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Note: Additional earnings information is provided in Wachovia's Second Quarter 2008 Report on Form 10-Q.
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July 22, 2008
WACHOVIA DETAILS 2nd QUARTER LOSS; OUTLINES INITIATIVES TO PRESERVE AND
GENERATE CAPITAL, PROTECT STRONG LIQUIDITY AND REDUCE RISK
Actions Include Quarterly Common Stock Dividend Reduction to 5 Cents per Share
$8.9 Billion Net Loss Includes $6.1 Billion Noncash Goodwill Impairment and $4.2
Billion Credit Reserve Build; Strength Apparent in Underlying Results
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Go to live audio Webcast beginning at 10:00am ET. Live teleconference may be accessed by dialing (888) 357-9787 for U.S. callers and (706) 679-7342 for International callers. You will be asked to tell the answering coordinator your name and the name of your firm.
Access code: WB Investor
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Teleconference replay will be available beginning on Tuesday, July 22 at 1:00pm ET and continuing through 5:00pm ET on Friday, October 17. To listen to the replay, please dial (706) 645-9291, access code 49418191.
CHARLOTTE, N.C.—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.
Lines of Business Highlights: General Bank, Wealth Management, Corporate and Investment Bank, Capital Management
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The pre-tax loss stemmed from:
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Other key trends in the second quarter of 2008 compared with the second quarter of 2007 included:
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.
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The General Bank includes retail, small business and commercial customers. The second quarter of 2008 compared with the second quarter of 2007 included:
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:
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:
Capital Management includes retail brokerage services and asset management. The second quarter of 2008 compared with the second quarter of 2007 included:
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.
About Wachovia
Wachovia Corporation (NYSE:WB) 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.
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.
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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About Wachovia