From the September 2008 issue of Research Magazine • Subscribe!

Wachovia Restructures, Taps Robert Steel as CEO/President

Wachovia has reported a net loss in the second quarter of $8.9 billion, including a $6.1 billion non-cash goodwill impairment charge in commercial-related sub-segments. Excluding goodwill impairment and other items, Wachovia "generated solid underlying growth on $7.5 billion in revenue," the company says. And "strong fiduciary and asset management fees and brokerage commissions largely reflected the A.G. Edwards acquisition."

However, "these bottom-line results are disappointing and unacceptable," says Chairman Lanty L. Smith. "Our company is facing up to these issues, is addressing the challenges head-on and has redirected near-term strategic priorities."

Wachovia says it will reduce the quarterly common stock dividend to five cents per share to conserve roughly $700 million of capital per quarter. It also intends to exit the general bank wholesale-mortgage origination channel.

"The securities brokerage business continues its excellent performance, with increases in both the number and quality of brokers and with industry-leading margins," says CEO and President Robert K. Steel, who began this post on July 9. "Our corporate and investment bank has reduced its exposure to further market-disruption charges. We had a record quarter in our wealth-management business."

Steel, 56, most recently served as under secretary for domestic finance for the U.S. Department of the Treasury, beginning in October 2006. Earlier, he had been with Goldman Sachs, which he joined in 1976 and retired from -- as a vice chairman -- in 2004.

Excluding goodwill impairment and net merger-related and restructuring expenses of $128 million, the company has a net loss of $2.67 billion, which includes the A.G. Edwards acquisition of October 2007. (The company had estimated total costs and expenses of the A.G. Edwards deal at $1.4 billion; in the second quarter of 2008, these actual expenses were $225 million, and they now total some $633 million.)

Capital management, which encompasses retail brokerage services and asset management, had second-quarter earnings of $297 million on revenue growth of nearly 30 percent. The unit also had an 18 percent increase in net interest income driven by retail-brokerage deposit growth of $17.5 billion, primarily tied to the A.G. Edwards acquisition.

This unit includes more than 14,630 advisors with average annualized revenue per FA at $576,000. Total AUM stood at nearly $250 billion, a decrease of 10 percent from December 31, 2007, driven by net outflows of $17.6 billion as well as $11.2 billion in lower market valuations.

Wealth-management sales, which include private banking, personal trust, investment advisory services, charitable services, financial planning and insurance-brokerage services, had 9 percent earnings growth to $98 million on 6 percent revenue growth in "challenging markets," the company says.

This unit also had 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, but it experienced a 3 percent decline in assets under management to $77.3 billion largely as a result of market depreciation.

Some 975 wealth-management producers are in this unit. The annualized revenue per relationship manager is $2.9 million, as of June 30, up 4 percent from a year ago.

Wachovia has also recently announced that CFO Thomas J. Wurtz and Chief Risk Officer Donald K. Truslow plan to leave the company once successors are named.

As stock analysts note, there is talk that Goldman Sachs may try to buy the company, since Wachovia has one of the largest retail-securities sales forces in the industry and has some $450 billion in deposits.

"Loans are up. Deposits are up. Adjusted margins are up. Non-interest income businesses were stable, and the bank has announced a major cost-cutting campaign," notes Richard Bove of Ladenburg Thalmann. "Wachovia's recovery has begun."

At the end of July, Wachovia hired William "Bill" Bourbeau as wealth-management director for Wachovia Wealth Management in Florida. Formerly with Bank of America and Merrill Lynch, he will lead the Florida wealth-markets group serving clients with $10 million in net worth. This team now has nearly 200 relationship managers and associates.

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Janet Levaux, MBA/MA, is the managing editor of Research; reach her at jlevaux@researchmag.com.

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