NEW YORK – Wachovia Corp. on Wednesday reported a staggering $24 billion loss as it took a goodwill impairment charge of nearly $19 billion ahead of its acquisition by Wells Fargo & Co.
The Charlotte, N.C.-based bank reported a loss after paying preferred dividends of $23.89 billion, or $11.18 per share, in the period ended Sept. 30, compared with earnings of $1.62 billion, or 85 cents per share, a year earlier.
Excluding goodwill impairment of $18.7 billion and merger-related and restructuring expense of $414 million, the bank lost $4.76 billion, or $2.23 per share.
Analysts polled by Thomson Reuters, on average, had expected earnings of 2 cents per share. Analyst estimates typically exclude one-time items.
The bank said its acquisition by Wells Fargo, in an all-stock deal currently valued at about $14 billion, is on track to close in the fourth quarter.
"Wachovia's third-quarter results were very much in line with our expectations," said Wells Fargo President and Chief Executive John Stumpf in a statement. "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."
A majority of the $18.7 billion writedown relates to the bank's retail and small business unit, under which Wachovia's troubled Pick-a-Pay mortgage portfolio is included. "The unprecedented, almost unimaginable, events of the third quarter and the consideration for our pending merger with Wells Fargo, created a scenario that required goodwill impairment for that and other sub-segments," said Chief Financial Officer David Zwiener during a recorded message reviewing the quarterly results.
Essentially, Wachovia was forced to write down the value of these assets because they were considered overvalued compared with the market value — or what Wells Fargo was willing to pay. The charge has no impact on Wachovia's capital levels.
During the quarter, Wachovia set aside a $6.63 billion provision for credit losses, including $3.4 billion to build its reserves to cover losses in its Pick-a-Pay loan portfolio.
Net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money to customers, rose 10 percent to $5.04 billion from a year earlier. Total average loans grew 11 percent to $478.49 billion, representing 20 percent growth in average commercial loans and 6 percent growth in average consumer loans.
Period-end core deposits declined 8 percent from the second quarter to $370 billion, due to "sizable and abrupt" end-of-quarter outflows in commercial deposits sparked by the failure of West Coast rival Washington Mutual Inc.
Since quarter end, Wachovia said it has begun to see commercial deposit trends improve.
Net charge offs, or loans written off as unpaid, totaled $1.87 billion, or 1.57 percent of average net loans on an annualized basis. Total non-performing assets, including loans held for sale, were $15 billion.
Fee and other income dropped 75 percent to $733 million from nearly $3 billion in the prior-year quarter, due to losses on investments.
The bank's Tier 1 capital ratio, essentially a measure of a company's cash versus debt, totaled 7.4 percent at the end of the quarter, down from 8 percent at the end of the second quarter.
Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion, at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating portfolio of Pick-A-Pay loans, Golden West's specialty, which let borrowers skip some payments.
The current Pick-a-Pay mortgage loan balance totals $118.7 billion. Wachovia expects total cumulative losses of $26.1 billion on this portfolio, with about 90 percent of the credit costs incurred by the end of next year.
Despite its problems, Wachovia recently found itself at the center of a bitter battle between two of the country's largest banks, as Citigroup and Wells Fargo fought for its lucrative deposits.
Wachovia had been struggling for some time, but the rush to a deal was prompted by a $5 billion run on deposits in late September that threatened the future of the bank, according to court documents.
Citigroup Inc. agreed to step in and buy Wachovia's banking operations for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp.
But only four days later, Wells Fargo made a higher offer that did not hinge on any government support. Originally, the deal was valued at $15.1 billion, or $7 a share, but Wells Fargo stock has declined since it was announced and the deal is now valued at about $14 billion.
After the fight for Wachovia moved to court, the parties agreed to a legal standstill at the urging of federal regulators. But following several days of negotiations, Citigroup walked away from the deal after the suitors failed to reach an agreement over how to split up Wachovia.
While Citigroup decided not to block the Wells Fargo-Wachovia deal, the bank is seeking $60 billion in damages for alleged interference in its agreement with Wachovia.
The deal is still subject to a vote by Wachovia shareholders.
Wells Fargo, which reported a better-than-expected 25 percent drop in third-quarter profit last week, has been weathering the mortgage crisis much better than many of its peers as it largely avoided subprime loans, which have been the undoing of the financial industry. The bank has said it expects to write down Wachovia's loan portfolio by about $74 billion, but will likely minimize the blow by taking advantage of recently approved tax deductions.
The combined company will have total assets of $1.4 trillion and $787 billion in deposits.
Wachovia shares fell 17 cents, or 3 percent, to $5.92 in morning trading. Wachovia has lost nearly 84 percent of its market value in 2008. Wells Fargo shares, meanwhile, slipped 69 cents, or 2 percent, to $31.91.