Wachovia Reports 3rd Quarter Loss of $4.8 Billion Excluding $18.7 Billion of
Noncash Goodwill Impairment and $414 Million Net Merger-Related Expense;
Results Reflect Pre-tax $4.8 Billion Credit Reserve Build
Wells Fargo Merger on Track For 4th Quarter 2008 Close
CHARLOTTE, N.C., Oct. 22 /PRNewswire-FirstCall/ --
Third Quarter 2008 Compared With Third Quarter 2007:
-- Net loss of $23.9 billion includes the following on a pre-tax basis:
$18.8 billion of goodwill impairment; $4.8 billion credit reserve build
to a 3.24 percent reserve-to-loan ratio; $2.5 billion of market
disruption losses including $1.2 billion of securities impairments;
$310 million principal investing loss
-- Results also reflect costs relating to previous announcements on the
auction rate securities settlement, support of Evergreen money market
fund exposure to Lehman Brothers and losses on government sponsored
entity preferred stock, amounting to $1.1 billion
-- Traditional businesses remained focused on customer service and sales
execution; customer satisfaction rating of 6.62 and customer loyalty at
51 percent remained at top of industry
-- Average core deposits up 4 percent on growth in retail CDs and retail
brokerage deposits
-- Way2Save campaign hits milestone 1.1 million accounts and $439 million
in new account balances
-- A.G. Edwards integration proceeding smoothly; integration over 50
percent complete
Earnings Highlights
Three Months Ended
September 30, June 30, September 30,
2008 2008 2007
(In millions, except per
share data) Amount EPS Amount EPS Amount EPS
Earnings
Net income (loss) $(23,698) (11.09) (8,915) (4.22) 1,706 0.90
Discontinued
operations, net of
income taxes - - - - (88) (0.05)
Dividends on preferred
stock (191) (0.09) (193) (0.09) - -
Net income (loss)
available to common
stockholders $(23,889) (11.18) (9,108) (4.31) 1,618 0.85
Discontinued
operations, net of
income taxes - - - - 88 0.05
Net goodwill impairment 18,715 8.76 6,056 2.87 - -
Net merger-related and
restructuring expenses 414 0.19 128 0.06 22 -
Earnings (loss) excluding
goodwill impairment,
and merger-related and
restructuring expenses $(4,760) (2.23) (2,924) (1.38) 1,728 0.90
Financial ratios
Return on average
common stockholders'
equity (157.43)% (50.47) 9.19
Net interest margin (a) 2.94 2.58 (d) 2.92
Fee and other income
as % of total
revenue (a) 12.70 42.15 39.02
Overhead efficiency
ratio (a) 442.60 % 170.24 60.20
Capital adequacy (b)
Tier 1 capital ratio 7.4 % 8.0 7.1
Total capital ratio 12.2 12.7 10.8
Leverage ratio 5.7 % 6.6 6.1
Asset quality
Allowance for loan losses
as % of nonaccrual
and restructured loans 109 % 95 129
Allowance for loan losses
as % of loans, net 3.18 2.20 0.78
Allowance for credit
losses as % of loans,
net (c) 3.24 2.24 0.82
Net charge-offs as % of
average loans, net 1.57 1.10 0.19
Nonperforming assets as
% of loans, net,
foreclosed properties
and loans held for sale 3.05 % 2.41 0.66
(a) Tax-equivalent.
(b) The third quarter of 2008 is based on estimates.
(c) The allowance for credit losses is the sum of the allowance for loan
losses and the reserve for unfunded lending commitments.
(d) 2Q08 includes the SILO charge of $975 million pre-tax; without that
charge, the net interest margin would have been 3.15%.
Wachovia today reported a net loss in the third quarter of 2008 of $23.89
billion, representing a net loss per share of $11.18, including a provision
for credit losses of $6.63 billion to cover $1.87 billion in net charge-offs
and to build reserves by $4.76 billion.
Wachovia's core businesses generated higher loans and average core
deposits, as well as strength in traditional banking and insurance fees;
however, market-related businesses and deposit trends reflected market
turmoil. The General Bank grew revenue 8 percent over last year and maintained
industry-leading customer satisfaction. The retail brokerage business
increased in both the number and quality of financial advisors and generated
solid cross-sales with other Wachovia businesses. Sales growth in the Wealth
Management business offset declines in equity valuations. The Corporate and
Investment Bank continued to execute on its transition to a more
customer-centric model.
Robert K. Steel, CEO and president said, "In these unprecedented times, my
colleagues have demonstrated that Wachovia always puts the interests of our
customers and clients first. Although this has been a challenging quarter,
Wachovia's underlying businesses remain solid and our franchise exceptionally
attractive. We look forward to the opportunities that lie ahead as we join
forces with Wells Fargo."
"Wachovia's third quarter results were very much in line with our
expectations," said Wells Fargo's President and CEO John Stumpf. "We're more
encouraged than ever by what we've seen in their franchise, and we're pleased
that Wachovia's team continues to focus on serving customers."
"We believe that it was prudent for Wachovia to put these losses behind
them," said Wells Fargo's Chief Financial Officer Howard Atkins. "The asset
write-downs, reserve build, and other items are consistent with our
acquisition assumptions. The goodwill impairment will have no impact on
tangible capital or our planned capital raise. Monday, Wachovia issued
preferred stock to Wells Fargo as contemplated in our share exchange
agreement, which represents 39.9 percent of Wachovia's voting power, and we're
on track to complete the merger as planned in the fourth quarter."
The third quarter 2008 net loss compared with earnings of $1.62 billion or
85 cents per share in the third quarter of 2007. Excluding goodwill impairment
of $18.7 billion after tax, net merger-related and restructuring expense of
$414 million, results in the third quarter of 2008 were a net loss of $4.76
billion, or a net loss per share of $2.23.
The pre-tax loss stemmed from:
-- The $18.8 billion in noncash goodwill impairment reflecting declining
market valuations and the terms of the merger with Wells Fargo; the
recognition of the impairment affected the retail and small business,
commercial, wealth management and asset management subsegments. The
goodwill impairment charge has no impact on Wachovia's tangible capital
levels or regulatory capital ratios, because goodwill is deducted when
computing those ratios;
-- A $6.6 billion credit loss provision, including $3.4 billion to build
reserves for the Pick-a-Pay mortgage portfolio and $1.4 billion to
build other loan loss reserves;
-- $2.5 billion in market disruption-related losses, including
$619 million in investment portfolio securities impairments;
-- $682 million valuation decline in principal investing;
-- $515 million in non-merger severance charges related to expense
reductions announced in the second quarter of 2008;
-- $497 million of auction rate securities settlement costs ($398 million,
net of minority interest); and
-- $397 million in losses related to planned securities sales, including
$171 million from the sale of government sponsored entity preferred
shares.
Wachovia Corporation
Three Months Ended
September 30, June 30, September 30,
(In millions) 2008 2008 2007
Net interest income (Tax-equivalent) $5,039 4,344 4,584
Fee and other income 733 3,165 2,933
Total revenue (Tax-equivalent) 5,772 7,509 7,517
Provision for credit losses 6,629 5,567 408
Noninterest expense 25,545 12,784 4,525
Income (loss) from continuing
operations before income taxes
benefits) (Tax-equivalent) (26,297) (10,824) 2,395
Income taxes (benefits) (Tax-
equivalent) (2,599) (1,909) 689
Net income (loss) available to
common stockholders (23,889) (9,108) 1,618
Average loans, net 478,485 476,734 429,801
Average core deposits $392,309 390,670 379,009
Key trends in the third quarter of 2008 compared with the third quarter of
2007 included:
-- A significant decline in fee and other income largely due to increased
net market disruption-related valuation losses and lower principal
investing results, which overshadowed strength in traditional banking.
A 25 percent rise in fiduciary and asset management fees and 33 percent
higher commissions resulted from the A.G. Edwards acquisition.
-- Net interest income of $5.0 billion, up 10 percent, with a net interest
margin of 2.94 percent on increased average loans. Average commercial
loans were up 20 percent and average consumer loans were up 6 percent.
Average loan growth was driven by strength in commercial, commercial
real estate and traditional mortgage, which more than offset the
$6.8 billion average net decrease effect of sales/securitization and
loan transfer activity. Average core deposit growth of 4 percent was
led by retail CDs and money market accounts. Period end core deposits
decreased 2 percent driven by a significant decline in higher cost
commercial deposits reflecting significant market turmoil at the end of
the third quarter of 2008.
-- An increase in noninterest expense largely reflecting the impact of
A.G. Edwards, as well as growth in credit-related sundry expense and a
planned $497 million ($398 million net of minority interest) in costs
related to the settlement of auction rate securities.
-- Provision for credit losses of $6.6 billion, which included
$4.8 billion to build reserves. The provision largely reflected the
weakening economy and current and anticipated severe deterioration in
the residential housing market, particularly in specific markets in
California and Florida. Net charge-offs were $1.9 billion, or an
annualized 1.57 percent of average net loans. Total nonperforming
assets including loans held for sale were $15.0 billion, or
3.05 percent of loans, foreclosed properties and loans held for sale,
largely reflecting increases in consumer real estate-related
nonperforming assets due to the effects of the weakened housing
industry.
Lines of Business
The following discussion covers the results for Wachovia's four core
business segments and is on a segment earnings basis, which excludes net
merger-related and restructuring expenses, goodwill impairment charges, other
intangible amortization, provision in excess of net charge-offs and
discontinued operations. Segment earnings are the basis on which Wachovia
manages and allocates capital to its business segments. In accordance with
Wachovia's business segment methodology, goodwill impairment of $18.8 billion
and provision expense in excess of charge-offs and other credit losses, which
amounted to $4.8 billion in the third quarter of 2008, are not allocated to
business segments. Pages 15 and 16 include a reconciliation of segment results
to Wachovia's consolidated results of operations in accordance with GAAP.
General Bank
General Bank Highlights
Three Months Ended
September 30, June 30, September 30,
(In millions) 2008 2008 2007
Net interest income (Tax-equivalent) $3,763 3,697 3,466
Fee and other income 1,003 1,000 935
Total revenue (Tax-equivalent) 4,816 4,754 4,460
Provision for credit losses 1,340 922 207
Noninterest expense 2,127 2,061 1,898
Segment earnings $857 1,124 1,495
Cash overhead efficiency ratio (Tax-
equivalent) 44.16 % 43.35 42.54
Average loans, net $318,573 317,969 295,188
Average core deposits 292,653 290,313 290,099
Economic capital, average $19,302 16,777 10,904
The General Bank includes retail, small business and commercial customers.
The third quarter of 2008 compared with the third quarter of 2007 included:
-- Earnings of $857 million, down $638 million, driven by rising credit
costs and related expenses, primarily in the mortgage business, which
overshadowed sales momentum elsewhere as reflected in total revenue of
$4.8 billion, up 8 percent.
-- 9 percent higher net interest income on deposit growth and improved
loan spreads despite rising nonperforming assets.
-- Average loan growth of 8 percent, led by consumer real estate secured,
commercial lending and auto. Growth in consumer real estate secured was
driven by mortgage and home equity and included slower prepayments.
Auto loan originations declined 24 percent.
-- Average core deposit growth of $2.6 billion.
-- Growth in net new retail checking accounts of 208,000 in the third
quarter of 2008 compared with an increase of 263,000 in the third
quarter of 2007.
-- 442,000 new retail checking accounts were tied to the Way2Save
campaign. This product, which launched in mid-January 2008, reached
1.1 million accounts in the third quarter and $439 million in
deposits at September 30, 2008.
-- 7 percent growth in fee and other income, with strength in service
charges, interchange income and higher mortgage banking fee income.
Strong interchange income reflected a 14 percent increase in
debit/credit card volume from the third quarter of 2007.
-- A 12 percent increase in noninterest expense due to growth in
credit-related sundry expense, FDIC expense, as well as continued
strategic investment in de novo branch activity and Western expansion.
During the third quarter of 2008, 13 de novo branches were opened and
seven branches were consolidated. As a result of performance
initiatives, operating leverage continued to improve, which enabled
continued strategic investment.
-- A $1.1 billion increase in the provision for credit losses to
$1.3 billion, largely reflecting higher net charge-offs in the
Pick-a-Pay portfolio and auto.
Wealth Management
Wealth Management Highlights
Three Months Ended
September 30, June 30, September 30,
(In millions) 2008 2008 2007
Net interest income (Tax-equivalent) $194 201 184
Fee and other income 192 208 184
Total revenue (Tax-equivalent) 388 412 372
Provision for credit losses 8 5 6
Noninterest expense 246 252 240
Segment earnings $84 98 80
Cash overhead efficiency ratio (Tax-
equivalent) 63.55 % 61.24 64.71
Average loans, net $22,765 22,557 20,996
Average core deposits 14,690 17,609 17,180
Economic capital, average $729 720 609
Wealth Management includes private banking, personal trust, investment
advisory services, charitable services, financial planning and insurance
brokerage. The third quarter of 2008 compared with the third quarter of 2007
included:
-- 5 percent earnings growth to $84 million on 4 percent revenue growth in
challenging markets.
-- 5 percent growth in net interest income on 8 percent loan growth and
wider deposit spreads despite a 14 percent decline in average core
deposits, which reflected the market turmoil.
-- 4 percent growth in fiduciary and asset management fees as the benefits
of a pricing initiative implemented in the third quarter of 2007 and
sales growth overcame declines in equity valuations and in assets under
management. Insurance commissions rose 5 percent compared with a weak
2007 third quarter.
-- A 3 percent increase in noninterest expense driven by investments in
private banking and Western expansion, offset by efficiency
initiatives.
-- A 13 percent decline in assets under management from year-end 2007 to
$73.2 billion largely due to market depreciation as well as net
outflows.
Corporate and Investment Bank
Corporate and Investment Bank Highlights
Three Months Ended
September 30, June 30, September 30,
(In millions) 2008 2008 2007
Net interest income (Tax-equivalent) $1,043 1,132 838
Fee and other income (416) 656 176
Total revenue (Tax-equivalent) 570 1,736 962
Provision for credit losses 525 438 1
Noninterest expense 1,154 963 626
Segment earnings (loss) $(703) 212 212
Cash overhead efficiency ratio (Tax-
equivalent) 202.09 % 55.50 65.12
Average loans, net $109,323 106,680 82,979
Average core deposits 27,497 31,686 37,208
Economic capital, average $14,732 13,821 9,791
The Corporate and Investment Bank includes corporate lending, investment
banking, and treasury and international trade finance. Unless otherwise noted,
third quarter 2008 results are compared with the third quarter of 2007. These
results included:
-- A loss of $703 million due to continued net valuation losses related to
disruption in the capital markets, and increased provision for credit
losses.
-- A 24 percent increase in net interest income, which reflected
32 percent growth in average loans including fourth quarter 2007 and
first quarter 2008 transfer into the loan portfolio at fair value of
certain loans originally slated for distribution, as well as loan
growth in the commercial lending businesses.
-- A decline in fee and other income due to significantly lower principal
investing results from lower valuations and a decrease in advisory and
underwriting fees despite lower market disruption-related losses from
the third quarter a year ago.
-- Market disruption-related losses of $940 million compared with
$565 million in the second quarter of 2008 and $1.2 billion in the
third quarter of 2007. Market disruption-related valuation losses, net
of applicable hedges, were:
-- $235 million in subprime residential asset-backed collateralized
debt obligations and other related exposures, compared with
$238 million in the second quarter and $230 million in the third
quarter of 2007;
-- $347 million in commercial mortgage structured products, compared
with $209 million in the second quarter and $488 million in the
third quarter of 2007;
-- $146 million in consumer mortgage structured products, compared with
$68 million in the second quarter and $82 million in the third
quarter of 2007;
-- $22 million gain in leveraged finance net of fees, compared with a
net $102 million gain in the second quarter and a net $272 million
loss in the third quarter of 2007; and
-- $234 million in non-subprime collateralized debt obligations and
other structured products, compared with $152 million in the second
quarter and $109 million in the third quarter of 2007.
-- A loss of $317 million in principal investing revenue, down from net
gains of $361 million in the third quarter of 2007 due to lower
valuations on both the direct and fund investment portfolios.
-- An 84 percent increase in noninterest expense primarily due to higher
variable compensation and $65 million of auction rate securities
settlement costs.
-- A provision of $525 million largely reflecting residential-related
commercial real estate and other corporate lending losses.
Capital Management
Capital Management Highlights
Three Months Ended
September 30, June 30, September 30,
(In millions) 2008 2008 2007
Net interest income (Tax-equivalent) $388 308 268
Fee and other income 968 1,995 1,444
Total revenue (Tax-equivalent) 1,360 2,295 1,704
Provision for credit losses 1 - -
Noninterest expense 2,145 2,328 1,241
Segment earnings (loss) $(499) (21) 294
Cash overhead efficiency ratio (Tax-
equivalent) 157.72 % 101.39 72.82
Average loans, net $3,223 2,878 2,142
Average core deposits 54,734 48,647 31,489
Economic capital, average $2,033 2,118 1,310
Capital Management includes retail brokerage services and asset
management. The third quarter of 2008 compared with the third quarter of 2007
included:
-- A loss of $499 million due to auction rate securities settlement costs
and continued market disruption-related losses;
-- A 45 percent increase in net interest income driven by retail brokerage
deposit growth of $23.3 billion primarily due to the A.G. Edwards
acquisition, as well as organic growth since the acquisition, partially
offset by spread compression;
-- A 33 percent decline in fee and other income driven by $931 million in
market disruption-related losses compared with $118 million in the
second quarter of 2008 and $40 million in the third quarter of 2007;
-- $737 million in valuation losses relating to the support of
Evergreen money market funds, compared with $24 million in the
second quarter of 2008 and $40 million in the third quarter of 2007;
-- $83 million in valuation losses relating to the liquidation of an
Evergreen fund compared with $89 million in the second quarter of
2008;
-- $80 million in valuation losses relating to auction rate securities
held on the balance sheet, compared with $5 million in the second
quarter of 2008;
-- $31 million relating to other securities impairment.
-- 73 percent growth in noninterest expense largely due to the effect of
the auction rate securities settlement and the A.G. Edwards merger.
Total assets under management were $209.1 billion at September 30, 2008,
down 24 percent from December 31, 2007, driven by net outflows of $40.6
billion as well as $25.0 billion in lower market valuations.
Wachovia Corporation (NYSE: WB) is one of the nation's largest diversified
financial services companies, with assets of $764.4 billion and market
capitalization of $7.6 billion at September 30, 2008. Wachovia provides a
broad range of retail banking and brokerage, asset and wealth management, and
corporate and investment banking products and services to customers through
3,300 retail financial centers in 21 states from Connecticut to Florida and
west to Texas and California, and nationwide retail brokerage, mortgage
lending and auto finance businesses. Globally, clients are served in selected
corporate and institutional sectors and through more than 40 international
offices. Our retail brokerage operations under the Wachovia Securities brand
name manage more than $1.0 trillion in client assets through 14,600 financial
advisors in 1,500 offices nationwide. Online banking is available at
wachovia.com; online brokerage products and services at wachoviasec.com; and
investment products and services at evergreeninvestments.com.
Forward-Looking Statements
This news release contains various forward-looking statements. A
discussion of various factors that could cause Wachovia Corporation's actual
results to differ materially from those expressed in such forward-looking
statements is included in Wachovia's filings with the Securities and Exchange
Commission, including its Current Report on Form 8-K dated October 22, 2008.
Additional Information
The proposed merger between Wachovia and Wells Fargo (the Merger) will be
submitted to Wachovia's shareholders for their consideration. Wells Fargo will
file a registration statement with the SEC, which will include a proxy
statement/prospectus, and each of Wachovia and Wells Fargo may file other
relevant documents concerning the proposed Merger. Shareholders and other
investors are urged to read the registration statement and the proxy
statement/prospectus when they become available, as well as any other relevant
documents concerning the proposed Merger filed with the SEC (and any
amendments or supplements to those documents), because they will contain
important information. You will be able to obtain a free copy of the
registration statement and the proxy statement/prospectus, as well as other
filings containing information about Wachovia and Wells Fargo, at the SEC's
website (http://www.sec.gov) and at the companies' respective websites,
wachovia.com and wellsfargo.com. Copies of the proxy statement/prospectus and
the SEC filings that will be incorporated by reference in the proxy
statement/prospectus can also be obtained, free of charge, by directing a
request to Wachovia Corporation, Investor Relations, One Wachovia Center,
Charlotte, NC 28288-0206, (704) 383-0798; or to Wells Fargo & Company,
Investor Relations, MAC A0101-025, 420 Montgomery Street, 2nd Floor, San
Francisco, California 94104-1207, (415) 396-3668.
Wachovia and Wells Fargo and their respective directors and executive
officers may be deemed to be participants in the solicitation of proxies from
the shareholders of Wachovia in connection with the proposed Merger.
Information about the directors and executive officers of Wachovia is set
forth in the proxy statement for Wachovia's 2008 annual meeting of
shareholders, as filed with the SEC on a Schedule 14A on March 10, 2008.
Information about the directors and executive officers of Wells Fargo is set
forth in the proxy statement for Wells Fargo's 2008 annual meeting of
shareholders, as filed with the SEC on a Schedule 14A on March 17, 2008.
Additional information regarding the interests of those participants and other
persons who may be deemed participants in the Merger may be obtained by
reading the proxy statement/prospectus regarding the proposed Merger when it
becomes available. You may obtain free copies of these documents as described
in the preceding paragraph.
Explanation of Wachovia's Use of Certain Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this news
release includes certain non-GAAP financial measures, including those
presented on page 1 and on page 12 under the captions "Earnings Excluding
Merger-Related and Restructuring Expenses, Goodwill Impairment and
Discontinued Operations" and "Earnings Excluding Merger-Related and
Restructuring Expenses, Goodwill Impairment, Other Intangible Amortization and
Discontinued Operations", and which are reconciled to GAAP financial measures
on pages 24 through 26. In addition, in this news release certain designated
net interest income amounts are presented on a tax-equivalent basis, including
the calculation of the overhead efficiency ratio.
Wachovia believes these non-GAAP financial measures provide information
useful to investors in understanding the underlying operational performance of
the company, its business and performance trends and facilitates comparisons
with the performance of others in the financial services industry.
Specifically, Wachovia believes the exclusion of merger-related and
restructuring expenses, goodwill impairment and discontinued operations
permits evaluation and a comparison of results for on-going business
operations, and it is on this basis that Wachovia's management internally
assesses the company's performance. Those non-operating items are excluded
from Wachovia's segment measures used internally to evaluate segment
performance in accordance with GAAP because management does not consider them
particularly relevant or useful in evaluating the operating performance of our
business segments. In addition, because of the significant amount of deposit
base intangible amortization, Wachovia believes the exclusion of this expense
provides investors with consistent and meaningful comparisons to other
financial services firms. Wachovia also believes the presentation of net
interest income on a tax-equivalent basis ensures comparability of net
interest income arising from both taxable and tax-exempt sources and is
consistent with industry standards. Wachovia operates one of the largest
retail brokerage businesses in our industry, and we have presented an overhead
efficiency ratio excluding these brokerage services, which management believes
is useful to investors in comparing the performance of our banking business
with other banking companies.
Although Wachovia believes the above non-GAAP financial measures enhance
investors' understanding of its business and performance, these non-GAAP
financial measures should not be considered an alternative to GAAP basis
financial measures.
Recorded Message and Supplemental Materials
A recorded message reviewing Wachovia's third quarter 2008 results is
available today at 7:00 a.m. Eastern Daylight Saving Time through January 18,
2009, at 800-642-1687 for U.S. callers and 706-645-9291 for international
callers. Conference ID: 69710892. The call is also available on the Internet
at Wachovia.com/investor.
This review may include a discussion of certain non-GAAP financial
measures. Supplemental materials relating to third quarter results, which also
include a reconciliation of any non-GAAP measures to Wachovia's reported
financials, are available on the Internet at Wachovia.com/investor, and
investors are encouraged to access these materials in advance of the listening
to the recorded message.
SOURCE Wachovia Corporation
Investors, Alice Lehman, +1-704-374-4139, or Ellen Taylor, +1-704-383-1381; or
Media, Mary Eshet, +1-704-383-7777, or Christy Phillips- Brown,
+1-704-383-8178, all of Wachovia Corporation/ /FIRST ADD -- TABULAR MATERIAL
-- TO FOLLOW
