Wachovia posts $8.86 billion second quarter loss

By Ieva M. Augstums

CHARLOTTE, N.C.

A surprisingly large second-quarter loss at Wachovia Corp. has quickly revived concerns that the financial sector still has a long way to go before it recovers from the year-old credit crisis.

Investors who were growing optimistic after a string of upbeat bank results in recent days were jolted Tuesday when Wachovia, the nation's fourth-largest bank, racked up an $8.86 billion loss because of charges and reserves for bad mortgage loans. The Charlotte-based bank also cut its dividend for the second time this year and eliminated 10,750 positions, including those held by 6,350 current workers.

Wachovia holds the largest share of Hampton Roads' bank deposits, with 21.8 percent, or $4.03 billion, as of June 30, 2007, according to the latest FDIC data. Wachovia has almost 1,000 employees in the region and more than 50 branches.

Any job cuts in Hampton Roads are expected to be limited to mortgage operations, said Christine Shaw, a Wachovia spokeswoman.

And the 22-story Wachovia Center office tower being built in downtown Norfolk remains on track.

Wachovia's results, coming before trading began on Wall Street, initially sent financial and other stocks falling. The stock market revived as the price of oil skidded again, and so Wachovia's stock finished by rising $3.61, or 27 percent, in especially heavy trading to close at $16.79 a share.

"Wachovia's news isn't isolated. I think there is still a structural issue with U.S. banks," said Russell Walker, a risk management professor at the Kellogg School of Management at Northwestern University. "Many of the banks, including Wachovia, are still facing challenges."

The results were especially sobering after better-than-estimated reports from Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. had raised hopes that most of the damage from the credit crisis had occurred. Wachovia's crosstown rival, Bank of America Corp., also managed to beat Wall Street expectations.

On Monday, Wachovia said it will stop offering home loans through brokers. Other big banks, such as Bank of America and National City Corp., have already stopped making loans through brokers entirely, relying instead on their loan officers.

"Wachovia, along with several other banks, is returning to much more traditional lending practices," said Walter O'Haire, senior analyst at Celent, a Boston-based financial research and consulting firm. "Lend to your existing customers and stay within your own geographic footprint."

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 $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

The bank has made several changes to its loan portfolio since, including tightening underwriting standards and stopping making certain loans.

"The path to resolving a crisis starts with acceptance. Wachovia has now accepted that it is in trouble," said Celent senior analyst Bart Narter. "The bank is making changes in its business to contain these losses."

Wachovia Chief Executive Officer Robert Steel said Tuesday he planned to cut $2 billion of expenses and even sell parts of the bank.

"We're serious about getting on top of these issues quickly," Steel, 56, said during a conference call with investors.

He described the bank's attitude as "prudently paranoid."

Wachovia said it lost the equivalent of $4.20 per share in the April-June period. In the same time frame last year, the bank earned $2.34 billion, or $1.22 per share.

Excluding $6.1 billion in write-downs to the value of its intangible assets and merger-related and restructuring charges of $128 million, Wachovia lost $2.67 billion, or $1.27 per share. Analysts on average expected a loss of 78 cents per share on revenue of almost $8.4 billion.

Earlier this month, the bank projected a $2.6 billion to $2.8 billion quarterly loss, equal to $1.23 to $1.33 per share, excluding goodwill items.

Wachovia said it is setting aside $10.96 billion for credit losses, up from $6.77 billion in the first quarter and $3.55 billion a year earlier. Net charge-offs, loans it doesn't think are collectible, increased more than eightfold from a year earlier, to $1.31 billion.

In Hampton Roads, Wachovia has no plans to close any of its branches, said Shaw, the bank spokeswoman.

As for job cuts, "we don't have any specifics yet," Shaw said, but any reductions will likely be limited to the bank's mortgage operations.

Shaw said she wasn't aware of any changes to Wachovia's plans for the Wachovia Center office tower and apartment-retail complex under construction in Norfolk. The bank, which is consolidating activities from other buildings in the region, is scheduled to lease 36,500 square feet in the new office tower and 5,000 square feet on the ground floor.

The project's developer said Wachovia's problems won't slow or derail the $179 million project, citing a signed lease and a loan already in place from the bank.

"It's not going to affect us at all," said Alan S. Nusbaum, chairman of developer S.L. Nusbaum Realty Co.

Staff writers Tom Shean and Harry Minium contributed to this report, which also includes information from Bloomberg News.