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Golden West Legacy Hurts Wachovia

Wachovia's $25 billion purchase of Golden West in May 2006 seemed like a perfect match at the time. Wachovia inherited a strong branch network and mortgage presence in the coveted California market, both big plusses for an East Coast-based banking company that wanted to increase its market share in the mortgage industry and expand its footprint in the West.

But the Golden West dowry doesn't look so valuable today. The company's mortgage portfolio focused on adjustable-rate mortgages, and Golden West was one of the early pioneers in making payment-option mortgage loans. That's the type of loan where borrowers had the choice of paying a minimum amount monthly, plunging them into negative amortization even before home prices started to falter. At the time the deal was announced, Golden West had $125 billion in assets, most of them related to adjustable-rate home loans.

Fast forward to Wachovia's fourth-quarter earnings statement, released in mid-April. The company reported a net loss of $350 million.

Wachovia boosted its provision for credit losses to $2.8 billion in the fourth quarter, citing more severe deterioration in the housing market than had been anticipated, particularly in California and Florida. Earnings were also hurt by the write down of subprime mortgage and other asset-backed securities held by Wachovia.

The company simultaneously cut its dividend in half and announced a deal to raise $7 billion of new capital, moves designed to cushion against further losses related to its large, weakening home loan portfolio.

Wachovia's CEO, Ken Thompson, did not soft-pedal the bad news in a conference call with analysts, saying the first-quarter results were "deeply disappointing." But he said the company is taking appropriate steps to deal with the current market.

"The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses," Mr. Thompson said in the company's earnings statement.

Nonperforming assets as a percentage of Wachovia's total loan portfolio increased to 1.7% at March 31, up from 0.42% a year earlier.

Like many banks, the subprime bust forced Wachovia to transfer some loans it intended to sell into its "held for investment" account, which boosted the loan portfolio.

Wachovia also said that it has priced $7 billion in concurrent offerings of common and convertible preferred stock. Mr. Thomson said the move will greatly improve Wachovia's capital ratios.

Mr. Thompson said that Wachovia was not under pressure from regulators to raise capital but decided to do so on its own given uncertainty about the mortgage market. He said the move will help Wachovia "deal with any conceivable circumstances that might develop in the future."

WACHOVIA'S LOSS PROVISION

Credit Loss Provision 3/31/08 3/31/07

Allowance as % of Loans 1.41% 0.84%

Charge-Offs as % of Loans 0.66% 0.15%

Nonperforming Loan % 1.70% 0.42%

Source: Wachovia (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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