October 22, 2008

WACHOVIA REPORTS Q3 LOSS (Oct. 22, 2008)

In the third quarter, Wachovia reports that the number of Series 7 brokers has stayed flat at 14,635. The number of bank, or Series 6, brokers, stands at 4,447, up 3 percent from the second quarter. The company says that it has seen "growth high-producing [Series 7] FAs offset by lower-producing FA attrition."

Overall, the segment including registered representatives, Capital Management, reports that it had a loss of $499 million on $1.36 billion total revenue.

The amount of annualized revenue per broker is now $522,000, down some 9 percent from the second quarter and 24 percent from a year ago. Broker client assets stand at $1 trillion, which is a 9 percent fall from the previous quarter -- but a 24 percent jump from the same period of 2007. And managed account assets stand at $171 billion, an increase of 9 percent, which the company attributes to the A.G. Edwards acquisition and $7.7 billion in net inflows.

Overall, total client assets are down 16 percent, despite a 24 percent drop in the S&P500, according to the company.

Retail brokerage core deposits, also called FDIC sweep deposits, rose 75 percent year over year and included $23 billion from the A.G. Edwards deal and solid growth. Annuity sales have expanded 36 percent vs. 2007.

Total assets under management were $209.1 billion as of September 30, down 27 percent from December 31, 2007, driven by net outflows of $40.6 billion as well as $25.0 billion in lower market valuations, according to the company.

In terms of fees and other income, they are down $1 billion vs. the second quarter, but include some $931 million of market-disruption losses. Wachovia also reports that commissions are down 17 percent from the earlier period, due to lower retail-brokerage transaction revenue. Fiduciary and asset-management fees have declined 4 percent on declines in AUM, including lower market valuations.

With its merger with Wells Fargo set to take place later this year, Wachovia announced the following corporate results for the third quarter of 2008:

- A net loss of $23.9 billion includes the following on a pre-tax basis: $18.8 billion of goodwill impairment; $4.8 billion credit reserve build to a 3.24 percent reserve-to-loan ratio; $2.5 billion of market disruption losses including $1.2 billion of securities impairments; $310 million principal investing loss;

- The latest results reflect costs relating to previous announcements on the auction rate securities settlement, support of Evergreen money market fund exposure to Lehman Brothers and losses on government sponsored entity preferred stock, amounting to $1.1 billion; and

- The integration of A.G. Edwards in St. Louis has been proceeding smoothly and is over 50 percent complete, the company says.

Wachovia insists that its retail brokerage business increased in both the number and quality of financial advisors and generated solid cross-sales with other Wachovia businesses.

Robert K. Steel, CEO and president, explains, "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," shares 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."

Capital Management includes retail brokerage services and asset management; further details on this group's latest results include:

- A loss of $499 million due to auction rate securities settlement costs and continued market disruption-related losses ($931 million);

- 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; and $31 million relating to other securities impairment.

- A 73 percent growth in non-interest expense largely due to the effect of the auction rate securities settlement and the A.G. Edwards merger.

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