CHARLOTTE, N.C., July 22 /PRNewswire-FirstCall/ -- Consistent with previously announced expectations, Wachovia today reported a net loss in the second quarter of 2008 of $8.9 billion, or a net loss of $4.20 per share, including a $6.1 billion noncash goodwill impairment charge in commercial-related subsegments reflecting declining market valuations and asset values. The goodwill impairment charge has no impact on Wachovia's tangible capital levels, regulatory capital ratios or on liquidity.
Wachovia added $5.6 billion to its loan loss reserve to cover net charge-offs and increase the reserve by $4.2 billion.
Excluding goodwill impairment and other notable items that drove the quarter's loss, Wachovia generated solid underlying growth on $7.5 billion in revenue. Revenue was driven by higher loans and deposits and strength in traditional banking fees, while strong fiduciary and asset management fees and brokerage commissions largely reflected the A.G. Edwards acquisition.
"These bottom-line results are disappointing and unacceptable," said Lanty L. Smith, Wachovia's board chairman, who served as interim chief executive officer beginning June 1. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility. Our company is facing up to these issues, is addressing the challenges head-on and has redirected near-term strategic priorities."
Two immediate actions were announced: First, reducing the quarterly common stock dividend to five cents per share, which will conserve approximately $700 million of capital per quarter. The dividend is payable on September 15, 2008, to shareholders of record on August 29, 2008. The second immediate action is exiting the General Bank wholesale mortgage origination channel. Earlier the company ceased offering the negative amortization option for the Pick-a-Pay mortgage product and committed to work with customers to refinance existing Pick-a-Pay mortgages into conventional mortgage products. Approximately 1,000 Wachovia mortgage origination personnel are being redeployed in the company's efforts to assist customers to refinance and restructure Pick-a-Pay mortgages. The objective is to assist customers in avoiding foreclosures and meaningfully reduce the company's risks in the mortgage area.
Robert K. Steel, CEO and president said, "In the short term, the entire organization is focused on protecting, preserving and generating capital; reinforcing Wachovia's strong liquidity position; and reducing risk." Steel, who was named to his new post on July 9, further commented that, even as the company focuses on and addresses its credit-related challenges, Wachovia's underlying businesses are performing well: "Wachovia has an exceptionally attractive franchise, footprint and set of businesses. Revenue in our general banking business grew 8 percent over last year and we maintained industry-leading customer satisfaction. The securities brokerage business continues its excellent performance, with increases in both the number and quality of brokers and with industry-leading margins. Our corporate and investment bank has reduced its exposure to further market disruption charges. We had a record quarter in our Wealth Management business."
Wachovia outlined additional initiatives that are already under way, ranging from reducing expense growth and capital expenditures, reducing earning assets, repositioning the certificate of deposit book and generating further growth in low-cost core deposits and other deposits. Also, the company is taking actions to reduce the number of credit-only commercial borrowers and to sell selected noncore assets.
Steel summarized by saying: "Our balance sheet and liquidity position are strong, and we are committed to keeping them that way. The actions taken and initiatives under way are expected to generate or preserve more than $5 billion of capital. We ended the quarter with approximately $50 billion in regulatory capital and a tier 1 ratio of 8 percent, and we will be intensely focused on improving that level between now and the end of 2009."
Steel said, "As we consider the company's position, it is clearly prudent and necessary to further reduce our common dividend. While this is a difficult decision, it is the best course for our shareholders over the long term. I am confident of the commitment of the Wachovia team to manage successfully through this period as we continue to diligently serve our customers and communities. I am impressed by the work the Wachovia leadership group has undertaken, the clarity around the issues we face and the direction Wachovia is headed as we focus on being good stewards of the company."
The second quarter 2008 net loss compared with earnings of $2.34 billion or $1.22 per share in the second quarter of 2007. Excluding goodwill impairment of $6.1 billion and net merger-related and restructuring expense of $128 million, results in the second quarter of 2008 were a net loss available to common stockholders of $2.67 billion, or a net loss of $1.27 per share. Results included the A.G. Edwards, Inc., acquisition from October 1, 2007.
Earnings Highlights Three Months Ended June 30, March 31, June 30, 2008 2008 2007 (In millions, except per share data) Amount EPS Amount EPS Amount EPS Earnings Net income (loss) $(8,662) (4.11) (664) (0.34) 2,341 1.22 Dividends on preferred stock (193) (0.09) (43) (0.02) - - Net income (loss) available to common stockholders $(8,855) (4.20) (707) (0.36) 2,341 1.22 Net goodwill impairment 6,056 2.87 - - - - Net merger-related and restructuring expenses 128 0.06 123 0.06 20 0.01 Earnings (loss) excluding goodwill impairment, and merger-related and restructuring expenses $(2,671) (1.27) (584) (0.30) 2,361 1.23 Financial ratios Return on average common stockholders' equity (49.07)% (3.81) 13.54 Net interest margin (a) 2.58(d) 2.92 2.96 Fee and other income as % of total revenue (a) 42.15 36.62 48.58 Overhead efficiency ratio (a) 163.58% 71.76 56.02 Capital adequacy (b) Tier 1 capital ratio 8.0% 7.4 7.5 Total capital ratio 12.7 12.1 11.5 Leverage ratio 6.6% 6.2 6.2 Asset quality Allowance for loan losses as % of nonaccrual and restructured loans 95% 84 174 Allowance for loan losses as % of loans, net 2.20 1.37 0.79 Allowance for credit losses as % of loans, net (c) 2.24 1.41 0.83 Net charge-offs as % of average loans, net 1.10 0.66 0.14 Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale 2.41% 1.70 0.49 (a) Tax-equivalent. (b) The second 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) Includes the SILO charge of $975 million pre-tax; without that charge, the net interest margin would have been 3.15%. The pre-tax loss stemmed from: -- The $6.1 billion in noncash goodwill impairment reflecting declining market valuations and the resulting effect on commercial, corporate lending and investment banking 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 $5.6 billion loan loss provision, which increased reserves by $4.2 billion, including $3.3 billion for the payment option mortgage portfolio; -- A $975 million noncash charge announced previously related to the tax treatment of certain leasing transactions widely referred to as "sale in, lease out" or SILO transactions; -- $936 million in market disruption-related losses; -- $590 million in legal reserves primarily related to previously disclosed matters; and -- $391 million in losses related to planned discretionary securities sales. Wachovia Corporation Three Months Ended June 30, March 31, June 30, (In millions) 2008 2008 2007 Net interest income (Tax-equivalent) $4,344 4,805 4,487 Fee and other income 3,165 2,777 4,240 Total revenue (Tax-equivalent) 7,509 7,582 8,727 Provision for credit losses 5,567 2,831 179 Noninterest expense 12,284 5,441 4,890 Income (loss) from continuing operations before income taxes (benefits) (Tax-equivalent) (10,439) (845) 3,519 Income taxes (benefits) (Tax-equivalent) (1,777) (181) 1,178 Net income (loss) available to common stockholders (8,855) (707) 2,341 Average loans, net 476,734 465,936 421,257 Average core deposits $390,670 394,513 378,496
Other key trends in the second quarter of 2008 compared with the second quarter of 2007 included:
-- A decline in fee and other income due to net market disruption-related valuation losses, which overshadowed strength in traditional banking. Fiduciary and asset management fees and brokerage commissions reflected the A.G. Edwards acquisition. -- A net interest margin of 2.58 percent, or 3.15 percent excluding the effect of the SILO charge. The SILO charge diminished net interest income, offset by growth in average commercial loans, up 25 percent, and average consumer loans, up 6 percent, as well as solid core deposit growth, up 3 percent. Average loan growth included the impact of the first quarter 2008 transfer of $6.9 billion of commercial and consumer loans to the loan portfolio from held-for-sale as well as strength in commercial, commercial real estate and traditional conforming mortgage loans. Deposit growth was led by strength in IRAs and money market accounts. -- An increase in noninterest expense largely reflecting the impact of A.G. Edwards, as well as growth in credit-related sundry expense and legal reserves. A renewed expense reduction initiative is under way throughout the company. -- Provision for credit losses of $5.6 billion, which included a reserve build of $4.2 billion. The provision largely reflected current and anticipated severe deterioration in the residential housing market, particularly in specific markets in California and Florida. Net charge-offs were $1.3 billion, or an annualized 1.10 percent of average net loans. Total nonperforming assets including loans held for sale were $12.0 billion, or 2.41 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, excess provision 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 $6.1 billion and provision expense in excess of charge-offs and other credit losses, which amounted to $4.2 billion in the second quarter of 2008, are not allocated to business segments.
Pages 14 and 15 include a reconciliation of segment results to Wachovia's consolidated results of operations in accordance with GAAP.
General Bank Highlights Three Months Ended June 30, March 31, June 30, (In millions) 2008 2008 2007 Net interest income (Tax-equivalent) $3,671 3,445 3,372 Fee and other income 1,000 980 935 Total revenue (Tax-equivalent) 4,728 4,480 4,363 Provision for credit losses 919 569 154 Noninterest expense 2,050 2,038 1,922 Segment earnings $1,117 1,189 1,453 Cash overhead efficiency ratio (Tax-equivalent) 43.35% 45.50 44.05 Average loans, net $319,574 311,556 291,607 Average core deposits 290,381 297,171 290,455 Economic capital, average $16,786 12,693 10,821 General Bank
The General Bank includes retail, small business and commercial customers. The second quarter of 2008 compared with the second quarter of 2007 included:
-- Earnings of $1.1 billion, down $336 million, driven by rising credit costs and related expenses, primarily in the mortgage business, which overshadowed continued strong sales momentum elsewhere as reflected in total revenue of $4.7 billion, up 8 percent. -- Average loan growth of 10 percent, with double digit growth in wholesale and retail businesses. Mortgage lending through our largely branch-originated mortgage and home equity channels was up 6 percent, primarily reflecting a decline in prepayments, and home equity lending was up 5 percent. Auto loan originations rose 12 percent. -- Relatively stable average core deposits. * Growth in net new retail checking accounts slowed, but still increased by 263,000 in the second quarter of 2008 compared with an increase of 314,000 in the second quarter of 2007. * 305,000 new retail checking accounts were tied to the Way2Save campaign; this product launched in mid-January 2008. -- 7 percent growth in fee and other income, with strength in service charges, interchange income and mortgage banking fee income. Strong interchange income reflected a 14 percent increase in debit/credit card volume from the second quarter of 2007. -- Noninterest expense up 7 percent due to growth in credit-related sundry expense and severance expense, as well as continued strategic investment in de novo branch activity and Western expansion. During the second quarter of 2008, 23 de novo branches were opened and 38 branches were consolidated. As a result of performance initiatives, operating leverage continued to improve, which enabled continued strategic investment. -- A $765 million increase in the provision for credit losses to $919 million, largely reflecting higher net charge-offs in the Pick-a-Pay portfolio. Wealth Management Highlights Three Months Ended June 30, March 31, June 30, (In millions) 2008 2008 2007 Net interest income (Tax-equivalent) $202 182 182 Fee and other income 207 211 202 Total revenue (Tax-equivalent) 412 398 387 Provision for credit losses 8 5 2 Noninterest expense 253 246 244 Segment earnings $98 92 90 Cash overhead efficiency ratio (Tax-equivalent) 61.05% 61.98 62.80 Average loans, net $23,151 22,365 21,056 Average core deposits 17,559 17,906 17,466 Economic capital, average $731 699 612 Wealth Management
Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. The second quarter of 2008 compared with the second quarter of 2007 included:
-- 9 percent earnings growth to $98 million on 6 percent revenue growth in challenging markets. -- 11 percent growth in net interest income on 10 percent loan growth and improved deposit spreads. -- 16 percent growth in fiduciary and asset management fees as a pricing initiative implemented in the third quarter of 2007 and other growth offset declines in equity valuations. Insurance commissions declined largely due to a soft market for insurance premiums and nonstrategic insurance account dispositions. -- A 4 percent increase in noninterest expense driven by continued investment in private banking and Western expansion. -- A 3 percent decline in assets under management to $77.3 billion largely due to market depreciation. Corporate and Investment Bank Highlights Three Months Ended June 30, March 31, June 30, (In millions) 2008 2008 2007 Net interest income (Tax-equivalent) $1,124 1,028 773 Fee and other income 657 (158) 1,522 Total revenue (Tax-equivalent) 1,729 820 2,245 Provision for credit losses 438 197 (2) Noninterest expense 960 747 1,020 Segment earnings (loss) $209 (78) 779 Cash overhead efficiency ratio (Tax-equivalent) 55.60% 91.00 45.43 Average loans, net $106,642 101,046 76,744 Average core deposits 31,682 33,623 36,713 Economic capital, average $13,816 13,233 8,850 Corporate and Investment Bank
The Corporate and Investment Bank includes corporate lending, investment banking, and treasury and international trade finance. Unless otherwise noted, second quarter 2008 results are compared with the second quarter of 2007. These results included:
-- Earnings of $209 million, down $570 million, due to continued net valuation losses related to disruption in the capital markets, and increased provision for credit losses. * Investment bank origination fees down 4 percent year over year, although these fees rose 16 percent from the first quarter of 2008. * Market share of 4.3 percent at June 30, 2008, up from 3.8 percent at June 30, 2007. -- Market valuation losses of $565 million, including a recovery on certain losses on leveraged finance commitments, compared with market valuation losses of $1.6 billion in the first quarter of 2008. Market valuation losses, net of applicable hedges, were: * $238 million in subprime residential asset-backed collateralized debt obligations and other related exposures, compared with $339 million in first quarter 2008; * $209 million in commercial mortgage structured products, compared with $521 million in first quarter 2008; * $68 million in consumer mortgage structured products, compared with $251 million in first quarter 2008; * $102 million gain in leveraged finance net of fees, compared with a net $309 million loss in first quarter 2008; and * $152 million in non-subprime collateralized debt obligations and other structured products, compared with $144 million in first quarter 2008. -- A 45 percent increase in net interest income, which reflected 39 percent growth in average loans including the first quarter 2008 transfer into the loan portfolio at fair value of certain loans originally slated for disposition, as well as loan growth in the corporate lending and global financial institutions businesses. -- Principal investing revenue of $115 million, down from $300 million in the second quarter of 2007 on lower gains in the public and private direct investment portfolios. -- A 6 percent decline in noninterest expense primarily due to lower variable compensation and reduced headcount in investment banking. -- Provision of $438 million largely reflecting residential-related commercial real estate and other corporate lending losses. Capital Management Highlights Three Months Ended June 30, March 31, June 30, (In millions) 2008 2008 2007 Net interest income (Tax-equivalent) $308 281 260 Fee and other income 1,995 2,191 1,536 Total revenue (Tax-equivalent) 2,295 2,462 1,785 Provision for credit losses - - - Noninterest expense 1,827 1,855 1,294 Segment earnings $297 386 312 Cash overhead efficiency ratio (Tax-equivalent) 79.61% 75.34 72.47 Average loans, net $2,881 2,562 1,663 Average core deposits 48,647 43,084 31,221 Economic capital, average $2,105 2,144 1,348 Capital Management
Capital Management includes retail brokerage services and asset management. The second quarter of 2008 compared with the second quarter of 2007 included:
-- Earnings of $297 million on 29 percent revenue growth, with net market disruption-related losses of $118 million, including $89 million of securities impairments relating to the liquidation of an Evergreen fund. -- An 18 percent increase in net interest income driven by retail brokerage deposit growth of $17.5 billion primarily due to the A.G. Edwards acquisition as well as solid growth since the acquisition, partially offset by spread compression. -- Continued solid momentum in retail brokerage managed account fees and the impact of the A.G. Edwards acquisition. -- 41 percent growth in noninterest expense largely due to the effect of A.G. Edwards, as well as higher legal expense.
Total assets under management of $245.9 billion at June 30, 2008, decreased 10 percent from December 31, 2007, driven by net outflows of $17.6 billion as well as $11.2 billion in lower market valuations.
Wachovia Corporation is one of the nation's largest diversified financial services companies, with assets of $812.4 billion and market capitalization of $33.5 billion at June 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 $1.1 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 July 22, 2008.
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 2 and on page 11 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 23 through 25. 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.
Earnings Conference Call and Supplemental Materials
Wachovia CEO Bob Steel and CFO Tom Wurtz will review Wachovia's second quarter 2008 results in a conference call and audio web cast beginning at 10:00 a.m. Eastern Daylight Saving Time today. This review may include a discussion of certain non-GAAP financial measures. Supplemental materials relating to second 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 conference call.
Web cast Instructions: To gain access to the web cast, which will be "listen-only," go to Wachovia.com/investor and click on the link "Wachovia Second Quarter Earnings Audio Web cast." In order to listen to the web cast, you will need to download either Real Player or Media Player.
Teleconference Instructions: The telephone number for the conference call is 888-357-9787 for U.S. callers or 706-679-7342 for international callers. You will be asked to tell the answering coordinator your name and the name of your firm. Mention the conference Access Code: WB Investor.
Replay: Tuesday, July 22, by 1:00 p.m. EDT and continuing through 5 p.m. EDT Friday, October 17. Replay telephone number is 706-645-9291; access code: 49418191.
