Financial Performance Highlights
(Dollars in millions, except per share data)
2004
2003
2002
$
22,990
20,345
18,063
5,214
4,259
3,560
$
3.81
3.18
2.60
26.74
%
24.21
19.99
$
493,324
401,188
342,033
$
47,317
32,428
32,078
1,588
1,312
1,357
$
1.66
1.25
1.00
29.79
24.71
23.63
52.60
46.59
36.44
$
83,537
61,139
49,461
4,004
3,360
3,280
96,030
86,114
80,868
Business Description
Compound Annual Growth 2002-2004
Dividends Per Share and Payout Ratios
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Letter to Our Shareholders
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3 | |
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Corporate Citizenship
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6 | |
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Corporate Overview
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9 | |
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Overview of Major Businesses
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10-11 | |
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Management’s Discussion and Analysis
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Executive summary (summary tables on pages 17 and 55)
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17 | |
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Critical accounting policies
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20 | |
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Net interest income and margin (tables on pages 24, 55, 68-69)
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24 | |
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Fee and other income (tables on pages 25, 55 and 74)
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25 | |
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Noninterest expense (tables on pages 26, 55 and 74)
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25 | |
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Business segments (tables on pages 28-31 and 105)
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26 | |
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Explanation of our use of non-GAAP financial measures
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53 | |
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Five-year summaries of income
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55 | |
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Selected quarterly data
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57 | |
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Management’s Report on Internal Control over Financial Reporting
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70 | |
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Reports of Independent Registered Accounting Firm
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71-72 | |
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Consolidated Financial Statements
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Consolidated balance sheets
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73 | |
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Consolidated statements of income
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74 | |
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Consolidated statements of changes in stockholders’ equity
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75 | |
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Consolidated statements of cash flows
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76 | |
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Notes to consolidated financial statements
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77 | |
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Glossary
|
133 | |
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Index
|
134-135 | |
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Board of Directors and Operating Committee
|
136 | |
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Shareholder Information (Dividend and Stock Price tables on pages 55, 57, 74 and above)
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Inside Back Cover |
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Momentum . . .
Wachovia’s growth is driven by a diversity of revenue sources, a broad and convenient distribution
system, and a singular focus on customer needs.
|
| Letter to Our Shareholders 17% one-year and 84% three-year Total Return to Shareholders Three-year performance ranks No. 1 among 20 Largest U.S. Banks |
Dear Wachovia Shareholders,
Wachovia’s performance was outstanding in 2004, the result of four years of extraordinary efforts by our entire team to firmly place your company on its successful growth path with a diversified set of complementary businesses, nationwide distribution of financial products and services, and exemplary customer service.
These efforts fueled 2004’s earnings growth of 22 percent to a record $5.2 billion. On a per share basis, earnings were up 20 percent from 2003 to $3.81. Our shareholders enjoyed a one-year total return (including stock price appreciation and dividends) of 17 percent, which once again outperformed banking industry indices. In fact, Wachovia’s total return ranks No. 1 among the nation’s 20 largest banks since year-end 2001, shortly after First Union and Wachovia merged. Over that three-year period, our total return was 84 percent.
In addition, we increased our common stock dividend twice in 2004, to $1.84 on an annualized basis. That is a 3.5 percent yield even before any stock price appreciation. We have increased the dividend five times since 2001, and our dividend payout ratio of 40 percent is in line with our target of paying our shareholders 40 percent to 50 percent of earnings excluding merger-related and certain other expenses. In 2004, we paid $2.3 billion in dividends to our common stock shareholders.
Driving our momentum is strong growth in our four major businesses, all of which produced record revenue and record earnings in 2004. Key drivers were strong balance sheet growth in our General Bank and market share growth in our Corporate and Investment Bank. Credit quality also was superior — even better than we had expected when the year began — and trends continue to look favorable.
We strengthened our banking markets with the November 1, 2004, acquisition of one of the nation’s premier regional banking companies, SouthTrust Corporation. This transaction solidified our leading market share in a number of the nation’s most desirable banking markets. In the economically strong and expanding Southeast, we are No. 1 in deposit market share. In addition, the SouthTrust acquisition accelerated our plans to enter the fast-growing Texas markets. At year-end 2004, we had 72 branches in the Dallas-Fort Worth, Houston, Austin and San Antonio markets, with plans to add another 50 by the end of 2005.
This market extension further propels the strong momentum in our General Bank, which I firmly believe is the best in the nation with a proud record of customer service leadership, state-of-the-art sales and servicing techniques, and reliable execution. Our General Bank, which provides retail and commercial banking products and services in 15 states, expanded
into Manhattan and entered the Texas markets very successfully in the past year. General Bank earnings grew 24 percent from 2003 — and in fact our General Bank, led by Ben Jenkins, has generated double-digit earnings growth on a compound annual basis since 2001. Strong balance sheet growth drove these results, with average low-cost core deposits up 21 percent from 2003. We have led our major bank peers in low-cost core deposit growth for the past two years.
Our capital markets arm, the Corporate and Investment Bank, led by Steve Cummings, produced excellent revenue growth in 2004 after focusing strategically on reducing its use of capital by improving credit quality, controlling expenses and refining its customer relationship focus. This attention was rewarded in 2004 with a 75 percent increase in net new lead relationships and solid market share gains, as well as double-digit earnings growth.
Our Wealth Management team, led by Stan Kelly, is focused on the high net-worth client segment. We created this as a separate business in 2001 in the First Union-Wachovia merger, and since then Wealth Management has focused on carefully defining its target market, enhancing its sales force and further refining its strategies. The results were clear in the record 2004 Wealth Management earnings and revenue resulting from strong balance sheet growth and an increase in trust and investment fees and insurance revenues.
Our Capital Management Group, which encompasses retail brokerage, mutual funds, insurance, institutional trust and other similar business lines, has been challenged, like the rest of the retail brokerage industry, by low trading activity reflecting the uncertainty of retail investors in weak equity markets. But in this revenue-challenged environment, we were able to largely complete our retail brokerage integration, reduce costs, continue to grow client assets, enhance our sales force and make needed upgrades in our brokerage systems. We believe Capital Management, with David Carroll at the helm since year-end 2004, is positioned extremely well for a market rebound in 2005, and in fact we did see a pickup in retail brokerage activity in the fourth quarter of 2004.
We are harnessing the power of our diversified business model to drive revenue growth through cross-business partnerships. One example is our Wachovia Client Partnership, which is a client acquisition and relationship growth strategy to provide a comprehensive approach and serve clients in the way that can best meet their needs. This partnership has generated more than 11,600 referrals between our business units since its inception in 2003, and attracted an additional $6.5 billion in loan, trust and investment, and deposit balances through
3
2004. New revenue in 2004 from cross-business referrals was $87 million, up 29 percent over our full year target. Another example is our retirement planning strategy, which took shape in 2004 and is designed to cross-sell retirement services and products to individuals and businesses. A key focus is on offering solid financial planning and leading retirement products to General Bank commercial and small business clients, as well as to clients of our Wealth, Corporate and Investment Bank, and retail brokerage teams.
In short, your company had a fantastic year, and we are building momentum with employees in all of
our businesses focused on the same six priorities:
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Expense efficiency
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Employee engagement
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Merger integration
Revenue growth For several years, I have said revenue growth is one of the most critical challenges facing the financial services industry, and this continued to be the case in the weak financial markets of 2004. But Wachovia outperformed its major bank peers on revenue growth — partially due to the retail brokerage transaction and the SouthTrust merger, but each of our businesses contributed organic growth.
We believe we have solid revenue opportunities ahead in all our businesses. The General Bank will add to its momentum as we complete the SouthTrust merger integration, institute our sales culture, and offer additional products and services to a larger base of customers. We are also gaining market share and lead bank relationships in the Corporate and Investment Bank. We continue to add to the expertise of our sales force in each business unit, and focus on improving investment management returns in Capital Management.
Our focus on growing the top line while maintaining expense discipline has resulted in double-digit earnings per share growth for the past 10 consecutive quarters. We believe this growth formula will continue to be effective for us going forward.
Efficiency and expense control Instilling a culture of expense discipline has long been a strategic priority for us. Our efforts have been successful, as illustrated by our bottom line results, but we know we can still improve. That’s why we embarked last spring on a business-by-business and process-by-process review with a goal of creating a company that continuously improves its efficiency and effectiveness and drives more profitability to the bottom line.
This is not a one-time, cost-cutting effort. It is a very deliberate, systematic three-year effort to control expense growth. Our goal is simply to be a much more efficient company, and slow the rate of expense growth even more than we’ve done in the past. At the same time, we intend to grow revenue aggressively, create jobs, invest for the future and provide the best products and service to our customers.
However, we don’t have a goal of being the most efficient company in our peer group. That’s because our business mix, which includes a large securities brokerage firm, differs from most traditional banks that have low efficiency ratios (meaning the amount spent to generate each dollar of revenue). In addition, we are investing in such things as desktop sales and servicing systems for our retail bankers and in technology improvements companywide. We will be mindful of costs, but I do not believe it’s wise to try to cost-cut your way to growth. Instead, we intend to be the model of a revenue-driven company, and we will continue investing to generate higher revenue growth.
We believe the expense initiatives we have under way in specific lines of business as well as several cross-organizational initiatives have the potential to slow our expense growth by $600 million to $1.0 billion and produce an improved operating overhead efficiency ratio in the range of 52 percent to 55 percent by the end of 2007, down from 62 percent in 2004. More information is in the Management’s Discussion and Analysis section.
On top of this expense initiative, our expenses have been reduced already by the successful completion in 2004 of the Wachovia-First Union integration, which we estimate removed nearly $1.0 billion from our annual expense run rate. We are also well along in achieving annual cost savings of $364 million pretax from systems conversion and integration of our retail brokerage transaction. And we’re beginning to gain expected savings from the SouthTrust integration, which we estimated when this acquisition was announced to be $414 million pre-tax. We expect that most of these last two merger-related expense savings will be achieved in 2005.
Customer loyalty Our revenue and earnings performance in 2004 is no accident, but the result of several years of hard work during which all of our employees, from the top levels to the front line, focused their full attention on providing the best possible service experience for our customers.
Now, for four consecutive years, the annual University of Michigan American Customer Satisfaction Index has affirmed Wachovia’s reputation as the customer service leader among the nation’s major banks. Our longtime shareholders will recall, however, that
4
| Strategic Driver: Revenue Growth and Expense Efficiency |
it was not that long ago — 1999 — when our customer service had slipped, and we learned a hard lesson in customer attrition. One of my first actions when I became CEO in mid-2000 was to tackle service quality. We increased staffing levels in our financial centers, call centers, and operations area. We revised our incentive compensation plans to emphasize not only sales performance, but service as well. We instituted a clear measurement system to track customer satisfaction through our Gallup surveys of 60,000 to 70,000 customers quarterly. And I chair the monthly meeting of senior managers that ensures we quickly address any operational or system issues that create obstacles to providing good customer service.
According to our Gallup surveys, our customer satisfaction has risen consistently since the low point in 1999, ending the fourth quarter of 2004 at 6.59 (on a scale of 1 to 7), which is considered among the best-in-class in our industry. We are particularly proud that customer satisfaction continued to improve even during the First Union-Wachovia merger integration — something Gallup tells us is virtually unheard of during a merger.
Now that we have a solid customer service mechanism in place, we have raised the bar. Our new goals are not only to ensure customer satisfaction with Wachovia, but customer loyalty as well, which we measure in response to such questions
as “would you recommend Wachovia to a friend?” and “will you continue to do business with Wachovia?” By the end of 2004, 49 percent of customers in our retail financial centers were defined as “loyal customers” who rated Wachovia extremely positively on overall satisfaction, willingness to do further business and willingness to recommend us. This is important because loyal customers stay with us longer, buy more products and services, create good word-of-mouth referrals, and reduce customer acquisition and servicing costs. Customer satisfaction is so important to us that our incentive programs include this metric.
Employee engagement Another priority for Wachovia is ensuring that our employees find their work meaningful — which creates what we call “employee engagement.” Some shareholders may question the importance of this priority. In my opinion, having employees who feel personally invested in achieving the company’s mission is vital to our success. Only fully engaged employees will continue, as ours do, to put their customers first even while going through the uncertainties of merger integration. Only fully engaged employees will see the benefit of working together to do what’s best for their customers regardless of who “owns” the customer. So we continue to work hard to drive high levels of employee engagement through our benefits programs, training and development programs, encour-
5
Corporate Citizenship
Strategic Driver:
and Employee
Engagement
2004 Community Impact
| 3 |
Reading First®, our
literacy education program, involved 10,000
employees in nearly 4,500 partnerships with
local classrooms, with 90,000 books donated
to classroom libraries
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|
| 3 |
12,000 employees volunteered in their
communities by building homes, mentoring
children, reading in schools, tutoring
adults in financial literacy, and more
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|
| 3 |
Over 1,200 grants totaling $148,000 made
to the charity of choice for employees who
volunteered at least 24 hours
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| 3 |
Wachovia donated 800,000 pounds of ice,
484,000 gallons of water, 7,500 food kits,
32,000 batteries, and disaster recovery
teammates drove 98,000 miles to
support victims of hurricanes Charley, Frances,
Ivan and Jeanne
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Fully Engaged Employees Vital to Success
% Fully Engaged Employees
Wachovia Employees Who Say They Like Their Work
| Cross-Industry | ||
| WB | Benchmark | |
| 4.18 | 4.16 |
Wachovia Employees Who Say Their Job Fully Uses Their Skill and Ability
| Cross-Industry | ||
| WB | Benchmark | |
| 3.77 | 3.59 |
(scale 1-5)
| 3 |
Contributed more than $104 million
to charitable organizations through
employee, company, and foundation giving
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| 3 |
Helped an average of 475 low- to
moderate-income families buy homes each
week
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| 3 |
Helped more than 77,000 entrepreneurs
grow or expand their own businesses
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| 3 |
Our employees and 34 nonprofit partners
trained more than 10,000 families and
individuals in personal computer, Internet
and money management skills through our
financial literacy programs offered in
English and Spanish
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Engaged Employees Make Customers No. 1 Priority
2004 American
Customer
Satisfaction Index
| Score | ||||
| 2004 | vs. 2003 | |||
|
Wachovia
|
78 | +3% | ||
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Bank of America
|
72 | -3 | ||
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JP Morgan
Chase/
Bank One |
70 | - | ||
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Wells Fargo
|
70 | +3 | ||
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Retail Banks
Industry Average |
75 | - | ||
Source: University of Michigan.
Customer Loyalty Scores
| 3 |
Provided $25 billion in community loans and investments
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| 3 |
Invested $223 million in equity to
create over 5,000 affordable rental
housing units
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| 3 |
Provided $11 million in community
development grants and in-kind donations
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| 3 |
Pledged more than $75 billion over five
years in community loans and investments to
serve communities affected by the
SouthTrust merger
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| 3 |
Currently rated “outstanding” by the
Office of the Comptroller of the Currency
for Community Reinvestment Act Compliance
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Community Involvement Drives Progress
Community Loans
and
Investments*
Charitable Giving*
6
agement and support of volunteerism and giving back to the communities we serve. We are committed to an inclusive environment where the best and brightest minds are encouraged to perform at their highest levels.
I spend a couple of days each week in the markets Wachovia serves, talking with employees and meeting with customers. I’ve been gratified by the feedback I receive that validates my belief that our employees firmly support our values and vision. You see the results in our customer service and loyalty scores, and in the increased productivity in our business lines. You see the pride in the hours of volunteer time — nearly 600,000 in 2004 — that our employees devote to volunteering in the United Way, in Habitat for Humanity, in classroom reading programs, and in their civic leadership roles. I am deeply proud to be associated with a group of people who achieve these great things. One of my pledges to our team is to continue working to further develop the people who have the vision and capabilities to run the much larger organization we have today.
Corporate governance During the past few years, nearly everyone in the financial services industry has come under intense public and regulatory scrutiny. We take regulatory compliance very seriously. Our goal is to identify issues quickly, work diligently toward an equitable resolution, with advice and guidance from our regulators, and be transparent in disclosing regulatory or legal actions to shareholders and customers. To that end we have resolved issues with the SEC concerning legacy Wachovia’s purchases of First Union common stock following our merger announcement, as well as issues related to mutual fund sales practices. More information about these settlements and other regulatory matters is included in our 2004 Form 10-K.
Beyond that, our goal is to be an industry model for good corporate governance. We are eager to prove we act with integrity, because trust is vitally important particularly to a financial services business. This dedication to leadership on corporate governance issues begins with our active and informed board of directors. With their leadership and with shareholder support, we believe Wachovia has instituted best practices in corporate governance, including limiting the size of our board and fostering board independence; aligning director and management interests with those of shareholders through strengthened stock ownership guidelines; and being among the first in the United States to expense stock options.
Merger integration Finally, conducting a smooth and successful integration of SouthTrust in a way that minimizes any potential disruption for customers is crucial for us in 2005. There
are thousands of details that we must get just right to ensure a completely successful integration. Fortunately, we developed the playbook for successful integration with our First Union-Wachovia merger, and we are following the same deliberate, well-planned path in this integration. The SouthTrust transaction closed on November 1, and we moved quickly to have the leadership team in place. We began planning the integration the day after the transaction was announced in June. We are already seeing good signs on the revenue side, the cultures are meshing well, and key front-line executives are staying with us. We feel optimistic we will achieve our merger objectives.
We will continue to focus intensely on these six priorities on an ongoing basis.
Competitive environment At the same time, we are in a very competitive industry that we believe over the long term will continue to undergo convergence and consolidation until only a handful of large financial institutions (not just banks) are left at the top. I believe these industry survivors will have multiple product lines, multiple delivery channels, broad geography and outstanding customer focus. The steps we take over the next five years will be extremely important to our success. So we will participate in this industry consolidation, but we will do so only in a disciplined manner that is financially beneficial for shareholders, that strengthens our position in an attractive business line or market, or expands the distribution of our products and services to additional customers.
We believe Wachovia already is ahead of most of our competitors in building precisely the business model required. We began investing to build this business model over a decade ago, and today we offer diverse product lines and multiple distribution channels. We have leading market share in a number of the nation’s most attractive and growing geographies. We manage the assets of 13 million households and businesses. And we have proven ourselves to be reliable in executing our growth strategies.
In fact, one of the things about Wachovia that makes me the proudest is that, as a company, we are getting better and better at execution. Our financial performance continues to improve. We are fiercely competitive, and throughout our company, our people take great pride in the results they are achieving for shareholders, for customers and for the communities they serve. As a result, we’ve become an asset-gathering powerhouse, managing more than $274 billion in core deposits and $653 billion in brokerage client assets for our clients. We believe we have a competitive advantage with broad retail distribution both through our 15-state retail bank network and through our nationwide securities brokerage firm.
7
In closing, I would like to express deep appreciation to all of those who shared in creating our 2004 success:
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Our directors, for their continuing active leadership and guidance.
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Our leadership team and employees throughout the company,
for their continuing diligence and dedication. Three members
of our key leadership team announced their retirements in
2004: Barnes Hauptfuhrer, co-leader of the Corporate and
Investment Bank; Don McMullen, head of our Capital Management Group; and Paul George, head of Human Resources.
Barnes, Don and Paul have made crucial contributions to
restoring Wachovia’s momentum, and they leave strong
legacies of success for all of our employees.
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Thanks also to our customers, for trusting us with their business.
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And of course, to our shareholders for your continuing
support of Wachovia.
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Our 96,000 employees and I pledge to remain fully focused on ensuring we do the right thing for our shareholders, customers and communities in all of our actions. Thank you for your interest in Wachovia.
Sincerely,
G. Kennedy Thompson
Chairman, President and Chief Executive Officer
February 18, 2005
| Strategic Driver: Corporate Governance and Merger Integration |
Corporate Overview
| 3 |
4th largest banking company
|
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| 3 |
Assets: $493.3 billion
|
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| 3 |
2004 earnings: $5.2 billion, up 22%
|
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| 3 |
13 million household and business relationships
|
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| 3 |
4th largest domestic online bank
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| 3 |
90 percent of our domestic deposits
are in states where we rank No. 1 or 2 in deposit
market share
|
| 3 |
3rd largest full-service brokerage firm
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| 3 |
Market capitalization: $83.5 billion
|
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| 3 |
Stockholders’ equity: $47.3 billion
|
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| 3 |
Top 3 trust provider
|
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| 3 |
Top 20 mutual fund company
|
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| 3 |
Top 3 loan syndications (lead and leveraged lead)
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| 3 |
Global fixed income and equity institutional distribution
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General Banking Regions
| * | Excludes credit card companies with deposits domiciled in Delaware. | |||
| Market share rankings based on SNL Financial data as of June 30, 2004. | ||||
| 3 |
Foreign branches in Frankfurt, Hong
Kong, London, Seoul, Taipei and Tokyo
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| 3 |
Representative offices in Europe,
Africa, the Middle East, Russia, Asia, Australia,
New Zealand and the Americas
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| 3 |
Brokerage offices in Argentina, Brazil,
Chile, Paraguay and Uruguay
|
| 3 |
Embassy and Government Banking Group in Washington, D.C.
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| 3 |
International processing centers in
Charlotte, N.C., Los Angeles, Miami, New York,
Philadelphia, and Winston-Salem, N.C.
|
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| 3 |
Foreign Exchange desks in Charlotte, N.C., and London
|
9
| Overview of Major Businesses Driving our momentum is an uncommon partnership of banking and brokerage businesses that leverage the collective wisdom of our skilled relationship managers and financial advisors to bridge a lifetime of our customers ’ needs Segment Revenue Contribution |
General Bank: Service Quality and Sales Momentum
Market Position
| 3 |
Dominant East Coast presence
|
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| 3 |
No. 1 in Southeast
|
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| 3 |
No. 3 nationwide deposit
share and branch network
|
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| 3 |
No. 5 bank ATM network
|
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| 3 |
Top 2 nationwide in real estate financial services
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| 3 |
No. 4 domestic online bank
|
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| 3 |
Over $16 billion online bill
payment volume processed, up 42%
from 2003
|
|
| 3 |
36 million check images
viewed, up 35% from 2003
|
Market Position
| 3 |
3rd largest full-service retail brokerage firm
|
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| 3 |
Growing presence in
49 states and
Washington, D.C.
|
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| 3 |
5.9 million broker client accounts
|
|
| 3 |
Over 1 million participants in retirement plans
|
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| 3 |
Top 10 corporate and municipal bond trustee
|
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| 3 |
Top 20 mutual fund provider
|
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| 3 |
Top 25 U.S. asset manager
|
Market Position
| 3 |
4th largest in Wealth Market
in Barron’s 2004 survey based on
Wachovia Securities and Wealth
Management assets under management for clients with $1 million
or more
|
|
| 3 |
Top 3 trust provider
|
|
| 3 |
Top 3 bank-owned, 11th
largest overall insurance
brokerage firm
|
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| 3 |
4th largest family office firm
|
Market Position
| 3 |
Strong industry position
across a full capital markets
product set
|
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| 3 |
Doubled investment banking
market share from 2001 to 2004
|
|
| 3 |
No. 1 structured products
servicer for four consecutive
years
|
|
| 3 |
No. 2 in U.S. collateralized debt obligations
|
|
| 3 |
Top 3 in loan syndications
(lead and leveraged lead)
|
|
| 3 |
Top 3 treasury services provider
|
|
| 3 |
No. 1 third party trade processor
|
11
| Dominant East Coast presence; No. 1 in Southeast |
General Bank Description
The General Bank provides a broad range of banking products and services to individuals, small
businesses, commercial enterprises, and governmental institutions in 15 states and Washington, D.C.
Our target market for small business customers are those with annual revenues up to $3 million; for
business banking customers, those with annual revenues between $3 million and $15 million; and
commercial customers with revenues between $15 million and $250 million.
2004 Business Fundamentals
| n |
$10.6 billion total revenue
|
|
|
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||
| n |
$128.1 billion average loans
|
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||
| n |
$172.5 billion average core deposits
|
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|
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||
| n |
$3.6 billion annuity sales
|
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| n |
11 million retail and small business relationships
|
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||
| n |
2,500 licensed branch employees (Series 6) and 1,200
Financial Advisors (Series 7)
|
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8.5 million online product and service enrollments and
2.7 million active online customers
|
Value Proposition
The General Bank provides checking, lending and investing products and services for customers at
every stage of life, whether they are saving for a home, for a child’s education or for a business
... whether they’re building wealth or building a business ... or planning for retirement. The
General Bank’s 43,000 employees, including 1,500 small business and commercial relationship
managers, provide knowledgeable and reliable guidance, whether customers choose to meet with them
personally, visit one of our 3,300 financial centers or 5,300 automated teller machines, call our
telephone banking center or visit online at Wachovia.com.
The General Bank also serves the specialized financial needs of businesses of all sizes with a variety of business checking and savings products, treasury services, global trade services, loans, leases and capital markets products and services.
Strategic Focus
Superior execution of sales and service strategies to acquire, deepen, enhance and retain long-term
customer relationships through exceptional service, in-depth customer knowledge and tailored
products and solutions. Increase the proportion of customers who transact, save or invest, and
borrow with us, rather than use only a single service.
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| Over $ 1 Trillion in Client Assets |
Capital Management Description
Capital Management leverages its multi-channel distribution to provide a full line of
proprietary and nonproprietary investment products and services to retail and institutional
clients. Retail brokerage services are offered through the 4,000 offices of Wachovia Securities in
49 of the 50 states and in Latin America.
2004 Business Fundamentals
| n |
$5.5 billion total revenue
|
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||
| n |
$256.3 billion assets under management
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| n |
$106.4 billion mutual fund assets
|
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||
| n |
$149.9 billion separate account assets
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| n |
$652.5 billion broker client assets
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$65.7 billion retirement plan assets
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$699.2 billion custody assets
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10,500 registered representatives
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Value Proposition
Capital Management is focused on helping clients achieve a lifetime of financial goals with
many choices and resources structured around the clients’ needs.
Our 10,500 registered representatives focus on helping clients make educated decisions regarding their financial portfolios and financial future, with an emphasis on disciplined investing and unbiased advice. The Capital Management Insurance Services Group offers fixed and variable annuities, life, auto and disability insurance, and business and corporate programs. Capital Management also includes Evergreen Investments, one of America’s largest asset management companies, which manages diverse investments for a broad range of investors — both retail and institutional. Our Corporate and Institutional Trust Services businesses offer a full range of retirement and corporate trust services.
Strategic Focus
Creating a growing and diversified business with a balanced mix of products sold through
multiple channels of distribution. Expanding the distribution of both proprietary and
nonproprietary products and growing assets under management. Providing exceptional investment
performance results for clients.
13
| 4th largest Wealth Manager in the Nation |
Wealth Management Description
With nearly 200 years of experience in managing wealth, Wealth Management provides a comprehensive
suite of private banking, trust and investment management, financial planning and insurance
services to high net worth individuals, their families and businesses. Our 54 teams of relationship
managers and specialty advisors focus on serving clients with $2 million or more in investable
assets, while three family offices focus on families with $25 million or more in investable assets.
2004 Business Fundamentals
| n |
$1.1 billion total revenue
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| n |
$64.7 billion assets under management
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| n |
$119.6 billion assets under administration
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| n |
53,000 client relationships
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| n |
1,000 wealth management advisors
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Value Proposition
Wealth Management offers a fully integrated and objective approach that incorporates all the
disciplines related to managing our clients’ wealth — from creation and growth to preservation and
transfer to future generations. A dedicated relationship manager coordinates a team of financial
advisors to meet each clients’ individual needs. Through a separate, independent practice called
Calibre, we also provide sophisticated family office solutions to ultra high net worth families
that go beyond meeting financial needs by ensuring each future generation is prepared to be
effective stewards of the family’s legacy.
Wealth Management is also focused on strategic partnerships with the General Bank, Capital Management and the Corporate and Investment Bank to ensure a complete array of products and advisory services are available to our clients.
Strategic Focus
Enhancing relationships with existing clients and leveraging the opportunity in our marketplace,
which includes 48 percent of the nation’s wealthy households. Providing unparalleled service and
expertise to our clients by developing and delivering sophisticated, leading-edge solutions through
highly credentialed relationship managers and specialty advisors.
14
| Top-Tier Universal Bank Focused on Growing Companies |
Corporate and Investment Bank Description
Serves domestic and global corporate and institutional clients typically with revenues in
excess of $250 million, and primarily in 10 key industry sectors: consumer and retail; defense and
aerospace; energy and power; financial institutions; healthcare; industrial growth; information
technology and business services; media and communications; real estate; and technology.
2004 Business Fundamentals
| n |
$5.2 billion total revenue
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$84.1 billion lending commitments
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$32.1 billion average loans
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| n |
$19.1 billion average core deposits
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| n |
3,000 corporate client relationships
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| n |
4,000 institutional investor relationships
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Value Proposition
The Corporate and Investment Bank has become a premier partner to corporations and
institutional investors through an intense focus on client needs, combined with significant
capital-raising capability and a leading treasury services platform. The Corporate and Investment
Bank has an integrated team approach, a breadth of products and services, and deep industry
expertise to help grow and sustain corporate clients in any economic environment. The relationship
managers in this arm of Wachovia Securities interact primarily with CEOs, CFOs and treasurers of
companies, as well as managing partners of private equity firms, institutional investors,
financial institutions and corporations with import/export needs.
The Corporate and Investment Bank’s 4,800 employees provide Wachovia with a deep pool of relationship coverage officers, product specialists, portfolio managers, and fixed income and equity sales, trading and research professionals.
Strategic Focus
Growing economic value for Wachovia shareholders through disciplined management of our
extensive resources in people and financial capital. Increasing the number of clients who think of
Wachovia as their lead corporate and investment bank. Increasing the number of products and
services provided to each of our clients.
15
|
| Wachovia prides itself on creating an uncommon financial services company focused on providing customer-driven products and services that produce relative stability and steady growth. |
Contents
|
Management’s Discussion and Analysis
|
17 | |||
|
Financial Tables
|
53 | |||
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Management’s Report on Internal Control over Financial Reporting
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70 | |||
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Reports of Independent Registered Accounting Firm
|
71-72 |
16
Management’s Discussion and Analysis
The following discussion and analysis is based primarily on amounts presented in our consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP). This discussion contains forward-looking statements. Please refer to our 2004 Form 10-K for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements.
Executive Summary
Our earnings are primarily generated through four core businesses: the General Bank, the Corporate and Investment Bank, Capital Management and Wealth Management. In the following discussion, we explain this diverse group of businesses and why we believe our shareholders and customers benefit from this balance and diversity. In addition, throughout this document, we address key performance indicators that drive shareholder value and serve as benchmarks to compensate management. We discuss trends and uncertainties affecting our businesses, and also analyze liquidity and capital resources.
Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. This means that in addition to the lending and deposit-taking activities of traditional banking companies, we also offer investment products and services for retail customers, and capital markets financing alternatives for institutional and corporate clients. This business mix produces revenue both from the interest income earned on loans and securities, as well as fee income from potentially faster-growth but less predictable asset management, retail brokerage and investment banking businesses. Fee income represented 47 percent of our total revenue in both 2004 and 2003.
The ability of our businesses to generate strong sales and serve a broad range of customer needs in differing market conditions allowed Wachovia to generate record net income available to common stockholders in 2004 of $5.2 billion, up 22 percent from 2003, and record diluted earnings per common share of $3.81, up 20 percent from 2003. Our results for 2004 also reflect the merger of Wachovia and SouthTrust Corporation, which closed on November 1, 2004. Because this merger was accounted for under the purchase method, prior periods have not been restated. Results in 2004 include SouthTrust for only the two months since consummation, so this transaction had relatively little impact on 2004
Summary of Results of Operations
| Years Ended December 31, | ||||||||||||
| (In millions, except per share data) | 2004 | 2003 | 2002 | |||||||||
|
Net interest income
(GAAP)
|
$ | 11,961 | 10,607 | 9,955 | ||||||||
|
Tax-equivalent adjustment
|
250 | 256 | 218 | |||||||||
|
Net interest income
(a)
|
12,211 | 10,863 | 10,173 | |||||||||
|
Fee and other income
|
10,779 | 9,482 | 7,890 | |||||||||
|
Total revenue
(a)
|
22,990 | 20,345 | 18,063 | |||||||||
|
Provision for credit losses
|
257 | 586 | 1,479 | |||||||||
|
Other noninterest expense
|
13,791 | 12,319 | 10,678 | |||||||||
|
Merger-related and restructuring expenses
|
444 | 443 | 387 | |||||||||
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Other intangible amortization
|
431 | 518 | 628 | |||||||||
|
Total noninterest expense
|
14,666 | 13,280 | 11,693 | |||||||||
|
Minority interest in income of
consolidated subsidiaries
|
184 | 143 | 6 | |||||||||
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Income taxes
|
2,419 | 1,833 | 1,088 | |||||||||
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Tax-equivalent adjustment
|
250 | 256 | 218 | |||||||||
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Income before cumulative effect of
a change in accounting principle
|
5,214 | 4,247 | 3,579 | |||||||||
|
Cumulative effect of a change in
accounting principle, net of income taxes
|
– | 17 | – | |||||||||
|
Net income
|
5,214 | 4,264 | 3,579 | |||||||||
|
Dividends on preferred stock
|
– | 5 | 19 | |||||||||
|
Net income available to
common stockholders
|
$ | 5,214 | 4,259 | 3,560 | ||||||||
|
Diluted earnings per common share
|
$ | 3.81 | 3.18 | 2.60 | ||||||||
results of operations except as noted. At consummation, SouthTrust had assets of $53.6 billion, stockholders’ equity of $4.8 billion, loans of $36.9 billion and deposits of $37.1 billion. Additionally, results reflect the full-year impact of the July 1, 2003, retail brokerage transaction.
In 2004 compared with 2003, total revenue rose 13 percent to $23.0 billion, with strong balance sheet growth overcoming margin compression largely related to the addition of lower-spread trading assets, growth in lower-spread consumer real-estate secured loans, consolidation of our conduits and growth in FDIC-insured sweep accounts and related investments. Tax-equivalent net interest income grew 12 percent on growth in average earning assets of 23 percent. Fee and other income grew 14 percent largely reflecting the impact of the retail brokerage transaction on commissions and on fiduciary and asset management fees. Improved principal investing results and higher customer transaction volume and the addition of SouthTrust also contributed to the increase, and offset lower asset securitization results.
Wachovia is one of the nation’s largest lenders, and the credit quality of our loan portfolio can have a significant impact on earnings. Our credit quality remained at or near the best in the
17
Management’s Discussion and Analysis
banking industry in 2004, and trends continue to look favorable for 2005. We experienced only a 2 percent increase from December 31, 2003, in total nonperforming assets, and the level would have declined without the addition of SouthTrust’s nonperforming assets. We have one of the best records on credit losses in the banking industry, with a net charge-off ratio of 0.17 percent, down 24 basis points from 0.41 percent in 2003. Our strategy is to mitigate risk and volatility on our balance sheet by actively monitoring and reducing potential problem loans, including the sale of at-risk credits when prudent. As a result of this strategy, the 56 percent decline in provision expense from 2003 reflected improved credit quality as well as more favorable economic conditions. At December 31, 2004, the allowance for loan losses increased 17 percent from December 31, 2003, due to the addition of SouthTrust.
Average loans in 2004 increased $13.7 billion from 2003 to $172.0 billion, primarily reflecting growth in consumer real estate-secured loans and commercial loans and the impact of the SouthTrust merger. Average core deposits increased 26 percent from 2003 to $231.6 billion, which included an average $24.3 billion of deposits associated with growth in our FDIC-insured money market sweep product introduced in the fourth quarter of 2003. Average low-cost core deposits increased 35 percent from 2003 to $190.9 billion.
We have focused for some time on improving efficiency, and in the spring of 2004 began a new in-depth review of our businesses and processes to systematically assess efficiency opportunities by business line and across the organization. Each business unit developed overhead efficiency targets for 2007, based on expected revenue growth rates and peer productivity data. Overall, we are targeting an overhead efficiency ratio in the range of 52 percent to 55 percent by 2007, which we expect to achieve by slowing our expense growth even as we continue to invest for future revenue growth. More information is included in the Letter to Shareholders and the Outlook section.
In addition, our mix of businesses and variable expense structure enables us to manage expenses in line with revenues. Total noninterest expense rose 10 percent from 2003, primarily reflecting increased variable pay on higher revenues, as well as the full effect of the retail brokerage transaction, the SouthTrust merger, and continued investments for the future.
Each of our four major businesses generated record revenue and record earnings in 2004. Outstanding deposit and loan growth provided a balance to weak retail brokerage activity affecting the entire brokerage industry.
Our General Bank, which contributed 46 percent of total revenue, continued to experience outstanding deposit growth, particularly in low-cost core deposits, as well as solid loan growth. The General Bank’s operating leverage improved over the comparative period, with revenue growth of 10 percent and expense growth of 4 percent, which includes the addition of SouthTrust. Credit quality in the General Bank also continued to be strong, resulting in a 33 percent decline in its provision for credit losses.
The retail brokerage and asset management businesses in Capital Management represent 24 percent of our total revenue. Capital Management’s retail brokerage firm experienced subdued brokerage activity in 2004, dampening results. Growth in commissions and in fiduciary and asset management fees largely reflected the full year impact of the retail brokerage transaction. Capital Management’s businesses are poised to benefit as markets improve. In addition, we anticipate earnings to benefit from expense savings after we complete the retail brokerage integration in the first half of 2005.
Wealth Management’s contribution to revenue was 5 percent with record earnings fueled by solid momentum in both net interest income and in trust and investment management fees. Average loans grew 17 percent and average core deposits grew 13 percent, while assets under management rose 10 percent on improved market valuations and additions from acquisitions.
Our Corporate and Investment Bank, which contributed 23 percent of total revenue, gained new business and performed well in 2004, with market share gains particularly in loan syndications, structured products, investment grade bonds, and improved principal investing results. Improving credit conditions and lower loan outstandings reduced the use of economic capital.
In addition, as we manage interest rate risk, we believe a rising rate environment – assuming that it is accompanied by a rebound in business activity in the wake of a more robust economy – will produce many benefits for our business model. Since the beginning of 2004, we have repositioned our balance sheet to be relatively neutral under a broad range of interest rate scenarios. Our balance sheet is strong and “well capitalized” under regulatory guidelines with a tier 1 capital ratio of 8.01 percent and a leverage ratio above 6 percent at December 31, 2004.
Wachovia’s board of directors increased the quarterly dividend paid to common stockholders 31 percent from 35 cents per share in the fourth quarter of 2003 to 46 cents in the fourth quarter of 2004. In 2004, we paid common stockholders total
18
dividends of $2.3 billion, or $1.66 per share, compared with $1.7 billion, or $1.25 per share, in 2003. This represented dividend payout ratios on earnings excluding merger-related and restructuring expenses, other intangible amortization and the change in accounting principle of 40.00 percent in 2004 and 34.72 percent in 2003. The 2004 payout ratio was in line with our goal of paying out 40 percent to 50 percent of earnings on this basis.
Outlook
As we look into the future, our efficiency initiatives and revenue growth strategies, fueled by momentum in our major businesses, give us confidence Wachovia will be one of the leading growth companies in our industry.
We continued to make excellent progress in meeting our corporate objectives of quality earnings growth, increased distribution of products and services, hallmark customer service, disciplined expense control and balance sheet strength. Based on our consistent performance, confidence in our business model, capital strength and improving market conditions, we have updated our financial outlook for 2005. Economic assumptions used to formulate the 2005 outlook include growth in the real gross domestic product (GDP) of 3.30 percent; inflation (based on the Consumer Price Index) of 2.80 percent; a federal funds rate of 3.25 percent by December 2005; a 10-year Treasury bond rate of 4.50 percent by December 2005; and growth in the S&P 500 index of 6 percent. This outlook compares growth rates from an illustrative combined Wachovia-SouthTrust, as if the two companies had been merged on January 1, 2004. This illustrative comparison includes Wachovia’s full year 2004 results plus SouthTrust’s results from January 1, 2004, to October 31, 2004, and includes deposit base and other intangible amortization. More information about the combined illustrative financial information is included in Wachovia’s Current Report on Form 8-K dated January 19, 2005. The following outlook is for the full year 2005:
| n |
Net interest income growth in the
low single-digit percentage range on a tax-equivalent
basis;
|
|
|
|
||
| n |
A 10 basis point to 15 basis
point decline over the course of the year in the net
interest margin from 3.42 percent for full year 2004;
|
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||
| n |
Fee income growth in the low- to mid-teens percentage range;
|
| n |
Noninterest expense growth
(excluding merger-related and restructuring expenses)
in the low single-digit percentage range, reflecting an
estimated $250 million of incremental expense savings
related to the retail brokerage integration, $250
million related to SouthTrust, and approximately $150
million in 2005 related to our efficiency initiative;
|
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| n |
Minority interest expense
(excluding merger-related and restructuring expenses)
in the range of 3.5 percent to 4.5 percent of pre-tax
income (before minority interest expense);
|
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| n |
Loan growth in the mid- to
high-single-digit percentage range, including consumer
loan growth and commercial loan growth both in the mid-
to high-single-digit range;
|
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| n |
Net charge-offs in the 15 basis
point to 25 basis point range with provision expense
also expected to be in this range;
|
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| n |
An effective tax rate of
approximately 35.0 percent to 35.5 percent on a
tax-equivalent basis;
|
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| n |
A leverage ratio above 6 percent
and a tangible capital to tangible asset ratio of
approximately 4.7 percent to 4.8 percent;
|
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| n |
A dividend payout ratio of 40
percent to 50 percent of earnings excluding
merger-related and restructuring expenses and other
intangible amortization; and
|
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||
| n |
Use of excess capital to
opportunistically repurchase shares, to reinvest in our
businesses and to undertake financially attractive,
shareholder friendly acquisitions.
|
Looking forward, we believe we have strengthened our competitive position through our merger with SouthTrust. This merger creates clear market leadership in a number of high-growth southeastern states and accelerates our expansion into attractive Texas markets. Key business and management decisions have been made, and an experienced merger integration team is in place to implement a detailed merger integration plan. At consummation, Wachovia issued 0.89 shares of its common stock for each share of SouthTrust common stock, or 298 million Wachovia shares. We project $255 million in annual after-tax expense reductions after a 15-month integration period, and one-time costs, including merger-related and restructuring expenses and exit cost purchase accounting adjustments, of $431 million after tax. In addition, we have recorded preliminary fair market value purchase accounting adjustments of $267 million after tax, representing a net increase in goodwill. These are preliminary adjustments and
19
Management’s Discussion and Analysis
are subject to further refinements. We expect to complete the divestiture of 18 SouthTrust branches consisting of approximately $600 million in deposits in the first quarter of 2005.
We continue to evaluate our operations and organizational structures to ensure they are closely aligned with our goal of maximizing performance through increased efficiency and competitiveness in our four core businesses. In conjunction with these efforts, we have established overhead efficiency targets, excluding merger-related and restructuring expenses, changes in accounting principle and intangible amortization, for each of our four businesses and for the overall company to achieve by 2007. These 2007 targets are as follows: General Bank, 45 percent to 47 percent; Capital Management, 75 percent to 77 percent; Wealth Management, 60 percent to 62 percent; and Corporate and Investment Bank, 49 percent to 51 percent; and for the company overall, 52 percent to 55 percent.
We are striving to make Wachovia a more efficient company, as defined by the overhead efficiency ratio, but it is not our goal to have the lowest overhead efficiency ratio in our peer group, because of our mix of businesses. We believe we will slow expense growth by $600 million to $1.0 billion by 2007. We believe this will result in position reductions in the range of 3,500 to 4,000, although we also expect to add positions in higher growth businesses. We believe approximately 20 percent of these reductions will result from normal attrition. To date, we have identified initial expense reduction opportunities in the range of $400 million to $500 million and work continues. We also expect to reinvest approximately 30 percent to 50 percent of the identified savings to increase revenues in our higher growth businesses.
When consistent with our overall business strategy, we may consider disposing of certain assets, branches, subsidiaries or lines of business. We continue to routinely explore acquisition opportunities in areas that would complement our core businesses, and frequently conduct due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities could occur.
Critical Accounting Policies
To understand our financial position and results of operations, it is important to understand our more significant accounting policies and the extent to which we use judgment and esti-
mates in applying those policies. Our accounting and reporting policies are in accordance with GAAP and they conform to general practices within the applicable industries. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimation. We have identified five policies as being particularly sensitive in terms of judgments and the extent to which estimates are used: allowance for loan losses and the reserve for unfunded lending commitments (which is recorded in other liabilities); fair value of certain financial instruments; consolidation; goodwill impairment; and contingent liabilities. Other accounting policies, such as pension and stock option fair value determination, also involve a significant amount of judgments and estimates, but the total amounts involved are not significant to our consolidated results of operations. Periodically, the Audit Committee of our board of directors reviews these policies, the judgments and estimation processes involved, and related disclosures.
Our policy on the allowance for loan losses applies to loans in all our segments, most significantly the Corporate and Investment Bank, the General Bank and the Parent, but is different from the methodology used to allocate the provision for credit losses for segment reporting purposes. The policy on fair value of certain financial instruments applies largely to the Corporate and Investment Bank and the Parent, both of which hold large portfolios of securities and derivatives. The policy on consolidation also affects the Corporate and Investment Bank and the Parent, both of which are involved in structuring securitization transactions. The policies on goodwill impairment and contingent liabilities affect all segments.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments The allowance for loan losses and reserve for unfunded lending commitments (collectively, the “allowance for credit losses”) are maintained at levels we believe are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the consolidated financial statements. We have developed policies and procedures for assessing the adequacy of the allowance for loan losses and reserve for unfunded lending commitments that reflect our careful assessment of credit risk considering all information available to us. Where appropriate, this assessment includes monitoring qualitative and quantitative trends, including changes in the levels of past due, criticized and nonperforming loans. In addition, we rely on estimates and exercise judgment in assessing credit risk. Depending on changes in circumstances, future assessments of credit risk may yield materially different results
20
from our estimates, and an increase or a decrease in the allowance for credit losses may be required.
We employ a variety of modeling and estimation tools for measuring credit risk that are used in developing an appropriate allowance for credit losses. These tools are periodically reevaluated and refined as appropriate. For example, in 2004, we refined our allowance for credit losses model to better align its methodology with our current framework for analyzing credit risk. This refinement did not significantly change the level of our allowance or our view as to its adequacy. The following provides a description of each component of our allowance for credit losses, the techniques we currently use and the estimates and judgments inherent to each.
Our refined model for the allowance for loan losses has four components: formula-based components for both the commercial and consumer portfolios, each including an adjustment for historical loss variability; a reserve for impaired commercial loans; and an unallocated component. Our refined model enables us to more effectively align the allowance with the different types of credit risk inherent in our loan portfolio. Separate allowance ranges for commercial and consumer components permit us to specifically address the current trends and events affecting the credit risk in the loan portfolio.
For commercial loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed for commercial loans classified by credit grade. Average losses for each credit grade are computed using the annualized historical rate at which loans in each credit grade have defaulted (default rates) and the historical average losses realized for defaulted loans (“loss-given-default” or LGD). We have developed default rates by analyzing seven years of our default experience and over 20 years of comparable external data. Default rates, which are validated annually, are estimates derived from long-term averages and are not conditioned on short-term economic or environmental factors. LGD rates have also been developed using seven years of internal and industry data.
For consumer loans, the formula-based component of the allowance for loan losses is based on loss rates for specific groups of similar loans in each product category. The loss rates are based on historical loss data, historical delinquency patterns, vintage analyses, credit score-based forecasting methods and stress tests.
For both commercial and consumer loans, the formula-based loss components include additional amounts to establish reasonable ranges that consider observed historical variability in losses. Factors we may consider in setting these amounts include, but are not limited to, industry-specific data, portfolio-specific risks or concentrations, and macroeconomic conditions. In an economic downturn, for example, the timing and magnitude of credit risk deterioration in certain industries may be faster and more severe than in others. In addition, adverse trends in macroeconomic factors such as unemployment rates, income growth, inflation and political events are likely to affect some borrowers’ ability to meet loan payments. Including historical variability in our model enables us to capture probable incurred losses that are not yet evident in current default grades, delinquencies or other credit risk measurement tools.
At December 31, 2004, the formula-based components of the allowance were $1.9 billion for commercial loans and $759 million for consumer loans.
We have established a specific reserve within the allowance for loan losses for impaired loans. We define impaired loans as commercial loans on nonaccrual status. We individually review any impaired loans with a minimum total exposure of $10 million in the Corporate and Investment Bank and $5 million in other segments. The reserve for each individually reviewed loan is based on the difference between the loan’s carrying amount and the loan’s estimated fair value. Fair value is estimated using the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. No other reserve is provided on impaired loans that are individually reviewed. At December 31, 2004, the allowance for loan losses included $31 million and the reserve for unfunded lending commitments included $16 million for individually reviewed impaired facilities.
The allowance for loan losses is supplemented with an unallocated component. This component reflects in part the inherent uncertainty of estimates and is designed as a final tool in fully capturing probable incurred losses in the loan portfolio. The amount of this component and its relationship to the total allowance for loan losses may change from one period to another. We anticipate that the unallocated component of the allowance will generally not exceed 5 percent of the total allowance for loan losses. At December 31, 2004, the unallocated component of the allowance for loan losses was $90 million, or 3 percent of the allowance for loan losses.
21
Management’s Discussion and Analysis
In June 2004, we reclassified the reserve for unfunded lending commitments that relates only to commercial business from the allowance for loan losses to other liabilities. The amount of the reserve is based on the modeling process that is consistent with the process described above for the commercial portion of the allowance for loan losses. In addition, this model includes as a key factor the historical average rate at which unfunded commercial exposures have been funded at the time of default. At December 31, 2004, the reserve for unfunded lending commitments was $154 million.
The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments as described above does not diminish the fact that the entire allowance for loan losses and reserve for unfunded lending commitments is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments. Our Corporate Loan Loss Allowance Committee, chaired by our chief risk officer, meets quarterly and is responsible for the review and approval of the allowance for credit losses as well as for policies and procedures connected with its determination. The Risk Committee of the board of directors reviews and approves policies governing the determination of the allowance for credit losses.
In addition to compliance with GAAP, the allowance for credit losses is also subject to review by banking regulators. Our primary bank regulators regularly conduct examinations of the allowance for credit losses and make assessments regarding its adequacy and the methodology employed in its determination.
Fair Value of Certain Financial Instruments Fair value is defined as the amount at which a financial instrument could be exchanged in a transaction between willing, unrelated parties in a normal business transaction. For purposes of this critical accounting policy, financial instruments include:
| n |
Instruments held for trading,
including debt and equity securities and derivatives,
as well as principal investments, which are recorded at
fair value with unrealized gains and losses recorded in
earnings;
|
|
|
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||
| n |
Debt and equity securities and
retained interests in securitizations classified as
available for sale, which are recorded at fair value
with unrealized gains and losses recorded in
stockholders’ equity; and
|
| n |
Derivatives designated as fair
value or cash flow accounting hedges, which are
recorded at fair value with unrealized gains and losses
recorded in earnings for fair value hedges and
stockholders’ equity for cash flow hedges.
|
Fair value is based on quoted market prices for the same instrument or for similar instruments adjusted for any differences in terms. If market prices are not available, then we estimate the fair value using models employing techniques such as discounted cash flow analyses. The assumptions used in the models, which typically include assumptions for interest rates, credit losses and prepayments, are independently verified against market observable data where possible. Discount rates used are those considered to be commensurate with the risks involved. All internally developed models are subject to independent validation. The valuation of financial instruments, particularly those with little or no liquidity, is subjective and involves a high degree of judgment. Small changes in assumptions can result in significant changes in valuation.
Principal investments, which are classified in other assets on our consolidated balance sheet, are recorded at fair value. Realized and unrealized gains and losses are included in principal investing income (loss) in the results of operations. For public equity investments, fair value is based on quoted market prices, net of applicable discounts for trading restrictions and liquidity. Non-public securities lack relevant market data. Therefore, we generally use our original cost basis as an estimate of fair value of our direct investment in these securities. This changes if the non-public entity in which we have invested has raised additional debt or equity capital, and we believe such a transaction, taking into consideration differences in the terms of securities, is a better indicator of fair value, or we believe the fair value is less than our original cost basis. All our direct investments are evaluated quarterly for declines in fair value.
For investments in private equity funds, we rely on information provided by the fund managers in initially determining estimated fair value. We meet with representatives of fund sponsors regularly and review quarterly fund reports to determine a given fund’s outlook and the need to record any write-down. We also consider valuation factors such as the age of the fund and industry concentrations to derive our final estimated fair value. Due to the significant subjectivity of these factors and the impact they have on fair value estimates, our policy is to recognize gains on our fund investments only when they have been realized through fund distributions. We record reductions in fair value of our fund investments, based on this valuation process, when identified.
22
At December 31, 2004, 37 percent of our total assets and 15 percent of our total liabilities were recorded at fair value. Of this total, 87 percent were valued using quoted market prices for same or similar securities; 11 percent using modeling techniques where the significant assumptions were based on market observations; and 2 percent using modeling techniques where significant assumptions were based on internal estimates rather than market observations.
An internal, independent valuation team, using information validated by extensive market observations, performs the valuation of those securities with no quoted market prices. The Securities Retention Committee, consisting of management from our treasury, finance, credit and business units, reviews all the valuations developed by this independent valuation team. The valuations of our principal investing portfolio are reviewed on a quarterly basis by our Principal Investing Oversight Committee, which includes management from Corporate and Investment Bank, finance, risk management and Principal Investing.
We believe we have the appropriate policies and procedures in place and that we use the appropriate technology in terms of modeling and projections to enable us to value these financial instruments in a reasonable and consistent manner. However, valuations are subject to change as a result of external factors beyond our control that have a substantial degree of uncertainty.
Consolidation In certain asset securitization transactions that meet the applicable criteria to be accounted for as sales, we sell assets to an entity referred to as a qualifying special-purpose entity (QSPE), which we do not consolidate. In order for a special purpose entity to be qualifying, it must meet a series of requirements at the inception of the transaction and on an ongoing basis. These requirements strictly limit the activities in which a QSPE may engage and the types of assets and liabilities it may hold. In some cases, these criteria are subject to interpretation. To the extent any QSPE fails to meet these criteria, we would be required to consolidate its assets and liabilities, subject to the analysis below.
We also sell assets to and have involvement with other special purpose entities, some of which are variable interest entities. Under the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities , a VIE is consolidated by the company holding the variable interest that will absorb a majority of the VIE’s expected losses, or receive a majority of the expected
residual returns, or both. The company that consolidates a VIE is referred to as the primary beneficiary.
A variety of complex estimation processes involving both qualitative and quantitative factors are used to determine whether an entity is a VIE, and to analyze and calculate its expected losses and its expected residual returns. These processes involve estimating the future cash flows of the VIE, analyzing the variability in those cash flows, and allocating the losses and returns among the parties holding variable interests. Also, there is a significant amount of judgment required in interpreting the provisions of FIN 46R and applying them to specific transactions.
In our case, FIN 46R applies to certain financing activities primarily conducted for corporate clients, including conduits that we administer, transactions such as collateralized debt obligations and collateralized mortgage obligations, partnerships, synthetic lease trusts and trust preferred securities. To the extent we are or we become, after certain reconsideration events, the primary beneficiary of a VIE, we would be required to consolidate its assets and liabilities.
Goodwill Impairment We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The first step in this test involves assigning tangible assets and liabilities, identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a second test is required to measure the amount of goodwill impairment. The second test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, we would recognize an impairment loss in an amount equal to that excess.
Fair values of reporting units were determined using discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses. The estimated cash flows were discounted in 2004 using market-based discount rates ranging from 7.6 percent to 12.1 percent.
As discussed in the Business Segments section, we operate in four core business segments. We determined that our reporting units for testing goodwill are our lines of business that are one level below the core business segments, where applicable. These reporting units are Wealth Management; General Bank: Commercial, Retail and Small Business; Capital Management:
23
Management’s Discussion and Analysis
Retail Brokerage Services and Asset Management; and Corporate and Investment Bank: Lending, Global Treasury and Trade Finance, Investment Banking and Principal Investing.
Our goodwill impairment testing for 2004 indicated that none of our goodwill was impaired. If we were to decrease estimated future net cash flows by 20 percent or increase our discount rates by 20 percent, the fair value of each reporting unit would continue to be in excess of its carrying amount, which indicates none of our goodwill would be impaired.
Note 1 and Note 8 in the Notes to Consolidated Financial Statements provide additional information related to the evaluation of goodwill and to the carrying amounts by core business segments.
Contingent Liabilities We are subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against us and/or our subsidiaries with respect to transactions in which we and/or our subsidiaries acted as a lender, an underwriter, a financial advisor, a broker, or acted in a related capacity. Reserves are established for legal and other claims when it becomes probable we will incur a loss and the amount can be reasonably estimated. We involve internal and external experts, such as attorneys, consultants and other professionals, in assessing probability and in estimating any amounts involved. Throughout the life of a contingency, we or our expert advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for these claims.
Corporate Results of Operations
Our results for 2004 reflect the November 1, 2004, merger of Wachovia and SouthTrust Corporation. Because this acquisition was included in only two months of our results of operations, its impact on 2004 results was not significant, except as noted.
Net Interest Income and Margin Banks earn net interest income on the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-bearing liabilities, primarily deposits and other funding sources. Net interest income increased 12 percent in 2004 from 2003 due to strong balance sheet growth. This growth offset com-
Average Balance Sheets and Interest Rates
| Years Ended December 31, | ||||||||||||||||
| (In millions) | 2004 | 2003 | ||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||
| Balances | Rates | Balances | Rates | |||||||||||||
|
Interest-bearing bank balances
|
$ | 3,578 | 1.43 | % | $ | 3,836 | 1.31 | % | ||||||||
|
Federal funds sold
|
24,940 | 1.37 | 16,780 | 1.02 | ||||||||||||
|
Trading account assets
|
28,944 | 4.28 | 18,395 | 4.43 | ||||||||||||
|
Securities
|
100,960 | 4.90 | 78,593 | 5.27 | ||||||||||||
|
Commercial loans, net
|
99,026 | 4.63 | 91,752 | 4.61 | ||||||||||||
|
Consumer loans, net
|
73,007 | 5.24 | 66,575 | 5.65 | ||||||||||||
|
Total loans, net
|
172,033 | 4.89 | 158,327 | 5.04 | ||||||||||||
|
Loans held for sale
|
16,735 | 4.42 | 9,110 | 4.34 | ||||||||||||
|
Other earning assets
|
11,064 | 3.30 | 7,199 | 3.38 | ||||||||||||
|
Risk management derivatives
|
– | 0.41 | – | 0.53 | ||||||||||||
|
Total earning assets
|
358,254 | 4.90 | 292,240 | 5.25 | ||||||||||||
|
Interest-bearing deposits
|
196,142 | 1.12 | 155,287 | 1.28 | ||||||||||||
|
Federal funds purchased
|
47,321 | 1.35 | 44,326 | 1.19 | ||||||||||||
|
Commercial paper
|
12,034 | 1.35 | 7,196 | 1.00 | ||||||||||||
|
Securities sold short
|
11,025 | 2.88 | 7,925 | 2.64 | ||||||||||||
|
Other short-term borrowings
|
6,087 | 0.90 | 5,166 | 0.77 | ||||||||||||
|
Long-term debt
|
39,780 | 4.00 | 36,676 | 4.02 | ||||||||||||
|
Risk management derivatives
|
– | 0.12 | – | 0.06 | ||||||||||||
|
Total interest-bearing
liabilities
|
312,389 | 1.71 | 256,576 | 1.74 | ||||||||||||
|
Net interest income and margin
|
$ | 12,211 | 3.41 | % | $ | 10,863 | 3.72 | % | ||||||||
pression in the net interest margin, which declined 31 basis points to 3.41 percent primarily due to the impact of growth in our FDIC-insured sweep product and related investments, as well as to the July 1, 2003, consolidation of our commercial paper conduits and to a larger retail brokerage operation. In addition, margin compression was driven by growth in low-spread trading assets as well as declining yields on consumer loans as higher yielding mortgage loans were refinanced over the past two years and replaced with newly originated lower yielding mortgage loans. The average federal funds discount rate increased 22 basis points in 2004 from 2003, while average longer-term two-year and 10-year treasury note rates increased 73 basis points and 26 basis points, respectively.
In June 2004, Wachovia and the Internal Revenue Service settled all issues relating to the IRS’s challenge of our tax position on lease-in, lease-out (LILO) transactions entered into by First Union Corporation and legacy Wachovia Corporation. Our current and deferred income tax liabilities previously accrued were adequate to cover this resolution. For the purposes of presenting average balances and net interest income summaries, deferred income taxes related to leveraged leases are netted against the lease balance included in average commercial loans.
24
Accordingly, the reduction of deferred income tax liabilities associated with this resolution increased the average lease balances and reduced the related average interest rate earned. In 2004, this resulted in an increase in average loans of $1.4 billion and a reduction in the average interest rate earned on commercial loans of approximately 6 basis points and, where separately reported, on lease financing of approximately 164 basis points.
In order to maintain our targeted interest rate risk profile, derivatives are used to manage the interest rate risk inherent in our assets and liabilities. In 2004, net interest rate risk management-related derivative income contributed $1.1 billion to net interest income, representing a 30 basis point impact on our net interest margin, compared with $1.4 billion, or 47 basis points, in 2003. All risk management-related derivatives are designated and accounted for as accounting hedges.
As discussed previously, we began marketing our
FDIC-insured sweep product to brokerage customers in
the fourth quarter of 2003. Since then, customer
balances have been transferred from money market mutual
fund accounts to these deposit accounts. We invested
these deposits in securities that together produce an
asset and liability structure that enables us to
maintain our desired interest rate sensitivity. By
December 31, 2004, this product had captured $29.9
billion in new deposits, up $18.0 billion from year-end
2003. These deposits represented $24.3 billion in
average core deposits in 2004.
Fee and Other Income
Years Ended December 31,
(In millions)
2004
2003
2002
$
1,978
1,731
1,698
1,226
1,017
962
2,601
2,318
1,742
2,772
2,345
1,888
911
787
681
35
110
(71
)
261
(139
)
(266
)
(10
)
45
169
1,005
1,268
1,087
$
10,779
9,482
7,890
Fee and Other Income Traditionally banks earn fee and other income from service charges on deposit accounts and other banking products and services, and these continue to be a significant component of our fee income. In addition, we have balanced our earnings with a diversified mix of businesses that provide alternative investment and financing products and services for the more sophisticated needs of our clients. These
alternative products produce income in our brokerage, asset management and investment banking businesses from commissions and fees for financial advice, custody, insurance and financing alternatives such as loan syndications and asset securitizations. Additionally, we realize gains from selling our investments in debt and equity securities. The fees on many of these products and services are based on market valuations and therefore are sensitive to movements in the financial markets. As the financial markets begin to recover, we are seeing gradual improvement in these market-based fees.
Fee and other income increased 14 percent in 2004 from 2003, reflecting in part the full year impact in 2004 of the July 1, 2003, retail brokerage transaction on commissions and on fiduciary and asset management fees. Service charges increased 14 percent, reflecting growth in checking accounts. Other banking fees increased 21 percent, reflecting growth in interchange income from debit and credit card transactions. Advisory, underwriting and other investment banking fees increased 16 percent, driven by growth in investment grade, loan syndications and equity capital markets originations. Principal investing, which includes the results of proprietary investments in equity and mezzanine securities, had net gains in 2004 of $261 million, due largely to higher realized gains in the recovering financial markets, compared with net losses of $139 million in 2003.
In 2004, we had net securities gains of $91 million from sales of securities received in settlement of problem loans, offset by net losses from portfolio sales of $43 million and impairment losses of $58 million. Net securities gains in 2003 included net gains from portfolio sales of $245 million offset by $200 million in impairment losses.
Other income declined 21 percent in 2004 from 2003 primarily due to a $264 million decline in asset securitization income, including $57 million of losses on auto loan securitizations. We also recognized a $68 million loss associated with a sale and leaseback of corporate real estate. We expect the sale and leaseback of corporate real estate will reduce occupancy and other related expenses annually by $22 million.
Noninterest Expense Noninterest expense increased 10 percent in 2004 from 2003 primarily reflecting increased variable pay on higher revenues, as well as the full year effect of the retail brokerage transaction and continued investments for the future. Salaries and employee benefits increased 13 percent primarily due to higher incentives, largely from the retail brokerage transaction, higher variable incentives in other business
25
Management’s Discussion and Analysis
Noninterest Expense
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
Salaries and employee benefits
|
$ | 8,703 | 7,708 | 6,597 | ||||||||
|
Occupancy
|
947 | 851 | 786 | |||||||||
|
Equipment
|
1,052 | 1,021 | 946 | |||||||||
|
Advertising
|
193 | 160 | 80 | |||||||||
|
Communications and supplies
|
620 | 598 | 545 | |||||||||
|
Professional and consulting fees
|
548 | 460 | 421 | |||||||||
|
Sundry expense
|
1,728 | 1,521 | 1,303 | |||||||||
|
Other noninterest expense
|
13,791 | 12,319 | 10,678 | |||||||||
|
Merger-related and restructuring expenses
|
444 | 443 | 387 | |||||||||
|
Other intangible amortization
|
431 | 518 | 628 | |||||||||
|
Total noninterest expense
|
$ | 14,666 | 13,280 | 11,693 | ||||||||
units, and the SouthTrust merger. Sundry expense increased 14 percent year over year primarily due to the full year impact of the retail brokerage transaction and the SouthTrust merger.
Merger-Related and Restructuring Expenses Merger-related and restructuring expenses in 2004 of $444 million included $41 million related to the SouthTrust merger, $298 million related to the retail brokerage transaction, the integration of which is nearing completion, and $108 million in final charges related to the First Union-Wachovia merger of 2001, offset by $3 million of reversals of previously recorded restructuring expenses. In 2003, we recorded $443 million of these expenses, relating to the retail brokerage and First Union-Wachovia transactions. See Note 16: Merger-Related and Restructuring Expenses in the notes to our consolidated financial statements.
We currently expect total merger-related and restructuring expenses for the SouthTrust merger to be $253 million before tax, of which $41 million had been recorded by December 31, 2004, and for the retail brokerage transaction, $500 million, of which $383 million had been recorded by December 31, 2004. We expect the remaining retail brokerage transaction expenses will be incurred through the first half of 2005 and the remaining SouthTrust expenses will be incurred through the first quarter of 2006.
Income Taxes Income taxes were $2.4 billion in 2004, an increase of $586 million from 2003. The effective tax rates were 31.70 percent in 2004 and 30.16 percent in 2003. On a fully tax-equivalent basis, the tax rate was 33.87 percent in 2004 and 32.97 percent in 2003. The increases in these rates were primarily caused by higher pretax income in 2004.
Business Segments
We provide a diversified range of banking and nonbanking financial services and products primarily through our four core business segments, the General Bank, Capital Management, Wealth Management, and the Corporate and Investment Bank. In this section, we discuss the performance and results of our business segments in 2004. See the Comparison of 2003 with 2002 section for details on business segment trends in that period. Business Segment data excludes merger-related and restructuring expense.
Note 14: Business Segments in the Notes to Consolidated Financial Statements discusses in detail the management reporting model upon which our segment information is based, and also provides a reconciliation of business segment earnings to the consolidated results of operations.
Key Performance Metrics Business segment earnings are the primary measure of segment profit or loss we use to assess segment performance and to allocate resources. Economic profit, risk-adjusted return on capital (RAROC) and efficiency ratios are additional metrics, all of which are based on and calculated directly from segment earnings, that assist management in evaluating segment results. These two measures are calculated as follows:
Economic Profit = Economic Net Income – Capital Charge
RAROC = Economic Net Income / Economic Capital
Economic profit is a measure of the earnings above an explicit charge for the capital used to support the transaction or business line. It is calculated as a dollar amount of return. RAROC is a ratio of return to risk and is stated as a percentage.
The return component of both of these measures is economic net income, which reflects two adjustments to segment earnings. First, we replace current period provision expense with expected losses (a statistically derived forward-looking number that represents the average expected loan losses over time), and we remove certain noncash expenses. The risk component for these measures is economic capital, which is discussed below, as is the capital charge used in calculating economic profit.
Economic Capital A disciplined and consistent approach to quantifying risk is required to achieve an accurate risk-based pricing and value-based performance reporting system. We employ an economic capital framework developed to measure the declines in economic value that a transaction, portfolio or
26
business unit could incur given an extreme event or business environment. The greater the frequency and severity of potential negative outcomes, the greater the levels of capital required.
The five types of risk to which we attribute economic capital are:
| n |
Credit Risk:
Credit risk, which
represented 49 percent of our economic capital in 2004,
is the risk of loss due to adverse changes in a
borrower’s ability to meet its financial obligations
under agreed upon terms;
|
|
|
|
||
| n |
Market Risk:
The major components
of market risk, which represented 25 percent of
economic capital, are interest rate risk inherent in
our balance sheet, price risk in our principal
investing portfolio and market value risk in our
trading portfolios; and
|
|
|
|
||
| n |
Operational, Business and Other
Risk:
Operational risk is the risk of loss from
inadequate or failed internal processes, people and
systems or from external events. This risk is inherent
in all our businesses. Business risk is the potential
losses our business lines could suffer that have not
been captured elsewhere (such as losses from a
difficult business environment). Business and
operational risk capital are the primary types of
capital held by non-balance sheet intensive businesses
such as trust, asset management and brokerage.
Other risk represents the loss in value that other
miscellaneous and fixed assets could realize that are
not capitalized as market risk. Operational, business
and other risk represented 26 percent of our economic
capital in 2004.
|
Our economic capital models are calibrated to achieve a standard of default protection equivalent to a “AA” rated institution. These models were developed to determine economic capital under a consistent, specific, internal definition of risk (that is, uncertainty in economic value). Accordingly, our required aggregate economic capital can be materially different from other capital measures developed under GAAP, regulatory or rating agency frameworks.
We measure the financial returns achieved by a transaction or business unit after deducting a charge for the economic capital required to support the risks taken. We calculate this charge by multiplying the attributed economic capital times the cost of our equity capital (derived through a capital asset pricing model approach).
Capital Charge = Economic Capital x Cost of Capital
Since 2002, the cost of capital has been 11 percent. The cost of capital is reviewed annually by our treasury division and approved by the RAROC Advisory Committee, which is a subcommittee of the Asset and Liability Management Committee. The Risk Governance section has more information about these committees.
We use our RAROC and economic profit measures in a variety of ways. They are used in the pricing of transactions such as loans, commitments and credit substitutes in each of our business segments. These transactional measures are aggregated to provide portfolio, business line, and ultimately business segment RAROC and economic profit measures. Incremental activities such as new product analysis, business line extensions and acquisitions are also measured using these tools. RAROC and/or economic profit are significant components of line incentive compensation programs and senior management incentive plans.
Changes in Methodology We continuously assess assumptions, methodologies and reporting classifications to better reflect the true economics of our business segments. Several refinements have been incorporated for 2004. We periodically review our cost base and the related activities to better align support costs to our business segments. This includes periodic cost studies, such as a 2003 study of activities in our General Bank retail branches. This study, using the increased amount of customer-related statistical data available, resulted in a better understanding of the costs related to certain services provided in the branches. The more detailed cost understanding led to an increase in the amount of allocated costs related to these services, some of which relate to businesses outside the General Bank.
As a result of these refinements, cost allocation methodologies used in 2004 are different than the methodologies used in the original reporting of 2003 results. While these refinements do not represent a significant change in the results of operations of our segments, we have updated the 2003 amounts to allow for a consistent comparison of segment results. The impact to segment earnings for full year 2003 as a result of these refinements was a $4 million decrease in the General Bank, a $17 million decrease in Capital Management, a $13 million decrease in Wealth Management, a $6 million decrease in the Corporate and Investment Bank, and a $40 million increase in the Parent.
27
Management’s Discussion and Analysis
General Bank The General Bank segment includes our Retail and Small Business and Commercial lines of business. The General Bank’s products include:
| n |
Retail Bank:
Checking, savings
and money market accounts, time deposits and IRAs, home
equity, residential mortgage, student and personal
loans, debit and credit cards, mutual funds and
annuities;
|
|
|
|
||
| n |
Small Business:
Deposit, credit
and investment products and services to businesses with
annual revenues up to $3 million; and
|
|
|
|
||
| n |
Commercial Banking:
Commercial
deposit, lending, treasury management, dealer financial
services and commercial real estate solutions to
businesses typically with annual revenues between $3
million and $250 million.
|
The acquisition of SouthTrust has the most operational impact on our General Bank, but the impact on General Bank results in 2004 was not significant, except as noted, because this acquisition was included in only the final two months of the year. In 2004 compared with 2003, General Bank segment earnings were a record $3.1 billion, an increase of 24 percent, reflecting a 10 percent increase in revenue largely driven by outstanding core deposit growth and growth in consumer real estate-secured loans. Noninterest expense grew 4 percent in the same period principally due to SouthTrust. This strong expense management resulted in an improved overhead efficiency ratio of 52.01 percent, excluding merger-related and restructuring expenses and other intangible amortization, an improvement from 55.07 percent a year earlier.
Fee and other income increased 11 percent from 2003 due to higher customer transaction volume and the addition of SouthTrust. Fee and other income includes service charges, interchange income, other banking fees and mortgage banking origination revenues. Service charges increased $246 million to $1.5 billion, interchange income increased $81 million to $347 million and other banking fees increased $42 million to $274 million. Mortgage banking origination fee income decreased $39 million to $127 million due to lower origination volume. Interchange income, mortgage banking origination fee income and amortization of servicing rights are included in other banking fees in the consolidated statements of income.
Asset sale and securitization income in the General Bank reflects the sale of mortgage loans and related income; securitizations and related gains on the sales of consumer real estate-secured loans (for example, prime equity lines) are
General Bank
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2004 | 2003 | 2002 | |||||||||
|
Income statement data
|
||||||||||||
|
Net interest income
(Tax-equivalent)
|
$ | 8,046 | 7,315 | 6,860 | ||||||||
|
Fee and other income
|
2,431 | 2,191 | 2,095 | |||||||||
|
Intersegment revenue
|
168 | 179 | 162 | |||||||||
|
Total revenue
(Tax-equivalent)
|
10,645 | 9,685 | 9,117 | |||||||||
|
Provision for credit losses
|
315 | 470 | 471 | |||||||||
|
Noninterest expense
|
5,536 | 5,334 | 5,120 | |||||||||
|
Income taxes
(Tax-equivalent)
|
1,740 | 1,416 | 1,287 | |||||||||
|
Segment earnings
|
$ | 3,054 | 2,465 | 2,239 | ||||||||
|
Performance and other data
|
||||||||||||
|
Economic profit
|
$ | 2,331 | 1,799 | 1,550 | ||||||||
|
Risk adjusted return on capital (RAROC)
|
52.67 | % | 42.83 | 38.31 | ||||||||
|
Economic capital, average
|
$ | 5,592 | 5,651 | 5,677 | ||||||||
|
Cash overhead efficiency ratio
(Tax-equivalent)
|
52.01 | % | 55.07 | 56.15 | ||||||||
|
Lending commitments
|
$ | 93,608 | 65,457 | 57,358 | ||||||||
|
Average loans, net
|
128,063 | 113,867 | 101,632 | |||||||||
|
Average core deposits
|
$ | 172,471 | 152,720 | 140,489 | ||||||||
|
FTE employees
|
43,388 | 34,552 | 36,521 | |||||||||
reflected in the Parent. In 2004 compared with 2003, asset sale and securitization income decreased $128 million to $57 million due to reduced sales of mortgages and servicing resulting from weaker volume. In 2004, asset sale and securitization income included $16 million in losses on related derivatives and $4 million in market value write-downs on loans held for sale compared with 2003 losses of $32 million and write-downs of $31 million. Asset sale and securitization income is included in other income in the consolidated statements of income.
The derivative transactions the General Bank enters into are designed to manage risk associated with its mortgage banking activities. These derivatives include economic hedges and, in certain cases, accounting hedges of mortgage loans held for sale and interest rate lock commitments, which are reported in the General Bank segment. These derivatives have no effect on interest income or interest expense.
The General Bank continues to do exceptionally well in attracting and retaining low-cost core deposits, with average low-cost core deposit balances increasing 21 percent from 2003 including the addition of SouthTrust. Core deposits include savings, interest-bearing checking accounts, noninterest-bearing and other consumer time deposits. Low-cost core deposits exclude consumer certificates of deposit and deposits held in our CAP Accounts. Net new retail checking accounts increased 571,000 in 2004, compared with an increase of 413,000 in 2003.
28
Average loans grew 12 percent from the prior year due primarily to growth in consumer real estate-secured and student loans, in middle market commercial and small business lending, and the addition of SouthTrust.
Provision expense declined by a third from 2003, primarily reflecting risk reduction strategies implemented in 2003, solid improvements in both commercial and consumer loan losses and a strengthening economy.
Capital Management Capital Management includes Retail Brokerage Services, which includes the retail brokerage and insurance groups; and Asset Management, which includes mutual funds, customized investment advisory services, and corporate and institutional trust services. Capital Management provides a full line of investment products and financial and retirement services, including:
| n |
Retail Brokerage Services:
Stocks, bonds, mutual funds, fixed and variable
annuities, asset management accounts, and other
investment products and services; and
|
|
|
|
||
| n |
Asset Management:
Mutual funds,
customized advisory services, defined benefit and
defined contribution retirement services, and corporate
and institutional trust services.
|
In 2004 compared with 2003, Capital Management’s segment earnings increased 24 percent based on revenue growth of 25 percent and expense growth of 25 percent, largely related to the full year impact in 2004 of the retail brokerage transaction completed on July 1, 2003. Revenue was $5.5 billion and included revenue from the retail brokerage businesses, which increased $964 million to $4.4 billion largely because 2004 included a full year of results related to the retail brokerage transaction, while 2003 included only six months of results from the combined operations. Retail brokerage transactional revenues of $2.2 billion increased 14 percent, while recurring and other revenues of $2.2 billion were up 48 percent. Revenue from the asset management businesses rose $107 million to $1.1 billion related to growth in assets under management and to the January 1, 2004, acquisition of a securities lending firm with $23 million in revenues.
Total assets under management and securities lending grew 21 percent from year-end 2003 to $297.2 billion, which included $42.7 billion related to our new securities lending business. Total net inflows were approximately $9.0 billion in 2004, excluding any acquisition impact and net money market fund outflows primarily related to the movement into
Capital Management
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2004 | 2003 | 2002 | |||||||||
|
Income statement data
|
||||||||||||
|
Net interest income
(Tax-equivalent)
|
$ | 555 | 249 | 162 | ||||||||
|
Fee and other income
|
4,948 | 4,191 | 3,051 | |||||||||
|
Intersegment revenue
|
(48 | ) | (69 | ) | (72 | ) | ||||||
|
Total revenue
(Tax-equivalent)
|
5,455 | 4,371 | 3,141 | |||||||||
|
Provision for credit losses
|
– | – | – | |||||||||
|
Noninterest expense
|
4,608 | 3,684 | 2,556 | |||||||||
|
Income taxes
(Tax-equivalent)
|
308 | 251 | 214 | |||||||||
|
Segment earnings
|
$ | 539 | 436 | 371 | ||||||||
|
Performance and other data
|
||||||||||||
|
Economic profit
|
$ | 392 | 324 | 295 | ||||||||
|
Risk adjusted return on capital (RAROC)
|
40.14 | % | 42.84 | 53.87 | ||||||||
|
Economic capital, average
|
$ | 1,344 | 1,018 | 689 | ||||||||
|
Cash overhead efficiency ratio
(Tax-equivalent)
|
84.48 | % | 84.28 | 81.38 | ||||||||
|
Average loans, net
|
$ | 278 | 139 | 165 | ||||||||
|
Average core deposits
|
$ | 25,951 | 2,788 | 1,343 | ||||||||
|
FTE employees
|
19,579 | 19,937 | 12,648 | |||||||||
Total Assets Under Management
| Years Ended December 31, | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| (In billions) | Amount | Mix | Amount | Mix | Amount | Mix | ||||||||||||||||||
|
Assets under management
|
||||||||||||||||||||||||
|
Money market
|
$ | 63 | 24 | % | $ | 67 | 27 | % | $ | 81 | 35 | % | ||||||||||||
|
Equity
|
81 | 32 | 72 | 29 | 56 | 24 | ||||||||||||||||||
|
Fixed income
|
112 | 44 | 108 | 44 | 94 | 41 | ||||||||||||||||||
|
Total assets under management
|
$ | 256 | 100 | % | $ | 247 | 100 | % | $ | 231 | 100 | % | ||||||||||||
|
Securities lending
|
41 | – | – | – | – | – | ||||||||||||||||||
|
Total assets under management
and securities lending
|
$ | 297 | – | $ | 247 | – | $ | 231 | – | |||||||||||||||
the FDIC-insured sweep product. The inflows were led by strong institutional separate account fixed income flows and the transfer of $6.0 billion of Prudential money market assets into Evergreen funds. Continued positive net equity sales along with increased equity market valuations are creating a higher revenue-yielding mix of funds. Assets under management growth also reflected net asset appreciation of approximately $7.0 billion since year-end 2003 from increased market valuations.
Assets under management also include deposit balances related to the FDIC-insured sweep product, which grew to $29.9 billion compared with $11.8 billion at year-end 2003, contributing to net interest income growth. The asset shift to the FDIC-insured sweep product resulted in a 3 percent decline in mutual fund assets from 2003 to $106.4 billion. Despite
29
Management’s Discussion and Analysis
the decline in mutual fund assets, total assets under management at December 31, 2004, increased 4 percent from December 31, 2003, to $256.3 billion.
Wealth Management Wealth Management provides a comprehensive suite of private banking, trust and investment management, financial planning and insurance brokerage services for wealthy individuals, their families and businesses. Products and services include:
| n |
Customized deposit, credit and
debt structuring services, including professional
practice lending, insurance premium, marine and
aircraft financing;
|
|
|
|
||
| n |
Legacy management such as
personal trust, estate settlement and charitable
services;
|
|
|
|
||
| n |
Risk management services
encompassing property and casualty, group health and
benefit, and life insurance;
|
|
|
|
||
| n |
Investment management products
and services including hedge funds, investment real
estate and private equity placements;
|
|
|
|
||
| n |
Advisory services including
business succession planning and not-for-profit,
individual and family philanthropic consulting; and
|
|
|
|
||
| n |
Family office services, such as
independent investment manager search and selection,
family office administration, and family governance and
stewardship consulting.
|
In 2004 compared with 2003, Wealth Management’s segment earnings were $198 million, an increase of 30 percent as higher revenues outpaced expense growth. Net interest income rose 17 percent on increased loans and core deposits. Fee and other income increased 5 percent due to solid growth in trust and investment management fees and improving insurance revenues. Noninterest expense rose 6 percent primarily due to higher incentives related to improved revenues and earnings. Provision expense declined as credit quality continued to improve.
Average loans increased 17 percent from 2003, reflecting growth in both commercial and consumer lending. Average core deposits rose 13 percent in the same period, led by higher money market, demand deposit and interest-checking account balances. Included in total assets under management are wealth assets under management of $64.7 billion
Wealth Management
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2004 | 2003 | 2002 | |||||||||
|
Income statement data
|
||||||||||||
|
Net interest income
(Tax-equivalent)
|
$ | 506 | 434 | 400 | ||||||||
|
Fee and other income
|
559 | 534 | 529 | |||||||||
|
Intersegment revenue
|
6 | 6 | 5 | |||||||||
|
Total revenue
(Tax-equivalent)
|
1,071 | 974 | 934 | |||||||||
|
Provision for credit losses
|
(1 | ) | 12 | 17 | ||||||||
|
Noninterest expense
|
762 | 722 | 661 | |||||||||
|
Income taxes
(Tax-equivalent)
|
112 | 88 | 93 | |||||||||
|
Segment earnings
|
$ | 198 | 152 | 163 | ||||||||
|
Performance and other data
|
||||||||||||
|
Economic profit
|
$ | 137 | 98 | 113 | ||||||||
|
Risk adjusted return on capital (RAROC)
|
46.72 | % | 37.16 | 42.15 | ||||||||
|
Economic capital, average
|
$ | 383 | 374 | 363 | ||||||||
|
Cash overhead efficiency ratio
(Tax-equivalent)
|
71.10 | % | 74.22 | 70.77 | ||||||||
|
Lending commitments
|
$ | 4,830 | 4,012 | 3,288 | ||||||||
|
Average loans, net
|
11,273 | 9,638 | 8,730 | |||||||||
|
Average core deposits
|
$ | 12,319 | 10,922 | 10,031 | ||||||||
|
FTE employees
|
3,833 | 3,791 | 3,694 | |||||||||
at December 31, 2004, which represented a 10 percent increase from year-end 2003 due to improved market valuations and additions from acquisitions.
Corporate and Investment Bank Our Corporate and Investment Bank segment includes the following lines of business:
| n |
Corporate Lending:
Large
corporate lending, loan syndications and commercial
leasing;
|
|
|
|
||
| n |
Global Treasury and Trade
Finance:
Treasury management products and services,
domestic and international correspondent banking
operations, and international trade services;
|
|
|
|
||
| n |
Investment Banking:
Equity
capital markets, merger and acquisition advisory
services, equity-linked products and the activities of
our fixed income division (including interest rate
products, credit products, structured products and
non-dollar products); and
|
|
|
|
||
| n |
Principal Investing:
Direct
investments primarily in private equity and mezzanine
securities, and investments in funds sponsored by
select private equity and venture capital groups.
|
In 2004 compared with 2003, Corporate and Investment Bank segment earnings increased 46 percent to $1.7 billion,
30
reflecting revenue growth of 18 percent while expenses increased 10 percent. Total fee and other income grew 30 percent due to strong growth in other capital markets fees, particularly in advisory and underwriting, and vastly improved principal investing results. Net interest income rose 6 percent driven by strong deposit growth in international, commercial mortgage servicing, and treasury services. Noninterest expense rose 10 percent due to increased revenue-based variable pay and higher other personnel costs, coupled with increased investment in growth initiatives.
Total fee and other income increased $669 million primarily due to principal investing gains of $261 million compared with losses of $139 million in 2003, reflecting higher realized gains and lower write-downs on both direct investments and fund investments.
Since the beginning of 2001, we have made minimal new commitments to private equity funds and have significantly reduced the pace of our direct investment activity compared with 1999 and 2000. Our principal investing strategy emphasizes diversity from an industry and business standpoint. We believe this strategy complements our Corporate and Investment Bank strategy and will contribute to our longer-term profitability.
Advisory, underwriting and other investment banking fees increased $126 million to $887 million due to strong market share gains and the resulting growth in origination revenues in loan syndications, investment grade securities and equity capital markets. We continue to invest in specific industry and product expertise to increase our market presence in these and other product offerings. Trading account profits declined $48 million to $86 million. Securities gains were $114 million compared with securities losses of $48 million in 2003. Other income of $511 million declined $32 million from 2003.
Corporate loan balances declined due to lower usage and continued strong refinance activity by our customers in the public debt markets, coupled with strong investor appetite for loan assets allowing us to sell down to our desired hold limits. Provision expense showed a net recovery of $41 million, including $46 million related to the recovery of write-downs on loans sold out of the loan portfolio, as improving credit conditions resulted in decreased charge-offs. Economic capital usage declined driven by a continued trend of improving credit quality and lower loan outstandings.
Average core deposits increased 24 percent in 2004 due to growth in international, which provides demand and money
Corporate and Investment Bank
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2004 | 2003 | 2002 | |||||||||
|
Income statement data
|
||||||||||||
|
Net interest income
(Tax-equivalent)
|
$ | 2,441 | 2,312 | 2,489 | ||||||||
|
Fee and other income
|
2,931 | 2,262 | 1,582 | |||||||||
|
Intersegment revenue
|
(128 | ) | (116 | ) | (87 | ) | ||||||
|
Total revenue
(Tax-equivalent)
|
5,244 | 4,458 | 3,984 | |||||||||
|
Provision for credit losses
|
(41 | ) | 250 | 993 | ||||||||
|
Noninterest expense
|
2,569 | 2,335 | 2,080 | |||||||||
|
Income taxes
(Tax-equivalent)
|
999 | 696 | 344 | |||||||||
|
Segment earnings
|
$ | 1,717 | 1,177 | 567 | ||||||||
|
Performance and other data
|
||||||||||||
|
Economic profit
|
$ | 1,056 | 558 | 174 | ||||||||
|
Risk adjusted return on capital (RAROC)
|
32.64 | % | 20.79 | 13.43 | ||||||||
|
Economic capital, average
|
$ | 4,878 | 5,699 | 7,142 | ||||||||
|
Cash overhead efficiency ratio
(Tax-equivalent)
|
48.99 | % | 52.37 | 52.21 | ||||||||
|
Lending commitments
|
$ | 84,052 | 69,728 | 78,332 | ||||||||
|
Average loans, net
|
32,125 | 33,210 | 40,946 | |||||||||
|
Average core deposits
|
$ | 19,058 | 15,395 | 12,824 | ||||||||
|
FTE employees
|
4,763 | 4,317 | 4,131 | |||||||||
market deposit services to domestic and foreign correspondent banks, and to growth in commercial mortgage servicing and treasury services. In commercial mortgage servicing, we service commercial mortgages and hold the related escrow deposits. We also service trusts supporting commercial mortgage-backed securities and hold deposits related to principal and interest payments on the underlying mortgages prior to payment of returns to investors in the securities. Beginning in late 2002, we increased our level of commercial mortgage servicing through purchases of servicing rights and increased retention of servicing rights in Wachovia-sponsored trusts.
Parent Parent includes all asset and liability management functions, including managing our investment portfolio for earnings, liquidity and interest rate risk. Parent also includes goodwill and other intangible assets, and related funding costs; certain revenues and expenses that are not allocated to the business segments; and the results of our HomEq Servicing business, which is responsible for home equity loan servicing, including that generated and retained by our mortgage company, as well as servicing for third party portfolios.
In 2004, the Parent had a segment loss of $91 million compared with segment earnings of $275 million in 2003. Total revenue in the Parent declined $282 million to $575 million primarily as a result of a $222 million reduction in securities
31
Management’s Discussion and Analysis
gains; a $133 million reduction in other income, including a loss of $68 million associated with a sale and leaseback of corporate real estate, and a $148 million reduction in income from asset securitizations, including $57 million in losses on auto loan securitizations; partially offset by a $110 million increase in net interest income. Average securities increased $20.7 billion to $94.5 billion, primarily reflecting investment of the proceeds from the FDIC-insured sweep product.
Noninterest expense decreased $15 million due to lower intangible amortization. Income tax benefits increased $149 million. For segment reporting, income tax expense or benefit is allocated to each business segment based on the statutory rate, adjusted for certain other items, and any difference between the total for all core business segments and the consolidated results is included in the Parent.
This segment reflects the impact of Prudential Financial’s 38 percent minority interest in Wachovia Securities Financial Holdings, LLC. Total minority interest, which also includes other subsidiaries, was $297 million compared with $174 million in 2003.
Balance Sheet Analysis
Earning Assets Our primary types of earning assets are securities and loans. Year-end 2004 earning assets were $430.3 billion, a 22 percent increase from $351.4 billion in 2003. This increase includes the $49.3 billion in SouthTrust earning assets acquired on November 1, 2004. Average earning assets in 2004 were $358.3 billion, which represented a 23 percent increase from 2003.
Securities The securities portfolio, all of which is classified as available for sale, consists primarily of U.S. Government agency and asset-backed securities. We use this portfolio primarily to manage liquidity, interest rate risk and regulatory capital, and to take advantage of market conditions that create more economically attractive returns on these investments. We had securities available for sale with a market value of $110.6 billion at December 31, 2004, a $10.2 billion increase from $100.4 billion at December 31, 2003. This increase reflects securities added from the SouthTrust merger and deposit growth offset by the sale of lower yielding securities and the impact of terminated securitizations.
Securities available for sale included a net unrealized gain of $1.8 billion at December 31, 2004, and $2.2 billion at December 31, 2003. The average rate earned on securities available for sale was 4.90 percent in 2004 and 5.27 percent in 2003.
Loans – On-Balance Sheet
| December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
Commercial
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 75,095 | 55,453 | 57,728 | ||||||||
|
Real estate–construction and other
|
12,673 | 5,969 | 4,542 | |||||||||
|
Real estate–mortgage
|
20,742 | 15,186 | 17,735 | |||||||||
|
Lease financing
|
25,000 | 23,978 | 22,667 | |||||||||
|
Foreign
|
7,716 | 6,880 | 6,425 | |||||||||
|
Total commercial
|
141,226 | 107,466 | 109,097 | |||||||||
|
Consumer
|
||||||||||||
|
Real estate secured
|
74,161 | 50,726 | 46,706 | |||||||||
|
Student loans
|
10,468 | 8,435 | 6,921 | |||||||||
|
Installment loans
|
7,684 | 8,965 | 10,249 | |||||||||
|
Total consumer
|
92,313 | 68,126 | 63,876 | |||||||||
|
Total loans
|
233,539 | 175,592 | 172,973 | |||||||||
|
Unearned income
|
9,699 | 10,021 | 9,876 | |||||||||
|
Loans, net
(On-balance sheet)
|
$ | 223,840 | 165,571 | 163,097 | ||||||||
Loans – Managed Portfolio (Including on-balance sheet)
| December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
Commercial
|
$ | 145,072 | 112,041 | 112,455 | ||||||||
|
Real estate secured
|
97,021 | 80,146 | 79,512 | |||||||||
|
Student loans
|
11,059 | 10,526 | 9,845 | |||||||||
|
Installment loans
|
10,359 | 8,965 | 10,249 | |||||||||
|
Total managed portfolio
|
$ | 263,511 | 211,678 | 212,061 | ||||||||
We retain interests in the form of either bonds or residual interests in connection with certain securitizations. The retained interests result primarily from the securitization of residential mortgage loans and prime equity lines and, to a lesser extent, auto loans from 2004 securitizations. Included in securities available for sale at December 31, 2004, were residual interests with a market value of $894 million, which included a net unrealized gain of $250 million, and retained bonds from securitizations with a market value of $5.2 billion, which included a net unrealized gain of $94 million. At December 31, 2004, retained bonds with an amortized cost of $5.1 billion and a market value of $5.2 billion were considered investment grade based on external ratings, with substantially all of these having credit ratings of AA and above. At December 31, 2003, these amounts were $10.8 billion and $11.2 billion, respectively, and substantially all had credit ratings of AA and above. The decrease in 2004 in retained interests in securities available for sale from December 31, 2003, reflects the impact of terminated securitizations.
32
Loans Our loan portfolio mix continues to strengthen with a greater proportion of consumer real estate-secured loans as we have pursued risk reduction strategies to actively reduce potential problem loans and certain large corporate loans. Net loan growth in 2004, in addition to the SouthTrust loan portfolio, stemmed largely from growth in consumer real estate-secured loans and in key commercial growth categories, including commercial real estate-construction, which more than doubled from year-end 2003 primarily due to SouthTrust. Commercial loans grew 31 percent, with the majority of the growth related to increases in asset-based and international correspondent bank lending, and in middle-market commercial, small business and commercial real estate loans. Consumer loans also grew 36 percent from year-end 2003, driven primarily by increases in consumer real estate-secured loans, including the transfer of $9.4 billion from loans held for sale in December 2004. In addition, student loans increased due to additions from terminated securitizations, and installment loans declined from year-end 2003 due to the securitization of $3.0 billion in auto loans.
Our loan portfolio is broadly diversified by industry, concentration and geography. Commercial loans represented 60 percent and consumer loans 40 percent of the loan portfolio at December 31, 2004. The majority of our loan portfolio is secured by collateral or is guaranteed. Eighty-one percent of the commercial loan portfolio is secured by collateral, and 98 percent of the consumer loan portfolio is secured by collateral or is guaranteed. Of our $74.2 billion consumer real estate-secured loan portfolio, 77 percent is secured by a first lien, 64 percent has a loan-to-value ratio of 80 percent or less, and 50 percent is priced on a variable rate basis.
Our consumer managed loan portfolio grew 19 percent from year-end 2003, reflecting higher balances in loans, partially offset by lower securitized loans on- and off-balance sheet reflecting the impact of terminated securitizations. The managed loan portfolio includes the on-balance sheet loan portfolio, loans held for sale, loans securitized for which the retained interests are classified in securities, and the off-balance sheet portfolio of securitized loans sold where we service the loans.
Nonperforming Assets Nonperforming assets increased only 2 percent from year-end 2003, primarily due to the addition of SouthTrust nonaccrual loans of $342 million of which $36 million were charged-off and $125 million were transferred to assets held for sale. Nonaccrual loans declined $80 million, or 8 percent from year-end 2003, reflecting credit quality improvement and more favorable market conditions. New inflows to com-
Year-End 2004 Commercial and Industrial Loans and Leases (a)
| Committed | ||||||||
| (In millions) | Outstanding | Exposure | (b) | |||||
|
Manufacturing
|
||||||||
|
Consumer products
|
$ | 1,226 | 4,228 | |||||
|
Chemicals
|
810 | 2,920 | ||||||
|
Steel and metal products
|
1,160 | 2,867 | ||||||
|
Publishing and printing
|
920 | 2,523 | ||||||
|
Machinery and equipment
|
581 | 2,095 | ||||||
|
Electronics
|
727 | 1,775 | ||||||
|
Paper
|
458 | 1,572 | ||||||
|
All other manufacturing
|
5,013 | 16,498 | ||||||
|
Total manufacturing
|
10,895 | 34,478 | ||||||
|
Services
|
15,114 | 35,289 | ||||||
|
Financial services
|
13,854 | 34,275 | ||||||
|
Retail trade
|
7,439 | 16,870 | ||||||
|
Wholesale trade
|
7,013 | 14,052 | ||||||
|
Public administration
|
1,560 | 13,968 | ||||||
|
Property management
|
7,974 | 12,883 | ||||||
|
Individuals
|
8,021 | 10,729 | ||||||
|
Public utilities
|
1,099 | 9,140 | ||||||
|
Transportation
|
3,135 | 7,145 | ||||||
|
Insurance
|
513 | 6,107 | ||||||
|
Agriculture, forestry and fishing, and mining
|
1,778 | 5,847 | ||||||
|
Building contractors
|
2,455 | 5,613 | ||||||
|
Telecommunications and cable
|
1,059 | 3,485 | ||||||
|
All other
(c)
|
15,873 | 15,941 | ||||||
|
Total
|
$ | 97,782 | 225,822 | |||||
Year-End 2004 Commercial Real Estate Loans
| Committed | ||||||||
| (In millions) | Outstanding | Exposure | (a) | |||||
|
Apartments
|
$ | 6,562 | 8,015 | |||||
|
Office buildings
|
4,918 | 5,764 | ||||||
|
Retail
|
6,214 | 7,560 | ||||||
|
Industrial
|
2,681 | 2,984 | ||||||
|
Single family
|
2,665 | 6,171 | ||||||
|
Lodging
|
1,006 | 1,097 | ||||||
|
Land-unimproved
|
1,350 | 1,988 | ||||||
|
Land-improved
|
2,357 | 3,834 | ||||||
|
Condominiums
|
1,302 | 2,728 | ||||||
|
Other
|
4,360 | 5,296 | ||||||
|
Total
|
$ | 33,415 | 45,437 | |||||
33
Management’s Discussion and Analysis
mercial nonaccrual loans declined 45 percent from 2003 and more than offset the additions from SouthTrust. Nonperforming assets were also reduced by charge-offs, payments and sales of $159 million in nonperforming loans from the loan portfolio and from loans held for sale in 2004.
Past Due Loans Accruing loans 90 days or more past due, excluding loans that are classified as loans held for sale, were $522 million at December 31, 2004, compared with $341 million at December 31, 2003. The increase was due to the merger with SouthTrust and a $134 million increase in past due student loans from the second quarter 2004 termination of student loan securitizations. Of total past due loans, $21 million were commercial loans or commercial real estate loans and $501 million were consumer loans. The student loans that were added to the balance sheet are guaranteed against default either by agencies acting under statute of the Higher Education Act and re-insured by the Department of Education or by private guarantors.
Net Charge-offs Net charge-offs as a percentage of average net loans of 0.17 percent in 2004 declined 24 basis points from 2003. Commercial net charge-offs declined from 0.37 percent in 2003 to 0.08 percent of average commercial loans in 2004, mainly due to moderating trends in nonperforming assets at the current beneficial point in the credit cycle, our strategic decision to actively manage down potential problem loans and a higher level of recoveries during the period. In the same period, consumer net charge-offs declined from 0.47 percent to 0.30 percent of average consumer loans. As older vintages of consumer loans mature or pay down, a higher quality consumer loan mix remains.
Provision for Credit Losses Our strategy is to mitigate risk and volatility on our balance sheet by actively monitoring and reducing potential problem loans, including the sale of at-risk credits when prudent. With improved loan quality and favorable economic conditions, this strategy resulted in a 56 percent decline in the provision for credit losses from 2003 to $257 million. Based on our expectations of positive trends in the economy and solid asset quality over the next few quarters, our outlook for 2005 anticipates a provision in the range of 15 basis points to 25 basis points of average net loans. More information on the provision for credit losses, including the impact of transfers to loans held for sale, is included in Table 10: Allowance for Loan Losses and Nonperforming Assets . The provision related to the transfer of loans to loans held for sale was an overall benefit in 2004, reflecting the recovery of lower of cost or market losses on loans in the loan portfolio that had been previously carried in loans held for sale.
Asset Quality
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
Loans, net
|
$ | 223,840 | 165,571 | 163,097 | ||||||||
|
Allowance for loan losses
|
$ | 2,757 | 2,348 | 2,604 | ||||||||
|
Allowance as % of loans, net
|
1.23 | % | 1.42 | 1.60 | ||||||||
|
Allowance as % of nonaccrual
and restructured loans
|
289 | 227 | 164 | |||||||||
|
Allowance as % of nonperforming assets
|
251 | % | 205 | 150 | ||||||||
|
Net charge-offs
|
$ | 300 | 652 | 1,122 | ||||||||
|
Net charge-offs as % average loans, net
|
0.17 | % | 0.41 | 0.73 | ||||||||
|
Nonperforming assets
|
||||||||||||
|
Nonaccrual loans
|
$ | 955 | 1,035 | 1,585 | ||||||||
|
Foreclosed properties
|
145 | 111 | 150 | |||||||||
|
Loans held for sale
|
157 | 82 | 138 | |||||||||
|
Total nonperforming assets
|
$ | 1,257 | 1,228 | 1,873 | ||||||||
|
Nonperforming assets to loans, net,
foreclosed properties and
loans held for sale
|
0.53 | % | 0.69 | 1.11 | ||||||||
Year-End 2004 Nonaccrual
Commercial and Industrial Loans and Leases
| ( In millions) | Outstanding | |||
|
Manufacturing
|
$ | 112 | ||
|
Cable
|
95 | |||
|
Services
|
52 | |||
|
Retail and wholesale trade
|
51 | |||
|
Transportation
|
18 | |||
|
Telecommunications
|
14 | |||
|
All other
|
243 | |||
|
Total
|
$ | 585 | ||
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments Our risk management strategies have resulted in reduced risk in our loan portfolio. The allowance for loan losses increased by $409 million from year-end 2003 to $2.8 billion at December 31, 2004, reflecting the addition of SouthTrust’s allowance of $510 million at consummation, offset by a reduction of $91 million from transfers to loans held for sale and loans sold out of the portfolio. Similarly, the decreasing risk in the portfolio has led to a $2 million reduction in the reserve for unfunded lending commitments from year-end 2003. The reserve for unfunded lending commitments relates to commercial loans and is included in other liabilities.
Further information on the allowance for loan losses and the reserve for unfunded lending commitments is included in Note 7: Allowance for Loan Losses and Reserve for Unfunded Lending
34
Commitments in the Notes to Consolidated Financial Statements . Information on critical allowance and reserve accounting policies is in the Critical Accounting Policies section.
Loans Held for Sale Loans held for sale include loans originated for sale or securitization as part of our core business strategy and the activities related to our ongoing portfolio risk management strategies to reduce exposure to areas of perceived higher risk. Our core business activity represents loans we originate with the intent to sell to third parties and primarily includes mortgages and consumer real estate-secured loans. At December 31, 2004 and 2003, core business activity represented almost all of loans held for sale.
In 2004, we sold or securitized $21.0 billion in loans out of the loans held for sale portfolio, including $5.9 billion of commercial loans and $15.1 billion of consumer loans, primarily residential mortgages and prime equity loans. Substantially all of these loan sales and securitizations represented core business activity. Of the loans sold, $24 million were nonperforming.
At December 31, 2004, prime equity loans in held for sale amounted to $8.4 billion, a slight decrease from year-end 2003. In 2004, $16.5 billion in prime equity loans were originated, $5.0 billion were purchased principally from terminated securitizations, $3.8 billion were sold and $8.5 billion of payments were received. Additionally, we transferred $9.3 billion of prime equity loans to the loan portfolio. Due to the low interest rate environment, prime equity loan activity has increased dramatically, which has resulted in originations exceeding sales or securitizations. Prime equity loans are retained in loans held for sale until we sell or securitize the loans to enhance liquidity, meet other business needs or take advantage of the current market for asset securitization debt.
At December 31, 2004, mortgage loans in loans held for sale amounted to $1.9 billion, an increase of $842 million from year-end 2003. In 2004, $11.5 billion in mortgage loans were originated and $11.0 billion of mortgage loans were sold. Mortgage loans are typically sold within 45 days to 60 days of origination. Mortgage loans that are not sold within 150 days, usually due to incomplete documentation or other factors, are transferred to the loan portfolio at the lower of cost or market value. In 2004, $269 million of mortgage loans were transferred to the loan portfolio representing 2 percent of originations.
We transferred $504 million of commercial loans and $58 million of additional unfunded exposure to loans held for sale in
Year-End 2004 Loans Held for Sale
| Net | ||||||||
| Carrying | Committed | |||||||
| (In millions) | Amount | Exposure | (a) | |||||
|
Core Business
|
||||||||
|
Commercial
|
||||||||
|
Commercial real estate
|
$ | 1,436 | 1,446 | |||||
|
Commercial
|
278 | 386 | ||||||
|
Total commercial
|
1,714 | 1,832 | ||||||
|
Consumer
|
||||||||
|
Prime equity loans
|
8,370 | 28,897 | ||||||
|
Mortgages
|
1,892 | 1,892 | ||||||
|
Student loans
|
128 | 128 | ||||||
|
Home equity loans
|
189 | 189 | ||||||
|
Total consumer
|
10,579 | 31,106 | ||||||
|
Total core business
|
12,293 | 32,938 | ||||||
|
Portfolio Management
|
||||||||
|
Commercial
|
||||||||
|
Finance
|
268 | 289 | ||||||
|
Real estate
|
72 | 111 | ||||||
|
Manufacturing
|
16 | 47 | ||||||
|
Building contractors
|
15 | 18 | ||||||
|
Services
|
9 | 29 | ||||||
|
Retail and wholesale trade
|
8 | 42 | ||||||
|
Other
|
10 | 11 | ||||||
|
Total commercial
|
398 | 547 | ||||||
|
Consumer
|
297 | 297 | ||||||
|
Total portfolio management
|
695 | 844 | ||||||
|
Total loans held for sale
|
$ | 12,988 | 33,782 | |||||
2004 as part of our portfolio management activities. These transfers included $478 million of total exposure from portfolio management actions on SouthTrust loans after consummation.
In 2003, we sold or securitized $25.2 billion of loans out of the loans held for sale portfolio. Of these loans, $227 million were nonperforming.
Goodwill In connection with the SouthTrust acquisition, we recorded purchase accounting adjustments to reflect the assets and liabilities of SouthTrust at their respective fair values as of November 1, 2004, and to reflect certain exit costs related to the merger, which has the effect of increasing goodwill. These purchase accounting adjustments are preliminary and are subject to refinement for up to one year following consummation.
35
Management’s Discussion and Analysis
We recorded preliminary fair value purchase accounting adjustments and corresponding increases in goodwill of $430 million ($267 million after tax) and exit cost purchase accounting adjustments of $60 million ($77 million after tax), primarily related to personnel and employee termination benefits, offset by the effect of regulatory mandated branch sales. In addition, we recorded deposit base and customer relationship intangibles of $740 million ($455 million after tax). Based on a purchase price of $14.0 billion and SouthTrust tangible stockholders’ equity of $3.9 billion, this resulted in goodwill of $9.9 billion at December 31, 2004.
In 2004, we recorded certain refinements to our initial estimates of the fair value of the assets and liabilities related to the retail brokerage transaction of $74 million, recorded additional exit cost purchase accounting adjustments of $397 million, and recorded a net $96 million adjustment to deferred income taxes. Together, these adjustments resulted in an increase to goodwill of $375 million. At December 31, 2004, the goodwill attributable to the retail brokerage transaction was $580 million.
We employ a disciplined, deliberate and methodical process of integration for our mergers. As part of this process, detailed plans are developed and then approved by senior management prior to execution of the plans. Amounts are recorded as exit cost purchase accounting adjustments only after approval of the associated plan by senior management.
In the first half of 2004, we made final decisions related to the retail brokerage transaction, particularly related to the integration of the back-office operations and management and to the consolidation of Prudential Securities and Wachovia Securities branches in overlapping markets, and senior management approved plans related to these final components of the integration plan. At that time, we recorded an additional $402 million in exit cost purchase accounting adjustments that principally included finalization of real estate requirements in New York City and employee terminations. In the fourth quarter of 2004, we reduced certain liabilities of $5 million associated with exit cost purchase accounting adjustments, which resulted in a reduction to goodwill.
Liquidity and Capital Adequacy
Liquidity planning and management are necessary to ensure we maintain the ability to fund operating costs effectively and to meet current and future obligations such as loan commitments and deposit outflows. Funding sources primarily include customer-based core deposits but also include purchased funds and cash flows from operations. Wachovia is one of the nation’s largest core deposit-funded banking institutions. Our large deposit base, which is spread across economically strong south and southeast regions and high per-capita income East Coast and middle Atlantic regions, creates considerable funding diversity and stability. In addition to core deposits, wholesale funding sources provide a broad and diverse supplemental source of funds on both a secured and unsecured basis. Typically wholesale funding can be obtained for a broader range of maturities than core deposits, which adds flexibility in liquidity planning and management.
The Liquidity Risk Management section has more information about the process we use to manage liquidity risk. Briefly, liquidity is maintained through maturity management and through our ability to liquidate assets, primarily investment securities. Another significant source of asset liquidity is the ability to securitize assets such as mortgage, prime equity, student and auto loans. Other off-balance sheet sources of liquidity exist as well.
Our senior and subordinated debt securities and commercial paper are highly rated by the major debt rating agencies, which reduces our funding costs. As noted below, we remained “well capitalized” for regulatory purposes at December 31, 2004.
Core Deposits Core deposits increased 34 percent from December 31, 2003, to $274.6 billion at December 31, 2004. This increase in core deposits included an additional $18.0 billion of core deposits associated with the FDIC-insured sweep product and $37.1 billion in SouthTrust deposits at consummation. Average low-cost core deposits grew 35 percent to $190.9 billion in 2004 from 2003 as we increased the proportion of low-cost core deposits over higher cost deposit balances in the low-interest rate environment.
The ratio of average noninterest-bearing deposits to average core deposits was 22 percent in 2004 and 24 percent in 2003. The portion of core deposits in higher rate, other consumer time deposits was 13 percent at December 31, 2004, and 14 percent at December 31, 2003. Other consumer time and other noncore deposits usually pay higher rates than savings and transaction accounts, but they gen-
36
erally are not available for immediate withdrawal. They are also less expensive to service.
Purchased Funds Average purchased funds, which include wholesale borrowings with maturities of 12 months or less, were $81.7 billion in 2004 and $72.5 billion in 2003. The increase was primarily the result of increases of $3.0 billion in average federal funds purchased and $4.8 billion in commercial paper due to the consolidation of the commercial paper conduits we administer. Purchased funds were $83.9 billion at December 31, 2004, and $87.9 billion at December 31, 2003.
Long-term Debt Long-term debt increased $10.0 billion from December 31, 2003, to $46.8 billion at December 31, 2004, primarily due to the debt issuances described below and to the addition of SouthTrust. In 2005, scheduled maturities of long-term debt amount to $8.9 billion. We anticipate either extending the maturities of these obligations or replacing the maturing obligations.
In 2004, we issued $5.2 billion in senior debt securities and $2.4 billion in subordinated debt securities under our current shelf registration statement filed with the Securities and Exchange Commission. Under this registration statement, we have $2.3 billion of senior or subordinated debt securities, common stock or preferred stock available for issuance. In addition, we have available for issuance up to $1.9 billion under a medium-term note program covering senior or subordinated debt securities. Also, Wachovia Bank has available a global note program for the issuance of up to $41.8 billion of senior or subordinated notes. In 2004, we issued $1.0 billion of subordinated bank notes under the global note program. Early in the first quarter of 2005, we issued $1.7 billion of subordinated bank notes under the global note program.
With the adoption of FIN 46R on March 31, 2004, we deconsolidated trusts holding preferred securities that amounted to $3.0 billion at December 31, 2003, and that were included in long-term debt. The trusts that issued these preferred securities used the related proceeds to purchase our junior subordinated debentures. Accordingly, at December 31, 2004, long-term debt included $3.1 billion of junior subordinated debentures. Junior subordinated debentures at December 31, 2004, and trust preferred securities at December 31, 2003, are included in tier 1 capital for regulatory purposes.
The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors.
Stockholders’ Equity The management of capital in a regulated banking environment requires a balance between optimizing leverage and return on equity while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. Our goal is to generate attractive returns on equity to stockholders while maintaining sufficient regulatory capital ratios.
Stockholders’ equity increased $14.9 billion from year-end 2003 to $47.3 billion at December 31, 2004. The increase reflects the issuance of 298 million shares of common stock at a cost of $14.0 billion in connection with the SouthTrust merger. We paid $2.3 billion, or $1.66 per share, in dividends to common stockholders in 2004 compared with $1.7 billion, or $1.25 per share, in 2003. Average diluted common shares outstanding increased 30 million shares from December 31, 2003, to 1.4 billion at December 31, 2004, primarily due to the SouthTrust merger. In 2004, we repurchased 47 million common shares at a cost of $2.4 billion in connection with our previously announced share repurchase programs. At year-end 2004, we were authorized to buy back up to a remaining 76 million shares of common stock. Please refer to our 2004 Form 10-K for additional information on share repurchases.
In 2004, we entered into transactions involving the simultaneous sale of put options and purchase of call options on 10 million shares of our common stock with expiration dates from October 2004 to August 2005. We entered into these equity collars to manage potential dilution associated with our employee stock options. These transactions are recorded as assets or liabilities with changes in fair value recorded in earnings. In 2004, we recorded a net gain of $31 million related to market value changes of these collars. In 2003, we recorded a net gain of $25 million, as well as a cumulative effect of a change in accounting principle of $17 million after tax relating to equity collars entered into in 2002.
Subsidiary Dividends Wachovia Bank, National Association, is the largest source of subsidiary dividends paid to the parent company. Capital requirements established by regulators limit dividends that this subsidiary and certain other of our subsidiaries can pay. Under these and other limitations, which include an internal requirement to maintain all deposit-taking banks at the well capitalized level, at December 31, 2004, our subsidiaries had $5.4 billion available for dividends that could be paid without prior regulatory approval. Our subsidiaries paid $1.8 billion in dividends to the parent company in 2004.
37
Management’s Discussion and Analysis
Regulatory Capital Our capital ratios were above regulatory minimums in 2004 and we continued to be classified as “well capitalized.” The tier 1 capital ratio decreased 51 basis points from December 31, 2003, to 8.01 percent, driven primarily by higher risk-weighted assets and the impact of SouthTrust. The minimum tier 1 capital ratio is 4 percent. Our total capital ratio was 11.11 percent and our leverage ratio was 6.38 percent at December 31, 2004, and 11.82 percent and 6.36 percent, respectively, at December 31, 2003.
Off-Balance Sheet Transactions
In the normal course of business, we engage in a variety of financial transactions that under GAAP either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk. The following discussion includes off-balance sheet guarantees and retained interests from securitization transactions.
Guarantees Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or change in an underlying asset, liability, rate or index. Our guarantees are generally in the form of securities lending indemnifications, standby letters of credit, liquidity agreements, loans sold with recourse or residual value guarantees.
Securities Lending Indemnifications As a result of our acquisition of a securities lending firm in January 2004, we act as a securities lending agent. Our clients’ securities are loaned, on a fully collateralized basis, to third party broker/dealers. We indemnify our clients against broker default and support these indemnifications with collateral that is marked to market daily. We generally require cash or other highly liquid collateral from the broker/dealer. At December 31, 2004, there was $50.0 billion in collateral supporting the $48.9 billion loaned. Accordingly, there is no carrying amount associated with these indemnifications.
Standby Letters of Credit We issue standby letters of credit to customers in the normal course of our commercial lending businesses. Standby letters of credit are guarantees of performance primarily issued to support private borrowing arrangements, including commercial paper, bond financings and similar transactions. We also assist commercial, municipal, nonprofit and other customers in obtaining long-term tax-exempt funding through municipal bond issues and by providing credit enhancements in the form of standby letters of
Summary of Off-Balance Sheet Exposures
| December 31, 2004 | ||||||||
| Carrying | ||||||||
| (In millions) | Amount | Exposure | ||||||
|
Guarantees
|
||||||||
|
Securities lending indemnifications
|
$ | – | 48,879 | |||||
|
Standby letters of credit
|
101 | 30,815 | ||||||
|
Liquidity agreements
|
1 | 7,568 | ||||||
|
Loans sold with recourse
|
39 | 5,238 | ||||||
|
Residual value guarantees
|
9 | 629 | ||||||
|
Total guarantees
|
$ | 150 | 93,129 | |||||
credit. Under these agreements and under certain conditions, in the event the bondholder requires the issuer to repurchase the bonds prior to maturity and the issuer cannot remarket the bonds, we are obligated to provide funding to the issuer to finance the repurchase of the bonds. We were not required to provide any funding to finance the repurchase of the bonds under these agreements in 2004.
Undrawn standby letters of credit amounted to $30.8 billion at December 31, 2004, and $27.6 billion at December 31, 2003. For letters of credit, we typically charge a fee equal to a percentage of the unfunded commitment. We recognized fee income on unfunded letters of credit of $230 million in 2004 and $224 million in 2003. The risk associated with standby letters of credit is incorporated in the overall assessment of our liquidity risk as described in the Liquidity Risk Management section. The Credit Risk Management section describes how we manage on- and off-balance sheet credit risk.
Liquidity Agreements From time to time, we securitize assets originated through our normal loan production channels or purchased in the open market, including fixed rate municipal bonds. In securitization transactions, assets are typically sold to a QSPE, which then issues beneficial interests in the form of senior and subordinated interests, including residual interests, collateralized by the assets. The QSPE is a legally distinct, bankruptcy remote entity that is used in these transactions to isolate the cash flows associated with the assets from originator default. This legal isolation and the allocation of risk to different tranches of securities issued by the QSPE allow securitization transactions to generally receive cost-advantaged funding rates.
In certain cases, the investors in the debt issued by the QSPE are conduits that are administered by other parties. We provide liquidity agreements on the commercial paper issued by the conduits to fund the purchase of the QSPE’s debt. Under
38
these liquidity agreements, we are obligated to purchase an interest in the assets that are financed by the conduits in the event the conduits are unable to continue to issue commercial paper to finance those assets. The ability to market commercial paper is affected by general economic conditions and by the credit rating of the party providing the liquidity agreement. To date, there has not been a situation where these conduits could not issue commercial paper. We received $4 million in 2004 and $9 million in 2003 in fees for providing these liquidity agreements.
In addition, at the discretion of the conduit administrator and in accordance with the provisions of the liquidity agreements, we may be required to purchase assets from the conduit. In some cases, the par value of the assets may be less than their fair value, and consequently, we record a loss for the difference between the par value and the fair value. In 2004 and 2003, we did not have significant losses associated with these purchases.
Generally, we receive fees from a QSPE for servicing the assets owned by the QSPE. We received $16 million in fees in 2004 and $22 million in fees in 2003.
In the fixed rate municipal bond securitizations, similar to other securitization transactions, the bonds are sold to a QSPE, which issues short-term tax-exempt securities and residual interests collateralized by the assets. Investors purchase these tax-exempt debt securities and generally we retain the residual interests. We also provide liquidity agreements on these debt securities issued by the QSPEs. The market for tax-exempt securities is generally very liquid, but in the event the debt securities could not be remarketed due to market conditions, the liquidity agreement would require us to purchase the debt securities from the QSPE at par value.
Loans Sold with Recourse In some loan sales or securitiza-tions, we may provide recourse to the buyer that requires us to repurchase loans at par value plus accrued interest on the occurrence of certain events, which are generally credit related, within a certain period of time. In many cases, we are able to recover amounts paid from the sale of the underlying collateral. In 2004 and 2003, we did not repurchase a significant amount of loans associated with these agreements.
Residual Value Guarantees Residual value guarantees outstanding at December 31, 2004, included $629 million representing assets under operating leases, of which $417 million related to operating leases of railcars.
Retained Interests As discussed above, we periodically securi-tize assets originated through our normal loan production channels or purchased in the open market. In securitization transactions, assets are typically sold to special purpose entities that are off-balance sheet. Certain securitization transactions result in a complete transfer of risk to investors, and in others, we retain risk in the form of senior or subordinated notes or residual interests in the securities issued by the off-balance sheet entities. Retained interests from securitizations with off-balance sheet entities recorded as either available for sale securities, trading account assets or loans amounted to $6.5 billion at December 31, 2004, and $13.3 billion at December 31, 2003. The decrease reflects the impact of terminated securitizations, primarily those involving consumer real estate-secured loans, which occurred when we purchased at fair value the beneficial interests held by third parties.
In 2004, we securitized and sold $3.0 billion of prime equity lines, retaining $77 million in the form of residual interests, and $3.1 billion of auto loans, retaining $195 million in the form of investment grade securities and $64 million in the form of residual interests. Included in other income were net gains of $20 million in 2004 related to securitizations. In 2003, we securitized and sold $2.9 billion of prime equity lines, retaining $69 million in the form of residual interests. Included in other income were net gains of $115 million in 2003 related to securitizations.
We have credit, liquidity and market risk associated with our retained interests. Determining the fair value of our retained interests is subjective and is described in more detail in the Critical Accounting Policies section. In addition, the Securities section includes more information.
39
Management’s Discussion and Analysis
Risk Governance and Administration
Overview Our business exposes us to several risk types including strategic business risks, credit, market, liquidity, operational, compliance, reputation, litigation and other risks. Our corporate risk governance structure enables us to weigh risk and return to produce sustainable revenue, reduce earnings volatility and increase shareholder value.
Board of Director Committees and Management Operating Committee Our risk governance structure begins with our board of directors, which evaluates risk and oversees the management of risk through its Risk Committee and Audit Committee.
The board of directors has approved management accountabilities and supporting committee structures to effect risk governance. Our chief executive officer is responsible for the overall risk governance structure. Our chief risk officer reports directly to our chief executive officer and is responsible for independent evaluation and oversight of our credit, market and operational risk-taking activities and our risk governance processes.
We oversee strategic business risk and our general business affairs through the Management Operating Committee. This committee meets monthly and is composed of the senior management of the company, including all executives who report directly to the chief executive officer.
Four Components of Risk Governance Our risk management strategy is aligned around four components of risk governance: our business units; our independent risk management function joined by other corporate staff functions including legal, finance, human resources and technology; internal audit; and risk committees.
Our business units are responsible for identifying, acknowledging, quantifying, mitigating and managing all risks. Business unit management determines and executes our strategies, which puts them closest to the changing nature of risks and therefore best able to take action to manage and mitigate those risks. Our management processes, structure and policies help us comply with laws and regulations and provide clear lines of sight for decision-making and accountability.
Our risk management organization provides objective oversight of our risk-taking activities and translates our overall risk appetite into approved limits. Risk management works with the business units and functional areas to establish appropri-
ate standards and also monitors business practices in relation to those standards. Risk management proactively works with the businesses and senior management to ensure we have continuous focus on key risks in our businesses and emerging trends that may change our risk profile.
Our internal audit group, which reports directly to the Audit Committee of the board of directors, provides an objective assessment of the design and execution of our internal control system including our management systems, risk governance, and policies and procedures. Internal audit activities are designed to provide reasonable assurance that resources are safeguarded; that significant financial, managerial and operating information is complete, accurate and reliable; and that employee actions comply with our policies and applicable laws and regulations.
Our risk committees provide a mechanism to bring together the many perspectives of our management team to discuss emerging risk issues, monitor risk-taking activities and evaluate specific transactions and exposures. All risk committees ultimately report to the Senior Risk Committee, which is chaired by the chief executive officer, which in turn reports to the board of directors, and is composed of certain members of the Management Operating Committee. The Senior Risk Committee is charged with monitoring the direction and trend of risks relative to business strategies set by the Management Operating Committee and relative to market conditions and other external factors. It reviews identified emerging risks and directs action to appropriately mitigate those risks. This committee also ensures that responsibilities and accountabilities for risk management and corrective action on control matters are properly delegated to appropriate individuals and implemented on a timely basis. The Senior Risk Committee directly oversees the activities of four key management committees: the Credit Risk Committee, the Market Risk Committee, the Operational Risk Committee, and the Asset and Liability Committee.
Credit Risk Management Credit risk is the risk of loss due to adverse changes in an issuer’s, borrower’s or counterparty’s ability to meet its financial obligations under agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure of that transaction and the parties involved. While we are subject to some credit risk in our trading, investing, liquidity, funding and asset management activities, it is typically only incidental in these businesses. Credit risk is central to the profit strategy in lending and other financing activities, and as a result, the majority of our credit risk is associated with these activities.
40
Credit risk is managed through a combination of policies and procedures and authorities that are tracked and regularly updated in a centralized database. The board of directors grants credit authority to the chief executive officer, who in turn, has delegated that authority to the chief risk officer. Credit authorities are further delegated through the independent risk management organization. Most officers who are authorized to approve credit exposure are in the risk management organization, are experienced in the industries and loan structures over which they have responsibility, and are independent of the officers who are responsible for generating new business.
There are two processes for approving credit risk exposures. The first involves standard approval structures (such as rapid approval grids) for use in retail, certain small business lending and most trading activities. The second approach involves individual approval of commercial exposures based, among other factors, on the financial strength of the borrower, assessment of the borrower’s management, industry sector trends, the type of exposure, the transaction structure and the general economic outlook.
Credit Risk Review is an independent unit that performs risk process reviews and evaluates a representative sample of individual credit extensions. Credit Risk Review has the authority to change internal risk ratings and is responsible for assessing the adequacy of credit underwriting and servicing practices. This unit reports directly to the Risk Committee of the board of directors.
Economic capital for all credit risk assets is calculated by the credit risk management group within the risk management organization.
Commercial Credit All commercial loans are assigned internal risk ratings reflecting the probability of the borrower defaulting on any obligation and the probable loss in the event of a default. Commercial credit extensions are also evaluated using a RAROC model that considers pricing, internal risk ratings, loan structure and tenor, among other variables. This produces a risk and return analysis, enabling the efficient use of economic capital attributable to credit risk. The same credit processes and checks and balances are used for unfunded commitments as for funded exposures.
The Credit Risk Committee approves policy guidelines that limit the maximum level of credit exposure to individual commercial borrowers or a related group of borrowers. These
guidelines are based on the default probabilities associated with the credit facilities extended to each borrower as well as on the economic capital associated with them. Concentration risk is also managed through geographic and industry diversification and loan quality factors. The Credit Risk Committee approves industry concentration and country exposure limits.
Borrower exposures may be designated as “watch list” accounts when warranted by either environmental factors or individual company performance. Such accounts are subjected to additional review by the business line management, risk management and credit risk review staff, and our chief risk officer in order to adequately assess the borrower’s credit status and to take appropriate action. In addition, projections of both nonperforming assets and losses for future quarters are performed monthly. We have also established special teams composed of highly skilled and experienced lenders to manage problem credits. These teams handle commercial recoveries, workouts and problem loan sales.
Commercial credit checks and balances, the independence of risk management functions and specialized processes are all designed to avoid credit problems where possible, and to recognize and address problems early in the cycle when they do occur.
Retail Credit In retail lending, we manage credit risk primarily from a portfolio view. The risk management division, working with the line of business, determines the appropriate risk and return profile for each portfolio, using a variety of tools including quantitative models and scorecards tailored to meet our specific needs.
By incorporating these models and policies into computer programs or “decisioning engines,” much of the underwriting is automated. Once a line of credit or other retail loan is extended, it is included in the overall portfolio, which is continuously monitored for changes in delinquency trends and other asset quality indicators. Delinquency action on individual credits is taken monthly or as needed if collection efforts are required.
Market Risk Management Market risk represents the risk of declines in value that on- and off-balance sheet positions could realize given a variety of market movements, such as changes in interest rates, equity prices and foreign exchange rates. We trade a variety of equities, debt securities, foreign exchange instruments and other derivatives to
41
Management’s Discussion and Analysis
| VAR Profile by Risk Type | ||||||||||||||||||||||||
| (In millions) | 2004 | 2003 | ||||||||||||||||||||||
| Risk Category | High | Low | Avg | High | Low | Avg | ||||||||||||||||||
|
Interest rate
|
$ | 20.3 | 4.7 | 12.4 | 18.8 | 6.0 | 10.0 | |||||||||||||||||
|
Foreign exchange
|
3.0 | 0.2 | 1.2 | 1.6 | 0.3 | 0.7 | ||||||||||||||||||
|
Equity
|
20.0 | 6.2 | 10.7 | 15.7 | 0.9 | 8.5 | ||||||||||||||||||
|
Commodity
|
0.9 | – | 0.2 | – | – | – | ||||||||||||||||||
|
Aggregate
|
$ | 27.4 | 11.8 | 18.7 | 22.1 | 9.2 | 13.7 | |||||||||||||||||
provide customized solutions for the risk management needs of our customers and for proprietary trading, and market risk is inherent in all these activities.
Market risk management activities are overseen by an independent market risk group, which reports outside of the business units to the risk management group. Risk measures include the use of value-at-risk (VAR) methodology with limits approved by the Market Risk Committee and subsequently by the Risk Committee. The Market Risk Committee also approves a variety of other trading limits designed to match trading activities to our appetite for risk and to our strategic objectives.
The VAR methodology uses market volatility over the most recent 252 trading days to estimate within a given level of confidence the maximum trading loss over a period of time that we would expect to incur from an adverse movement in market rates and prices over the period. We calculate 1-day VAR at the 97.5 percent and 99 percent confidence levels, and 10-day VAR at the 99 percent confidence level. The VAR model is supplemented by stress testing on a daily basis. The analysis captures all financial instruments that are considered trading positions. Our 1-day VAR limit in 2004 was $30 million. The total 1-day VAR was $21 million at December 31, 2004, and $12 million at December 31, 2003, and primarily related to interest rate risk and equity risk. The high, low and average VARs in 2004 were $27 million, $12 million and $19 million, respectively.
Operational Risk Management Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk is inherent in all our businesses. Operational risk is divided into the following functional risk areas: vendor risk, compliance, technology, financial, fiduciary, human capital, business continuity planning, legal, change and implementation risk, and internal and external fraud.
Operational risk is managed through an enterprise-wide framework for organizational structure, processes and tech-
Daily VAR Backtesting
(Dollars of revenue in millions)
Histogram of Daily Profit and Loss in 2004
(Dollars of revenue in millions)
nologies. This framework has been developed and implemented by an independent operational risk team that reports to the risk management group. This team is composed of a corporate operational risk group as well as operational risk leaders aligned with our business units and support functions. In addition to our governance process, we devote significant emphasis and resources to continuous refinement of processes and tools that aid us in proactive identification
42
and management of material operational risks, including a rigorous self-assessment process. Additionally, we focus on training, education and development of a risk management culture that reinforces the message that all employees are responsible for the management of operational risk. We believe proactive management of operational risk is a competitive advantage due to lower earnings volatility, greater customer satisfaction and enhanced reputation.
One component of operational risk is compliance risk. This risk is managed by our compliance group, which works within the business lines but reports centrally to the risk management group under the leadership of our chief compliance officer. This structure allows compliance risk management to consult with the business unit as policies and procedures are developed and enables close monitoring of daily activities.
Managing merger risk and change in general is another key component of operational risk. To manage the integration risk inherent in our retail brokerage transaction and the SouthTrust merger, merger integration teams, led by experienced merger executives, are following the same risk management processes used in the First Union-Wachovia merger. A disciplined process to assess organizational readiness for change is being used. This process provides readiness and risk information related to staffing, training, customer communication, compliance, vendors, corporate real estate, technology infrastructure, application systems, operational support and reconcilement.
We are also focused on managing other key operational risks such as business continuity, reliance on vendors, and privacy and information security. These risks are not unique to our institution and are inherent in the financial services industry. We link business performance measurements to operational risk through risk profiles, quality of the internal controls and capital allocation.
Liquidity Risk Management Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. In our liquidity management process, we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs.
The Liquidity Risk Management table focuses only on future obligations. In this table, all deposits with indeterminate matu-
Liquidity Risk Management
| December 31, 2004 | ||||||||||||||||||||
| Over One | Over Three | Over | ||||||||||||||||||
| One Year | Year Through | Years Through | Five | |||||||||||||||||
| (In millions) | Total | or Less | Three Years | Five Years | Years | |||||||||||||||
|
Contractual Commitments
|
||||||||||||||||||||
|
Deposit maturities
|
$ | 295,053 | 278,811 | 10,473 | 4,718 | 1,051 | ||||||||||||||
|
Long-term debt
|
46,759 | 8,920 | 17,518 | 6,129 | 14,192 | |||||||||||||||
|
Operating lease obligations
|
3,998 | 515 | 910 | 748 | 1,825 | |||||||||||||||
|
Capital lease obligations
|
875 | 30 | 59 | 784 | 2 | |||||||||||||||
|
Investment obligations
|
685 | 685 | – | – | – | |||||||||||||||
|
Other purchase obligations
|
490 | 316 | 121 | 53 | – | |||||||||||||||
|
Total
|
$ | 347,860 | 289,277 | 29,081 | 12,432 | 17,070 | ||||||||||||||
rities, such as demand deposits, checking accounts, savings accounts and money market accounts, are presented as having a maturity of one year or less.
Funding sources primarily include customer-based core deposits, purchased funds, collateralized borrowings, cash flows from operations, and asset securitizations and sales.
Cash flows from operations are a significant component of liquidity risk management and consider both deposit maturities and the scheduled cash flows from loan and investment maturities and payments, along with dividend payments.
We purchase funds on an unsecured basis in the federal funds, commercial paper, bank note, national certificate of deposit and long-term debt markets. In addition, we routinely use securities in our trading portfolio and in our available for sale portfolio as collateral for secured borrowings. In the event of severe market disruptions, we have access to secured borrowings through the Federal Reserve Bank. Our ability to access unsecured funding markets and the cost of funds acquired in these markets are primarily dependent on our credit rating, which is currently P-1/A-1 for short-term paper and Aa3/A for senior debt (Moody’s and Standard & Poor’s, respectively). Our goal is to maintain a long-term AA credit rating. We believe a long-term credit rating of AA will provide us with many benefits, including access to additional funding sources at lower rates (assuming a static interest rate environment). Conversely, a downgrade from our current long-term debt ratings would have an adverse impact, including higher costs of funds, access to fewer funding sources and possibly the triggering of liquidity agreements. Providing funding under liquidity agreements could result in our forgoing more profitable lending and investing opportunities as well as dividend payments because of funding constraints.
43
Management’s Discussion and Analysis
Asset securitizations provide an alternative source of funding. Except for the customer-oriented conduit activities, we do not rely heavily on the securitization markets as a source of funds but instead we use securitizations to diversify risk and manage regulatory capital levels. Widening of the credit spreads in the securitization market may make accessing these markets undesirable. If securitizations become undesirable, we may discontinue certain lending activities and/or increase our reliance on alternative funding sources.
The Asset and Liability Committee is responsible for liquidity risk management. This committee approves liquidity limits and receives thorough periodic reports on our liquidity position. The liquidity reporting details compliance with limits and with guidelines. It includes a review of forecasted liquidity needs based on scheduled and discretionary asset and liability maturities. It evaluates the adequacy of funding sources to meet these needs. In addition, stress tests are evaluated to determine required levels of funding in an adverse environment. These stress tests include reduced access to traditional funding sources in addition to unexpected draw-downs of contingent liquidity exposures (for example, liquidity agreements with conduits).
Derivatives We use derivatives to manage our exposure to interest rate risk, to generate profits from proprietary trading and to assist our customers with their risk management objectives. All derivatives are recorded on the balance sheet at fair value with realized and unrealized gains and losses included either in the results of operations or in other comprehensive income, depending on the nature, purpose and designation of the derivative transaction. Derivative transactions are often measured in terms of notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is not usually exchanged, but is used only as the basis on which interest or other payments are calculated.
For interest rate risk management, we use derivatives as a cost- and capital-efficient way to hedge on-balance sheet assets, liabilities and forecasted transactions. Derivatives used for interest rate risk management include various interest rate swap, futures, forward and option structures with indices that relate to the pricing of specific on-balance sheet instruments. Trading and customer derivatives include a wide array of interest rate, commodity, foreign currency, credit and equity derivatives.
Swap contracts are commitments to settle in cash at a future date or dates, which may range from a few days to a number of years, based on differentials between specified financial indices as applied to a notional principal amount. Futures and forward contracts are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. Option contracts give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time, a financial instrument at a contracted price that may also be settled in cash, based on differentials between specified indices. Credit derivatives are contractual agreements that in exchange for a fee provide insurance against a credit event including bankruptcy, insolvency, credit downgrade and failure to meet payment obligations of one or more referenced credits.
We measure the credit exposure on our derivative contracts by taking into account both the current market value of each contract in a gain position, which is reported on the balance sheet, and a prudent estimate of potential change in value over each contract’s life. The measurement of the potential future exposure for each derivative is based on a simulation of market rates and generally takes into account legally enforceable risk mitigating agreements for each obligor such as netting and collateral.
We manage the credit risk of these instruments in much the same way we manage credit risk of our loan portfolios, by establishing credit limits for each counterparty and by requiring collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When we have more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with that counterparty. The Credit Risk Management section has more information on the management of credit risk.
The market risk associated with interest rate risk management derivatives is fully incorporated into our earnings simulation model in the same manner as financial instruments for which the interest-bearing balance is reflected on the balance sheet. The Interest Rate Risk Management section describes the way in which we manage this risk. The market risk associated with trading and customer derivative posi-
44
tions is managed using the VAR methodology, as described in the Market Risk Management section.
More information on our derivatives used for interest rate risk management is included in Note 1 , Note 3 and Note 19 in the Notes to Consolidated Financial Statements .
Interest Rate Risk Management One of the fundamental roles in banking is the management of interest rate risk, or the risk that changes in interest rates may diminish the income that we earn on loans, securities and other earning assets. The following discussion explains how we oversee the interest rate risk management process and the actions we take to protect earnings from interest rate risk.
A balance sheet is considered asset sensitive when its assets (loans and securities) reprice faster or to a greater extent than liabilities (deposits and borrowings). An asset-sensitive balance sheet will produce more net interest income when interest rates rise and less net interest income when interest rates decline. Our large and relatively rate-insensitive deposit base funds a portfolio of primarily floating rate commercial and consumer loans. This mix naturally creates a highly asset-sensitive balance sheet. Over the past two years, our focus on new customer acquisition and quality customer service has enabled us to generate deposit growth that has far outpaced loan growth, significantly adding to our naturally asset-sensitive position. To achieve more neutrality, we maintain a large portfolio of fixed rate discretionary instruments such as loans, securities and derivatives.
We often elect to use derivatives to protect assets, liabilities and future financial transactions from changes in interest rates. When deciding whether to use derivatives instead of investing in securities to reach the same goal, we consider a number of factors, such as cost, efficiency, the effect on our liquidity and capital, and our overall interest rate risk management strategy. We choose to use derivatives when they provide greater relative value or more efficient execution of our strategy than securities. The derivatives we use for interest rate risk management include various interest rate swaps, futures, forwards and options and in many cases are designated and accounted for as accounting hedges. We fully incorporate the market risk associated with interest rate risk management derivatives into our earnings simulation model in the same manner as other on-balance sheet financial instruments.
“Market” and “Flat” Rate Scenarios
We analyze and manage the amount of risk we are taking to changes in interest rates by forecasting a wide range of interest rate scenarios and for time periods as long as 36 months. However, in analyzing interest rate sensitivity for policy measurement, we compare forecasted earnings per share in both “high rate” and “low rate” scenarios to the “market forward rate” and “flat rate” scenarios. The policy measurement period is 12 months in length, beginning with the first month of the forecast. Our objective is to ensure we prudently manage interest-bearing assets and liabilities in ways that improve financial performance without unduly putting earnings at risk. Our policy is to limit the risk we can take through balance sheet management actions to 5 percent of earnings per share in both falling and rising rate environments.
Our “market forward rate” is constructed using currently implied market forward rate estimates for all points on the yield curve over the next 36 months. Our standard approach evaluates expected earnings in a 400 basis point range, or 200 basis points both above and below the “market forward rate” scenario. However, given the historically low absolute level of the federal funds rate throughout 2004, we modified the “low rate” scenario to measure a decline of only 50 basis points. Additionally, we determine earnings volatility in a range 200 basis points above and 50 basis points below a scenario where rates remain unchanged for the policy period. The “Market” and “Flat” Rate Scenarios graph depicts the range of the federal funds rate in each of these scenarios as measured in December 2004. Our various scenarios together measure earnings volatility to federal funds rates ranging from 1.75 percent to 5.16 percent in December 2005.
45
Management’s Discussion and Analysis
We simultaneously measure the impact of a parallel and nonparallel shift in rates on each of our interest rate scenarios. A parallel shift would, as the term implies, shift all points on the yield curve by the same increments. For example, by the twelfth month in our policy measurement period, short-term rates such as the federal funds rate would increase by 200 basis points over the “market forward rate,” while longer term rates such as the 10-year and 30-year treasury bond rates would increase by 200 basis points as well. A nonparallel shift would consist of a 200 basis point increase in short-term rates, while long-term rates would increase by a different amount. A rate shift in which short-term rates rise to a greater degree than long-term rates is referred to as a “flattening” of the yield curve. Conversely long-term rates rising to a greater degree than short-term rates would lead to a “steepening” of the yield curve.
The impact of a nonparallel shift in rates depends on the types of assets in which funds are invested and the shape of the curve implicit in the “market forward rate” scenario. For the past two years, the yield curve has been unusually steep by historical standards. In 2004, the average spread between the 10-year and two-year treasury note rates was 189 basis points, which, when compared with the average spread since 1980 of 83 basis points, would be considered quite wide.
In this historically steep yield curve environment, we believe prudent risk management practices dictate the evaluation of rate shifts that include a “flattening” of the yield curve where short-term rates rise faster and to a greater degree than long-term rates. Accordingly, in 2004 we evaluated scenarios that measure the impact of a “moderate flattening” and a “severe flattening” of the yield curve. Interest rate risk management decisions are based on a composite view of sensitivity considering parallel and nonparallel shifts. The methodology we use is discussed further in the Earnings Sensitivity section.
In the first half of 2004, the threat of rising rates, but uncertain timing, kept the curve very steep. Before the Federal Reserve’s Federal Open Market Committee’s tightening campaign began, our investment and hedging strategies were designed to manage both repricing risk and curve flattening that typically accompanies a rapid rise in short-term rates.
By year-end, much of the anticipated flattening had already occurred. At December 31, 2004, the spread between the
10-year and two-year treasury note rates was 115 basis points, and it is currently projected to revert back to the long-term average 83 basis points by year-end 2005. While we still believe further flattening is possible, and we will continue to measure the impact of a nonparallel shift in rates, we feel the risk of earnings volatility due to further flattening has somewhat subsided.
Considering the balance of risks for 2005, we will focus primarily on managing the value created through our expanded deposit base as we defend the net interest margin against the pressures of rising short-term rates and, relative to 2004, a significantly flatter curve. We expect to rely on our large base of low-cost core deposits to fund incremental investments in loans and securities. The characteristics of the loans we add will prompt different strategies. Fixed rate loans, for example, diminish the need to buy discretionary investments, so if we add more fixed rate loans to our loan portfolio, we would likely allow existing discretionary investments to mature or be liquidated. If we add more variable rate loans, we would likely allow fixed rate securities to mature or be liquidated, and then add new derivatives that, in effect, would convert the incremental variable rate loans to fixed rate loans.
Earnings Sensitivity The Policy Period Sensitivity Measurement table on the next page provides a summary of our interest rate sensitivity measurement.
In December 2004, our earnings simulation model indicated earnings would be negatively affected by 0.1 percent in a “high rate composite” scenario relative to the “market forward rate” over the policy period. Additionally, we measure a scenario where rates gradually decline 50 basis points over a 12-month period relative to the “market forward rate” scenario. The model indicates earnings would be unchanged in this scenario.
Our sensitivity to the “market forward rate” scenario is measured using three different yield curve shapes. The first is a gradual 200 basis point increase at each point on the yield curve over a 12-month period. This is referred to as a parallel shift in the yield curve and would follow the “market forward rate” scenario’s expected flattening. Next we measure the exposure to nonparallel shifts by allowing short-term rates to rise by 200 basis points, while allowing rates for terms longer than one year to increase by a lesser degree. This approach creates incrementally flatter curves. This has the impact of stressing liability costs by a full 200 basis
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Policy Period Sensitivity Measurement
| Actual Fed | Implied Fed | Percent | ||||||||||
| Funds Rate at | Funds Rate at | Earnings | ||||||||||
| December 1, 2004 | November 30, 2005 | Sensitivity | ||||||||||
|
Flat Rate Scenarios*
|
2.14 | % | 2.25 | |||||||||
|
High Rate
|
4.25 | 0.10 | ||||||||||
|
Low Rate
|
1.75 | (0.10 | ) | |||||||||
|
Market Forward
Rate Scenarios** |
2.14 | % | 3.16 | |||||||||
|
High Rate Composite
|
5.16 | (0.10 | ) | |||||||||
|
Low Rate
|
2.66 | |||||||||||
points, while new fixed rate lending and investment rates receive less than a 200 basis point increase. The focal point is the spread between the 10-year and two-year treasury note rates. In our “moderate flattening” scenario, this spread declines from 109 basis points in the “market forward rate” scenario to 68 basis points compared with the historical long-term average of 83 basis points. Our “severe flattening” scenario further reduces the spread between the 10-year and two-year treasury note rates to 26 basis points by the end of the measurement period. This approach fully stresses expected earnings to the risks of nonparallel curve shifts. The reported sensitivity is a composite of these three scenarios.
The Policy Period Sensitivity Measurement table shows that our “flat rate” scenario holds the federal funds rate constant at 2.25 percent through November 2005. Based on our December 2004 outlook, if interest rates were to follow our “high rate” scenario (i.e., a 200 basis point increase in short-term rates from our “flat rate” scenario) with a parallel shift in the yield curve, our earnings sensitivity model indicates earnings during the 12-month policy measurement period would increase by 0.1 percent.
Typically, we analyze a 200 basis point decline for our “low rate” scenario relative to a “flat rate” scenario. However, because of the current federal funds rate level, we believe a 50 basis point decline in rates is more appropriate. If rates were to follow the “low rate” scenario relative to our “flat rate” scenario, our earnings would decrease by 0.1 percent. For our “most likely rate” scenario, we believe the “market forward rate” is the most appropriate. The “market forward rate” scenario assumes the federal funds rate of 2.14 percent at December 1, 2004, gradually rises to 3.16 percent through the end of our policy measurement period.
While our interest rate sensitivity modeling assumes management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to earnings and we implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, we formulate strategies aimed at protecting earnings from the potential negative effects of changes in interest rates.
Financial Disclosure We have always maintained internal controls over financial reporting, which generally include those controls relating to the preparation of our consolidated financial statements in conformity with GAAP. As a bank holding company, we are subject to the internal control reporting and attestation requirements of the Federal Deposit Insurance Corporation Improvement Act, and therefore, we are very familiar with the process of maintaining and evaluating our internal controls over financial reporting. We also are focused on our “disclosure controls and procedures,” which as defined by the Securities and Exchange Commission, are generally those controls and procedures designed to ensure that financial and non-financial information required to be disclosed in our reports filed with the SEC is reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our Disclosure Committee, which includes senior representatives from our treasury, accounting and investor relations departments, as well as from our four core business segments, assists senior management in its oversight of the accuracy and timeliness of our disclosures, as well as in implementing and evaluating our overall disclosure process. As part of our disclosure process, accounting representatives in our finance division and representatives from our four core business segments prepare and review monthly, quarterly and annual financial reports, which also are reviewed by each of the business segment’s chief financial officers and senior management. Accounting representatives in our finance division also conduct further reviews with our senior management team, other appropriate personnel involved in the disclosure process, including the Disclosure Committee and internal audit, and our independent auditors and counsel, as appropriate. Financial results and other financial information also are reviewed with the Audit Committee of the board of directors on at least a quarterly basis. In addition, accounting representatives in our finance division meet with representatives of our
47
Management’s Discussion and Analysis
primary federal banking regulators on a quarterly basis to review, among other things, income statement and balance sheet trends, any significant or unusual transactions, changes in or adoption of significant accounting policies, and other significant non-financial data, as identified by our representatives. The chief executive officer and the chief financial officer also meet with the federal banking regulators on a semiannual basis. As required by applicable regulatory requirements, the chief executive officer and the chief financial officer review and make various certifications regarding the accuracy of our periodic public reports filed with the SEC, our disclosure controls and procedures, and our internal control over financial reporting. With the assistance of the Disclosure Committee, we will continue to assess and monitor our disclosure controls and procedures, and our internal controls over financial reporting, and will make refinements as necessary.
Accounting and Regulatory Matters
The following information addresses significant new developments in accounting standard setting that will affect us, as well as new or proposed legislation that will continue to have a significant impact on our industry.
Other-Than-Temporary Impairment and Available for Sale Securities In March 2004, the FASB partially ratified the consensus reached by the Emerging Issues Task Force (EITF) on EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). Subsequently in 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which partially delayed EITF 03-01 until the FASB issues further guidance. It is not possible at this time to determine whether or when any changes to existing accounting guidance might occur.
Share-Based Payments In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised) (SFAS 123R), Share-Based Payments , which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation . SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in income. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R is effective for share-based awards granted on or after July 1, 2004. As discussed in Note 1: Summary of Significant Accounting Policies , we adopted the fair value method of accounting for stock options in 2002.
Accordingly, the implementation of SFAS 123R will not have a material impact on our consolidated financial position or results of operations.
Leveraged Lease Accounting For a leveraged lease, SFAS No. 13, Accounting for Leases (SFAS 13), as amended and interpreted, states that if a change in an important lease assumption changes the total estimated net income under the lease, then the rate of return and the allocation of lease income to positive investment years must be recalculated from inception of the lease using the revised important assumption. The net investment in the lease must then be adjusted to the revised amount by a charge or credit to the results of operations in the period in which the important assumption is changed. Changes that affect only the timing of cash flows and not the total net income under the lease do not result in a recalculation of the lease.
The FASB continues to discuss several matters related to leveraged lease accounting including the extent to which changes that affect the timing of cash flows but not the total net income under the lease should be incorporated into the recalculation when a change in an important lease assumption occurs. If the FASB modifies existing interpretations of SFAS 13 and related industry practice, it could result in a one-time charge to the results of operations. An amount approximating this one-time charge would then be recognized in income over the remaining terms of the affected leases. It is not possible at this time to determine when any changes to existing lease accounting guidance and related industry practice might occur or the extent of the one-time charge that would likely result from any such changes that are adopted.
We understand the FASB intends to continue discussing this matter at a board meeting in the near future. We will monitor these discussions and to the extent any decisions are reached by the FASB that result in material changes from our current accounting treatment for leveraged leases, we will provide appropriate disclosures.
Income Taxes The American Jobs Creation Act of 2004 (the Act) introduces a special one-time dividends-received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. The amount of deferred taxes we recorded in 2004 in connection with a decision to repatriate certain earnings was not significant. We continue to evaluate the impact of the Act on our remaining undistributed earnings.
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Purchased Loans In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer , which addresses the accounting for differences between contractual cash flows and expected cash flows for loans or debt securities acquired in a transfer when those differences are attributable at least in part to a decline in credit quality. The scope of SOP 03-3 includes loans that have shown evidence of deterioration in credit quality since origination, and includes loans acquired individually, in pools or as part of a business combination. We do not believe adoption of SOP 03-3 will have a material impact on our consolidated financial position or results of operations.
Regulatory Matters Various legislative and regulatory proposals concerning the financial services industry are pending in Congress, the legislatures in states in which we conduct operations and before various regulatory agencies that supervise our operations. Given the uncertainty of the legislative and regulatory process, we cannot assess the impact of any such legislation or regulations on our consolidated financial position or results of operations. For a more detailed description of the laws and regulations governing our business operations, please see our 2004 Form 10-K.
In June 2004 the Basel Committee on Bank Supervision published new international guidelines for determining regulatory capital. The U.S. regulators have published a draft containing guidance of their interpretation of the new Basel guidelines. We will be required to determine regulatory capital under the new methodologies, in parallel with the existing capital rules, beginning in 2007. In 2008, we will determine regulatory capital solely under the new rules, which include certain limitations in 2008 and 2009. This is a very significant change that results in regulatory capital being more risk sensitive than under the current framework, and represents a significant implementation effort for us to be in compliance with the new regulations. The necessary project management infrastructure and funding have been established to ensure we will fully comply with the new regulations.
Earnings Analysis for Fourth Quarter 2004
Results in the fourth quarter of 2004 compared with the fourth quarter of 2003 include the two-month impact of the acquisition of SouthTrust. In this period, net income available to common stockholders rose 32 percent to a quarterly record $1.4 billion from $1.1 billion, and diluted earnings per common share rose 14 percent to 95 cents from 83 cents. These amounts include after-tax net merger-related and restructuring expenses of $53 million, or 4 cents per share, in the fourth quarter of 2004, and $75 million, or 5 cents per share, in the fourth quarter of 2003. Total revenue rose 11 percent to $6.2 billion, with 14 percent growth in tax-equivalent net interest income and 7 percent growth in fee and other income primarily due to SouthTrust. Total noninterest expense rose 2 percent, primarily reflecting higher incentives related to improved revenues and SouthTrust. Average loans were $196.5 billion, up 23 percent from the prior year’s fourth quarter, and included $24.2 billion from SouthTrust. There was strong growth in commercial loans, driven by middle-market commercial, small business and asset-based lending, and consumer loans, largely in consumer real estate-secured loans and student loans. Average core deposits increased 34 percent to $260.6 billion, while average low-cost core deposits increased 41 percent to $216.8 billion. SouthTrust added $14.1 billion in average low-cost core deposits. The increase in average core deposits also included an average $24.1 billion of core deposits associated with the FDIC-insured sweep product. The provision for credit losses increased $23 million, largely due to additional provision related to SouthTrust.
49
Management’s Discussion and Analysis
Comparison of 2003 with 2002
Corporate Results of Operations In 2003, we earned $4.3 billion in net income available to common stockholders, a 20 percent increase from 2002. On a per common share basis, diluted earnings rose 22 percent to $3.18. The increase was driven by 7 percent growth in net interest income and 20 percent growth in fee income, largely related to the effect of the retail brokerage transaction and a 60 percent decline in the provision for credit losses, offset by 14 percent growth in noninterest expense, also related to the retail brokerage transaction.
Tax-equivalent net interest income increased $690 million in 2003 from 2002, while the net interest margin declined 25 basis points to 3.72 percent. Net interest income grew due to a 14 percent increase in average earning assets supported by growth in low-cost core deposits. The increase in earning assets and the margin decline both reflect the impact of the retail brokerage transaction and the consolidation of our conduits.
Fee and other income increased in 2003 from 2002 primarily due to increased brokerage and insurance commissions, and fiduciary and asset management fees, reflecting the addition of the retail brokerage business and improving equity markets. Trading account profits increased to $110 million in 2003 from a loss of $71 million in 2002 primarily due to strength in fixed income and equity-linked products. Principal investing had net losses in 2003 of $139 million compared with net losses in 2002 of $266 million.
Net portfolio securities gains were $45 million in 2003, down $124 million from 2002, and included net gains from portfolio sales of $245 million offset by $200 million in impairment losses. Net portfolio securities gains in 2002 included net gains from portfolio sales of $341 million offset by $172 million in impairment losses.
Other income increased $181 million in 2003 from 2002. Of this increase, $52 million related to mortgage securitiza-tion and sales, which was more than offset by a decline of $85 million in home equity sale and securitization income. The sale of loans out of the loan portfolio as well as market value adjustments on and sales of loans held for sale resulted in a net gain of $219 million in 2003 compared with $64 million in 2002.
Total noninterest expense increased 14 percent from 2002, which was due primarily to the addition of expense related to the retail brokerage transaction and net merger-related and restructuring expenses. Excluding the impact of the retail brokerage transaction and merger-related and restructuring expenses, noninterest expense year over year increased moderately from higher revenue-based incentives, stock option expense and nondiscretionary costs such as pension expense, partially offset by the impact of expense control initiatives and merger efficiencies.
Income taxes were $1.8 billion in 2003, an increase of $745 million from 2002. In 2003, income taxes included a benefit of $58 million related to the second quarter public issuance of $300 million in preferred stock by a Real Estate Investment Trust (REIT) subsidiary. In 2002, income taxes included a benefit of $338 million largely due to a loss on our investment in one of our subsidiaries and, to a lesser extent, to the public issuance of $450 million in preferred stock by the REIT subsidiary.
Business Segments For much of 2003, many customers were generally wary of the financial and equity markets, and as a result, the banking industry saw rapid growth in deposit products. In this environment, our General Bank produced record revenue and earnings, while our Capital Management, Wealth Management, and Corporate and Investment Bank businesses proved to be resilient and produced record results as well.
General Bank earnings increased 10 percent in 2003 from 2002 due to higher consumer real estate-secured balances and strong growth in small business lending and core deposits. The rise in net interest income in 2003 reflected a 12 percent increase in average loans and 9 percent growth in average core deposits. Fee and other income rose 5 percent in 2003 due to mortgage-related revenue and strong debit card revenue as well as to increases in service charges and merchant income. Noninterest expense increased 4 percent in 2003 from 2002, reflecting higher production-based costs such as incentives. Strong expense management and the realization of merger efficiencies were evident in an improved overhead efficiency ratio (excluding merger-related and restructuring expenses, other intangible amortization and the change in accounting principle) of 55.07 percent in 2003, down from 56.15 percent in 2002.
Capital Management’s earnings increased 18 percent in 2003 from 2002 and were driven largely by the retail brokerage
50
transaction, although underlying performance also continued to strengthen due to improved equity markets. Total revenue increased 39 percent and noninterest expense increased 44 percent. Revenues from the retail brokerage businesses increased $1.2 billion to $3.4 billion, largely due to the impact of the retail brokerage transaction. Assets under management increased $15.8 billion from December 31, 2002, to $246.6 billion at December 31, 2003, as equity markets improved, driving revenues from the asset management businesses to $1.0 billion, an increase of $67 million from 2002.
Wealth Management’s earnings decreased 7 percent in 2003 from 2002. Total revenue increased 4 percent offset by a 9 percent increase in noninterest expense. Net interest income grew 9 percent as a result of strong loan and deposit production. Fee and other income rose modestly on higher insurance commissions, which were partially offset by a decline in trust and investment management fees as average equity valuations in 2003 fell below 2002 levels. Assets under management of $59.0 billion at year-end 2003 increased 2 percent from year-end 2002 primarily due to a rebound in the equity markets late in the fourth quarter of 2003. Noninterest expense in 2003 rose $61 million due to higher benefit costs, incentive payments, legal expenses and severance.
Corporate and Investment Bank earnings more than doubled from 2002 to $1.2 billion in 2003. Total revenue increased 12 percent in the same period as strong results in fixed income products, lower net principal investing losses and improvement in trading account profits more than offset a 7 percent decline in net interest income from lower loan balances in corporate lending. Fee and other income increased 43 percent in 2003 from 2002, largely driven by a rebound in trading account profits, which increased $218 million in 2003 from 2002, and improved advisory and underwriting fees in fixed income, convertible securities, merger and acquisition advisory services, equity capital markets and loan syndications. Fee and other income also improved due to lower principal investing losses of $139 million in 2003 compared with $266 million in 2002, as well as increased loans held for sale gains. Provision expense fell $743 million in 2003 from 2002 due to higher recoveries, improved credit quality and more favorable economic conditions. The 19 percent decline in average net loans in 2003 from 2002 was a result of weak loan demand and lower credit facility usage, as well as portfolio management activity. Average core deposits increased 20 percent in the same period due to growth in commercial mortgage servicing and international trade finance.
Earnings in the Parent were $275 million in 2003 compared with $482 million in 2002. Fee and other income in the Parent declined primarily as a result of a $41 million reduction in mortgage banking income and a $144 million reduction in securities gains, partially offset by a $62 million increase in revenue from other corporate investments. Advisory fees in 2002 included an incremental $42 million related to the securitization of assets from one of our conduits. Trading losses of $66 million in 2003 included $31 million in losses related to liquidity agreements we have with the conduits we administer. Trading losses of $26 million in 2002 included a $42 million loss related to the purchase of $361 million of assets from one of our conduits pursuant to a credit enhancement agreement we have with the conduit. Noninterest expense declined by $127 million in 2003 from 2002 primarily due to reduced deposit base intangible amortization and legal costs. Income tax expense increased $275 million from 2002, which included the recognition in 2002 of a tax benefit related to a realized tax loss on our investment in The Money Store.
Balance Sheet Analysis Average earning assets in 2003 were $292.2 billion, which represented a 14 percent increase from 2002. Nearly half of this increase was due to the addition of assets from the retail brokerage transaction, the consolidation of our conduits and securities funded through our FDIC-insured sweep product.
Securities available for sale were $100.4 billion at December 31, 2003, an increase from $75.8 billion in 2002, which reflects securities purchased in anticipation of the FDIC-insured sweep product and the conduit consolidation.
Net loans increased 2 percent in 2003 from 2002, primarily due to purchases of $8.0 billion of residential mortgage loans for investment purposes, which offset run-off in the mortgage loan portfolio as well as a decline in corporate loans as a result of sales, securitizations and transfers to loans held for sale. In 2003, we transferred to loans held for sale or directly sold $1.7 billion of loans, primarily from the corporate portfolio, compared with transfers or sales of $3.8 billion in 2002.
Total nonperforming assets declined 34 percent from 2002, reflecting more favorable market conditions, a slowdown in new inflows to commercial nonaccrual loans and $299 million in loan sales directly from the loan portfolio.
Net charge-offs as a percentage of average net loans were 0.41 percent in 2003, down from 0.73 percent in 2002,
51
Management’s Discussion and Analysis
due mainly to moderating trends in nonperforming assets and our strategic decision to actively manage down potential problem loans. The improved loan quality and more favorable economic conditions resulted in a provision for credit losses 60 percent lower in 2003 than in 2002. The provision for credit losses in 2002 of $1.5 billion included $357 million related to $3.8 billion of loans sold directly out of the loan portfolio or transferred to loans held for sale.
The allowance for loan losses declined 10 percent to $2.3 billion, or 1.42 percent of net loans, in 2003 compared with $2.6 billion, or 1.60 percent, in 2002. The decline was related to $228 million in allowance associated with loans that were sold or transferred to loans held for sale, and to improving credit quality trends. In 2003, we also sold $1.1 billion of loans directly out of the loan portfolio.
Liquidity and Capital Adequacy Core deposits increased 16 percent from December 31, 2002, to $204.7 billion. Average low-cost core deposits grew 20 percent as we focused on increasing the proportion of this lower cost funding over other deposit products. Average purchased funds were $72.5 billion, an increase of 38 percent primarily related
to the retail brokerage transaction. Long-term debt declined $2.9 billion to $36.7 billion at December 31, 2003, reflecting scheduled maturities.
Stockholders’ equity increased $350 million from year-end 2002 to $32.4 billion at December 31, 2003. We paid $1.7 billion, or $1.25 per share, in dividends to common stockholders in 2003 compared with $1.4 billion, or $1.00 per share, in 2002. We paid holders of Dividend Equalization Preferred Shares (DEPs) issued in connection with the First Union-Wachovia merger total dividends of $5 million, or 5 cents per DEP share, in 2003, compared with $19 million, or 20 cents per DEP share in 2002. Future dividend rights of the DEPs ceased completely following the fourth quarter 2003 common stock dividend payment.
Our tier 1 capital ratio increased 30 basis points from December 31, 2002, to 8.52 percent at December 31, 2003, driven primarily by higher retained earnings and the minority interest created in the retail brokerage transaction. Our total capital and leverage ratios were 11.82 percent and 6.36 percent, respectively, at December 31, 2003, and 12.01 percent and 6.77 percent, respectively, at December 31, 2002.
52
Financial Tables
Table 1
EXPLANATION OF OUR USE OF NON-GAAP FINANCIAL MEASURES
In addition to the results of operations presented in accordance with generally accepted accounting principles (GAAP), our management uses, and this annual report contains, certain non-GAAP financial measures, such as expenses excluding merger-related and restructuring expenses; the dividend payout ratio on a basis that excludes other intangible amortization, merger-related and restructuring expenses, and the cumulative effect of a change in accounting principle; and net interest income on a tax-equivalent basis.
| Years Ended December 31, | ||||||||||||||||||||
|
(In millions, except per share data) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
Net interest income
(GAAP)
|
$ | 11,961 | 10,607 | 9,955 | 7,775 | 7,437 | ||||||||||||||
|
Tax-equivalent adjustment
|
250 | 256 | 218 | 159 | 99 | |||||||||||||||
|
Net interest income
(Tax-equivalent)
|
$ | 12,211 | 10,863 | 10,173 | 7,934 | 7,536 | ||||||||||||||
|
DIVIDEND PAYOUT RATIOS ON COMMON SHARES
|
||||||||||||||||||||
|
Diluted earnings per common share
(GAAP)
|
$ | 3.81 | 3.18 | 2.60 | ||||||||||||||||
|
Other intangible amortization
|
0.20 | 0.24 | 0.28 | |||||||||||||||||
|
Merger-related and restructuring expenses
|
0.14 | 0.19 | 0.18 | |||||||||||||||||
|
Cumulative effect of a change in accounting principle
|
- | (0.01 | ) | - | ||||||||||||||||
|
Earnings per share (a)
|
$ | 4.15 | 3.60 | 3.06 | ||||||||||||||||
|
Dividends paid per common share
|
$ | 1.66 | 1.25 | 1.00 | ||||||||||||||||
|
Dividend payout ratios
(GAAP)
(b)
|
43.57 | % | 39.31 | 38.46 | ||||||||||||||||
|
Dividend payout ratios (a)(b)
|
40.00 | % | 34.72 | 32.68 | ||||||||||||||||
(a) Excludes other intangible amortization, merger-related and restructuring expenses, and the cumulative effect of a change in accounting principle.
53
Financial Tables
Table 2
SELECTED STATISTICAL DATA
| Years Ended December 31, | ||||||||||||||||||||
|
(Dollars in millions, except per share data) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
PROFITABILITY
|
||||||||||||||||||||
|
Return on average common stockholders’ equity
|
14.77 | % | 13.25 | 11.72 | 7.98 | 0.59 | ||||||||||||||
|
Net interest margin (a)
|
3.41 | 3.72 | 3.97 | 3.59 | 3.55 | |||||||||||||||
|
Fee and other income as % of total revenue (b)
|
46.88 | 46.61 | 43.68 | 44.24 | 47.11 | |||||||||||||||
|
Effective income tax rate
|
31.70 | % | 30.16 | 23.29 | 29.39 | 80.37 | ||||||||||||||
|
ASSET QUALITY
|
||||||||||||||||||||
|
Allowance for loan losses as % of loans, net (b)
|
1.23 | % | 1.42 | 1.60 | 1.72 | 1.31 | ||||||||||||||
|
Allowance for loan losses as % of nonperforming assets (b)(c)
|
251 | 205 | 150 | 164 | 127 | |||||||||||||||
|
Allowance for credit losses as % of loans, net
|
1.30 | 1.51 | 1.72 | 1.83 | 1.39 | |||||||||||||||
|
Net charge-offs as % of average loans, net
|
0.17 | 0.41 | 0.73 | 0.70 | 0.59 | |||||||||||||||
|
Nonperforming assets as % of loans, net,
foreclosed properties and loans held for sale
|
0.53 | % | 0.69 | 1.11 | 1.13 | 1.22 | ||||||||||||||
|
CAPITAL ADEQUACY
|
||||||||||||||||||||
|
Tier 1 capital ratio
|
8.01 | % | 8.52 | 8.22 | 7.04 | 7.02 | ||||||||||||||
|
Total capital ratio
|
11.11 | 11.82 | 12.01 | 11.08 | 11.19 | |||||||||||||||
|
Leverage
|
6.38 | % | 6.36 | 6.77 | 6.19 | 5.92 | ||||||||||||||
|
OTHER DATA
|
||||||||||||||||||||
|
FTE employees (b)
|
96,030 | 86,114 | 80,868 | 84,046 | 70,639 | |||||||||||||||
|
Total financial centers/brokerage offices
|
4,004 | 3,360 | 3,280 | 3,434 | 2,568 | |||||||||||||||
|
ATMs
|
5,321 | 4,408 | 4,560 | 4,675 | 3,772 | |||||||||||||||
|
Registered common stockholders
|
185,647 | 170,205 | 181,455 | 191,231 | 157,524 | |||||||||||||||
|
Actual common shares
(In millions)
|
1,588 | 1,312 | 1,357 | 1,362 | 980 | |||||||||||||||
|
Common stock price
|
$ | 52.60 | 46.59 | 36.44 | 31.36 | 27.81 | ||||||||||||||
|
Market capitalization
|
$ | 83,537 | 61,139 | 49,461 | 42,701 | 27,253 | ||||||||||||||
(a) Tax-equivalent.
54
Table 3
SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
| Years Ended December 31, | ||||||||||||||||||||
|
(In millions, except per share data) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
SUMMARIES OF INCOME
|
||||||||||||||||||||
|
Interest income
|
$ | 17,288 | 15,080 | 15,632 | 16,100 | 17,534 | ||||||||||||||
|
Tax-equivalent adjustment
|
250 | 256 | 218 | 159 | 99 | |||||||||||||||
|
Interest income (a)
|
17,538 | 15,336 | 15,850 | 16,259 | 17,633 | |||||||||||||||
|
Interest expense
|
5,327 | 4,473 | 5,677 | 8,325 | 10,097 | |||||||||||||||
|
Net interest income (a)
|
12,211 | 10,863 | 10,173 | 7,934 | 7,536 | |||||||||||||||
|
Provision for credit losses
|
257 | 586 | 1,479 | 1,947 | 1,736 | |||||||||||||||
|
Net interest income after provision for credit losses (a)
|
11,954 | 10,277 | 8,694 | 5,987 | 5,800 | |||||||||||||||
|
Securities gains (losses)
|
(10 | ) | 45 | 169 | (67 | ) | (1,125 | ) | ||||||||||||
|
Fee and other income (b)
|
10,789 | 9,437 | 7,721 | 6,363 | 7,837 | |||||||||||||||
|
Merger-related and restructuring expenses
|
444 | 443 | 387 | 106 | 2,190 | |||||||||||||||
|
Other noninterest expense (b)
|
14,222 | 12,837 | 11,306 | 9,724 | 9,520 | |||||||||||||||
|
Minority interest in income of consolidated subsidiaries
|
184 | 143 | 6 | 1 | - | |||||||||||||||
|
Income before income taxes and cumulative effect of
a change in accounting principle (a)
|
7,883 | 6,336 | 4,885 | 2,452 | 802 | |||||||||||||||
|
Income taxes
|
2,419 | 1,833 | 1,088 | 674 | 565 | |||||||||||||||
|
Tax-equivalent adjustment
|
250 | 256 | 218 | 159 | 99 | |||||||||||||||
|
Income before cumulative effect of a change
in accounting principle
|
5,214 | 4,247 | 3,579 | 1,619 | 138 | |||||||||||||||
|
Cumulative effect of a change in accounting principle,
net of income taxes
|
- | 17 | - | - | (46 | ) | ||||||||||||||
|
Net income
|
5,214 | 4,264 | 3,579 | 1,619 | 92 | |||||||||||||||
|
Dividends on preferred stock
|
- | 5 | 19 | 6 | - | |||||||||||||||
|
Net income available to common stockholders
|
$ | 5,214 | 4,259 | 3,560 | 1,613 | 92 | ||||||||||||||
|
PER COMMON SHARE DATA
|
||||||||||||||||||||
|
Basic
|
||||||||||||||||||||
|
Income before change in accounting principle
|
$ | 3.87 | 3.20 | 2.62 | 1.47 | 0.12 | ||||||||||||||
|
Net income
|
3.87 | 3.21 | 2.62 | 1.47 | 0.07 | |||||||||||||||
|
Diluted
|
||||||||||||||||||||
|
Income before change in accounting principle
|
3.81 | 3.17 | 2.60 | 1.45 | 0.12 | |||||||||||||||
|
Net income
|
3.81 | 3.18 | 2.60 | 1.45 | 0.07 | |||||||||||||||
|
Cash dividends
|
$ | 1.66 | 1.25 | 1.00 | 0.96 | 1.92 | ||||||||||||||
|
Average common shares - Basic
|
1,346 | 1,325 | 1,356 | 1,096 | 971 | |||||||||||||||
|
Average common shares - Diluted
|
1,370 | 1,340 | 1,369 | 1,105 | 974 | |||||||||||||||
|
Average common stockholders’ equity
|
$ | 35,295 | 32,135 | 30,384 | 20,218 | 15,541 | ||||||||||||||
|
Book value per common share
|
29.79 | 24.71 | 23.63 | 20.88 | 15.66 | |||||||||||||||
|
Common stock price
|
||||||||||||||||||||
|
High
|
54.52 | 46.59 | 39.50 | 36.38 | 38.88 | |||||||||||||||
|
Low
|
43.56 | 32.72 | 28.75 | 27.81 | 24.00 | |||||||||||||||
|
Year-end
|
$ | 52.60 | 46.59 | 36.44 | 31.36 | 27.81 | ||||||||||||||
|
To earnings ratio (c)
|
13.81 | X | 14.65 | 14.02 | 21.63 | 397.29 | ||||||||||||||
|
To book value
|
177 | % | 189 | 154 | 150 | 178 | ||||||||||||||
|
BALANCE SHEET DATA
|
||||||||||||||||||||
|
Assets (b)
|
$ | 493,324 | 401,188 | 342,033 | 330,634 | 254,272 | ||||||||||||||
|
Long-term debt
|
$ | 46,759 | 36,730 | 39,662 | 41,733 | 35,809 | ||||||||||||||
(a) Tax-equivalent.
55
Financial Tables
Table 4
NET TRADING REVENUE - INVESTMENT BANKING (a)
| Years Ended December 31, | ||||||||||||
|
(In millions) |
2004 | 2003 | 2002 | |||||||||
|
Net interest income
(Tax-equivalent)
|
$ | 630 | 486 | 487 | ||||||||
|
Trading accounts profits (losses)
|
93 | 156 | (80 | ) | ||||||||
|
Other fee income
|
249 | 248 | 231 | |||||||||
|
Total net trading revenue
(Tax-equivalent)
|
$ | 972 | 890 | 638 | ||||||||
(a) Certain amounts presented in prior years have been reclassified to conform to the presentation in 2004.
Table 5
SELECTED RATIOS
Years Ended December 31,
2004
2003
2002
2001
2000
12.09
X
11.25
10.55
13.37
15.93
1.22
%
1.18
1.12
0.60
0.04
14.77
13.25
11.72
7.98
0.59
14.77
%
13.27
11.78
8.00
0.59
43.57
%
39.31
38.46
66.21
2,742.86
43.57
%
39.15
38.72
64.13
2,742.86
(a) Based on average balances and net income.
56
Table 6
SELECTED QUARTERLY DATA
| 2004 | 2003 | |||||||||||||||||||||||||||||||
|
(In millions, except per share data) |
Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||
|
Interest income
|
$ | 4,969 | 4,301 | 4,019 | 3,999 | 3,951 | 3,712 | 3,696 | 3,721 | |||||||||||||||||||||||
|
Interest expense
|
1,672 | 1,336 | 1,181 | 1,138 | 1,074 | 1,059 | 1,156 | 1,184 | ||||||||||||||||||||||||
|
Net interest income
|
3,297 | 2,965 | 2,838 | 2,861 | 2,877 | 2,653 | 2,540 | 2,537 | ||||||||||||||||||||||||
|
Provision for credit losses
|
109 | 43 | 61 | 44 | 86 | 81 | 195 | 224 | ||||||||||||||||||||||||
|
Net interest income after
provision for credit losses
|
3,188 | 2,922 | 2,777 | 2,817 | 2,791 | 2,572 | 2,345 | 2,313 | ||||||||||||||||||||||||
|
Securities gains (losses)
|
23 | (71 | ) | 36 | 2 | (24 | ) | 22 | 10 | 37 | ||||||||||||||||||||||
|
Fee and other income
|
2,781 | 2,672 | 2,571 | 2,765 | 2,637 | 2,604 | 2,158 | 2,038 | ||||||||||||||||||||||||
|
Merger-related and
restructuring expenses
|
116 | 127 | 102 | 99 | 135 | 148 | 96 | 64 | ||||||||||||||||||||||||
|
Other noninterest expense
|
3,718 | 3,544 | 3,393 | 3,567 | 3,640 | 3,432 | 2,915 | 2,850 | ||||||||||||||||||||||||
|
Minority interest in income of
consolidated subsidiaries
|
54 | 28 | 45 | 57 | 63 | 55 | 16 | 9 | ||||||||||||||||||||||||
|
Income before income taxes and
cumulative effect of a change
in accounting principle
|
2,104 | 1,824 | 1,844 | 1,861 | 1,566 | 1,563 | 1,486 | 1,465 | ||||||||||||||||||||||||
|
Income taxes
|
656 | 561 | 592 | 610 | 466 | 475 | 454 | 438 | ||||||||||||||||||||||||
|
Income before cumulative effect
of a change in accounting
principle
|
1,448 | 1,263 | 1,252 | 1,251 | 1,100 | 1,088 | 1,032 | 1,027 | ||||||||||||||||||||||||
|
Cumulative effect of a change
in accounting principle, net of
income taxes
|
- | - | - | - | - | 17 | - | - | ||||||||||||||||||||||||
|
Net income
|
1,448 | 1,263 | 1,252 | 1,251 | 1,100 | 1,105 | 1,032 | 1,027 | ||||||||||||||||||||||||
|
Dividends on preferred stock
|
- | - | - | - | - | - | 1 | 4 | ||||||||||||||||||||||||
|
Net income available to
common stockholders
|
$ | 1,448 | 1,263 | 1,252 | 1,251 | 1,100 | 1,105 | 1,031 | 1,023 | |||||||||||||||||||||||
|
PER COMMON SHARE
DATA
|
||||||||||||||||||||||||||||||||
|
Basic earnings
|
||||||||||||||||||||||||||||||||
|
Income before change in
accounting principle
|
$ | 0.97 | 0.97 | 0.96 | 0.96 | 0.84 | 0.83 | 0.77 | 0.77 | |||||||||||||||||||||||
|
Net income
|
0.97 | 0.97 | 0.96 | 0.96 | 0.84 | 0.84 | 0.77 | 0.77 | ||||||||||||||||||||||||
|
Diluted earnings
|
||||||||||||||||||||||||||||||||
|
Income before change in
accounting principle
|
0.95 | 0.96 | 0.95 | 0.94 | 0.83 | 0.82 | 0.77 | 0.76 | ||||||||||||||||||||||||
|
Net income
|
0.95 | 0.96 | 0.95 | 0.94 | 0.83 | 0.83 | 0.77 | 0.76 | ||||||||||||||||||||||||
|
Cash dividends
|
0.46 | 0.40 | 0.40 | 0.40 | 0.35 | 0.35 | 0.29 | 0.26 | ||||||||||||||||||||||||
|
Common stock price
|
||||||||||||||||||||||||||||||||
|
High
|
54.52 | 47.50 | 47.66 | 48.90 | 46.59 | 44.71 | 43.15 | 38.69 | ||||||||||||||||||||||||
|
Low
|
46.84 | 43.56 | 44.16 | 45.91 | 42.07 | 40.60 | 34.47 | 32.72 | ||||||||||||||||||||||||
|
Period-end
|
$ | 52.60 | 46.95 | 44.50 | 47.00 | 46.59 | 41.19 | 39.96 | 34.07 | |||||||||||||||||||||||
|
SELECTED RATIOS (a)
|
||||||||||||||||||||||||||||||||
|
Return on assets
|
1.22 | % | 1.18 | 1.22 | 1.26 | 1.12 | 1.16 | 1.21 | 1.23 | |||||||||||||||||||||||
|
Return on total stockholders’
equity
|
13.50 | 15.12 | 15.49 | 15.37 | 13.58 | 13.71 | 12.79 | 12.99 | ||||||||||||||||||||||||
|
Stockholders’ equity to assets
|
9.03 | % | 7.83 | 7.91 | 8.21 | 8.26 | 8.49 | 9.46 | 9.50 | |||||||||||||||||||||||
(a) Based on average balances and net income.
57
Financial Tables
Table 7
LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
(a) The managed portfolio includes the on-balance sheet loan portfolio, loans securitized for which the retained interests are classified in securities on-balance sheet, loans held for sale on-balance sheet and the off-balance sheet portfolio of securitized loans sold, where we service the loans.
58
Table 8
LOANS HELD FOR SALE
| Years Ended December 31, | ||||||||||||||||
|
( In millions) |
2004 | 2003 | 2002 | 2001 | ||||||||||||
|
Balance, beginning of year
|
$ | 12,625 | 6,012 | 7,763 | 8,146 | |||||||||||
|
CORE BUSINESS ACTIVITY (a)
|
||||||||||||||||
|
Core business activity, beginning of year
|
12,504 | 5,488 | 6,991 | 3,447 | ||||||||||||
|
Balance of acquired entities at purchase date
|
653 | - | - | 180 | ||||||||||||
|
Originations/purchases
|
38,192 | 35,831 | 27,443 | 22,712 | ||||||||||||
|
Transfer to (from) loans held for sale, net
|
(9,374 | ) | (806 | ) | (3,800 | ) | (193 | ) | ||||||||
|
Lower of cost or market value adjustments
|
(2 | ) | (67 | ) | (52 | ) | (52 | ) | ||||||||
|
Performing loans sold or securitized
|
(20,824 | ) | (24,399 | ) | (23,755 | ) | (18,207 | ) | ||||||||
|
Nonperforming loans sold
|
(2 | ) | (47 | ) | (11 | ) | (2 | ) | ||||||||
|
Other, principally payments
|
(8,854 | ) | (3,496 | ) | (1,328 | ) | (894 | ) | ||||||||
|
Core business activity, end of year
|
12,293 | 12,504 | 5,488 | 6,991 | ||||||||||||
|
PORTFOLIO MANAGEMENT ACTIVITY (a)
|
||||||||||||||||
|
Portfolio management activity, beginning of year
|
121 | 524 | 772 | 4,699 | ||||||||||||
|
Balance of acquired entities at purchase date
|
- | - | - | 117 | ||||||||||||
|
Transfers to (from) loans held for sale, net
|
||||||||||||||||
|
Performing loans
|
680 | 437 | 1,941 | 1,161 | ||||||||||||
|
Nonperforming loans
|
136 | 121 | 306 | 291 | ||||||||||||
|
Lower of cost or market value adjustments
|
1 | 45 | (1 | ) | (136 | ) | ||||||||||
|
Performing loans sold
|
(136 | ) | (577 | ) | (1,768 | ) | (4,252 | ) | ||||||||
|
Nonperforming loans sold
|
(22 | ) | (180 | ) | (63 | ) | (376 | ) | ||||||||
|
Allowance for loan losses related to loans
transferred to loans held for sale
|
(59 | ) | (134 | ) | (435 | ) | (335 | ) | ||||||||
|
Other, principally payments
|
(26 | ) | (115 | ) | (228 | ) | (397 | ) | ||||||||
|
Portfolio management activity, end of year
|
695 | 121 | 524 | 772 | ||||||||||||
|
Balance, end of year (b)
|
$ | 12,988 | 12,625 | 6,012 | 7,763 | |||||||||||
(a) Core business activity means we originate loans with the intent to sell them to third parties, and portfolio management activity means we look for market opportunities to reduce risk in the loan portfolio by transferring loans to loans held for sale.
59
Financial Tables
Table 9
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES (a)
| December 31, 2004 | ||||||||||||||||||||
|
Real |
||||||||||||||||||||
| Commercial, | Estate- | |||||||||||||||||||
| Financial | Construction | Real | ||||||||||||||||||
| and | and | Estate- | ||||||||||||||||||
| (In millions) | Agricultural | Other | Mortgage | Foreign | Total | |||||||||||||||
|
FIXED RATE
|
||||||||||||||||||||
|
1 year or less
|
$ | 2,393 | 51 | 186 | 3,348 | 5,978 | ||||||||||||||
|
1-5 years
|
5,393 | 147 | 1,513 | 11 | 7,064 | |||||||||||||||
|
After 5 years
|
7,000 | 103 | 919 | — | 8,022 | |||||||||||||||
|
Total fixed rate
|
14,786 | 301 | 2,618 | 3,359 | 21,064 | |||||||||||||||
|
ADJUSTABLE RATE
|
||||||||||||||||||||
|
1 year or less
|
21,073 | 6,126 | 4,462 | 3,037 | 34,698 | |||||||||||||||
|
1-5 years
|
30,916 | 5,941 | 11,171 | 1,242 | 49,270 | |||||||||||||||
|
After 5 years
|
8,320 | 305 | 2,491 | 78 | 11,194 | |||||||||||||||
|
Total adjustable rate
|
60,309 | 12,372 | 18,124 | 4,357 | 95,162 | |||||||||||||||
|
Total
|
$ | 75,095 | 12,673 | 20,742 | 7,716 | 116,226 | ||||||||||||||
(a) Excludes lease financing.
60
Table 10
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
| Years Ended December 31, | ||||||||||||||||||||
|
(In millions) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
ALLOWANCE FOR LOAN LOSSES (a)
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | 2,348 | 2,604 | 2,813 | 1,620 | 1,655 | ||||||||||||||
|
Provision for credit losses
|
290 | 549 | 1,110 | 1,583 | 1,079 | |||||||||||||||
|
Provision for credit losses relating to loans
transferred to loans held for sale or sold
|
(31 | ) | 75 | 357 | 284 | 657 | ||||||||||||||
|
Balance of acquired entities at purchase date
|
510 | - | - | 766 | - | |||||||||||||||
|
Allowance relating to loans acquired, transferred
to loans held for sale or sold
|
(60 | ) | (228 | ) | (554 | ) | (503 | ) | (1,020 | ) | ||||||||||
|
Net charge-offs
|
(300 | ) | (652 | ) | (1,122 | ) | (937 | ) | (751 | ) | ||||||||||
|
Balance, end of year
|
$ | 2,757 | 2,348 | 2,604 | 2,813 | 1,620 | ||||||||||||||
|
as % of loans, net
|
1.23 | % | 1.42 | 1.60 | 1.72 | 1.31 | ||||||||||||||
|
as % of nonaccrual and restructured loans (b)
|
289 | % | 227 | 164 | 183 | 138 | ||||||||||||||
|
as % of nonperforming assets (b)
|
251 | % | 205 | 150 | 164 | 127 | ||||||||||||||
|
LOAN LOSSES
|
||||||||||||||||||||
|
Commercial, financial and agricultural
|
$ | 221 | 471 | 890 | 768 | 531 | ||||||||||||||
|
Commercial real estate - construction and mortgage
|
9 | 18 | 22 | 10 | 13 | |||||||||||||||
|
Consumer
|
296 | 396 | 377 | 301 | 323 | |||||||||||||||
|
Total loan losses
|
526 | 885 | 1,289 | 1,079 | 867 | |||||||||||||||
|
LOAN RECOVERIES
|
||||||||||||||||||||
|
Commercial, financial and agricultural
|
148 | 148 | 93 | 75 | 53 | |||||||||||||||
|
Commercial real estate - construction and mortgage
|
3 | 4 | 2 | 8 | 3 | |||||||||||||||
|
Consumer
|
75 | 81 | 72 | 59 | 60 | |||||||||||||||
|
Total loan recoveries
|
226 | 233 | 167 | 142 | 116 | |||||||||||||||
|
Net charge-offs
|
$ | 300 | 652 | 1,122 | 937 | 751 | ||||||||||||||
|
Commercial loan net charge-offs as % of
average commercial loans, net
|
0.08 | % | 0.37 | 0.84 | 0.82 | 0.65 | ||||||||||||||
|
Consumer loan net charge-offs as % of
average consumer loans, net
|
0.30 | 0.47 | 0.54 | 0.49 | 0.51 | |||||||||||||||
|
Total net charge-offs as % of average loans, net
|
0.17 | % | 0.41 | 0.73 | 0.70 | 0.59 | ||||||||||||||
|
NONPERFORMING ASSETS
|
||||||||||||||||||||
|
Nonaccrual loans
|
||||||||||||||||||||
|
Commercial, financial and agricultural
|
$ | 585 | 765 | 1,269 | 1,294 | 884 | ||||||||||||||
|
Commercial real estate - construction and mortgage
|
127 | 54 | 105 | 87 | 55 | |||||||||||||||
|
Consumer real estate secured
|
230 | 192 | 208 | 117 | 220 | |||||||||||||||
|
Installment loans
|
13 | 24 | 3 | 36 | 17 | |||||||||||||||
|
Total nonaccrual loans
|
955 | 1,035 | 1,585 | 1,534 | 1,176 | |||||||||||||||
|
Foreclosed properties (c)
|
145 | 111 | 150 | 179 | 103 | |||||||||||||||
|
Total nonperforming assets
|
$ | 1,100 | 1,146 | 1,735 | 1,713 | 1,279 | ||||||||||||||
|
Nonperforming loans included in loans held for sale (d)
|
$ | 157 | 82 | 138 | 228 | 334 | ||||||||||||||
|
Nonperforming assets included in loans and in loans
held for sale
|
$ | 1,257 | 1,228 | 1,873 | 1,941 | 1,613 | ||||||||||||||
|
as % of loans, net, and foreclosed properties (b)
|
0.49 | % | 0.69 | 1.06 | 1.04 | 1.03 | ||||||||||||||
|
as % of loans, net, foreclosed properties and loans
held for sale (d)
|
0.53 | % | 0.69 | 1.11 | 1.13 | 1.22 | ||||||||||||||
|
Accruing loans past due 90 days
|
$ | 522 | 341 | 304 | 288 | 183 | ||||||||||||||
(a) In 2004, we reclassified the reserve for unfunded lending commitments from the allowance for loan losses to other liabilities. Amounts presented in prior years have been reclassified to conform to the presentation in 2004. More information is in Note 7 to “Notes to Consolidated Financial Statements”.
61
Financial Tables
Table 11
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (a)
|
December 31, |
||||||||||||||||||||||||||||||||||||||||
|
2004 |
2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||||||
| Loans | Loans | Loans | Loans | Loans | ||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
| (In millions) | Amt. | Loans | Amt. | Loans | Amt. | Loans | Amt. | Loans | Amt. | Loans | ||||||||||||||||||||||||||||||
|
COMMERCIAL
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial, financial
and agricultural
|
$ | 1,384 | 32 | % | $ | 582 | 32 | % | $ | 864 | 33 | % | $ | 932 | 35 | % | $ | 661 | 42 | % | ||||||||||||||||||||
|
Real estate -
|
||||||||||||||||||||||||||||||||||||||||
|
Construction
and other
|
155 | 5 | 59 | 3 | 75 | 3 | 59 | 5 | 33 | 2 | ||||||||||||||||||||||||||||||
|
Mortgage
|
268 | 9 | 113 | 8 | 128 | 10 | 105 | 10 | 55 | 7 | ||||||||||||||||||||||||||||||
|
Lease financing
|
35 | 11 | 57 | 14 | 66 | 13 | 45 | 13 | 42 | 12 | ||||||||||||||||||||||||||||||
|
Foreign
|
67 | 3 | 64 | 4 | 77 | 4 | 64 | 4 | 37 | 4 | ||||||||||||||||||||||||||||||
|
CONSUMER
|
||||||||||||||||||||||||||||||||||||||||
|
Real estate secured
|
382 | 32 | 221 | 29 | 196 | 27 | 127 | 25 | 116 | 27 | ||||||||||||||||||||||||||||||
|
Student loans
|
56 | 5 | 39 | 5 | 4 | 4 | - | 1 | - | - | ||||||||||||||||||||||||||||||
|
Installment loans
|
320 | 3 | 156 | 5 | 192 | 6 | 145 | 7 | 80 | 6 | ||||||||||||||||||||||||||||||
|
UNALLOCATED
|
90 | - | 1,057 | - | 1,002 | - | 1,336 | - | 596 | - | ||||||||||||||||||||||||||||||
|
Total
|
$ | 2,757 | 100 | % | $ | 2,348 | 100 | % | $ | 2,604 | 100 | % | $ | 2,813 | 100 | % | $ | 1,620 | 100 | % | ||||||||||||||||||||
(a) In 2004, we reclassified the reserve for unfunded lending commitments from the allowance for loan losses to other liabilities. Amounts presented prior to 2004 have been reclassified to conform to the presentation in 2004. More information is in Note 7 to “Notes to Consolidated Financial Statements”. In addition, in 2004 the allowance for loan losses model was refined to better align its methodology with the current framework for analyzing credit risk. As a result, it is anticipated that the unallocated component of the allowance for loan losses will generally not exceed 5 percent of the total allowance for loan losses, and is 3 percent of the allowance for loan losses at December 31, 2004. The allocation of the allowance for loan losses for years prior to 2004 has not been restated to reflect the 2004 refinements to the allowance for loan losses model.
62
Table 12
NONACCRUAL LOAN ACTIVITY (a)
| Years Ended December 31, | ||||||||||||||||||||
|
(In millions) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
Balance, beginning of year
|
$ | 1,035 | 1,585 | 1,534 | 1,176 | 968 | ||||||||||||||
|
COMMERCIAL NONACCRUAL LOAN ACTIVITY
|
||||||||||||||||||||
|
Commercial nonaccrual loans, beginning of year
|
819 | 1,374 | 1,381 | 939 | 606 | |||||||||||||||
|
Balance of acquired entities at purchase date
|
321 | - | - | 209 | - | |||||||||||||||
|
New nonaccrual loans and advances
|
575 | 1,051 | 2,275 | 1,719 | 1,434 | |||||||||||||||
|
Gross charge-offs
|
(230 | ) | (489 | ) | (912 | ) | (778 | ) | (544 | ) | ||||||||||
|
Transfers to loans held for sale
|
(134 | ) | (69 | ) | (239 | ) | (20 | ) | (258 | ) | ||||||||||
|
Transfers to other real estate owned
|
(3 | ) | (12 | ) | (12 | ) | (45 | ) | - | |||||||||||
|
Sales
|
(135 | ) | (256 | ) | (278 | ) | (150 | ) | (15 | ) | ||||||||||
|
Other, principally payments
|
(501 | ) | (780 | ) | (841 | ) | (493 | ) | (284 | ) | ||||||||||
|
Net commercial nonaccrual loan activity
|
(428 | ) | (555 | ) | (7 | ) | 233 | 333 | ||||||||||||
|
Commercial nonaccrual loans, end of year
|
712 | 819 | 1,374 | 1,381 | 939 | |||||||||||||||
|
CONSUMER NONACCRUAL LOAN ACTIVITY
|
||||||||||||||||||||
|
Consumer nonaccrual loans, beginning of year
|
216 | 211 | 153 | 237 | 362 | |||||||||||||||
|
Balance of acquired entities at purchase date
|
21 | - | - | 33 | - | |||||||||||||||
|
New nonaccrual loans and advances, net
|
10 | 106 | 178 | 262 | 118 | |||||||||||||||
|
Transfers to loans held for sale
|
(4 | ) | (58 | ) | (58 | ) | (288 | ) | (243 | ) | ||||||||||
|
Sales and securitizations
|
- | (43 | ) | (62 | ) | (91 | ) | - | ||||||||||||
|
Net consumer nonaccrual loan activity
|
6 | 5 | 58 | (117 | ) | (125 | ) | |||||||||||||
|
Consumer nonaccrual loans, end of year
|
243 | 216 | 211 | 153 | 237 | |||||||||||||||
|
Balance, end of year
|
$ | 955 | 1,035 | 1,585 | 1,534 | 1,176 | ||||||||||||||
(a) Excludes nonaccrual loans included in loans held for sale and foreclosed properties.
63
Financial Tables
Table 13
GOODWILL AND OTHER INTANGIBLE ASSETS
| December 31, | ||||||||||||||||||||
|
(In millions) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
Goodwill
|
$ | 21,526 | 11,149 | 10,880 | 10,616 | 3,481 | ||||||||||||||
|
Deposit base
|
1,048 | 757 | 1,225 | 1,822 | 174 | |||||||||||||||
|
Customer relationships
|
443 | 396 | 239 | 244 | 9 | |||||||||||||||
|
Tradename
|
90 | 90 | 90 | 90 | - | |||||||||||||||
|
Total goodwill and other intangible assets
|
$ | 23,107 | 12,392 | 12,434 | 12,772 | 3,664 | ||||||||||||||
64
Table 14
DEPOSITS
| December 31, | ||||||||||||||||||||
|
(In millions) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
CORE DEPOSITS
|
||||||||||||||||||||
|
Noninterest-bearing
|
$ | 64,197 | 48,683 | 44,640 | 43,464 | 30,315 | ||||||||||||||
|
Savings and NOW accounts
|
83,678 | 63,011 | 51,691 | 47,175 | 36,215 | |||||||||||||||
|
Money market accounts
|
91,184 | 65,045 | 45,649 | 39,022 | 19,840 | |||||||||||||||
|
Other consumer time
|
35,529 | 27,921 | 33,763 | 39,649 | 35,223 | |||||||||||||||
|
Total core deposits
|
274,588 | 204,660 | 175,743 | 169,310 | 121,593 | |||||||||||||||
|
OTHER DEPOSITS
|
||||||||||||||||||||
|
Foreign
|
9,881 | 9,151 | 6,608 | 9,116 | 7,795 | |||||||||||||||
|
Other time
|
10,584 | 7,414 | 9,167 | 9,027 | 13,280 | |||||||||||||||
|
Total deposits
|
$ | 295,053 | 221,225 | 191,518 | 187,453 | 142,668 | ||||||||||||||
Table 15
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
65
Financial Tables
Table 16
CAPITAL RATIOS
| December 31, | ||||||||||||||||||||
|
(In millions) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
|
CONSOLIDATED CAPITAL RATIOS (a)
|
||||||||||||||||||||
|
Qualifying capital
|
||||||||||||||||||||
|
Tier 1 capital
|
$ | 28,583 | 23,863 | 21,411 | 18,999 | 13,952 | ||||||||||||||
|
Total capital
|
39,633 | 33,102 | 31,289 | 29,878 | 22,253 | |||||||||||||||
|
Adjusted risk-weighted assets
|
356,766 | 279,979 | 260,609 | 269,726 | 198,849 | |||||||||||||||
|
Adjusted leverage ratio assets
|
$ | 448,205 | 375,447 | 316,473 | 306,745 | 235,749 | ||||||||||||||
|
Ratios
|
||||||||||||||||||||
|
Tier 1 capital
|
8.01 | % | 8.52 | 8.22 | 7.04 | 7.02 | ||||||||||||||
|
Total capital
|
11.11 | 11.82 | 12.01 | 11.08 | 11.19 | |||||||||||||||
|
Leverage
|
6.38 | 6.36 | 6.77 | 6.19 | 5.92 | |||||||||||||||
|
STOCKHOLDERS’ EQUITY TO ASSETS
|
||||||||||||||||||||
|
Year-end
|
9.59 | 8.09 | 9.38 | 8.61 | 6.04 | |||||||||||||||
|
Average
|
8.27 | % | 8.89 | 9.49 | 7.49 | 6.28 | ||||||||||||||
|
BANK CAPITAL RATIOS
|
||||||||||||||||||||
|
Tier 1 capital
|
||||||||||||||||||||
|
Wachovia Bank, National Association
|
7.86 | % | 7.60 | 7.42 | 7.55 | 6.92 | ||||||||||||||
|
Wachovia Bank of Delaware, National Association
|
15.76 | 15.46 | 14.35 | 12.51 | 12.20 | |||||||||||||||
|
Total capital
|
||||||||||||||||||||
|
Wachovia Bank, National Association
|
11.52 | 11.72 | 11.81 | 11.68 | 10.73 | |||||||||||||||
|
Wachovia Bank of Delaware, National Association
|
18.28 | 18.28 | 16.58 | 13.98 | 13.97 | |||||||||||||||
|
Leverage
|
||||||||||||||||||||
|
Wachovia Bank, National Association
|
6.15 | 5.85 | 6.25 | 6.29 | 6.04 | |||||||||||||||
|
Wachovia Bank of Delaware, National Association
|
12.18 | % | 9.72 | 11.04 | 7.92 | 7.76 | ||||||||||||||
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4.00 percent and a minimum ratio of total capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3.00 percent to 4.00 percent.
66
Table 17
INTEREST DIFFERENTIAL
| 2004 Compared to 2003 | 2003 Compared to 2002 | |||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||
| Income/ | Variance | Income/ | Variance | |||||||||||||||||||||
| Expense | Attributable to (b) | Expense | Attributable to (b) | |||||||||||||||||||||
| (In millions) | Variance | Rate | Volume | Variance | Rate | Volume | ||||||||||||||||||
|
EARNING ASSETS
|
||||||||||||||||||||||||
|
Interest-bearing bank balances
|
$ | 1 | 5 | (4 | ) | (13 | ) | (21 | ) | 8 | ||||||||||||||
|
Federal funds sold and securities
purchased under resale agreements
|
170 | 72 | 98 | (23 | ) | (110 | ) | 87 | ||||||||||||||||
|
Trading account assets (a)
|
425 | (34 | ) | 459 | 45 | (129 | ) | 174 | ||||||||||||||||
|
Securities (a)
|
808 | (330 | ) | 1,138 | 219 | (734 | ) | 953 | ||||||||||||||||
|
Loans (a)
|
422 | (259 | ) | 681 | (927 | ) | (1,137 | ) | 210 | |||||||||||||||
|
Loans held for sale
|
344 | 10 | 334 | 20 | (60 | ) | 80 | |||||||||||||||||
|
Other earning assets
|
123 | (6 | ) | 129 | 65 | (99 | ) | 164 | ||||||||||||||||
|
Total earning assets excluding derivatives
|
2,293 | (542 | ) | 2,835 | (614 | ) | (2,290 | ) | 1,676 | |||||||||||||||
|
Risk management derivatives
|
(91 | ) | (91 | ) | - | 100 | 100 | - | ||||||||||||||||
|
Total earning assets including derivatives
|
$ | 2,202 | (633 | ) | 2,835 | (514 | ) | (2,190 | ) | 1,676 | ||||||||||||||
|
INTEREST-BEARING LIABILITIES
|
||||||||||||||||||||||||
|
Deposits
|
203 | (288 | ) | 491 | (852 | ) | (1,072 | ) | 220 | |||||||||||||||
|
Short-term borrowings
|
327 | 158 | 169 | 72 | (239 | ) | 311 | |||||||||||||||||
|
Long-term debt
|
113 | (11 | ) | 124 | (191 | ) | (99 | ) | (92 | ) | ||||||||||||||
|
Total interest-bearing liabilities
excluding derivatives
|
643 | (141 | ) | 784 | (971 | ) | (1,410 | ) | 439 | |||||||||||||||
|
Risk management derivatives
|
211 | 211 | - | (233 | ) | (233 | ) | - | ||||||||||||||||
|
Total interest-bearing liabilities
including derivatives
|
854 | 70 | 784 | (1,204 | ) | (1,643 | ) | 439 | ||||||||||||||||
|
Net interest income
|
$ | 1,348 | (703 | ) | 2,051 | 690 | (547 | ) | 1,237 | |||||||||||||||
(a) Yields related to securities and loans exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent and applicable state tax rates. Lease financing amounts include related deferred income taxes.
67
Financial Tables
WACHOVIA CORPORATION AND SUBSIDIARIES
NET INTEREST INCOME SUMMARIES (a)
(a) Certain amounts presented in prior years have been reclassified to conform to
the presentation in 2004.
(b) Yields related to securities and loans exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by
the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent
and applicable state taxes rates. Lease financing amounts include related deferred income taxes.
(c) The loan averages are stated net of unearned
income, and the averages include loans on which the accrual of interest has been discontinued.
68
| YEAR ENDED 2002 | YEAR ENDED 2001 | YEAR ENDED 2000 | ||||||||||||||||||||||||||||||||||
|
Average |
Average | Average | ||||||||||||||||||||||||||||||||||
| Interest | Rates | Interest | Rates | Interest | Rates | |||||||||||||||||||||||||||||||
| Average | Income/ | Earned/ | Average | Income/ | Earned/ | Average | Income/ | Earned/ | ||||||||||||||||||||||||||||
| Balances | Expense | Paid | Balances | Expense | Paid | Balances | Expense | Paid | ||||||||||||||||||||||||||||
|
|
$ | 3,312 | 63 | 1.90 | % | $ | 2,359 | 92 | 3.92 | % | $ | 1,095 | 54 | 4.93 | % | |||||||||||||||||||||
|
|
10,702 | 195 | 1.83 | 9,458 | 400 | 4.23 | 7,800 | 447 | 5.73 | |||||||||||||||||||||||||||
|
|
14,774 | 769 | 5.20 | 12,965 | 782 | 6.03 | 11,680 | 828 | 7.10 | |||||||||||||||||||||||||||
|
|
62,142 | 3,924 | 6.32 | 51,681 | 3,626 | 7.02 | 51,751 | 3,816 | 7.37 | |||||||||||||||||||||||||||
|
|
- | - | - | - | - | - | 1,677 | 137 | 8.20 | |||||||||||||||||||||||||||
|
|
59,724 | 2,858 | 4.78 | 56,094 | 4,572 | 8.15 | 53,518 | 4,908 | 9.17 | |||||||||||||||||||||||||||
|
|
5,305 | 217 | 4.10 | 4,726 | 281 | 5.95 | 2,639 | 224 | 8.49 | |||||||||||||||||||||||||||
|
|
18,365 | 942 | 5.13 | 11,466 | 776 | 6.77 | 9,176 | 779 | 8.49 | |||||||||||||||||||||||||||
|
|
7,235 | 762 | 10.54 | 6,548 | 685 | 10.46 | 5,194 | 611 | 11.75 | |||||||||||||||||||||||||||
|
|
6,875 | 239 | 3.48 | 6,109 | 339 | 5.55 | 4,856 | 342 | 7.04 | |||||||||||||||||||||||||||
|
|
97,504 | 5,018 | 5.15 | 84,943 | 6,653 | 7.83 | 75,383 | 6,864 | 9.11 | |||||||||||||||||||||||||||
|
|
41,971 | 2,884 | 6.87 | 39,281 | 3,100 | 7.89 | 41,966 | 3,452 | 8.23 | |||||||||||||||||||||||||||
|
|
3,916 | 183 | 4.66 | 1,000 | 57 | 5.66 | 57 | 6 | 9.84 | |||||||||||||||||||||||||||
|
|
11,061 | 829 | 7.50 | 8,624 | 772 | 8.95 | 9,482 | 965 | 10.18 | |||||||||||||||||||||||||||
|
|
56,948 | 3,896 | 6.84 | 48,905 | 3,929 | 8.03 | 51,505 | 4,423 | 8.59 | |||||||||||||||||||||||||||
|
|
154,452 | 8,914 | 5.77 | 133,848 | 10,582 | 7.91 | 126,888 | 11,287 | 8.89 | |||||||||||||||||||||||||||
|
|
7,401 | 375 | 5.06 | 7,083 | 522 | 7.38 | 7,258 | 714 | 9.83 | |||||||||||||||||||||||||||
|
|
3,388 | 178 | 5.25 | 3,600 | 255 | 7.08 | 3,867 | 350 | 9.04 | |||||||||||||||||||||||||||
|
|
256,171 | 14,418 | 5.63 | 220,994 | 16,259 | 7.36 | 212,016 | 17,633 | 8.32 | |||||||||||||||||||||||||||
|
|
- | 1,432 | 0.56 | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
|
256,171 | 15,850 | 6.19 | 220,994 | 16,259 | 7.36 | 212,016 | 17,633 | 8.32 | |||||||||||||||||||||||||||
|
|
10,313 | 8,784 | 8,028 | |||||||||||||||||||||||||||||||||
|
|
54,119 | 40,667 | 27,827 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
$ | 320,603 | $ | 270,445 | $ | 247,871 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
49,091 | 464 | 0.95 | 41,979 | 1,012 | 2.41 | 38,518 | 1,169 | 3.03 | |||||||||||||||||||||||||||
|
|
41,711 | 657 | 1.57 | 23,461 | 944 | 4.02 | 15,327 | 654 | 4.27 | |||||||||||||||||||||||||||
|
|
36,492 | 1,442 | 3.95 | 36,037 | 1,941 | 5.39 | 35,519 | 1,966 | 5.53 | |||||||||||||||||||||||||||
|
|
7,323 | 131 | 1.78 | 7,318 | 294 | 4.01 | 8,780 | 514 | 5.85 | |||||||||||||||||||||||||||
|
|
7,285 | 153 | 2.10 | 11,916 | 553 | 4.64 | 14,115 | 966 | 6.85 | |||||||||||||||||||||||||||
|
|
141,902 | 2,847 | 2.01 | 120,711 | 4,744 | 3.93 | 112,259 | 5,269 | 4.69 | |||||||||||||||||||||||||||
|
|
32,242 | 558 | 1.73 | 28,055 | 1,364 | 4.86 | 30,997 | 1,893 | 6.11 | |||||||||||||||||||||||||||
|
|
3,063 | 34 | 1.10 | 2,912 | 112 | 3.84 | 2,882 | 173 | 6.00 | |||||||||||||||||||||||||||
|
|
6,322 | 155 | 2.45 | 5,256 | 161 | 3.06 | 4,519 | 253 | 5.60 | |||||||||||||||||||||||||||
|
|
2,630 | 27 | 1.04 | 3,539 | 99 | 2.81 | 4,518 | 217 | 4.80 | |||||||||||||||||||||||||||
|
|
38,902 | 1,667 | 4.29 | 38,538 | 1,845 | 4.79 | 34,279 | 2,292 | 6.69 | |||||||||||||||||||||||||||
|
|
225,061 | 5,288 | 2.35 | 199,011 | 8,325 | 4.18 | 189,454 | 10,097 | 5.33 | |||||||||||||||||||||||||||
|
|
- | 389 | 0.17 | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
|
225,061 | 5,677 | 2.52 | 199,011 | 8,325 | 4.18 | 189,454 | 10,097 | 5.33 | |||||||||||||||||||||||||||
|
|
38,972 | 30,796 | 28,784 | |||||||||||||||||||||||||||||||||
|
|
26,178 | 20,417 | 14,092 | |||||||||||||||||||||||||||||||||
|
|
30,392 | 20,221 | 15,541 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
$ | 320,603 | $ | 270,445 | $ | 247,871 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
$ | 15,850 | 6.19 | % | $ | 16,259 | 7.36 | % | $ | 17,633 | 8.32 | % | ||||||||||||||||||||||||
|
|
5,677 | 2.22 | 8,325 | 3.77 | 10,097 | 4.77 | ||||||||||||||||||||||||||||||
|
|
$ | 10,173 | 3.97 | % | $ | 7,934 | 3.59 | % | $ | 7,536 | 3.55 | % | ||||||||||||||||||||||||
(d) Tax-equivalent adjustments included in trading account assets, securities,
commercial, financial and agricultural loans, and lease financing are (in
millions): $92, $113, $40 and $5, respectively, in 2004; $90, $118, $40 and $8,
respectively, in 2003; and $58, $106, $45 and $9, respectively, in 2002. (e) The
rates earned and the rates paid on risk management derivatives are based on
off-balance sheet notional amounts. The fair value of these instruments is
included in other assets and other liabilities.
69
Management’s Report
WACHOVIA CORPORATION AND SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Wachovia Corporation and subsidiaries (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control – Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2004.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management.
KPMG LLP, an independent, registered public accounting firm, has audited the Company’s
consolidated financial statements as of and for the year ended December 31, 2004, and the
Company’s assertion as to the effectiveness of internal control over financial reporting as of
December 31, 2004, as stated in their reports, which are included herein.
70
Robert P. Kelly
Senior Executive Vice President and
Chief Financial Officer
Independent Auditors’ Report
WACHOVIA CORPORATION AND SUBSIDIARIES
The Board of Directors and Stockholders
Wachovia Corporation
We have audited management’s assessment, included in the accompanying Wachovia Corporation and Subsidiaries: Management’s Report on Internal Control over Financial Reporting, that Wachovia Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Wachovia Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Wachovia Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Also, in our opinion, Wachovia Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Wachovia Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 18, 2005, expressed an unqualified opinion on those consolidated financial statements.
Charlotte, North Carolina
February 18, 2005
71
Independent Auditors’ Report
WACHOVIA CORPORATION AND SUBSIDIARIES
Board of Directors and Stockholders
Wachovia Corporation
We have audited the accompanying consolidated balance sheets of Wachovia Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wachovia Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Wachovia Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 18, 2005, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Charlotte, North Carolina
February 18, 2005
72
Audited Financial Statements
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| (In millions, except per share data) | 2004 | 2003 | ||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$ | 11,714 | 11,479 | |||||
|
Interest-bearing bank balances
|
4,441 | 2,308 | ||||||
|
Federal funds sold and securities purchased under resale agreements
(carrying amount of collateral held $10,394 at December 31, 2004, $3,585 repledged) |
22,436 | 24,725 | ||||||
|
Total cash and cash equivalents
|
38,591 | 38,512 | ||||||
|
Trading account assets
|
45,932 | 34,714 | ||||||
|
Securities (amortized cost $108,835 in 2004; $98,268 in 2003)
|
110,597 | 100,445 | ||||||
|
Loans, net of unearned income ($9,699 in 2004; $10,021 in 2003)
|
223,840 | 165,571 | ||||||
|
Allowance for loan losses
|
(2,757 | ) | (2,348 | ) | ||||
|
Loans, net
|
221,083 | 163,223 | ||||||
|
Loans held for sale
|
12,988 | 12,625 | ||||||
|
Premises and equipment
|
5,268 | 4,619 | ||||||
|
Due from customers on acceptances
|
718 | 854 | ||||||
|
Goodwill
|
21,526 | 11,149 | ||||||
|
Other intangible assets
|
1,581 | 1,243 | ||||||
|
Other assets
|
35,040 | 33,804 | ||||||
|
Total assets
|
$ | 493,324 | 401,188 | |||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Deposits
|
||||||||
|
Noninterest-bearing deposits
|
64,197 | 48,683 | ||||||
|
Interest-bearing deposits
|
230,856 | 172,542 | ||||||
|
Total deposits
|
295,053 | 221,225 | ||||||
|
Short-term borrowings
|
63,406 | 71,290 | ||||||
|
Bank acceptances outstanding
|
755 | 876 | ||||||
|
Trading account liabilities
|
21,709 | 19,184 | ||||||
|
Other liabilities
|
15,507 | 16,945 | ||||||
|
Long-term debt
|
46,759 | 36,730 | ||||||
|
Total liabilities
|
443,189 | 366,250 | ||||||
|
Minority interest in net assets of consolidated subsidiaries
|
2,818 | 2,510 | ||||||
|
STOCKHOLDERS’ EQUITY
|
||||||||
|
Preferred stock, Class A, 40 million shares, no par value; 10 million shares,
no par value; none issued
|
- | - | ||||||
|
Dividend Equalization Preferred shares, no par value, outstanding 97 million
shares in 2004 and in 2003
|
- | - | ||||||
|
Common stock, $3.33-1/3 par value; authorized 3 billion shares, outstanding
1.588 billion shares in 2004; 1.312 billion shares in 2003
|
5,294 | 4,374 | ||||||
|
Paid-in capital
|
31,120 | 17,811 | ||||||
|
Retained earnings
|
10,178 | 8,904 | ||||||
|
Accumulated other comprehensive income, net
|
725 | 1,339 | ||||||
|
Total stockholders’ equity
|
47,317 | 32,428 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 493,324 | 401,188 | |||||
See accompanying Notes to Consolidated Financial Statements.
73
Audited Financial Statements
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Years Ended December 31, | ||||||||||||
| (In millions, except per share data) | 2004 | 2003 | 2002 | |||||||||
|
INTEREST INCOME
|
||||||||||||
|
Interest and fees on loans
|
$ | 9,858 | 9,507 | 10,296 | ||||||||
|
Interest and dividends on securities
|
4,639 | 3,828 | 3,675 | |||||||||
|
Trading account interest
|
1,147 | 724 | 711 | |||||||||
|
Other interest income
|
1,644 | 1,021 | 950 | |||||||||
|
Total interest income
|
17,288 | 15,080 | 15,632 | |||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest on deposits
|
2,853 | 2,360 | 3,430 | |||||||||
|
Interest on short-term borrowings
|
1,503 | 1,219 | 1,105 | |||||||||
|
Interest on long-term debt
|
971 | 894 | 1,142 | |||||||||
|
Total interest expense
|
5,327 | 4,473 | 5,677 | |||||||||
|
Net interest income
|
11,961 | 10,607 | 9,955 | |||||||||
|
Provision for credit losses
|
257 | 586 | 1,479 | |||||||||
|
Net interest income after provision for credit losses
|
11,704 | 10,021 | 8,476 | |||||||||
|
FEE AND OTHER INCOME
|
||||||||||||
|
Service charges
|
1,978 | 1,731 | 1,698 | |||||||||
|
Other banking fees
|
1,226 | 1,017 | 962 | |||||||||
|
Commissions
|
2,601 | 2,318 | 1,742 | |||||||||
|
Fiduciary and asset management fees
|
2,772 | 2,345 | 1,888 | |||||||||
|
Advisory, underwriting and other investment banking fees
|
911 | 787 | 681 | |||||||||
|
Trading account profits (losses)
|
35 | 110 | (71 | ) | ||||||||
|
Principal investing
|
261 | (139 | ) | (266 | ) | |||||||
|
Securities gains (losses)
|
(10 | ) | 45 | 169 | ||||||||
|
Other income
|
1,005 | 1,268 | 1,087 | |||||||||
|
Total fee and other income
|
10,779 | 9,482 | 7,890 | |||||||||
|
NONINTEREST EXPENSE
|
||||||||||||
|
Salaries and employee benefits
|
8,703 | 7,708 | 6,597 | |||||||||
|
Occupancy
|
947 | 851 | 786 | |||||||||
|
Equipment
|
1,052 | 1,021 | 946 | |||||||||
|
Advertising
|
193 | 160 | 80 | |||||||||
|
Communications and supplies
|
620 | 598 | 545 | |||||||||
|
Professional and consulting fees
|
548 | 460 | 421 | |||||||||
|
Other intangible amortization
|
431 | 518 | 628 | |||||||||
|
Merger-related and restructuring expenses
|
444 | 443 | 387 | |||||||||
|
Sundry expense
|
1,728 | 1,521 | 1,303 | |||||||||
|
Total noninterest expense
|
14,666 | 13,280 | 11,693 | |||||||||
|
Minority interest in income of consolidated subsidiaries
|
184 | 143 | 6 | |||||||||
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
7,633 | 6,080 | 4,667 | |||||||||
|
Income taxes
|
2,419 | 1,833 | 1,088 | |||||||||
|
Income before cumulative effect of a change in accounting principle
|
5,214 | 4,247 | 3,579 | |||||||||
|
Cumulative effect of a change in accounting principle, net of income taxes
|
- | 17 | - | |||||||||
|
Net income
|
5,214 | 4,264 | 3,579 | |||||||||
|
Dividends on preferred stock
|
- | 5 | 19 | |||||||||
|
Net income available to common stockholders
|
$ | 5,214 | 4,259 | 3,560 | ||||||||
|
PER COMMON SHARE DATA
|
||||||||||||
|
Basic
|
||||||||||||
|
Income before change in accounting principle
|
$ | 3.87 | 3.20 | 2.62 | ||||||||
|
Net income
|
3.87 | 3.21 | 2.62 | |||||||||
|
Diluted
|
||||||||||||
|
Income before change in accounting principle
|
3.81 | 3.17 | 2.60 | |||||||||
|
Net income
|
3.81 | 3.18 | 2.60 | |||||||||
|
Cash dividends
|
$ | 1.66 | 1.25 | 1.00 | ||||||||
|
AVERAGE COMMON SHARES
|
||||||||||||
|
Basic
|
1,346 | 1,325 | 1,356 | |||||||||
|
Diluted
|
1,370 | 1,340 | 1,369 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
74
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Years Ended December 31, 2004, 2003 and 2002 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Preferred Shares | Common Stock | Paid-in | Retained | Comprehensive | ||||||||||||||||||||||||||||
| (In millions) | Shares | Amount | Shares | Amount | Capital | Earnings | Income, Net | Total | ||||||||||||||||||||||||
|
Balance, December 31, 2001
|
96 | $ | 17 | 1,362 | $ | 4,539 | 17,911 | 5,551 | 437 | 28,455 | ||||||||||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||||||
|
Net income
|
- | - | - | - | - | 3,579 | - | 3,579 | ||||||||||||||||||||||||
|
Net unrealized gains, net of
reclassification
|
||||||||||||||||||||||||||||||||
|
adjustments on
|
||||||||||||||||||||||||||||||||
|
Debt and equity securities
|
- | - | - | - | - | - | 1,244 | 1,244 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
- | - | - | - | - | - | 454 | 454 | ||||||||||||||||||||||||
|
Total comprehensive income
|
- | - | - | - | - | 3,579 | 1,698 | 5,277 | ||||||||||||||||||||||||
|
Preferred shares issued
|
1 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Purchases of common stock
|
- | - | (15 | ) | (51 | ) | (210 | ) | (413 | ) | - | (674 | ) | |||||||||||||||||||
|
Common stock issued for
|
||||||||||||||||||||||||||||||||
|
Stock options and restricted stock
|
- | - | 9 | 31 | 177 | - | - | 208 | ||||||||||||||||||||||||
|
Acquisitions
|
- | - | 1 | 5 | 46 | - | - | 51 | ||||||||||||||||||||||||
|
Deferred compensation, net
|
- | - | - | - | 146 | - | - | 146 | ||||||||||||||||||||||||
|
Cash dividends
|
||||||||||||||||||||||||||||||||
|
Preferred shares
|
- | (17 | ) | - | - | - | (2 | ) | - | (19 | ) | |||||||||||||||||||||
|
Common at $1.00 per share
|
- | - | - | - | - | (1,366 | ) | - | (1,366 | ) | ||||||||||||||||||||||
|
Balance, December 31, 2002
|
97 | - | 1,357 | 4,524 | 18,070 | 7,349 | 2,135 | 32,078 | ||||||||||||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||||||
|
Net income
|
- | - | - | - | - | 4,264 | - | 4,264 | ||||||||||||||||||||||||
|
Net unrealized losses, net of
reclassification adjustments on
|
||||||||||||||||||||||||||||||||
|
Debt and equity securities
|
- | - | - | - | - | - | (301 | ) | (301 | ) | ||||||||||||||||||||||
|
Derivative financial instruments
|
- | - | - | - | - | - | (495 | ) | (495 | ) | ||||||||||||||||||||||
|
Total comprehensive income
|
- | - | - | - | - | 4,264 | (796 | ) | 3,468 | |||||||||||||||||||||||
|
Purchases of common stock
|
- | - | (59 | ) | (195 | ) | (799 | ) | (1,263 | ) | - | (2,257 | ) | |||||||||||||||||||
|
Common stock issued for
|
||||||||||||||||||||||||||||||||
|
Stock options and restricted stock
|
- | - | 14 | 45 | 417 | - | - | 462 | ||||||||||||||||||||||||
|
Gain on subsidiary issuance of stock
|
- | - | - | - | - | 224 | - | 224 | ||||||||||||||||||||||||
|
Deferred compensation, net
|
- | - | - | - | 123 | - | - | 123 | ||||||||||||||||||||||||
|
Cash dividends
|
||||||||||||||||||||||||||||||||
|
Preferred shares
|
- | - | - | - | - | (5 | ) | - | (5 | ) | ||||||||||||||||||||||
|
Common at $1.25 per share
|
- | - | - | - | - | (1,665 | ) | - | (1,665 | ) | ||||||||||||||||||||||
|
Balance, December 31, 2003
|
97 | - | 1,312 | 4,374 | 17,811 | 8,904 | 1,339 | 32,428 | ||||||||||||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||||||
|
Net income
|
- | - | - | - | - | 5,214 | - | 5,214 | ||||||||||||||||||||||||
|
Minimum pension liability
|
- | - | - | - | - | - | (65 | ) | (65 | ) | ||||||||||||||||||||||
|
Net unrealized losses, net of
reclassification
|
||||||||||||||||||||||||||||||||
|
adjustments on
|
||||||||||||||||||||||||||||||||
|
Debt and equity securities
|
- | - | - | - | - | - | (245 | ) | (245 | ) | ||||||||||||||||||||||
|
Derivative financial instruments
|
- | - | - | - | - | - | (304 | ) | (304 | ) | ||||||||||||||||||||||
|
Total comprehensive income
|
- | - | - | - | - | 5,214 | (614 | ) | 4,600 | |||||||||||||||||||||||
|
Purchases of common stock
|
- | - | (47 | ) | (159 | ) | (651 | ) | (1,547 | ) | - | (2,357 | ) | |||||||||||||||||||
|
Common stock issued for
|
||||||||||||||||||||||||||||||||
|
Stock options and restricted stock
|
- | - | 25 | 85 | 890 | - | - | 975 | ||||||||||||||||||||||||
|
Acquisitions
|
- | - | 298 | 994 | 13,006 | - | - | 14,000 | ||||||||||||||||||||||||
|
Deferred income taxes on subsidiary stock
|
- | - | - | - | - | (87 | ) | - | (87 | ) | ||||||||||||||||||||||
|
Deferred compensation, net
|
- | - | - | - | 64 | - | - | 64 | ||||||||||||||||||||||||
|
Cash dividends
|
||||||||||||||||||||||||||||||||
|
Common at $1.66 per share
|
- | - | - | - | - | (2,306 | ) | - | (2,306 | ) | ||||||||||||||||||||||
|
Balance, December 31, 2004
|
97 | $ | - | 1,588 | $ | 5,294 | 31,120 | 10,178 | 725 | 47,317 | ||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
75
Audited Financial Statements
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 5,214 | 4,264 | 3,579 | ||||||||
|
Adjustments to reconcile net income to net cash provided (used)
by operating activities
|
||||||||||||
|
Cumulative effect of a change in accounting principle
|
- | (17 | ) | - | ||||||||
|
Accretion and amortization of securities discounts and premiums, net
|
191 | 317 | 59 | |||||||||
|
Provision for credit losses
|
257 | 586 | 1,479 | |||||||||
|
Securitization transactions
|
(113 | ) | (377 | ) | (410 | ) | ||||||
|
Gain on sale of mortgage servicing rights
|
(34 | ) | (96 | ) | (65 | ) | ||||||
|
Securities transactions
|
10 | (45 | ) | (169 | ) | |||||||
|
Depreciation and other amortization
|
1,415 | 1,484 | 1,611 | |||||||||
|
Deferred income taxes
|
(1,534 | ) | 642 | 918 | ||||||||
|
Trading account assets, net
|
(11,071 | ) | (860 | ) | (7,769 | ) | ||||||
|
Mortgage loans held for resale
|
(843 | ) | 1,670 | (299 | ) | |||||||
|
Loss on sales of premises and equipment
|
101 | 75 | 12 | |||||||||
|
Loan held for sale, net
|
(3,513 | ) | (6,613 | ) | 1,751 | |||||||
|
Contribution to qualified pension plan
|
(279 | ) | (418 | ) | (703 | ) | ||||||
|
Other assets, net
|
559 | (860 | ) | 18 | ||||||||
|
Trading account liabilities, net
|
2,464 | (3,716 | ) | 5,546 | ||||||||
|
Minority interest acquired
|
- | 300 | 444 | |||||||||
|
Other liabilities, net
|
(678 | ) | (2,094 | ) | (5,498 | ) | ||||||
|
Net cash provided (used) by operating activities
|
(7,854 | ) | (5,758 | ) | 504 | |||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Increase (decrease) in cash realized from
|
||||||||||||
|
Sales of securities
|
55,393 | 22,990 | 30,179 | |||||||||
|
Maturities of securities
|
29,834 | 29,862 | 17,557 | |||||||||
|
Purchases of securities
|
(89,110 | ) | (74,841 | ) | (56,536 | ) | ||||||
|
Origination of loans, net
|
(12,236 | ) | (2,741 | ) | (3,188 | ) | ||||||
|
Sales of premises and equipment
|
580 | 812 | 750 | |||||||||
|
Purchases of premises and equipment
|
(960 | ) | (1,149 | ) | (720 | ) | ||||||
|
Goodwill and other intangible assets
|
(471 | ) | (162 | ) | (154 | ) | ||||||
|
Purchase of bank-owned separate account life insurance
|
(372 | ) | (251 | ) | (804 | ) | ||||||
|
Cash equivalents acquired, net of purchases of banking organizations
|
1,110 | 8,177 | (81 | ) | ||||||||
|
Net cash used by investing activities
|
(16,232 | ) | (17,303 | ) | (12,997 | ) | ||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Increase (decrease) in cash realized from
|
||||||||||||
|
Increase in deposits, net
|
36,727 | 29,707 | 4,065 | |||||||||
|
Securities sold under repurchase agreements and other short-term borrowings, net
|
(12,031 | ) | 13,488 | 2,708 | ||||||||
|
Issuances of long-term debt
|
8,495 | 2,374 | 5,518 | |||||||||
|
Payments of long-term debt
|
(5,079 | ) | (5,306 | ) | (7,589 | ) | ||||||
|
Issuances of common stock, net
|
716 | 301 | 75 | |||||||||
|
Purchases of common stock
|
(2,357 | ) | (2,257 | ) | (674 | ) | ||||||
|
Cash dividends paid
|
(2,306 | ) | (1,670 | ) | (1,385 | ) | ||||||
|
Net cash provided by financing activities
|
24,165 | 36,637 | 2,718 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
79 | 13,576 | (9,775 | ) | ||||||||
|
Cash and cash equivalents, beginning of year
|
38,512 | 24,936 | 34,711 | |||||||||
|
Cash and cash equivalents, end of year
|
$ | 38,591 | 38,512 | 24,936 | ||||||||
|
CASH PAID FOR
|
||||||||||||
|
Interest
|
$ | 5,207 | 4,241 | 6,067 | ||||||||
|
Income taxes
|
3,954 | 1,055 | 568 | |||||||||
|
NONCASH ITEMS
|
||||||||||||
|
Transfer to securities from loans resulting from securitizations
|
213 | - | 4,167 | |||||||||
|
Transfer to securities from loans held for sale resulting from securitizations
|
- | - | 2,246 | |||||||||
|
Transfer to loans from securities resulting from terminated securitizations
|
980 | - | - | |||||||||
|
Transfer to loans held for sale from securities resulting from terminated securitizations
|
3,918 | - | - | |||||||||
|
Transfer to loans held for sale from loans, net
|
(8,558 | ) | (248 | ) | (1,553 | ) | ||||||
|
Issuance of common stock for purchase accounting merger
|
$ | 14,000 | - | 51 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
76
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
77
DECEMBER 31, 2004, 2003 AND 2002
Audited Financial Statements
On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses).
78
At inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective and strategy for undertaking the hedge. This process includes identification of the hedging instrument, hedged item, risk being hedged and the methodology for measuring ineffectiveness. In addition, the Company assesses, both at the inception of the hedge and on an ongoing quarterly basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item, and whether the derivative is expected to continue to be highly effective. The Company discontinues hedge accounting prospectively when either it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated or exercised; the derivative is de-designated because it is unlikely that a forecasted transaction will occur; or management determines designation of the derivative as a hedging instrument is no longer appropriate.
79
Audited Financial Statements
The Company employs a variety of modeling and estimation tools for measuring credit risk, which are used in developing an appropriate allowance for loan losses and reserve for unfunded lending commitments. The allowance for loan losses consists of formula-based components for both the commercial and consumer portfolios, each of which includes an adjustment for historical loss variability, a reserve for impaired commercial loans and an unallocated component.
80
OTHER
81
Audited Financial Statements
The effect on net income available to common stockholders and earnings per share as if the
fair value method had been applied to all outstanding and unvested awards for each of the years in
the three-year period ended December 31, 2004, is presented below.
Years Ended December 31,
(In millions, except per share data)
2004
2003
2002
$
5,214
4,259
3,560
85
66
38
(119
)
(133
)
(106
)
$
5,180
4,192
3,492
$
3.87
3.21
2.62
3.85
3.16
2.57
3.81
3.18
2.60
$
3.78
3.13
2.55
For restricted stock, which generally vests based on continued service with the Company, the deferred compensation is measured as the fair value of the shares on the date of grant, and the deferred compensation is amortized as salaries and employee benefits expense in the results of operations in accordance with the applicable vesting schedule, generally straight-line over three years to five years.
82
NOTE 2: BUSINESS COMBINATIONS
On June 21, 2004, the Company announced the signing of a definitive merger agreement with SouthTrust Corporation (“SouthTrust”), and the merger was completed on November 1, 2004. The terms of this transaction called for the Company to exchange 0.89 shares of its common stock for each share of SouthTrust common stock. Based on the Company’s average of the closing prices for a period beginning two trading days before the announcement of the merger and ending two days after the merger announcement of $45.86 ($40.82 for each share of SouthTrust common stock), the transaction is valued at $14.0 billion.
83
Audited Financial Statements
PRELIMINARY GOODWILL AND OTHER INTANGIBLE ASSETS CREATED
BY THE WACHOVIA/SOUTHTRUST MERGER
| (In millions) | 2004 | |||
|
Purchase price less SouthTrust ending tangible
stockholders’ equity as of November 1, 2004
|
$ | 10,048 | ||
|
Fair value purchase accounting adjustments (a)
|
||||
|
Financial assets, including securities, loans and loans held for sale
|
(69 | ) | ||
|
Premises and equipment
|
98 | |||
|
Employee benefit plans
|
99 | |||
|
Financial liabilities, including deposits and long-term debt
|
275 | |||
|
Other
|
27 | |||
|
Total pre-tax fair value purchase accounting adjustments
|
430 | |||
|
Deferred income taxes
|
(163 | ) | ||
|
Total after-tax fair value purchase accounting adjustments
|
267 | |||
|
Exit cost purchase accounting adjustments (b)
|
||||
|
Personnel and employee termination benefits
|
168 | |||
|
Write-up of fair value on regulatory-mandated branch sales
|
(129 | ) | ||
|
Other
|
21 | |||
|
Total pre-tax exit costs
|
60 | |||
|
Deferred income taxes
|
17 | |||
|
Total after-tax exit cost purchase accounting adjustments
|
77 | |||
|
Total purchase intangibles
|
10,392 | |||
|
Deposit base intangible
|
662 | |||
|
Other identifiable intangibles
|
78 | |||
|
Total deposit base and other identifiable intangibles
|
740 | |||
|
Deferred income taxes
|
(285 | ) | ||
|
Preliminary goodwill
|
$ | 9,937 | ||
(a) These adjustments represent fair value adjustments in compliance with business combination
accounting standards and adjust assets and liabilities of SouthTrust to their respective fair
values as of November 1, 2004.
(b) These adjustments represent incremental costs relating to combining the two companies and are
specifically attributable to SouthTrust.
84
WACHOVIA/PRUDENTIAL FINANCIAL, INC. TRANSACTION
85
Audited Financial Statements
NOTE 3: TRADING ACCOUNT ASSETS AND LIABILITIES
| December 31, | ||||||||
| (In millions) | 2004 | 2003 | ||||||
|
TRADING ACCOUNT ASSETS
|
||||||||
|
U. S. Treasury securities
|
$ | 2,768 | 1,460 | |||||
|
U. S. Government agency securities
|
3,799 | 3,653 | ||||||
|
State, county and municipal securities
|
868 | 734 | ||||||
|
Mortgage-backed securities
|
7,486 | 4,009 | ||||||
|
Other asset-backed securities
|
5,860 | 4,748 | ||||||
|
Corporate bonds and debentures
|
5,745 | 3,977 | ||||||
|
Derivative financial instruments
|
10,658 | 11,859 | ||||||
|
Sundry
|
8,748 | 4,274 | ||||||
|
Total trading account assets
|
$ | 45,932 | 34,714 | |||||
|
TRADING ACCOUNT LIABILITIES
|
||||||||
|
Securities sold short
|
12,258 | 8,654 | ||||||
|
Derivative financial instruments
|
9,451 | 10,530 | ||||||
|
Total trading account liabilities
|
$ | 21,709 | 19,184 | |||||
86
NOTE 4: SECURITIES
| December 31, 2004 | ||||||||||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||||||||||
| 1 Year | 1-5 | 5-10 | After 10 | Gross Unrealized | Amortized | Maturity | ||||||||||||||||||||||||||||||
| (In millions) | or Less | Years | Years | Years | Total | Gains | Losses | Cost | in Years | |||||||||||||||||||||||||||
|
MARKET VALUE
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 216 | 457 | 140 | 164 | 977 | 2 | 3 | 978 | 4.83 | ||||||||||||||||||||||||||
|
U.S. Government agencies
|
319 | 51,777 | 14,805 | 14 | 66,915 | 596 | 135 | 66,454 | 4.49 | |||||||||||||||||||||||||||
|
Asset-backed
|
||||||||||||||||||||||||||||||||||||
|
Residual interests
from securitizations
|
- | 434 | 460 | - | 894 | 254 | 4 | 644 | 5.05 | |||||||||||||||||||||||||||
|
Retained bonds
from securitizations
|
289 | 2,716 | 251 | - | 3,256 | 35 | 1 | 3,222 | 3.85 | |||||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
241 | 4,754 | 615 | 71 | 5,681 | 56 | 16 | 5,641 | 3.50 | |||||||||||||||||||||||||||
|
Commercial
mortgage-backed
|
33 | 4,291 | 3,949 | - | 8,273 | 486 | 7 | 7,794 | 5.49 | |||||||||||||||||||||||||||
|
Other
|
3,785 | 800 | 54 | - | 4,639 | 15 | 1 | 4,625 | 1.10 | |||||||||||||||||||||||||||
|
State, county and municipal
|
102 | 372 | 457 | 2,864 | 3,795 | 243 | 5 | 3,557 | 16.82 | |||||||||||||||||||||||||||
|
Sundry
|
526 | 7,483 | 5,111 | 3,047 | 16,167 | 265 | 18 | 15,920 | 6.82 | |||||||||||||||||||||||||||
|
Total market value
|
$ | 5,511 | 73,084 | 25,842 | 6,160 | 110,597 | 1,952 | 190 | 108,835 | 5.08 | ||||||||||||||||||||||||||
|
MARKET VALUE
|
||||||||||||||||||||||||||||||||||||
|
Debt securities
|
$ | 5,511 | 73,084 | 25,842 | 4,584 | 109,021 | 1,908 | 184 | 107,297 | |||||||||||||||||||||||||||
|
Equity securities
|
- | - | - | 1,576 | 1,576 | 44 | 6 | 1,538 | ||||||||||||||||||||||||||||
|
Total market value
|
$ | 5,511 | 73,084 | 25,842 | 6,160 | 110,597 | 1,952 | 190 | 108,835 | |||||||||||||||||||||||||||
|
AMORTIZED COST
|
||||||||||||||||||||||||||||||||||||
|
Debt securities
|
$ | 5,482 | 72,094 | 25,285 | 4,436 | 107,297 | ||||||||||||||||||||||||||||||
|
Equity securities
|
- | - | - | 1,538 | 1,538 | |||||||||||||||||||||||||||||||
|
Total amortized cost
|
$ | 5,482 | 72,094 | 25,285 | 5,974 | 108,835 | ||||||||||||||||||||||||||||||
|
WEIGHTED AVERAGE YIELD
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury
|
2.16 | % | 2.91 | 4.32 | 2.40 | 2.86 | ||||||||||||||||||||||||||||||
|
U.S. Government agencies
|
4.87 | 4.97 | 5.11 | 5.22 | 5.00 | |||||||||||||||||||||||||||||||
|
Asset-backed
|
||||||||||||||||||||||||||||||||||||
|
Residual interests
from securitizations
|
- | 15.25 | 20.21 | - | 17.23 | |||||||||||||||||||||||||||||||
|
Retained bonds
from securitizations
|
7.41 | 3.45 | 3.33 | - | 3.79 | |||||||||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
5.79 | 4.63 | 4.39 | 5.04 | 4.66 | |||||||||||||||||||||||||||||||
|
Commercial
mortgage-backed
|
3.12 | 6.41 | 5.29 | - | 5.85 | |||||||||||||||||||||||||||||||
|
Other
|
3.31 | 6.39 | 3.82 | - | 3.84 | |||||||||||||||||||||||||||||||
|
State, county and
municipal
|
8.63 | 9.36 | 8.95 | 7.12 | 7.58 | |||||||||||||||||||||||||||||||
|
Sundry
|
4.20 | 4.46 | 4.72 | 5.64 | 4.76 | |||||||||||||||||||||||||||||||
|
Consolidated
|
3.85 | % | 5.00 | 5.23 | 6.21 | 5.06 | ||||||||||||||||||||||||||||||
87
Audited Financial Statements
| December 31, 2003 | ||||||||||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||||||||||
| 1 Year | 1-5 | 5-10 | After 10 | Gross Unrealized | Amortized | Maturity | ||||||||||||||||||||||||||||||
| (In millions) | or Less | Years | Years | Years | Total | Gains | Losses | Cost | in Years | |||||||||||||||||||||||||||
|
MARKET VALUE
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 105 | 630 | - | 2 | 737 | 3 | - | 734 | 2.12 | ||||||||||||||||||||||||||
|
U.S. Government agencies
|
251 | 29,544 | 17,014 | - | 46,809 | 664 | 172 | 46,317 | 4.13 | |||||||||||||||||||||||||||
|
Asset-backed
|
||||||||||||||||||||||||||||||||||||
|
Residual interests
from securitizations
|
29 | 474 | 501 | 48 | 1,052 | 369 | - | 683 | 4.94 | |||||||||||||||||||||||||||
|
Retained bonds
from securitizations
|
501 | 6,328 | 2,127 | 9 | 8,965 | 278 | 2 | 8,689 | 3.37 | |||||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
2,409 | 9,197 | 545 | - | 12,151 | 79 | 38 | 12,110 | 2.96 | |||||||||||||||||||||||||||
|
Commercial
mortgage-backed
|
- | 4,222 | 4,319 | 40 | 8,581 | 621 | 14 | 7,974 | 5.73 | |||||||||||||||||||||||||||
|
Other
|
3,665 | 2,944 | 73 | 14 | 6,696 | 20 | 3 | 6,679 | 1.64 | |||||||||||||||||||||||||||
|
State, county and municipal
|
56 | 324 | 509 | 2,289 | 3,178 | 245 | 1 | 2,934 | 16.72 | |||||||||||||||||||||||||||
|
Sundry
|
509 | 6,227 | 2,508 | 3,032 | 12,276 | 197 | 69 | 12,148 | 7.70 | |||||||||||||||||||||||||||
|
Total market value
|
$ | 7,525 | 59,890 | 27,596 | 5,434 | 100,445 | 2,476 | 299 | 98,268 | 4.64 | ||||||||||||||||||||||||||
|
MARKET VALUE
|
||||||||||||||||||||||||||||||||||||
|
Debt securities
|
$ | 7,525 | 59,890 | 27,596 | 3,961 | 98,972 | 2,421 | 294 | 96,845 | |||||||||||||||||||||||||||
|
Equity securities
|
- | - | - | 1,473 | 1,473 | 55 | 5 | 1,423 | ||||||||||||||||||||||||||||
|
Total market value
|
$ | 7,525 | 59,890 | 27,596 | 5,434 | 100,445 | 2,476 | 299 | 98,268 | |||||||||||||||||||||||||||
|
AMORTIZED COST
|
||||||||||||||||||||||||||||||||||||
|
Debt securities
|
$ | 7,397 | 58,647 | 26,985 | 3,816 | 96,845 | ||||||||||||||||||||||||||||||
|
Equity securities
|
- | - | - | 1,423 | 1,423 | |||||||||||||||||||||||||||||||
|
Total amortized cost
|
$ | 7,397 | 58,647 | 26,985 | 5,239 | 98,268 | ||||||||||||||||||||||||||||||
|
WEIGHTED AVERAGE YIELD
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury
|
0.95 | % | 2.22 | - | 5.13 | 2.05 | ||||||||||||||||||||||||||||||
|
U.S. Government agencies
|
6.78 | 4.84 | 5.24 | - | 5.00 | |||||||||||||||||||||||||||||||
|
Asset-backed
|
||||||||||||||||||||||||||||||||||||
|
Residual interests
from securitizations
|
- | 49.34 | 19.33 | 14.29 | 34.13 | |||||||||||||||||||||||||||||||
|
Retained bonds
from securitizations
|
7.23 | 5.15 | 1.85 | 13.94 | 4.47 | |||||||||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
3.96 | 2.56 | 3.76 | - | 2.89 | |||||||||||||||||||||||||||||||
|
Commercial
mortgage-backed
|
- | 5.77 | 5.64 | 4.10 | 5.70 | |||||||||||||||||||||||||||||||
|
Other
|
2.38 | 3.13 | 5.68 | 0.27 | 2.74 | |||||||||||||||||||||||||||||||
|
State, county and municipal
|
7.78 | 9.24 | 9.54 | 7.60 | 8.06 | |||||||||||||||||||||||||||||||
|
Sundry
|
6.48 | 4.98 | 5.50 | 5.55 | 5.29 | |||||||||||||||||||||||||||||||
|
Consolidated
|
3.63 | % | 4.77 | 5.24 | 6.45 | 4.90 | ||||||||||||||||||||||||||||||
88
At December 31, 2004 and 2003, all securities not classified as trading were classified as available for sale.
The gross unrealized losses at December 31, 2004, principally related to U.S. Government agencies, were primarily caused by interest rate changes. The Company has reviewed these securities in accordance with its accounting policy for other-than-temporary impairment, which is discussed in Note 1, and does not consider them other-than-temporarily impaired. Included in equity securities are $161 million of preferred equity securities issued by U.S. Government agencies. The gross unrealized losses on these securities were not significant at December 31, 2004.
89
Audited Financial Statements
NOTE 5: SECURITIZATIONS AND RETAINED BENEFICIAL INTERESTS, VARIABLE INTEREST ENTITIES AND SERVICING ASSETS
SECURITIZATIONS AND RETAINED BENEFICIAL INTERESTS
| December 31, | ||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||||||
| Commercial | Consumer | Auto | Commercial | Consumer | Commercial | Consumer | ||||||||||||||||||||||
| (In millions) | Real Estate | Real Estate | Loans | Real Estate | Real Estate | Real Estate | Real Estate | |||||||||||||||||||||
|
ORIGINAL ECONOMIC ASSUMPTIONS (a)
|
||||||||||||||||||||||||||||
|
Prepayment speed (CPR)
|
- | % | 41.37 | 25.75 | - | 44.54 | - | 39.50 | ||||||||||||||||||||
|
Weighted average life
|
- | yrs | 4.31 | 2.81 | - | 4.15 | - | 2.02 | ||||||||||||||||||||
|
Expected credit losses
|
- | % | 0.44 | 1.33 | - | 0.40 | - | 0.32 | ||||||||||||||||||||
|
Discount rate (b)
|
- | % | 11.00 | 12.00 | - | 11.00 | - | 3.46 | ||||||||||||||||||||
|
CASH FLOW ACTIVITY
|
||||||||||||||||||||||||||||
|
Proceeds from
|
||||||||||||||||||||||||||||
|
New securitizations
|
$ | 7,122 | 2,989 | 2,793 | 5,135 | 3,051 | 2,711 | 6,073 | ||||||||||||||||||||
|
Collections used by trust to
purchase new balances in
revolving securitizations
|
- | 187 | - | - | 561 | - | 1,344 | |||||||||||||||||||||
|
Service fees received
|
12 | 6 | 5 | 9 | 9 | 9 | 13 | |||||||||||||||||||||
|
Cash flow received from
retained interests
|
- | 2 | 12 | 1 | 17 | 2 | 1,147 | |||||||||||||||||||||
|
Servicing advances, net
|
$ | 21 | - | - | 13 | - | 11 | - | ||||||||||||||||||||
(a) There were no beneficial interests in commercial real estate loan securitizations retained in
2004, 2003 and 2002 that were valued using discounted cash flow analyses.
(b) Consumer real estate in 2002 included $2.6 billion of notes discounted at 1.96 percent, $1.5
billion of notes discounted at 5.39 percent and $177 million of residual interests discounted at
9.92 percent.
90
At December 31, 2004, the Company had $2.8 billion of retained interests in consumer real estate loan securitizations valued using prepayment speeds of 18.96 percent to 43.83 percent, expected credit losses of 0.04 percent to 6.35 percent and discount rates of 3.73 percent to 19.30 percent. Adverse changes of 10 percent and 20 percent in the key economic assumptions used to value the retained interests were analyzed. An adverse change of 10 percent and 20 percent in the prepayment speed would result in a decrease in value of $22 million and $55 million, respectively. An adverse change of 10 percent and 20 percent in the expected credit losses would result in a decrease in value of $8 million and $21 million, respectively. An adverse change of 10 percent and 20 percent in the discount rate would result in a decrease in value of $31 million and $61 million, respectively. In addition, the Company has $643 million of retained interests in student loan, small business administration loan, municipal security, corporate debt security and auto loan securitizations for which price sensitivity is insignificant.
| December 31, 2004 | December 31, 2003 | |||||||||||||||||||||||
| Loans Past | Loan | Loans Past | Loan | |||||||||||||||||||||
| Due 90 | Losses, | Due 90 | Losses, | |||||||||||||||||||||
| (In millions) | Balance | Days (a) | Net | Balance | Days (a) | Net | ||||||||||||||||||
|
MANAGED LOANS
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Loans held in portfolio
|
$ | 141,226 | 21 | 79 | 107,466 | 29 | 337 | |||||||||||||||||
|
Securitized loans
|
1,734 | 14 | 9 | 2,001 | 22 | - | ||||||||||||||||||
|
Loans held for sale
|
2,112 | - | - | 2,574 | - | - | ||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Loans held in portfolio
|
92,313 | 501 | 221 | 68,126 | 312 | 315 | ||||||||||||||||||
|
Securitized loans
|
10,217 | 129 | 59 | 10,555 | 357 | 73 | ||||||||||||||||||
|
Securitized loans included in securities
|
5,033 | 47 | 19 | 10,905 | 141 | 74 | ||||||||||||||||||
|
Loans held for sale
|
10,876 | 12 | 25 | 10,051 | 18 | 16 | ||||||||||||||||||
|
Total managed loans
|
263,511 | 724 | 412 | 211,678 | 879 | 815 | ||||||||||||||||||
|
Less
|
||||||||||||||||||||||||
|
Securitized loans
|
(11,951 | ) | (143 | ) | (68 | ) | (12,556 | ) | (379 | ) | (73 | ) | ||||||||||||
|
Securitized loans included in securities
|
(5,033 | ) | (47 | ) | (19 | ) | (10,905 | ) | (141 | ) | (74 | ) | ||||||||||||
|
Loans held for sale
|
(12,988 | ) | (12 | ) | (25 | ) | (12,625 | ) | (18 | ) | (16 | ) | ||||||||||||
|
Loans held in portfolio
|
$ | 233,539 | 522 | 300 | 175,592 | 341 | 652 | |||||||||||||||||
(a) Includes bankruptcies and foreclosures.
91
Audited Financial Statements
VARIABLE INTEREST ENTITIES
92
NOTE 6: LOANS
Loans at December 31, 2004 and 2003, before unearned income, are presented below.
| December 31, | ||||||||
| (In millions) | 2004 | 2003 | ||||||
|
COMMERCIAL
|
||||||||
|
Commercial, financial and agricultural
|
$ | 75,095 | 55,453 | |||||
|
Real estate — construction and other
|
12,673 | 5,969 | ||||||
|
Real estate — mortgage
|
20,742 | 15,186 | ||||||
|
Lease financing
|
25,000 | 23,978 | ||||||
|
Foreign
|
7,716 | 6,880 | ||||||
|
Total commercial
|
141,226 | 107,466 | ||||||
|
CONSUMER
|
||||||||
|
Real estate secured
|
74,161 | 50,726 | ||||||
|
Student loans
|
10,468 | 8,435 | ||||||
|
Installment loans
|
7,684 | 8,965 | ||||||
|
Total consumer
|
92,313 | 68,126 | ||||||
|
Total loans
|
$ | 233,539 | 175,592 | |||||
The components of the net investment in leveraged leases at December 31, 2004 and 2003, are presented below.
December 31,
(In millions)
2004
2003
$
19,333
19,045
1,992
1,907
(9,338
)
(9,790
)
11,987
11,162
(5,016
)
(6,995
)
$
6,971
4,167
The Company recognized income before income taxes from leveraged leases of $598 million, $606 million and $603 million in 2004, 2003 and 2002, respectively, and the related income tax expense was $234 million, $236 million and $236 million in 2004, 2003 and 2002, respectively. Future minimum lease receipts relating to direct financing leases, including leveraged leases, were $21.7 billion at December 31, 2004, with $2.6 billion receivable within the next five years. Future minimum lease receipts under noncancelable operating leases was $451 million at December 31, 2004, substantially all of which is receivable over the next five years.
93
Audited Financial Statements
NOTE 7: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
In 2004, the Company refined the model used for determining certain components of the
allowance for loan losses. The model refinement did not have a material impact on the Company’s
recorded allowance for loan losses. Additionally, in 2004, the Company reclassified the reserve for
unfunded lending commitments from the allowance for loan losses to other liabilities. The
reclassifications had no effect on the provision for credit losses as reported. The reclassified
allowance for loan losses for each of the years in the three-year period ended December 31, 2004,
is presented below.
Years Ended December 31,
(In millions)
2004
2003
2002
$
2,348
2,604
2,813
290
549
1,110
(31
)
75
357
510
-
-
(60
)
(228
)
(554
)
3,057
3,000
3,726
(526
)
(885
)
(1,289
)
226
233
167
(300
)
(652
)
(1,122
)
$
2,757
2,348
2,604
The reserve for unfunded lending commitments for each of the years in the three-year period
ended December 31, 2004, is presented below.
Years Ended December 31,
(In millions)
2004
2003
2002
$
156
194
182
(2
)
(38
)
12
$
154
156
194
94
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill related to each of the Company’s business segments for each of the years in the two-year period ended December 31, 2004, are presented below.
| December 31, 2004 and 2003 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| and | ||||||||||||||||||||
| General | Capital | Wealth | Investment | |||||||||||||||||
| (In millions) | Bank | Management | Management | Bank | Total | |||||||||||||||
|
Balance, December 31, 2002
|
$ | 6,923 | 1,639 | 525 | 1,793 | 10,880 | ||||||||||||||
|
Purchase accounting adjustments
|
1 | 10 | 2 | - | 13 | |||||||||||||||
|
Additions to goodwill
|
- | 232 | - | 24 | 256 | |||||||||||||||
|
Balance, December 31, 2003
|
6,924 | 1,881 | 527 | 1,817 | 11,149 | |||||||||||||||
|
Purchase accounting adjustments
|
- | 340 | 17 | (5 | ) | 352 | ||||||||||||||
|
Additions to goodwill
|
9,191 | 158 | 238 | 438 | 10,025 | |||||||||||||||
|
Balance, December 31, 2004
|
$ | 16,115 | 2,379 | 782 | 2,250 | 21,526 | ||||||||||||||
At December 31, 2004 and 2003, the Company had $90 million assigned as the carrying amount of its tradename, which based on its indefinite useful life, is not subject to amortization.
| December 31, 2004 | December 31, 2003 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| (In millions) | Amount | Amortization | Amount | Amortization | ||||||||||||
|
Deposit base
|
$ | 2,782 | 1,734 | 2,532 | 1,775 | |||||||||||
|
Customer relationships
|
598 | 155 | 494 | 98 | ||||||||||||
|
Servicing assets
|
1,081 | 373 | 687 | 226 | ||||||||||||
|
Total
|
$ | 4,461 | 2,262 | 3,713 | 2,099 | |||||||||||
In connection with certain acquisitions in 2004, the Company recorded deposit base intangibles of $662 million, customer relationships of $107 million and servicing assets of $420 million. These intangibles have a weighted average amortization period of 13 years, 9 years and 8 years, respectively. In connection with certain acquisitions in 2003, the Company recorded customer relationship intangibles of $207 million and servicing assets of $247 million. These intangibles have a weighted average amortization period of 19 years and 6 years, respectively.
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
INTANGIBLE AMORTIZATION
|
||||||||||||
|
Identified intangible assets
|
||||||||||||
|
Deposit base
|
$ | 371 | 468 | 596 | ||||||||
|
Customer relationships
|
60 | 50 | 32 | |||||||||
|
Total
|
431 | 518 | 628 | |||||||||
|
Servicing assets
|
162 | 80 | 55 | |||||||||
|
Total intangible amortization
|
$ | 593 | 598 | 683 | ||||||||
The estimated annual identified intangible assets amortization expense in each of the five years subsequent to December 31, 2004, is as follows (in millions): 2005, $407; 2006, $268; 2007, $160; 2008, $126; and 2009, $101.
95
Audited Financial Statements
NOTE 9: OTHER ASSETS
| December 31, | ||||||||
| (In millions) | 2004 | 2003 | ||||||
|
Accounts receivable, including interests in receivables
|
$ | 8,328 | 7,113 | |||||
|
Customer receivables, including margin loans
|
6,041 | 6,538 | ||||||
|
Interest and dividends receivable
|
2,702 | 2,388 | ||||||
|
Bank and corporate-owned life insurance
|
8,728 | 7,354 | ||||||
|
Equity method investments, including principal investing
|
2,408 | 1,799 | ||||||
|
Prepaid pension costs
|
2,077 | 1,848 | ||||||
|
Sundry assets
|
4,756 | 6,764 | ||||||
|
Total other assets
|
$ | 35,040 | 33,804 | |||||
96
NOTE 10: SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 2004, 2003 and 2002, and the related maximum amounts outstanding at the end of any month in each of the three years, are presented below.
| December 31, | Maximum Outstanding | |||||||||||||||||||||||
| (In millions) | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||
|
Federal funds purchased
|
$ | 1,959 | 4,364 | 4,817 | 5,350 | 7,606 | 5,824 | |||||||||||||||||
|
Securities sold under repurchase agreements
|
43,441 | 48,434 | 30,249 | 50,141 | 51,112 | 30,872 | ||||||||||||||||||
|
Commercial paper
|
12,111 | 11,424 | 2,642 | 12,778 | 12,403 | 3,995 | ||||||||||||||||||
|
Other
|
5,895 | 7,068 | 3,465 | 7,104 | 9,279 | 3,464 | ||||||||||||||||||
|
Total short-term borrowings
|
$ | 63,406 | 71,290 | 41,173 | ||||||||||||||||||||
| December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
|
WEIGHTED AVERAGE INTEREST RATES
|
||||||||||||
|
Federal funds purchased and securities sold
under repurchase agreements
|
2.05 | % | 0.78 | 1.34 | ||||||||
|
Commercial paper
|
2.18 | % | 1.01 | 0.47 | ||||||||
|
WEIGHTED AVERAGE MATURITIES
(In days)
|
||||||||||||
|
Federal funds purchased and securities sold
under repurchase agreements
|
28 | 19 | 25 | |||||||||
|
Commercial paper
|
11 | 10 | 3 | |||||||||
97
Audited Financial Statements
NOTE 11: LONG-TERM DEBT
(a) Not redeemable prior to maturity.
(b) Redeemable in whole or in part at the option of the Parent Company only on certain specified dates.
(c) Redeemable in whole or in part at the option of the holders only on certain specified dates.
(d) Assumed by the Parent Company.
(e) Redeemable in whole or in part at the option of a nonbank subsidiary only on certain specified dates.
(f) Includes $28 million of capitalized leases in the Parent Company.
98
At December 31, 2004, floating rate notes of $6.4 billion had rates of interest ranging from 2.17 percent to 2.84 percent.
99
Audited Financial Statements
NOTE 12: COMMON AND PREFERRED STOCK AND CAPITAL RATIOS
| December 31, | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| (Options and shares in thousands) | Number | Price (a) | Number | Price (a) | Number | Price (a) | ||||||||||||||||||
|
STOCK OPTIONS
|
||||||||||||||||||||||||
|
Options outstanding, beginning of year
|
124,198 | $ | 36.71 | 115,018 | $ | 36.04 | 102,591 | $ | 35.18 | |||||||||||||||
|
Granted
|
15,534 | 44.71 | 20,983 | 37.49 | 24,238 | 37.96 | ||||||||||||||||||
|
Options of acquired entities
|
14,909 | 25.12 | - | - | - | - | ||||||||||||||||||
|
Exercised
|
(17,148 | ) | 31.74 | (10,513 | ) | 28.89 | (6,110 | ) | 24.45 | |||||||||||||||
|
Expired and forfeited
|
(757 | ) | 45.04 | (1,290 | ) | 53.35 | (5,701 | ) | 40.92 | |||||||||||||||
|
Options outstanding, end of year
|
136,736 | $ | 36.85 | 124,198 | $ | 36.71 | 115,018 | $ | 36.04 | |||||||||||||||
|
Options exercisable, end of year
|
99,228 | $ | 35.65 | 81,219 | $ | 36.75 | 63,139 | $ | 36.56 | |||||||||||||||
|
RESTRICTED STOCK
|
||||||||||||||||||||||||
|
Unvested shares, beginning of year
|
11,391 | $ | 35.56 | 11,531 | $ | 35.21 | 13,366 | $ | 37.73 | |||||||||||||||
|
Granted
|
5,980 | 46.45 | 4,919 | 36.75 | 4,924 | 32.44 | ||||||||||||||||||
|
Vested
|
(4,658 | ) | 35.92 | (4,540 | ) | 36.01 | (5,967 | ) | 38.66 | |||||||||||||||
|
Expired and forfeited
|
(443 | ) | 40.20 | (519 | ) | 35.07 | (792 | ) | 34.44 | |||||||||||||||
|
Unvested shares, end of year
|
12,270 | $ | 40.56 | 11,391 | $ | 35.56 | 11,531 | $ | 35.21 | |||||||||||||||
|
EMPLOYEE STOCK OPTIONS
|
||||||||||||||||||||||||
|
Options outstanding, beginning of year
|
19,199 | $ | 46.75 | 20,758 | $ | 46.75 | 22,963 | $ | 46.75 | |||||||||||||||
|
Exercised
|
(3,818 | ) | 46.75 | - | - | - | - | |||||||||||||||||
|
Expired and forfeited
|
(15,381 | ) | 46.75 | (1,559 | ) | 46.75 | (2,205 | ) | 46.75 | |||||||||||||||
|
Options outstanding, end of year
|
- | $ | - | 19,199 | $ | 46.75 | 20,758 | $ | 46.75 | |||||||||||||||
|
Options exercisable, end of year
|
- | $ | - | 15,527 | $ | 46.75 | 4,867 | $ | 46.75 | |||||||||||||||
(a) The weighted-average price for stock options is the weighted-average exercise price of the options, and for restricted stock, the weighted-average fair value of the stock at the date of grant.
STOCK PLANS
100
The Company also had an employee stock option plan (the “1999 Plan”) that expired on September 30, 2004. Under the terms of the 1999 plan, 3.8 million shares of common stock were issued in 2004 and all other options related to the 1999 Plan expired unexercised. Prior to 2004, no common stock was issued under the 1999 Plan.
101
Audited Financial Statements
SHAREHOLDER PROTECTION RIGHTS AGREEMENT
102
NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it includes net income and other comprehensive income. Accumulated other comprehensive income, net, for each of the years in the three-year period ended December 31, 2004, is presented below.
| Years Ended December 31, | ||||||||||||
| 2004, 2003 and 2002 | ||||||||||||
| Income Tax | ||||||||||||
| Pre-tax | (Expense) | After-tax | ||||||||||
| (In millions) | Amount | Benefit | Amount | |||||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
|
||||||||||||
|
Accumulated other comprehensive income, net, December 31, 2001
|
$ | 727 | (290 | ) | 437 | |||||||
|
Unrealized net holding gain on securities
|
1,954 | (747 | ) | 1,207 | ||||||||
|
Net gain on cash flow hedge derivatives
|
1,197 | (454 | ) | 743 | ||||||||
|
Reclassification adjustment for realized gains and losses on securities
|
60 | (23 | ) | 37 | ||||||||
|
Reclassification adjustment for realized gains and losses on cash flow
hedge derivatives
|
(466 | ) | 177 | (289 | ) | |||||||
|
Accumulated other comprehensive income, net, December 31, 2002
|
3,472 | (1,337 | ) | 2,135 | ||||||||
|
Unrealized net holding loss on securities
|
(173 | ) | 92 | (81 | ) | |||||||
|
Net gain on cash flow hedge derivatives
|
74 | (28 | ) | 46 | ||||||||
|
Reclassification adjustment for realized gains and losses on securities
|
(355 | ) | 135 | (220 | ) | |||||||
|
Reclassification adjustment for realized gains and losses on cash flow
hedge derivatives
|
(873 | ) | 332 | (541 | ) | |||||||
|
Accumulated other comprehensive income, net, December 31, 2003
|
2,145 | (806 | ) | 1,339 | ||||||||
|
Minimum pension liability
|
(105 | ) | 40 | (65 | ) | |||||||
|
Unrealized net holding loss on securities
|
(268 | ) | 114 | (154 | ) | |||||||
|
Net loss on cash flow hedge derivatives
|
(107 | ) | 40 | (67 | ) | |||||||
|
Reclassification adjustment for realized gains and losses on securities
|
(147 | ) | 56 | (91 | ) | |||||||
|
Reclassification adjustment for realized gains and losses on cash flow
hedge derivatives
|
(382 | ) | 145 | (237 | ) | |||||||
|
Accumulated other comprehensive income, net, December 31, 2004
|
$ | 1,136 | (411 | ) | 725 | |||||||
103
Audited Financial Statements
NOTE 14: BUSINESS SEGMENTS
The Company has five operating segments that by virtue of exceeding certain quantitative thresholds are reportable segments. The four core business segments are the General Bank, Capital Management, Wealth Management, the Corporate and Investment Bank, plus the Parent (“Parent segment”). The Company’s Capital Management segment includes 100 percent of the combined retail brokerage entity. The 38 percent minority interest is included in the Parent. Each of these reportable segments offers a different array of products and services.
104
| Year Ended December 31, 2004 | ||||||||||||||||||||||||||||
| Corporate | Merger- | |||||||||||||||||||||||||||
| and | Related and | |||||||||||||||||||||||||||
| General | Capital | Wealth | Investment | Restructuring | ||||||||||||||||||||||||
| (Dollars in millions) | Bank | Management | Management | Bank | Parent | Expenses (b) | Consolidated | |||||||||||||||||||||
|
CONSOLIDATED
|
||||||||||||||||||||||||||||
|
Net interest income (a)
|
$ | 8,046 | 555 | 506 | 2,441 | 663 | (250 | ) | 11,961 | |||||||||||||||||||
|
Fee and other income
|
2,431 | 4,948 | 559 | 2,931 | (90 | ) | - | 10,779 | ||||||||||||||||||||
|
Intersegment revenue
|
168 | (48 | ) | 6 | (128 | ) | 2 | - | - | |||||||||||||||||||
|
Total revenue (a)
|
10,645 | 5,455 | 1,071 | 5,244 | 575 | (250 | ) | 22,740 | ||||||||||||||||||||
|
Provision for credit losses
|
315 | - | (1 | ) | (41 | ) | (16 | ) | - | 257 | ||||||||||||||||||
|
Noninterest expense
|
5,536 | 4,608 | 762 | 2,569 | 747 | 444 | 14,666 | |||||||||||||||||||||
|
Minority interest
|
- | - | - | - | 297 | (113 | ) | 184 | ||||||||||||||||||||
|
Income taxes (benefits)
|
1,699 | 307 | 112 | 876 | (447 | ) | (128 | ) | 2,419 | |||||||||||||||||||
|
Tax-equivalent adjustment
|
41 | 1 | - | 123 | 85 | (250 | ) | - | ||||||||||||||||||||
|
Net income available to
common stockholders
|
$ | 3,054 | 539 | 198 | 1,717 | (91 | ) | (203 | ) | 5,214 | ||||||||||||||||||
|
Economic profit
|
$ | 2,331 | 392 | 137 | 1,056 | (99 | ) | - | 3,817 | |||||||||||||||||||
|
Risk adjusted return on
capital
|
52.67 | % | 40.14 | 46.72 | 32.64 | 6.38 | - | 37.69 | ||||||||||||||||||||
|
Economic capital, average
|
$ | 5,592 | 1,344 | 383 | 4,878 | 2,107 | - | 14,304 | ||||||||||||||||||||
|
Cash overhead efficiency
ratio (a)
|
52.01 | % | 84.48 | 71.10 | 48.99 | 54.97 | - | 59.98 | ||||||||||||||||||||
|
Lending commitments
|
$ | 93,608 | - | 4,830 | 84,052 | 408 | - | 182,898 | ||||||||||||||||||||
|
Average loans, net
|
128,063 | 278 | 11,273 | 32,125 | 294 | - | 172,033 | |||||||||||||||||||||
|
Average core deposits
|
$ | 172,471 | 25,951 | 12,319 | 19,058 | 1,809 | - | 231,608 | ||||||||||||||||||||
|
FTE employees
|
43,388 | 19,579 | 3,833 | 4,763 | 24,467 | - | 96,030 | |||||||||||||||||||||
| Year Ended December 31, 2003 | ||||||||||||||||||||||||||||
| Corporate | Merger- | |||||||||||||||||||||||||||
| and | Related and | |||||||||||||||||||||||||||
| General | Capital | Wealth | Investment | Restructuring | ||||||||||||||||||||||||
| (Dollars in millions) | Bank | Management | Management | Bank | Parent | Expenses (b) | Consolidated | |||||||||||||||||||||
|
CONSOLIDATED
|
||||||||||||||||||||||||||||
|
Net interest income (a)
|
$ | 7,315 | 249 | 434 | 2,312 | 553 | (256 | ) | 10,607 | |||||||||||||||||||
|
Fee and other income
|
2,191 | 4,191 | 534 | 2,262 | 304 | - | 9,482 | |||||||||||||||||||||
|
Intersegment revenue
|
179 | (69 | ) | 6 | (116 | ) | - | - | - | |||||||||||||||||||
|
Total revenue (a)
|
9,685 | 4,371 | 974 | 4,458 | 857 | (256 | ) | 20,089 | ||||||||||||||||||||
|
Provision for credit losses
|
470 | - | 12 | 250 | (146 | ) | - | 586 | ||||||||||||||||||||
|
Noninterest expense
|
5,334 | 3,684 | 722 | 2,335 | 762 | 443 | 13,280 | |||||||||||||||||||||
|
Minority interest
|
- | - | - | - | 174 | (31 | ) | 143 | ||||||||||||||||||||
|
Income taxes (benefits)
|
1,377 | 250 | 88 | 570 | (298 | ) | (154 | ) | 1,833 | |||||||||||||||||||
|
Tax-equivalent adjustment
|
39 | 1 | - | 126 | 90 | (256 | ) | - | ||||||||||||||||||||
|
Income before cumulative
effect of a change in
accounting principle
|
2,465 | 436 | 152 | 1,177 | 275 | (258 | ) | 4,247 | ||||||||||||||||||||
|
Cumulative effect of a change
in accounting principle, net
of income taxes
|
- | - | - | - | 17 | - | 17 | |||||||||||||||||||||
|
Net income
|
2,465 | 436 | 152 | 1,177 | 292 | (258 | ) | 4,264 | ||||||||||||||||||||
|
Dividends on preferred stock
|
- | - | - | - | 5 | - | 5 | |||||||||||||||||||||
|
Net income available to
common stockholders
|
$ | 2,465 | 436 | 152 | 1,177 | 287 | (258 | ) | 4,259 | |||||||||||||||||||
|
Economic profit
|
$ | 1,799 | 324 | 98 | 558 | 227 | - | 3,006 | ||||||||||||||||||||
|
Risk adjusted return on
capital
|
42.83 | % | 42.84 | 37.16 | 20.79 | 21.00 | - | 31.02 | ||||||||||||||||||||
|
Economic capital, average
|
$ | 5,651 | 1,018 | 374 | 5,699 | 2,273 | - | 15,015 | ||||||||||||||||||||
|
Cash overhead efficiency
ratio (a)
|
55.07 | % | 84.28 | 74.22 | 52.37 | 28.39 | - | 60.55 | ||||||||||||||||||||
|
Lending commitments
|
$ | 65,457 | - | 4,012 | 69,728 | 482 | - | 139,679 | ||||||||||||||||||||
|
Average loans, net
|
113,867 | 139 | 9,638 | 33,210 | 1,473 | - | 158,327 | |||||||||||||||||||||
|
Average core deposits
|
$ | 152,720 | 2,788 | 10,922 | 15,395 | 1,297 | - | 183,122 | ||||||||||||||||||||
|
FTE employees
|
34,552 | 19,937 | 3,791 | 4,317 | 23,517 | - | 86,114 | |||||||||||||||||||||
105
Audited Financial Statements
| Year Ended December 31, 2002 | ||||||||||||||||||||||||||||
| Corporate | Merger- | |||||||||||||||||||||||||||
| and | Related and | |||||||||||||||||||||||||||
| General | Capital | Wealth | Investment | Restructuring | ||||||||||||||||||||||||
| (Dollars in millions) | Bank | Management | Management | Bank | Parent | Expenses (b) | Consolidated | |||||||||||||||||||||
|
CONSOLIDATED
|
||||||||||||||||||||||||||||
|
Net interest income (a)
|
$ | 6,860 | 162 | 400 | 2,489 | 262 | (218 | ) | 9,955 | |||||||||||||||||||
|
Fee and other income
|
2,095 | 3,051 | 529 | 1,582 | 633 | - | 7,890 | |||||||||||||||||||||
|
Intersegment revenue
|
162 | (72 | ) | 5 | (87 | ) | (8 | ) | - | - | ||||||||||||||||||
|
Total revenue (a)
|
9,117 | 3,141 | 934 | 3,984 | 887 | (218 | ) | 17,845 | ||||||||||||||||||||
|
Provision for credit losses
|
471 | - | 17 | 993 | (2 | ) | - | 1,479 | ||||||||||||||||||||
|
Noninterest expense
|
5,120 | 2,556 | 661 | 2,080 | 889 | 387 | 11,693 | |||||||||||||||||||||
|
Minority interest
|
- | - | - | - | 6 | - | 6 | |||||||||||||||||||||
|
Income taxes (benefits)
|
1,247 | 214 | 93 | 251 | (573 | ) | (144 | ) | 1,088 | |||||||||||||||||||
|
Tax-equivalent adjustment
|
40 | - | - | 93 | 85 | (218 | ) | - | ||||||||||||||||||||
|
Net income
|
2,239 | 371 | 163 | 567 | 482 | (243 | ) | 3,579 | ||||||||||||||||||||
|
Dividends on preferred stock
|
- | - | - | - | 19 | - | 19 | |||||||||||||||||||||
|
Net income available to
common stockholders
|
$ | 2,239 | 371 | 163 | 567 | 463 | (243 | ) | 3,560 | |||||||||||||||||||
|
Economic profit
|
$ | 1,550 | 295 | 113 | 174 | 587 | - | 2,719 | ||||||||||||||||||||
|
Risk adjusted return on
capital
|
38.31 | % | 53.87 | 42.15 | 13.43 | 35.73 | - | 27.74 | ||||||||||||||||||||
|
Economic capital, average
|
$ | 5,677 | 689 | 363 | 7,142 | 2,372 | - | 16,243 | ||||||||||||||||||||
|
Cash overhead efficiency
ratio (a)
|
56.15 | % | 81.38 | 70.77 | 52.21 | 29.40 | - | 59.11 | ||||||||||||||||||||
|
Lending commitments
|
$ | 57,358 | - | 3,288 | 78,332 | 611 | - | 139,589 | ||||||||||||||||||||
|
Average loans, net
|
101,632 | 165 | 8,730 | 40,946 | 2,979 | - | 154,452 | |||||||||||||||||||||
|
Average core deposits
|
$ | 140,489 | 1,343 | 10,031 | 12,824 | 1,579 | - | 166,266 | ||||||||||||||||||||
|
FTE employees
|
36,521 | 12,648 | 3,694 | 4,131 | 23,874 | - | 80,868 | |||||||||||||||||||||
(a) Tax-equivalent.
(b) See Merger-Related and Restructuring Expenses in Management’s Discussion and Analysis for more
information on merger-related and restructuring expenses. Additionally, the tax-equivalent amounts included in each segment are
eliminated herein in order for “Total” amounts to agree with amounts appearing in the Consolidated
Statements of Income.
106
NOTE 15: PERSONNEL EXPENSE AND RETIREMENT BENEFITS
The Company has a savings plan under which eligible employees are permitted to make contributions to the plan of one percent to 30 percent of eligible compensation. Annually, on approval of the Human Resources and Corporate Relations Director, employee contributions may be matched up to 6 percent of the employee’s eligible compensation. A 6 percent matching level was in place for each of the periods presented. The first one percent of the Company’s matching contribution is made in the Company’s common stock. Each employee can immediately elect to liquidate the Company’s common stock credited to the employee’s account by transferring the value of the common stock to any of a number of investment options available within the savings plan. Savings plan expense in 2004, 2003 and 2002 was $208 million, $173 million and $167 million, respectively.
107
Audited Financial Statements
| Other Postretirement | ||||||||||||||||
| Qualified Pension | Benefits | |||||||||||||||
| (Percent) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
|
EQUITY SECURITIES
|
||||||||||||||||
|
Wachovia Corporation common stock
|
3 | % | 5 | - | - | |||||||||||
|
Other equity securities
|
63 | 59 | 5 | 5 | ||||||||||||
|
Total equity securities
|
66 | 64 | 5 | 5 | ||||||||||||
|
OTHER SECURITIES
|
||||||||||||||||
|
Debt securities
|
32 | 30 | 74 | 69 | ||||||||||||
|
Real estate
|
1 | 1 | - | - | ||||||||||||
|
Other
|
1 | 5 | 21 | 26 | ||||||||||||
|
Total
|
100 | % | 100 | 100 | 100 | |||||||||||
The change in benefit obligation and the change in fair value of plan assets related to each of the Qualified Pension, the Nonqualified Pension and the Other Postretirement Benefits using a September 30 measurement date for each of the years in the two-year period ended December 31, 2004, is presented below.
108
The expected return on plan assets used in the annual evaluation is established at an amount that reflects the targeted asset allocation and expected returns for each component of the plan assets. The rate is reviewed annually and adjusted as appropriate to reflect changes in expected market performance or in targeted asset allocation ranges. The Company’s investment objective relating to Qualified Pension assets is to have a portfolio of assets adequate to support the liability associated with the Qualified Pension defined benefit obligation. The Company uses an asset allocation strategy to achieve this objective, focusing on return objectives over the long-term period associated with the benefit obligation. The current targeted range for asset allocation is 60 percent to 70 percent in equity securities and 30 percent to 40 percent in debt securities and cash. Rebalancing occurs on a periodic basis to maintain the targeted allocation, but normal market activity may result in deviations. While the investment objective is based on the long-term nature of the Qualified Pension, the Company uses certain measurements on rolling five-year periods to assess asset results and manager performance.
109
Audited Financial Statements
| Other Postretirement Benefits | ||||||||||||
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
RETIREMENT BENEFIT COSTS
|
||||||||||||
|
Service cost
|
$ | 4 | 11 | 13 | ||||||||
|
Interest cost
|
52 | 55 | 61 | |||||||||
|
Expected return on plan assets
|
(3 | ) | (6 | ) | (6 | ) | ||||||
|
Amortization of transition losses
|
- | 3 | 4 | |||||||||
|
Amortization of prior service cost
|
(8 | ) | (1 | ) | 3 | |||||||
|
Amortization of actuarial losses
|
8 | 7 | 7 | |||||||||
|
Special termination benefit cost
|
- | - | 1 | |||||||||
|
Net retirement benefit costs
|
$ | 53 | 69 | 83 | ||||||||
|
ASSUMPTIONS USED TO DETERMINE
RETIREMENT BENEFIT COSTS
|
||||||||||||
|
Discount rate
|
6.25 | % | 6.00-6.75 | 7.25 | ||||||||
|
Expected return on plan assets
|
3.00 | 3.00 | 6.00 | |||||||||
|
Weighted average rate of increase in
future compensation levels
|
3.50 | % | 3.50-3.75 | 4.25 | ||||||||
Medical trend rates assumed with respect to Other Postretirement Benefits at the beginning of 2004 were 12.00 percent grading to 5.50 percent (pre-65 years of age) and 14.00 percent grading to 5.50 percent (post-65 years of age); and at the end of 2004 were 11.00 percent grading to 5.50 percent (pre-65 years of age) and 13.00 percent grading to 5.50 percent (post-65 years of age). Medical trend rates assumed with respect to Other Postretirement Benefits at the beginning of 2003 were 9.00 percent grading to 5.50 percent (pre-65 years of age) and 12.00 percent grading to 5.50 percent (post-65 years of age); and at the end of 2003 were 12.00 percent grading to 5.50 percent (pre-65 years of age) and 14.00 percent grading to 5.50 percent (post-65 years of age).
110
NOTE 16: MERGER-RELATED AND RESTRUCTURING EXPENSES
The Company defines restructuring expenses as those costs related to exit or disposal activities generally incurred as part of a business combination. Specifically, restructuring expenses include costs associated with contract termination, including leases and one-time employee termination benefits in excess of ongoing severance plan benefits. In 2002, under then applicable accounting standards, restructuring expenses also included termination benefits under an ongoing severance plan and liabilities that were incurred as part of the Company’s commitment to a plan of disposal if the plan met certain criteria, even though commitment to a plan did not, by itself, necessarily result in a liability. To the extent an expense related to a merger did not qualify as a restructuring expense, it was classified as a merger-related expense. Merger-related expenses consist principally of integration costs related to combining operations such as system conversions, and in 2003 and 2004, termination benefits under an ongoing severance plan as well.
111
Audited Financial Statements
112
Components of the 2002 restructuring expenses included employee severance payments and related benefits of $66 million for 1,672 employees who were displaced or notified of their pending termination date as of December 31, 2002. Of the terminated employees in 2002, approximately 20 percent were from the General Bank segment, 10 percent were from the Corporate and Investment Bank segment, 55 percent were from the Parent segment, 9 percent were from the Capital Management segment and 6 percent were from the Wealth Management segment. Through December 31, 2004, substantially all employee termination benefits related to the terminations in 2002 have been paid.
| Years Ended December 31, | ||||||||||||
| 2004, 2003 and 2002 | ||||||||||||
| First Union/ | ||||||||||||
| Wachovia | ||||||||||||
| (In millions) | Merger | Other | Total | |||||||||
|
RESTRUCTURING ACCRUAL ACTIVITY
|
||||||||||||
|
Balance, December 31, 2001
|
$ | 63 | 63 | 126 | ||||||||
|
Restructuring expenses
|
140 | - | 140 | |||||||||
|
Cash payments
|
(124 | ) | (51 | ) | (175 | ) | ||||||
|
Noncash write-downs and other adjustments
|
(18 | ) | - | (18 | ) | |||||||
|
Balance, December 31, 2002
|
61 | 12 | 73 | |||||||||
|
Cash payments
|
(50 | ) | (3 | ) | (53 | ) | ||||||
|
Reversal of prior accruals
|
- | (6 | ) | (6 | ) | |||||||
|
Noncash write-downs and other adjustments
|
(11 | ) | - | (11 | ) | |||||||
|
Balance, December 31, 2003
|
- | 3 | 3 | |||||||||
|
Reversal of prior accruals
|
- | (3 | ) | (3 | ) | |||||||
|
Balance, December 31, 2004
|
$ | - | - | - | ||||||||
113
Audited Financial Statements
NOTE 17: INCOME TAXES
The aggregate amount of income taxes included in the consolidated statements of income and in the consolidated statements of changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2004, is presented below.
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
CONSOLIDATED STATEMENTS OF INCOME
|
||||||||||||
|
Income taxes
|
$ | 2,419 | 1,833 | 1,088 | ||||||||
|
Income taxes related to the cumulative effect of a
change in accounting principle
|
- | 8 | - | |||||||||
|
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
|
||||||||||||
|
Income taxes related to
|
||||||||||||
|
Unrealized gains and losses on debt and equity securities
|
(170 | ) | (227 | ) | 770 | |||||||
|
Unrealized gains and losses on derivative financial instruments
|
(185 | ) | (304 | ) | 277 | |||||||
|
Unrealized gains and losses on minimum pension liability
|
(40 | ) | - | - | ||||||||
|
Total
|
$ | 2,024 | 1,310 | 2,135 | ||||||||
The provision for income taxes for each of the years in the three-year period ended December 31, 2004,
is presented below.
Years Ended December 31,
(In millions)
2004
2003
2002
$
3,436
956
(159
)
297
68
202
3,733
1,024
43
220
167
127
3,953
1,191
170
(1,507
)
511
949
(27
)
131
(31
)
(1,534
)
642
918
$
2,419
1,833
1,088
The reconciliation of federal income tax rates and amounts to the effective income tax rates and amounts for each of the years in the three-year period ended December 31, 2004, follows.
114
| Years Ended December 31, | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| Percent of | Percent of | Percent of | ||||||||||||||||||||||
| Pre-tax | Pre-tax | Pre-tax | ||||||||||||||||||||||
| (In millions) | Amount | Income | Amount | Income | Amount | Income | ||||||||||||||||||
|
Income before income taxes and cumulative
effect of a change in accounting principle
|
$ | 7,633 | $ | 6,080 | $ | 4,667 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Tax at federal income tax rate
|
$ | 2,672 | 35.0 | % | $ | 2,128 | 35.0 | % | $ | 1,633 | 35.0 | % | ||||||||||||
|
Reasons for difference in federal income
tax rate and effective tax rate
|
||||||||||||||||||||||||
|
Tax-exempt interest, net of cost to carry
|
(154 | ) | (2.0 | ) | (157 | ) | (2.6 | ) | (130 | ) | (2.8 | ) | ||||||||||||
|
State income taxes, net of federal tax benefit
|
176 | 2.3 | 129 | 2.1 | 111 | 2.4 | ||||||||||||||||||
|
Life insurance, increase in cash surrender value
|
(148 | ) | (1.9 | ) | (143 | ) | (2.4 | ) | (122 | ) | (2.6 | ) | ||||||||||||
|
Foreign taxes, net
|
34 | 0.4 | 32 | 0.5 | 30 | 0.6 | ||||||||||||||||||
|
Subsidiary stock, recognition of basis differences
|
- | - | (58 | ) | (0.9 | ) | (326 | ) | (7.0 | ) | ||||||||||||||
|
Tax credits, net of related basis adjustments
|
(115 | ) | (1.5 | ) | (134 | ) | (2.2 | ) | (139 | ) | (3.0 | ) | ||||||||||||
|
Change in the beginning-of-the-year
deferred tax assets valuation allowance
|
5 | 0.1 | 14 | 0.2 | 17 | 0.4 | ||||||||||||||||||
|
Other items, net
|
(51 | ) | (0.7 | ) | 22 | 0.4 | 14 | 0.3 | ||||||||||||||||
|
Total income taxes
|
$ | 2,419 | 31.7 | % | $ | 1,833 | 30.1 | % | $ | 1,088 | 23.3 | % | ||||||||||||
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and liabilities for each of the years in the three-year period ended December 31,
2004, are presented below.
December 31,
(In millions)
2004
2003
2002
$
1,052
908
1,045
1,589
1,356
987
241
80
21
109
111
163
7
773
781
821
674
595
484
648
678
4,303
4,550
4,270
59
54
40
134
61
57
411
806
1,337
520
435
532
64
72
144
6,107
7,566
6,759
798
703
568
226
325
220
8,260
9,968
9,617
$
4,016
5,472
5,387
115
Audited Financial Statements
A portion of the annual change in the net deferred income tax liability relates to unrealized gains and losses on debt and equity securities. The related 2004, 2003 and 2002 deferred income tax expense (benefit) of $(170) million, $(227) million and $770 million, respectively, was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. A portion of the annual change in the net deferred income tax liability relates to unrealized gains and losses on derivative financial instruments. The related 2004, 2003 and 2002 deferred income tax expense (benefit) of $(185) million, $(304) million and $277 million, respectively, was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. Additionally, a portion of the annual change in the net deferred income tax liability relates to unrealized gains and losses on the minimum pension liability. The related 2004 deferred income tax benefit of $40 million was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. Purchase acquisitions also increased the net deferred income tax liability by $473 million in 2004, and decreased the net deferred income tax liability by $26 million and $50 million in 2003 and 2002, respectively.
116
NOTE 18: BASIC AND DILUTED EARNINGS PER COMMON SHARE
The calculation of basic and diluted earnings per common share for each of the years in the three-year period ended December 31, 2004, is presented below.
| Years Ended December 31, | ||||||||||||
| (In millions, except per share data) | 2004 | 2003 | 2002 | |||||||||
|
Income available to common stockholders before cumulative effect
of a change in accounting principle and dividends on preferred stock
|
$ | 5,214 | 4,247 | 3,579 | ||||||||
|
Cumulative effect of a change in accounting principle, net of
income taxes
|
- | 17 | - | |||||||||
|
Dividends on preferred stock
|
- | (5 | ) | (19 | ) | |||||||
|
Income available to common stockholders
|
$ | 5,214 | 4,259 | 3,560 | ||||||||
|
Basic earnings per common share
|
||||||||||||
|
Income before change in accounting principle
|
$ | 3.87 | 3.20 | 2.62 | ||||||||
|
Cumulative effect of a change in accounting principle
|
- | 0.01 | - | |||||||||
|
Net income
|
$ | 3.87 | 3.21 | 2.62 | ||||||||
|
Diluted earnings per common share
|
||||||||||||
|
Income before change in accounting principle
|
$ | 3.81 | 3.17 | 2.60 | ||||||||
|
Cumulative effect of a change in accounting principle
|
- | 0.01 | - | |||||||||
|
Net income
|
$ | 3.81 | 3.18 | 2.60 | ||||||||
|
Average common shares — basic
|
1,346 | 1,325 | 1,356 | |||||||||
|
Common share equivalents, unvested restricted stock, incremental
common shares from forward purchase contracts and convertible
long-term debt assumed converted
|
24 | 15 | 13 | |||||||||
|
Average common shares — diluted
|
1,370 | 1,340 | 1,369 | |||||||||
117
Audited Financial Statements
NOTE 19: DERIVATIVES
The Company uses derivatives to manage exposure to interest rate risk, to generate profits from proprietary trading and to assist customers with their risk management objectives. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is not exchanged, but is used only as the basis on which interest and other payments are determined.
| December 31, 2004 | December 31, 2003 | |||||||||||||||
| Fair | Notional | Fair | Notional | |||||||||||||
| (In millions) | Value | Amount | Value | Amount | ||||||||||||
|
Forward and futures contracts
|
$ | 436 | 301,730 | 1,113 | 322,787 | |||||||||||
|
Interest rate swap agreements
|
1,047 | 1,230,083 | 368 | 763,824 | ||||||||||||
|
Purchased options, interest rate caps, floors, collars and swaptions
|
8,268 | 560,136 | 8,035 | 521,947 | ||||||||||||
|
Written options, interest rate caps, floors, collars and swaptions
|
(8,232 | ) | 676,185 | (8,012 | ) | 441,862 | ||||||||||
|
Foreign currency and exchange rate swap commitments
|
(5 | ) | 44,717 | (105 | ) | 40,571 | ||||||||||
|
Commodity and equity swaps
|
$ | (307 | ) | 3,647 | (70 | ) | 5,133 | |||||||||
Risk management derivative financial instruments represent financial instruments the Company has designated and accounted for as accounting hedges. Information related to these derivative financial instruments used for the Company’s interest rate risk management purposes at December 31, 2004 and 2003, follows.
118
Risk management derivative financial instruments for each of the years in the two-year period
ended December 31, 2004, are presented below.
December 31, 2004
In-
Average
Notional
Gross Unrealized
effective-
Maturity in
(In millions)
Amount
Gains
Losses (f)
Equity (g)
ness (h)
Years (i)
$
35,290
1,560
(114
)
890
4
4.56
1,370
-
(130
)
(81
)
-
5.72
14,000
11
(38
)
(17
)
-
1.32
1,220
10
-
6
(1
)
0.05
2,400
-
-
-
-
0.25
2,258
8
(27
)
-
(19
)
16.66
900
-
(2
)
-
(1
)
0.04
$
57,438
1,589
(311
)
798
(17
)
3.93
37,769
39
(837
)
(493
)
(2
)
3.79
42,700
18
(548
)
(327
)
-
3.21
18,000
2
(3
)
-
-
0.25
42,914
48
-
29
-
0.25
19,930
842
(46
)
-
-
5.10
4,925
-
(1
)
-
-
0.63
166,238
949
(1,435
)
(791
)
(2
)
2.41
$
223,676
2,538
(1,746
)
7
(19
)
-
December 31, 2003
In-
Average
Notional
Gross Unrealized
effective-
Maturity in
(In millions)
Amount
Gains
Losses (f)
Equity (g)
ness (h)
Years (i)
$
36,652
2,429
(103
)
1,436
1
5.65
1,413
-
(162
)
(100
)
-
6.74
7,850
35
(25
)
6
-
1.20
1,000
4
-
2
(2
)
0.04
9,000
-
-
-
-
0.25
500
-
-
-
-
0.25
1,224
8
(2
)
-
(8
)
18.14
1,122
1
(4
)
-
5
0.15
$
58,761
2,477
(296
)
1,344
(4
)
4.27
36,242
5
(1,332
)
(821
)
1
4.54
47,200
27
(653
)
(386
)
-
3.88
25,365
-
(71
)
(44
)
-
0.25
16,004
1,242
(5
)
-
-
3.95
4,925
1
-
-
-
1.63
129,736
1,275
(2,061
)
(1,251
)
1
3.28
$
188,497
3,752
(2,357
)
93
(3
)
-
119
Audited Financial Statements
(a) Includes only derivative financial instruments related to interest rate risk management activities that have been designated and accounted for as accounting hedges. All other derivative financial instruments are classified as trading.
120
Expected maturities of risk management derivative financial instruments for each of the
years in the two-year period ended December 31, 2004, are presented below.
December 31, 2004
1 Year
1-2
2-5
5-10
After 10
(In millions)
or Less
Years
Years
Years
Years
Total
$
1,174
7,523
9,833
16,760
-
35,290
1
2
479
850
38
1,370
$
11,620
2,000
4,000
-
-
17,620
6.64
%
4.14
4.60
5.17
1.56
4.85
2.46
%
2.45
2.58
2.59
4.58
2.56
$
4
100
217
981
(3
)
1,299
$
-
26
71
490
1,671
2,258
$
900
-
-
-
-
900
-
%
2.09
2.39
2.25
1.57
1.67
-
%
2.96
3.76
4.54
3.74
3.90
$
(1
)
-
-
(4
)
(16
)
(21
)
$
12,559
4,285
13,097
4,124
3,704
37,769
$
61,114
12,000
24,500
6,000
-
103,614
3.15
%
2.86
2.47
2.64
2.34
2.79
3.55
%
2.74
5.32
6.52
5.90
4.50
$
(319
)
(38
)
(354
)
(294
)
(276
)
(1,281
)
$
3,400
3,357
6,283
5,122
1,768
19,930
$
4,925
-
-
-
-
4,925
6.98
%
6.02
5.33
5.40
5.32
5.74
2.30
%
2.63
2.25
2.46
2.23
2.37
$
83
152
229
234
97
795
121
Audited Financial Statements
| December 31, 2003 | ||||||||||||||||||||||||
| 1 Year | 1-2 | 2-5 | 5-10 | After 10 | ||||||||||||||||||||
| (In millions) | or Less | Years | Years | Years | Years | Total | ||||||||||||||||||
|
CASH FLOW ASSET HEDGES
|
||||||||||||||||||||||||
|
Notional amount - swaps–receive fixed
|
$ | 1,162 | 1,196 | 13,993 | 20,301 | - | 36,652 | |||||||||||||||||
|
Notional amount - swaps–pay fixed
|
- | 1 | 226 | 1,148 | 38 | 1,413 | ||||||||||||||||||
|
Notional amount - other
|
$ | 12,350 | 6,000 | - | - | - | 18,350 | |||||||||||||||||
|
Weighted average receive rate (a)
|
5.96 | % | 6.61 | 5.00 | 5.17 | 0.78 | 5.16 | |||||||||||||||||
|
Weighted average pay rate (a)
|
1.16 | % | 1.30 | 1.23 | 1.38 | 4.58 | 1.32 | |||||||||||||||||
|
Unrealized gain (loss)
|
$ | 3 | 100 | 854 | 1,225 | (4 | ) | 2,178 | ||||||||||||||||
|
FAIR VALUE ASSET HEDGES
|
||||||||||||||||||||||||
|
Notional amount - swaps–pay fixed
|
$ | - | - | - | - | 1,224 | 1,224 | |||||||||||||||||
|
Notional amount - other
|
$ | 1,122 | - | - | - | - | 1,122 | |||||||||||||||||
|
Weighted average receive rate (a)
|
- | % | - | - | - | 0.78 | 0.78 | |||||||||||||||||
|
Weighted average pay rate (a)
|
- | % | - | - | - | 3.66 | 3.66 | |||||||||||||||||
|
Unrealized gain (loss)
|
$ | (3 | ) | - | - | - | 6 | 3 | ||||||||||||||||
|
CASH FLOW LIABILITY HEDGES
|
||||||||||||||||||||||||
|
Notional amount - swaps–pay fixed
|
$ | 4,130 | 6,178 | 15,160 | 7,835 | 2,939 | 36,242 | |||||||||||||||||
|
Notional amount - other
|
$ | 29,280 | 9,785 | 21,500 | 12,000 | - | 72,565 | |||||||||||||||||
|
Weighted average receive rate (a)
|
2.69 | % | 1.18 | 1.16 | 1.15 | 1.03 | 1.44 | |||||||||||||||||
|
Weighted average pay rate (a)
|
2.97 | % | 2.63 | 4.49 | 7.18 | 6.27 | 4.83 | |||||||||||||||||
|
Unrealized gain (loss)
|
$ | (232 | ) | (292 | ) | (659 | ) | (571 | ) | (270 | ) | (2,024 | ) | |||||||||||
|
FAIR VALUE LIABILITY HEDGES
|
||||||||||||||||||||||||
|
Notional amount - swaps–receive fixed
|
$ | 2,100 | 3,400 | 7,482 | 2,000 | 1,022 | 16,004 | |||||||||||||||||
|
Notional amount - other
|
$ | - | 4,925 | - | - | - | 4,925 | |||||||||||||||||
|
Weighted average receive rate (a)
|
6.71 | % | 6.98 | 5.95 | 6.82 | 5.74 | 6.36 | |||||||||||||||||
|
Weighted average pay rate (a)
|
1.27 | % | 1.20 | 1.30 | 1.19 | 1.18 | 1.25 | |||||||||||||||||
|
Unrealized gain (loss)
|
$ | 61 | 242 | 546 | 299 | 90 | 1,238 | |||||||||||||||||
(a) Weighted average receive and pay rates include the impact of currently effective interest rate swaps and basis swaps only and not the impact of forward-starting interest rate swaps. All interest rate swaps have variable pay or receive rates based on one-month to six-month LIBOR, and they are the pay or receive rates in effect at December 31, 2004 and 2003.
Activity related to risk management derivative financial instruments for each of the years in the two-year period ended
December 31, 2004, is presented below.
December 31, 2004 and 2003
Asset
Liability
(In millions)
Hedges
Hedges
Total
$
45,830
89,263
135,093
50,777
61,418
112,195
(32,260
)
(20,221
)
(52,481
)
(3,801
)
(783
)
(4,584
)
(1,785
)
59
(1,726
)
58,761
129,736
188,497
93,436
129,287
222,723
(53,665
)
(73,304
)
(126,969
)
(27,516
)
(12,982
)
(40,498
)
(13,578
)
(6,499
)
(20,077
)
$
57,438
166,238
223,676
122
NOTE 20: COMMITMENTS, GUARANTEES AND CONTINGENCIES
In the normal course of business, the Company engages in a variety of transactions to meet the financing needs of its customers, to reduce its exposure to fluctuations in interest rates and to conduct lending activities. These transactions principally include lending commitments, other commitments and guarantees. These transactions involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements.
123
Audited Financial Statements
| December 31, | ||||||||||||||||
| 2004 | 2003 | |||||||||||||||
| Maximum | Maximum | |||||||||||||||
| Carrying | Risk of | Carrying | Risk of | |||||||||||||
| (In millions) | Amount | Loss | Amount | Loss | ||||||||||||
|
Securities lending indemnifications
|
$ | - | 48,879 | - | - | |||||||||||
|
Standby letters of credit
|
101 | 30,815 | 72 | 27,597 | ||||||||||||
|
Liquidity agreements
|
1 | 7,568 | 6 | 10,319 | ||||||||||||
|
Loans sold with recourse
|
39 | 5,238 | 29 | 2,655 | ||||||||||||
|
Residual value guarantees
|
9 | 629 | 4 | 641 | ||||||||||||
|
Written put options
|
353 | 3,187 | 422 | 2,021 | ||||||||||||
|
Contingent consideration
|
- | 259 | - | 271 | ||||||||||||
|
Total guarantees
|
$ | 503 | 96,575 | 533 | 43,504 | |||||||||||
As a securities lending agent, client securities are loaned, on a fully collateralized basis, to third party broker/dealers. The Company indemnifies its clients against broker default and supports these guarantees with collateral that is marked to market daily. The Company generally requires cash or other highly liquid collateral from the broker/dealer. At December 31, 2004, there was $50.0 billion in collateral supporting the $48.9 billion loaned. Accordingly, there is no carrying amount associated with these agreements.
124
As part of the Company’s acquisition activity, the Company often negotiates terms in which a portion of the purchase price is contingent on future events, typically related to the acquired businesses meeting revenue or profitability targets. The additional consideration may be cash or stock. Contingent consideration is paid when the contingency is resolved and it is recorded as additional goodwill. At December 31, 2004, the Company had $259 million in cash and no common stock committed under such agreements that will be paid through 2011 if the contingencies are met.
125
Audited Financial Statements
Securities and Exchange Commission. As previously disclosed, on July 23, 2004, the Securities and Exchange Commission (“SEC”) staff advised the Company that the staff was considering recommending to the SEC that it institute an enforcement action against the Company and certain former legacy Wachovia Corporation officers, some of whom remain with the combined company, relating to legacy Wachovia Corporation’s purchases of legacy First Union Corporation common stock and the disclosures made by both legacy companies related to those purchases following the April 2001 announcement of the merger between legacy First Union Corporation and legacy Wachovia Corporation. The Company, without admitting or denying the allegations set forth in the complaint filed on November 4, 2004, consented to entry of final judgment by the United States District Court for the District of Columbia permanently enjoining the Company from directly or indirectly violating Sections 13(a) and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-13 and 14a-9 promulgated thereunder. The judgment also orders the Company to pay a civil money penalty of $37 million pursuant to Section 21(d)(3) of the Securities Exchange Act of 1934. The Company anticipates that there will be no additional SEC enforcement proceedings related to this matter against it or any current or former officers.
126
Bluebird Partners, L.P., Litigation. On December 12, 2002, the jury in the Supreme Court of the State of New York, County of New York, returned a verdict against First Fidelity Bank, N.A. New Jersey (“First Fidelity”), a predecessor to Wachovia Bank in the case captioned “Bluebird Partners, L.P. v. First Fidelity Bank, N.A., et al”. The trial court directed a verdict in favor of CoreStates New Jersey National Bank, another predecessor of Wachovia Bank. In this action for breach of contract, breach of fiduciary duty, negligence and malpractice, plaintiff alleges that First Fidelity, while serving as indenture trustee for debt certificates issued by Continental Airlines, failed to take the necessary action to protect the value of the collateral after Continental Airlines filed for bankruptcy on December 3, 1990, and that the decline in the value of the collateral during the pendency of the bankruptcy caused plaintiff’s losses. On July 10, 2003, the trial judge granted First Fidelity’s motion to set aside the verdict, holding that the evidence was insufficient to support the verdict. Plaintiff appealed, and on October 7, 2004, the Supreme Court, Appellate Division, First Department reversed the dismissal and reinstated the verdict. On January 13, 2005, the court entered judgment against Wachovia Bank in the amount of $32.9 million plus pre- and post-judgment interest at the statutory rate from April 27, 1993. Post-judgment interest continues to accrue at the statutory rate until the judgment is paid. On January 24, 2005, Bluebird filed a notice of appeal of the judgment amount. The Company filed a motion for a new trial. In addition, the Company believes that numerous reversible errors occurred, and that the evidence was insufficient to support the verdict that First Fidelity’s actions caused Bluebird’s loss. The Company will file a motion for leave to appeal to the Court of Appeals.
127
Audited Financial Statements
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of on-balance sheet financial instruments at December 31, 2004 and 2003, is presented below.
| December 31, | ||||||||||||||||
| 2004 | 2003 | |||||||||||||||
| Estimated | Estimated | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| (In millions) | Amount | Value | Amount | Value | ||||||||||||
|
FINANCIAL ASSETS
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 38,591 | 38,591 | 38,512 | 38,512 | |||||||||||
|
Trading account assets
|
45,932 | 45,932 | 34,714 | 34,714 | ||||||||||||
|
Securities
|
110,597 | 110,597 | 100,445 | 100,445 | ||||||||||||
|
Loans, net of unearned income and
allowance for loan losses
|
221,083 | 221,746 | 163,223 | 162,089 | ||||||||||||
|
Loans held for sale
|
12,988 | 12,988 | 12,625 | 12,625 | ||||||||||||
|
Other financial assets
|
$ | 22,215 | 22,215 | 21,032 | 21,032 | |||||||||||
|
FINANCIAL LIABILITIES
|
||||||||||||||||
|
Deposits
|
295,053 | 277,645 | 221,225 | 211,049 | ||||||||||||
|
Short-term borrowings
|
63,406 | 63,406 | 71,290 | 71,290 | ||||||||||||
|
Trading account liabilities
|
21,709 | 21,709 | 19,184 | 19,184 | ||||||||||||
|
Other financial liabilities
|
7,495 | 7,495 | 5,856 | 5,856 | ||||||||||||
|
Long-term debt
|
$ | 46,759 | 48,583 | 36,730 | 38,897 | |||||||||||
The fair values of performing loans for all portfolio loans were calculated by discounting estimated cash flows through expected maturity dates using estimated market yields that reflect the credit and interest rate risks inherent in each category of loans, and prepayment assumptions. Estimated fair values for the commercial loan portfolio were based on weighted average discount rates ranging from 4.16 percent to 9.53 percent and 3.28 percent to 8.91 percent at December 31, 2004 and 2003, respectively, and for the consumer loan portfolio from 7.30 percent to 13.74 percent and 7.25 percent to 14.61 percent, respectively. For performing residential mortgage loans, fair values were estimated using discounted cash flow analyses utilizing yields for similar mortgage-backed securities. The fair values of nonperforming loans were calculated by discounting estimated cash flows using discount rates commensurate with the risk associated with the cash flows.
128
Information about the fair value of off-balance sheet financial instruments at December
31, 2004 and 2003, is presented below.
December 31,
2004
2003
Estimated
Estimated
Notional
Fair
Notional
Fair
(In millions)
Amount
Value
Amount
Value
$
170,818
316
129,660
143
30,815
101
27,597
72
$
62,314
49
13,615
39
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties. Generally, for fixed rate loan commitments, fair value also considers the difference between the current level of interest rates and the committed rates.
129
Audited Financial Statements
NOTE 22: WACHOVIA CORPORATION (PARENT COMPANY)
The Parent Company serves as the primary source of funding for the activities for most of its nonbank subsidiaries.
CONDENSED BALANCE SHEETS
| December 31, | ||||||||
| (In millions) | 2004 | 2003 | ||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$ | 9 | 17 | |||||
|
Interest-bearing balances with bank subsidiary
|
9,794 | 4,382 | ||||||
|
Total cash and cash equivalents
|
9,803 | 4,399 | ||||||
|
Trading account assets
|
34 | 5 | ||||||
|
Securities (amortized cost $585 in 2004; $569 in 2003)
|
617 | 609 | ||||||
|
Loans, net
|
30 | 15 | ||||||
|
Loans due from subsidiaries
|
||||||||
|
Banks
|
5,231 | 4,972 | ||||||
|
Nonbanks
|
5,100 | 4,052 | ||||||
|
Investments in wholly owned subsidiaries
|
||||||||
|
Banks
|
33,650 | 31,063 | ||||||
|
Bank holding companies
|
13,912 | - | ||||||
|
Nonbanks
|
5,437 | 3,682 | ||||||
|
Total
|
52,999 | 34,745 | ||||||
|
Investments arising from purchase acquisitions
|
1,154 | 1,116 | ||||||
|
Total investments in wholly owned subsidiaries
|
54,153 | 35,861 | ||||||
|
Other assets
|
1,786 | 2,020 | ||||||
|
Total assets
|
$ | 76,754 | 51,933 | |||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Commercial paper
|
2,818 | 2,102 | ||||||
|
Other short-term borrowings with affiliates
|
962 | 968 | ||||||
|
Other liabilities
|
1,467 | 630 | ||||||
|
Long-term debt with an affiliate
|
- | 2 | ||||||
|
Long-term debt
|
21,818 | 13,431 | ||||||
|
Junior subordinated debentures
|
2,360 | - | ||||||
|
Junior subordinated deferrable interest debentures
|
- | 2,360 | ||||||
|
Total liabilities
|
29,425 | 19,493 | ||||||
|
Minority interest
|
12 | 12 | ||||||
|
Stockholders’ equity
|
47,317 | 32,428 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 76,754 | 51,933 | |||||
130
CONDENSED STATEMENTS OF INCOME
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
INCOME
|
||||||||||||
|
Dividends from subsidiaries
|
||||||||||||
|
Banks
|
$ | 1,672 | 4,142 | 1,438 | ||||||||
|
Nonbanks
|
103 | 270 | 32 | |||||||||
|
Interest income
|
483 | 483 | 541 | |||||||||
|
Fee and other income
|
1,484 | 1,002 | 820 | |||||||||
|
Total income
|
3,742 | 5,897 | 2,831 | |||||||||
|
EXPENSE
|
||||||||||||
|
Interest on short-term borrowings
|
39 | 25 | 48 | |||||||||
|
Interest on long-term debt
|
515 | 447 | 599 | |||||||||
|
Noninterest expense
|
1,405 | 1,063 | 782 | |||||||||
|
Total expense
|
1,959 | 1,535 | 1,429 | |||||||||
|
Income before income tax benefits, equity in undistributed net income (loss)
of subsidiaries and cumulative effect of a change in accounting principle
|
1,783 | 4,362 | 1,402 | |||||||||
|
Income tax benefits
|
(1 | ) | (39 | ) | (28 | ) | ||||||
|
Income before equity in undistributed net income (loss) of subsidiaries
and cumulative effect of a change in accounting principle
|
1,784 | 4,401 | 1,430 | |||||||||
|
Equity in undistributed net income (loss) of subsidiaries
|
3,430 | (154 | ) | 2,149 | ||||||||
|
Income before cumulative effect of a change in accounting principle
|
5,214 | 4,247 | 3,579 | |||||||||
|
Cumulative effect of a change in accounting principle, net of income taxes
|
- | 17 | - | |||||||||
|
Net income
|
5,214 | 4,264 | 3,579 | |||||||||
|
Dividends on preferred stock
|
- | 5 | 19 | |||||||||
|
Net income available to common stockholders
|
$ | 5,214 | 4,259 | 3,560 | ||||||||
131
Audited Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (In millions) | 2004 | 2003 | 2002 | |||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 5,214 | 4,264 | 3,579 | ||||||||
|
Adjustments to reconcile net income to net cash provided (used) by operating
activities
|
||||||||||||
|
Equity in undistributed net (income) loss of subsidiaries
|
(3,430 | ) | 154 | (2,149 | ) | |||||||
|
Cumulative effect of a change in accounting principle
|
- | (17 | ) | - | ||||||||
|
Securities transactions
|
(17 | ) | (19 | ) | 21 | |||||||
|
Accretion and amortization of securities discounts and premiums, net
|
4 | - | - | |||||||||
|
Depreciation and other amortization
|
331 | 292 | 289 | |||||||||
|
Deferred income taxes
|
(83 | ) | (91 | ) | (15 | ) | ||||||
|
Trading account assets, net
|
(29 | ) | (5 | ) | 16 | |||||||
|
Other assets, net
|
387 | 180 | (623 | ) | ||||||||
|
Minority interest
|
- | - | 12 | |||||||||
|
Other liabilities, net
|
652 | (36 | ) | (456 | ) | |||||||
|
Net cash provided by operating activities
|
3,029 | 4,722 | 674 | |||||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Increase (decrease) in cash realized from
|
||||||||||||
|
Sales and maturities of securities
|
352 | 691 | 454 | |||||||||
|
Purchases of securities
|
(274 | ) | (236 | ) | (349 | ) | ||||||
|
Advances to subsidiaries, net
|
(1,297 | ) | 105 | 727 | ||||||||
|
Investments in subsidiaries, net
|
(1,514 | ) | (1,080 | ) | 2,546 | |||||||
|
Longer-term loans originated or acquired
|
(60 | ) | (9 | ) | (53 | ) | ||||||
|
Principal repaid on longer-term loans
|
45 | 18 | 102 | |||||||||
|
Purchases of premises and equipment, net
|
(20 | ) | (33 | ) | (10 | ) | ||||||
|
Cash equivalents acquired, net of purchases of banking organizations
|
429 | - | - | |||||||||
|
Net cash provided (used) by investing activities
|
(2,339 | ) | (544 | ) | 3,417 | |||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Increase (decrease) in cash realized from
Commercial paper
|
706 | (428 | ) | (515 | ) | |||||||
|
Other short-term borrowings, net
|
(6 | ) | (21 | ) | (1,502 | ) | ||||||
|
Issuances of long-term debt
|
10,480 | 771 | - | |||||||||
|
Payments of long-term debt
|
(2,519 | ) | (3,152 | ) | (751 | ) | ||||||
|
Issuances of common stock
|
716 | 301 | 75 | |||||||||
|
Purchases of common stock
|
(2,357 | ) | (2,257 | ) | (674 | ) | ||||||
|
Cash dividends paid
|
(2,306 | ) | (1,670 | ) | (1,385 | ) | ||||||
|
Net cash provided (used) by financing activities
|
4,714 | (6,456 | ) | (4,752 | ) | |||||||
|
Increase (decrease) in cash and cash equivalents
|
5,404 | (2,278 | ) | (661 | ) | |||||||
|
Cash and cash equivalents, beginning of year
|
4,399 | 6,677 | 7,338 | |||||||||
|
Cash and cash equivalents, end of year
|
$ | 9,803 | 4,399 | 6,677 | ||||||||
|
CASH PAID FOR
|
||||||||||||
|
Interest
|
$ | 422 | 480 | 777 | ||||||||
|
Income taxes
|
315 | 174 | 154 | |||||||||
|
NONCASH ITEM
|
||||||||||||
|
Issuance of common stock for purchase accounting merger
|
$ | 14,000 | - | 51 | ||||||||
132
Glossary of Financial Terms
133
Index
|
Financial Review
|
||
|
Critical Accounting Policies
|
20 | |
|
Earnings Performance
|
||
|
Executive summary (tables on pages 17 and 55)
|
17 | |
|
Net interest income and margin (tables on pages 24, 54-55, 67-69)
|
24 | |
|
Fee and other income (tables on pages 25, 55, 57 and 74)
|
25 | |
|
Noninterest expense (tables on pages 26, 55, 57 and 74)
|
25 | |
|
Merger-related and restructuring expenses (tables on pages 26, 53, 55, 57, 74 and 112)
|
26 | |
|
Income taxes (tables on pages 55, 57, 74, 76 and 114)
|
26 | |
|
Business segments (tables on pages 28-31 and 105-106)
|
26 | |
|
Comparison of 2003 with 2002
|
50 | |
|
Explanation of our use of non-GAAP financial measures
|
53 | |
|
Five-year summaries of income
|
55 | |
|
Selected quarterly data
|
57 | |
|
|
||
|
Balance Sheet Analysis
|
||
|
Securities (tables on pages 68-69, 73, 76 and 87-89)
|
32 | |
|
Loans (tables on pages 28-33, 58, 73, 91 and 93)
|
33 | |
|
Average balances (tables on pages 24 and 68-69)
|
24 | |
|
Charge-offs (tables on pages 34, 54 and 61)
|
34 | |
|
Commercial real estate (table on page 93)
|
33 | |
|
Commitments
|
28-31, 43, 105-106 | |
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Geographic concentrations
|
33 | |
|
Industry concentrations
|
33-34 | |
|
Loans held for sale (tables on pages 35 and 59)
|
35 | |
|
Mix at year-end
|
33 | |
|
Nonperforming assets (tables on pages 34 and 61)
|
33 | |
|
Past due loans (tables on page 61)
|
34 | |
|
Project type
|
33 | |
|
Provision for credit losses, allowance for loan losses and reserve
for unfunded lending commitments (tables on pages 17, 28-31, 61-62, 74 and 94)
|
34 | |
|
Deposits (tables on pages 65, 68-69, and 73)
|
36 | |
|
|
||
|
Funding Sources
|
||
|
Core deposits (other deposit tables on pages 65 and 73)
|
36 | |
|
Purchased funds (tables on pages 73 and 97)
|
37 | |
|
Long-term debt (tables on pages 55, 68-69, 73, 76 and 98)
|
37 | |
|
Debt ratings
|
Inside Back Cover | |
|
Regulatory capital (table on page 66)
|
38 | |
|
Stockholders’ equity (tables on pages 56-57, 73, 75 and Inside Front Cover)
|
37 | |
|
Subsidiary dividends
|
37 | |
|
|
||
|
Off-Balance Sheet Transactions
|
||
|
Summary table
|
38 | |
|
|
||
|
Risk Management
|
||
|
Credit risk management
|
40 | |
|
Interest rate risk management
|
45 | |
|
Derivatives (tables on pages 118-119 and 121-122)
|
44 | |
|
Trading activities
|
86 | |
|
Market risk management
|
41 | |
|
Operational risk management
|
42 | |
|
Liquidity risk management
|
43 | |
|
Allowance for loan losses and reserve for unfunded lending commitments (tables on pages 34, 61-62, 73 and 94)
|
34 |
134
|
Management’s Report on Internal Control over Financial Reporting
|
70 | |
|
|
||
|
Reports of Independent Registered Accounting Firm
|
71-72 | |
|
|
||
|
Consolidated Financial Statements
|
||
|
Consolidated balance sheets
|
73 | |
|
Consolidated statements of income
|
74 | |
|
Consolidated statements of changes in stockholders’ equity
|
75 | |
|
Consolidated statements of cash flows
|
76 | |
|
|
||
|
Notes to Consolidated Financial Statements
|
||
|
Summary of significant accounting policies
|
77 | |
|
Business combinations
|
83 | |
|
Trading account assets and liabilities
|
86 | |
|
Securities
|
87 | |
|
Securitizations and retained beneficial interests, variable interest entities and servicing assets
|
90 | |
|
Loans
|
93 | |
|
Allowance for loan losses and reserve for unfunded lending commitments
|
94 | |
|
Goodwill and other intangible assets
|
95 | |
|
Other assets
|
96 | |
|
Short-term borrowings
|
97 | |
|
Long-term debt
|
98 | |
|
Common and preferred stock and capital ratios
|
100 | |
|
Accumulated other comprehensive income, net
|
103 | |
|
Business segments
|
104 | |
|
Personnel expense and retirement benefits
|
107 | |
|
Merger-related and restructuring expenses
|
111 | |
|
Income taxes
|
114 | |
|
Basic and diluted earnings per common share
|
117 | |
|
Derivatives
|
118 | |
|
Commitments, guarantees and contingencies
|
123 | |
|
Fair value of financial instruments
|
128 | |
|
Wachovia Corporation (parent company)
|
130 | |
|
|
||
|
Ratios
|
||
|
Capital and leverage
|
54 and 66 | |
|
Common stockholders’ equity to assets
|
54, 56-57, 66 | |
|
Dividend payout ratio
|
Inside Front Cover, 3, 19, 53 and 56 | |
|
Efficiency
|
4, 28-31 | |
|
Net interest margin
|
24, 54, 67-69 | |
|
Profitability (ROA and ROE)
|
Inside Front Cover, 54, 56-57 |
135
Corporate Governance
At December 31, 2004
| Board of Directors | ||||||
|
|
||||||
|
John D. Baker II
President and Chief Executive Officer, Florida Rock Industries, Inc. Jacksonville, Florida James S. Balloun Private Investor Atlanta, Georgia Robert J. Brown Chairman and Chief Executive Officer, B&C Associates, Inc. High Point, North Carolina Peter C. Browning Dean, McColl Graduate School of Business, Queens University of Charlotte Charlotte, North Carolina John T. Casteen III President, University of Virginia Charlottesville, Virginia |
William H. Goodwin Jr.
Chairman and President, CCA Industries, Inc. Chairman, Chief Executive Officer and Chief Operating Officer, The Riverstone Group, LLC Richmond, Virginia Robert A. Ingram Vice Chairman Pharmaceuticals, GlaxoSmithKline Research Triangle Park, North Carolina Donald M. James Chairman and Chief Executive Officer, Vulcan Materials Company Birmingham, Alabama Wallace D. Malone Jr. Vice Chairman, Wachovia Corporation Charlotte, North Carolina Mackey J. McDonald Chairman, President and Chief Executive Officer, VF Corporation Greensboro, North Carolina |
Joseph Neubauer
Chairman and Chief Executive Officer, ARAMARK Corporation Philadelphia, Pennsylvania Lloyd U. Noland III Chairman, President and Chief Executive Officer, Noland Company Newport News, Virginia Van L. Richey President and Chief Executive Officer, American Cast Iron Pipe Company Birmingham, Alabama Ruth G. Shaw President and Chief Executive Officer, Duke Power Company, Duke Energy Corporation Charlotte, North Carolina Lanty L. Smith Lead Independent Director, Wachovia Corporation Chairman, Soles Brower Smith & Co. Greensboro, North Carolina |
G. Kennedy Thompson
Chairman, President and Chief Executive Officer, Wachovia Corporation Charlotte, North Carolina John C. Whitaker Jr. Chairman and Chief Executive Officer, Inmar, Inc. Winston-Salem, North Carolina Dona Davis Young Chairman, President and Chief Executive Officer, The Phoenix Companies, Inc. Hartford, Connecticut |
|||
| Committees of the Board of Directors | ||||||||
|
|
||||||||
|
Executive
Lanty L. Smith, Chair Peter C. Browning William H. Goodwin Jr. Robert A. Ingram Joseph Neubauer G. Kennedy Thompson John C. Whitaker Jr. |
Audit
Joseph Neubauer, Chair James S. Balloun John T. Casteen III Lloyd U. Noland III Lanty L. Smith |
Risk
Dona Davis Young, Chair John D. Baker II Peter C. Browning William H. Goodwin Jr. Donald M. James Van L. Richey John C. Whitaker Jr. |
Corporate Governance &
Nominating Robert A. Ingram, Chair Peter C. Browning William H. Goodwin Jr. Mackey J. McDonald Joseph Neubauer Lanty L. Smith |
Management Resources &
Compensation Ruth G. Shaw, Chair Robert J. Brown Robert A. Ingram Mackey J. McDonald |
||||
| Operating Committee | ||||||
|
|
||||||
|
G. Kennedy Thompson
Chairman, President and Chief Executive Officer David M. Carroll Senior Executive Vice President and President, Capital Management Group Thomas H. Coley Executive Vice President and Southern Banking Group Executive, General Bank Stephen E. Cummings Senior Executive Vice President and Head of Corporate and Investment Bank Jean E. Davis Senior Executive Vice President and Head of Operations, Technology and eCommerce |
Reginald E. Davis
Executive Vice President and Northern Banking Group Executive, General Bank R. Glenn Eubanks Executive Vice President and Head of Real Estate Financial Services, General Bank Benjamin P. Jenkins III Senior Executive Vice President and President, General Bank Robert P. Kelly Senior Executive Vice President and Chief Financial Officer Stanhope A. Kelly Senior Executive Vice President and President, Wealth Management |
Daniel J. Ludeman
Executive Vice President, Wachovia Securities, LLC President and Chief Executive Officer, Wachovia Securities Wallace D. Malone Jr. Vice Chairman Shannon W. McFayden Senior Executive Vice President and Director of Human Resources and Corporate Relations E. Frank Schmidt Executive Vice President and Co-Head of Merger Integration Cecelia S. Sutton Executive Vice President and Head of the Retail Segment, General Bank |
Mark C. Treanor
Senior Executive Vice President, General Counsel and Secretary Donald K. Truslow Senior Executive Vice President and Chief Risk Officer Benjamin F. Williams Jr. Managing Director, Wachovia Capital Markets, LLC, and Head of Global Capital Markets, Corporate and Investment Bank Thomas J. Wurtz Executive Vice President and Treasurer |
|||
136
Shareholder Information
How to Contact Us
Annual and quarterly financial information is available online at Wachovia.com/investor. Request publications or speak with the shareholder relations manager through our interactive voice response system at 704-374-6782.
Transfer Agent
Wachovia Bank, National Association
1-800-347-1246
Wachovia Shareholder Services-NC1153
1525 West W.T. Harris Boulevard 3C3
Charlotte, North Carolina 28262-8522
Media
Mary Eshet, Media Relations Manager
704-374-2138
Debt Ratings
Wachovia Corporation and Wachovia Bank, National Association, each have debt securities issued in the marketplace. The following table shows debt ratings at December 31, 2004.
Annual Meeting
Tuesday, April 19, 2005, 9:30 a.m.
Hilton Charlotte & Towers, 222 East Third Street
Charlotte, North Carolina
Corporate Headquarters
Wachovia Corporation
301 South College Street, Suite 4000
Charlotte, North Carolina 28288-0013
704-374-6161
Certifications
On May 11, 2004, G. Kennedy Thompson, Wachovia’s chief executive officer, submitted to the New York Stock Exchange the CEO certification required by the NYSE’s rules certifying that he was not aware of any violations by Wachovia of the NYSE’s corporate governance listing standards.
Wachovia Corporation is an equal opportunity employer.
| Moody's | Standard & Poor's | Fitch | ||||
| Outlook | Stable | Positive | Positive | |||
|
Wachovia Corporation
|
||||||
|
Senior long-term debt
|
Aa3 | A | A+ | |||
|
Subordinated long-term debt
|
A1 | A- | A | |||
|
Short-term debt
|
P-1 | A-1 | F1 | |||
|
Wachovia Bank, National Association
|
||||||
|
Long-term deposits
|
Aa2 | A+ | AA- | |||
|
Short-term deposits
|
P-1 | A-1 | F1+ | |||
|
Long-term debt/letters of credit
|
Aa2 | A+ | A+ | |||
|
Short-term debt/letters of credit
|
P-1 | A-1 | F1 | |||
|
Subordinated debt
|
Aa3 | A | A | |||
Recent Wachovia Achievements
| n | No. 1 total stock return among the 20 largest U.S. banks from 2001 through 2004 | |
| n | Best Chief Financial Officer for a Large-Cap Bank in America for two consecutive years - Bob Kelly, CFO ( Institutional Investor ) | |
| n | Top 2 Investor Relations Team for a Large-Cap Bank in America ( Institutional Investor ) | |
| n | No. 1 Investor Relations Web site among U.S. financial institutions and No. 6 worldwide ( IR Web Report ) | |
| n | Top 100 Best Corporate Citizens ( Business Ethics magazine) | |
| n | Top 20 Best Corporate Reputation (2004 Delahaye Index) | |
| n | No. 1 among peer banks in University of Michigan’s American Customer Satisfaction Index for four consecutive years | |
| n | Only financial services company to receive Fast Company 2004 Customer First Award | |
| n | No. 1 among banks in 2004 Brandweek Customer Loyalty Awards | |
| n | No. 1 Operational Bank for cost control and service quality (Global Concepts 2004 benchmarking survey) | |
| n | Top 10 Best Places to Work, Best in Financial Services Industry and Best-in-Class for family friendly culture ( Working Mother magazine) | |
| n | Top 50 Companies for Diversity ( DiversityInc ) | |
| n | Top 50 Best Companies for Latinas to work in the U.S. for third consecutive year ( Latina Style ) | |
| n | Outstanding Companies for Black Women ( Essence magazine) | |
| n | 100 best corporations in North America for developing human capital for three consecutive years ( Training magazine) | |
| n | Top 2 Online Customer Respect among U.S. commercial banks (Customer Respect Group) | |
| n | Best Corporate/Institutional Online Cash Management Bank in North America ( Global Finance magazine) |
|
Wachovia Corporation
one wachovia center charlotte, nc 28288 www.wachovia.com/investor 505004 |
|