Wachovia plans cutbacks to deal with record second-quarter loss
This article first appeared in the St. Louis Beacon: July 22, 2008 - The beleaguered banking giant Wachovia Corp. cut its dividend to near invisibility Tuesday as it posted a record second-quarter loss and said it would fire 6,350 workers. It also will eliminate 4,400 open positions and contractors. However, thanks in part to its acquisition of A.G. Edwards last year, one of the bright spots in Wachovia's financial picture was its brokerage business.
The dividend was cut to 5 cents a share from 37.5 cents to save $700 million each quarter, as the bank continues to reel from its battered mortgage-lending business.
"While this is a difficult decision, it is the best course for our shareholders over the long term," said Robert K. Steel, a former Treasury Department undersecretary who was appointed CEO on July 9.
The dividend reduction and employee dismissals are two moves being made by Wachovia to trim expenses and build a firmer foundation in light of the bank's being hit by the weak housing market.
Steel told analysts Tuesday he would sell "non-core assets," but he didn't define them or set a timetable. Several expense-cutting actions announced Tuesday will enable Wachovia to save $490 million during the second half of 2008 and $1.5 billion next year, he said.
On Monday, Wachovia said it would get out of the wholesale mortgage lending business. Starting July 25, it won't offer mortgages through brokers.
Other core businesses, however, including its brokerage operation "are doing pretty darn well," Steel told analysts during a Tuesday teleconference.
Steel's comments about the dividend were similar to those made by the former CEO G. Kennedy Thompson in April when he said the bank would reduce its dividend to 37.5 cents from 64 cents. At that time, the dividend cut was designed to save $2.1 billion annually.
Wachovia also raised $8.1 billion by issuing common stock and preferred stock in April. On Tuesday, Steel said Wachovia wasn't planning to issue more stock.
Steel became CEO about five weeks after the board pushed out Kennedy. Wachovia's financial condition and stock price have wilted primarily due to Kennedy's 2006 acquisition of Golden West Financial, the California mortgage lender.
Shares have dropped more than 70 percent in 12 months. Just after Wachovia announced its second quarter results, the stock fell as low as $11.65 compared to Monday's closing price of $13.18. As investors reviewed the results, however, the stock was at $14.18 by early afternoon.
Still, three credit-rating firms -- Standard & Poor's, Moody's Investors Service and Fitch -- reduced their ratings on Tuesday. Fitch cut its longer-term issuer default and long-term senior subordinated debt ratings to A-plus from AA-minus, a one-notch drop due to "the increasingly pronounced asset quality deterioration" of Wachovia's mortgage portfolio."
Fitch also gave Wachovia a negative outlook, suggesting that further downgrades could occur if such outside factors, such as falling home prices, overwhelmed the company's "conservative view of potential future collateral deterioration."
For the three months ended June 30, Wachovia revealed a loss of $8.9 billion, or $4.20 a share. For the same March-June period last year, the company earned $2.34 billion, or $1.22 a share. Total revenue fell to $7.51 billion from $8.73 billion.
Much of the second-quarter loss was due to a one-time, non-cash charge of $6.1 billion called goodwill impairment. Goodwill is a financial term reflecting intangibles such as customer relations, brand name, and company reputation.
Wachovia said its impaired goodwill reflect "declining market valuations and the resulting effects on commercial, corporate lending and investment banking" units of the company.
Without the goodwill impairment charge or expenses related to restructuring and last year's acquisition of A.G. Edwards, Wachovia lost $2.67 billion, or $1.27 a share.
"These bottom-line results are disappointing and unacceptable," said Lanty L. Smith, Wachovia's board chairman. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility."
Wachovia said its brokerage business -- the combining of A.G. Edwards and Wachovia Securities -- was a bright spot. "The securities brokerage business continues its excellent performance, with increases in both the number and quality of brokers and with industry-leading margins," Steel said.
However, a true assessment of the A.G. Edwards acquisition's impact is still many months away. The St. Louis brokerage was acquired in Oct. 1, 2007, so its performance last year is still not reflected in Wachovia latest quarterly financial comparisons.
Tom Wurtz, the chief financial officer, told analysts Tuesday that the integration of A.G. Edwards is 40-percent complete. He said the retail brokerage remains "strong." Although broker client assets have declined 7 percent since the A.G. Edwards deal was closed, the Standard & Poor's 500-stock index is off 16 percent over the same period, he said
Wachovia's capital management unit, which includes the brokerage and asset management businesses, produced $308 million in net interest income for the second quarter, up 18 percent from the same period last year. Revenue rose 29 percent to $2.3 billion.
Earnings fell to $297 million from $312 million due to higher expenses related to the A.G. Edwards acquisition and to the liquidation of a mutual fund sold under the Evergreen brand.
Robert W. Steyer, a former business writer for the St. Louis Post-Dispatch, is a freelance journalist in New York.