans ................................ 12.62 13.14 13.92 Return on assets (7) ...................... 1.37 1.34 1.40 Return on shareholders' equity (7) ........ 17.00 16.37 16.91
(1) Includes $10,845 in nonrecurring merger-related provision in 1997 to align the practices of the merged entities with those of the corporation. (2) Includes $4,639 of nonrecurring losses to restructure the available-for-sale portfolio in 1997. (3) Nonrecurring charges in 1998 and 1997 include merger-related items of $85,312 and $220,330, respectively, and a personal computer hardware and software disposal charge of $67,202 in 1997. (4) Net income excluding the effect of nonrecurring items was $929,847 and $799,929 for 1998 and 1997, respectively. Net income per diluted share excluding the effect of nonrecurring items was $4.45 and $3.96 for 1998 and 1997, respectively. (5) Cash dividends per common share are those of Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc. (6) Includes amounts of pooled companies. (7) Excluding the after-tax impact of nonrecurring charges of $55,677 and $207,123, returns were 1.45% and 1.39% on assets and 17.99% and 17.65% on shareholders' equity for 1998 and 1997, respectively. 26 -------------------------- Results of Operations ----------------------------------------------------------------- 1998 vs. 1997 Overview During 1998, the U. S. economy continued its eighth successive year of expansion amidst softening caused by turmoil in foreign markets and higher domestic wages. Based on advance estimates, gross domestic product for the year rose 3.9 percent, matching 1997's growth rate, with activity boosted in the latter months of 1998 by three reductions in short-term interest rates. Economic growth within Wachovia Corporation's home states remained good during 1998. Unemployment for the year averaged 4.5 percent in Florida, 4 percent in Georgia, 3.5 percent in North Carolina, 3.5 percent in South Carolina and 3.1 percent in Virginia compared with 4.5 percent nationwide. The corporation seeks to broaden its competitive position by gaining access to new customers and by enhancing its products and services through internal development and through selective partnerships and acquisitions. Management pursues a variety of initiatives as part of this strategy. During 1998, these included integrating new banking partners in Virginia and Florida; significantly expanding capital markets' capabilities; installing new systems for trust and loans; acquiring a South Carolina-based benefits consulting firm; purchasing a credit card portfolio; and announcing plans to acquire Interstate/Johnson Lane, a major regional investment advisory and brokerage firm with offices primarily in North Carolina, Georgia, South Carolina and Virginia. Because Wachovia's growth strategy includes the use of acquisitions, the corporation regularly evaluates opportunities and conducts due diligence activities in connection with possible acquisitions. As a result, 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. Wachovia's net income for 1998 totaled $874.170 million or $4.18 per diluted share compared with $592.806 million or $2.94 per diluted share in 1997. Results for both years included nonrecurring charges, which totaled $85.312 million, pretax, in 1998 for merger integration expenses and $303.016 million, pretax, in 1997 for merger-related charges, an equipment impairment charge and restructuring of the securities portfolio. The net after-tax impact of the nonrecurring charges was $55.677 million or $.27 per diluted share for 1998 and $207.123 million or $1.02 per diluted share for 1997. Excluding the nonrecurring charges, net income on an operating basis was $929.847 million or $4.45 per diluted share in 1998 versus $799.929 million or $3.96 per diluted share in 1997. NET INCOME PER SHARE (DILUTED) (A bar graph appears here. See the table below for plot points.) 1993 1994 1995 1996 1997 1998 2.80 2.96 3.36 3.65 2.94 4.18* *EXCLUDING NONRECURRING ITEMS, NET INCOME PER DILUTED SHARE WAS $3.96 IN 1997 AND $4.45 IN 1998. NET INCOME (MILLIONS) (A bar graph appears here. See the table below for plot points.) 1993 1994 1995 1996 1997 1998 595.0 623.9 707.9 757.3 592.8* 874.2* *EXCLUDING NONRECURRING ITEMS, NET INCOME WAS $799.9 MILLION IN 1997 AND $929.8 MILLION IN 1998. 27 The corporation's operating results for the year reflected strong revenue growth, with total revenues rising $468.796 million or 14.8 percent to $3.626 billion. Good gains occurred in both net interest income and fee-generating businesses as the corporation expanded on its consumer and corporate banking initiatives and moved forward with technology enhancements. Moderating the revenue gains for the year were higher credit losses and increases in noninterest expense. Expanded discussion of the corporation's results of operations and financial condition is presented in the following narrative with accompanying tables and charts. Historical financial results include the corporation's acquisition of Central Fidelity Banks, Inc., on a pooling-of-interests basis but do not include the corporation's purchases of Jefferson Bankshares, Inc., and 1st United Bancorp in the fourth quarter of 1997 and of Ameribank Bancshares in the second quarter of 1998 prior to the date of their acquisitions. 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. The narrative should be read in conjunction with the Consolidated Financial Statements and Notes on pages 61 through 82. Expanded six-year financial data appears on pages 83 through 88. Business Segments The corporation has four reportable business segments: Consumer, Corporate, Card, and Treasury & Administration. The Consumer segment provides individuals and small businesses with products and services ranging from traditional loans and deposits, mortgages, trust services, brokerage and mutual fund investments, including the corporation's proprietary Wachovia Funds, to insurance, private banking and other financial advisory services. Customers are served in the corporation's primary operating states of Georgia, North Carolina, South Carolina, Virginia and Florida through a wide variety of delivery channels, including ATMs, traditional branches, work-site banking facilities, in-store banking centers, PC Access, Wachovia On-Call telephone banking and automated Phone Access. Major initiatives for the division include PRO (Profitable Relationship Optimization), which is the corporation's strategy for profitable customer selling and retention; Financial Integration, an affluent customer strategy utilizing teams of financial advisors and specialists; and the Market Network Model, used for determining the mix of local retail delivery channels based on location needs and opportunities. Corporate offers credit, specialized finance, investment and processing services. Customers range from businesses with annual sales of $2 million and above to major multinational corporations. The division is a leading provider of treasury services and certain corporate and charitable trust products. Significantly broadened capabilities have been added in capital markets, including merchant banking and financial advisory services, commercial real estate corporate finance, asset securitization and equipment leasing. The corporation's planned acquisition of Interstate/Johnson Lane is expected to augment the division's capital markets capabilities. The Corporate Division also is enhancing service and product offerings through its global services area. Recent initiatives include conversion of the corporation's London office to 28 branch bank status, enabling Wachovia to provide credit and deposit services for European-based companies, and acquisition of a Sao Paulo, Brazil, bank to facilitate trade capabilities for customers conducting business in Latin America. The Card division represents the corporation's credit card business. The division generates revenues from interest on unpaid card balances and from fees primarily on interchange, cash advances, over limit advances, late payments and servicing securitized receivables. The division employs modeling techniques and other credit evaluation measures to target above-average credit risk customers who carry monthly balances and seek low interest rates. Products offered include prime rate plus and Prime for Life(R) Visa and MasterCard credit cards. At year-end 1998, Card had a national portfolio of managed credit card outstandings totaling $6.549 billion. The Treasury & Administration segment principally reflects asset and liability management for interest rate sensitivity risk; management of the securities portfolio; transfer pricing offset on loans, deposits and other funds; and other corporate costs such as Year 2000 expenses and nonrecurring expenses. Business segment results are reported on a management accounting basis. Management accounting practices are internally driven, reflecting evolving information needs specific to a company's business managers, and may differ by company due to wide discretion in application. As a consequence, the corporation's business segment results are not necessarily comparable with those of other financial institutions with similar segments or with those of other companies which compete directly in one or more of the corporation's lines of business. In addition, business segment results may be restated in the future as the corporation's management structure, information needs or reporting systems evolve. The provision for loan losses is assigned to each business segment based on the credit risk of each segment's loan portfolio. Overhead expense is allocated based on the proportion of each segment's direct expenses to total direct expenses of the combined segments. Income tax expense is calculated for each business segment using a blended corporate-wide tax rate based on taxable equivalent adjusted net income. Note C of the Notes to Consolidated Financial Statements provides additional information on accounting policies for the corporation's business segments and on items reconciling segment results to the corporation's consolidated results. Financial results by business segment are discussed below. Consumer. Net income for Consumer grew $23.631 million or 6.9 percent to $366.842 million. Revenue gains were broadly spread, with taxable equivalent net interest income up $106.561 million or 9.8 percent and fee income increasing $79.799 million or 15.4 percent. Growth in taxable equivalent net interest income primarily reflected greater loan volume, with noninterest income increasing largely due to higher levels of fees in mortgage, deposit accounts and trust services, as well as to gains in debit card income and insurance commissions. The provision for loan losses declined $10.206 million or 22.9 percent, while noninterest expense grew $157.706 million or 15.3 percent, driven largely by higher compensation. Consumer's pretax profit increased $38.860 million or 7.4 percent to $566.517 million. Corporate. Corporate's net income totaled $365.741 million, an increase of $111.634 million or 43.9 percent from $254.107 million in 1997. Taxable equivalent net interest income rose $151.968 million or 29 27.2 percent, fueled primarily by loan and lease growth. Noninterest income, led by gains in consulting services, derivatives income, deposit account fees and trust services fees, expanded $97.581 million or 32.7 percent. The provision for loan losses increased $289 thousand or 35 percent, while noninterest expense was up $75.112 million or 16.1 percent, primarily reflecting a higher staff expense base. The division's pretax profit rose $174.148 million or 44.6 percent to $564.815 million for 1998. Card. The corporation's credit card business had net income of $109.299 million, up $1.796 million or 1.7 percent from $107.503 million in 1997. Taxable equivalent net interest income rose $51.595 million or 12.6 percent, driven by a higher external rate earned on credit cards and modest growth in loan balances. Noninterest income advanced $8.418 million or 5.1 percent, primarily due to increases in cardholder income. The provision for loan losses expanded $39.261 million or 18 percent, while noninterest expense was up $17.238 million or 9 percent, partly due to increased advertising and marketing costs. Pretax profit for the Card segment rose $3.514 million or 2.1 percent to $168.790 million for the year. Treasury & Administration. Treasury & Administration's net income rose to $32.288 million in 1998 from a loss of $112.015 million in 1997. Improvement in 1998 was primarily the result of a $202.739 million reduction in operating expenses resulting from substantially lower merger integration costs, Year 2000 expense, and other systems development and nonrecurring expenses that are held within the unit. The $45.973 million reduction in net interest margin was primarily attributable to changes in noninterest earning assets held in the unit, such as goodwill, changes to the securities portfolio and discretionary funding which includes the optimization of the capital position. The change in other income is primarily driven by corporate owned life insurance income. Business Segments Table 2 - -------------------------------------------------------------------------------- Consumer Corporate Card ------------------- ---------------- ----------------- Operations Summary 1998 1997 1998 1997 1998 1997 -------- -------- ------ ------ ------- ------- (millions) External net interest margin ...................... $ 337 $ 303 $1,543 $1,340 $ 767 $ 723 Internal funding (charge) credit ............. 855 782 (831) (780) (307) (314) -------- -------- ------ ------ ------- ------- Net interest income* ......... 1,192 1,085 712 560 460 409 Total other income ........... 598 518 396 299 175 166 -------- -------- ------ ------ ------- ------- Total revenues ............... 1,790 1,603 1,108 859 635 575 Provision for loan losses..... 34 44 1 1 258 219 Total other expense .......... 1,189 1,031 542 467 208 191 -------- -------- ------ ------ ------- ------- Pretax profit ................ 567 528 565 391 169 165 Income taxes (benefit) ....... 200 185 199 137 60 57 -------- -------- ------ ------ ------- ------- Net income (loss) ............ $ 367 $ 343 $ 366 $ 254 $ 109 $ 108 ======== ======== ====== ====== ======= ======= Percentage contribution to total revenues** ......... 48.2% 50.0% 29.8% 26.7% 17.1% 17.9% Percentage contribution to net income ............... 42.0% 57.9% 41.8% 42.9% 12.5% 18.1% Average Balances (billions) Total assets ................. $ 17 $ 15 $ 27 $ 23 $ 7 $ 6
Treasury & Administration Eliminations Total Corporation --------------------- ----------------- ------------------- Operations Summary 1998 1997 1998 1997 1998 1997 -------- ------- ------- ------- ------- ------- (millions) External net interest margin ...................... ($ 249) ($ 215) $ (47) $ (57) $2,351 $2,094 Internal funding (charge) credit ............. 351 363 (68) (51) ---- ---- -------- ------- ------- ------- ------- ------- Net interest income* ......... 102 148 (115) (108) 2,351 2,094 Total other income ........... 80 24 ---- ---- 1,249 1,007 -------- ------- ------- ------- ------- ------- Total revenues ............... 182 172 (115) (108) 3,600 3,101 Provision for loan losses..... 6 1 ---- ---- 299 265 Total other expense .......... 126 328 (68) (50) 1,997 1,967 -------- ------- ------- ------- ------- ------- Pretax profit ................ 50 (157) (47) (58) 1,304 869 Income taxes (benefit) ....... 18 (45) (47) (58) 430 276 -------- ------- ------- ------- ------- ------- Net income (loss) ............ $ 32 ($ 112) $ ---- $ ---- $ 874 $ 593 ======== ======= ======= ======= ======= ======= Percentage contribution to total revenues** ......... 4.9% 5.4% Percentage contribution to net income ............... 3.7% (18.9%) Average Balances (billions) Total assets ................. $ 13 $ 14 $ 64 $ 58
* Net interest income is reported on a taxable equivalent basis by segment and on a nontaxable equivalent basis for the corporation, reflecting segment eliminations. ** Percentage contribution to total revenues is based on the proportion of each segment's revenues to the combined revenues of all segments. Revenues for the total corporation are presented based on nontaxable equivalent net interest income and total other income, including securities transactions. 30 Consolidated Financial Results Net Interest Income Taxable equivalent net interest income for the corporation rose $246.445 million or 11.5 percent in 1998 to $2.398 billion. Strong loan growth and a wider interest rate spread drove the increase as the corporation benefited from good business development, a slightly higher average yield on total interest-earning assets and a reduction in the average rate paid for funding sources. The net yield on interest-earning assets (defined as taxable equivalent net interest income as a percentage of average interest-earning assets) expanded 10 basis points to 4.24 percent for the year. Management expects taxable equivalent net interest income to advance at a more modest pace in 1999, reflecting an outlook of economic softness, good but more moderate loan growth and a stable net yield on interest-earning assets. NET INTEREST INCOME* (MILLIONS) (A BAR GRAPH APPEARS HERE. SEE THE TABLE BELOW FOR PLOT POINTS.) 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- INTEREST INCOME* 2845 3135 3898 4087 4320 4712 INTEREST EXPENSE 1129 1369 2011 2086 2169 2314 NET INTEREST INCOME* 1716 1766 1887 2001 2151 2398 *TAXABLE EQUIVALENT Interest Income Taxable equivalent interest income increased $391.840 million or 9.1 percent due to substantially higher loan volume. Average loans expanded $4.685 billion or 11.8 percent for the year, fueled predominately by the commercial portfolio, with the average rate earned on loans unchanged from 1997. Loan growth is expected to remain good in 1999 while the rate of increase is expected to moderate, given management's outlook for slower overall economic expansion. Management anticipates loan growth of around 6 percent in 1999, with gains led by taxable commercial loans, commercial mortgages, construction loans and indirect retail loans. Credit cards are expected to remain flat with 1998 as new outstandings replace runoff in the portfolio. Commercial loans, including related real estate categories, rose $4.097 billion or 18.6 percent with solid gains occurring in all categories except tax-exempt loans. Taxable commercial loans advanced $2.696 billion or 23.8 percent, and commercial mortgages increased $746 million or 12.3 percent. Lease financing, which primarily consists of leveraged leases and other structured corporate transactions, grew $474 million or 49.6 percent. Construction loans rose $394 million or 26.3 percent, while foreign loans were higher by $311 million or 63.1 percent. The decline in tax-exempt loans reflected both the reduced availability of tax-exempt financing under current tax laws and paydowns in employee stock ownership plan loans. 31
Taxable Equivalent Rate/Volume Variance Analysis* Table 3 - -------------------------------------------------------------------------------- Average Volume Average Rate -------------------- -------------------- 1998 1997 1998 1997 -------- ------- -------- ---- (Millions) Loans: Commercial ....................................... $14,023 $11,327 7.21 7.32 Tax-exempt ....................................... 1,219 1,743 9.24 8.93 -------- ------- Total commercial ................................. 15,242 13,070 7.37 7.54 Direct retail .................................... 1,143 1,194 9.39 8.99 Indirect retail .................................. 3,091 2,966 8.27 8.56 Credit card ...................................... 5,680 5,626 13.46 12.92 Other revolving credit ........................... 498 424 11.18 12.27 -------- ------- Total retail ..................................... 10,412 10,210 11.36 11.17 Construction ..................................... 1,893 1,499 9.00 9.40 Commercial mortgages ............................. 6,813 6,067 8.58 8.34 Residential mortgages ............................ 7,808 7,422 7.92 7.99 -------- ------- Total real estate ................................ 16,514 14,988 8.31 8.27 Lease financing .................................. 1,429 955 11.63 9.71 Foreign .......................................... 804 493 6.85 6.93 -------- ------- Total loans ...................................... 44,401 39,716 8.79 8.79 Securities: Held-to-maturity: U.S. Government and agency ....................... 381 30 6.10 6.12 Mortgage-backed securities ....................... 800 1,049 8.30 8.03 State and municipal securities ................... 194 221 10.92 11.87 Other ............................................ 101 23 6.67 6.94 -------- ------- Total securities held-to-maturity ................ 1,476 1,323 7.97 8.61 Available-for-sale:** U.S. Government and agency ....................... 4,010 5,269 6.68 6.62 Mortgage-backed securities ....................... 4,424 3,174 6.65 6.91 Other ............................................ 672 1,027 7.04 6.54 ------- ------- Total securities available-for-sale .............. 9,106 9,470 6.69 6.71 ------- ------- Total securities ................................. 10,582 10,793 6.87 6.94 Interest-bearing bank balances ................... 157 89 8.26 5.89 Federal funds sold and securities purchased under resale agreements .......................... 467 397 5.52 5.62 Trading account assets ........................... 955 960 4.76 5.38 -------- ------- Total interest-earning assets .................... $56,562 $51,955 8.33 8.32 ======== ======= Interest Expense Interest-bearing demand .......................... $ 4,984 $ 4,109 1.29 1.56 Savings and money market savings ................. 11,604 10,595 3.89 3.83 Savings certificates ............................. 9,943 10,365 5.46 5.62 Large denomination certificates .................. 3,051 2,929 5.42 5.61 -------- ------- Total interest-bearing deposits in domestic offices ................................. 29,582 27,998 4.14 4.34 Interest-bearing deposits in foreign offices ..... 2,429 1,585 5.59 5.51 -------- ------- Total interest-bearing deposits .................. 32,011 29,583 4.25 4.41 Federal funds purchased and securities sold under repurchase agreements ...................... 7,498 6,744 5.18 5.30 Commercial paper ................................. 1,277 781 5.02 5.06 Other short-term borrowed funds .................. 2,120 1,462 5.25 5.57 -------- ------- Total short-term borrowed funds .................. 10,895 8,987 5.18 5.32 Bank notes ....................................... 2,620 3,075 6.10 6.14 Other long-term debt ............................. 3,659 3,046 6.31 6.51 -------- ------- Total long-term debt ............................. 6,279 6,121 6.22 6.32 -------- ------- Total interest-bearing liabilities ............... $49,185 $44,691 4.71 4.85 ======== ======= --------- ----- Interest rate spread 3.62 3.47 Net yield on interest-earning assets and ========= ===== net interest income .............................. 4.24 4.14 ========= =====
Variance Interest Attributable to ------------------------- -------------------- 1998 1997 Variance Rate Volume ----------- ---------- -------------- ------ ------ Interest Income (Thousands) Loans: Commercial ....................................... $1,011,401 $ 829,406 $ 181,995 ($12,663) $ 194,658 Tax-exempt ....................................... 112,672 155,689 (43,017) 5,279 (48,296) ---------- ---------- ------------- Total commercial ................................. 1,124,073 985,095 138,978 (21,620) 160,598 Direct retail .................................... 107,405 107,326 79 4,688 (4,609) Indirect retail .................................. 255,512 254,001 1,511 (8,941) 10,452 Credit card ...................................... 764,426 727,114 37,312 30,264 7,048 Other revolving credit ........................... 55,644 52,007 3,637 (4,884) 8,521 ---------- ---------- ------------- Total retail ..................................... 1,182,987 1,140,448 42,539 19,752 22,787 Construction ..................................... 170,403 140,780 29,623 (6,093) 35,716 Commercial mortgages ............................. 584,266 505,876 78,390 14,783 63,607 Residential mortgages ............................ 618,118 592,907 25,211 (5,404) 30,615 ---------- ---------- ------------- Total real estate ................................ 1,372,787 1,239,563 133,224 6,386 126,838 Lease financing .................................. 166,128 92,721 73,407 20,907 52,500 Foreign .......................................... 55,067 34,164 20,903 (379) 21,282 ---------- ---------- ------------- Total loans ...................................... 3,901,042 3,491,991 409,051 (2,561) 411,612 Securities: Held-to-maturity: U.S. Government and agency ....................... 23,268 1,843 21,425 (6) 21,431 Mortgage-backed securities ....................... 66,416 84,191 (17,775) 2,785 (20,560) State and municipal securities ................... 21,179 26,259 (5,080) (1,997) (3,083) Other ............................................ 6,746 1,597 5,149 (63) 5,212 ---------- ---------- ------------- Total securities held-to-maturity ................ 117,609 113,890 3,719 (8,878) 12,597 Available-for-sale:** U.S. Government and agency ....................... 267,969 348,763 (80,794) 3,319 (84,113) Mortgage-backed securities ....................... 294,020 219,293 74,727 (8,625) 83,352 Other ............................................ 47,256 67,139 (19,883) 4,762 (24,645) ---------- ---------- ------------- Total securities available-for-sale .............. 609,245 635,195 (25,950) (1,585) (24,365) ---------- ---------- ------------- Total securities ................................. 726,854 749,085 (22,231) (7,696) (14,535) Interest-bearing bank balances ................... 12,987 5,230 7,757 2,663 5,094 Federal funds sold and securities purchased 3,865 under resale agreements .......................... 25,803 22,319 3,484 (381) (290) Trading account assets ........................... 45,433 51,654 (6,221) (5,931) ---------- ---------- ------------- Total interest-earning assets .................... 4,712,119 4,320,279 391,840 8,064 383,776 Interest Expense Interest-bearing demand .......................... 64,530 64,249 281 (12,110) 12,391 Savings and money market savings ................. 451,655 405,444 46,211 7,046 39,165 Savings certificates ............................. 542,477 582,145 (39,668) (16,389) (23,279) Large denomination certificates .................. 165,384 164,391 993 (5,739) 6,732 ---------- ---------- ------------- Total interest-bearing deposits in domestic offices ................................. 1,224,046 1,216,229 7,817 (59,269) 67,086 Interest-bearing deposits in foreign offices ..... 135,659 87,320 48,339 1,237 47,102 ---------- ---------- ------------- Total interest-bearing deposits .................. 1,359,705 1,303,549 56,156 (48,188) 104,344 Federal funds purchased and securities sold under repurchase agreements ...................... 388,390 357,190 31,200 (8,015) 39,215 Commercial paper ................................. 64,088 39,566 24,522 (344) 24,866 Other short-term borrowed funds .................. 111,368 81,406 29,962 (4,859) 34,821 ---------- ---------- ------------- Total short-term borrowed funds .................. 563,846 478,162 85,684 (13,377) 99,061 Bank notes ....................................... 159,896 188,710 (28,814) (1,008) (27,806) Other long-term debt ............................. 230,766 198,397 32,369 (6,430) 38,799 ---------- ---------- ------------- Total long-term debt ............................. 390,662 387,107 3,555 (6,274) 9,829 ---------- ---------- ------------- Total interest-bearing liabilities ............... 2,314,213 2,168,818 145,395 (67,588) 212,983 ---------- ---------- ------------- Interest rate spread Net yield on interest-earning assets and net interest income .............................. $2,397,906 $2,151,461 $ 246,445 52,100 194,345 ========== ========== =============
* 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 $132 million in 1998 and $66 million in 1997. 32 The corporation has foreign credit outstandings consisting of loans and lease financing. Foreign loans at December 31, 1998 were $1.093 billion, representing 2.4 percent of total loans, compared with $639 million or 1.4 percent of total loans at year-end 1997. 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. The corporation's country of risk profile at December 31, 1998 for its $1.093 billion foreign loan portfolio was as follows: Western Europe, $482 million or 44.1 percent of total foreign loans; Latin America, $401 million or 36.7 percent, including $262 million in Brazil; the United States, $189 million or 17.3 percent; and all other areas, $21 million or 1.9 percent. Credits extended in Brazil were predominately short-term in nature. There were no extensions of credit in Russia at December 31, 1998 or 1997, and extensions of credit in Asia were not significant. The corporation's foreign lease financing was predominately defeased leasing at year-end 1998 and was all in countries in Western Europe. Selected Loan Maturities and Interest Sensitivity Table 4 - -------------------------------------------------------------------------------- December 31, 1998 (thousands) One Year One to Over Total or Less Five Years Five Years -------- -------------- ------------- ------------- Commercial, financial and other ................. $14,328,152 $13,126,907 $ 783,920 $ 417,325 Industrial revenue and other tax-exempt ......... 972,603 396,245 201,750 374,608 Construction and land development ............... 2,044,437 1,881,055 163,382 ---- Commercial mortgages ............................ 6,988,050 3,112,331 1,192,171 2,683,548 Loans to foreign borrowers ...................... 1,093,428 954,296 139,132 ---- ----------- ----------- ---------- ---------- Selected loans, net ......................... $25,426,670 $19,470,834 $2,480,355 $3,475,481 =========== =========== ========== ========== Loans with predetermined interest rates ......... $ 5,413,064 $ 1,469,523 $1,727,626 $2,215,915 Loans with floating interest rates .............. 20,013,606 18,001,311 752,729 1,259,566 ----------- ----------- ---------- ---------- Total ...................................... $25,426,670 $19,470,834 $2,480,355 $3,475,481 =========== =========== ========== ==========
Commercial real estate loans, based on regulatory definitions, were $9.032 billion or 19.8 percent of total loans at December 31, 1998 versus $8.570 billion or 19.4 percent one year earlier. 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. There were no significant concentrations of loans in any one industry at year-end 1998 or 1997. Consumer loans, including residential mortgages, increased $588 million or 3.3 percent. Gains were driven largely by residential mortgages, which rose $386 million or 5.2 percent, and by indirect retail loans, which were higher by $125 million or 4.2 percent and primarily consists of automobile sales financing. Growth in residential mortgages occurred in adjustable rate mortgages as the corporation generally does not keep fixed-rate mortgages in its loan portfolio. Credit card loans rose modestly for the year, while other revolving credit expanded $74 million or 17.5 percent. Included in average credit card outstandings for 1998 was $269 million of receivables purchased in the third quarter. The corporation's managed credit card loans at December 31, 1998 were $6.549 billion, representing 14.2 percent of total managed loans, versus $6.419 billion or 14.4 percent of total managed loans one year earlier. Managed totals included $500 million of securitized credit cards at year-end 1998 and 1997. Additional information on the corporation's managed credit card portfolio appears on page 42. Securities, the second largest category of interest-earning assets, decreased $211 million or 2 percent, with reductions in the available-for-sale portfolio partially offset by increases in securities held-to-maturity. Additional incremental runoff in the securities portfolio is expected in 1999 based on maturity schedules 33 Securities Table 5 - -------------------------------------------------------------------------------- December 31 (thousands) 1998 --------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Average Cost Gain Loss Value Maturity ------------- ------------ ----------- ---------- ----------- (Yrs./Mos.) Held-to-Maturity U.S. Treasury and other U.S. Government agencies: Within one year ................. $ 262,934 $ 2,443 $ ---- $ 265,377 One to five years ............... 255,129 4,219 3 259,345 Five to ten years ............... ---- ---- ---- ---- Over ten years .................. ---- ---- ---- ---- ------------- ----------- ----------- ---------- Total ......................... 518,063 6,662 3 524,722 1/9 State and municipal: Within one year ................. 12,735 152 ---- 12,887 One to five years ............... 58,864 5,750 ---- 64,614 Five to ten years ............... 71,232 9,699 ---- 80,931 Over ten years .................. 33,937 3,920 ---- 37,857 ------------- ----------- ----------- ---------- Total ......................... 176,768 19,521 ---- 196,289 6/2 Mortgage-backed: Within one year ................. 146 1 ---- 147 One to five years ............... 78,227 1,878 3 80,102 Five to ten years ............... 69,450 953 1 70,402 Over ten years .................. 462,505 28,837 1 491,341 ------------- ----------- ----------- ---------- Total ......................... 610,328 31,669 5 641,992 15/0 Other: Within one year ................. 40,670 184 2 40,852 One to five years ............... 37,178 472 ---- 37,650 Five to ten years ............... 600 21 ---- 621 Over ten years .................. ---- ---- ---- ---- ------------- ----------- ----------- ---------- Total ......................... 78,448 677 2 79,123 1/2 ------------- ----------- ----------- ---------- Total held-to-maturity ........ 1,383,607 58,529 10 1,442,126 8/1 Available-for-Sale U.S. Treasury and other U.S. Government agencies: Within one year ................. 884,334 9,735 39 894,030 One to five years ............... 2,091,953 61,274 75 2,153,152 Five to ten years ............... 139,227 8,316 1,877 145,666 Over ten years .................. 8,149 4,570 ---- 12,719 ------------- ----------- ----------- ---------- Total ......................... 3,123,663 83,895 1,991 3,205,567 2/7 State and municipal: Within one year ................. 5,211 42 ---- 5,253 One to five years ............... 33,565 1,010 ---- 34,575 Five to ten years ............... 15,276 1,453 1 16,728 Over ten years .................. 6,912 694 1 7,605 ------------- ----------- ----------- ---------- Total ......................... 60,964 3,199 2 64,161 5/4 Mortgage-backed: Within one year ................. 14,606 44 1 14,649 One to five years ............... 280,390 4,287 98 284,579 Five to ten years ............... 796,036 12,680 66 808,650 Over ten years .................. 3,068,432 33,630 3,186 3,098,876 ------------- ----------- ----------- ---------- Total ......................... 4,159,464 50,641 3,351 4,206,754 17/3 Other: Within one year ................. 97 1 ---- 98 One to five years ............... 148,278 1,676 ---- 149,954 Five to ten years ............... 10,084 156 ---- 10,240 Over ten years .................. 174,983 417 1,983 173,417 ------------- ----------- ----------- ---------- Total ......................... 333,442 2,250 1,983 333,709 12/4 ------------- ----------- ----------- ---------- Total interest earning available-for-sale ........... 7,677,533 139,985 7,327 7,810,191 10/11 Federal Reserve Bank stock and other ........................... 171,632 1,825 ---- 173,457 ------------- ----------- ----------- ---------- Total available-for-sale ...... 7,849,165 141,810 7,327 7,983,648 ------------- ----------- ----------- ---------- Total portfolio ............... $9,232,772 $ 200,339 $ 7,337 $9,425,774 ============= =========== =========== ==========
1998 1997 1996 ----------- -------------------------- -------------------------- Taxable Equivalent Amortized Fair Amortized Fair Yield* Cost Value Cost Value ------------ ------------ ----------- ----------- ----------- Held-to-Maturity U.S. Treasury and other U.S. Government agencies: Within one year ................. 5.82% $ 97,213 $ 97,229 $ ---- $ ---- One to five years ............... 6.10 105,700 106,314 ---- ---- Five to ten years ............... ---- ---- ---- ---- Over ten years .................. ---- ---- ---- ---- ------------ ----------- ------------ ----------- Total ......................... 5.96 202,913 203,543 ---- ---- State and municipal: Within one year ................. 11.13 16,033 16,207 9,128 9,212 One to five years ............... 13.28 59,950 64,287 24,822 27,490 Five to ten years ............... 13.03 94,835 107,903 74,129 85,625 Over ten years .................. 11.39 52,085 57,400 59,822 66,425 ------------ ----------- ------------ ----------- Total ......................... 12.66 222,903 245,797 167,901 188,752 Mortgage-backed: Within one year ................. 6.32 553 550 ---- ---- One to five years ............... 7.25 103,233 105,106 125,681 127,541 Five to ten years ............... 6.75 129,809 132,484 164,342 168,203 Over ten years .................. 8.04 728,566 768,940 814,332 854,940 ------------ ----------- ------------ ----------- Total ......................... 7.79 962,161 1,007,080 1,104,355 1,150,684 Other: Within one year ................. 6.46 37,793 38,069 5,399 5,442 One to five years ............... 6.32 83,219 83,614 29,111 30,350 Five to ten years ............... 7.15 350 361 37,711 40,193 Over ten years .................. ---- ---- 7,614 8,134 ------------ ----------- ------------ ----------- Total ......................... 6.40 121,362 122,044 79,835 84,119 ------------ ----------- ------------ ----------- Total held-to-maturity ........ 7.65 1,509,339 1,578,464 1,352,091 1,423,555 Available-for-Sale U.S. Treasury and other U.S. Government agencies: Within one year ................. 6.26 1,428,265 1,436,174 2,118,932 2,122,993 One to five years ............... 6.39 2,966,942 3,010,078 3,000,028 3,038,951 Five to ten years ............... 3.83 98,262 99,626 5,149 5,500 Over ten years .................. 13.60 8,078 12,231 11,166 15,858 ------------ ----------- ------------ ----------- Total ......................... 6.26 4,501,547 4,558,109 5,135,275 5,183,302 State and municipal: Within one year ................. 8.05 10,033 10,091 15,649 15,855 One to five years ............... 7.65 36,592 37,433 35,119 35,841 Five to ten years ............... 9.32 17,015 17,592 29,038 29,571 Over ten years .................. 9.73 16,155 17,822 17,445 18,307 ------------ ----------- ------------ ----------- Total ......................... 8.36 79,795 82,938 97,251 99,574 Mortgage-backed: Within one year ................. 6.56 25,113 25,145 159,978 159,890 One to five years ............... 6.69 772,458 778,099 1,243,815 1,252,752 Five to ten years ............... 6.55 557,712 562,110 972,528 973,369 Over ten years .................. 6.57 2,188,428 2,215,829 1,010,796 1,021,108 ------------ ----------- ------------ ----------- Total ......................... 6.57 3,543,711 3,581,183 3,387,117 3,407,119 Other: Within one year ................. 6.01 52,435 52,676 166,407 166,905 One to five years ............... 6.66 350,400 352,950 801,346 803,543 Five to ten years ............... 6.73 6,524 6,917 ---- ---- Over ten years .................. 6.46 99,616 98,825 ---- ---- ------------ ----------- ------------ ----------- Total ......................... 6.56 508,975 511,368 967,753 970,448 ------------ ----------- ------------ ----------- Total interest earning available-for-sale ........... 6.46 8,634,028 8,733,598 9,587,396 9,660,443 Federal Reserve Bank stock and other ........................... 160,649 175,939 153,852 164,309 ------------ ----------- ------------ ----------- Total available-for-sale ...... 8,794,677 8,909,537 9,741,248 9,824,752 ------------ ----------- ------------ ----------- Total portfolio ............... $10,304,016 $10,488,001 $11,093,339 $11,248,307 ============ =========== ============ ===========
* Yields are presented on a fully taxable equivalent basis using the federal income tax rate and state tax rates, as applicable. Yields on available-for-sale securities are based on amortized cost. 34 of the portfolio. At year-end 1998, securities available-for-sale totaled $7.984 billion and securities held-to-maturity were $1.384 billion. Marking the securities available-for-sale portfolio at December 31, 1998 to fair value resulted in an unrealized gain of $134.483 million, pretax, and $82.440 million, net of tax. Marking the securities available-for-sale average portfolio for the year to fair value resulted in an unrealized gain of $131.761 million, pretax, and $81.025 million, net of tax. Unrealized gains are included, net of tax, in shareholders' equity. Interest Expense Interest expense for 1998 increased $145.395 million or 6.7 percent. The rise reflected higher levels of interest-bearing liabilities to fund loan growth, with the impact on interest expense moderated by a lower average rate paid. Total interest-bearing liabilities expanded $4.494 billion or 10.1 percent, primarily led by deposits and short-term borrowed funds, while the average rate paid declined 14 basis points to 4.71 percent. The corporation utilizes a diverse funding base and believes flexibility and ongoing innovation will be required by financial institutions to attract future funding sources. As part of its funding strategy, the corporation markets traditional funding products while issuing a variety of wholesale funding 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 enhancements to basic checking products, including the addition of the corporation's Access Now account. Wholesale funding sources include senior and subordinated debt, capital securities and a global bank note program. Interest-bearing deposits for the year increased $2.428 billion or 8.2 percent. Savings and money market savings led the growth, expanding $1.009 billion or 9.5 percent, with gains occurring primarily in Premiere and Business Premiere accounts. Demand deposits rose $875 million or 21.3 percent, while foreign deposits were up $844 million or 53.2 percent. The rise in interest-bearing deposits in foreign offices was due, in part, to deposit-taking authorization received in late 1997 by the corporation's London, England, office. Large denomination certificates were higher by $122 million or 4.2 percent for the year, while savings certificates decreased $422 million or 4.1 percent. Gross deposits in 1998 averaged $39.814 billion, up $3.298 billion or 9 percent from $36.516 billion in 1997. Collected deposits, net of float, averaged $37.551 billion for the year, a rise of $3.033 billion or 8.8 percent from $34.518 billion in 1997. Short-term borrowed funds expanded $1.908 billion or 21.2 percent. Federal funds purchased and securities sold under repurchase agreements were higher by $754 million or 11.2 percent, and commercial paper increased $496 million or 63.5 percent. Other short-term borrowed funds, primarily consisting of short-term bank notes, grew $658 million or 45 percent. 35 Short-Term Borrowed Funds Table 6 - -------------------------------------------------------------------------------- (thousands) 1998 1997 1996 ------------------- ------------------- ---------------------- Amount Rate Amount Rate Amount Rate ----------- ----- ----------- ----- ---------- ----- At year-end: Federal funds purchased and securities sold under repurchase agreements .......................... $ 5,463,418 4.14% $ 8,322,716 5.48% $7,206,005 5.71% Commercial paper ................................ 1,359,382 4.21 1,034,024 4.66 706,376 4.69 Other borrowed funds ............................ 1,912,262 5.16 752,874 5.39 1,039,221 5.46 ------------ ------------ ----------- Total .......................................... $ 8,735,062 4.38 $10,109,614 5.39 $8,951,602 5.60 ============ ============ =========== Average for the year: Federal funds purchased and securities sold under repurchase agreements .......................... $ 7,498,280 5.18 $ 6,743,997 5.30 $7,136,064 5.37 Commercial paper* ............................... 1,276,623 5.02 781,345 5.06 595,806 4.88 Other borrowed funds ............................ 2,120,257 5.25 1,461,781 5.57 1,286,160 5.46 ------------ ------------ ----------- Total .......................................... $10,895,160 5.18 $ 8,987,123 5.32 $9,018,030 5.35 ============ ============ =========== Maximum month-end balance: Federal funds purchased and securities sold under repurchase agreements .......................... $ 8,796,505 $ 8,322,716 $8,519,928 Commercial paper ................................ 1,487,187 1,034,024 706,376 Other borrowed funds ............................ 2,677,503 1,953,440 1,961,632
* Average interest rate for each year includes effect of fees paid on back-up lines of credit. Long-term debt was modestly higher, rising $158 million or 2.6 percent for the year. Bank notes declined $455 million or 14.8 percent as management shifted bank note borrowings to other long-term debt, which consists of senior and subordinated debt and capital securities. During the second half of 1998, the corporation issued a total of $1.300 billion of senior and subordinated unsecured debt. In July, the corporation issued $350 million of 10-year subordinated fixed-rate notes. In September, $250 million of two-year senior floating-rate notes and $300 million of three-year senior floating-rate notes were issued. In December, the corporation issued $400 million of 10-year subordinated fixed-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. Capital securities at December 31, 1998 totaled $996 million, reflecting issuances in December 1996 and in January, April and June 1997. The 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 included $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 considered medium-term in nature and are classified as bank notes under long-term debt. Short-term bank notes outstanding at December 31, 1998 were $1.240 billion with an average cost of 5.28 percent and an average maturity of 1.4 months. Medium-term bank notes were $2.856 billion and had an average cost of 5.64 percent and an average maturity of 3.5 years. 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. 36 Market Risk and Asset/Liability Management Market risk is the risk of loss due to adverse changes in instrument values or earnings fluctuation resulting from changes in market factors. This includes, but may not be limited to, changes in interest rates, foreign exchange rates, commodity prices and other market variables including equity price risk. Wachovia has potential exposure to interest rates and foreign exchange rates, no risk in commodity prices (since the corporation does not directly hold commodities or trade in commodity contracts) and immaterial risk in changing equity prices. Market risks reside in both the trading and nontrading portfolios. Trading portfolios represent assets, liabilities and off-balance sheet instruments that are marked-to-market through the income statement. Nontrading portfolios represent assets, liabilities and off-balance sheet instruments that are not marked-to-market through the income statement but are accounted for on an accrual basis or are marked-to-market through the equity account. The primary risk in both the trading and nontrading portfolios is to changes in interest rates. Exposures to movements in foreign exchange rates are predominantly in the trading portfolio. All locations use the U. S. dollar as their functional currency and exposures to foreign exchange translation risk are immaterial to consolidated net income. Exposure to equity price movement is through holdings at the parent company and private equity investments in the capital markets line of business. The volatility of values in the equity portfolios is immaterial to net income. Estimating the amount of risk in either the trading or nontrading portfolios requires assumptions about the future. The nature of the assumptions causes all representations of risk to be estimates. These estimates will be different from actual results for many reasons, including but not limited to, changes in the growth of the overall economy which will impact volume growth in the company, changing credit spreads, market interest rates moving in patterns other than the patterns chosen for analysis, changes in customer preferences, changes in tactical and strategic plans and initiatives, and changes in Federal Reserve policy. Stress testing is performed on all market risk measurement analyses to help understand the relative sensitivity of key assumptions and thereby better understand the risk profile of the corporation. Trading Market Risk Trading market risk is the risk to net income from changes in the fair value of assets and liabilities and off-balance sheet instruments that are marked-to-market through the income statement. Trading portfolios are maintained to create value by servicing customer needs for investment and risk management products at competitive prices. The key trading portfolios by purpose are U. S. Treasury and government agencies, municipal bonds, residential mortgage-backed securities and money market instruments. The corporation enters into derivatives contracts and foreign currency exchange forward and option contracts to service customer needs and does not take material trading positions in either. The earnings risk due to changes in fair value in the trading portfolios is limited by the short-term holding periods of some of the portfolios, entering into offsetting trades with market counterparties, establishing and monitoring market risk limits by portfolio, and utilizing various hedging techniques. Risk appetite, policies, practices and procedures are established in the business units and approved by the relevant risk committees and Board of Directors to ensure that business objectives are met within a framework of prudent and sound risk management. A value-at-risk (VAR) methodology is used to gauge potential losses in various trading portfolios due to changes in interest rates. The VAR model is a statistical variance/covariance model that calculates an estimate of exposure to interest rate movements within a predetermined confidence level over a defined 37 forward-looking time period. The VAR estimate represents the maximum expected loss in fair value of a trading portfolio over a one day time horizon, given a 99 percent confidence level. In other words, there is about a 1 percent chance, given historical volatility of interest rates, that a loss greater than the VAR estimate will occur by the end of the next day. The VAR estimate takes into account several variables that affect the value of the trading portfolio, including interest rates, security prices and their volatilities, and statistical correlations. The potential expected volatility of interest rates is calculated using a one-year history of market movements. These historical volatilities are exponentially weighted to give more weight to recent market movements. At year-end 1998, the combined VAR exposure, given the above calculation parameters, was $161 thousand which represented .04 percent of the combined trading portfolio value of $393.434 million. The combined average VAR exposure for 1998 was $221 thousand which represented .03 percent of the combined average trading portfolio value of $813.631 million. These VAR numbers are for the combined U. S. Treasury and government agency, municipal bond, residential mortgage-backed securities and money market instrument portfolios. Nontrading Market Risk Nontrading market risk is the risk to net income from changes in interest rates on asset, liability and off-balance sheet portfolios other than trading portfolios. The risk is driven by potential mismatches resulting from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, and potential exercise of explicit and embedded options. There is also net income risk from changes in market rate relationships known as basis risk. Funds Management is charged with the responsibility of managing nontrading market risk. Funds Management includes asset/liability management and the management of discretionary securities and funding portfolios. The goal of Funds Management is to maintain high quality and consistent growth in net income while maintaining acceptable levels of risk to changes in interest rates, and acceptable levels of capital and liquidity. This goal is achieved by influencing the maturity and repricing characteristics of the various lending and deposit taking lines of business, by managing the discretionary portfolios, and by utilizing off-balance sheet financial instruments. Funds Management operates under the policies established by the Finance Committee of the Board of Directors and the guidance of the Management Finance Committee. Nontrading interest rate risk, liquidity, capital positions and discretionary on- and off-balance sheet activity are reviewed quarterly by the Finance Committee of the Board of Directors. Interim oversight of the function is provided through regular meetings of Funds Management managers, the Treasurer 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 nontrading interest rate risk including simulating net income, monitoring the sensitivity of the net present value of the balance sheet, and monitoring the difference or gap between maturing or rate-sensitive assets and liabilities over various time periods. Management believes that nontrading interest rate risk is best measured by simulation modeling which calculates expected net income based on projected interest-earning assets, interest-bearing liabilities, off-balance sheet financial instruments, other income and other expense. The model projections are based upon historical trends and management's expectations of balance sheet growth patterns, spreads to market rates, historical market rate relationships, prepayment behavior, current and expected product offerings, sales activity, and expected exercise of explicit and embedded options. The Management Finance Committee regularly reviews the assumptions used in the model. 38 The corporation monitors interest rate risk by measuring the potential change in 12 months of net income under eight standard interest rate scenarios. The scenarios are rolled forward by quarter up to four quarters in the future to view income sensitivity over any given 12-month period within the next 24 months. All of the scenarios are compared with a scenario where current market rates are held constant for the forecast period (i.e., the flat rate scenario). The scenarios are immediate shocks of the yield curve up and down 100 and 200 basis points and ramp scenarios for up and down 100 and 200 basis points occurring evenly across the next 12 months. Policy guidelines are approved by the Management Finance Committee and the Finance Committee of the Board of Directors. For simulation, which is a dynamic forward-looking analysis, the guidelines are focused on the 200 basis point ramp scenarios across 12 months. The policy guideline limit for net income simulation is a negative impact to net income of 7.5 percent for the up or down 200 basis point ramp scenarios when compared with the flat rate scenario. Management has generally maintained a risk position well within the policy guideline level. The model indicated the impact of a 200 basis point gradual rise in rates over the next 12 months would cause approximately a .7 percent decrease in net income at December 31, 1998 compared with a 2 percent decrease at December 31, 1997. A gradual decrease in rates over the next 12 months would cause approximately a .01 percent decrease in net income as of December 31, 1998 compared with an increase of 1.5 percent as of December 31, 1997. The corporation runs additional scenarios beyond the standard shock and ramp scenarios including yield curve steepening, flattening and inversion scenarios. Various sensitivity analyses are performed on a regular basis to segregate interest rate risk into separate components and understand the risk attributable to prepayments, caps and floors, and other options. Extensive assumptions testing is performed to understand the degree of impact from changing key assumptions such as the speed of prepayments, the interest rate elasticity of core deposit rates and faster- or slower-growing balance sheets. The corporation also utilizes a present value methodology to discern risk levels present in the balance sheet beyond the 24-month time horizon used in simulation analysis. The net present value methodology is a point in time analysis of the balance sheet not including new business volumes or management initiatives. All cash flows from earning assets, interest-bearing liabilities, noninterest-bearing deposits and off-balance sheet instruments are discounted to a present value. Assumptions are made to estimate the expected lives of indeterminant maturity assets and liabilities such as line of credit products and savings and checking accounts. Discount rates used in the analysis are based upon forward rates implied by the current yield curve with credit spreads added to discount current new business back to par value. As in simulation analysis, extensive assumptions testing is performed to understand the degree of impact from changing key assumptions. The policy guideline limit for present value of the balance sheet is a negative change in value of 10 percent for up or down shocks of 100 basis points to the beginning yield curve. As of December 31, 1998, Wachovia's change in net present value of the balance sheet for a 100 basis point upward shock to the yield curve was a decline of 2.4 percent. For a decline in rates of 100 basis points, the change was an increase of 1.1 percent. Liquidity Market Risk 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. 39 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 Assets Nonperforming assets at December 31, 1998 were $181.303 million or .40 percent of loans and foreclosed property. The total was up $51.808 million or 40 percent from year-end 1997, reflecting an increase in nonaccrual loans related principally to three multibank credits with an aggregate exposure of $47.552 million for the corporation. The largest category of total nonperforming assets is real estate related. At December 31, 1998, real estate nonperforming assets were $105.990 million or .64 percent of real estate loans and foreclosed real estate versus $106.318 million or .64 percent at year-end 1997. Included in real estate nonperforming assets were real estate nonperforming loans of $85.225 million at December 31, 1998 compared with $84.872 million one year earlier. Commercial real estate nonperforming assets were $47.571 million or .53 percent of related loans and foreclosed real estate versus $50.930 million or .59 percent at the end of 1997. Commercial real estate nonperforming loans included in these totals were $34.911 million at December 31, 1998 versus $45.335 million at year-end 1997. Nonperforming Assets and Contractually Past Due Loans Table 7 - -------------------------------------------------------------------------------- December 31 (thousands) 1998 1997 --------- --------- Nonperforming Assets Cash-basis assets ................................. $ 157,118 $ 101,156 Restructured loans ................................ ---- ---- --------- --------- Total nonperforming loans ..................... 157,118 101,156 Foreclosed property: Foreclosed real estate ........................... 33,443 38,071 Less valuation allowance ......................... 12,678 16,625 Other foreclosed assets .......................... 3,420 6,893 --------- --------- Total foreclosed property ..................... 24,185 28,339 --------- --------- Total nonperforming assets .................... $ 181,303 $ 129,495 ========= ========= Nonperforming loans to year-end loans ............. .34% .23% Nonperforming assets to year-end loans and foreclosed property .............................. .40 .29 Year-end allowance for loan losses times nonperforming loans .............................. 3.49x 5.38x Year-end allowance for loan losses times nonperforming assets ............................. 3.02 4.21 Contractually Past Due Loans (accruing loans past due 90 days or more) ......... $ 136,807 $ 114,343 ========= =========
1996 1995 1994 1993 --------- --------- --------- --------- Nonperforming Assets Cash-basis assets ................................. $ 98,638 $ 102,310 $ 146,246 $ 202,231 Restructured loans ................................ ---- ---- ---- 686 --------- --------- --------- --------- Total nonperforming loans ..................... 98,638 102,310 146,246 202,917 Foreclosed property: Foreclosed real estate ........................... 35,472 39,877 53,746 101,253 Less valuation allowance ......................... 10,805 11,136 12,112 19,974 Other foreclosed assets .......................... 8,213 4,212 2,931 3,406 --------- --------- --------- --------- Total foreclosed property ..................... 32,880 32,953 44,565 84,685 --------- --------- --------- --------- Total nonperforming assets .................... $ 131,518 $ 135,263 $ 190,811 $ 287,602 ========= ========= ========= ========= Nonperforming loans to year-end loans ............. .26% .29% .46% .73% Nonperforming assets to year-end loans and foreclosed property .............................. .35 .38 .60 1.03 Year-end allowance for loan losses times nonperforming loans .............................. 5.26x 5.07x 3.53x 2.51x Year-end allowance for loan losses times nonperforming assets ............................. 3.95 3.84 2.70 1.77 Contractually Past Due Loans (accruing loans past due 90 days or more) ......... $ 84,788 $ 69,953 $ 48,050 $ 51,239 ========= ========= ========= =========
40 Provision and Allowance for Loan Losses The provision for loan losses was $299.480 million, higher by $34.531 million or 13 percent from $264.949 million in 1997. Included in the provision for 1997 was a special charge of $10.845 million to conform the credit policies of acquired companies to those of the corporation. Excluding this nonrecurring charge, the provision in 1998 increased $45.376 million or 17.9 percent from 1997's adjusted level. 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. The assessment primarily considers allowance for loan loss levels relative to loan risk weightings assigned by management. The risk weightings by loan type, including homogenous and nonhomogenous loans, are based on several factors as appropriate, including historical credit loss experience, current economic conditions, the composition of the total loan portfolio, including industry concentrations, and assessments of individual credits within specific loan types. The commercial allocation of the allowance for loan losses has increased over the prior year due to increased net loan losses during the last half of the year and increased outstandings. Because these factors are dynamic in nature, risk weightings for individual loans and loan types are subject to change and the provision for loan losses can fluctuate. Management bases its credit evaluations and reviews on an analysis of a credit's cash flows and enforces an aggressive loan loss policy of early recognition and charge-off of troubled credits. Effective with the first quarter of 1998, management began assessing Year 2000 compliance among borrowers as part of its overall credit review process. Net loan losses for the year totaled $298.824 million or .67 percent of average loans, increasing $34.660 million or 13.1 percent from net losses of $264.164 million or .67 percent of loans in 1997. The rise in total net charge-offs was driven primarily by credit cards, which included $4.949 million in losses from the $269 million of receivables purchased in the third quarter. Anticipated credit loss experience was factored into the acquisition price of this portfolio. Net losses in commercial loans also rose for the year, while net charge-offs in other retail loans, which consists of direct and indirect retail loans, declined and net recoveries in real estate loans widened. Excluding credit cards, net loan losses were $41.108 million or .11 percent of average loans, lower by $3.722 million or 8.3 percent from $44.830 million or .13 percent of loans in 1997. Net loan losses are expected to increase at a slower rate in 1999 based on management's assessment of risk in the loan portfolio as of the start of the year. Credit card net charge-offs were $257.716 million or 4.54 percent of average credit card receivables, up $38.382 million or 17.5 percent from $219.334 million or 3.90 percent of credit card loans in 1997. Commercial net charge-offs rose $6.130 million to $11.213 million or .07 percent of commercial loans, principally due to losses associated with two large credits. Net losses in other retail loans declined $4.080 million or 14.6 percent to $23.884 million or .56 percent of related receivables, while net recoveries in real estate loans increased $4.256 million to $4.825 million or .03 percent of average outstandings. 41 Selected data on the corporation's managed credit card portfolio, which includes securitized loans, appears in the following table. Managed Credit Card Data Table 8 ----------------------------------------------------------------- (thousands) 1998 1997 1996 1995 ----------- ----------- ----------- ----------- Average credit card outstandings .................. $ 6,181,109 $ 6,179,456 $ 5,573,626 $ 4,767,657 Net loan losses ................................... 276,705 240,388 183,082 114,014 Net loan losses to average loans .................. 4.48% 3.89% 3.28% 2.39% Delinquencies (30 days or more) to year-end loans . 3.30 2.75 2.35 2.31
At December 31, 1998, the allowance for loan losses totaled $547.992 million, representing 1.20 percent of loans and 349 percent of nonperforming loans. The allowance for loan losses at year-end 1997 was $544.723 million, representing 1.23 percent of loans and 538 percent of nonperforming loans. ALLOWANCE FOR LOAN LOSSES (MILLIONS) (A bar graph appears here. See the table below for plot points.) 1993 1994 1995 1996 1997 1998 YEAR-END LOAN LOSS ALLOWANCE 509.80 516.10 518.80 519.30 544.70 548.00 X ALLOWANCE TIMES NONPERFORMING LOANS 2.51X 3.53X 5.07X 5.26X 5.38X 3.49X EARNINGS COVERAGE OF NET LOAN LOSSES* (MILLIONS) (A bar graph appears here. See the table below for plot points.) 1993 1994 1995 1996 1997 1998 EARNINGS BEFORE INCOME TAXES AND PROVISION FOR LOAN LOSSES 924.70 1003.50 1094.40 1289.50 1420.10 1668.10 X NUMBER OF TIMES EARNINGS COVERED NET LOAN LOSSES 6.43X 11.18X 8.56X 6.66X 5.38X 5.58X LOAN LOSS EXPERIENCE (MILLIONS) (A bar graph appears here. See the table below for plot points.) 1993 1994 1995 1996 1997 1998 CREDIT CARD 62.00 69.70 109.70 162.90 219.30 257.70 COMMERCIAL 8.30 7.50 (2.70) 0.50 5.10 11.20 REAL ESTATE 63.30 (.20) (3.90) (8.60) (6.0) (4.80) OTHER 10.10 12.80 24.70 38.70 40.40 34.70 % NET LOAN LOSSES TO AVERAGE LOANS .56% .30% .38% .53% .67% .67% 42 Allowance for Loan Losses Table 9 - -------------------------------------------------------------------------------- (thousands) 1998 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- --------- Summary of Transactions Balance at beginning of year ...................... $544,723 $519,297 $518,808 $516,132 $509,798 $481,357 Additions from acquisitions ....................... 2,613 24,641 200 ---- ---- ---- Provision for loan losses ......................... 299,480 264,949 193,776 130,504 96,122 172,161 Deduct net loan losses: Loans charged off: Commercial ...................................... 17,880 9,254 6,375 6,364 14,319 15,047 Credit card ..................................... 286,520 246,008 184,387 125,301 83,597 75,325 Other revolving credit .......................... 10,802 10,564 8,834 5,966 4,933 5,259 Other retail .................................... 35,378 39,801 41,581 26,958 15,696 12,611 Real estate ..................................... 4,514 11,564 7,915 15,299 18,292 75,136 Lease financing ................................. 3,095 4,488 1,635 892 226 458 Foreign ......................................... ---- ---- ---- ---- ---- ---- -------- -------- -------- -------- -------- -------- Total .......................................... 358,189 321,679 250,727 180,780 137,063 183,836 Recoveries: Commercial ...................................... 6,667 4,171 5,905 9,078 6,848 6,720 Credit card ..................................... 28,804 26,674 21,445 15,644 13,913 13,350 Other revolving credit .......................... 2,571 2,361 1,695 1,369 1,278 1,328 Other retail .................................... 11,494 11,837 11,524 7,472 6,505 6,545 Real estate ..................................... 9,339 12,133 16,488 19,239 18,495 11,877 Lease financing ................................. 490 339 183 142 204 264 Foreign ......................................... ---- ---- ---- 8 32 32 -------- -------- -------- -------- -------- -------- Total .......................................... 59,365 57,515 57,240 52,952 47,275 40,116 -------- -------- -------- -------- -------- -------- Net loan losses .................................. 298,824 264,164 193,487 127,828 89,788 143,720 -------- -------- -------- -------- -------- -------- Balance at end of year ............................ $547,992 $544,723 $519,297 $518,808 $516,132 $509,798 ======== ======== ======== ======== ======== ======== Net Loan Losses (Recoveries) by Category Commercial ........................................ $ 11,213 $ 5,083 $ 470 $(2,714) $ 7,471 $ 8,327 Credit card ....................................... 257,716 219,334 162,942 109,657 69,684 61,975 Other revolving credit ............................ 8,231 8,203 7,139 4,597 3,655 3,931 Other retail ...................................... 23,884 27,964 30,057 19,486 9,191 6,066 Real estate ....................................... (4,825) (569) (8,573) (3,940) (203) 63,259 Lease financing ................................... 2,605 4,149 1,452 750 22 194 Foreign ........................................... ---- ---- ---- (8) (32) (32) -------- -------- -------- ---------- -------- -------- Total .......................................... $298,824 $264,164 $193,487 $127,828 $ 89,788 $143,720 ======== ======== ======== ========= ======== ======== Net loan losses -- excluding credit cards ......... $ 41,108 $ 44,830 $ 30,545 $18,171 $ 20,104 $ 81,745 Net Loan Losses (Recoveries) to Average Loans by Category Commercial ........................................ .07% .04% ----% (.02%) .07% .10% Credit card ....................................... 4.54 3.90 3.29 2.41 1.74 2.07 Other revolving credit ............................ 1.65 1.93 1.71 1.15 .96 1.06 Other retail ...................................... .56 .67 .69 .47 .23 .17 Real estate ....................................... (.03) ---- (.06) (.03) ---- .64 Lease financing ................................... .18 .43 .22 .27 .01 .14 Foreign ........................................... ---- ---- ---- ---- ( .03) (.04) Total loans ....................................... .67 .67 .53 .38 .30 .56 Total loans -- excluding credit cards ............. .11 .13 .10 .06 .08 .36 Year-end allowance to outstanding loans ........... 1.20 1.23 1.37 1.46 1.63 1.84 Earnings coverage of net loan losses* ............. 5.58x 5.38x 6.66x 8.56x 11.18x 6.43x Allocation of Allowance for Loan Losses** Commercial ........................................ $129,520 $120,195 $117,883 $123,161 $135,725 $135,898 Credit card ....................................... 228,232 221,142 191,606 141,763 130,111 94,697 Other revolving credit ............................ 8,465 10,682 8,268 7,174 6,433 5,812 Other retail ...................................... 37,308 36,669 48,011 42,999 38,175 39,384 Real estate ....................................... 92,523 93,821 94,167 127,763 143,659 147,570 Lease financing ................................... 6,304 6,537 3,685 1,666 2,211 2,018 Foreign ........................................... 6,342 3,702 3,702 3,697 3,830 931 Unallocated ....................................... 39,298 51,975 51,975 70,585 55,988 83,488 -------- -------- -------- --------- -------- -------- Total ........................................... $547,992 $544,723 $519,297 $518,808 $516,132 $509,798 ======== ======== ======== ========= ======== ========
* Earnings before income taxes and provision for loan losses excluding securities transactions and nonrecurring charges. ** The allocation of the allowance for loan losses above represents an estimate based on historical loss experience, individual credits, economic conditions and other judgmental factors. Since any allocation is judgmental and involves consideration of many factors, the allocation may be more or less than the charge-offs that may ultimately occur. The entire allowance is available for charge-offs in any category of loans. See page 83 for percentage of loan categories to total loans. 43 Noninterest Income Total other operating revenue, which excludes securities sales, rose $222.351 million or 22.1 percent to $1.228 billion for the year. Growth occurred in all categories, with gains strongest in capital markets income, deposit account service charges, trust services fees, mortgage fees and electronic banking. Total other operating revenue included gains of $17.155 million in 1998 and $21.096 million in 1997 from branch sales. Excluding branch sale gains, total other operating revenue rose $226.292 million or 23 percent for the year. Management expects total other operating revenue to increase approximately 10 percent in 1999 based on a stable but slower economic growth outlook and on anticipated gains largely in capital markets, mortgage activity, deposit account services, technology-based banking and financial advisory areas. Capital markets income expanded $80.561 million or 162.7 percent. Growth was driven by gains primarily in consulting services, private placement fees, foreign exchange trading and derivatives income. The corporation sells its capital markets services across its client base with a focus on middle market corporate customers. Services offered include risk management, debt capital and corporate financing, fixed income sales and trading, merchant banking and financial advisory, trust and treasury services, and global and specialty lending. In June 1998, 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 grade rating. Tier II powers permitting further expansion into corporate debt and equity securities without investment grade limitation are expected to be effective in 1999. Revenues from service charges on deposit accounts rose $28.749 million or 9.4 percent. Higher levels of overdraft charges, commercial analysis fees and insufficient funds charges primarily drove the increase. Fees for trust services grew $24.400 million or 13.9 percent. Increases occurred largely in Personal Financial Services and in fees associated with the Wachovia Funds, the corporation's proprietary family of mutual funds. In 1998, management completed installation of a new trust system, designed to enhance and better support the corporation's array of trust products and services. At December 31, 1998, the corporation's trust assets totaled $138.130 billion, including $42.025 billion under discretionary management. This compared with total trust assets of $129.079 billion, including $33.568 billion under discretionary management at year-end 1997. Mortgage fees rose $21.385 million or 90.8 percent, fueled by greater origination activity, gains on sales of mortgage servicing rights and higher gains on loans sold to the secondary market. Increased debit card and ATM usage pushed electronic banking revenues up $9.617 million or 14.9 percent. Credit card income advanced $8.893 million or 5.5 percent, with growth primarily due to higher card sales in both consumer and corporate business accounts. Active managed accounts averaged 2.296 million in 1998 versus 2.050 million in 1997. Investment fee income grew $8.368 million or 23.1 percent. The increase primarily reflected higher levels of fees from customer mutual fund investments and from brokerage commissions. Included in investment fee income are commission sales of the Wachovia Funds by the corporation's branch-based Investment Counselors. Assets of the Wachovia Funds totaled $6.423 billion at December 31, 1998 compared with $5.620 billion at year-end 1997. 44 Noninterest Income Table 10 - -------------------------------------------------------------------------------- (thousands) 1998 1997 1996 ---------- ---------- -------- Service charges on deposit accounts .............................. $ 334,980 $ 306,231 $280,670 Fees for trust services ................ 199,949 175,549 154,621 Credit card income -- net of interchange payments .................. 171,127 162,234 143,382 Electronic banking ..................... 74,257 64,640 56,226 Capital markets income ................. 130,083 49,522 44,212 Investment fees ........................ 44,619 36,251 30,820 Mortgage fees .......................... 44,929 23,544 21,371 Insurance premiums and commissions ........................... 31,897 30,205 20,562 Bankers' acceptance and letter of credit fees ........................... 39,025 34,526 28,243 Other service charges and fees ......... 39,766 38,750 38,590 Other income ........................... 117,487 84,316 56,035 ----------- ----------- --------- Total other operating revenue ........................... 1,228,119 1,005,768 874,732 Gain on sale of mortgage servicing portfolio ............................. ---- ---- ---- Gain on sale of subsidiary ............. ---- ---- ---- Securities gains (losses) .............. 20,442 1,454 4,588 ----------- ----------- --------- Total .............................. $1,248,561 $1,007,222 $879,320 =========== =========== =========
Five-Year Compound 1995 1994 1993 Growth Rate -------- -------- -------- --------------- Service charges on deposit accounts .............................. $ 244,671 $ 231,646 $237,328 7.1% Fees for trust services ................ 145,464 142,026 133,651 8.4 Credit card income -- net of interchange payments .................. 127,153 126,886 104,922 10.3 Electronic banking ..................... 39,722 28,347 17,857 33.0 Capital markets income ................. 29,832 12,131 24,972 39.1 Investment fees ........................ 22,059 11,185 12,244 29.5 Mortgage fees .......................... 26,139 33,997 41,339 1.7 Insurance premiums and commissions ........................... 17,455 17,018 16,566 14.0 Bankers' acceptance and letter of credit fees ........................... 25,953 25,801 22,277 11.9 Other service charges and fees ......... 30,271 22,876 22,094 12.5 Other income ........................... 48,396 38,186 36,219 26.5 ---------- ---------- --------- Total other operating revenue ........................... 757,115 690,099 669,469 12.9 Gain on sale of mortgage servicing portfolio ............................. 79,025 ---- ---- Gain on sale of subsidiary ............. ---- ---- 8,030 (100.0) Securities gains (losses) .............. (19,672) (21,972) 74,256 ( 22.7) ---------- ---------- --------- Total .............................. $ 816,468 $ 668,127 $751,755 10.7 ========== ========== =========
Remaining combined categories of total other operating revenue increased $44.319 million or 26.6 percent excluding gains from branch sales. Insurance premiums and commissions were higher by $1.692 million or 5.6 percent, and bankers' acceptance and letter of credit fees grew $4.499 million or 13 percent. Other service charges and fees expanded modestly, while other income rose $37.112 million or 58.7 percent. Including securities sales, total noninterest income was up $241.339 million or 24 percent for the year. Securities sales resulted in net gains of $20.442 million in 1998, including sizable gains in the third and fourth quarters from the sale of select equity investments. This compared with net securities gains of $1.454 million in 1997, including losses of $4.639 million in the fourth quarter to restructure the available-for-sale portfolio. Noninterest Expense Total noninterest expense rose $29.611 million or 1.5 percent, with growth for the year affected by non-recurring charges taken both in 1998 and 1997. In 1998, the corporation incurred merger expenses of $85.312 million, primarily for systems conversions and signage changes related to its Virginia and Florida banking acquisitions. Nonrecurring noninterest expense charges totaling $287.532 million were taken in 1997 for merger-related charges and an equipment impairment charge. Excluding the merger expenses and special charge, noninterest expense on a core operating basis totaled $1.911 billion in 1998 and grew $231.831 million or 13.8 percent from 1997's core expense level of $1.679 billion. Integration expenses approximating $15 million are expected in 1999 in connection with the corporation's planned acquisition of Interstate/Johnson Lane. Excluding merger charges, noninterest expense in 1999 is expected to rise approximately 5 percent from 1998's core level of $1.911 billion. The estimated growth rate is based on anticipated slower increases largely in salary costs. Employee medical costs and amortization expense are expected to drive most of the noninterest expense growth for 1999. 45 Noninterest Expense Table 11 - -------------------------------------------------------------------------------- (thousands) 1998 1997 1996 ----------- ----------- ----------- Salaries ............................. $ 874,750 $ 742,106 $ 655,065 Employee benefits .................... 180,603 163,051 141,867 ----------- ----------- ----------- Total personnel expense........... 1,055,353 905,157 796,932 Net occupancy expense ................ 138,636 116,654 114,001 Equipment expense .................... 156,203 142,227 132,775 Postage and delivery ................. 52,981 48,657 47,195 Outside data processing, programming and software ............ 68,680 86,497 51,139 Stationery and supplies .............. 34,767 30,960 30,043 Advertising and sales promotion....... 70,222 72,046 68,639 Professional services ................ 56,066 54,113 41,223 Travel and business promotion ........ 29,254 25,215 21,096 Amortization of intangible assets..... 39,091 13,308 9,163 Foreclosed property expense -- net of income ............ 571 1,875 1,930 Personal computer impairment charge* ............................. ---- 67,202 ---- Merger-related charges* .............. 85,312 220,330 ---- Other expense ........................ 209,196 182,480 194,837 ----------- ----------- ----------- Total ............................ $ 1,996,332 $ 1,966,721 $ 1,508,973 =========== =========== =========== Overhead ratio** ..................... 55.1% 62.3% 52.5% Overhead ratio without nonrecurring charges ................ 52.7 53.2 52.5
Five-Year Compound 1995 1994 1993 Growth Rate ----------- ----------- ----------- --------------- Salaries ............................. $ 604,041 $ 566,368 $ 545,869 9.9% Employee benefits .................... 129,749 125,144 139,754 5.3 ----------- ----------- ----------- Total personnel expense........... 733,790 691,512 685,623 9.0 Net occupancy expense ................ 109,543 102,131 101,225 6.5 Equipment expense .................... 127,268 124,321 119,340 5.5 Postage and delivery ................. 44,553 41,169 44,051 3.8 Outside data processing, programming and software ............ 47,737 39,870 42,810 9.9 Stationery and supplies .............. 30,238 27,327 28,100 4.3 Advertising and sales promotion....... 57,957 42,576 43,972 9.8 Professional services ................ 41,152 23,326 19,025 24.1 Travel and business promotion ........ 20,267 16,743 15,977 12.9 Amortization of intangible assets..... 12,296 21,042 30,276 5.2 Foreclosed property expense -- net of income ............ 2,420 7,508 22,929 (52.2) Personal computer impairment charge* ............................. ---- ---- ---- Merger-related charges* .............. ---- ---- ---- Other expense ........................ 214,408 205,726 200,930 .8 ----------- ----------- ----------- Total ............................ $ 1,441,629 $ 1,343,251 $ 1,354,258 8.1 =========== =========== =========== Overhead ratio** ..................... 54.5% 54.7% 56.8% Overhead ratio without nonrecurring charges ................ 54.5 54.7 56.8
* Nonrecurring charges ** Noninterest expense as a percentage of taxable equivalent net interest income and total other operating revenue. Total personnel expense grew $150.196 million or 16.6 percent. Salaries expense rose $132.644 million or 17.9 percent, primarily due to expanded incentive pay for revenue-generating businesses and to a higher wage base. Employee benefits expense increased $17.552 million or 10.8 percent, with growth occurring largely in medical costs, retirement plan expenses and payroll taxes. Combined net occupancy and equipment expense was up $35.958 million or 13.9 percent. Net occupancy expense rose $21.982 million or 18.8 percent, primarily reflecting increased building maintenance and depreciation costs for expanded physical facilities. Higher depreciation for new equipment helped push equipment expense up $13.976 million or 9.8 percent. Remaining combined categories of noninterest expense rose $45.677 million or 8.9 percent excluding nonrecurring charges. Higher levels of intangible assets from purchase acquisitions pushed amortization expense of intangible assets up $25.783 million, accounting for the majority of the rise. Partially offsetting the expense growth was a reduction in outside data processing, programming and software costs, largely due to lower Year 2000 expenses. Year 2000 The change in date to the year 2000 from 1999 will cause data 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. 46 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 and 1998 for recent merger partners. As of December 31, 1998, virtually all of the corporation's information technology systems had been converted. While regulatory guidelines require conversion only of mission critical systems, the corporation has worked to convert all information technology systems. For computer chip embedded functions, the corporation has replaced and tested noncompliant functions essential to business operations. In-house testing of information technology systems currently is underway, with testing completed on approximately 81 percent of all applications at year-end 1998. Management expects to complete testing of all of its information systems by March 31, 1999. 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 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 73 percent compliant as of December 31, 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 having occurred in 1998. Management estimates that total Year 2000 project costs will be approximately $80 million, with $66 million having been spent through December 31, 1998 including $28 million in 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 shutdown of voice and data communication systems due to failure by switching systems, satellites or telephone companies; excessive cash withdrawal activity; cash couriers delayed or not available; ATM failures; 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. 47 The corporation has identified 60 risks associated with the date change event and is in the process of finalizing formal contingency plans for each major risk. Management views contingency planning as part of an overall strategy for managing the date change event and post-event risks and considers pre- implementation mitigating actions as critical components to successful contingency planning. In the event of a voice and data communication system shutdown, contingency plans include deploying cellular and field phones to communicate between established command posts. To reduce expected cash withdrawal demands while simultaneously preparing for higher fund withdrawal activity, the corporation is sponsoring public awareness programs on appropriate cash reserve levels, applying for increased borrowing limits from the Federal Reserve, and broadening its regular liquidity management reviews. Standing agreements with cash courier services are being reviewed to identify and resolve potential courier service problems prior to the date change event. To minimize ATM failures, the corporation has upgraded its entire network of ATMs, including their primary and backup computer processors. Alternate cash access plans include using existing communication channels to direct customers to working ATMs in the event of localized ATM failures and extending branch office hours where needed. To reduce potential problems in international offices, the corporation has converted and is in the process of testing the information systems of its Sao Paulo, Brazil, and London, England, offices. Separate contingency plans have been developed by each foreign office to assist independent operations. In addition to its contingency planning, management has mapped all information systems to its core business processes as part of its preimplementation mitigating action plan. This will enable the corporation to identify affected business processes should data information problems occur during the changeover to calendar year 2000 and in the time period immediately following. The corporation believes the actions it is taking should reduce the risks posed by Year 2000 challenges to its own systems. Management recognizes, however, that unforeseen circumstances could arise both within its own systems and with the systems of external entities and can give no assurances that, if such circumstances arose, they would not adversely affect the corporation's Year 2000 compliance efforts. Further, management cannot determine the impact that any adverse affect might have on the corporation's operations, financial position or cash flows. Euro Conversion On January 1, 1999, eleven member countries of the European Union established the Euro as their common legal currency and established 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 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. Income Taxes Applicable income taxes in 1998 increased $153.298 million or 55.5 percent. 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 income taxes. The interest earned on certain state and municipal debt instruments is exempt from federal income taxes and, in some cases, state income 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. 48 New Accounting Standards In December 1996, the Financial Accounting Standards Board issued 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 established 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, established 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. The disclosure requirements are presented in Note C to the Consolidated Financial Statements. 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. 49 ----------------------------------------------- Shareholders' Equity and Capital Ratios ----------------------------------------------------------------- Shareholders' equity at December 31, 1998 totaled $5.338 billion, rising $163.931 million or 3.2 percent from $5.174 billion at year-end 1997. Included in shareholders' equity at December 31, 1998 was $82.440 million, net of tax, of unrealized gains on securities available-for-sale compared with $71.098 million, net of tax, of unrealized gains one year earlier. Wachovia's book value at year-end 1998 was $26.30 per share, higher by 4.7 percent from $25.13 per share at the close of 1997. The corporation's internal capital generation rate (defined as net income less dividends as a percentage of average equity) was 9.5 percent for the year. During 1998, the corporation repurchased a total of 6,417,200 shares of its common stock under two separate authorizations by the Board of Directors. The shares were repurchased at an average price of $82.22 per share, for a total cost of $527.623 million. In 1997, the corporation repurchased 6,913,400 shares of its common stock at an average price of $61.78 per share, for a total cost of $427.111 million. On June 23, 1998, the Board of Directors authorized the repurchase of up to 12 million shares of the corporation's common stock effective through January 28, 2000. As of December 31, 1998, a total of 4,642,200 shares had been repurchased under the June 23, 1998 authorization. Management expects to complete the share repurchase authorization in 1999. At its meeting on January 22, 1999, the corporation's Board of Directors authorized the repurchase of shares to be issued in connection with the pending purchase acquisition of Interstate/Johnson Lane. The transaction is expected to close during the second quarter of 1999 and result in goodwill of approximately $140 million. Intangible assets at December 31, 1998 totaled $687.535 million, consisting of $542.615 million of goodwill, $93.888 million of deposit base intangibles, $40.428 million of purchased credit card premiums, $10.299 million of mortgage servicing rights and $305 thousand of other intangibles. Intangible assets Capital Components and Ratios Table 12 - -------------------------------------------------------------------------------- December 31 (thousands) 1998 1997 1996 ------------ ----------- ------------ Tier I capital: Common shareholders' equity ............................................. $ 5,338,232 $ 5,174,301 $ 4,608,401 Capital securities ...................................................... 996,368 995,993 300,000 Less ineligible intangible assets ....................................... 666,672 634,052 91,509 Unrealized (gains) losses on securities available-for-sale -- net of tax (82,440) (71,098) (51,686) ----------- ----------- ----------- Total Tier I capital .................................................. 5,585,488 5,465,144 4,765,206 Tier II capital: Allowable allowance for loan losses ..................................... 547,992 544,723 519,297 Allowable long-term debt ................................................ 1,794,148 1,193,451 1,288,041 ----------- ----------- ----------- Tier II capital additions ............................................. 2,342,140 1,738,174 1,807,338 ----------- ----------- ----------- Total capital ......................................................... $ 7,927,628 $ 7,203,318 $ 6,572,544 =========== =========== =========== Risk-adjusted assets ..................................................... $69,928,737 $64,844,037 $53,338,099 Quarterly average assets* ................................................ $64,454,538 $59,139,712 $55,897,010 Risk-based capital ratios: Tier I capital .......................................................... 7.99% 8.43% 8.93% Total capital ........................................................... 11.34 11.11 12.32 Tier I leverage ratio .................................................... 8.67 9.24 8.52
* Excludes ineligible intangible assets and average unrealized gains (losses) on securities available-for-sale, net of tax. 50 one year earlier were $649.542 million, with $520.803 million of goodwill, $113.248 million of deposit base intangibles, $13.780 million of mortgage servicing rights and $1.711 million of other intangibles, primarily purchased credit card premiums. The increase in intangible assets resulted from purchase acquisitions consummated in 1998. 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 unrealized gain or loss, net of tax, on securities available-for-sale. 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 December 31, 1998, the corporation's Tier I to risk-adjusted assets ratio was 7.99 percent and total capital to risk-adjusted assets was 11.34 percent. The Tier I leverage ratio was 8.67 percent. Capital securities included in the capital ratios were $996.368 million and $995.993 million at year-end 1998 and 1997, respectively. Dividends Cash dividends paid in 1998 totaled $381.798 million, rising $54.495 million or 16.6 percent from $327.303 million paid in 1997. The payout ratio of cash dividends paid to net income was 43.7 percent for the year. On January 22, 1999, the corporation's Board of Directors declared a first quarter 1999 dividend of $.49 per common share, payable March 1, 1999 to shareholders of record on February 4. The dividend is higher by 11.4 percent from $.44 per common share paid in the same period of 1998. Additional dividend information may be found on page 90. YEAR-END SHAREHOLDERS' EQUITY PER SHARE FIVE-YEAR COMPOUND GROWTH RATE = 7.9% (A bar graph appears here. See the table below for plot points.) 1993 1994 1995 1996 1997 1998 17.98 18.79 22.08 22.90 25.13 26.30 51 Financial Summary Table 13 - -------------------------------------------------------------------------------- 1998 -------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Summary of Operations (thousands, except per share data) Interest income ................................. $ 1,176,192 $ 1,171,466 $ 1,169,758 $ 1,147,829 Interest expense ................................ 566,443 582,030 587,054 578,686 ------------- ----------- ----------- ----------- Net interest income ............................. 609,749 589,436 582,704 569,143 Provision for loan losses (1) ................... 84,104 72,809 68,441 74,126 ------------- ----------- ----------- ----------- Net interest income after provision for loan losses ......................................... 525,645 516,627 514,263 495,017 Other operating revenue ......................... 318,812 310,541 315,043 283,723 Securities gains (losses) (2) ................... 7,407 6,886 2,992 3,157 ------------- ----------- ----------- ----------- Total other income .............................. 326,219 317,427 318,035 286,880 Personnel expense ............................... 269,941 263,282 262,406 259,724 Nonrecurring charges (3) ........................ 6,961 11,934 30,849 35,568 Other expense ................................... 215,784 217,187 223,739 198,957 ------------- ----------- ----------- ----------- Total other expense ............................. 492,686 492,403 516,994 494,249 Income before income tax expense ................ 359,178 341,651 315,304 287,648 Income tax expense .............................. 117,612 114,284 105,388 92,327 ------------- ----------- ----------- ----------- Net income ...................................... $ 241,566 $ 227,367 $ 209,916 $ 195,321 ============= =========== =========== =========== Net income per common share: Basic .......................................... $ 1.19 $ 1.11 $ 1.02 $ .95 Diluted ........................................ $ 1.17 $ 1.09 $ 1.00 $ .93 Cash dividends paid per common share (4) ........ $ .49 $ .49 $ .44 $ .44 Cash dividends paid on common stock (5) ......... $ 99,452 $ 100,784 $ 90,973 $ 90,589 Cash dividend payout ratio (5) .................. 41.2% 44.3% 43.3% 46.4% Average basic shares outstanding ................ 202,824 204,832 206,718 205,894 Average diluted shares outstanding .............. 206,991 208,837 210,662 210,158 Selected Average Balances (millions) Total assets .................................... $ 65,298 $ 63,429 $ 63,916 $ 63,133 Loans -- net of unearned income ................. 45,966 43,894 43,974 43,749 Securities ...................................... 9,952 10,664 11,102 10,623 Other interest-earning assets ................... 1,622 1,508 1,558 1,630 Total interest-earning assets ................... 57,540 56,066 56,634 56,002 Interest-bearing deposits ....................... 31,766 31,654 32,182 32,455 Short-term borrowed funds ....................... 11,135 10,858 10,947 10,635 Long-term debt .................................. 6,830 6,080 6,092 6,107 Total interest-bearing liabilities .............. 49,731 48,592 49,221 49,197 Noninterest-bearing deposits .................... 8,148 7,874 7,939 7,240 Total deposits .................................. 39,914 39,528 40,121 39,695 Shareholders' equity ............................ 5,178 5,173 5,211 5,109 Ratios (averages) Annualized net loan losses to loans ............. .73% .66% .62% .68% Annualized net yield on interest-earning assets ......................................... 4.28 4.26 4.21 4.21 Shareholders' equity to: Total assets ................................... 7.93 8.16 8.15 8.09 Net loans ...................................... 11.40 11.93 12.00 11.82 Annualized return on assets ..................... 1.48 1.43 1.31 1.24 Annualized return on shareholders' equity ....... 18.66 17.58 16.11 15.29 Operating Performance Excluding Nonrecurring Items (thousands, except per share data) Net income ...................................... $ 246,160 $ 235,243 $ 230,276 $ 218,168 Net income per diluted share .................... $ 1.19 $ 1.13 $ 1.09 $ 1.04 Annualized return on assets ..................... 1.51% 1.48% 1.44% 1.38% Annualized return on shareholders' equity ....... 19.02 18.19 17.68 17.08 Cash dividend payout ratio (5) .................. 40.4 42.8 39.5 41.5
1997 ------------------------------------------------------------ Fourth Third Second First Quarter Quarter Quarter Quarter ------------ ----------- ----------- ----------- Summary of Operations (thousands, except per share data) Interest income ................................. $1,119,617 $ 1,072,921 $ 1,051,622 $ 1,018,225 Interest expense ................................ 564,145 549,277 539,423 515,973 ------------ ----------- ----------- ----------- Net interest income ............................. 555,472 523,644 512,199 502,252 Provision for loan losses (1) ................... 76,915 62,756 63,047 62,231 ------------ ----------- ----------- ----------- Net interest income after provision for loan losses ......................................... 478,557 460,888 449,152 440,021 Other operating revenue ......................... 263,258 256,047 259,594 226,869 Securities gains (losses) (2) ................... (1,693) 1,091 498 1,558 ------------ ----------- ----------- ----------- Total other income .............................. 261,565 257,138 260,092 228,427 Personnel expense ............................... 244,250 230,352 218,916 211,639 Nonrecurring charges (3) ........................ 287,532 ---- ---- ---- Other expense ................................... 200,636 194,949 201,485 176,962 ------------ ----------- ----------- ----------- Total other expense ............................. 732,418 425,301 420,401 388,601 Income before income tax expense ................ 7,704 292,725 288,843 279,847 Income tax expense .............................. 4,100 93,803 92,038 86,372 ------------ ----------- ----------- ----------- Net income ...................................... $ 3,604 $ 198,922 $ 196,805 $ 193,475 ============ =========== =========== =========== Net income per common share: Basic .......................................... $ .02 $ 1.02 $ 1.00 $ .97 Diluted ........................................ $ .02 $ 1.00 $ .98 $ .95 Cash dividends paid per common share (4) ........ $ .44 $ .44 $ .40 $ .40 Cash dividends paid on common stock (5) ......... $ 87,045 $ 83,952 $ 78,001 $ 78,305 Cash dividend payout ratio (5) .................. 2,415.2% 42.2% 39.6% 40.5% Average basic shares outstanding ................ 201,415 194,981 196,676 200,110 Average diluted shares outstanding .............. 205,934 198,555 199,819 203,307 Selected Average Balances (millions) Total assets .................................... $ 59,835 $ 57,183 $ 57,044 $ 56,333 Loans -- net of unearned income ................. 41,770 39,731 39,100 38,223 Securities ...................................... 10,126 10,649 11,102 11,310 Other interest-earning assets ................... 1,637 1,457 1,370 1,316 Total interest-earning assets ................... 53,533 51,837 51,572 50,849 Interest-bearing deposits ....................... 30,706 29,300 29,450 28,857 Short-term borrowed funds ....................... 9,444 9,172 8,917 8,403 Long-term debt .................................. 5,935 6,031 6,063 6,465 Total interest-bearing liabilities .............. 46,085 44,503 44,430 43,725 Noninterest-bearing deposits .................... 7,484 6,843 6,789 6,612 Total deposits .................................. 38,190 36,143 36,239 35,469 Shareholders' equity ............................ 4,884 4,391 4,376 4,479 Ratios (averages) Annualized net loan losses to loans ............. .73% .63% .64% .65% Annualized net yield on interest-earning assets ......................................... 4.21 4.12 4.10 4.13 Shareholders' equity to: Total assets ................................... 8.16 7.68 7.67 7.95 Net loans ...................................... 11.85 11.20 11.34 11.88 Annualized return on assets ..................... .02 1.39 1.38 1.37 Annualized return on shareholders' equity ....... .30 18.12 17.99 17.28 Operating Performance Excluding Nonrecurring Items (thousands, except per share data) Net income ...................................... $ 210,727 $ 198,922 $ 196,805 $ 193,475 Net income per diluted share .................... $ 1.02 $ 1.00 $ .98 $ .95 Annualized return on assets ..................... 1.41% 1.39% 1.38% 1.37% Annualized return on shareholders' equity ....... 17.26 18.12 17.99 17.28 Cash dividend payout ratio (5) .................. 41.3 42.2 39.6 40.5
(1) Includes $10,845 in nonrecurring merger-related provision in the 1997 fourth quarter. (2) Includes $4,639 of nonrecurring losses to restructure the available-for-sale portfolio in the 1997 fourth quarter. (3) Nonrecurring charges in the 1998 fourth, third, second and first quarters include merger-related items of $6,961, $11,934, $30,849 and $35,568, respectively; nonrecurring charges in the 1997 fourth quarter include merger-related charges of $220,330 and a personal computer impairment charge 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. 52 ----------------------------- Fourth Quarter Analysis ----------------------------------------------------------------- Net income for the fourth quarter of 1998 was $241.566 million or $1.17 per diluted share compared with $3.604 million or $.02 per diluted share a year earlier. Included in the results for both quarters were nonrecurring charges, which totaled $6.961 million, pretax, in the 1998 period for merger expenses and $303.016 million, pretax, in the 1997 period for merger and special charges. The net impact of the non-recurring charges was $4.594 million, after-tax, or $.02 per diluted share for the fourth quarter of 1998 and $207.123 million, after-tax, or $1.00 per diluted share for the final three months of 1997. On a core operating basis excluding merger and special charges, net income for the fourth quarter of 1998 was $246.160 million or $1.19 per diluted share versus $210.727 million or $1.02 per diluted share a year earlier. Revenue growth for the quarter was strong. Total revenues advanced $107.785 million or 13 percent year over year to $939.666 million on solid increases from both interest and noninterest income sources. Taxable equivalent net interest income expanded $52.231 million or 9.2 percent. The rise was driven primarily by strong loan demand, with a lower average rate paid for funding sources also contributing to the increase. Average loans grew $4.196 billion or 10 percent, led largely by taxable commercial loans, commercial real estate loans and lease financing. The average rate earned on loans decreased 19 basis points. Total interest-bearing liabilities rose $3.646 billion or 7.9 percent, while the average rate paid declined 34 basis points. Short-term borrowed funds expanded $1.691 billion or 17.9 percent, interest-bearing deposits increased $1.060 billion or 3.5 percent and long-term debt rose $895 million or 15.1 percent. QUARTERLY NET INCOME PER SHARE, 1998 (DILUTED) (A bar graph appears here. See the table below for plot points.) 1ST Q 2ND Q 3RD Q 4TH Q .93 1.00 1.09 1.17 QUARTERLY NET INCOME PER SHARE, 1997 (DILUTED) (A bar graph appears here. See the table below for plot points.) 1ST Q 2ND Q 3RD Q 4TH Q .95 .98 1.00 .02 53 Taxable Equivalent Rate/Volume Variance Analysis -- Fourth Quarter* Table 14 - -------------------------------------------------------------------------------- Average Volume Average Rate - -------------------- -------------------- 1998 1997 1998 1997 - -------- ---- -------- ---- (Millions) Loans: Commercial ....................................... $15,045 $12,173 6.97 7.40 Tax-exempt ....................................... 1,033 1,616 9.72 8.85 -------- ------- Total commercial ................................. 16,078 13,789 7.14 7.57 Direct retail .................................... 1,112 1,235 8.86 9.07 Indirect retail .................................. 3,212 2,976 7.92 8.46 Credit card ...................................... 5,829 5,735 13.62 13.14 Other revolving credit ........................... 523 437 11.36 12.33 -------- ------- Total retail ..................................... 10,676 10,383 11.30 11.28 Construction ..................................... 1,971 1,689 8.78 9.30 Commercial mortgages ............................. 6,875 6,444 8.35 8.50 Residential mortgages ............................ 7,543 7,894 7.72 7.89 -------- ------- Total real estate ................................ 16,389 16,027 8.11 8.28 Lease financing .................................. 1,736 1,057 12.16 10.46 Foreign .......................................... 1,087 514 6.85 7.13 -------- ------- Total loans ...................................... 45,966 41,770 8.64 8.83 Securities: Held-to-maturity: U.S. Government and agency ....................... 526 119 6.08 6.12 Mortgage-backed securities ....................... 664 981 8.28 8.04 State and municipal securities ................... 181 218 11.50 11.63 Other ............................................ 83 85 6.53 6.62 -------- ------- Total securities held-to-maturity ................ 1,454 1,403 7.79 8.35 Available-for-sale:** U.S. Government and agency ....................... 3,478 4,781 6.52 6.78 Mortgage-backed securities ....................... 4,425 3,141 6.44 6.94 Other ............................................ 595 801 6.82 6.53 -------- ------- Total securities available-for-sale .............. 8,498 8,723 6.50 6.81 -------- ------- Total securities ................................. 9,952 10,126 6.68 7.02 Interest-bearing bank balances ................... 163 116 7.73 6.56 Federal funds sold and securities purchased under resale agreements .......................... 641 594 5.33 5.71 Trading account assets ........................... 818 927 3.48 5.55 -------- ------- Total interest-earning assets .................... $57,540 $53,533 8.19 8.39 ======== ======= Interest Expense Interest-bearing demand .......................... $ 4,639 $ 4,368 1.30 1.57 Savings and money market savings ................. 12,481 11,189 3.67 3.85 Savings certificates ............................. 9,128 10,676 5.35 5.61 Large denomination certificates .................. 3,387 2,816 5.31 5.75 -------- ------- Total interest-bearing deposits in domestic offices ................................. 29,635 29,049 4.00 4.34 Interest-bearing deposits in foreign offices ..... 2,131 1,657 5.23 5.69 -------- ------- Total interest-bearing deposits .................. 31,766 30,706 4.09 4.41 Federal funds purchased and securities sold under repurchase agreements ...................... 7,404 7,091 4.68 5.34 Commercial paper ................................. 1,439 887 4.62 5.10 Other short-term borrowed funds .................. 2,292 1,466 5.23 5.54 -------- ------- Total short-term borrowed funds .................. 11,135 9,444 4.78 5.35 Bank notes ....................................... 2,459 2,940 6.06 6.14 Other long-term debt ............................. 4,371 2,995 6.12 6.59 -------- ------- Total long-term debt ............................. 6,830 5,935 6.10 6.37 -------- ------- Total interest-bearing liabilities ............... $49,731 $46,085 4.52 4.86 ======== ======= --------- ----- Interest rate spread 3.67 3.53 Net yield on interest-earning assets and ========= ===== net interest income .............................. 4.28 4.21 ========= =====
Variance Interest Attributable to -------------------------- ------------------------- 1998 1997 Variance Rate Volume ----------- ------------ -------------- ---------- ---------- Interest Income (Thousands) Loans: Commercial ....................................... $ 264,170 $ 227,131 $ 37,039 ($ 14,037) $ 51,076 Tax-exempt ....................................... 25,293 36,043 (10,750) 3,258 (14,008) ----------- ----------- ------------- Total commercial ................................. 289,463 263,174 26,289 (15,568) 41,857 Direct retail .................................... 24,851 28,237 (3,386) (622) (2,764) Indirect retail .................................. 64,128 63,469 659 (4,184) 4,843 Credit card ...................................... 200,086 189,903 10,183 7,028 3,155 Other revolving credit ........................... 14,980 13,573 1,407 (1,133) 2,540 ----------- ----------- ------------- Total retail ..................................... 304,045 295,182 8,863 518 8,345 Construction ..................................... 43,617 39,604 4,013 (2,315) 6,328 Commercial mortgages ............................. 144,741 138,084 6,657 (2,444) 9,101 Residential mortgages ............................ 146,794 156,915 (10,121) (3,249) (6,872) ----------- ----------- ------------- Total real estate ................................ 335,152 334,603 549 (6,922) 7,471 Lease financing .................................. 53,221 27,860 25,361 5,145 20,216 Foreign .......................................... 18,782 9,236 9,546 (364) 9,910 ----------- ----------- ------------- Total loans ...................................... 1,000,663 930,055 70,608 (21,118) 91,726 Securities: Held-to-maturity: U.S. Government and agency ....................... 8,056 1,843 6,213 (13) 6,226 Mortgage-backed securities ....................... 13,861 19,874 (6,013) 583 (6,596) State and municipal securities ................... 5,237 6,390 (1,153) (74) (1,079) Other ............................................ 1,364 1,407 (43) (19) (24) ----------- ----------- ------------- Total securities held-to-maturity ................ 28,518 29,514 (996) (2,039) 1,043 Available-for-sale:** U.S. Government and agency ....................... 57,126 81,648 (24,522) (3,031) (21,491) Mortgage-backed securities ....................... 71,798 54,939 16,859 (4,211) 21,070 Other ............................................ 10,238 13,182 (2,944) 573 (3,517) ----------- ----------- ------------- Total securities available-for-sale .............. 139,162 149,769 (10,607) (6,816) (3,791) ----------- ----------- ------------- Total securities ................................. 167,680 179,283 (11,603) (8,565) (3,038) Interest-bearing bank balances ................... 3,166 1,920 1,246 383 863 Federal funds sold and securities purchased under resale agreements .......................... 8,615 8,542 73 (584) 657 Trading account assets ........................... 7,173 12,968 (5,795) (4,401) (1,394) ----------- ----------- ------------- Total interest-earning assets .................... 1,187,297 1,132,768 54,529 (28,671) 83,200 Interest Expense Interest-bearing demand .......................... 15,206 17,333 (2,127) (3,154) 1,027 Savings and money market savings ................. 115,367 108,682 6,685 (5,436) 12,121 Savings certificates ............................. 123,203 150,959 (27,756) (6,630) (21,126) Large denomination certificates .................. 45,359 40,830 4,529 (3,283) 7,812 ----------- ----------- ------------- Total interest-bearing deposits in domestic offices ................................. 299,135 317,804 (18,669) (24,976) 6,307 Interest-bearing deposits in foreign offices ..... 28,112 23,778 4,334 (2,044) 6,378 ----------- ----------- ------------- Total interest-bearing deposits .................. 327,247 341,582 (14,335) (25,851) 11,516 Federal funds purchased and securities sold under repurchase agreements ...................... 87,291 95,440 (8,149) (12,219) 4,070 Commercial paper ................................. 16,746 11,411 5,335 (1,180) 6,515 Other short-term borrowed funds .................. 30,209 20,453 9,756 (1,193) 10,949 ----------- ----------- ------------- Total short-term borrowed funds .................. 134,246 127,304 6,942 (14,339) 21,281 Bank notes ....................................... 37,576 45,501 (7,925) (581) (7,344) Other long-term debt ............................. 67,374 49,758 17,616 (3,811) 21,427 ----------- ----------- ------------- Total long-term debt ............................. 104,950 95,259 9,691 (4,202) 13,893 ----------- ----------- ------------- Total interest-bearing liabilities ............... 566,443 564,145 2,298 (40,689) 42,987 ----------- ----------- ------------- Interest rate spread Net yield on interest-earning assets and net interest income .............................. $ 620,854 $ 568,623 $ 52,231 9,117 43,114 =========== =========== =============
* 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 $177 million in 1998 and $99 million in 1997. 54 Allowance for Loan Losses Table 15 - -------------------------------------------------------------------------------- (thousands) 1998 ----------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- -------- -------- -------- Summary of Transactions Balance at beginning of period ............ $ 547,686 $547,572 $544,741 $544,723 Additions from acquisitions ............... ---- ---- 2,613 ---- Provision for loan losses ................. 84,104 72,809 68,441 74,126 Deduct net loan losses: Loans charged off: Commercial .............................. 7,365 4,601 3,252 2,662 Credit card ............................. 75,401 69,043 70,015 72,061 Other revolving credit .................. 3,050 2,736 2,927 2,089 Other retail ............................ 9,851 8,515 6,624 10,388 Real estate ............................. 2,407 264 634 1,209 Lease financing ......................... 701 782 726 886 Foreign ................................. ---- ---- ---- ---- ----------- -------- -------- -------- Total ................................. 98,775 85,941 84,178 89,295 Recoveries: Commercial .............................. 1,979 1,517 1,271 1,900 Credit card ............................. 7,073 7,522 7,270 6,939 Other revolving credit .................. 641 610 630 690 Other retail ............................ 3,167 2,242 3,070 3,015 Real estate ............................. 2,001 1,223 3,578 2,537 Lease financing ......................... 116 132 136 106 Foreign ................................. ---- ---- ---- ---- ----------- -------- -------- -------- Total ................................. 14,977 13,246 15,955 15,187 ----------- -------- -------- -------- Net loan losses .......................... 83,798 72,695 68,223 74,108 ----------- -------- -------- -------- Balance at end of period .................. $ 547,992 $547,686 $547,572 $544,741 =========== ======== ======== ======== Net Loan Losses (Recoveries) by Category Commercial ................................ $ 5,386 $ 3,084 $ 1,981 $ 762 Credit card ............................... 68,328 61,521 62,745 65,122 Other revolving credit .................... 2,409 2,126 2,297 1,399 Other retail .............................. 6,684 6,273 3,554 7,373 Real estate ............................... 406 (959) (2,944) (1,328) Lease financing ........................... 585 650 590 780 Foreign ................................... ---- ---- ---- ---- ----------- -------- -------- -------- Total ................................. $ 83,798 $ 72,695 $ 68,223 $ 74,108 =========== ======== ======== ======== Net loan losses -- excluding credit cards .................................... $ 15,470 $ 11,174 $ 5,478 $ 8,986 Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial ................................ .13% .08% .05% .02% Credit card ............................... 4.69 4.40 4.52 4.54 Other revolving credit .................... 1.84 1.67 1.86 1.20 Other retail .............................. .62 .60 .34 .70 Real estate ............................... .01 (.02) (.07) (.03) Lease financing ........................... .13 .16 .19 .29 Foreign ................................... ---- ---- ---- ---- Total loans ............................... .73 .66 .62 .68 Total loans -- excluding credit cards ..... .15 .12 .06 .09 Period-end allowance to outstanding loans .................................... 1.20 1.20 1.23 1.22
1997 ------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- --------- -------- -------- Summary of Transactions Balance at beginning of period ............ $ 519,356 $519,335 $519,312 $519,297 Additions from acquisitions ............... 24,641 ---- ---- ---- Provision for loan losses ................. 76,915 62,756 63,047 62,231 Deduct net loan losses: Loans charged off: Commercial .............................. 3,801 686 1,772 2,995 Credit card ............................. 68,796 61,277 59,935 56,000 Other revolving credit .................. 3,659 2,520 2,259 2,126 Other retail ............................ 9,032 8,777 10,027 11,965 Real estate ............................. 5,786 1,469 1,764 2,545 Lease financing ......................... 916 988 1,218 1,366 Foreign ................................. ---- ---- ---- ---- ----------- --------- -------- -------- Total ................................. 91,990 75,717 76,975 76,997 Recoveries: Commercial .............................. 1,184 988 1,289 710 Credit card ............................. 6,251 6,894 6,573 6,956 Other revolving credit .................. 588 575 591 607 Other retail ............................ 2,577 2,638 2,929 3,693 Real estate ............................. 5,125 1,787 2,465 2,756 Lease financing ......................... 76 100 104 59 Foreign ................................. ---- ---- ---- ---- ----------- --------- -------- -------- Total ................................. 15,801 12,982 13,951 14,781 ----------- --------- -------- -------- Net loan losses .......................... 76,189 62,735 63,024 62,216 ----------- --------- -------- -------- Balance at end of period .................. $ 544,723 $519,356 $519,335 $519,312 =========== ========= ======== ======== Net Loan Losses (Recoveries) by Category Commercial ................................ $ 2,617 $ (302) $ 483 $ 2,285 Credit card ............................... 62,545 54,383 53,362 49,044 Other revolving credit .................... 3,071 1,945 1,668 1,519 Other retail .............................. 6,455 6,139 7,098 8,272 Real estate ............................... 661 (318) (701) (211) Lease financing ........................... 840 888 1,114 1,307 Foreign ................................... ---- ---- ---- ---- ----------- --------- -------- -------- Total ................................. $ 76,189 $62,735 $ 63,024 $ 62,216 =========== ========= ======== ======== Net loan losses -- excluding credit cards .................................... $ 13,644 $ 8,352 $ 9,662 $ 13,172 Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial ................................ .08% (.01%) .01% .07% Credit card ............................... 4.36 3.85 3.85 3.52 Other revolving credit .................... 2.81 1.87 1.59 1.44 Other retail .............................. .61 .61 .69 .78 Real estate ............................... .02 (.01) (.02) (.01) Lease financing ........................... .32 .35 .50 .62 Foreign ................................... ---- ---- ---- ---- Total loans ............................... .73 .63 .64 .65 Total loans -- excluding credit cards ..... .15 .10 .12 .16 Period-end allowance to outstanding loans .................................... 1.23 1.27 1.29 1.32
55 The provision for loan losses was $84.104 million, higher by $7.189 million or 9.3 percent from the year earlier period, which included $10.845 million in a special merger-related charge. Excluding this special charge, the provision rose $18.034 million or 27.3 percent on a recurring basis. Net loan losses totaled $83.798 million or .73 percent of average loans, increasing $7.609 million or 10 percent from net charge-offs of $76.189 million or .73 percent of loans a year earlier. The increase in net loan losses reflected higher losses, primarily in credit cards and commercial loans. Credit card net loan losses were $68.328 million or 4.69 percent of related loans, up $5.783 million or 9.2 percent from a year earlier. On a managed basis, including securitized loans, credit card net charge-offs totaled $72.997 million or 4.61 percent of average receivables versus $67.735 million or 4.31 percent in the same period of 1997. Average managed credit card outstandings were $6.329 billion for the fourth quarter of 1998 compared with $6.281 billion a year earlier. Excluding credit cards, net loan losses were $15.470 million or .15 percent of loans, an increase of $1.826 million or 13.4 percent from $13.644 million or .15 percent of loans in the same three months of 1997. Total other operating revenue rose $55.554 million or 21.1 percent, with all categories expanding for the period. Capital markets income led the growth, increasing $20.004 million or 124.7 percent on strong gains primarily in derivatives income, consulting services and foreign exchange trading. Credit card income advanced $7.812 million or 20.4 percent, and fees for trust services rose $6.531 million or 13.8 percent. Service charges on deposit accounts were higher by $5.990 million or 7.4 percent, and mortgage fees grew $5.963 million or 79.4 percent, primarily on increased originations and larger gains on sales of mortgage servicing rights. Including securities sales, total noninterest income was up $64.654 million or 24.7 percent. Noninterest expense increased $40.839 million or 9.2 percent excluding merger and special charges. Total personnel expense rose $25.691 million or 10.5 percent, primarily due to higher incentive pay and growth in employee medical costs. Combined net occupancy and equipment expense moved up $10.215 million or 15.2 percent, largely reflecting increased depreciation for new buildings and equipment. Remaining combined categories of noninterest expense rose $4.933 million or 3.7 percent excluding nonrecurring charges. Year 2000 costs for the fourth quarter of 1998 were $6 million. Noninterest Income Table 16 - -------------------------------------------------------------------------------- (thousands) 1998 ---------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ------- --------- -------- Service charges on deposit accounts ........ $ 86,967 $ 84,674 $ 82,465 $ 80,874 Fees for trust services .................... 53,909 51,185 48,802 46,053 Credit card income -- net of interchange payments ...................... 46,194 43,312 43,077 38,544 Electronic banking ......................... 19,746 19,449 18,667 16,395 Capital markets income ..................... 36,044 37,625 40,304 16,110 Investment fees ............................ 11,051 10,712 11,665 11,191 Mortgage fees .............................. 13,472 12,251 11,502 7,704 Insurance premiums and commissions ......... 7,981 8,213 8,135 7,568 Bankers' acceptance and letter of credit fees ...................................... 9,909 9,745 9,802 9,569 Other service charges and fees ............. 9,611 9,680 10,125 10,350 Other income ............................... 23,928 23,695 30,499 39,365 ----------- -------- -------- -------- Total other operating revenue .......... 318,812 310,541 315,043 283,723 Securities gains (losses) .................. 7,407 6,886 2,992 3,157 ----------- -------- -------- -------- Total .................................. $ 326,219 $317,427 $318,035 $286,880 =========== ======== ======== ======== 1997 --------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter --------- -------- -------- -------- Service charges on deposit accounts ........ $ 80,977 $ 76,584 $ 74,576 $ 74,094 Fees for trust services .................... 47,378 43,653 43,668 40,850 Credit card income -- net of interchange payments ...................... 38,382 43,182 43,814 36,856 Electronic banking ......................... 17,355 16,841 15,678 14,766 Capital markets income ..................... 16,040 14,994 11,176 7,312 Investment fees ............................ 9,541 9,721 8,533 8,456 Mortgage fees .............................. 7,509 5,711 5,154 5,170 Insurance premiums and commissions ......... 7,169 7,966 8,170 6,900 Bankers' acceptance and letter of credit fees ...................................... 8,116 9,589 8,910 7,911 Other service charges and fees ............. 9,257 9,671 9,622 10,200 Other income ............................... 21,534 18,135 30,293 14,354 --------- -------- -------- -------- Total other operating revenue .......... 263,258 256,047 259,594 226,869 Securities gains (losses) .................. (1,693) 1,091 498 1,558 --------- -------- -------- -------- Total .................................. $261,565 $257,138 $260,092 $228,427 ========= ======== ======== ========
56 Noninterest Expense Table 17 - -------------------------------------------------------------------------------- (thousands) 1998 --------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- -------- --------- --------- Salaries ................................ $ 221,019 $221,242 $ 219,731 $ 212,758 Employee benefits ....................... 48,922 42,040 42,675 46,966 ----------- -------- --------- --------- Total personnel expense ............. 269,941 263,282 262,406 259,724 Net occupancy expense ................... 35,838 34,896 34,119 33,783 Equipment expense ....................... 41,683 38,545 41,288 34,687 Postage and delivery .................... 12,962 13,373 13,368 13,278 Outside data processing, programming and software ........................... 21,203 18,496 16,244 12,737 Stationery and supplies ................. 9,339 10,689 7,233 7,506 Advertising and sales promotion ......... 12,782 17,147 22,555 17,738 Professional services ................... 15,311 14,929 14,522 11,304 Travel and business promotion ........... 7,521 7,656 7,638 6,439 Amortization of intangible assets ....... 10,908 9,840 9,226 9,117 Foreclosed property expense -- net of income ................................. 517 (164) 88 130 Personal computer impairment charge*..... ---- ---- ---- ---- Merger-related charges* ................. 6,961 11,934 30,849 35,568 Other expense ........................... 47,720 51,780 57,458 52,238 ----------- -------- --------- --------- Total ............................... $ 492,686 $492,403 $ 516,994 $ 494,249 =========== ======== ========= ========= Overhead ratio .......................... 52.4% 54.0% 56.8% 57.2% Overhead ratio without nonrecurring charges ................................ 51.7 52.7 53.4 53.1
1997 ---------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- --------- --------- -------- Salaries ................................ $ 200,859 $ 190,434 $ 178,987 $171,826 Employee benefits ....................... 43,391 39,918 39,929 39,813 ----------- --------- --------- -------- Total personnel expense ............. 244,250 230,352 218,916 211,639 Net occupancy expense ................... 30,687 29,816 27,657 28,494 Equipment expense ....................... 36,619 36,283 35,792 33,533 Postage and delivery .................... 12,539 11,883 11,899 12,336 Outside data processing, programming and software ........................... 22,952 21,980 26,988 14,577 Stationery and supplies ................. 7,637 8,415 7,676 7,232 Advertising and sales promotion ......... 15,768 20,355 20,349 15,574 Professional services ................... 16,348 14,102 14,385 9,278 Travel and business promotion ........... 7,433 6,120 6,154 5,508 Amortization of intangible assets ....... 6,433 2,347 2,264 2,264 Foreclosed property expense -- net of income ................................. 492 487 951 (55) Personal computer impairment charge*..... 67,202 ---- ---- ---- Merger-related charges* ................. 220,330 ---- ---- ---- Other expense ........................... 43,728 43,161 47,370 48,221 ----------- --------- --------- -------- Total ............................... $ 732,418 $ 425,301 $ 420,401 $388,601 =========== ========= ========= ======== Overhead ratio .......................... 88.0% 53.6% 53.4% 52.2% Overhead ratio without nonrecurring charges ................................ 53.5 53.6 53.4 52.2
* Nonrecurring charges -------------------------- Results of Operations ----------------------------------------------------------------- 1997 vs. 1996 Business Segments Consumer. The Consumer segment's net income rose $50.991 million or 17.4 percent to $343.211 million. Taxable equivalent net interest income expanded $72.592 million or 7.2 percent, primarily driven by higher loan levels. Noninterest income advanced $79.712 million or 18.2 percent on gains largely in deposit account fees and trust services fees. The provision for loan losses increased $6.530 million or 17.2 percent, while noninterest expense was up $72.450 million or 7.6 percent, primarily due to growth in staff expense costs. The segment's pretax profit increased $73.324 million or 16.1 percent to $527.657 million. Corporate. Net income for the Corporate division totaled $254.107 million, increasing $7.301 million or 3 percent from $246.806 million in 1996. Solid loan growth helped push taxable equivalent net interest income higher by $39.723 million or 7.6 percent, while noninterest income rose $26.600 million or 9.8 percent due to increases largely in deposit account service fees, derivatives income and trust services fees. The provision for loan losses was up $130 thousand or 18.7 percent. Noninterest expense increased $59.252 million or 14.5 percent, primarily driven by higher personnel costs. Pretax profit edged up $6.941 million or 1.8 percent to $390.667 million. Card. Net income for the Card segment was $107.503 million, higher by $23.661 million or 28.2 percent from $83.842 million in 1996. Taxable equivalent net interest income increased $87.316 million or 27.1 percent on strong loan growth, and noninterest income expanded $20.798 million or 14.3 percent, reflecting gains largely in interchange income and overlimit fees. The provision for loan losses was higher by $53.735 million or 32.6 percent, while noninterest expense grew $19.458 million or 11.3 percent primarily due to increased salary costs. Pretax profit increased $34.921 million or 26.8 percent to $165.276 million. 57 Treasury & Administration. Treasury & Administration's net income declined to a loss of $112.015 million in 1997 from net income of $134.391 million in 1996. The decline in 1997 was primarily the result of a $309.340 million increase in operating expenses resulting from merger-related integration costs, Year 2000 expense, and other systems development and nonrecurring expenses that are held within the unit. The $46.209 million reduction in net interest margin was primarily attributable to changes in noninterest earning assets held in the unit, such as goodwill, changes to the securities portfolio and discretionary funding which includes the optimization of the capital position. Consolidated Financial Results Consolidated net income for 1997 totaled $592.806 million or $2.94 per diluted share compared with $757.259 million or $3.65 per diluted share in 1996. Results for 1997 were impacted by merger and special charges totaling $303.016 million, pretax, and $207.123 million, after-tax. Excluding the nonrecurring charges, the corporation's net income for 1997 was $799.929 million or $3.96 per diluted share. Taxable equivalent net interest income increased $150.683 million or 7.5 percent, fueled by good loan demand and a higher average rate earned on interest-earning assets. The net yield on interest-earning assets improved 16 basis points to 4.14 percent. Taxable equivalent interest income rose $233.730 million or 5.7 percent. Increased loan volume and a higher average yield both on loans and on total interest-earning assets drove the gain. Average loans expanded $2.977 billion or 8.1 percent, with the average yield rising 20 basis points to 8.79 percent. Taxable commercial loans, credit cards, residential mortgages and commercial mortgages led the loan growth. Interest expense was up $83.047 million or 4 percent, reflecting higher levels of interest-bearing deposits and an increase in the average rate paid on total interest-bearing liabilities. Interest-bearing deposits rose $1.974 billion or 7.1 percent, while short-term borrowed funds and long-term debt decreased. The average rate paid on total interest-bearing liabilities moved up 4 basis points. The following table summarizes the variances in taxable equivalent interest income and interest expense due to changes in rates and volumes between 1997 and 1996. Changes that are not due solely to rate or volume are allocated in proportion to the relationship of the absolute dollar amount of change in each. 58 Taxable Equivalent Interest Income and Expense Variance Table 18 - -------------------------------------------------------------------------------- (thousands) 1997 over 1996 ----------------------------------------- Attributable To ------------------------ Rate Volume Total --------- ---------- --------- Increase (decrease) in interest income: Loans -- including fees ................................................. $ 75,779 $ 260,356 $ 336,135 Securities: Held-to-maturity: State and municipal .................................................. (1,047) (6,241) (7,288) Other ................................................................ (226) (8,652) (8,878) Available-for-sale ..................................................... (2,481) (62,526) (65,007) Interest-bearing bank balances .......................................... (6,861) (21,193) (28,054) Federal funds sold and securities purchased under resale agreements ..... 713 6,195 6,908 Trading account assets .................................................. (2,201) 2,115 (86) --------- Total interest-earning assets ........................................ 92,646 141,084 233,730 Increase (decrease) in interest expense: Interest-bearing deposits in domestic offices ........................... 5,369 62,063 67,432 Interest-bearing deposits in foreign offices ............................ 2,475 29,903 32,378 Short-term borrowed funds ............................................... (2,425) (1,649) (4,074) Long-term debt .......................................................... 22,601 (35,290) (12,689) --------- Total interest-bearing liabilities ................................... 16,574 66,473 83,047 --------- Increase in net interest income .......................................... $ 150,683 =========
Nonperforming assets at December 31, 1997 were $129.495 million or .29 percent of loans and foreclosed property. The total was modestly lower from year-end 1996 due to reduced valuations for foreclosed real estate. The provision for loan losses was $264.949 million, increasing $71.173 million or 36.7 percent from $193.776 million in 1996. Included in the provision for 1997 was a special charge of $10.845 million to conform the credit policies of acquired companies to those of the corporation. Net loan losses were $264.164 million or .67 percent of average loans, a rise of $70.677 million or 36.5 percent from net charge-offs of $193.487 million or .53 percent of loans in 1996. The increase in net loan losses primarily reflected higher net charge-offs in credit cards and lower net recoveries in real estate loans previously charged-off. Credit card net loan losses totaled $219.334 million or 3.90 percent of average outstandings, up $56.392 million or 34.6 percent from $162.942 million or 3.29 percent of loans a year earlier. Excluding credit cards, net loan losses were $44.830 million or .13 percent of loans versus $30.545 million or .10 percent in 1996. At December 31, 1997, the allowance for loan losses totaled $544.723 million, representing 1.23 percent of loans and 538 percent of nonperforming loans compared with $519.297 million, 1.37 percent and 526 percent, respectively, at year-end 1996. Total other operating revenue increased $131.036 million or 15 percent with gains occurring in all categories. Growth was led by service charges on deposit accounts, fees for trust services, credit card income, electronic banking, investment fees and capital markets income. Total other operating revenue included gains of $21.096 million in 1997 from branch sales versus a gain of $12.496 million in 1996 from the sale of the corporation's bond trustee business. Excluding these nonrecurring gains, total other operating revenue rose $122.436 million or 14.2 percent for the year. Noninterest expense for 1997 was higher by $457.748 million or 30.3 percent and included $287.532 million in merger and special charges taken in the fourth quarter. Excluding these nonrecurring charges, noninterest expense on a core operating basis rose $170.216 million or 11.3 percent. Growth was driven principally by higher personnel costs and increased programming and consulting expenses associated with Year 2000 systems conversions. Total Year 2000 spending costs in 1997 were $38 million. 59 Management's Responsibility for Financial Reporting The management of Wachovia Corporation is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements. In meeting its responsibility both for the integrity and fairness of these statements and information, management depends on the accounting system and related internal controls that are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and proper and reliable records are maintained. The concept of reasonable assurance is based on the recognition that the cost of internal controls should not exceed the related benefits. As an integral part of internal controls, the Corporation maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of internal controls and coordinate audit coverage with the independent auditors. The Audit Committee of Wachovia's Board of Directors, composed solely of outside directors, meets regularly with the Corporation's management, internal auditors, independent auditors and regulatory examiners to review matters relating to financial reporting, internal controls and the nature, extent and results of the audit effort. The independent auditors, internal auditors and banking regulators have direct access to the Audit Committee with or without management present. The financial statements have been audited by Ernst & Young LLP, independent auditors, who render an independent professional opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which the Corporation's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures which include reviewing the internal controls and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are presented fairly in all material respects. Report of Independent Auditors The Board of Directors Wachovia Corporation We have audited the accompanying consolidated statements of condition of Wachovia Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Central Fidelity National Bank and subsidiaries for the year ended December 31, 1997 or the consolidated financial statements of Central Fidelity Banks, Inc. and subsidiaries for the year ended December 31, 1996, which statements reflect total assets constituting 16% in 1997, and total interest income constituting 20% in 1997 and 19% in 1996 of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Central Fidelity National Bank and subsidiaries and Central Fidelity Banks, Inc. and subsidiaries, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wachovia Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Winston-Salem, North Carolina January 14, 1999 60 - --------------------------------------- Consolidated Statements of Condition - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries December 31 December 31 1998 1997 Assets Cash and due from banks .................................................................. $ 3,800,265 $ 4,221,818 Interest-bearing bank balances ........................................................... 109,983 133,191 Federal funds sold and securities purchased under resale agreements ...................... 675,470 1,589,234 Trading account assets ................................................................... 664,812 999,122 Securities available-for-sale ............................................................ 7,983,648 8,909,537 Securities held-to-maturity (fair value of $1,442,126 in 1998 and $1,578,464 in 1997)..... 1,383,607 1,509,339 Loans, net of unearned income ............................................................ 45,719,222 44,194,382 Less allowance for loan losses ........................................................... 547,992 544,723 ----------- ----------- Net loans .............................................................................. 45,171,230 43,649,659 Premises and equipment ................................................................... 901,681 810,155 Due from customers on acceptances ........................................................ 348,955 628,398 Other assets ............................................................................. 3,083,191 2,946,616 ----------- ----------- Total assets ........................................................................... $64,122,842 $65,397,069 =========== =========== Liabilities Deposits in domestic offices: Demand .................................................................................. $ 8,768,271 $ 8,598,055 Interest-bearing demand ................................................................. 4,980,715 4,654,172 Savings and money market savings ........................................................ 12,641,766 11,679,432 Savings certificates .................................................................... 8,982,396 10,934,720 Large denomination certificates ......................................................... 3,344,553 2,284,068 ----------- ----------- Total deposits in domestic offices ..................................................... 38,717,701 38,150,447 Interest-bearing deposits in foreign offices ............................................. 2,277,028 4,503,396 ----------- ----------- Total deposits ......................................................................... 40,994,729 42,653,843 Federal funds purchased and securities sold under repurchase agreements .................. 5,463,418 8,322,716 Commercial paper ......................................................................... 1,359,382 1,034,024 Other short-term borrowed funds .......................................................... 1,912,262 752,874 Long-term debt ........................................................................... 7,596,727 5,934,133 Acceptances outstanding .................................................................. 348,955 628,398 Other liabilities ........................................................................ 1,109,137 896,780 ----------- ----------- Total liabilities ...................................................................... 58,784,610 60,222,768 Off-balance sheet items, commitments and contingent liabilities -- Notes J, K and M Shareholders' Equity Preferred stock, par value $5 per share: Authorized 50,000,000 shares; none outstanding .......................................... ---- ---- Common stock, par value $5 per share: Authorized 1,000,000,000 shares in 1998 and 500,000,000 shares in 1997; issued and outstanding 202,986,100 shares in 1998 and 205,926,632 shares in 1997 .................. 1,014,931 1,029,633 Capital surplus .......................................................................... 669,244 974,803 Retained earnings ........................................................................ 3,571,617 3,098,767 Accumulated other comprehensive income ................................................... 82,440 71,098 ----------- ----------- Total shareholders' equity ............................................................. 5,338,232 5,174,301 ----------- ----------- Total liabilities and shareholders' equity ............................................. $64,122,842 $65,397,069 =========== ===========
See notes to consolidated financial statements 61 - ------------------------------------ Consolidated Statements of Income - -------------------------------------------------------------------------------- thousands, except per share Wachovia Corporation and Subsidiaries Year Ended December 31 1998 1997 1996 Interest Income Loans, including fees .................................................... $ 3,873,404 $ 3,455,296 $ 3,109,698 Securities available-for-sale ............................................ 597,557 625,139 684,134 Securities held-to-maturity: State and municipal ..................................................... 15,044 16,452 21,039 Other investments ....................................................... 95,952 87,632 96,508 Interest-bearing bank balances ........................................... 12,988 5,230 33,284 Federal funds sold and securities purchased under resale agreements ...... 25,803 22,319 15,411 Trading account assets ................................................... 44,497 50,317 49,434 ------------- ----------- ----------- Total interest income .................................................. 4,665,245 4,262,385 4,009,508 Interest Expense Deposits: Domestic offices ........................................................ 1,224,046 1,216,229 1,148,797 Foreign offices ......................................................... 135,659 87,320 54,942 ------------- ----------- ----------- Total interest on deposits ............................................. 1,359,705 1,303,549 1,203,739 Short-term borrowed funds ................................................ 563,846 478,162 482,236 Long-term debt ........................................................... 390,662 387,107 399,796 ------------- ----------- ----------- Total interest expense ................................................. 2,314,213 2,168,818 2,085,771 Net Interest Income ...................................................... 2,351,032 2,093,567 1,923,737 Provision for loan losses ................................................ 299,480 264,949 193,776 ------------- ----------- ----------- Net interest income after provision for loan losses ...................... 2,051,552 1,828,618 1,729,961 Other Income Service charges on deposit accounts ...................................... 334,980 306,231 280,670 Fees for trust services .................................................. 199,949 175,549 154,621 Credit card income ....................................................... 171,127 162,234 143,382 Capital markets income ................................................... 130,083 49,522 44,212 Electronic banking ....................................................... 74,257 64,640 56,226 Investment fees .......................................................... 44,619 36,251 30,820 Mortgage fees ............................................................ 44,929 23,544 21,371 Other operating income ................................................... 228,175 187,797 143,430 ------------- ----------- ----------- Total other operating revenue .......................................... 1,228,119 1,005,768 874,732 Securities gains ......................................................... 20,442 1,454 4,588 ------------- ----------- ----------- Total other income ..................................................... 1,248,561 1,007,222 879,320 Other Expense Salaries ................................................................. 874,750 742,106 655,065 Employee benefits ........................................................ 180,603 163,051 141,867 ------------- ----------- ----------- Total personnel expense ................................................ 1,055,353 905,157 796,932 Net occupancy expense .................................................... 138,636 116,654 114,001 Equipment expense ........................................................ 156,203 142,227 132,775 Personal computer impairment charge ...................................... ---- 67,202 ---- Merger-related charges ................................................... 85,312 220,330 ---- Other operating expense .................................................. 560,828 515,151 465,265 ------------- ----------- ----------- Total other expense .................................................... 1,996,332 1,966,721 1,508,973 Income before income tax expense ......................................... 1,303,781 869,119 1,100,308 Income tax expense ....................................................... 429,611 276,313 343,049 ------------- ----------- ----------- Net Income ............................................................... $ 874,170 $ 592,806 $ 757,259 ============= =========== =========== Net income per common share: Basic ................................................................... $ 4.26 $ 2.99 $ 3.70 Diluted ................................................................. $ 4.18 $ 2.94 $ 3.65 Average shares outstanding: Basic ................................................................... 205,058 198,290 204,889 Diluted ................................................................. 209,153 201,901 207,432
See notes to consolidated financial statements 62 - -------------------------------------------------- Consolidated Statements of Shareholders' Equity - -------------------------------------------------------------------------------- $ in thousands, except per share Wachovia Corporation and Subsidiaries Common Stock Capital Shares Amount Surplus Year Ended December 31, 1996 Balance at beginning of year ............................... 195,680,018 $ 978,400 $ 982,628 Comprehensive income: Net income ................................................ Other comprehensive income: Unrealized holding losses on securities available-for-sale (net of deferred tax benefit of $45,624)................. Less reclassification adjustment for gains realized in net income (net of tax expense of $1,522).................... Comprehensive income .................................... Cash dividends declared by pooled companies: Wachovia Corporation -- $1.52 a share...................... Central Fidelity Banks, Inc. -- $.86 a share............... Common stock issued pursuant to: Stock option and employee benefit plans ................... 1,056,131 5,280 33,250 Dividend reinvestment plan ................................ 349,928 1,750 15,130 Conversion of debentures .................................. 312,594 1,563 4,444 Acquisition of bank ....................................... 208,207 1,041 9,003 Common stock acquired ...................................... (8,885,278) (44,426) (375,138) Three-for-two common stock split by Central Fidelity Banks, Inc. ............................................... 12,530,939 62,655 36,797 Miscellaneous .............................................. 535 -------------- ----------- ---------- Balance at end of year ..................................... 201,252,539 $ 1,006,263 $ 706,649 ============== =========== ========== Year Ended December 31, 1997 Balance at beginning of year ............................... 201,252,539 $ 1,006,263 $ 706,649 Comprehensive income: Net income ................................................ Other comprehensive income: Unrealized holding gains on securities available-for-sale (net of deferred tax expense of $11,298)................. Less reclassification adjustment for gains realized in net income (net of tax expense of $648)...................... Comprehensive income .................................... Cash dividends declared by pooled companies: Wachovia Corporation -- $1.68 a share...................... Central Fidelity Banks, Inc. -- $.94 a share............... Common stock issued pursuant to: Stock option and employee benefit plans ................... 1,547,645 7,737 55,689 Dividend reinvestment plan ................................ 298,553 1,493 18,030 Conversion of debentures .................................. 3,628 18 52 Acquisition of banks ...................................... 11,742,782 58,715 689,029 Common stock acquired ...................................... (8,918,515) (44,593) (500,343) Miscellaneous .............................................. 5,697 -------------- ----------- ---------- Balance at end of year ..................................... 205,926,632 $ 1,029,633 $ 974,803 ============== =========== ========== Year Ended December 31, 1998 Balance at beginning of year ............................... 205,926,632 $ 1,029,633 $ 974,803 Comprehensive income: Net income ................................................ Other comprehensive income: Unrealized holding gains on securities available-for-sale (net of deferred tax expense of $16,233)................. Less reclassification adjustment for gains realized in net income (net of tax expense of $7,982).................... Comprehensive income .................................... Cash dividends declared -- $1.86 a share.................... Common stock issued pursuant to: Stock option and employee benefit plans ................... 2,211,599 11,058 102,540 Dividend reinvestment plan ................................ 301,992 1,510 22,885 Acquisitions .............................................. 1,127,723 5,639 77,674 Common stock acquired ...................................... (6,581,846) (32,909) (508,093) Miscellaneous .............................................. (565) -------------- ----------- ---------- Balance at end of year ..................................... 202,986,100 $ 1,014,931 $ 669,244 ============== =========== ==========
Accumulated Other Retained Comprehensive Earnings Income Total Year Ended December 31, 1996 Balance at beginning of year ............................... $ 2,499,298 $ 139,978 $ 4,600,304 Comprehensive income: Net income ................................................ 757,259 757,259 Other comprehensive income: Unrealized holding losses on securities available-for-sale (net of deferred tax benefit of $45,624)................. (85,226) (85,226) Less reclassification adjustment for gains realized in net income (net of tax expense of $1,522).................... (3,066) (3,066) ------------ ------------- ----------- Comprehensive income .................................... 757,259 (88,292) 668,967 Cash dividends declared by pooled companies: Wachovia Corporation -- $1.52 a share...................... (254,458) (254,458) Central Fidelity Banks, Inc. -- $.86 a share............... (51,282) (51,282) Common stock issued pursuant to: Stock option and employee benefit plans ................... 38,530 Dividend reinvestment plan ................................ 16,880 Conversion of debentures .................................. 6,007 Acquisition of bank ....................................... 10,044 Common stock acquired ...................................... (419,564) Three-for-two common stock split by Central Fidelity Banks, Inc. ............................................... (99,530) (78) Miscellaneous .............................................. (7,484) (6,949) ------------ ------------- ----------- Balance at end of year ..................................... $ 2,843,803 $ 51,686 $ 4,608,401 =========== ============= =========== Year Ended December 31, 1997 Balance at beginning of year ............................... $ 2,843,803 $ 51,686 $ 4,608,401 Comprehensive income: Net income ................................................ 592,806 592,806 Other comprehensive income: Unrealized holding gains on securities available-for-sale (net of deferred tax expense of $11,298)................. 20,218 20,218 Less reclassification adjustment for gains realized in net income (net of tax expense of $648)...................... (806) (806) ------------ ------------- ----------- Comprehensive income .................................... 592,806 19,412 612,218 Cash dividends declared by pooled companies: Wachovia Corporation -- $1.68 a share...................... (273,301) (273,301) Central Fidelity Banks, Inc. -- $.94 a share............... (54,002) (54,002) Common stock issued pursuant to: Stock option and employee benefit plans ................... 63,426 Dividend reinvestment plan ................................ 19,523 Conversion of debentures .................................. 70 Acquisition of banks ...................................... 747,744 Common stock acquired ...................................... (544,936) Miscellaneous .............................................. (10,539) (4,842) ------------ ------------- ----------- Balance at end of year ..................................... $ 3,098,767 $ 71,098 $ 5,174,301 =========== ============= =========== Year Ended December 31, 1998 Balance at beginning of year ............................... $ 3,098,767 $ 71,098 $ 5,174,301 Comprehensive income: Net income ................................................ 874,170 874,170 Other comprehensive income: Unrealized holding gains on securities available-for-sale (net of deferred tax expense of $16,233)................. 23,802 23,802 Less reclassification adjustment for gains realized in net income (net of tax expense of $7,982).................... (12,460) (12,460) ------------ ------------- ----------- Comprehensive income .................................... 874,170 11,342 885,512 Cash dividends declared -- $1.86 a share.................... (381,798) (381,798) Common stock issued pursuant to: Stock option and employee benefit plans ................... 113,598 Dividend reinvestment plan ................................ 24,395 Acquisitions .............................................. 83,313 Common stock acquired ...................................... (541,002) Miscellaneous .............................................. (19,522) (20,087) ------------ ------------- ----------- Balance at end of year ..................................... $ 3,571,617 $ 82,440 $ 5,338,232 =========== ============= ===========
See notes to consolidated financial statements 63 - ---------------------------------------- Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- thousands Wachovia Corporation and Subsidiaries Year Ended December 31 1998 Operating Activities Net income ............................................................................ $ 874,170 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses ............................................................ 299,480 Depreciation and amortization ........................................................ 155,069 Deferred income taxes ................................................................ 266,451 Securities gains ..................................................................... (20,442) Gain on sale of noninterest-earning assets ........................................... (7,421) Increase (decrease) in accrued income taxes .......................................... 224,609 Decrease in accrued interest receivable .............................................. 40,246 (Decrease) increase in accrued interest payable ...................................... (26,107) Net change in other accrued and deferred income and expense .......................... (60,053) Net trading account activities ....................................................... 334,310 Net loans held for resale ............................................................ (184,571) -------------- Net cash provided by operating activities ........................................... 1,895,741 Investing Activities Net decrease in interest-bearing bank balances ........................................ 23,208 Net decrease (increase) in federal funds sold and securities purchased under resale agreements ........................................................................... 947,064 Purchases of securities available-for-sale ............................................ (3,106,977) Purchases of securities held-to-maturity .............................................. (394,956) Sales of securities available-for-sale ................................................ 590,447 Calls, maturities and prepayments of securities available-for-sale .................... 3,564,575 Calls, maturities and prepayments of securities held-to-maturity ...................... 532,922 Net increase in loans made to customers ............................................... (1,514,208) Capital expenditures .................................................................. (258,719) Proceeds from sales of premises and equipment ......................................... 44,860 Net increase in other assets .......................................................... (347,349) Business combinations ................................................................. 16,108 -------------- Net cash provided (used) by investing activities .................................... 96,975 Financing Activities Net increase in demand, savings and money market accounts ............................. 1,301,117 Net (decrease) increase in certificates of deposit .................................... (3,192,149) Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements ................................................................ (2,870,049) Net increase in commercial paper ...................................................... 325,358 Net increase (decrease) in other short-term borrowings ................................ 1,159,388 Proceeds from issuance of bank notes .................................................. 939,592 Maturities of bank notes .............................................................. (1,023,617) Proceeds from issuance of other long-term debt ........................................ 1,745,087 Payments on other long-term debt ...................................................... (5,155) Common stock issued ................................................................... 80,375 Dividend payments ..................................................................... (381,798) Common stock repurchased .............................................................. (531,122) Other equity transactions ............................................................. ---- Net increase (decrease) in other liabilities .......................................... 38,704 -------------- Net cash (used) provided by financing activities .................................... (2,414,269) (Decrease) Increase in Cash and Cash Equivalents ...................................... (421,553) Cash and cash equivalents at beginning of year ........................................ 4,221,818 -------------- Cash and cash equivalents at end of year .............................................. $ 3,800,265 ============== Supplemental Disclosures Interest paid ......................................................................... $ 2,340,320 Income taxes paid ..................................................................... 159,500 Year Ended December 31 1997 1996 Operating Activities Net income ............................................................................ $ 592,806 $ 757,259 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses ............................................................ 264,949 193,776 Depreciation and amortization ........................................................ 165,692 117,731 Deferred income taxes ................................................................ 35,169 50,052 Securities gains ..................................................................... (1,454) (4,588) Gain on sale of noninterest-earning assets ........................................... (4,775) (2,486) Increase (decrease) in accrued income taxes .......................................... (6,416) 8,092 Decrease in accrued interest receivable .............................................. 9,173 34,917 (Decrease) increase in accrued interest payable ...................................... 36,764 (42,086) Net change in other accrued and deferred income and expense .......................... 196,902 (7,300) Net trading account activities ....................................................... 190,704 (74,401) Net loans held for resale ............................................................ 144,849 524,191 -------------- -------------- Net cash provided by operating activities ........................................... 1,624,363 1,555,157 Investing Activities Net decrease in interest-bearing bank balances ........................................ 393 448,408 Net decrease (increase) in federal funds sold and securities purchased under resale agreements ........................................................................... (1,258,355) 30,398 Purchases of securities available-for-sale ............................................ (3,418,951) (1,358,041) Purchases of securities held-to-maturity .............................................. (36,340) (45,679) Sales of securities available-for-sale ................................................ 2,211,721 541,533 Calls, maturities and prepayments of securities available-for-sale .................... 2,341,747 1,912,940 Calls, maturities and prepayments of securities held-to-maturity ...................... 273,696 318,205 Net increase in loans made to customers ............................................... (4,639,373) (3,138,067) Capital expenditures .................................................................. (162,286) (223,153) Proceeds from sales of premises and equipment ......................................... 46,164 100,515 Net increase in other assets .......................................................... (476,129) (401,488) Business combinations ................................................................. 133,081 2,814 -------------- -------------- Net cash provided (used) by investing activities .................................... (4,984,632) (1,811,615) Financing Activities Net increase in demand, savings and money market accounts ............................. 1,719,641 1,719,718 Net (decrease) increase in certificates of deposit .................................... 3,076,795 (781,971) Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements ................................................................ 1,041,778 313,514 Net increase in commercial paper ...................................................... 327,648 203,881 Net increase (decrease) in other short-term borrowings ................................ (286,347) (769,057) Proceeds from issuance of bank notes .................................................. 948,372 2,465,005 Maturities of bank notes .............................................................. (2,315,367) (2,498,492) Proceeds from issuance of other long-term debt ........................................ 687,940 950,796 Payments on other long-term debt ...................................................... (418,982) (94,803) Common stock issued ................................................................... 59,281 37,445 Dividend payments ..................................................................... (327,303) (304,733) Common stock repurchased .............................................................. (532,682) (415,084) Other equity transactions ............................................................. (154) (78) Net increase (decrease) in other liabilities .......................................... (72,725) 71,406 -------------- -------------- Net cash (used) provided by financing activities .................................... 3,907,895 897,547 (Decrease) Increase in Cash and Cash Equivalents ...................................... 547,626 641,089 Cash and cash equivalents at beginning of year ........................................ 3,674,192 3,033,103 -------------- -------------- Cash and cash equivalents at end of year .............................................. $ 4,221,818 $ 3,674,192 ============== ============== Supplemental Disclosures Interest paid ......................................................................... $ 2,132,054 $ 2,127,857 Income taxes paid ..................................................................... 249,715 273,422
See notes to consolidated financial statements 64 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note A -- Accounting Policies Nature of Operations -- The Corporation is a southeastern interstate bank holding company maintaining dual headquarters in Atlanta, Georgia, and Winston-Salem, North Carolina. The Corporation's principal banking subsidiary is Wachovia Bank, N.A., which maintains operations in Florida, Georgia, North Carolina, South Carolina and Virginia. Credit card services are provided through The First National Bank of Atlanta. In addition to general commercial banking, the Corporation and its subsidiaries are engaged in trust and investment management, residential mortgage origination, leasing, state and local government securities underwriting, foreign exchange, corporate finance and other money market services. The Corporation completed three business combinations during 1997 and three during 1998. Disclosure of material business combination transactions is included in Note B -- Business Combinations. In October 1998, Wachovia announced a definitive agreement to acquire Interstate/Johnson Lane, a financial services company offering securities brokerage for individuals and institutional investors; market making and underwriting of securities; and investment management. The transaction will be accounted for as a purchase business combination and is expected to be completed during the first half of 1999. The transaction is valued at approximately $230 million and will result in goodwill of approximately $140 million. Principles of Consolidation -- The consolidated financial statements include the accounts of Wachovia Corporation and its subsidiaries after elimination of all material intercompany balances and transactions. Business Combinations -- In business combinations accounted for as poolings-of-interests, the financial position and results of operations and cash flows of the respective companies are restated as though the companies were combined for all historical periods. In business combinations accounted for using the purchase method of accounting, the net assets of the companies acquired are recorded at their fair values at the date of acquisition. Goodwill is amortized on a straight-line basis over the estimated periods benefited. Identifiable intangibles, including deposit base intangibles, are amortized on an accelerated or straight-line basis over the estimated periods benefited. The results of operations of the acquired companies are included since the date of acquisition. Use of Estimates -- The financial statements are prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Due From Banks -- The Corporation considers cash and due from banks, all of which are maintained in financial institutions, as cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows. Trading Instruments -- The Corporation maintains trading positions in both derivative and nonderivative (or cash) financial instruments. Trading cash instruments are held for distribution through retail sales or in anticipation of market movements and are carried at fair value. Gains and losses, both realized and unrealized, are included in capital markets income. Interest revenue arising from cash financial instruments is included in interest income-trading account assets. Trading cash instruments are comprised primarily of securities backed by the U.S. Treasury and various federal agencies and state and local governmental bodies. Trading derivative financial instruments are customer oriented, and trading positions are established as necessary to accommodate customers' requirements. Gains and losses from securities trading derivatives and foreign exchange activities are included in other income. Securities Held-to-Maturity and Available-for-Sale -- Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are classified as held-to-maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading and marketable equity securities are classified as available-for-sale and are stated at fair value. Unrealized gains and losses, net of tax, on available-for-sale securities are included in accumulated other comprehensive income -- a separate component of shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from securities. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as securities gains and losses. Risk Management Instruments -- Interest rate swaps and options (caps and floors) are used as part of the Corporation's overall interest rate risk management and are designated as hedges of interest-bearing assets, liabilities, firm commitments and anticipated transactions. These derivatives modify the interest rate characteristics of specified financial instruments. Amounts receivable or payable under interest rate swap and option agreements are recognized in net interest income. Derivative instruments not qualifying as end-user positions are treated as trading positions and marked-to-market. To qualify as a hedge, the swap or option must be designated and documented as a hedge and be effective in reducing the market risk associated with the existing asset, liability, firm commitment, or identified anticipated transaction which is probable to occur. Effectiveness of the hedge is evaluated on an initial and ongoing basis using statistical calculations of correlation. Gains and losses on risk management derivatives that are terminated early are deferred and amortized to net interest income over the remaining period originally covered by the instrument. If the underlying designated item is no longer held, or if an anticipated transaction is no longer likely to occur, any previously unrecognized gain or loss on the derivative contract is recognized in earnings and the contract is subsequently accounted for at fair value. Loans and Allowance for Loan Losses -- Loans are carried at their principal amount outstanding, except for loans held for resale which are carried at the lower of cost or market. Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding. Except for revolving credit loans, the recognition of interest income is discontinued when a loan becomes 90 days past due as to principal and interest or when, in management's judgment, the interest will not 65 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note A -- Accounting Policies -- Concluded be collectible in the normal course of business. When interest accruals are discontinued, the balance of accrued interest is reversed. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest and the loan is in the process of collection. Interest is accrued on revolving credit loans until payments become 120 days delinquent, at which time the outstanding principal balance and accrued unpaid interest is charged off. The allowance is maintained at a level believed to be adequate by management to absorb probable losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current domestic and international economic conditions, volume and composition of the loan portfolio and other risks inherent in the portfolio. The method used to determine the amount of loss inherent in the loan portfolio and thereby assess the adequacy of the recorded balance of the allowance for loan losses involves identifying portfolios of loans with similar characteristics for which estimates of inherent future probable losses can be made. The estimates are based on historical loss factors as adjusted for current business and economic conditions. The loss factors are applied to the respective portfolios in order to determine the overall allowance adequacy. Premises and Equipment -- Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the leasehold asset or the lease term. Impairment of Long-Lived Assets -- Impairment losses on long-lived assets to be held and used are recognized whenever events or changes in circumstances result in the carrying value of the assets exceeding the sum of the expected future cash flows. The measurement of the impairment losses recognized is based on the difference between the fair value and carrying value of the assets. Long-lived assets to be disposed of are reported at the lower of carrying value or fair value less cost to sell. Income Taxes -- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Each subsidiary provides for income taxes based on its contribution to income taxes (benefit) of the consolidated group. The Corporation and its subsidiaries file a consolidated tax return. Stock-Based Compensation -- The Corporation applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Corporation's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock awards and appreciation rights is recorded based on the market price at the date of grant and the end of the period, respectively. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123), encourages, but does not require, adoption of a fair value method of accounting for employee stock-based compensation plans. The Corporation follows the pro forma disclosure provisions of FASB 123. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- In December 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of the FASB's 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. Reporting Comprehensive Income -- In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FASB 130), was issued and establishes standards for reporting and displaying comprehensive income and its components. FASB 130 requires comprehensive income and its components, as recognized under accounting standards, to be displayed in a financial statement with the same prominence as other financial statements. The disclosure requirements of FASB 130 have been included in the Corporation's Consolidated Statements of Shareholders' Equity. Disclosures about Segments of an Enterprise and Related Information -- In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and establishes new standards for reporting information about operating segments in annual and interim financial statements. The standard also requires descriptive information about the way the operating segments are determined, the products and services provided by the segments and the nature of differences between reportable segment measurements and those used for the consolidated enterprise. The disclosure requirements of FASB 131 have been included in Note C -- Business Segment Information. Internal Use Software -- 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). SOP 98-1 provides guidance as to when it is or is not appropriate to capitalize the cost of software developed or obtained for internal use. The effect of the adoption of SOP 98-1 was not material. Derivative Instruments and Hedging Activity -- 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 imbedded 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 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. Reclassification -- Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. - -------------------------------------------------------------------------------- 66 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note B -- Business Combinations On December 15, 1997, the Corporation merged with Central Fidelity Banks, Inc. (Central Fidelity), headquartered in Richmond, Virginia. The acquisition of Central Fidelity resulted in the issuance of approximately 36.3 million shares. The acquisition was accounted for as a pooling-of-interests and, accordingly, all historical financial information for the Corporation has been restated to include Central Fidelity historical information for all periods presented herein. Intercompany transactions prior to the merger have been eliminated, and certain reclassifications were made to the Central Fidelity financial statements to conform to the Corporation's presentations. No material adjustments were recorded to conform Central Fidelity's accounting policies. During 1997, the Corporation recorded charges of $220,330 for direct and other costs in connection with the merger, including restructuring activities to consolidate the operations, business line locations and administrative functions. These activities were completed during 1998. Included in systems and operations conversion costs and business line and integration costs are activities such as contract termination, write-down of unutilized assets and other business and systems conversion costs. Details of the merger-related costs follow. Dec. 31, Dec. 31, 1997 Utilized 1997 Utilized 1998 Provision in 1997 Balance in 1998 Balance ---------- ---------- -------- ----------- ------- Severance and personnel related costs ............. $ 114,079 $ ---- $114,079 $59,199 $54,880 Systems and operations conversion costs ............. 66,953 51,530 15,423 15,356 67 Business line and integration expenses .......... 16,316 9,660 6,656 3,923 2,733 Deal costs and other expenses .......... 22,982 20,031 2,951 2,951 ---- ---------- ------- -------- ------- ------- Total ............... $ 220,330 $81,221 $139,109 $81,429 $57,680 ========== ======= ======== ======= =======
In 1998, in connection with the Central Fidelity merger and purchase accounting transactions discussed below, the Corporation incurred additional merger-related expenses of $85,312 for systems conversion and integration of business lines. On October 31, 1997, the Corporation completed its merger with Jefferson Bankshares, Inc. (Jefferson), headquartered in Charlottesville, Virginia. The acquisition of Jefferson resulted in the issuance of approximately 8.7 million shares of common stock valued at $554,337. The purchase price was allocated to the net assets acquired, resulting in $337,452 of goodwill and $41,512 of deposit base intangibles. On November 11, 1997, the Corporation completed its merger with 1st United Bancorp (1st United), headquartered in Boca Raton, Florida. The acquisition of 1st United resulted in the issuance of approximately 3.0 million shares of common stock valued at $193,407. The purchase price was allocated to the net assets acquired, resulting in $141,154 of goodwill and $22,718 of deposit base intangibles. During 1998, the Corporation merged with Ameribank Bancshares (Ameribank), headquartered in Hollywood, Florida, with $280 million in assets; Hunt, DuPree, Rhine and Associates Inc., a benefits consulting company; and Retirement Plan Securities Inc., a registered investment advisor. The impact of these purchase transactions was not material to the Corporation's financial position or results of operations. Goodwill and deposit base intangibles, arising from the purchase transactions above, are being amortized over 25 and 7 years, respectively. In 1997, merger-related expenses of $23,055 were accrued to reflect management's best estimate of severance costs related to Jefferson and 1st United employees and other expenses of premerger activities related to these transactions. The fair value of Jefferson and 1st United assets and liabilities acquired at the dates of acquisition was $3,426,567 and $2,678,823, respectively. The pro forma results, giving effect to the purchase transactions as though they occurred as of the beginning of the reporting periods, do not vary significantly from actual results. - -------------------------------------------------------------------------------- Note C -- Business Segment Information The Corporation's reportable segments are strategic business units that provide unique products and services to a variety of customer groups. Each segment has its own management team as well as distinct marketing, production, technology and distribution strategies. The Corporation's four reportable segments are Consumer, Corporate, Card and Treasury & Administration. Consumer generates its revenues primarily from individuals and small businesses by providing credit and deposit services as well as insurance, investment and trust products. Corporate earns its revenues primarily by providing financing, deposit, cash management, investment and asset administration products to corporate customers. Card derives revenues from the marketing, issuing and servicing of credit card products to individuals and corporations. Treasury & Administration is comprised of balance sheet management activities that include managing the investment portfolio, discretionary funding, utilization of off-balance sheet financial instruments, optimizing the Corporation's equity position and corporate expenses such as merger-related charges, Year 2000 conversion costs and other corporate costs. 67 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note C -- Business Segment Information -- Concluded Year Ended December 31, 1998 Consumer Corporate Card - ---------------------------- ----------- ----------- ---------- External net interest margin ............. $ 336,495 $ 1,543,168 $ 767,469 Internal funding (charge) credit ......... 855,317 (831,502) (306,909) ----------- ----------- ---------- Net interest margin ...................... 1,191,812 711,666 460,560 Provision for loan loss .................. 34,328 1,114 257,799 Total other income ....................... 598,208 396,308 174,410 Total expenses ........................... 1,189,175 542,045 208,381 ----------- ----------- ---------- Income before income tax expense ......... 566,517 564,815 168,790 Income tax expense ....................... 199,675 199,074 59,491 ----------- ----------- ---------- Net income ............................... $ 366,842 $ 365,741 $ 109,299 =========== =========== ========== Average total assets ..................... $16,955,302 $26,677,485 $6,697,455 =========== =========== ========== Treasury & Year Ended December 31, 1998 Administration Eliminations Total - ---------------------------- ----------- ----------- ----------- External net interest margin ............. $ (249,226) $(46,874) $ 2,351,032 Internal funding (charge) credit ......... 351,196 (68,102) ---- ----------- ---------- ----------- Net interest margin ...................... 101,970 (114,976) 2,351,032 Provision for loan loss .................. 6,239 ---- 299,480 Total other income ....................... 79,635 ---- 1,248,561 Total expenses ........................... 124,833 (68,102) 1,996,332 ----------- ---------- ----------- Income before income tax expense ......... 50,533 (46,874) 1,303,781 Income tax expense ....................... 18,245 (46,874) 429,611 ----------- ---------- ----------- Net income ............................... $ 32,288 $ ---- $ 874,170 =========== ========== =========== Average total assets ..................... $13,618,293 $ ---- $63,948,535 =========== ========== ===========
Year Ended December 31, 1997 Consumer Corporate Card - ---------------------------- ----------- ----------- ---------- External net interest margin ............. $ 303,409 $ 1,340,043 $ 723,006 Internal funding (charge) credit ......... 781,842 (780,345) (314,041) ----------- ----------- ---------- Net interest margin ...................... 1,085,251 559,698 408,965 Provision for loan loss .................. 44,534 825 218,538 Total other income ....................... 518,409 298,727 165,992 Total expenses ........................... 1,031,469 466,933 191,143 ----------- ----------- ---------- Income before income tax expense ......... 527,657 390,667 165,276 Income tax expense (benefit) ............. 184,446 136,560 57,773 ----------- ----------- ---------- Net income (loss) ........................ $ 343,211 $ 254,107 $ 107,503 =========== =========== ========== Average total assets ..................... $14,680,571 $23,208,642 $6,261,114 =========== =========== ========== Treasury & Year Ended December 31, 1997 Administration Eliminations Total - ---------------------------- ----------- ----------- ----------- External net interest margin ............. $ (214,997) $(57,894) $ 2,093,567 Internal funding (charge) credit ......... 362,940 (50,396) ---- ----------- -------- ----------- Net interest margin ...................... 147,943 (108,290) 2,093,567 Provision for loan loss .................. 1,052 ---- 264,949 Total other income ....................... 24,094 ---- 1,007,222 Total expenses ........................... 327,572 (50,396) 1,966,721 ----------- -------- ----------- Income before income tax expense ......... (156,587) (57,894) 869,119 Income tax expense (benefit) ............. (44,572) (57,894) 276,313 ----------- -------- ----------- Net income (loss) ........................ $ (112,015) $ ---- $ 592,806 =========== ======== =========== Average total assets ..................... $13,456,748 $ ---- $57,607,075 =========== ======== ===========
Year Ended December 31, 1996 Consumer Corporate Card - ---------------------------- ----------- ----------- ---------- External net interest margin ............. $ 229,332 $ 1,247,448 $ 592,489 Internal funding (charge) credit ......... 783,327 (727,473) (270,840) ----------- ----------- ---------- Net interest margin ...................... 1,012,659 519,975 321,649 Provision for loan loss .................. 38,004 695 164,803 Total other income ....................... 438,697 272,127 145,194 Total expenses ........................... 959,019 407,681 171,685 ----------- ----------- ---------- Income before income tax expense ......... 454,333 383,726 130,355 Income tax expense ....................... 162,113 136,920 46,513 ----------- ----------- ---------- Net income ............................... $ 292,220 $ 246,806 $ 83,842 =========== =========== ========== Average total assets ..................... $13,481,908 $21,250,372 $5,095,709 =========== =========== ========== Treasury & Year Ended December 31, 1996 Administration Eliminations Total - ---------------------------- ----------- ----------- ----------- External net interest margin ............. $ (68,478) $(77,054) $ 1,923,737 Internal funding (charge) credit ......... 262,630 (47,644) ---- ----------- -------- ----------- Net interest margin ...................... 194,152 (124,698) 1,923,737 Provision for loan loss .................. (9,726) ---- 193,776 Total other income ....................... 23,302 ---- 879,320 Total expenses ........................... 18,232 (47,644) 1,508,973 ----------- -------- ----------- Income before income tax expense ......... 208,948 (77,054) 1,100,308 Income tax expense ....................... 74,557 (77,054) 343,049 ----------- -------- ----------- Net income ............................... $ 134,391 $ ---- $ 757,259 =========== ======== =========== Average total assets ..................... $15,756,214 $ ---- $55,584,203 =========== ======== ===========
The Corporation's management accounting policies generally follow the policies described in Note A, except for net interest income which is reported on a fully taxable equivalent basis. The Corporation's funds transfer pricing system utilizes a multiple pool method to simulate matched funding to compensate or charge for funds provided or used with a corresponding offset in the Treasury & Administration business segment. Provision for loan loss is assigned to each segment based on the credit risk of each segment's loan portfolio. Operating expense is recognized as incurred and charged on a fully absorbed basis. Additionally, income tax expense is calculated based on the business segments fully taxable equivalent income and the Corporation's effective tax rate. Reconciling items between management accounting and the Corporation's consolidated financial statements are limited to the taxable equivalent adjustment and other income statement reclassifications shown as Eliminations. The Corporation operates primarily in the United States; accordingly, geographic distribution of revenue and long-lived assets in other countries is not significant. Revenues from no individual customer exceeded 10% of consolidated total revenues. - -------------------------------------------------------------------------------- 68 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note D -- Securities The aggregate amortized cost, fair value and gross unrealized gains and losses of securities as of December 31 were as follows: 1998 --------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ---------- --------------------------- Held-to-Maturity - ------------------------------------------ U.S. Treasury and other agencies ......... $ 518,063 $ 6,662 $ 3 $ 524,722 State and municipal ...................... 176,768 19,521 ---- 196,289 Mortgage-backed .......................... 610,328 31,669 5 641,992 Other .................................... 78,448 677 2 79,123 ------------- -------- ----------- ---------- $1,383,607 $ 58,529 $ 10 $1,442,126 ============= ======== =========== ========== Available-for-Sale - ------------------------------------------- U.S. Treasury and other agencies ......... $3,123,663 $ 83,895 $ 1,991 $3,205,567 State and municipal ...................... 60,964 3,199 2 64,161 Mortgage-backed .......................... 4,159,464 50,641 3,351 4,206,754 Other .................................... 333,442 2,250 1,983 333,709 Equity ................................... 171,632 1,825 ---- 173,457 ------------- -------- ----------- ---------- $7,849,165 $141,810 $ 7,327 $7,983,648 ============= ======== =========== ==========
1997 ----------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Held-to-Maturity - ------------------------------------------- U.S. Treasury and other agencies ......... $ 202,913 $ 818 $ 188 $ 203,543 State and municipal ...................... 222,903 22,894 ---- 245,797 Mortgage-backed .......................... 962,161 45,106 187 1,007,080 Other .................................... 121,362 682 ---- 122,044 ---------- -------- ---------- ---------- $1,509,339 $ 69,500 $ 375 $1,578,464 ========== ======== ========== ========== Available-for-Sale - ------------------------------------------- U.S. Treasury and other agencies ......... $4,501,547 $ 57,579 $ 1,017 $4,558,109 State and municipal ...................... 79,795 3,150 7 82,938 Mortgage-backed .......................... 3,543,711 39,967 2,495 3,581,183 Other .................................... 508,975 3,255 862 511,368 Equity ................................... 160,649 15,443 153 175,939 ---------- -------- ---------- ---------- $8,794,677 $119,394 $ 4,534 $8,909,537 ========== ======== ========== ==========
The amortized cost and estimated fair value of securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair Cost Value -------- ------ Held-to-Maturity - ------------------------------------------------ Due in one year or less ........................ $ 316,485 $ 319,263 Due after one year through five years .......... 429,398 441,711 Due after five years through ten years ......... 141,282 151,954 Due after ten years ............................ 496,442 529,198 ---------- ---------- Total ................................... 1,383,607 1,442,126 Available-for-Sale - ------------------------------------------------- Due in one year or less ........................ 904,248 914,030 Due after one year through five years .......... 2,554,186 2,622,260 Due after five years through ten years ......... 960,623 981,284 Due after ten years ............................ 3,258,476 3,292,617 ---------- ---------- Total ................................... 7,677,533 7,810,191 No contractual maturity ........................ 171,632 173,457 ---------- ---------- Total ................................... 7,849,165 7,983,648 ---------- ---------- Total securities ........................ $9,232,772 $9,425,774 ========== ==========
Proceeds, gross gains and losses realized from the sales of available-for-sale securities for December 31 were as follows: 1998 1997 -------- ---------- Proceeds ............. $590,447 $2,211,721 Gross gains .......... 20,553 6,576 Gross losses ......... 111 5,122
Trading account assets are reported at fair value with net unrealized gains (losses) of ($554), ($1,736) and $906 included in earnings during 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, securities with a carrying value of $5,759,164 and $6,259,029, respectively, were pledged as collateral to secure public deposits and for other purposes. There were no obligations of any one issuer exceeding 10% of consolidated shareholders' equity at December 31, 1998. There were no transfers or sales of held-to-maturity securities during 1998 or 1997. - -------------------------------------------------------------------------------- 69 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note E -- Loans and Allowance for Loan Losses Loans at December 31 are summarized as follows: 1998 1997 ----------- ------------ Commercial: Commercial, financial and other ......... $14,328,152 $ 13,528,344 Tax-exempt .............................. 972,603 1,607,159 Retail: Direct .................................. 1,097,574 1,249,612 Indirect ................................ 3,239,532 3,028,288 Credit card ............................. 6,049,350 5,919,098 Other revolving credit .................. 536,887 459,563 Real estate: Construction ............................ 2,044,437 1,779,522 Commercial mortgages .................... 6,988,050 6,790,446 Residential mortgages ................... 7,490,086 8,098,794 Lease financing -- net ..................... 1,879,123 1,094,169 Foreign .................................... 1,093,428 639,387 ----------- ------------ Total loans -- net ...................... $45,719,222 $ 44,194,382 =========== ============
Loans at December 31, 1998 and 1997 that had been placed on a cash basis were $157,118 and $101,156, respectively. Interest income which would have been recorded pursuant to the original terms of loans restructured to below market rates was $16,906 and $11,390 on the preceding dates. Interest income recorded on these loans was $9,608 and $4,606, respectively. The Corporation follows Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan." A loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts of principal and interest due according to the contractual terms of the loan agreement. Impaired loans are included as a portion of cash-basis assets. Impairment is measured by discounting the expected future cash flows at the loan's effective interest rate. For real estate loans, impairment is measured based on the estimated fair value of the underlying collateral. If the present value of the expected future cash flows, or the fair value of collateral in the case of a real estate loan, is less than the loan's recorded balance, the deficiency is considered in evaluating the overall adequacy of the allowance for loan losses. The following table summarizes impaired loans and related allowance information at December 31. 1998 1997 ------- ------- Impaired loans with related allowance ............ $27,366 $15,711 Impaired loans with no related allowance ......... 29,249 32,207 ------- ------- Total impaired loans ...................... $56,615 $47,918 ======= ======= Allowance on impaired loans ...................... $ 7,110 $ 2,209 ======= =======
Year Ended December 31 --------------------------------------- 1998 1997 1996 ------- ------- ------- Average impaired loans ............. $31,026 $47,862 $62,742 Interest income .................... 5,942 1,957 3,308 Cash-basis interest income ......... 2,600 614 1,014
At December 31, 1998, the Corporation had no significant outstanding commitments to lend additional funds to borrowers whose loans have been restructured. Changes in the allowance for loan losses for the three years ended December 31 were as follows: 1998 1997 1996 -------- -------- -------- Balance at beginning of year ......... $544,723 $519,297 $518,808 Additions from acquisitions .......... 2,613 24,641 200 Provision for loan losses ............ 299,480 264,949 193,776 Recoveries on loans previously charged off ........................ 59,365 57,515 57,240 Loans charged off .................... (358,189) (321,679) (250,727) -------- -------- -------- Balance at end of year ............... $547,992 $544,723 $519,297 ======== ======== ========
Loans totaling $15,258, $17,413 and $16,236 were transferred to foreclosed real estate during 1998, 1997 and 1996, respectively. It is the policy of the Corporation to review each prospective credit in order to determine an adequate level of security or collateral to obtain prior to making the loan. The type of collateral will vary and ranges from liquid assets to real estate. The Corporation's access to collateral, in the event of borrower default, is assured through adherence to state lending laws and the Corporation's lending standards and credit monitoring procedures. The Corporation regularly monitors its credit concentrations on loan purpose, industry and customer bases. At year-end, there were no material credit concentrations within these categories. The Corporation's subsidiaries have granted loans and extended letters of credit to certain directors and executive officers of the Corporation and its subsidiaries and to their associates. The aggregate amount of loans was $207,462 and $257,271 at December 31, 1998 and 1997, respectively. During 1998, $554,186 in new loans was made and repayments totaled $603,995. Outstanding standby letters of credit to related parties totaled $13,536 and $1,922 at December 31, 1998 and 1997, respectively. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. Loans held for sale at December 31 along with activity during the period are summarized as follows: 1998 1997 ---------- ----------- Balance at beginning of year ......... $ 111,246 $ 254,281 Originations/purchases ............... 6,972,491 12,006,679 Sales/transfers ...................... (6,787,920) (12,149,714) ---------- ----------- Balance at end of year ............... $ 295,817 $ 111,246 ========== ===========
- -------------------------------------------------------------------------------- 70 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note F -- Premises, Equipment and Leases Premises and equipment at December 31 are summarized as follows: 1998 1997 --------- --------- Land ........................................ $ 130,439 $ 127,976 Premises .................................... 651,199 632,555 Equipment ................................... 904,139 778,652 Leasehold improvements ...................... 123,410 121,829 --------- --------- 1,809,187 1,661,012 Less accumulated depreciation and amortization .............................. 907,506 850,857 --------- --------- Total premises and equipment ......... $ 901,681 $ 810,155 ========= =========
The annual minimum rentals under the terms of the Corporation's noncancelable operating leases as of December 31, 1998 are as follows: 1999 ........................................ $ 61,967 2000 ........................................ 55,041 2001 ........................................ 46,720 2002 ........................................ 34,587 2003 ........................................ 27,537 Thereafter .................................. 133,697 -------- Total minimum lease payments ......... $359,549 ========
The net rental expense for all operating leases amounted to $70,416 in 1998, $63,701 in 1997 and $58,239 in 1996. Certain leases have various renewal options and require increased rentals under cost of living escalation clauses. Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $114,742, $154,223 and $109,901, respectively. During 1997, an impairment charge of $67,202, which approximated the carrying value of certain personal computer hardware and software, was recorded as a result of the Corporation's plan to implement a company-wide distributed technology platform for improved employee communication capabilities. The plan involved the write-down and disposal of these assets. - -------------------------------------------------------------------------------- Note G -- Credit Arrangements, Short-Term Borrowed Funds and Certificates of Deposit At December 31, 1998 and 1997, lines of credit arrangements aggregating $400,000 were available to the Corporation from unaffiliated banks. Commitment fees were 8 basis points in 1998 and 1997; compensating balances are not required. The unused portion of these banking arrangements principally serves as commercial paper back-up lines. There were no borrowings outstanding under credit arrangements during 1998 or 1997. Federal funds purchased and securities sold under repurchase agreements generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are delivered to either broker-dealers or to custodian accounts for customers. The broker- dealers may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the Corporation identical securities at the maturity of the agreements. Other borrowed funds consists of term federal funds purchased, treasury tax and loan deposits and short-term bank notes and are generally repaid within seven to 120 days from the transaction date. Information concerning short-term borrowed funds is included in Table 6 of Management's Discussion and Analysis of Financial Condition and Results of Operations. The scheduled maturities of certificates of deposit subsequent to December 31, 1998 are $8,687,914 in 1999, $2,495,574 in 2000, $700,401 in 2001, $167,305 in 2002 and $275,755 thereafter. The remaining maturity of domestic office certificates of deposit in denominations in excess of $100 is $1,339,796, three months or less; $582,617, over three through six months; $805,504, over six through twelve months; and $616,636, over twelve months. - -------------------------------------------------------------------------------- 71 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note H -- Long-Term Debt Long-term debt at December 31 is summarized as follows: 1998 1997 ---------- ---------- Wachovia Corporation: Senior debt: Senior floating-rate notes due in 2000, net of discount of $218......................... $ 249,782 $ ---- Senior floating-rate notes due in 2001, net of discount of $416......................... 299,584 ---- 6.625% senior notes due in 2006, net of discount of $725 and $793, respectively ........ 199,275 199,207 ---------- ---------- Total senior debt ..................................................................... 748,641 199,207 Subordinated debt (qualifies for inclusion in the determination of total capital under the Risk-Based Capital guidelines): 7.0% subordinated debt securities due in 1999, net of discount of $456 and $915, 299,544 299,085 respectively 8.15% subordinated notes due in 2002 ................................................... 150,000 150,000 6.375% subordinated debt securities due in 2003, net of discount of $968 and $1,163, 249,032 248,837 respectively 6.8% subordinated notes due in 2005, net of discount of $260 and $291, respectively .... 249,740 249,709 6.25% subordinated notes due in 2008, net of discount of $2,206......................... 347,793 ---- 5.625% subordinated notes due in 2008, net of discount of $2,600........................ 397,400 ---- 6.375% subordinated notes due in 2009, net of discount of $250 and $267, respectively .. 249,750 249,733 6.605% subordinated notes due in 2025 .................................................. 250,000 250,000 ---------- ---------- Total subordinated debt ............................................................... 2,193,259 1,447,364 Other ................................................................................... 27,273 31,093 ---------- ---------- Total Wachovia Corporation ............................................................ 2,969,173 1,677,664 Subsidiaries: Bank notes, net of discount of $4,970 and $5,548, respectively (a) ...................... 2,856,230 2,939,952 Federal Home Loan Bank borrowings (b) ................................................... 762,950 307,186 Other ................................................................................... 12,006 13,338 ---------- ---------- Total subsidiaries .................................................................... 3,631,186 3,260,476 Capital Trusts (qualifies for inclusion in Tier I capital under the Risk-Based Capital guidelines): Wachovia Capital Trust I -- 7.64% Capital Securities due in 2027 (c) .................... 300,000 300,000 Wachovia Capital Trust II -- Floating-Rate Capital Securities due in 2027, net of discount of $2,813 and $3,161, respectively (d) ....................................................................... 297,187 296,839 Wachovia Capital Trust V -- 7.965% Capital Securities due in 2027 (e) ................... 300,000 300,000 Central Fidelity Capital Trust I -- Floating-Rate Capital Securities due in 2027, net of discount of $819 and $846, respectively (f) ....................................................................... 99,181 99,154 ---------- ---------- Total Capital Trusts .................................................................. 996,368 995,993 ---------- ---------- Total long-term debt .................................................................. $7,596,727 $5,934,133 ========== ==========
(a) Wachovia Bank, N.A., has an ongoing bank note program under which the bank may offer an aggregate principal amount of up to $21.6 billion. The notes can be issued globally as fixed or floating rate and with maturities beginning at seven days. Bank notes with original maturities of one year or less are included in other short-term borrowed funds. Bank notes with original maturities greater than one year are classified as long-term debt. Interest rates on long-term notes ranged from 4.9% to 7.50% and 4.9% to 7.75% with maturities ranging from 1999 to 2038 and 1998 to 2008 at December 31, 1998 and 1997, respectively. The average rates were 5.64% and 6.12% with average maturities of 3.5 years and 2.9 years at December 31, 1998 and 1997, respectively. (b) The Federal Home Loan Bank borrowings were issued as fixed- or floating-rate with terms of 2 years to 5 years. Interest rates on the borrowings ranged from 5.16% to 7.06% and 5.63% to 8.31% for December 31, 1998 and 1997 and with maturities ranging from 1999 to 2003 and 1998 to 2003 at December 31, 1998 and 1997, respectively. Borrowings from the Federal Home Loan Bank are collateralized by qualifying securities and loans. (c) In December 1996, Wachovia Capital Trust I (WCT I), a wholly owned subsidiary, issued $300,000 of 7.64% Capital Securities due in 2027. WCT I invested the proceeds of the Capital Securities, together with $9,280 paid by the Corporation for WCT I's Common Securities, in $309,280 of the Corporation's 7.64% Junior Subordinated Deferrable Interest Debentures. WCT I's sole asset is the Junior Subordinated Deferrable Interest Debentures which mature in 2027. The Corporation has guaranteed all of WCT I's obligations under the Capital Securities. (d) In January 1997, Wachovia Capital Trust II (WCT II), a wholly owned subsidiary, issued $300,000 Floating-Rate Capital Securities due in 2027. WCT II invested the proceeds of the Capital Securities, together with $9,280 paid by the Corporation for WCT II's Common Securities, in $305,692, net of discount of $3,588, of the Corporation's Floating-Rate Junior Subordinated Deferrable Interest Debentures. WCT II's sole asset is the Junior Subordinated Deferrable Interest Debentures which mature in 2027. The Corporation has guaranteed all of WCT II's obligations under the Capital Securities. (e) In June 1997, Wachovia Capital Trust V (WCT V), a wholly owned subsidiary, issued $300,000 of 7.965% Capital Securities due in 2027. WCT V invested the proceeds of the Capital Securities, together with $9,280 paid by the Corporation for WCT V's Common Securities, in $309,280 of the Corporation's 7.965% Junior Subordinated Deferrable Interest Debentures. WCT V's sole asset is the Junior Subordinated Deferrable Interest Debentures which mature in 2027. The Corporation has guaranteed all of WCT V's obligations under the Capital Securities. (f) In April 1997, Central Fidelity Capital Trust I (CFCT I), a wholly owned subsidiary, issued $100,000 Floating-Rate Capital Securities due in 2027. CFCT I invested the proceeds of the Capital Securities, together with $3,093 paid by the Corporation for CFCT I's Common Securities, in $103,093 of the Corporation's Floating-Rate Junior Subordinated Debt Securities. CFCT I's sole asset is the Junior Subordinated Debt Securities which mature in 2027. The Corporation has guaranteed all of CFCT I's obligations under the Capital Securities. The principal maturities of long-term debt subsequent to December 31, 1998 are $1,199,546 in 1999, $893,122 in 2000, $1,232,375 in 2001, $504,417 in 2002, $733,286 in 2003 and $3,033,982 thereafter. - -------------------------------------------------------------------------------- 72 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note I -- Capital Stock At December 31, 1998, 28,125,864 common shares were reserved for the conversion of notes and issuance for employee benefit plans and the dividend reinvestment plan. During 1998, the Corporation repurchased 6,417,200 shares under two separate stock repurchase authorizations by the Board of Directors. Repurchased shares will be used for various corporate purposes including the issuance of shares for purchase business combinations, employee benefit plans and the dividend reinvestment plan. In January 1999, the Board of Directors authorized the repurchase of the Corporation's common stock to be issued in connection with the pending purchase acquisition of Interstate/Johnson Lane. The Corporation has one active stock option plan, the restated 1994 Wachovia Corporation Stock Plan. Under this Plan, up to 2.5% of the Corporation's outstanding common stock at year-end may be granted to selected key employees and nonemployee directors in the form of incentive and nonqualified stock options, stock appreciation rights (SARS), restricted stock awards and restricted units. Since the inception, a total of 7,839,808 options, 1,023,800 awards and 125,000 SARS have been granted. The Corporation also has several predecessor plans, the 1989 Plan and plans of merged entities which were assumed with appropriate conversion shares under option and option price. These plans continue to have options outstanding which may be exercised. The Corporation's stock plans provide for the granting of options or awards for the purchase or issuance of 14,895,546 shares at 100% of the fair market value of the stock at the date of the grant. A committee of the Board of Directors determines such times options and awards shall be granted and exercised and the term of the exercise period (not to exceed 10 years). The plan awards officers shares of restricted stock earned contingent upon both a performance requirement and a five- year period. Additionally, newly elected nonemployee directors are granted a one-time award of 1,000 shares of restricted stock to be earned over a three-year period and nonemployee directors are awarded 250 shares of restricted stock annually which are earned over a one-year period. The cost relating to performance-based stock compensation was $15,998, $9,131 and $4,522 during 1998, 1997 and 1996, respectively. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of FASB 123. 1998 1997 1996 -------- -------- -------- Net income: As reported .......... $874,170 $592,806 $757,259 Pro forma ............ 866,883 585,442 751,226 Basic earnings per share: As reported .......... $ 4.26 $ 2.99 $ 3.70 Pro forma ............ 4.23 2.95 3.67
These pro forma amounts may not be representative of future years since only awards and options granted after January 1, 1995 have been included in accordance with FASB 123. The weighted average fair values of options at their grant date during 1998, 1997 and 1996 were $16.46, $13.29 and $9.53, respectively. The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The following summarizes the weighted-average of the assumptions used in the model. 1998 1997 1996 ------ ------ ------ Risk-free interest rate ............... 5.73% 6.50% 5.67% Expected years until exercise ......... 6.50 6.30 6.32 Expected stock volatility ............. 19% 22% 22% Dividend yield ........................ 3.20% 3.31% 3.40%
Activity in the option and award plans during 1998, 1997 and 1996 is summarized as follows: Options and Awards Outstanding Available ------------------------- Option Price for Grant Awards Options Per Share --------------- ------- --------- ------------- Balance at December 31, 1995 ...................... 6,535,065 272,766 6,458,379 $ 12.50-36.88 Granted ................... (2,043,839) 242,107 1,801,732 24.85-47.13 Exercised ................. ---- (68,366) (1,015,339) 12.50-43.75 Forfeited ................. 65,296 (2,500) (85,616) 28.13-43.75 ---------- ------- ---------- Total December 31, 1996 ...................... 4,556,522 444,007 7,159,156 15.42-47.13 Granted ................... (2,732,191) 243,517 2,488,674 43.56-76.69 Assumed (Jefferson and 1st United) ......... ---- ---- 217,355 11.10-45.30 Excercised ................ ---- (26,000) (1,477,080) 15.42-45.30 Cancelled ................. (552,633) ---- ---- ---- Authorized ................ 3,794,392 ---- ---- ---- Forfeited ................. 82,075 (1,550) (92,444) 21.69-57.25 ---------- ------- ---------- Total December 31, 1997 ...................... 5,148,165 659,974 8,295,661 11.10-76.69 Granted ................... (3,209,626) 364,426 2,845,200 75.00-87.38 Exercised ................. ---- (69,150) (2,159,068) 15.73-75.00 Authorized ................ 3,064,084 ---- ---- ---- Forfeited ................. 72,030 (1,000) (115,150) 33.88-86.50 ---------- ------- ---------- Total December 31, 1998 ...................... 5,074,653 954,250 8,866,643 11.10-87.38 ========== ======= ==========
The following table summarizes information concerning currently outstanding and exercisable options. Options Outstanding Options Exercisable - -------------------------------------------------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------- ----------- ----------- -------- ----------- --------- $ 11.10-30.00 1,130,755 2.67 $ 23.39 1,130,755 $ 23.39 30.01-50.00 3,268,421 6.12 37.64 1,997,227 36.18 50.01-70.00 1,637,513 8.09 57.30 309,474 57.30 70.01-87.38 2,829,954 9.14 76.48 137,338 83.37 ---------- --------- 8,866,643 3,574,794 ========== =========
- -------------------------------------------------------------------------------- Note J -- Off-Balance Sheet Trading and Lending Activities The Corporation maintains positions in a variety of financial instruments with off-balance sheet risk to accommodate customers' financing objectives and management of interest rate and foreign currency risk. The Corporation maintains active trading positions in foreign exchange forward contracts and manages credit risk through the establishment of offsetting sell positions, as well as standard limit and monitoring procedures. The Corporation maintains a trading portfolio of interest rate swap and option (caps and floors) contracts and foreign exchange options consisting of generally matched, offsetting contracts with customer and market counterparties. 73 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note J -- Off-Balance Sheet Trading and Lending Activities -- Continued Off-balance sheet financial instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The Corporation follows the same credit policies and careful underwriting practices in making commitments and conditional obligations as it does for on-balance sheet instruments. In those instances where collateral is necessary to support financial instrument credit risk, the Corporation assures its ability to access borrower's collateral, in the event of default, through strict adherence to corporate lending policy and applicable state lending laws. Derivative Financial Instruments Held or Issued for Trading Purposes -- The amounts disclosed below represent the year-end notional and fair value of derivative financial instruments held or issued for trading purposes and the average fair value during the year. Notional principal amounts are often used to express the volume of these transactions but do not represent the much smaller amounts potentially subject to credit risk. The Corporation's credit exposure to off-balance sheet derivative financial instruments is represented by the fair value gain of the instrument if a counterparty fails to perform. Options written do not expose the Corporation to credit risk, except to the extent of the underlying risk in the debt instrument that the Corporation may be obligated to acquire under certain written put options. The present value of purchased caps and floors in a gain position represents the Corporation's potential credit exposure. 1998 --------------------------------------------------------- Notional Fair Value Fair Value Average Value Gains (Losses) Fair Value ----------- ---------- ------------------------- U.S. dollar interest rate contracts as intermediary: Interest rate swaps-pay fixed .............. $6,101,212 $40,948 ($104,107) $(109) Interest rate swaps-pay floating ........... 6,769,599 120,699 (30,715) 155 Interest rate caps and floors written ...... 2,551,837 2,374 ---- 44 Interest rate caps and floors purchased..... 2,606,271 ---- (2,372) (44) Securities trading activities: Commitments to purchase securities, futures and forward contracts ............. 55,769 47 (128) 859 Commitments to sell securities, futures and forward contracts ..................... 98,957 346 (16) (718) Foreign exchange trading activities: Commitments to purchase foreign exchange .................................. 1,689,837 36,656 (1,185) 3,676 Commitments to sell foreign exchange ....... 1,336,800 5,542 (37,906) 2,383 Foreign exchange options written ........... 28,972 527 (497) 21 Foreign exchange options purchased ......... 28,972 ---- ---- 2
1997 -------------------------------------------------- Notional Fair Value Fair Value Average Value Gains (Losses) Fair Value ---------- ---------- ---------- ---------- U.S. dollar interest rate contracts as intermediary: Interest rate swaps-pay fixed .............. $3,624,822 $8,423 ($32,930) $ (94) Interest rate swaps-pay floating ........... 4,206,981 38,366 (7,876) 116 Interest rate caps and floors written ...... 1,886,230 1,729 ---- 21 Interest rate caps and floors purchased..... 1,867,736 ---- (1,722) (21) Securities trading activities: Commitments to purchase securities, futures and forward contracts ............. 537,237 1,768 (163) (66) Commitments to sell securities, futures and forward contracts ..................... 584,187 357 (1,896) 222 Foreign exchange trading activities: Commitments to purchase foreign exchange .................................. 1,457,485 5,725 (28,525) 7,162 Commitments to sell foreign exchange ....... 1,460,270 30,816 (4,776) (4,696) Foreign exchange options written ........... 12,737 179 (15) 62 Foreign exchange options purchased ......... 12,070 13 (165) (49)
The Corporation controls the credit risk of these instruments through adherence to credit approval policies, monetary limits and monitoring procedures. Entering into interest rate swap agreements involves not only credit risk but also interest rate and foreign currency risk associated with unmatched positions. The Corporation controls the interest rate and foreign currency risk inherent in the derivative trading portfolio by entering into offsetting positions or by using other hedging techniques. Risks are further mitigated for those instruments that trade on organized exchanges, as the exchanges provide oversight and determine who may buy and sell such instruments. Interest Rate Swaps -- These transactions generally involve the exchange of fixed- and floating-rate payments without the exchange of the underlying principal amounts. Payments made or received under swap contracts are accrued based on contractual terms and are reported as other operating income. The related accrued amounts receivable or payable to customers or counterparties are included in other assets or liabilities. Revenues from the customer portfolio represent a small profit margin on intermediated transactions. The difference in the fair value of the offsetting contracts is not material. At December 31, 1998, the weighted average maturity of pay-fixed swaps and receive-fixed swaps held in the customer portfolio was 4.35 years. Under pay-fixed swap agreements, the Corporation paid interest at a weighted average fixed rate of 5.60% and received interest at a weighted average floating rate of 5.37% (based on year-end rates). Under receive-fixed swap agreements, the Corporation received interest at a weighted average fixed rate of 5.26% and paid interest at a weighted average floating rate of 5.34% (based on year-end rates). Interest Rate Caps and Floors -- These instruments are written by the Corporation to enable its customers to transfer, modify or reduce their interest rate risk exposure. In a cap or floor contract, the purchaser pays a premium at the initiation of the contract for the right to receive payments if market interest rates are greater than the strike price of a cap or less than the strike price of a floor. Payments made or received under cap or floor contracts are accrued based on contractual terms and are reported as other operating income. 74 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note J -- Off-Balance Sheet Trading and Lending Activities -- Concluded Commitments to Purchase and Sell Securities, Futures and Forward Contracts -- These instruments are contracts for delayed delivery of securities or money market instruments in which the seller agrees to deliver a specified instrument at a specified price or yield at a specified date. Commitments to purchase and sell securities, futures and forward contracts used in securities trading operations are recognized currently at market value and are reported as trading account profits (losses). Net Options Written to Purchase and Sell Foreign Exchange -- Forward commitments involve the purchase or sale of foreign currency amounts for delivery at a specified future date. Payments on forward commitments are exchanged on the delivery date based on the exchange rate in the contract. Forward commitments to purchase and sell foreign exchange are recognized at market value and are reported as other operating income. Foreign Exchange Options -- These agreements represent rights to purchase or sell foreign currency at a predetermined price at a future date. The purchaser pays a premium at the initiation of the contract for the right to exchange a specified amount at the contract's exchange rate at the maturity of the option. Revenues from the derivative trading portfolio are shown below. 1998 1997 1996 ------- ------- ------- Interest rate contracts ............. $19,406 $ 8,020 $ 3,071 Securities activities ............... (2,304) (3,035) 2,772 Foreign exchange activities ......... 20,054 11,283 10,292 ------- ------- ------- Total .......................... $37,156 $16,268 $16,135 ======= ======= =======
Off-Balance Sheet Financial Instruments Issued for Lending Activities -- The Corporation issues off-balance sheet financial instruments as part of its commercial and consumer lending activities. The contract amounts of these instruments represent potential credit risk at December 31 as shown below. 1998 1997 ----------- ----------- Commercial and consumer lending activities: Unfunded commitments to extend credit .......................... $53,178,254 $44,484,255 Standby letters of credit ......... 9,062,050 8,106,782 Commercial and similar letters of credit .......................... 214,086 183,695 Participations in bankers' acceptances ..................... 5,240 5,850
Commitments to Extend Credit -- These are legally binding contracts to lend to a customer, provided there is no contract violation. These commitments have fixed termination dates and generally require payment of a fee. As most commitments expire prior to being drawn, the amounts shown do not necessarily represent the future cash requirements of the contracts. Credit worthiness is evaluated and in some instances collateral is obtained to support the borrowing. At December 31, 1998 and 1997, approximately 16% and 15%, respectively, of unfunded commitments to extend credit were supported by collateral. Of the total unfunded commitment amounts presented, approximately 23% in 1998 and 25% in 1997 were comprised of cancelable credit card commitments, and approximately 10% in 1998 and 1997 were represented by real estate commitments. Standby, Commercial and Similar Letters of Credit -- These instruments are conditional commitments issued by the Corporation guaranteeing the performance of a customer to a third party. These guarantees are issued primarily to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers and is subject to the Corporation's underwriting process. At December 31, 1998 and 1997, approximately 3% and 4%, respectively, of these instruments were supported by collateral. There were no significant concentrations of letters of credit to any one group of borrowers at either year-end. Participation in Bankers' Acceptances -- These instruments represent risk participation in time drafts drawn by customers under a committed multibank credit facility. These drafts have been accepted and remarketed by other financial institutions. Under the terms of these arrangements, the Corporation may be required to reimburse the accepting financial institution for the Corporation's pro rata share of any payment default by the customer. - -------------------------------------------------------------------------------- Note K -- Off-Balance Sheet Risk Management Activities The Corporation uses a variety of off-balance sheet financial instruments as part of its overall interest rate risk management process. The Corporation's principal objective of asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the Corporation's funding needs. Accordingly, the Corporation uses a combination of derivative financial instruments, including interest rate swaps, futures and options with indices that correlate to on-balance sheet instruments to modify the repricing characteristics of interest-earning assets and interest-bearing liabilities. 75 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note K -- Off-Balance Sheet Risk Management Activities -- Concluded The amounts disclosed below represent the year-end notional and fair value of derivative financial instruments held for risk management purposes. The Corporation's credit exposure to off-balance sheet derivative financial instruments is represented by the fair value gain of the instrument if a counterparty fails to perform. There were no deferred losses resulting from terminated swap contracts at December 31, 1998 and 1997. 1998 ------------------------------------- Notional Fair Value Fair Value Value Gains (Losses) ---------- ---------- ---------- Convert floating-rate liabilities to fixed: Swaps-pay fixed/receive floating ....................................... $ 665,592 $ 1,049 $(7,341) Convert fixed-rate assets to floating: Swaps-pay fixed/receive floating ....................................... 329,825 ---- (14,437) Forward starting swaps-pay fixed/receive floating ...................... 200,000 ---- (257) Convert fixed-rate liabilities to floating: Swaps-receive fixed/pay floating ....................................... 2,100,000 134,960 (2,220) Convert liabilities with quarterly rate resets to monthly: Swaps-receive floating/pay floating .................................... 300,000 ---- (208) Convert floating-rate assets to fixed: Swaps-receive fixed/pay floating ....................................... 456,896 8,768 (87) ------------ -------- --------- Total interest rate swaps and options ................................ 4,052,313 144,777 (24,550) Financial futures contracts -- hedge of federal funds purchased ......... ---- ---- ---- Credit derivatives ...................................................... 1,500,000 387 ---- ------------ -------- --------- Total derivatives .................................................... $5,552,313 $145,164 ($ 24,550) ============ ======== ========= 1997 ----------------------------------- Notional Fair Value Fair Value Value Gains (Losses) ---------- ---------- ---------- Convert floating-rate liabilities to fixed: Swaps-pay fixed/receive floating ....................................... $ 357,056 $ 287 $(2,366) Convert fixed-rate assets to floating: Swaps-pay fixed/receive floating ....................................... 358,299 ---- (8,689) Forward starting swaps-pay fixed/receive floating ...................... 1,375,000 65,915 ---- Convert fixed-rate liabilities to floating: Swaps-receive fixed/pay floating ....................................... 300,000 ---- (279) Convert liabilities with quarterly rate resets to monthly: Swaps-receive floating/pay floating .................................... 409,196 6,932 (75) Convert floating-rate assets to fixed: Swaps-receive fixed/pay floating ....................................... 125,000 878 ---- ---------- ------- --------- Total interest rate swaps and options ................................ 2,924,551 74,012 (11,409) Financial futures contracts -- hedge of federal funds purchased ......... 1,000,000 ---- (46) Credit derivatives ...................................................... ---- ---- ---- ---------- ------- --------- Total derivatives .................................................... $3,924,551 $74,012 ($ 11,455) ========== ======= =========
- -------------------------------------------------------------------------------- Note L -- Income Taxes The provision for income taxes is summarized below. 1998 1997 1996 -------- -------- --------- Current: Federal ........................... $145,058 $233,618 $282,405 Foreign ........................... 686 594 542 State and local ................... 17,416 6,932 10,050 -------- -------- --------- Total current ................ 163,160 241,144 292,997 Deferred: Federal ........................... 251,902 23,453 51,383 State ............................. 14,549 11,716 (1,331) -------- -------- --------- Total deferred ............... 266,451 35,169 50,052 -------- -------- --------- Total income tax expense ..... $429,611 $276,313 $343,049 ======== ======== =========
The reasons for the difference between consolidated income tax expense and the amount computed by applying the statutory federal income tax rate of 35% to income before taxes were as follows: 1998 1997 1996 ---------- -------- ---------- Income before income taxes ...... $1,303,781 $869,119 $1,100,308 ========== ======== ========== Federal income taxes at statutory rate ................ $ 456,324 $304,192 $ 385,108 State and local income taxes, net of federal benefit ........ 20,778 12,121 5,648 Effect of tax-exempt securities interest and other income ..... (51,499) (42,031) (38,457) Other items ..................... 4,008 2,031 (9,250) ---------- -------- ---------- Total income tax expense ................. $ 429,611 $276,313 $ 343,049 ========== ======== ==========
Significant components of the Corporation's deferred tax assets and liabilities, which are included in other assets and other liabilities, at December 31 are as follows: Deferred Tax Assets ---------------------- 1998 1997 -------- -------- Allowance for loan losses ................ $200,546 $197,012 Employee compensation and retirement benefits .............................. 76,702 72,602 Other .................................... 37,867 40,630 -------- -------- Gross deferred tax assets ......... $315,115 $310,244 ======== ========
Deferred Tax Liabilities ------------------------- 1998 1997 --------- -------- Unrealized gains on securities available- for-sale ....................................... $50,719 $ 42,468 Depreciation ...................................... 29,279 4,052 Lease financing ................................... 433,753 200,921 Accretion of discounts on securities .............. 19,928 18,326 Identifiable intangibles .......................... 17,459 22,898 Other ............................................. 34,372 19,922 --------- -------- Gross deferred tax liabilities ............. $585,510 $308,587 ========= ======== Net deferred tax (liability) asset ......... ($270,395) $ 1,657 ========= ========
- -------------------------------------------------------------------------------- 76 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note M -- Cash, Dividend, Loan Restrictions, Capital Ratios and Contingent Liabilities In the normal course of business, the Corporation and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in cash, debt and dividend restrictions. A summary of the most restrictive items follows. The Corporation's banking subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1998 was $219,344. Under current Federal Reserve regulations, the banking subsidiaries also are limited in the amount they may loan to their affiliates, including the Corporation. Loans to a single affiliate may not exceed 10% and loans to all affiliates may not exceed 20% of the bank's capital, surplus and undivided profits plus the allowance for loan losses. Based on these limitations, $762,653 was available for loans to the Corporation at December 31, 1998. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the banking subsidiaries cannot distribute as dividends to the Corporation in 1999, without the approval of the Comptroller of the Currency, more than $215,761 plus an additional amount equal to the banks' retained net profits for 1999 up to the date of any dividend declaration. As a result of the above dividend and loan restrictions, approximately $4,849,328 of consolidated net assets of the Corporation's banking subsidiaries at December 31, 1998 was restricted from transfer to the Corporation in the form of cash dividends, loans or advances. The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory, and possible discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. The Corporation and its banking subsidiaries are required to maintain minimum Tier I capital, total risk-based capital and Tier I leverage ratios of 4%, 8% and 3%, respectively. The Corporation and its banking subsidiaries meet all capital adequacy requirements to which they are subject. At December 31, 1998, the most recent notification from the Comptroller of the Currency categorized the Corporation's banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be well capitalized, the banking subsidiaries must maintain minimum Tier I capital, total risk-based capital, and Tier I leverage ratios of 6%, 10% and 5%, respectively. There are no conditions or events since that notification that management believes have changed the banking subsidiaries' well capitalized status. The actual capital amounts and ratios for the Corporation at December 31, 1998 were as follows: Total risk-based capital of $7,927,628 representing an 11.34% ratio and Tier I capital of $5,585,488 representing Tier I capital and leverage ratios of 7.99% and 8.67%, respectively. Corresponding amounts and ratios for the Corporation as of December 31, 1997 were $7,203,318 representing an 11.11% ratio, $5,465,144 representing ratios of 8.43% and 9.24%, respectively. The actual capital amounts and ratios for the Corporation's principal banking subsidiary, Wachovia Bank, N.A., at December 31, 1998 were as follows: Total risk-based capital of $7,749,905 representing an 11.34% ratio and Tier I capital of $5,097,196 representing Tier I capital and leverage ratios of 7.46% and 8.28%, respectively. The Corporation, in the normal course of business, is subject to various pending or threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible for the Corporation to predict the outcome of these lawsuits or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on the Corporation's financial position. - -------------------------------------------------------------------------------- Note N -- Pension and Other Postretirement Benefits The Corporation maintains several defined benefit pension plans, the first of which covers substantially all employees (the Qualified Plan). The Qualified Plan provides pension benefits that are based upon the employee's length of credited service and final average compensation as defined in the plan. The pension expense of the Qualified Plan is determined using the projected unit credit method. The Corporation's policy is to fund amounts allowable for federal income tax purposes. The Corporation also sponsors separate unfunded nonqualified pension plans that provide certain officers with defined pension benefits in excess of limits imposed on qualified plans by federal tax law and for certain compensation not covered in the qualified plans. The Corporation and its subsidiaries provide certain health care benefits for retired employees. Substantially all of the employees may become eligible for these benefits if they reach retirement age while working for the Corporation or its subsidiaries. The benefits are provided through self-insured plans administered by insurance companies whose premiums are based on the claims paid during the year. The following table sets forth the changes in the projected benefit obligations and the fair value of plan assets for the Corporation's defined benefit pension plans and health care benefits provided for retired employees and the amounts recognized in the Consolidated Statements of Condition at December 31. 77 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note N -- Pension and Other Postretirement Benefits -- Continued Pension Benefits ------------------------------------ 1998 1997 ------------ ----------- Change in benefit obligation: Projected benefit obligation at beginning of year ......... $754,739 $585,846 Service cost .............................................. 31,933 24,660 Interest cost ............................................. 54,963 46,626 Actuarial gain (loss) ..................................... 34,414 84,630 Benefits paid ............................................. (31,928) (30,551) Plan change ............................................... 14,480 13,643 Purchase business combinations ............................ ---- 29,885 ------------ --------- Projected benefit obligation at end of year ............... $858,601 $754,739 ============ ========= Change in plan assets: Fair value of plan assets at beginning of year ............ $742,203 $603,675 Actual return on plan assets .............................. 113,372 130,114 Employer contributions .................................... 3,663 11,292 Benefits paid ............................................. (31,928) (30,551) Purchase business combinations ............................ ---- 27,673 ------------ --------- Fair value of plan assets at end of year .................. $827,310 $742,203 ============ ========= Accrued benefit cost: Funded status ............................................. $(31,291) $(12,536) Unrecognized transition (asset) liability ................. (22,332) (24,028) Unrecognized prior service cost ........................... 16,094 6,446 Unrecognized net loss (gains) ............................. 13,805 25,606 ------------ --------- Accrued benefit cost ...................................... $(23,724) $ (4,512) ============ ========= Weighted-average assumptions as of December 31: Discount rate ............................................. 7.00% 7.25% Expected return on plan assets ............................ 9.00% 8.00% 6% through 2001, 6% through 2001, Rate of compensation increase ............................. 5% thereafter 5% thereafter Assumed rate of increase in health care costs: Retirees under age 65 .................................... ---- ---- Retirees over age 65 ..................................... ---- ---- Other Benefits -------------------------- 1998 1997 --------- --------- Change in benefit obligation: Projected benefit obligation at beginning of year ......... $85,652 $ 72,732 Service cost .............................................. 1,396 2,407 Interest cost ............................................. 5,573 5,718 Actuarial gain (loss) ..................................... (2,769) 9,059 Benefits paid ............................................. (6,046) (6,041) Plan change ............................................... (7,747) ---- Purchase business combinations ............................ ---- 1,777 --------- ----------- Projected benefit obligation at end of year ............... $76,059 $ 85,652 ========= =========== Change in plan assets: Fair value of plan assets at beginning of year ............ $12,170 $ 12,786 Actual return on plan assets .............................. 1,361 (616) Employer contributions .................................... ---- ---- Benefits paid ............................................. ---- ---- Purchase business combinations ............................ ---- ---- --------- ----------- Fair value of plan assets at end of year .................. $13,531 $ 12,170 ========= =========== Accrued benefit cost: Funded status ............................................. ($ 62,528) ($ 73,482) Unrecognized transition (asset) liability ................. 55,716 59,695 Unrecognized prior service cost ........................... (6,612) 626 Unrecognized net loss (gains) ............................. (11,185) (8,167) --------- ------------ Accrued benefit cost ...................................... ($ 24,609) ($ 21,328) ========= ============ Weighted-average assumptions as of December 31: Discount rate ............................................. 7.00% 7.25% Expected return on plan assets ............................ 7.00% 7.00% Rate of compensation increase ............................. 6.00% 6.00% Assumed rate of increase in health care costs: Retirees under age 65 .................................... 8.00% 8.00-8.20% Retirees over age 65 ..................................... 6.00% 6.00-8.20%
The rate of increase in health care costs is assumed to remain constant for each category of retirees. Included in plan assets at December 31, 1998 were 130,626 shares of Wachovia Corporation common stock with a market value of $11,422. PensionBenefits Other Benefits ------------------------------------- --------------------------------- 1998 1997 1996 1998 1997 1996 -------- ------- ------- ------- ------- ------- Components of net periodic benefit cost: Service cost ........................... $31,933 $24,660 $23,297 $1,396 $ 2,407 $1,955 Interest cost .......................... 54,963 46,626 41,391 5,573 5,718 5,245 Expected return on plan assets ......... (63,050) (50,821) (44,262) (852) (895) (770) Amortization of unrecognized amounts: Transition (asset) liability .......... (5,585) (5,297) (5,910) 3,980 3,980 3,979 Prior service cost .................... 537 (1,532) (1,617) (509) 57 57 Net actuarial loss (gain) ............. 2,132 1,360 1,679 (262) (484) (476) -------- ------- ------- ------- -------- ------- Benefit cost ............................ $20,930 $14,996 $14,578 $9,326 $10,783 $9,990 ======== ======= ======= ======= ======== =======
The assumed health care cost trend rate has a significant effect on the amounts reported. A one percentage point change in the assumed health care cost trend rate would have the following effects: 1 Percentage 1 Percentage Point Point Increase Decrease ------------ ------------- Effect on total of service and interest cost components in 1999 ............. $ 186 $ 164 Effect on post retirement benefit obligation as of December 31, 1998 ................................ $2,560 $2,263
The Corporation also provides supplemental benefits to substantially all employees through defined contribution plans designed to encourage participants to save on a regular basis and to provide such participants with deferred compensation and additional performance incentive. Total expense relating to these plans, which represented the Corporation's matching and discretionary contributions, was $23,473 in 1998, $25,969 in 1997 and $19,847 in 1996. Employee participants may elect to contribute from 1% to 15% of base salary, with the Corporation matching 50% of each participant's contribution up to a maximum employer contribution of 3% of base salary. The plans provide 78 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note N -- Pension and Other Postretirement Benefits -- Concluded for additional contributions of up to 3% of salary in accordance with a preestablished formula based on certain earnings performance criteria and also for special discretionary employer contributions of up to 4% of each eligible employee's base salary as approved annually by the Board of Directors. Effective January 1, 1999, the matching rate for the first 3% of base salary was raised to 100%. - -------------------------------------------------------------------------------- Note O -- Selected Income Statement Information The components of other operating income and expense for the three years ended December 31 were as follows: 1998 1997 1996 -------- -------- -------- Other operating income: Insurance premiums and commissions ........................ $ 31,897 $ 30,205 $ 20,562 Bankers' acceptance and letter of credit fees ............. 39,025 34,526 28,243 Other service charges and fees ............................ 39,766 38,750 38,590 Other income .............................................. 117,487 84,316 56,035 -------- -------- -------- Total other operating income ............................ $228,175 $187,797 $143,430 ======== ======== ======== Other operating expense: Postage and delivery ...................................... $ 52,981 $ 48,657 $ 47,195 Outside data processing, programming and software ......... 68,680 86,497 51,139 Stationery and supplies ................................... 34,767 30,960 30,043 Advertising and sales promotion ........................... 70,222 72,046 68,639 Professional services ..................................... 56,066 54,113 41,223 Travel and business promotion ............................. 29,254 25,215 21,096 Amortization of intangible assets ......................... 39,091 13,308 9,163 Foreclosed property expense, net of income ................ 571 1,875 1,930 Other expense ............................................. 209,196 182,480 194,837 -------- -------- -------- Total other operating expense ........................... $560,828 $515,151 $465,265 ======== ======== ========
- -------------------------------------------------------------------------------- Note P -- Earnings Per Share Year Ended December 31 ---------------------------------------- 1998 1997 1996 -------- ---- ---- Basic (thousands, except per share) Average common shares outstanding .............................. 205,058 198,290 204,889 ======== ======= ======= Net income ..................................................... $874,170 $592,806 $757,259 ======== ======== ======== Per share amount ............................................... $ 4.26 $ 2.99 $ 3.70 Diluted (thousands, except per share) Average common shares outstanding .............................. 205,058 198,290 204,889 Dilutive common stock options at average market price .......... 3,778 3,394 2,322 Dilutive common stock awards at average market price ........... 300 210 126 Convertible long-term debt assumed converted ................... 17 7 95 -------- -------- -------- Average diluted shares outstanding ............................. 209,153 201,901 207,432 ======== ======== ======== Net income ..................................................... $874,170 $592,806 $757,259 Add interest on convertible long-term debt, net of tax ......... 48 6 65 -------- -------- -------- Adjusted net income ............................................ $874,218 $592,812 $757,324 ======== ======== ======== Per share amount ............................................... $ 4.18 $ 2.94 $ 3.65
- -------------------------------------------------------------------------------- 79 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note Q -- Fair Value of Financial Instruments The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented are based on pertinent information available to management as of December 31, 1998 and 1997. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and therefore, current estimates of fair value may differ significantly from the amounts presented. Trading Account Assets -- Fair values are based on quoted market prices as recognized in the statements of condition. Securities -- Fair values are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Loans -- For credit card, equity lines and other loans with short-term or variable rate characteristics, the carrying value reduced by an estimate of credit losses inherent in the portfolio is a reasonable estimate of fair value. The fair value of all other loans is estimated by discounting their future cash flows using interest rates currently being offered for loans with similar terms, reduced by an estimate of credit losses inherent in the portfolio. The discount rates used are commensurate with the interest rate and prepayment risks involved for the various types of loans. Deposits -- The fair values disclosed for demand deposits (e.g., interest- and noninterest-bearing demand, savings and money market savings) are equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated monthly maturities. Long-Term Debt -- Fair values are estimated using discounted cash flow analyses, based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. Many of the Corporation's assets and liabilities are short-term financial instruments whose carrying amounts reported in the statements of condition approximate fair value. These items include cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under resale agreements, due from customers on acceptances, short-term borrowed funds, acceptances outstanding, and the financial instruments included in other assets and liabilities. The following summarizes estimated fair values of the Corporation's remaining on-balance sheet financial instruments as of December 31. 1998 ----------------------------- Carrying Estimated Value Fair Value ------------ ------------- Financial assets: Trading account assets ................ $ 664,812 $ 664,812 Securities ............................ 9,367,255 9,425,774 Loans, net of allowance for loan losses 45,171,230 45,465,075 Financial liabilities: Deposits .............................. 40,994,729 41,156,155 Long-term debt ........................ 7,596,727 7,895,996
1997 ----------------------------- Carrying Estimated Value Fair Value ---------- ------------- Financial assets: Trading account assets ................ $ 999,122 $ 999,122 Securities ............................ 10,418,876 10,488,001 Loans, net of allowance for loan losses 43,649,659 43,944,373 Financial liabilities: Deposits .............................. 42,653,843 42,757,011 Long-term debt ........................ 5,934,133 6,041,697
Off-Balance Sheet Instruments -- Fair values are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing for loan commitments and letters of credit, and the estimated amount the Corporation would receive or pay to terminate or replace the contract at current market rates for the remainder of the off-balance sheet instruments. See Notes J and K for additional information about off-balance sheet financial instruments. The estimated fair values of the Corporation's off-balance sheet financial instruments as of December 31 are summarized below. The amounts for commitments and letters of credit are presented as negative in order to represent the approximate cost the Corporation would incur to pay third parties to assume these commitments. Interest rate contracts and other off-balance sheet financial instruments represent the net fair value gain or loss of the contracts. 1998 1997 Estimated Estimated Fair Value Fair Value ---------- ----------- Unfunded commitments to extend credit ......... ($ 76,894) ($ 44,682) Letters of credit ............................. (66,434) (58,429) Interest rate contracts issued for trading purposes .................................... 26,827 5,990 Interest rate contracts held for purposes other than trading .......................... 120,614 62,557 Other off-balance sheet financial instruments issued or held for trading or lending purposes .................................... 3,386 3,318
This presentation excludes certain financial instruments and all nonfinancial instruments. The disclosures exclude all nonfinancial instruments such as customer relationships, deposit base intangibles and goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. - -------------------------------------------------------------------------------- 80 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note R -- Wachovia Corporation (Parent Company Only) Information The following is a condensed statement of financial condition of the parent company at December 31. 1998 1997 ----------- ---------- Assets - ------ Cash on demand deposit with bank subsidiary ................................. $ 520 $ 6,968 Interest-bearing bank balances with bank subsidiaries ............................... 1,041,471 856,503 Securities available-for-sale ................ 130,829 51,523 Demand loans to nonbank subsidiaries ......... 779,035 993,073 Notes receivable from subsidiaries ........... 2,521,540 1,506,529 Investments in: Bank subsidiaries .......................... 5,827,743 5,260,189 Nonbank subsidiaries ....................... 293,923 224,157 Other assets ................................. 191,817 164,910 ----------- ---------- Total assets .......................... $10,786,878 $9,063,852 =========== ========== Liabilities and Shareholders' Equity - ------------------------------------ Parent company commercial paper .............. $ 1,359,382 $1,034,024 Subordinated notes payable to nonbank subsidiaries ............................... 1,031,023 1,080,659 Long-term debt ............................... 2,969,173 1,677,664 Demand loans from bank subsidiary ............ 18,015 18,015 Other liabilities ............................ 71,053 79,189 Shareholders' equity ......................... 5,338,232 5,174,301 ----------- ---------- Total liabilities and shareholders' equity .............................. $10,786,878 $9,063,852 =========== ==========
The principal maturities of the parent company's long-term debt subsequent to December 31, 1998 are $303,353 in 1999, $249,782 in 2000, $325,179 in 2001, $151,678 in 2002, $249,032 in 2003 and $2,721,172 thereafter. The operating results of the parent company for the three years ended December 31 are shown below. 1998 1997 1996 -------- -------- -------- Income - ------ Dividends from: Bank subsidiaries .................. $562,000 $658,800 $561,800 Nonbank subsidiaries ............... ---- 11,060 800 Interest from subsidiaries ............ 222,956 184,476 104,823 Other interest income ................. 7,997 15,320 16,877 Other income .......................... 57,387 34,012 55,243 -------- -------- --------- Total income ................... 850,340 903,668 739,543 Expense - ------- Interest on short-term borrowed funds .............................. 64,086 39,566 30,491 Interest on long-term debt ............ 197,944 169,192 105,075 Interest paid to subsidiaries ......... 1,746 22,354 15,488 Other expense ......................... 47,858 50,655 34,349 -------- -------- --------- Total expense .................. 311,634 281,767 185,403 Income before income tax benefit and equity in undistributed net income (excess dividends) of subsidiaries ....................... 538,706 621,901 554,140 Income tax benefit .................... (14,259) (16,519) (7,055) -------- -------- --------- Income before equity in undistributed net income (excess dividends) of subsidiaries ....................... 552,965 638,420 561,195 Equity in undistributed net income (excess dividends) of subsidiaries ....................... 321,205 (45,614) 196,064 -------- -------- --------- Net income ..................... $874,170 $592,806 $757,259 ======== ======== =========
81 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Concluded - -------------------------------------------------------------------------------- $ in thousands Wachovia Corporation and Subsidiaries Note R -- Wachovia Corporation (Parent Company Only) Information -- Concluded The cash flows for the parent company for the three years ended December 31 were as follows: 1998 1997 1996 ---------- -------- -------- Operating Activities - -------------------- Net income ........................ $ 874,170 $592,806 $757,259 Other, net ........................ 52,802 23,830 (7,177) Equity in excess dividends (undistributed net income) of subsidiaries ......... (321,205) 45,614 (196,064) ---------- -------- -------- Net cash provided by operations ................... 605,767 662,250 554,018 Investing Activities - -------------------- Net (increase) decrease in interest-bearing bank balances ........................ (184,968) 315,194 (406,418) Purchases of securities available-for-sale .............. (105,763) (17,097) (334,586) Sale of securities available- for-sale ........................ 38,257 349,052 30,485 Net decrease (increase) in demand loans to nonbank subsidiaries .................... 214,038 (559,130) (149,483) Notes issued to subsidiaries ...... (1,015,908) (550,000) ---- Notes repaid by subsidiaries 908 ---- 585 Net (increase) decrease in other assets .................... (22,318) (5,154) 26,771 Equity investment in subsidiaries .................... (249,001) (45,956) (68,252) ---------- -------- -------- Net cash used by investing activities ................... (1,324,755) (513,091) (900,898) Financing Activities - -------------------- Net (decrease) increase in loans and notes from subsidiaries .................... (50,474) 355,340 629,616 Net increase in commercial paper ........................... 325,358 327,648 204,090 Proceeds from long-term debt ............................ 1,288,859 ---- 196,106 Issuance of stock ................. 80,375 59,281 37,445 Dividend payments ................. (381,798) (327,303) (304,733) Common stock repurchased (531,122) (537,855) (415,162) Decrease in other liabilities ..... (18,658) (19,346) (462) ---------- -------- -------- Net cash provided (used) by financing activities ...... 712,540 (142,235) 346,900 ---------- -------- -------- (Decrease) increase in cash ....... (6,448) 6,924 20 Cash at beginning of year ......... 6,968 44 24 ---------- -------- -------- Cash at end of year ............... $ 520 $ 6,968 $ 44 ========== ======== ======== Noncash investing and financing activities: Common stock issued on conversion of long term debt ............................ $ ---- $ 70 $ 6,007
82 - -------------------------------------------------------------------------------- Year-End Information - -------------------------------------------------------------------------------- Wachovia Corporation and Subsidiaries 1998 1997 Condensed Balance Sheet (millions) Cash and due from banks .............................. $ 3,800 $ 4,222 Interest-bearing bank balances ....................... 110 133 Federal funds sold and securities purchased under resale agreements ................... 675 1,589 Trading account assets ............................... 665 999 Securities: Available-for-sale .................................. 7,984 8,909 Held-to-maturity .................................... 1,384 1,509 Loans, net of unearned income ........................ 45,719 44,194 Less allowance for loan losses ....................... 548 544 -------- -------- Net loans .......................................... 45,171 43,650 Premises and equipment ............................... 902 810 Other assets ......................................... 3,432 3,576 -------- -------- Total assets ....................................... $ 64,123 $ 65,397 ======== ======== Deposits in domestic offices ......................... $ 38,718 $ 38,151 Deposits in foreign offices .......................... 2,277 4,503 -------- -------- Total deposits ..................................... 40,995 42,654 Federal funds purchased and securities sold under repurchase agreements .................... 5,463 8,323 Commercial paper ..................................... 1,359 1,034 Other short-term borrowed funds ...................... 1,912 753 Bank notes ........................................... 2,856 2,940 Other long-term debt ................................. 4,741 2,994 Other liabilities .................................... 1,459 1,525 Shareholders' equity ................................. 5,338 5,174 -------- -------- Total liabilities and shareholders' equity ......... $ 64,123 $ 65,397 ======== ======== Loan Portfolio (millions) Domestic borrowers: Commercial .......................................... $ 14,328 $ 13,528 Tax-exempt .......................................... 973 1,607 Direct retail ....................................... 1,098 1,250 Indirect retail ..................................... 3,240 3,028 Credit card ......................................... 6,049 5,919 Other revolving credit .............................. 537 460 Construction ........................................ 2,044 1,780 Commercial mortgages ................................ 6,988 6,790 Residential mortgages ............................... 7,490 8,099 Lease financing, net ................................ 1,879 1,094 -------- -------- Total .............................................. 44,626 43,555 Foreign ............................................. 1,093 639 -------- -------- Total loans ........................................ $ 45,719 $ 44,194 ======== ======== Loan Portfolio (percentages) Commercial ........................................... 33.5 34.2 Credit card .......................................... 13.2 13.4 Other revolving credit ............................... 1.2 1.0 Other retail ......................................... 9.5 9.7 Real estate .......................................... 36.1 37.7 Lease financing ...................................... 4.1 2.5 Foreign .............................................. 2.4 1.5 --------- --------- Total .............................................. 100.0 100.0 ========= ========= 1996 1995 1994 1993 Condensed Balance Sheet (millions) Cash and due from banks .............................. $ 3,674 $ 3,033 $ 2,953 $ 2,839 Interest-bearing bank balances ....................... 78 526 7 13 Federal funds sold and securities purchased under resale agreements ................... 276 302 399 884 Trading account assets ............................... 1,190 1,115 891 791 Securities: Available-for-sale .................................. 9,825 11,034 7,018 4,094 Held-to-maturity .................................... 1,352 1,620 4,185 7,879 Loans, net of unearned income ........................ 38,007 35,585 31,664 27,754 Less allowance for loan losses ....................... 519 519 516 510 -------- -------- -------- -------- Net loans .......................................... 37,488 35,066 31,148 27,244 Premises and equipment ............................... 794 781 690 650 Other assets ......................................... 2,552 2,315 1,951 1,794 -------- -------- -------- -------- Total assets ....................................... $ 57,229 $ 55,792 $ 49,242 $ 46,188 ======== ======== ======== ======== Deposits in domestic offices ......................... $ 34,137 $ 33,594 $ 29,380 $ 29,201 Deposits in foreign offices .......................... 1,185 761 916 807 -------- -------- -------- -------- Total deposits ..................................... 35,322 34,355 30,296 30,008 Federal funds purchased and securities sold under repurchase agreements .................... 7,206 6,892 6,939 6,198 Commercial paper ..................................... 707 535 432 606 Other short-term borrowed funds ...................... 1,039 1,776 1,044 1,101 Bank notes ........................................... 4,308 4,691 4,751 2,782 Other long-term debt ................................. 2,717 1,493 997 751 Other liabilities .................................... 1,322 1,449 873 998 Shareholders' equity ................................. 4,608 4,601 3,910 3,744 -------- -------- -------- -------- Total liabilities and shareholders' equity ......... $ 57,229 $ 55,792 $ 49,242 $ 46,188 ======== ======== ======== ======== Loan Portfolio (millions) Domestic borrowers: Commercial .......................................... $ 10,341 $ 10,365 $ 8,915 $ 7,250 Tax-exempt .......................................... 2,016 2,328 1,907 2,055 Direct retail ....................................... 1,218 1,197 1,128 1,008 Indirect retail ..................................... 3,082 3,118 2,813 2,804 Credit card ......................................... 5,596 4,610 4,522 3,586 Other revolving credit .............................. 424 417 398 382 Construction ........................................ 1,247 1,008 829 747 Commercial mortgages ................................ 5,684 5,113 4,673 4,242 Residential mortgages ............................... 7,132 6,537 6,028 5,444 Lease financing, net ................................ 831 502 197 163 -------- -------- -------- -------- Total .............................................. 37,571 35,195 31,410 27,681 Foreign ............................................. 436 390 254 73 -------- -------- -------- -------- Total loans ........................................ $ 38,007 $ 35,585 $ 31,664 $ 27,754 ======== ======== ======== ======== Loan Portfolio (percentages) Commercial ........................................... 32.5 35.7 34.2 33.5 Credit card .......................................... 14.7 12.9 14.3 12.9 Other revolving credit ............................... 1.1 1.2 1.3 1.4 Other retail ......................................... 11.3 12.1 12.4 13.7 Real estate .......................................... 37.0 35.6 36.4 37.6 Lease financing ...................................... 2.2 1.4 .6 .6 Foreign .............................................. 1.2 1.1 .8 .3 --------- --------- --------- --------- Total .............................................. 100.0 100.0 100.0 100.0 ========= ========= ========= =========
83 - -------------------------------------------------------------------------------- Consolidated Average Balances - -------------------------------------------------------------------------------- thousands Wachovia Corporation and Subsidiaries 1998 1997 Amount % Amount % Assets Loans -- net of unearned income: Commercial ................................................................ $14,023,069 21.9 $11,326,589 19.7 Tax-exempt ................................................................ 1,218,909 1.9 1,743,227 3.0 ------------ ----- ------------ ----- Total commercial ........................................................ 15,241,978 23.8 13,069,816 22.7 Direct retail ............................................................. 1,143,392 1.8 1,193,557 2.1 Indirect retail ........................................................... 3,090,938 4.8 2,966,521 5.1 Credit card ............................................................... 5,680,171 8.9 5,626,062 9.8 Other revolving credit .................................................... 497,681 .8 423,900 .7 ------------ ----- ------------ ----- Total retail ............................................................ 10,412,182 16.3 10,210,040 17.7 Construction .............................................................. 1,892,817 3.0 1,498,438 2.6 Commercial mortgages ...................................................... 6,812,786 10.6 6,067,194 10.5 Residential mortgages ..................................................... 7,808,436 12.2 7,422,225 12.9 ------------ ----- ------------ ----- Total real estate ....................................................... 16,514,039 25.8 14,987,857 26.0 Lease financing ........................................................... 1,428,872 2.2 955,055 1.7 Foreign ................................................................... 803,644 1.3 493,110 .9 ------------ ----- ------------ ----- Total loans ............................................................. 44,400,715 69.4 39,715,878 69.0 Securities: Held-to-maturity: State and municipal ...................................................... 193,911 .3 221,196 .4 Other .................................................................... 1,282,160 2.0 1,101,603 1.8 ------------ ----- ------------ ----- Total securities held-to-maturity ....................................... 1,476,071 2.3 1,322,799 2.2 Available-for-sale ........................................................ 9,106,015 14.2 9,470,064 16.4 ------------ ----- ------------ ----- Total securities ........................................................ 10,582,086 16.5 10,792,863 18.6 Interest-bearing bank balances .............................................. 157,219 .3 88,801 .2 Federal funds sold and securities purchased under resale agreements ......... 467,079 .7 397,213 .7 Trading account assets ...................................................... 954,809 1.5 960,244 1.7 ------------ ----- ------------ ----- Total interest-earning assets ........................................... 56,561,908 88.4 51,954,999 90.2 Cash and due from banks ..................................................... 3,210,746 5.1 2,904,160 5.0 Premises and equipment ...................................................... 856,737 1.3 803,362 1.4 Other assets (1) ............................................................ 3,854,897 6.0 2,465,276 4.3 Allowance for loan losses ................................................... (535,753) ( .8) (520,722) ( .9) ------------ ------ ------------ ------ Total assets ............................................................ $63,948,535 100.0 $57,607,075 100.0 ============ ====== ============ ====== Liabilities and Shareholders' Equity Interest-bearing deposits in domestic offices: Demand .................................................................... $ 4,984,421 7.8 $ 4,108,606 7.1 Savings and money market savings .......................................... 11,603,522 18.2 10,594,764 18.4 Savings certificates ...................................................... 9,943,373 15.5 10,364,936 18.0 Large denomination certificates ........................................... 3,051,290 4.8 2,929,042 5.1 ------------ ------ ------------ ------ Total interest-bearing deposits in domestic offices ..................... 29,582,606 46.3 27,997,348 48.6 Interest-bearing deposits in foreign offices ................................ 2,428,713 3.8 1,585,149 2.8 ------------ ------ ------------ ------ Total interest-bearing deposits ......................................... 32,011,319 50.1 29,582,497 51.4 Federal funds purchased and securities sold under repurchase agreements ..... 7,498,279 11.7 6,743,997 11.7 Commercial paper ............................................................ 1,276,624 2.0 781,345 1.4 Other short-term borrowed funds ............................................. 2,120,256 3.3 1,461,781 2.5 ------------ ------ ------------ ------ Total short-term borrowed funds ......................................... 10,895,159 17.0 8,987,123 15.6 Bank notes .................................................................. 2,619,824 4.1 3,075,331 5.3 Other long-term debt ........................................................ 3,658,983 5.7 3,046,492 5.3 ------------ ------ ------------ ------ Total long-term debt .................................................... 6,278,807 9.8 6,121,823 10.6 ------------ ------ ------------ ------ Total interest-bearing liabilities ...................................... 49,185,285 76.9 44,691,443 77.6 Other deposits: Demand in domestic offices ................................................ 7,797,454 12.2 6,921,083 12.0 Demand in foreign offices ................................................. 309 .0 169 .0 Noninterest-bearing time in domestic offices .............................. 5,203 .0 13,192 .0 Other liabilities ........................................................... 1,792,333 2.8 1,447,863 2.5 Shareholders' equity ........................................................ 5,167,951 8.1 4,533,325 7.9 ------------ ------ ------------ ------ Total liabilities and shareholders' equity .............................. $63,948,535 100.0 $57,607,075 100.0 ============ ====== ============ ====== Total deposits .............................................................. $39,814,285 $36,516,941
(1) Includes unrealized gains (losses) of $131,761 in 1998, $65,846 in 1997, $93,556 in 1996, $34,248 in 1995 and ($12,405) in 1994 on securities available-for-sale. 84 - -------------------------------------------------------------------------------- 1996 1995 Amount % Amount % Assets Loans -- net of unearned income: Commercial ................................................................ $10,480,829 18.9 $ 9,727,718 18.8 Tax-exempt ................................................................ 2,126,486 3.8 2,067,016 4.0 ------------ ----- ------------- ----- Total commercial ........................................................ 12,607,315 22.7 11,794,734 22.8 Direct retail ............................................................. 1,194,349 2.1 1,177,466 2.3 Indirect retail ........................................................... 3,138,707 5.6 2,973,026 5.8 Credit card ............................................................... 4,948,626 8.9 4,551,448 8.8 Other revolving credit .................................................... 417,953 .8 398,693 .8 ------------ ----- ------------- ----- Total retail ............................................................ 9,699,635 17.4 9,100,633 17.7 Construction .............................................................. 1,069,576 1.9 948,248 1.8 Commercial mortgages ...................................................... 5,452,795 9.8 4,902,241 9.5 Residential mortgages ..................................................... 6,796,978 12.2 6,182,282 12.0 ------------ ----- ------------- ----- Total real estate ....................................................... 13,319,349 23.9 12,032,771 23.3 Lease financing ........................................................... 655,485 1.2 278,038 .5 Foreign ................................................................... 457,500 .8 304,277 .6 ------------ ----- ------------- ----- Total loans ............................................................. 36,739,284 66.0 33,510,453 64.9 Securities: Held-to-maturity: State and municipal ...................................................... 273,529 .5 423,747 .8 Other .................................................................... 1,199,467 2.1 3,735,893 7.1 ------------ ----- ------------- ----- Total securities held-to-maturity ....................................... 1,472,996 2.6 4,159,640 7.9 Available-for-sale ........................................................ 10,402,219 18.7 7,817,579 15.2 ------------ ----- ------------- ----- Total securities ........................................................ 11,875,215 21.3 11,977,219 23.1 Interest-bearing bank balances .............................................. 420,838 .8 119,277 .2 Federal funds sold and securities purchased under resale agreements ......... 286,478 .5 221,359 .4 Trading account assets ...................................................... 921,764 1.7 916,140 1.8 ------------ ----- ------------- ----- Total interest-earning assets ........................................... 50,243,579 90.3 46,744,448 90.4 Cash and due from banks ..................................................... 2,789,738 5.1 2,801,993 5.5 Premises and equipment ...................................................... 785,438 1.4 722,418 1.4 Other assets (1) ............................................................ 2,278,391 4.1 1,951,842 3.7 Allowance for loan losses ................................................... (512,943) ( .9) (517,430) ( 1.0) ------------ ------ ------------- ------ Total assets ............................................................ $55,584,203 100.0 $51,703,271 100.0 ============ ====== ============= ====== Liabilities and Shareholders' Equity Interest-bearing deposits in domestic offices: Demand .................................................................... $ 3,993,079 7.2 $ 3,923,942 7.6 Savings and money market savings .......................................... 9,440,738 17.0 8,318,312 16.1 Savings certificates ...................................................... 10,521,925 18.9 10,435,857 20.3 Large denomination certificates ........................................... 2,612,410 4.7 2,173,624 4.2 ------------ ------ ------------- ------ Total interest-bearing deposits in domestic offices ..................... 26,568,152 47.8 24,851,735 48.2 Interest-bearing deposits in foreign offices ................................ 1,040,585 1.9 749,511 1.4 ------------ ------ ------------- ------ Total interest-bearing deposits ......................................... 27,608,737 49.7 25,601,246 49.6 Federal funds purchased and securities sold under repurchase agreements ..... 7,136,064 12.8 6,263,319 12.1 Commercial paper ............................................................ 595,806 1.1 535,210 1.0 Other short-term borrowed funds ............................................. 1,286,160 2.3 2,061,418 4.0 ------------ ------ ------------- ------ Total short-term borrowed funds ......................................... 9,018,030 16.2 8,859,947 17.1 Bank notes .................................................................. 4,609,878 8.3 4,174,561 8.1 Other long-term debt ........................................................ 2,082,894 3.7 1,520,122 2.9 ------------ ------ ------------- ------ Total long-term debt .................................................... 6,692,772 12.0 5,694,683 11.0 ------------ ------ ------------- ------ Total interest-bearing liabilities ...................................... 43,319,539 77.9 40,155,876 77.7 Other deposits: Demand in domestic offices ................................................ 6,476,977 11.7 6,214,100 12.0 Demand in foreign offices ................................................. 1,563 .0 6,823 .0 Noninterest-bearing time in domestic offices .............................. 12,362 .0 12,537 .0 Other liabilities ........................................................... 1,315,939 2.4 1,150,355 2.2 Shareholders' equity ........................................................ 4,457,823 8.0 4,163,580 8.1 ------------ ------ ------------- ------ Total liabilities and shareholders' equity .............................. $55,584,203 100.0 $51,703,271 100.0 ============ ====== ============= ====== Total deposits .............................................................. $34,099,639 $31,834,706
Five-Year 1994 1993 Compound Amount % Amount % Growth Rate Assets Loans -- net of unearned income: Commercial .............................................................. $ 7,923,773 17.1 $ 6,691,358 15.8 15.9% Tax-exempt .............................................................. 2,066,908 4.4 1,993,493 4.7 ( 9.4) ------------- ----- ------------- ----- Total commercial ...................................................... 9,990,681 21.5 8,684,851 20.5 11.9 Direct retail ........................................................... 1,087,952 2.3 955,942 2.2 3.6 Indirect retail ......................................................... 2,862,342 6.2 2,593,024 6.1 3.6 Credit card ............................................................. 4,014,135 8.6 2,993,593 7.1 13.7 Other revolving credit .................................................. 382,216 .8 370,403 .9 6.1 ------------- ----- ------------- ----- Total retail .......................................................... 8,346,645 17.9 6,912,962 16.3 8.5 Construction ............................................................ 791,154 1.7 801,627 1.9 18.7 Commercial mortgages .................................................... 4,529,213 9.7 4,131,072 9.7 10.5 Residential mortgages ................................................... 5,587,543 12.0 5,028,473 11.9 9.2 ------------- ----- ------------- ----- Total real estate ..................................................... 10,907,910 23.4 9,961,172 23.5 10.6 Lease financing ......................................................... 180,022 .4 140,887 .3 58.9 Foreign ................................................................. 108,028 .2 76,212 .2 60.2 ------------- ----- ------------- ----- Total loans ........................................................... 29,533,286 63.4 25,776,084 60.8 11.5 Securities: Held-to-maturity: State and municipal .................................................... 599,206 1.3 826,228 1.9 (25.2) Other .................................................................. 3,371,132 7.1 9,146,254 21.5 (32.5) ------------- ----- ------------- ----- Total securities held-to-maturity ..................................... 3,970,338 8.4 9,972,482 23.4 (31.8) Available-for-sale ...................................................... 7,267,408 15.6 1,020,590 2.4 54.9 ------------- ----- ------------- ----- Total securities ...................................................... 11,237,746 24.0 10,993,072 25.8 ( .8) Interest-bearing bank balances ............................................ 31,941 .1 92,927 .2 11.1 Federal funds sold and securities purchased under resale agreements ....... 303,177 .7 564,358 1.3 ( 3.7) Trading account assets .................................................... 689,417 1.5 721,892 1.7 5.8 ------------- ----- ------------- ----- Total interest-earning assets ......................................... 41,795,567 89.7 38,148,333 89.8 8.2 Cash and due from banks ................................................... 2,688,765 5.9 2,640,520 6.2 4.0 Premises and equipment .................................................... 663,773 1.4 613,822 1.4 6.9 Other assets (1) .......................................................... 1,910,228 4.1 1,630,243 3.8 18.8 Allowance for loan losses ................................................. (516,702) ( 1.1) (503,697) ( 1.2) 1.2 ------------- ------ ------------- ------ Total assets .......................................................... $46,541,631 100.0 $42,529,221 100.0 8.5 ============= ====== ============= ====== Liabilities and Shareholders' Equity Interest-bearing deposits in domestic offices: Demand .................................................................. $ 4,047,307 8.7 $ 3,851,842 9.1 5.3 Savings and money market savings ........................................ 7,973,997 17.1 7,906,297 18.6 8.0 Savings certificates .................................................... 8,419,653 18.0 8,372,243 19.6 3.5 Large denomination certificates ......................................... 1,889,807 4.1 2,263,284 5.3 6.2 ------------- ------ ------------- ------ Total interest-bearing deposits in domestic offices ................... 22,330,764 47.9 22,393,666 52.6 5.7 Interest-bearing deposits in foreign offices .............................. 516,157 1.1 466,571 1.1 39.1 ------------- ------ ------------- ------ Total interest-bearing deposits ....................................... 22,846,921 49.0 22,860,237 53.7 7.0 Federal funds purchased and securities sold under repurchase agreements ... 6,146,656 13.2 5,015,727 11.8 8.4 Commercial paper .......................................................... 524,715 1.1 503,317 1.2 20.5 Other short-term borrowed funds ........................................... 697,743 1.5 981,020 2.3 16.7 ------------- ------ ------------- ------ Total short-term borrowed funds ....................................... 7,369,114 15.8 6,500,064 15.3 10.9 Bank notes ................................................................ 3,629,703 7.8 1,535,750 3.6 11.3 Other long-term debt ...................................................... 1,524,081 3.3 994,090 2.3 29.8 ------------- ------ ------------- ------ Total long-term debt .................................................. 5,153,784 11.1 2,529,840 5.9 19.9 ------------- ------ ------------- ------ Total interest-bearing liabilities .................................... 35,369,819 75.9 31,890,141 74.9 9.1 Other deposits: Demand in domestic offices .............................................. 6,215,419 13.4 6,117,579 14.4 5.0 Demand in foreign offices ............................................... 5,380 .0 5,516 .0 (43.8) Noninterest-bearing time in domestic offices ............................ 70,997 .2 75,976 .2 (41.5) Other liabilities ......................................................... 1,067,818 2.3 921,075 2.2 14.2 Shareholders' equity ...................................................... 3,812,198 8.2 3,518,934 8.3 8.0 ------------- ------ ------------- ------ Total liabilities and shareholders' equity ............................ $46,541,631 100.0 $42,529,221 100.0 8.5 ============= ====== ============= ====== Total deposits ............................................................ $29,138,717 $29,059,308 6.5
85 - -------------------------------------------------------------------------------- Net Interest Income -- Taxable Equivalent - -------------------------------------------------------------------------------- thousands Wachovia Corporation and Subsidiaries 1998 1997 Amount % Amount % Interest Income Loans, including fees: Commercial ................................................................. $ 1,011,401 21.5 $ 829,406 19.2 Tax-exempt ................................................................. 112,672 2.4 155,689 3.6 ------------- ----- ------------- ----- Total commercial ........................................................ 1,124,073 23.9 985,095 22.8 Direct retail .............................................................. 107,405 2.3 107,326 2.5 Indirect retail ............................................................ 255,512 5.4 254,001 5.9 Credit card ................................................................ 764,426 16.2 727,114 16.8 Other revolving credit ..................................................... 55,644 1.2 52,007 1.2 ------------- ----- ------------- ----- Total retail ............................................................ 1,182,987 25.1 1,140,448 26.4 Construction ............................................................... 170,403 3.6 140,780 3.3 Commercial mortgages ....................................................... 584,266 12.4 505,876 11.7 Residential mortgages ...................................................... 618,118 13.1 592,907 13.7 ------------- ----- ------------- ----- Total real estate ....................................................... 1,372,787 29.1 1,239,563 28.7 Lease financing ............................................................ 166,128 3.5 92,721 2.1 Foreign .................................................................... 55,067 1.2 34,164 .8 ------------- ----- ------------- ----- Total loans ............................................................. 3,901,042 82.8 3,491,991 80.8 Securities: Held-to-maturity: State and municipal ...................................................... 21,179 .5 26,259 .6 Other investments ........................................................ 96,430 2.0 87,631 2.0 ------------- ----- ------------- ----- Total securities held-to-maturity ....................................... 117,609 2.5 113,890 2.6 Available-for-sale ......................................................... 609,245 12.9 635,195 14.7 ------------- ----- ------------- ----- Total securities ........................................................ 726,854 15.4 749,085 17.3 Interest-bearing bank balances .............................................. 12,988 .3 5,230 .1 Federal funds sold and securities purchased under resale agreements ......... 25,803 .5 22,319 .5 Trading account assets ...................................................... 45,432 1.0 51,654 1.3 ------------- ----- ------------- ----- Total interest income .................................................... 4,712,119 100.0 4,320,279 100.0 Interest Expense Interest-bearing demand ..................................................... 64,530 1.4 64,249 1.5 Savings and money market savings ............................................ 451,655 9.6 405,444 9.4 Savings certificates ........................................................ 542,477 11.5 582,145 13.4 Large denomination certificates ............................................. 165,384 3.5 164,391 3.8 ------------- ----- ------------- ----- Total interest-bearing deposits in domestic offices ..................... 1,224,046 26.0 1,216,229 28.1 Interest-bearing deposits in foreign offices ................................ 135,659 2.9 87,320 2.0 ------------- ----- ------------- ----- Total interest-bearing deposits ......................................... 1,359,705 28.9 1,303,549 30.1 Federal funds purchased and securities sold under repurchase agreements ..... 388,390 8.2 357,190 8.3 Commercial paper ............................................................ 64,088 1.3 39,566 .9 Other short-term borrowed funds ............................................. 111,368 2.4 81,406 1.9 ------------- ----- ------------- ----- Total short-term borrowed funds ......................................... 563,846 11.9 478,162 11.1 Bank notes .................................................................. 159,896 3.4 188,710 4.4 Other long-term debt ........................................................ 230,766 4.9 198,397 4.6 ------------- ----- ------------- ----- Total long-term debt .................................................... 390,662 8.3 387,107 9.0 ------------- ----- ------------- ----- Total interest expense .................................................. 2,314,213 49.1 2,168,818 50.2 ------------- ----- ------------- ----- Net Interest Income ......................................................... $ 2,397,906 50.9 $ 2,151,461 49.8 ============= ===== ============= ===== Percentage of interest-earning assets: Interest income ............................................................ 8.33% 8.32% Interest expense ........................................................... 4.09 4.18 ------------- ------------- Net interest income ..................................................... 4.24% 4.14% ============= ============= Taxable equivalent adjustment included in interest income: Loans ...................................................................... $ 27,638 $ 36,695 Securities ................................................................. 18,301 19,862 Trading account assets ..................................................... 935 1,337 ------------- ------------- Total (2) ............................................................... $ 46,874 $ 57,894 ============= =============
(1) Percentages reflected above are based on total interest income. (2) The taxable equivalent adjustment reflects the federal income tax rate of 35% and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. 86 - -------------------------------------------------------------------------------- 1996 1995 Amount % Amount % Interest Income Loans, including fees: Commercial ................................................................. $ 747,463 18.3 $ 728,263 18.7 Tax-exempt ................................................................. 190,285 4.7 203,551 5.2 ------------- ----- ------------- ----- Total commercial ........................................................ 937,748 23.0 931,814 23.9 Direct retail .............................................................. 106,634 2.6 103,522 2.7 Indirect retail ............................................................ 266,435 6.5 245,936 6.3 Credit card ................................................................ 595,208 14.6 566,391 14.5 Other revolving credit ..................................................... 51,026 1.2 50,544 1.3 ------------- ----- ------------- ----- Total retail ............................................................ 1,019,303 24.9 966,393 24.8 Construction ............................................................... 99,470 2.4 93,152 2.4 Commercial mortgages ....................................................... 452,576 11.1 423,149 10.9 Residential mortgages ...................................................... 552,944 13.5 505,995 13.0 ------------- ----- ------------- ----- Total real estate ....................................................... 1,104,990 27.0 1,022,296 26.3 Lease financing ............................................................ 61,717 1.5 24,173 .6 Foreign .................................................................... 32,098 .8 22,610 .6 ------------- ----- ------------- ----- Total loans ............................................................. 3,155,856 77.2 2,967,286 76.2 Securities: Held-to-maturity: State and municipal ...................................................... 33,547 .8 50,192 1.3 Other investments ........................................................ 96,509 2.4 271,292 7.0 ------------- ----- ------------- ----- Total securities held-to-maturity ....................................... 130,056 3.2 321,484 8.3 Available-for-sale ......................................................... 700,202 17.1 526,287 13.5 ------------- ----- ------------- ----- Total securities ........................................................ 830,258 20.3 847,771 21.8 Interest-bearing bank balances .............................................. 33,284 .8 9,377 .2 Federal funds sold and securities purchased under resale agreements ......... 15,411 .4 13,279 .3 Trading account assets ...................................................... 51,740 1.3 60,416 1.5 ------------- ----- ------------- ----- Total interest income .................................................... 4,086,549 100.0 3,898,129 100.0 Interest Expense Interest-bearing demand ..................................................... 59,761 1.5 74,179 1.9 Savings and money market savings ............................................ 336,596 8.2 304,294 7.8 Savings certificates ........................................................ 598,869 14.6 596,122 15.2 Large denomination certificates ............................................. 153,571 3.8 126,708 3.3 ------------- ----- ------------- ----- Total interest-bearing deposits in domestic offices ..................... 1,148,797 28.1 1,101,303 28.2 Interest-bearing deposits in foreign offices ................................ 54,942 1.3 41,876 1.1 ------------- ----- ------------- ----- Total interest-bearing deposits ......................................... 1,203,739 29.4 1,143,179 29.3 Federal funds purchased and securities sold under repurchase agreements ..... 382,976 9.4 374,158 9.6 Commercial paper ............................................................ 29,054 .7 29,324 .8 Other short-term borrowed funds ............................................. 70,206 1.7 124,283 3.2 ------------- ----- ------------- ----- Total short-term borrowed funds ......................................... 482,236 11.8 527,765 13.6 Bank notes .................................................................. 264,486 6.5 258,885 6.6 Other long-term debt ........................................................ 135,310 3.3 81,326 2.1 ------------- ----- ------------- ----- Total long-term debt .................................................... 399,796 9.8 340,211 8.7 ------------- ----- ------------- ----- Total interest expense .................................................. 2,085,771 51.0 2,011,155 51.6 ------------- ----- ------------- ----- Net Interest Income ......................................................... $ 2,000,778 49.0 $ 1,886,974 48.4 ============= ===== ============= ===== Percentage of interest-earning assets: Interest income ............................................................ 8.13% 8.35% Interest expense ........................................................... 4.15 4.31 ------------- ------------- Net interest income ..................................................... 3.98% 4.04% ============= ============= Taxable equivalent adjustment included in interest income: Loans ...................................................................... $ 46,158 $ 55,068 Securities ................................................................. 28,577 46,817 Trading account assets ..................................................... 2,306 4,594 ------------- ------------- Total (2) ............................................................... $ 77,041 $ 106,479 ============= =============
Five-Year 1994 1993 Compound Amount % Amount % Growth Rate Interest Income Loans, including fees: Commercial ................................................................ $ 486,566 15.6 $ 362,764 12.7 22.8% Tax-exempt ................................................................ 186,360 5.9 181,785 6.4 ( 9.1) ------------- ----- ------------- ----- Total commercial ....................................................... 672,926 21.5 544,549 19.1 15.6 Direct retail ............................................................. 86,093 2.7 80,775 2.8 5.9 Indirect retail ........................................................... 223,830 7.1 220,751 7.8 3.0 Credit card ............................................................... 453,117 14.6 359,334 12.6 16.3 Other revolving credit .................................................... 44,904 1.4 42,392 1.5 5.6 ------------- ----- ------------- ----- Total retail ........................................................... 807,944 25.8 703,252 24.7 11.0 Construction .............................................................. 70,261 2.2 58,712 2.1 23.8 Commercial mortgages ...................................................... 352,563 11.2 308,194 10.8 13.6 Residential mortgages ..................................................... 434,177 13.9 410,837 14.5 8.5 ------------- ----- ------------- ----- Total real estate ...................................................... 857,001 27.3 777,743 27.4 12.0 Lease financing ........................................................... 14,090 .4 12,540 .4 67.7 Foreign ................................................................... 6,162 .2 3,318 .1 75.4 ------------- ----- ------------- ----- Total loans ............................................................ 2,358,123 75.2 2,041,402 71.7 13.8 Securities: Held-to-maturity: State and municipal ..................................................... 75,069 2.4 97,057 3.4 (26.2) Other investments ....................................................... 234,557 7.5 596,239 21.0 (30.5) ------------- ----- ------------- ----- Total securities held-to-maturity ...................................... 309,626 9.9 693,296 24.4 (29.9) Available-for-sale ........................................................ 416,408 13.3 60,408 2.1 58.8 ------------- ----- ------------- ----- Total securities ....................................................... 726,034 23.2 753,704 26.5 ( .7) Interest-bearing bank balances ............................................. 1,322 .0 2,980 .1 34.2 Federal funds sold and securities purchased under resale agreements ........ 13,262 .4 18,675 .7 6.7 Trading account assets ..................................................... 36,407 1.2 28,481 1.0 9.8 ------------- ----- ------------- ----- Total interest income ................................................... 3,135,148 100.0 2,845,242 100.0 10.6 Interest Expense Interest-bearing demand .................................................... 70,890 2.3 76,099 2.7 ( 3.2) Savings and money market savings ........................................... 221,317 7.1 209,608 7.4 16.6 Savings certificates ....................................................... 383,670 12.2 384,360 13.5 7.1 Large denomination certificates ............................................ 84,669 2.7 112,188 3.9 8.1 ------------- ----- ------------- ----- Total interest-bearing deposits in domestic offices .................... 760,546 24.3 782,255 27.5 9.4 Interest-bearing deposits in foreign offices ............................... 22,318 .7 14,503 .5 56.4 ------------- ----- ------------- ----- Total interest-bearing deposits ........................................ 782,864 25.0 796,758 28.0 11.3 Federal funds purchased and securities sold under repurchase agreements .... 268,155 8.6 159,265 5.7 19.5 Commercial paper ........................................................... 20,587 .7 15,103 .5 33.5 Other short-term borrowed funds ............................................ 29,559 .9 31,827 1.1 28.5 ------------- ----- ------------- ----- Total short-term borrowed funds ........................................ 318,301 10.2 206,195 7.3 22.3 Bank notes ................................................................. 203,777 6.5 79,734 2.8 14.9 Other long-term debt ....................................................... 64,064 2.0 46,022 1.6 38.1 ------------- ----- ------------- ----- Total long-term debt ................................................... 267,841 8.5 125,756 4.4 25.4 ------------- ----- ------------- ----- Total interest expense ................................................. 1,369,006 43.7 1,128,709 39.7 15.4 ------------- ----- ------------- ----- Net Interest Income ........................................................ $ 1,766,142 56.3 $ 1,716,533 60.3 6.9 ============= ===== ============= ===== Percentage of interest-earning assets: Interest income ........................................................... 7.50% 7.46% Interest expense .......................................................... 3.28 2.96 ------------- ------------- Net interest income .................................................... 4.22% 4.50% ============= ============= Taxable equivalent adjustment included in interest income: Loans ..................................................................... $ 52,918 $ 53,899 Securities ................................................................ 52,268 52,426 Trading account assets .................................................... 2,871 2,235 ------------- ------------- Total (2) .............................................................. $ 108,057 $ 108,560 ============= =============
87 - -------------------------------------------------------------------------------- Statistical Summary - -------------------------------------------------------------------------------- Wachovia Corporation and Subsidiaries 1998 1997 Average Yields Earned (taxable equivalent) Loans: Commercial .................................................... 7.21% 7.32% Tax-exempt .................................................... 9.24 8.93 Total commercial ............................................ 7.37 7.54 Direct retail ................................................. 9.39 8.99 Indirect retail ............................................... 8.27 8.56 Credit card ................................................... 13.46 12.92 Other revolving credit ........................................ 11.18 12.27 Total retail ................................................ 11.36 11.17 Construction .................................................. 9.00 9.40 Commercial mortgages .......................................... 8.58 8.34 Residential mortgages ......................................... 7.92 7.99 Total real estate ........................................... 8.31 8.27 Lease financing ............................................... 11.63 9.71 Foreign ....................................................... 6.85 6.93 Total loans ................................................. 8.79 8.79 Securities: Held-to-maturity: State and municipal ......................................... 10.92 11.87 Other ....................................................... 7.52 7.95 Total securities held-to-maturity .......................... 7.97 8.61 Available-for-sale ............................................ 6.69 6.71 Total securities ........................................... 6.87 6.94 Interest-bearing bank balances ................................. 8.26 5.89 Federal funds sold and securities purchased under resale agreements .................................................... 5.52 5.62 Trading account assets ......................................... 4.76 5.38 Total interest-earning assets ............................... 8.33 8.32 Average Rates Paid Interest-bearing demand ........................................ 1.29% 1.56% Savings and money market savings ............................... 3.89 3.83 Savings certificates ........................................... 5.46 5.62 Large denomination certificates ................................ 5.42 5.61 Total interest-bearing deposits in domestic offices ......... 4.14 4.34 Interest-bearing deposits in foreign offices ................... 5.59 5.51 Total interest-bearing deposits ............................. 4.25 4.41 Federal funds purchased and securities sold under repurchase agreements .................................................... 5.18 5.30 Commercial paper ............................................... 5.02 5.06 Other short-term borrowed funds ................................ 5.25 5.57 Total short-term borrowed funds ............................. 5.18 5.32 Bank notes ..................................................... 6.10 6.14 Other long-term debt ........................................... 6.31 6.51 Total long-term debt ........................................ 6.22 6.32 Total interest-bearing liabilities .......................... 4.71 4.85 Interest rate spread ........................................... 3.62 3.47 Net yield on interest-earning assets ........................... 4.24 4.14 Ratios (averages) Shareholders' equity to: Total assets .................................................. 8.08% 7.87% Net loans ..................................................... 11.78 11.57 Deposits ...................................................... 12.98 12.41 Equity and long-term debt ..................................... 45.15 42.54 Return on assets ............................................... 1.37 1.03 Return on shareholders' equity ................................. 16.92 13.08 Return on deposits ............................................. 2.20 1.62 Dividends paid as a percentage of net income ................... 43.68 55.21 1996 1995 1994 1993 Average Yields Earned (taxable equivalent) Loans: Commercial .................................................... 7.13% 7.49% 6.14% 5.42% Tax-exempt .................................................... 8.95 9.85 9.02 9.12 Total commercial ............................................ 7.44 7.90 6.74 6.27 Direct retail ................................................. 8.93 8.79 7.91 8.45 Indirect retail ............................................... 8.49 8.27 7.82 8.51 Credit card ................................................... 12.03 12.44 11.29 12.00 Other revolving credit ........................................ 12.21 12.68 11.75 11.44 Total retail ................................................ 10.51 10.62 9.68 10.17 Construction .................................................. 9.30 9.82 8.88 7.32 Commercial mortgages .......................................... 8.30 8.63 7.78 7.46 Residential mortgages ......................................... 8.14 8.18 7.77 8.17 Total real estate ........................................... 8.30 8.50 7.86 7.81 Lease financing ............................................... 9.42 8.69 7.83 8.90 Foreign ....................................................... 7.02 7.43 5.70 4.35 Total loans ................................................. 8.59 8.85 7.98 7.92 Securities: Held-to-maturity: State and municipal ......................................... 12.26 11.84 12.53 11.75 Other ....................................................... 8.05 7.26 6.96 6.52 Total securities held-to-maturity .......................... 8.83 7.73 7.80 6.95 Available-for-sale ............................................ 6.73 6.73 5.73 5.92 Total securities ........................................... 6.99 7.08 6.46 6.86 Interest-bearing bank balances ................................. 7.91 7.86 4.14 3.21 Federal funds sold and securities purchased under resale agreements .................................................... 5.38 6.00 4.37 3.31 Trading account assets ......................................... 5.61 6.59 5.28 3.95 Total interest-earning assets ............................... 8.13 8.34 7.50 7.46 Average Rates Paid Interest-bearing demand ........................................ 1.50% 1.89% 1.75% 1.98% Savings and money market savings ............................... 3.57 3.66 2.78 2.65 Savings certificates ........................................... 5.69 5.71 4.56 4.59 Large denomination certificates ................................ 5.88 5.83 4.48 4.96 Total interest-bearing deposits in domestic offices ......... 4.32 4.43 3.41 3.49 Interest-bearing deposits in foreign offices ................... 5.28 5.59 4.32 3.11 Total interest-bearing deposits ............................. 4.36 4.47 3.43 3.49 Federal funds purchased and securities sold under repurchase agreements .................................................... 5.37 5.97 4.36 3.18 Commercial paper ............................................... 4.88 5.48 3.92 3.00 Other short-term borrowed funds ................................ 5.46 6.03 4.24 3.24 Total short-term borrowed funds ............................. 5.35 5.96 4.32 3.17 Bank notes ..................................................... 5.74 6.20 5.61 5.19 Other long-term debt ........................................... 6.50 5.35 4.20 4.63 Total long-term debt ........................................ 5.97 5.97 5.20 4.97 Total interest-bearing liabilities .......................... 4.81 5.01 3.87 3.54 Interest rate spread ........................................... 3.32 3.33 3.63 3.92 Net yield on interest-earning assets ........................... 3.98 4.04 4.23 4.50 Ratios (averages) Shareholders' equity to: Total assets .................................................. 8.02% 8.05% 8.19% 8.27% Net loans ..................................................... 12.31 12.62 13.14 13.92 Deposits ...................................................... 13.07 13.08 13.08 12.11 Equity and long-term debt ..................................... 39.98 42.24 42.52 58.17 Return on assets ............................................... 1.36 1.37 1.34 1.40 Return on shareholders' equity ................................. 16.99 17.00 16.37 16.91 Return on deposits ............................................. 2.22 2.22 2.14 2.05 Dividends paid as a percentage of net income ................... 40.37 39.91 40.77 38.73
88 Historical Comparative Data The following charts present six-year comparative data for Wachovia Corporation and the median of the 25 largest U. S. bank holding companies based on assets as of each year-end. The median is representative of the typical bank holding company within the comparison group. All historical data is as originally reported, not restated for pooling- of-interests mergers or acquisitions. Wachovia's results were impacted by nonrecurring charges taken in 1998 and the 1997 fourth quarter. Results for 1998 and 1997 on an operating basis are footnoted in the relevant charts below.
RETURN ON ASSETS (AVERAGE) 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA 1.46 1.46 1.45 1.43 1.03 1.37 25 LARGEST U.S. BANKS(MEDIAN) 1.20 1.21 1.21 1.29 1.26 1.18 *Excluding nonrecurring items, the return was 1.39% In 1997 and 1.45% In 1998. RETURN ON COMMON EQUITY (AVERAGE) 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA 17.13 17.41 17.67 17.62 13.08 15.86 25 LARGEST U.S. BANKS(MEDIAN) 16.94 16.10 16.77 17.02 18.53 16.92 *Excluding nonrecurring items, the return was 17.65% In 1997 and 17.99% In 1998. COMMON EQUITY TO ASSETS (AVERAGE) 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA 8.64 8.36 8.22 8.09 7.87 8.08 25 LARGEST U.S. BANKS(MEDIAN) 6.57 6.86 7.00 7.47 7.36 7.61 NET INTERST INCOME* AS A PERCENTAGE OF AVERAGE EARNING ASSETS 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA 4.48 4.34 4.16 4.02 4.14 4.24 25 LARGEST U.S. BANKS(MEDIAN) 4.64 4.34 4.45 4.36 4.24 3.97 *Taxable equivalent NONINTERST EXPENSE AS A PERCENTAGE OF TOTAL ADJUSTED REVENUES* 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA 57.05 54.15 54.23 52.21 62.29 55.06 25 LARGEST U.S. BANKS(MEDIAN) 62.54 61.88 61.72 60.91 60.88 64.20 * Excluding sales of securities transactions, mortgage servicing portfolio and subsidiary. ** Excluding nonrecurring items, the ratio was 53.19% in 1997 and 52.70% in 1998. NET LOAN LOSSES TO AVERAGE LOANS 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA .31 .29 .37 .49 .67 .67 25 LARGEST U.S. BANKS(MEDIAN) .75 .39 .44 .53 .63 .49 NONPERFORMING ASSETS TO YEAR-END LOANS AND FORECLOSED PROPERTY 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA .67 .39 .24 .25 .29 .40 25 LARGEST U.S. BANKS(MEDIAN) 1.90 1.03 .80 .76 .62 .60
89 Stock Data The following charts present high and low trading ranges for the corporation's common stock, price to earnings ratios and data on cash dividends per share and cash dividend payouts for the most recent six years. Stock price trading ranges and price to earnings ratios for the most recent eight quarters also are provided. The Five-Year Total Return chart compares Wachovia, the S&P 500 Index and the Keefe, Bruyette & Woods (KBW) 50 Total Return Index in stock price appreciation and dividends, assuming quarterly reinvestment, from the base period December 31, 1993 through year-end 1998. The KBW 50 Index is a market capitalization weighted measure of total return for 50 of the largest U. S. banking companies including all money center and most regional banks. Wachovia's common stock is listed on the New York Stock Exchange under the trading symbol WB. The corporation is a member of the Standard & Poor's 500 Index of stocks and the S&P 500 Major Regional Banks Industry Group.
COMMON STOCK PRICE RANGE* NYSE SYMBOL: WB 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- HIGH 40.50 35.38 48.25 60.25 83.94 96.81 LOW 31.88 30.13 32.00 39.63 53.50 72.75 * Prices represent those of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. CASH DIVIDENDS PER SHARE* FIVE-YEAR COMPOUND GROWTH RATE=10.9% 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- 1.11 1.23 1.38 1.52 1.68 1.86 * Dividends per share represent those paid by Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. COMMON STOCK PRICE/EARNINGS RATIOS* 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- HIGH 14.4 11.3 13.8 15.8 28.6 23.2 LOW 11.3 9.7 9.1 10.4 18.2 17.4 * Amounts base on high and low common stock prices for each year and annual net income per diluted share as originally reported by Wachovia Corporation. CASH DIVIDEND PAYOUT* (MILLIONS) 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- 38.7% 40.8% 39.9% 40.4% 55.2% 43.7% 230.40 254.40 282.50 305.70 327.70 381.80
* Dividends include amounts paid by pooled companies. % Payout ratio (total dividends as a percentage of net income) Common Stock Data -- Per Share Table 19 - -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ------ ---- ---- ---- ---- ---- Market value: * End of year ..................... $ 87.44 $ 81.13 $ 56.50 $ 45.75 $ 32.25 $ 33.50 High ............................ 96.81 83.94 60.25 48.25 35.38 40.50 Low ............................. 72.75 53.50 39.63 32.00 30.13 31.88 Book value ** .................... 26.30 25.13 22.90 22.08 18.79 17.98 Dividend * ....................... 1.86 1.68 1.52 1.38 1.23 1.11 Price/earnings ratio *** ......... 20.9 x 27.6 x 14.8 x 13.1 x 10.3 x 11.9 x
* Information for years before 1997 represents that of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. ** Book value per share has been restated to reflect the merger with Central Fidelity Banks, Inc., as a pooling-of-interests. *** Price earnings ratio is based on end-of-year stock price and net income per diluted share. Information for years before 1997 represents that of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. Excluding the after-tax impact of nonrecurring charges, the 1998 and 1997 price earnings ratios were 19.6x and 20.5x, respectively. 90 QUARTERLY COMMON STOCK PRICE RANGE*
1997 1998 1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q ----- ----- ----- ----- ----- ----- ----- ----- HIGH 64.63 66.88 72.38 83.94 85.75 90.19 90.94 96.81 LOW 54.50 53.50 58.19 71.06 72.75 77.38 72.88 80.88 * Prices represent those of Wachovia Corporation Prior to merger with Central Fidelity Banks, Inc. QUARTERLY COMMON STOCK PRICE/EARNINGS RATIOS* 1997 1998 1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q ----- ----- ----- ----- ----- ----- ----- ----- HIGH 16.4 16.7 17.8 27.4 28.6 30.3 29.9 23.2 LOW 13.9 13.3 14.3 23.2 24.3 26.0 24.0 19.3
* Amounts based on high and low common staock prices for each period and net income per diluted share for the 12 months ended on the last day of each period as originally reported by Wachovia Corporation. FIVE-YEAR TOTAL RETURN* 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- WACHOVIA 100.00 99.95 147.05 187.65 276.57 304.70 S&P 500 INDEX 100.00 101.32 139.39 171.40 228.58 293.91 KBW 50 INDEX 100.00 94.90 152.00 215.01 214.32 340.34 * Base period 12/31/93=100. Dividends reinvested. Data for the S&P 500 Index and KBW 50 Index is weighted by market capitalization. 91 1998 Form 10-K United States Securities and Exchange Commission Washington, DC 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 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 Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $5.00 par value, which is registered on the New York Stock Exchange. As of February 4, 1999, Wachovia Corporation had 203,240,721 shares of common stock outstanding. The aggregate market value of Wachovia Corporation common stock held by nonaffiliates on February 4, 1999 was approximately $17.241 billion and the number of shares held by nonaffiliates was 203,137,636. Wachovia Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Documents Incorporated by Reference - -------------------------------------------------------------------------------- Portions of the Wachovia Corporation's Proxy Statement for its 1999 Annual Shareholders' Meeting, which will be filed with the Commission by April 23, 1999 are incorporated by reference into Part III of this report. Portions of the annual report to shareholders for the year ended December 31, 1998 are incorporated by reference into Parts I and II as indicated in the table below. Except for parts of the Wachovia Corporation Annual Report expressly incorporated herein by reference, this Annual Report is not to be deemed filed with the Securities and Exchange Commission. Part I Page Item 1 Business: Description of Business ................3, 26-59, 89-91, 95-96 Subsidiaries of Wachovia Corporation ................................................93 Average Balance Sheets/ Interest/Rates ...............................84-85, 86-87, 88 Volume and Rate Variance Analysis ......................................32, 59 Securities .............................................34, 69 Loans ..........................................33, 40, 70, 83 Allowance for Loan Losses and Loan Loss Experience ............................41-43, 59 Deposits .................................35-36, 71, 84-85, 88 Return on Equity and Assets ............................26, 88 Short-Term Borrowed Funds ..................................36 Item 2 Properties .................................................93 Item 3 Legal Proceedings ..........................................77 Item 4 Submission of Matters to a Vote of Security Holders ......................................None Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .........................90-91 Part II -- CONTINUED PAGE Item 6 Selected Financial Data ....................................26 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................26-59, 95-96 Item 7A Quantitative and Qualitative Disclosures About Market Risk ...........................37-39 Item 8 Financial Statements and Supplementary Data ......................................60-82 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................None Part III Item 10 Directors and Executive Officers of the Registrant .............................Proxy Statement Item 11 Executive Compensation ........................Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Management ................................Proxy Statement Item 13 Certain Relationships and Related Transactions ..........................Proxy Statement Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................................94
92 Subsidiaries of Wachovia Corporation - -------------------------------------------------------------------------------- The following table sets forth the subsidiaries of Wachovia Corporation on December 31, 1998. The financial statements of all subsidiaries are included in the consolidated statements of Wachovia Corporation and subsidiaries.
Organized under the laws of: Wachovia Bank, N.A. the United States Wachovia International Banking Corporation the United States* Wachovia Leasing Corporation North Carolina Wachovia Insurance Services, Inc. North Carolina Greenville Agricultural Credit Corporation North Carolina Wachovia Mortgage Company North Carolina New Salem, Inc. North Carolina Wachovia Auto Leasing Company Georgia WMCS, Inc. Georgia Wachovia Capital Associates, Inc. Georgia Wachovia Insurance Services of South Carolina, Inc. South Carolina First National Properties, Inc. South Carolina Mulberry Corporation Virginia G.C. Leasing, Inc. Virginia North Hart Run, Inc. Virginia New Salem of Virginia, Inc. Virginia S. Brooke, Corporation Virginia Central Fidelity Properties, Inc. Virginia Central Fidelity Services, Inc. Virginia CFB Insurance Agency, Inc. Virginia Jefferson Properties, Inc. Virginia Southern Provident Life Insurance Company Arizona Atlantic Savings Bank, FSB the United States Atlantic Mortgage Corporation of South Carolina, Inc. South Carolina Wachovia Investments, Inc. North Carolina Wachovia Corporate Services, Inc. North Carolina Wachovia Operational Services Corporation North Carolina Wachovia Trust Services, Inc. North Carolina
Organized under the laws of: The First National Bank of Atlanta (Delaware) the United States Wachovia Bank Card Services, Inc. Delaware Financial Life Insurance Company of Georgia Georgia The Wachovia Insurance Agency of Georgia, Inc. Georgia First Atlanta Lease Liquidating Corporation Georgia Wachovia Corporation of Florida Florida Wachovia Corporation of Alabama Alabama Wachovia Corporation of Tennessee Tennessee Wachovia Capital Markets, Inc. North Carolina Wachovia Capital Investments, Inc. Georgia Wachovia International Capital Corporation Georgia WSH Holdings, Ltd. Cayman Islands, British West Indies Banco Wachovia Brazil Wachovia International Servicos Limitada Brazil Wachovia Capital Trust I Delaware Wachovia Capital Trust II Delaware Wachovia Capital Trust V Delaware Central Fidelity Capital Trust I Delaware Wachovia Community Development Corporation North Carolina First Atlanta Corporation Georgia Hunt, DuPree, Rhine and Associates, Inc. South Carolina Parchment Finance 1 Corporation Delaware Retirement Plans Securities, Inc. South Carolina * Organized under Chapter 25(a) of the Federal Reserve Act of the United States
Properties - -------------------------------------------------------------------------------- The principal offices of the Corporation and Wachovia Bank, N.A., are located at 100 North Main Street, Winston-Salem, North Carolina, where the company owns and occupies approximately 545,000 square feet of office space. Offices are also maintained at 191 Peachtree Street, N.E., Atlanta, Georgia, under a 382,000 square foot office space lease expiring in 2008. The table on page 3 lists the number of banking offices. The Corporation's banking subsidiaries own in fee 459 offices while the others are leased or are located on leased land. The approximate lease terms range from one to fifty years on these properties. In addition, the Corporation's banking subsidiaries own in fee or lease a number of multistory office buildings which house supporting services. Other subsidiaries of the Corporation maintain leased office space in cities in which they conduct their respective operations. 93 Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------------------------------------------------------------------------------- Exhibits -- The index of exhibits has been filed as separate pages of the 1998 Form 10-K. Copies of the exhibit list or of Exhibits are available via EDGAR at the SEC Internet address at www.sec.gov or are available upon request to: Corporate Reporting, Wachovia Corporation, P.O. Box 3099, Winston-Salem, North Carolina, 27150. A copying fee will be charged for the Exhibits. Financial Statement Schedules -- Omitted due to inapplicability or because required information is shown in the Financial Statements or the Notes thereto. Financial Data Schedule (for SEC purposes only). Reports on Form 8-K -- A Current Report on Form 8-K dated October 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. A Current Report on Form 8-K dated October 28, 1998 was filed with the Securities and Exchange Commission announcing an Agreement and Plan of Merger by and between Wachovia Corporation and Interstate/Johnson Lane, Inc. Signatures - -------------------------------------------------------------------------------- Pursuant to the requirements to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on January 22, 1999. WACHOVIA CORPORATION ROBERT S. McCOY, JR. - -------------------- Robert S. McCoy, Jr. Senior Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on January 22, 1999. L. M. BAKER, JR. - ---------------- L. M. Baker, Jr. Chairman of the Board, President and Chief Executive Officer ROBERT S. McCOY, JR. - -------------------- Robert S. McCoy, Jr. Senior Executive Vice President and Chief Financial Officer DONALD K. TRUSLOW - ----------------- Donald K. Truslow Executive Vice President, Comptroller and Treasurer The Directors of Wachovia Corporation (listed below) have executed a power of attorney appointing Kenneth W. McAllister, their attorney-in-fact, empowering him to sign this report on their behalf: James S. Balloun James F. Betts Peter C. Browning John T. Casteen III John L. Clendenin Lawrence M. Gressette, Jr. Thomas K. Hearn, Jr. George W. Henderson, III W. Hayne Hipp Robert A. Ingram George R. Lewis Elizabeth Valk Long John G. Medlin, Jr. Lloyd U. Noland, III Sherwood H. Smith, Jr. John C. Whitaker, Jr. KENNETH W. McALLISTER - --------------------- Kenneth W. McAllister Attorney-in-Fact 94 Supervision and Regulation General - -------------------------------------------------------------------------------- Wachovia Corporation is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (FRB). State banking commissions also serve in a supervisory and regulatory capacity with respect to bank holding company activities. The corporation is also a savings and loan holding company registered under the Home Owners' Loan Act of 1933, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and is subject to the supervision and examination of the Office of Thrift Supervision (OTS). Wachovia Bank, N.A. (WBNA), and The First National Bank of Atlanta (FNBA) are subject to supervision and examination by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) and Atlantic Savings Bank, F.S.B. (Atlantic) is subject to supervision and examination by the OTS. The corporation's nonbanking subsidiaries are subject to a variety of state and federal laws. For example, the corporation's discount brokerage and investment advisory subsidiary is subject to supervision and regulation by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., state securities regulators and the various exchanges through which it conducts business. The corporation's insurance subsidiaries are subject to the insurance laws of the states in which they are active. All nonbanking subsidiaries are supervised by the FRB. The federal banking agencies have broad enforcement powers over depository institutions, including the power to terminate deposit insurance, to impose substantial fines and other civil and criminal penalties, and to appoint a conservator or receiver if any of a number of conditions are met. The federal banking agencies also have broad enforcement powers over bank holding companies, including the power to impose substantial fines and other civil and criminal penalties. Almost every aspect of the operations and financial condition of the corporation's banking subsidiaries is subject to extensive regulation and supervision and to various requirements and restrictions under federal and state law, including requirements governing capital adequacy, liquidity, earnings, dividends, reserves against deposits, management practices, branching, loans, investments and the provision of services. The activities and operations of the corporation also are subject to extensive federal supervision and regulation which, among other things, limit nonbanking activities, impose minimum capital requirements, and require approval to acquire 5% or more of any class of voting shares or substantially all of the assets of a bank or other company. In addition to the impact of regulation, the corporation and its subsidiaries may be significantly affected by legislation which can change banking statutes in substantial and unexpected ways, and by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy. There continue to be a number of legislative and regulatory proposals that would have an impact on the operation of the corporation and its subsidiaries. While the potential effects of legislation currently under consideration cannot be measured with any degree of certainty, the corporation is unaware of any pending legislative reforms or regulatory activities which would materially affect its financial position or operating results in the foreseeable future. Payment of Dividends and Other Restrictions - -------------------------------------------------------------------------------- The corporation is a legal entity separate and distinct from its subsidiaries. There are various legal and regulatory limitations on the extent to which the corporation's subsidiaries, including its bank and savings and loan subsidiaries, can finance or otherwise supply funds to the corporation. The principal source of the corporation's cash revenues is dividends from its subsidiaries and there are certain legal restrictions under federal and state law on the payment of dividends by such subsidiaries. The amount of dividends that may be paid by WBNA and FNBA without regulatory approval, is limited to the lessor of (i) its net profits for the current year combined with its retained net profits for the preceeding two calendar years or (ii) its cumulative undivided profits. The relevant regulatory agencies also have authority to prohibit a bank holding company, which would include the corporation, or a national banking association from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute an unsafe or unsound practice. Under applicable law, as a savings bank, Atlantic must give the OTS 30 days prior notice of any proposed payment of dividends. WBNA and FNBA and their respective subsidiaries are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, the corporation and its other subsidiaries. Furthermore, loans and extensions of credit also are subject to various collateral requirements. Capital Adequacy - -------------------------------------------------------------------------------- The federal bank regulatory agencies have adopted minimum risk-based and leverage capital guidelines for United States banking organizations. The minimum required risk-based capital ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%, of which 4% must consist of Tier I capital. The minimum required leverage capital 95 ratio (Tier I capital to average total assets) is 3% for banking organizations that meet certain specified criteria, including that they have the highest regulatory rating. A higher leverage ratio may apply under certain circumstances. The corporation's capital ratios are discussed in greater detail on pages 50 and 51. Failure to meet capital guidelines can subject a banking organization to a variety of enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC, and under certain conditions the appointment of a receiver or conservator. Federal banking statutes establish five capital categories for depository institutions ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") and impose significant restrictions on the operations of an institution that is not at least adequately capitalized. Under certain circumstances, an institution may be downgraded to a category lower than that warranted by its capital levels and subjected to the supervisory restrictions applicable to institutions in the lower capital category. A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be under capitalized. Adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC, while undercapitalized institutions may not accept, renew, or roll over brokered deposits. An undercapitalized depository institution is also subject to restrictions in a number of areas, including asset growth, acquisitions, branching, new lines of business and borrowing from the Federal Reserve System. In addition, an undercapitalized depository institution is required to submit a capital restoration plan. A depository institution's holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount needed to restore the capital of the institution to the levels required for the institution to be classified as adequately capitalized at the time the institution fails to comply with the plan and any such guarantee would be entitled to a priority of payment in bankruptcy. A depository institution is treated as if it is significantly undercapitalized if it fails to submit a capital plan that (i) is based on realistic assumptions and (ii) is likely to succeed in restoring the depository institution's capital. Significantly undercapitalized depository institutions may be subject to a number of additional significant requirements and restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, to replace or improve management, to reduce total assets, to cease acceptance of correspondent bank deposits, to restrict senior executive compensation and to limit transactions with affiliates. Critically undercapitalized depository institutions are further subject to restrictions on paying principal or interest on subordinated debt, making investments, expanding, acquiring or selling assets, extending credit for highly leveraged transactions, paying excessive compensation, amending their charters or bylaws and making any material changes in accounting methods. In general, a receiver or conservator must be appointed for a depository institution within 90 days after the institution is deemed to be critically undercapitalized. Support of Subsidiary Banks - -------------------------------------------------------------------------------- Under FRB policy, the corporation is expected to act as a source of financial strength to, and to commit resources to support its banking subsidiaries. This support may be required at times when, absent such FRB policy, the corporation may not be inclined to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. A depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC insured depository institution or any assistance provided by the FDIC to any commonly controlled FDIC insured depository institution "in danger of default." Default is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Liability for the losses of commonly controlled depository institutions can lead to the failure of some or all depository institutions in a holding company structure, if the remaining institutions are unable to pay the liability assessed by the FDIC. Any obligation or liability owed by a subsidiary bank to its parent company is subordinate to the subsidiary bank's cross-guarantee liability for losses of commonly controlled depository institutions. FDIC Insurance Assessments - -------------------------------------------------------------------------------- WBNA and Atlantic are subject to FDIC deposit insurance assessments. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve certain designated reserve ratios in the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) and to impose special additional assessments. The FDIC applies a risk-based assessment system that places each financial institution into one of nine risk categories, based on capital levels and supervisory criteria and an evaluation of the bank's risk to the BIF or SAIF, as applicable. The current FDIC premium schedule for the SAIF and the BIF ranges from 0% to 0.27%. 96 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 Chairman, President and Chief Executive Officer The Liberty Corporation Robert A. Ingram Chief Executive Officer Glaxo Wellcome plc Chairman of the Board Glaxo Wellcome Inc. George R. Lewis President and Chief Executive Officer Philip Morris Capital Corporation Elizabeth Valk Long Executive Vice President Time Inc. 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 97 Shareholder Information Corporate Headquarters Wachovia Corporation 100 North Main Street 191 Peachtree Street, NE Winston-Salem, NC 27150 Atlanta, GA 30303 Corporate Mailing Addresses and Telephone Numbers Wachovia Corporation P.O. Box 3099 P.O. Box 4148 Winston-Salem, NC 27150 Atlanta, GA 30302 336-770-5000 404-332-5000 Notice of Annual Meeting The Annual Meeting of Shareholders of Wachovia Corporation will be held Friday, April 23, 1999 at 10:30 a.m. EDT, in the Wachovia Park Building, 101 North Cherry Street, Winston-Salem, North Carolina. All shareholders are invited to attend. Common Stock Wachovia common stock trades on the New York Stock Exchange under the ticker symbol WB. Transfer Agent Wachovia Bank, N.A. Winston-Salem, NC 1-800-633-4236 Correspondence and transfer requests should be sent to the following: Wachovia Shareholder Services P.O. Box 8218 Boston, MA 02266-8218 Shareholder Account Assistance Shareholders who wish to change the address or ownership of stock, report lost certificates, eliminate duplicate mailings or for other account reregistration procedures and assistance should contact the Transfer Agent at the address or phone number above. Dividend Services Through the Dividend Reinvestment and Common Stock Purchase Plan record shareholders can invest dividends as well as optional cash payments in additional shares without payment of brokerage commissions or service charges. Direct Deposit of Cash Dividends is a timesaving method of receiving cash dividends through automatic deposit to an account at any financial institution that participates in an Automated Clearing House. Wachovia Shareholder Direct Shareholders and other interested individuals can access timely corporate information on Wachovia, such as earnings and dividend announcements, by calling 1-888-4WB-NEWS (1-888-492-6397). The toll-free service is available 24-hours-a-day, 7-days-a-week. Internet Address The corporation's Internet address is: www.wachovia.com Investor Contact Robert S. McCoy, Jr. Chief Financial Officer 336-732-5926 James C. Mabry Senior Vice President Investor Relations 336-732-5788 Winston-Salem, NC 27150 Shareholder Relations Contact H. Jo Barlow Vice President 336-732-5787 Winston-Salem, NC 27150 Independent Auditors Ernst & Young LLP Credit Ratings December 31, 1998
Moody's Standard & Poor's --------- ------------------ Wachovia Corporation Senior debt Aa3 AA- Subordinated debt A1 A+ Commercial paper P-1 A-1+ Wachovia Bank, N.A. Long-term deposits Aa2 AA Short-term deposits P-1 A-1+
Wachovia Bank's global bank notes are rated the same as short- and long-term deposits. 98 EX-23 4 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 2-99538, 33-34386, 33-35357, 33-54094, 33-53325, 333-02239, 333-32255, 333-36889, 333-37339, 333-45099; Form S-3: Nos. 33-2232, 333-06319, 333-59165 and Form S-4: No. 333-68823) of Wachovia Corporation and in the related prospectuses of our report dated January 14, 1999, with respect to the consolidated financial statements of Wachovia Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1998. Ernst & Young LLP Winston-Salem, North Carolina March 26, 1999 EX-23 5 EXHIBIT 23.2 EXHIBIT 23.2 Consent of Independent Auditors The Board of Directors Wachovia Corporation: We consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 2-99538, 33-34386, 33-35357, 33-54094, 33-53325, 333-02239, 333-32255, 333-36889, 333-37339, 333-45099; Form S-3: Nos. 33-2232, 333-06319, 333-59165 and Form S-4: No. 333-68823) of Wachovia Corporation of our report dated January 20, 1998, relating to the consolidated balance sheet of Central Fidelity National Bank and subsidiaries as of December 31, 1997, and the related consolidated statements of income, cash flows and changes in shareholder's equity for the year then ended, and of our report dated January 15, 1997, relating to the consolidated statements of income, cash flows and changes in shareholders' equity of Central Fidelity Banks, Inc. and subsidiaries for the year ended December 31, 1996, which reports appear in the December 31, 1998 annual report on Form 10-K of Wachovia Corporation. KPMG LLP Richmond, Virginia March 26, 1999 EX-24 6 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that we, the undersigned directors of Wachovia Corporation, and each of us, do hereby make, constitute and appoint Kenneth W. McAllister and William M. Watson, Jr., and each of them (either of whom may act without the consent or joinder of the other), our attorneys-in-fact and agents with full power of substitution for us and in our name, place and stead, in any and all capacities, to execute for us and in our behalf the Annual Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1998 and any and all amendments to the foregoing Report and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as we might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, we the undersigned have executed this Power of Attorney this 22nd day of January 1999. L. M. Baker, Jr. James S. Balloun - -------------------------------- ------------------------------ L. M. Baker, Jr. James S. Balloun James F. Betts Peter C. Browning - -------------------------------- ------------------------------ James F. Betts Peter C. Browning John T. Casteen III John L. Clendenin - -------------------------------- ------------------------------ John T. Casteen III John L. Clendenin Lawrence M. Gressette, Jr. Thomas K. Hearn, Jr. - -------------------------------- ------------------------------ Lawrence M. Gressette, Jr. Thomas K. Hearn, Jr. George W. Henderson, III W. Hayne Hipp - -------------------------------- ------------------------------ George W. Henderson, III W. Hayne Hipp Robert A. Ingram George R. Lewis - -------------------------------- ------------------------------ Robert A. Ingram George R. Lewis Lisa Valk Long John G. Medlin, Jr. - -------------------------------- ------------------------------ Lisa Valk Long John G. Medlin, Jr. Lloyd U. Noland, III Sherwood H. Smith, Jr. - -------------------------------- ------------------------------ Lloyd U. Noland, III Sherwood H. Smith, Jr. John C. Whitaker, Jr. - -------------------------------- John C. Whitaker, Jr. EX-27 7 FDS -- WACHOVIA
9 1000 U.S. Dollars 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 3,800,265 109,983 675,470 664,812 7,983,648 1,383,607 1,442,126 45,719,222 547,992 64,122,842 40,994,729 8,735,062 1,458,092 7,596,727 0 0 1,014,931 4,323,301 64,122,842 3,873,404 708,553 83,288 4,665,245 1,359,705 2,314,213 2,351,032 299,480 20,442 1,996,332 1,303,781 874,170 0 0 874,170 4.26 4.18 4.24 157,118 136,807 0 0 544,723 358,189 59,365 547,992 502,352 6,342 39,298 EPS-BASIC
EX-99 8 EXHIBIT 99.1 EXHIBIT 99.1 INDEPENDENT AUDITORS' REPORT Shareholder of Central Fidelity National Bank and subsidiaries: We have audited the consolidated balance sheet of Central Fidelity National Bank and subsidiaries (the "Company") as of December 31, 1997, and the related consolidated statements of income, cash flows and changes in shareholder's equity for the year then ended (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Fidelity National Bank and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG LLP Richmond, Virginia January 20, 1998 EX-99 9 EXHIBIT 99.2 EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Central Fidelity Banks, Inc.: We have audited the consolidated statements of income, cash flows and changes in shareholders' equity of Central Fidelity Banks, Inc. and subsidiaries (the "Company") for the year ended December 31, 1996 (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Central Fidelity Banks, Inc. and subsidiaries for the year ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP Richmond, Virginia January 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----