The Southeast banking companies Wachovia Corp., SunTrust Banks Inc., and Regions Financial Corp. all reported messy second-quarter earnings that failed to meet Wall Street expectations, and took additional steps to bolster capital levels.
Wachovia reported its second straight loss — a significant one — and its new president and chief executive Robert Steel discussed several measures, some already under way, aimed at returning the company to profitability.
"We have the ability to consider the sale of noncore assets," Mr. Steel told analysts during a conference call Tuesday morning, though he would not say which pieces might be sold. "I think the reality is that we are looking at everything and evaluating different activities."
Wachovia, which reported a net loss of $8.7 billion, or $4.11 a share — after earning $2.34 billion in last year's second quarter — again slashed its quarterly dividend, this time by 87%, to 5 cents a share, to preserve $2.8 billion in annual capital. Including its first reduction, in April, it has cut the dividend by 92%.
Regions and SunTrust were both in the black, though analysts generally found the report a letdown. Regions cut its dividend for the first time, by 74%, to 10 cents a share. SunTrust, which said Tuesday that it intends to leave its dividend intact, said it had arranged to sell 40 million shares of Coca-Cola Co. stock in the second quarter and this month to bolster capital levels.
During Wachovia's call, Mr. Steel said: "Our reported results today are clearly a disappointing performance for which we take responsibility. We are serious about getting on top of these issues quickly."
The former Treasury Department under secretary, who was hired two weeks ago to lead Wachovia, will oversee several initiatives resulting from a review initiated in June. The Charlotte company said Tuesday that it plans to shed $20 billion in loans and securities by yearend while reducing annual expenses by $1.5 billion by, among other things, eliminating 10,750 jobs and slowing branch expansion.
Wachovia is also exiting wholesale mortgage origination and will no longer offer loans through outside brokers. It has completed a five-week review of 500 capital projects and will delay or cancel initiatives so it can lower 2009 capital expenditures by $350 million. Mr. Steel said the company would lay off 6,350 employees, many of which would be in its mortgage operations, and eliminate 4,400 open positions and contractors. Wachovia's Tier 1 capital was 8% at June 30, and Mr. Steel said there are no plans to raise more capital by selling common stock.
Though he did not identify which businesses Wachovia might shed, the CEO called the company's retail brokerage operations "a core part of our business and franchise model" and a good fit with other business lines.
Mr. Steel also shot down any notion that he would be cleaning up Wachovia for a quick sale. "From our perspective we have strong franchise and … we think the future for Wachovia as an independent company is an exciting one."
Wachovia's second-quarter report featured a $6 billion impairment charge to goodwill. Some analysts were surprised the charge had nothing to do with Wachovia's October 2006 purchase of the Oakland, Calif., thrift company Golden West Financial Corp., which exposed Wachovia to risky "pick-a-payment" mortgages and contributed to the June 2 ouster of Mr. Steel's predecessor, G. Kennedy Thompson. Rather, the charges covered impairment in corporate lending, investment banking, and the commercial segment within the general bank.
Thomas Wurtz, the chief financial officer of the $812 billion-asset Wachovia, said during the conference call that impairment charges arose "from the significant disconnect between our market cap and our book value of equity." Mr. Wurtz said the benefit from other bank acquisitions and strong organic growth over the past eight years support the entire goodwill in Wachovia's retail and small-business banking operations, where Golden West is embedded. "It is quite unlikely this will change," he said.
Wachovia, which lost $707 million in the first quarter, has been plagued since mid-2007 by mounting losses in the $120 billion pick-a-payment portfolio and writedowns on securities in its investment bank. Donald Truslow, the company's chief credit officer, was more pessimistic Tuesday on the future deterioration of the pick-a-payment portfolio, estimating that its cumulative losses could reach 12%, compared with a forecast of 8% in April. Nonperforming assets in that portfolio rose 52% from the first quarter and made up 58.8% of the company's $11.9 billion in nonperfomers at June 30. He also said the housing market may not bottom out until 2010. Wachovia's loan-loss provision rose 96.6% from the first quarter and 3,010% from a year earlier, to $5.6 billion. Net chargeoffs rose 71.1% from the first quarter and 184% from a year earlier, to $1.3 billion. Nonperforming assets rose 42.6% from the first quarter and 122% from a year earlier, to $11.9 billion. Other notable expenses included a $975 million charge tied to leveraged-lease transactions, $936 million in market-related losses, $590 million in legal reserves, and $391 million in losses tied to "planned discretionary securities sales."
Revenue slid 1% from the first quarter and 14% from a year earlier, to $7.51 billion. The net interest margin shrank 34 basis points from the first quarter and 38 basis points from a year earlier.
Nancy Bush at NAB Research LLC said she was surprised that the impairment charges did not include Golden West, but she was impressed by Wachovia's "realistic if not draconian" view of the housing market.
James M. Wells 3rd, SunTrust's chairman and chief executive, also focused on capital and credit quality and said credit trends were mixed — with early-stage delinquencies stabilizing as chargeoffs and nonperforming assets increase.
"Visibility into the fourth quarter and beyond is limited," he said on a conference call. "The outcome is fundamentally a macroeconomic question and the outlook for 2009 is quite uncertain at this point."
Profit at the $177 billion-asset Atlanta company rose 86% from the first quarter but fell 20.6% from a year earlier, to $535.3 million. Earnings of $1.53 a share beat the average analysts estimate of 64 cents, according to Thomson Reuters, but they were significantly augmented by $1.04 in special gains, including $345 million from selling 10 million shares of Coke stock and $18.4 million after tax from selling the investment management services unit First Mercantile Corp.
SunTrust said it arranged to sell another 30 million shares this month and had donated another 3.6 million shares to a charitable foundation, boosting its Tier 1 capital to 7.95% from 7.47% at June 30. The gains largely offset $103 million in mark-to-market losses on debt and a $448 million loan-loss provision that fell 20% from the first quarter to reflect a lower reserve build, but more than quadrupled from a year earlier.
Net chargeoffs rose 8.6% from the first quarter and 267% from a year earlier, to $323 million. Nonperforming assets rose 34.8% from the first quarter and 265% from a year earlier, to $2.79 billion.
Thomas Freeman, SunTrust's chief credit officer, said that while its alternative-A mortgage portfolio "appears to be stabilizing," nonaccruals and chargeoffs in home equity "continued at elevated levels" that should persist into next year. The company's commercial portfolio, outside of residential development, is "holding up nicely."
SunTrust defended its dividend; Mr. Wells said early in a conference call that the credit outlook and Coca-Cola stock sales "positions us appropriately for the future." SunTrust, which had issued a statement this month defending its dividend against market speculation that it could be cut, still has about 43.6 million shares of Coca-Cola stock.
The $144 billion-asset Regions had also been seen as likely to cut its dividend, and it did so after reporting earnings that fell 38.7% from the first quarter and 54.5% from a year earlier, to $206.4 million. Earnings of 30 cents a share were 12 cents below the average analysts' estimate, according to Thomson Reuters. Regions said the leaner dividend would save $780 million in annual capital.
Regions' loan-loss provision rose 67% from the first quarter and 415% from a year earlier, to $309 million. Net chargeoffs rose 66.1% from the first quarter and 288% from a year earlier, to $209 million. Nonperforming assets rose 33% from the first quarter and 174% from a year earlier, to $1.6 billion.
Regions, of Birmingham, Ala., attributed much of its problems to home equity, which it said contributed to more than half of the increase in net chargeoffs from a quarter earlier. The company said losses in its home-builder book totaled $34.2 million in the second quarter, and that it shrunk the portfolio by 7.5%, to $5.8 billion.
C. Dowd Ritter, Regions' chairman, president, and CEO, said during a conference call that steps it is taking to tackle its credit issues include a moratorium on land loans and condominium loans. But, he said, "There is no quick fix to today's housing-related issues," and he said Regions does not expect the housing situation to improve until 2010. "Credit management is clearly a top priority," Mr. Ritter said.
"While it's difficult to have a great deal of confidence and projections as to the depth and duration of this credit down cycle, we do know that it's successful navigation requires a proactive approach."
After losing ground in early trading Tuesday, all three companies rebounded: Wachovia closed up 27%, Regions 9.6%, and SunTrust 5.5%.