First Union Corp. delivered its second big earnings surprise of the year on Tuesday, warning that annual profits would fall at least 14% below the previous estimate of $4 a share.
In a conference call with investors and analysts, chairman and chief executive officer Edward E. Crutchfield said revenues from a string of recent acquisitions, notably the April 1998 purchase of CoreStates Financial Corp., have not measured up.
Additionally, he said, expenses are rising as First Union invests in asset management and Internet banking businesses.
The $223 billion-asset banking company, based in Charlotte, N.C., has been struggling to regain investors' confidence in its ability to generate strong revenue and earnings growth. In January it advised Wall Street analysts that earnings predictions should be cut by 6%.
Mr. Crutchfield acknowledged Tuesday that the company's rapid acquisition strategy over the past few years had become overwhelming. "When you triple an organization in three to three-and-a-half years, that in itself is a complex management chore," he said.
But he said strategic shifts under way-including a plan to switch bank branch customers to the Internet-would yield solid results.
"We are in the midst of transforming this corporation from the old business model-which is traditional banking-to a new business model," Mr. Crutchfield said.
First Union said it would earn $3.3 billion to $3.4 billion in 1999, or $3.40 to $3.50 a share.
In March the company announced a major cost-cutting plan to help meet its profit goals. It took a first-quarter charge against earnings of $380 million to cover the cost of eliminating 5,850 employees, or 7% of its work force.
For the second quarter, First Union said net income would be $770 million to $800 million, or 80 to 83 cents per share. Analysts had projected the company would earn 97 cents per share.
Mr. Crutchfield laid out a number of reasons for the revision. Among them: Weak results from the June 1998 acquisition of Money Store (see related article on this page); expenses related to the acquisition of Everen Securities, a Chicago investment firm; and a $110 million supplement to the loan-loss provision.
But CoreStates of Philadelphia appeared to be the biggest problem. "Obviously they were overconfident about the ability to transfer CoreStates into a revenue growth story," said Michael Granger, an analyst with Fox- Pitt Kelton Inc.
"CoreStates is a third of First Union's banking franchise. So if you have a third of the franchise not working, you've got a big hole," said Catherine Murray, an analyst with J.P. Morgan Securities.
During the conference call, which at times became contentious, Mr. Crutchfield laid out the company's plans.
He said he is wedded to an Internet strategy that would allow First Union to reduce its branch network, and promised to release details over the next 30 days. The company hopes to increase its Internet customers from 700,000 to 1.5 million by yearend, and to five million by yearend 2001. First Union expects to spend at least $300 million on the Internet over the next two years, Mr. Crutchfield said.
First Union is attempting to transform itself into a company like Fidelity Investments or Charles Schwab Corp., the chief executive said.
"We're not going to let the fact that we're a traditional business blind us to the success of the Internet," he added. "There's nothing Schwab has that we can't have this summer. We're simply going to war with them."
Moreover, "bank acquisitions no longer represent a fundamental part of our strategy," Mr. Crutchfield said.
First Union has no plans to sell to a larger competitor or seek a merger of equals, he added. "I've cooled down on this merger of equals business. I don't believe any combination of traditional banks makes sense anymore," Mr. Crutchfield said.
Analysts said First Union's strategic intentions sounded good, but they noted that the company had lost some credibility on Wall Street because of the repeated earnings revisions.
"I don't think there's anything the matter with their strategy," said Diane Glossman, an analyst with Lehman Brothers. "The question is going to be execution.
"I think their credibility was low at the beginning of the year, it was lower at the end of January, and now it's going to take them a while to rebuild those bridges they were starting to build with the investment community," she added.
"In general, I understand where they're going strategically," said J.P. Morgan's Ms. Murray. "However, totally altering the distribution model is high risk."
First Union also announced it planned to buy back up to 50 million shares of its stock.