Wachovia Loses $23.9 Billion on Real-Estate Charges

Pedestrians walk past a Wachovia branch in New York on Sept. 29, 2008. Photographer: Jin Lee/Bloomberg News

Oct. 22 (Bloomberg) — Wachovia Corp., the bank being acquired by Wells Fargo & Co., reported its third straight quarterly loss, hurt by crumbling mortgage markets and writedowns on securities backed by real estate.

The third-quarter loss was $23.9 billion, or $11.18 a share, compared with net income of $1.6 billion, or 85 cents, in the same period a year earlier, the Charlotte, North Carolina-based company said today in a statement. The loss was $2.23 a share excluding one-time items, versus the average loss estimate of 2 cents from 16 analysts surveyed by Bloomberg.

Wells Fargo outbid New York-based Citigroup Inc. for Wachovia, agreeing to spend $14 billion to create the largest U.S. branch network. San Francisco-based Wells Fargo was aided by a change in tax rules that makes it easier to absorb losses on Wachovia’s mortgages. The bank also agreed to sell assets to comply with U.S. regulations if the combined company controls more than 10 percent of deposits nationwide.

“Wells Fargo will get substantial tax benefits from losses incurred by Wachovia, so the more losses the better off they are,” Chris Marinac, managing director of FIG Partners LLC in Atlanta, said before earnings were released. “It’s kind of a free pass.”

Wachovia boosted reserves by $4.8 billion in the quarter, which included an impairment charge of $18.7 billion. That charge reflected lower market values and terms of the Wells Fargo transaction, Wachovia said.

`On Track’

“We’re on track to complete the merger as planned in the fourth quarter,” Wells Fargo Chief Financial Officer Howard Atkins said in a statement.

Wachovia rose 2 cents to $6.09 yesterday and has tumbled 84 percent this year on the New York Stock Exchange. Wells Fargo gained 41 cents, or 1.3 percent, to $32.64. It has advanced 8.1 percent this year, the biggest increase in the 24-company KBW Bank Index.

Wells Fargo said it expects $74 billion in losses and writedowns from Wachovia’s $498 billion portfolio, including $32 billion in option-adjustable-rate mortgages and $24 billion in commercial loans. It plans to offset the markdowns by raising $20 billion in capital through the sale of shares and by cutting $5 billion in annual expense.

Wells Fargo viewed Wachovia “as its best chance to become a coast-to-coast franchise to compete effectively against Bank of America and JPMorgan Chase & Co.,” analyst David Hendler of CreditSights Inc. said in an Oct. 15 report. The bank will have more than 6,675 branches, compared with 6,139 at Bank of America Corp., and assets of about $1.4 trillion.

Golden West

Wachovia agreed to the takeover less than three months after new Chief Executive Officer Robert Steel pledged to rebuild investor confidence in the bank, which in 2006 paid $24 billion for California lender Golden West Financial Corp. Golden West was a leader in option-adjustable-rate mortgages, which helped contribute to housing-related losses.

The bank wrote off $810 million in option adjustable-rate mortgages, up from $508 million in the previous quarter. Borrowers are not paying interest on about $9 billion of the loans, or 7.6 percent of the total outstanding.

Wells Fargo expects a cumulative loss of $26 billion from option ARMs, with more than 90 percent of those credit costs to be incurred by the end of next year. Steel in September estimated such losses would reach about $14 billion. Option-ARMs, which Wachovia no longer offers, allow borrowers to defer part of their interest payments, boosting the principal.

California, Florida

Loans in California and Florida, two of the states hardest hit by the decline in housing prices, account for about 70 percent of Wachovia’s $119 billion of option-ARMs.

Profit at the division that includes retail, small business and commercial customers fell 43 percent to $857 million from $1.5 billion last year.

Wachovia said “low-cost core” deposits declined 8 percent to $370 billion during the quarter as business customers withdrew almost a fourth of their funds. The bank cited “significant market turmoil at quarter-end,” when Citigroup and Wells Fargo were vying for Wachovia. The trend for deposits from commercial customers has reversed since Oct. 1 because of the proposed merger and new regulations boosting deposit insurance, the bank said.

The corporate and investment bank lost $703 million, compared with a $212 million profit a year earlier. Wells Fargo is studying which investment-banking businesses to retain given its limited experience in the market, CEO John Stumpf has said.

A.G. Edwards

The capital-management subsidiary lost $499 million, compared with a $294 million profit last year. The unit includes the A.G. Edwards Inc. brokerage, which was acquired last October, and the Evergreen asset-management company. Assets under management declined 24 percent from Dec. 31 to $209 billion because of $40.6 billion in net outflows and $25 billion in declining market valuation.

Today’s earnings announcement may be the last by Wachovia, started by German immigrants in central North Carolina in 1879. Its sale, which Treasury Secretary Henry Paulson praised yesterday as good for the U.S. banking system, is set to be completed by the end of the year.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: October 22, 2008 07:49 EDT
By David Mildenberg

Source: Bloomberg

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