CHARLOTTE, NC—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.
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
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 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
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 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.
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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.
Investors seeking further information should contact the Investor Relations team: Alice Lehman at 704-374-4139 or Ellen Taylor at 704-383-1381. Media seeking further information should contact the Corporate Media Relations team: Mary Eshet at 704-383-7777 or Christy Phillips-Brown at 704-383-8178.
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