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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-10000
WACHOVIA CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0898180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WACHOVIA CORPORATION
ONE WACHOVIA CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(Address of principal executive offices)
(Zip Code)
(704) 374-6565
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
1,368,629,807 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of April 30, 2002.
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Wachovia Corporation (formerly named First Union Corporation, "Wachovia")
may from time to time make written or oral forward-looking statements, including
statements contained in Wachovia's filings with the Securities and Exchange
Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto
and thereto), in its reports to stockholders and in other Wachovia
communications, which are made in good faith by Wachovia pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements with
respect to Wachovia's beliefs, plans, objectives, goals, guidelines,
expectations, financial condition, results of operations, future performance and
business of Wachovia, including without limitation, (i) statements relating to
the benefits of the merger between the former Wachovia Corporation ("Legacy
Wachovia") and Wachovia completed on September 1, 2001 (the "Merger"), including
future financial and operating results, cost savings, enhanced revenues, and the
accretion to reported earnings that may be realized from the Merger, (ii)
statements regarding certain of Wachovia's goals and expectations with respect
to earnings, earnings per share, revenue, expenses, and the growth rate in such
items, as well as other measures of economic performance, including statements
relating to estimates of credit quality trends, and (iii) statements preceded
by, followed by or that include the words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan", "projects" or
similar expressions. These forward-looking statements involve certain risks and
uncertainties that are subject to change based on various factors (many of which
are beyond Wachovia's control). The following factors, among others, could cause
Wachovia's financial performance to differ materially from that expressed in
such forward-looking statements: (1) the risk that the businesses of Wachovia
and Legacy Wachovia in connection with the Merger will not be integrated
successfully or such integration may be more difficult, time-consuming or costly
than expected; (2) expected revenue synergies and cost savings from the Merger
may not be fully realized or realized within the expected time frame; (3)
revenues following the Merger may be lower than expected; (4) deposit attrition,
operating costs, customer loss and business disruption following the Merger,
including, without limitation, difficulties in maintaining relationships with
employees, may be greater than expected; (5) the strength of the United States
economy in general and the strength of the local economies in which Wachovia
conducts operations may be different than expected resulting in, among other
things, a deterioration in credit quality or a reduced demand for credit,
including the resultant effect on Wachovia's loan portfolio and allowance for
loan losses; (6) the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors of
the Federal Reserve System; (7) inflation, interest rate, market and monetary
fluctuations; (8) adverse conditions in the stock market, the public debt market
and other capital markets (including changes in interest rate conditions) and
the impact of such conditions on Wachovia's capital markets and capital
management activities, including, without limitation, Wachovia's mergers and
acquisition advisory business, equity and debt underwriting activities, private
equity investment activities, derivative securities activities, investment and
wealth management advisory businesses, and brokerage activities; (9) the timely
development of competitive new products and services by Wachovia and the
acceptance of these products and services by new and existing customers; (10)
the willingness of customers to accept third party products marketed by
Wachovia; (11) the willingness of customers to substitute competitors' products
and services for Wachovia's products and services and vice versa; (12) the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); (13) technological
changes; (14) changes in consumer spending and saving habits; (15) the effect of
corporate restructurings, acquisitions and/or dispositions, including, without
limitation, the Merger, and the actual restructuring and other charges related
thereto, and the failure to achieve the expected revenue growth and/or expense
savings from such corporate restructurings, acquisitions and/or dispositions;
(16) the growth and profitability of Wachovia's noninterest or fee income being
less than expected; (17) unanticipated regulatory or judicial proceedings; (18)
the impact of changes in accounting policies by the Securities and Exchange
Commission; (19) adverse changes in financial performance and/or condition of
Wachovia's borrowers which could impact repayment of such borrowers' outstanding
loans; (20) the impact on Wachovia's businesses, as well as on the risks set
forth above, of various domestic or international military or terrorist
activities or conflicts; and (21) Wachovia's success at managing the risks
involved in the foregoing.
Wachovia cautions that the foregoing list of important factors is not
exclusive. Wachovia does not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
Wachovia.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited consolidated financial statements of Wachovia
within Item 1 include, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for fair presentation of such
consolidated financial statements for the periods indicated.
Notes to Consolidated Financial Statement begin on the next page.
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NOTE 1: BASIC AND DILUTED EARNINGS PER COMMON SHARE
The calculation of basic and diluted earnings per common share for
the three months ended March 31, 2002 and March 31, 2001, is presented below.
Three Months Ended
March 31,
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(In millions, except per share data) 2002 2001
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Income before dividends on preferred stock $ 913 584
Less imputed interest on the Company's transactions
in its common stock - (7)
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Income available to common stockholders before dividends
on preferred stock 913 577
Dividends on preferred stock (6) -
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Income available to common stockholders $ 907 577
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Basic earnings per common share $ 0.67 0.60
Diluted earnings per common share $ 0.66 0.59
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Average common shares - basic 1,355 968
Common share equivalents, unvested restricted stock, incremental
common shares from forward purchase contracts and convertible
long-term debt assumed converted 11 8
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Average common shares - diluted 1,366 976
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NOTE 2: GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets. Under the provisions of SFAS 142, goodwill and identified intangible
assets with indefinite useful lives are not subject to amortization. Rather they
are subject to impairment testing on an annual basis, or more often if events or
circumstances indicate that there may be impairment. Identified intangible
assets that have a finite useful life are amortized over that life in a manner
that reflects the estimated decline in the economic value of the identified
intangible asset and are reviewed for impairment when events or circumstances
indicate that there may be impairment.
The Company adopted the provisions of SFAS 142 on January 1, 2002.
Under the provisions of SFAS 142, all amortization of goodwill and identified
intangible assets with indefinite useful lives ceased. Also under SFAS 142, all
goodwill and identified intangible assets with an indefinite useful life must be
tested for impairment as of January 1, 2002, and annually thereafter. 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 value. If the fair value is less than the carrying value, a
further test is required to measure the amount of goodwill impairment.
The Company's impairment evaluation as of January 1, 2002, under the
new standard indicated that none of the Company's goodwill was impaired.
Net income and earnings per share amounts adjusted to exclude goodwill
amortization expense for the three months ended March 31, 2002 and March 31,
2001, are presented below.
Three Months Ended
March 31,
-----------------------
(Dollars in millions, except per share data) 2002 2001
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Reported net income available to common stockholders $ 907 584
Less imputed interest on the Company's transactions
in its common stock -- (7)
Add back goodwill amortization -- 60
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Adjusted net income available to common stockholders $ 907 637
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BASIC EARNINGS PER COMMON SHARE
Reported net income available to common stockholders $ 0.67 0.60
Add back goodwill amortization -- 0.06
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Adjusted net income available to common stockholders $ 0.67 0.66
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DILUTED EARNINGS PER COMMON SHARE
Reported net income available to common stockholders $ 0.66 0.59
Add back goodwill amortization -- 0.06
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Adjusted net income available to common stockholders $ 0.66 0.65
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INTANGIBLE AMORTIZATION
Identified intangible assets
Deposit base $ 160 17
Customer relationships 8 1
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Total 168 18
Servicing assets 15 10
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Total intangible amortization $ 183 28
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According to SFAS 142, a reporting unit is an operating segment or one
level below an operating segment. The Company determined that lines of business
were its reporting units. The changes in the carrying amount of goodwill related
to each of the Company's business segments for the three months ended March 31,
2002, are presented below.
Corporate
and
General Capital Wealth Investment
(In millions) Bank Management Management Bank Total
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Balance, January 1, 2002 $ 6,835 1,548 467 1,766 10,616
Purchase accounting adjustments 70 6 14 22 112
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Balance, March 31, 2002 $ 6,905 1,554 481 1,788 10,728
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At March 31, 2002, and at December 31, 2001, the Company had $90
million assigned to its tradename which, based on its indefinite useful life, is
not subject to amortization under SFAS 142.
The gross carrying amount, accumulated amortization and weighted
average amortization period for each of the Company's identified intangible
assets subject to amortization at March 31, 2002, and at December 31, 2001, is
presented below.
MARCH 31, 2002 December 31, 2001
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WEIGHTED Weighted
GROSS AVERAGE Gross Average
CARRYING ACCUMULATED AMORTIZATION Carrying Accumulated Amortization
(In millions) AMOUNT AMORTIZATION IN YEARS Amount Amortization In Years
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Deposit base $ 2,536 875 7 2,536 714 7
Customer relationships 261 24 16 261 17 16
Servicing assets 378 124 21 375 114 20
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Total $ 3,175 1,023 3,172 845
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The estimated annual identified intangible assets amortization in each
of the five years subsequent to December 31, 2001, is as follows (in millions):
2002, $673; 2003, $541; 2004, $413; 2005, $286; and 2006, $170.
NOTE 3: TRANSACTIONS BY THE COMPANY IN ITS OWN STOCK
The Company has used forward equity sales transactions ("equity
forwards") and forward purchase contracts in connection with its stock
repurchase program. These contracts were entered into in 1999 and 2000. They
mature at various dates in 2002. The Company has also entered into option
contracts in its stock to offset potential dilution from the exercise of stock
options in future years. These option contracts involve the contemporaneous
purchase of a call option and the sale of a put option to the same counterparty
("collar transactions"). These collar transactions were entered into in 1999 and
2000. They mature at various dates in 2003.
The use of equity forwards provided the Company with the ability to
purchase shares under the stock repurchase program in the open market and then
issue shares in a private transaction to the counterparty in the amount
necessary to maintain targeted capital ratios. Under the terms of the equity
forward, the Company issued shares of common stock to an investment banking firm
at a specified price that approximated market value. Simultaneously, the Company
entered into a forward contract with the same counterparty to repurchase the
shares at the same price plus a premium that accrues over the life of the
contract, net of dividends paid to the counterparty (the "forward price"). The
maturity date can be extended by mutual consent of the counterparties.
Under the terms of the forward purchase contracts, the Company has
agreed to purchase shares on a specific future date at the forward price. The
counterparties to these contracts generally purchase the shares to which the
contract is subject in the open market and hold the shares for the duration of
the contract. The maturity dates can be extended by mutual consent of the
counterparties.
The terms of the forward contracts provide three settlement
alternatives and the method selected to settle any contract is at the sole
discretion of the Company: gross physical settlement where the Company pays the
forward price to the counterparty in cash and takes delivery of the shares, and
net share or net cash settlement where the difference between the forward price
and the market price is settled in shares or cash, respectively. Under the net
settlement method, if the forward price is less than the market price, the
Company would receive shares or cash, and if the forward price is greater than
the market price, the Company would deliver shares or cash. If the Company were
to elect net share settlement on any of these contracts, the calculation of the
number of net shares to be received or delivered would be based on the market
price of the Company's shares at settlement. The collar transactions are subject
to the same settlement alternatives.
These transactions are accounted for as equity. In calculating diluted
earnings per share, the premium component of the forward price on equity
forward contracts is subtracted in calculating income available to common
stockholders. For forward purchase contracts, diluted shares include the share
equivalent of the excess of the forward price over the current market price of
the shares. In the first quarter of 2002, the premium component of the equity
forward was anti-dilutive.
The Company has stated its intent to settle the equity forward and the
forward purchase contracts over the next few years.
Information related to these contracts at March 31, 2002, is presented
below.
March 31, 2002
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Maximum
Number of
Forward/ Total Value Shares That
Strike Number of the Could be
(In thousands, except per share amounts) Price of Shares Contract Issued (b)
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Type of contract
Equity forward $38.77 2,740 $106,230 22,000
Forward purchase contract 48.75 8,783 428,160 100,000
Forward purchase contract 31.82 24,314 773,656 243,137
Put options in connection with collars (a) $33.17 7,592 $251,828 42,776
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(a) Represents the weighted average strike price of the put options. The strike
prices range from $31.39 to $34.72.
(b) This represents the maximum number of shares that the Company could be
required to deliver under a net share settlement and would only occur if there
was a precipitous decline in the Company's share price to an amount less than
a weighted average of $4.03 per share for all contracts.
The Company has also sold put options with a weighted average strike
price of $3.28 on 287 million shares of its common stock. The put options must
be settled on a gross physical basis, and accordingly, are accounted for as
liabilities. The put options were entered into in 1999 and 2000 and mature at
various dates in 2002.
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Consolidated Balance Sheets of Wachovia and subsidiaries at March 31,
2002, March 31, 2001, and December 31, 2001, respectively, set forth on page 57
of Wachovia's First Quarter 2002 Financial Supplement for the three months ended
March 31, 2002 (the "Financial Supplement"), are incorporated herein by
reference.
The Consolidated Statements of Income (Loss) of Wachovia and subsidiaries
for the three months ended March 31, 2002 and 2001, set forth on page 58 of the
Financial Supplement, are incorporated herein by reference.
The Consolidated Statements of Cash Flows of Wachovia and subsidiaries for
the three months ended March 31, 2002 and 2001, set forth on page 59 of the
Financial Supplement, are incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages 2 through 24 of the Financial Supplement and is
incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk appears on pages
20 through 22 and pages 49 through 52 of the Financial Supplement and is
incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 26, 2000, a jury in the Philadelphia County (PA) Court of Common
Pleas returned a verdict in the case captioned Pioneer Commercial Funding
Corporation v. American Financial Mortgage Corporation, CoreStates Bank, N.A.,
et al. The verdict against CoreStates Bank, N.A. ("CoreStates"), a predecessor
of First Union National Bank, included consequential damages of $13.5 million
and punitive damages of $337.5 million. The trial court had earlier directed a
verdict against CoreStates for compensatory damages of $1.7 million. The
plaintiff, who was not a CoreStates customer, alleged that the sum of $1.7
million, which it claims it owned, was improperly setoff by CoreStates. Upon our
motion, the trial court reduced the amount of the punitive damages award to
$40.5 million in December 2000. We believe that numerous reversible errors
occurred at the trial, and that the facts do not support the damages awards. In
March 2002, the Pennsylvania Superior Court vacated the award of punitive
damages, affirmed the awards of consequential and compensatory damages and
remanded the case for a new trial on punitive damages. We have petitioned the
Pennsylvania Superior Court to allow re-argument and await a decision on the
petition. We will continue to vigorously pursue our rights of appeal. We
believe, after consultation with external counsel, that the ultimate outcome of
this litigation will not have a material adverse effect on our consolidated
financial condition.
On March 25, 2002, a judgment was entered on a jury verdict in the Circuit
Court for Baltimore City, Maryland in the case captioned Steele Software Systems
Corporation v. First Union National Bank. The verdict includes compensatory
damages of $39.5 million and punitive damages of $200 million. The plaintiff, a
vendor which provided real estate settlement services, alleged that First Union
National Bank misled the plaintiff into entering into a services agreement with
First Union National Bank, and subsequently breached that agreement. Wachovia
has filed a motion in the trial court seeking a judgment notwithstanding the
verdict, a new trial or relief from the punitive damages award. Wachovia
believes that numerous reversible errors occurred at the trial, and that the
facts do not support the damages awards. Wachovia will vigorously pursue its
pending post-trial motions and its right of appeal. Wachovia believes, after
consultation with external counsel, that while the ultimate outcome of this
litigation cannot be estimated at this time, it will not have a material adverse
effect on Wachovia's consolidated financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In 1999, in connection with its stock repurchase program, Wachovia sold 17
million shares of its common stock to an investment banking firm. In connection
therewith, Wachovia agreed to repurchase the 17 million shares or otherwise
settle the contract, at Wachovia's option. In October 2000, Wachovia repurchased
4 million of those shares and in August 2001, Wachovia repurchased an additional
10 million shares leaving 3 million shares to be repurchased as of March 31,
2002. The offer and sale of the shares of common stock by Wachovia were exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof because such offer and sale did not involve a public
offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of Wachovia held on April 16, 2002,
the following proposals were submitted to a vote of the holders of Wachovia's
common stock voting as indicated:
1. Approval of a proposal to elect the following individuals as directors of
Wachovia:
FOR WITHHELD
Class I directors:
John D. Baker, II ............................ 1,095,005,590 56,975,881
Leslie M. Baker, Jr. ......................... 1,099,767,352 52,214,119
Robert J. Brown .............................. 1,101,020,067 50,961,404
Peter C. Browning ............................ 1,101,299,432 50,682,039
G. Kennedy Thompson .......................... 1,095,121,932 56,859,539
John C. Whitaker, Jr. ........................ 1,101,260,700 50,720,771
Class II directors:
F. Duane Ackerman ............................ 1,095,103,657 56,877,814
John T. Casteen, III ......................... 1,094,879,482 57,101,989
Robert A. Ingram ............................. 1,101,618,751 50,362,720
Class III directors:
James S. Balloun ............................. 1,101,500,944 50,480,527
Lloyd U. Noland .............................. 1,101,984,755 49,996,716
Dona Davis Young ............................. 1,101,074,031 50,907,440
2. Approval of a proposal to ratify the appointment of KPMG LLP as Wachovia's
auditors for 2002:
FOR AGAINST ABSTAIN
1,117,175,828 28,383,409 6,422,234
3. Approval of a proposal to amend Wachovia's articles of incorporation to allow
stockholders owning at least 25% of outstanding shares of Wachovia common
stock entitled to vote to call a special meeting of stockholders:
FOR AGAINST ABSTAIN BROKER NON-VOTES
870,326,360 23,714,947 11,461,458 246,478,706
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
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(4) Instruments defining the rights of security holders, including
indentures.*
(12)(a) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(12)(b) Computations of Consolidated Ratios of Earnings to Fixed Charges
and Preferred Stock Dividends
(19) Wachovia's First Quarter 2002 Financial Supplement.
* Wachovia agrees to furnish to the Commission upon request, copies of the
instruments, including indentures, defining the rights of the holders of the
long-term debt of Wachovia and its consolidated subsidiaries.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2002, a Current Report on Form 8-K,
dated January 23, 2002, was filed with the Commission by Wachovia. In addition,
a Current Report on Form 8-K dated April 18, 2002, has been filed with the
Commission by Wachovia.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WACHOVIA CORPORATION
Date: May 15, 2002
By: /s/ DAVID M. JULIAN
----------------------------------------------
David M. Julian
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
(4) Instruments defining the rights of security holders, including
indentures.*
(12)(a) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(12)(b) Computations of Consolidated Ratios of Earnings to Fixed Charges
and Preferred Stock Dividends.
(19) Wachovia's First Quarter 2002 Financial Supplement.
* Wachovia agrees to furnish to the Commission upon request, copies of the
instruments, including indentures, defining the rights of the holders of the
long-term debt of Wachovia and its consolidated subsidiaries.