Wachovia Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) November 8, 2007
Wachovia Corporation
(Exact Name of Registrant as Specified in Its Charter)
North Carolina
(State or Other Jurisdiction of Incorporation)
| |
|
|
| 1-10000
|
|
56-0898180 |
| |
| (Commission File Number)
|
|
(IRS Employer Identification No.) |
| |
|
|
| One Wachovia Center |
|
|
| Charlotte, North Carolina
|
|
28288-0013 |
| |
| (Address of Principal Executive Offices)
|
|
(Zip Code) |
(704) 374-6565
(Registrant’s Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item 8.01. Other Events.
Wachovia Corporation (“Wachovia”) today is providing information on the impact of market volatility
on its financial results for the month of October and is providing further information on its
expectation for credit costs for the fourth quarter of 2007 and
certain additional information. Wachovia is providing this information
in advance of a presentation by a senior executive on
November 9, 2007 to investors and analysts.
This same information will be included in Wachovia’s Third
Quarter Report on Form 10-Q that will be filed on November 9, 2007:
October Market Events Following our October 2007 announcement of third quarter 2007 results of
operations and our financial outlook for the remainder of 2007, certain financial markets
experienced further deterioration, particularly the markets for subprime residential
mortgage-backed securities (“RMBS”) and for collateralized debt obligations (“CDOs”) collateralized
by RMBS (“ABS CDOs”). In October, rising defaults and delinquencies in subprime residential
mortgages and rating agencies’ downgrades of a large number of subprime residential
mortgage-related securities led to unprecedented declines in the ABX subprime indices, that
contributed to a rapid decline in the valuations of subprime RMBS and ABS CDOs. The following
table illustrates the decline in the ABX 06-2 subprime index from
January 1, 2007, to October 31,
2007:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
% Change |
| |
|
|
|
|
|
|
|
Jan 2 to |
|
Sep 28 to |
| |
|
Jan 2 |
|
Sep 28 |
|
Oct 31 |
|
Sep 28 |
|
Oct 31 |
| |
|
|
AAA
AA
A
BBB
BBB-
|
|
100.1
100.1
99.3
96.3
95.1
|
|
96.0
89.6
70.1
39.3
32.8
|
|
89.8
64.1
37.9
20.7
19.9
|
|
-4%
-10%
-29%
-59%
-66%
|
|
-6%
-28%
-46%
-47%
-39% |
The value of CDOs we have in our portfolio depends on the value of the underlying collateral. ABS
CDOs experienced declines in value correlated to the declines in value of subprime RMBS in October.
Our third quarter 2007 market disruption-related losses totaling $1.3 billion pre-tax included
$347 million of subprime-related valuation losses, net of hedges, on ABS CDOs. Due to the October
market deterioration, these ABS CDOs experienced further declines in value in the month of October
2007 by an amount we currently estimate to be approximately
$1.1 billion pre-tax. At October 31,
2007, we had remaining exposure to ABS CDOs of $676 million, including on-balance sheet positions
and the notional amount of off-balance sheet positions, compared to $1.8 billion at September 30,
2007.
We have
exposure to subprime RMBS in other positions totaling $2.1 billion at both October 31, 2007,
and September 30, 2007. Estimated aggregate valuation losses of these other positions during the
month of October 2007 are immaterial net of hedges.
The
following table outlines our subprime exposure at September 30, 2007, and October 31, 2007, and
related valuation losses in the third quarter of 2007 and in October 2007:
2
Global Markets and Investment Banking
Net ABS CDO-Related and
Subprime RMBS Exposures(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Net Write- |
|
|
|
|
| |
|
Net Exposure |
|
|
Net Exposure |
|
|
Downs for |
|
|
|
|
| |
|
at |
|
|
at |
|
|
Third Quarter |
|
|
October |
|
| (Dollars in billions) |
|
Oct. 31, 2007 |
|
|
Sept. 30, 2007 |
|
|
2007 |
|
|
Write-Downs |
|
| |
ABS
CDO-related exposures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super senior
ABS CDO exposures(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Grade |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Mezzanine |
|
|
0.41 |
|
|
|
1.23 |
|
|
|
(0.16 |
) |
|
|
(0.82 |
) |
CDO-squared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
Total super
senior ABS CDO exposures |
|
|
0.41 |
|
|
|
1.23 |
|
|
|
(0.16 |
) |
|
|
(0.82 |
) |
Other
retained ABS CDO exposures |
|
|
0.27 |
|
|
|
0.56 |
|
|
|
(0.17 |
) |
|
|
(0.29 |
) |
| |
Total ABS
CDO-related exposures |
|
|
0.68 |
|
|
|
1.79 |
|
|
|
(0.33 |
) |
|
|
(1.11 |
) |
| |
Subprime
RMBS exposures(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-ABS CDO
subprime (AAA) |
|
|
2.07 |
|
|
|
2.09 |
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
Non-ABS CDO
subprime (non-AAA) (net of hedges) |
|
|
(0.02 |
) |
|
|
(0.04 |
) |
|
|
- |
|
|
|
0.02 |
|
| |
Total subprime RMBS exposures |
|
|
2.05 |
|
|
|
2.05 |
|
|
|
(0.02 |
) |
|
|
- |
|
| |
Total(2) |
|
$ |
2.73 |
|
|
|
3.84 |
|
|
|
(0.35 |
) |
|
|
(1.11 |
) |
| |
| (1) |
|
Wachovia relies on insurance purchased from AAA rated
financial guarantors and actively monitors and manages its counterparty exposure for these positions. The table excludes exposures
guaranteed by such counterparties. |
| (2) |
|
In addition to the above exposure, Wachovia has approximately $138 million of interest
rate derivative counterparty risk related to various CDO transactions and $625 million of
indirect contingent exposure to AAA RMBS (no ABS CDOs) reserve account investments; the
majority of these exposures are senior to super senior risk in the
related transactions and the probability of loss is believed to be
remote. |
| (3) |
|
Assumes that for $258 million of subprime whole loan
positions, if accounted for in securities form, 70% would be AAA and
30% below AAA. |
Of the remaining asset classes where we recorded market disruption-related losses in the third
quarter of 2007, the aggregate net market value changes in October in these investments have not
been significant. These asset classes include commercial mortgage, leveraged finance, consumer
mortgage, and other structured credit products not collateralized by subprime RMBS. Some of the
markets for these asset classes continue to demonstrate poor liquidity and higher than typical
volatility while others have displayed moderate stability in October.
The fair values of all of our assets that are subject to market valuation adjustments, including
subprime RMBS and ABS CDOs, depend on market conditions and assumptions that may change over time.
Accordingly, the fair values of these investments in future periods, including at the end of the
fourth quarter, and their effect on our financial results, will depend on future market
developments and assumptions and may be materially greater or less than the changes in values
during October discussed above. For example, markets for all asset classes discussed above have
remained extraordinarily volatile in the first week of November, with additional rating agencies’
downgrades on subprime RMBS and ABS CDOs, and credit spread widening and illiquidity.
Wachovia has historically been a major participant in structuring and underwriting CDOs. As
measured by lead underwriter league table rankings, Wachovia ranked 3rd for both the
first nine months of 2007 and the full year 2006, with issuance volumes of $19.6 billion and $23.4
billion, respectively. The primary focus of Wachovia’s CDO business has been, and continues to be,
transactions backed by commercial loans and commercial real estate loans. Our issuance of ABS CDOs
has been limited. We originated three ABS CDOs in the first nine months of 2007 and six in full
year 2006, accounting for approximately 16 percent and
23 percent, respectively, of the total issuance volume of
our CDO business during these periods.
3
Additionally, due to anticipated loan growth and the impact of continuing credit deterioration in
our loan portfolio, we expect to increase our allowance for loan losses in the fourth quarter of
2007. The expected credit deterioration will likely be focused in certain geographic areas that
have recently experienced dramatic declines in housing values. We expect that these declines will
correlate to increases in loan losses for loans originated within the last two years within these
geographic areas. Accordingly, Wachovia now expects to record a loan loss provision in the fourth
quarter of 2007 by an amount estimated to be between $500 million and $600 million in excess of
charge-offs for the quarter. The actual provision will be determined in accordance with our
policies and procedures, will depend on credit conditions and assumptions at quarter-end and may be
materially greater or less than the range discussed in the preceding sentence.
The above information should be read together with the fourth quarter 2007 outlook information for
fee income which we previously communicated in our October 19,
2007, Current Report on Form 8-K
regarding third quarter 2007 results. Such fee income outlook has not
been updated to reflect the
effects of these “October Market Events”. The information above regarding our loan loss provision
supersedes the provision outlook provided on October 19, 2007. We do not intend to update the
information provided herein until we announce fourth quarter 2007 earnings in January 2008.
Visa On October 3, 2007, Visa Inc. (“Visa”) announced that it had completed restructuring
transactions in preparation for its initial public offering planned for early 2008. We have a
membership interest in Visa. On November 7, 2007, Visa announced that it had reached a settlement
with American Express regarding certain litigation. The settlement is subject to certain
approvals, including the approval by at least two-thirds of the Visa USA, Inc. voting members. We
and other banks have obligations to share in certain losses under various
agreements with Visa in connection with this and
other litigation. In light of
the above information and accounting guidance related to Visa
matters received on November 7, 2007 from the SEC, we recorded a
$115 million liability for litigation and a corresponding
expense in the third quarter of 2007. This resulted in a
$72 million reduction in net income, or $0.04 per share
reduction in diluted earnings per share, in the third quarter of
2007. These items will be reflected in our financial statements for
the third quarter to be included in our Third Quarter Report on Form
10-Q, which will also include additional information about these
items. Wachovia anticipates at this time that its proportionate share
of the proceeds of the planned Visa initial public offering will
more than completely offset such items.
* * *
This Current Report on Form 8-K (including information included or incorporated by reference
herein) may contain, among other things, certain forward-looking statements, including, without
limitation, (i) statements regarding certain of Wachovia’s goals and expectations with respect to
earnings, earnings per share, revenue, expenses and the growth rate in such items, as well as other
measures of economic performance, including statements relating to estimates of Wachovia’s credit
quality trends, (ii) statements relating to the benefits of the merger between A.G. Edwards, Inc.
(“A.G. Edwards”) and Wachovia completed on October 1, 2007 (the “A.G. Edwards Merger”), including
future financial and operating results, cost savings, enhanced revenues and the accretion/dilution
to reported earnings that may be realized from the A.G. Edwards Merger, (iii) statements relating
to the benefits of the merger between Wachovia and Golden West completed on October 1, 2006 (the
“Golden West Merger”), including future financial and operating results, cost savings, enhanced
revenues and the accretion/dilution to reported earnings that may be realized from the Golden West
Merger, and (iv) statements preceded by, followed by or that include the words “may”, “could”,
“should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan”, “projects”,
“outlook” or similar expressions. These statements are based upon the current beliefs and
expectations of Wachovia’s management and are subject to significant risks and uncertainties that
are subject to change based on various factors (many of which are beyond Wachovia’s control).
Actual results may differ from those set forth in the forward-looking statements.
The following factors, among others, could cause Wachovia’s financial performance to differ
materially from that expressed in such forward-looking statements: (1) the risk that the applicable
businesses in connection with the A.G. Edwards Merger or the Golden West Merger will not be
integrated successfully or such integrations may be more difficult, time-consuming or costly than
4
expected; (2) the risk that expected revenue synergies and cost savings from the A.G. Edwards
Merger or the Golden West Merger may not be fully realized or realized within the expected time
frame; (3) the risk that revenues following the A.G. Edwards Merger or the Golden West Merger may
be lower than expected; (4) deposit attrition, operating costs, customer loss and business
disruption following the A.G. Edwards Merger or the Golden West Merger, including, without
limitation, difficulties in maintaining relationships with employees, may be greater than expected;
(5) the risk that the strength of the United States economy in general and the strength of the
local economies in which Wachovia conducts operations may be different than expected resulting in,
among other things, a deterioration in credit quality or a reduced demand for credit, including the
resultant effect on Wachovia’s loan portfolio and allowance for loan losses; (6) the effects of,
and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of
the Board of Governors of the Federal Reserve System; (7) potential or actual litigation; (8)
inflation, interest rate, market and monetary fluctuations; (9) adverse conditions in the stock
market, the public debt market and other capital markets (including changes in interest rate
conditions) and the impact of such conditions on Wachovia’s brokerage and capital markets
activities; (10) the timely development of competitive new products and services by Wachovia and
the acceptance of these products and services by new and existing customers; (11) the willingness
of customers to accept third party products marketed by Wachovia; (12) the willingness of customers
to substitute competitors’ products and services for Wachovia’s products and services and vice
versa; (13) the impact of changes in financial services’ laws and regulations (including laws
concerning taxes, banking, securities and insurance); (14) technological changes; (15) changes in
consumer spending and saving habits; (16) the effect of corporate restructurings, acquisitions
and/or dispositions, including, without limitation, the A.G. Edwards Merger and the Golden West
Merger, and the actual restructuring and other expenses related thereto, and the failure to achieve
the expected revenue growth and/or expense savings from such corporate restructurings, acquisitions
and/or dispositions; (17) the growth and profitability of Wachovia’s noninterest or fee income
being less than expected; (18) unanticipated regulatory or judicial proceedings or rulings; (19)
the impact of changes in accounting principles; (20) adverse changes in financial performance
and/or condition of Wachovia’s borrowers which could impact repayment of such borrowers’
outstanding loans; (21) the impact on Wachovia’s businesses, as well as on the risks set forth
above, of various domestic or international military or terrorist activities or conflicts; and (22)
Wachovia’s success at managing the risks involved in the foregoing.
Wachovia cautions that the foregoing list of factors is not exclusive. All subsequent written and
oral forward-looking statements concerning Wachovia, the A.G. Edwards Merger, the Golden West
Merger or other matters and attributable to Wachovia or any person acting on its behalf are
expressly qualified in their entirety by the cautionary statements above. Wachovia does not
undertake any obligation to update any forward-looking statement, whether written or oral, relating
to the matters discussed in this Current Report on Form 8-K.
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| |
|
|
|
|
|
|
WACHOVIA CORPORATION |
|
|
|
|
|
Date: November 8, 2007
|
|
By:
|
|
/s/ Thomas J. Wurtz |
|
|
|
|
|
|
|
Name:
|
|
Thomas J. Wurtz |
|
|
Title:
|
|
Senior Executive Vice President
and Chief Financial Officer |
6