Wells Cuts Payout 50%, Plans a Big Provision
SAN FRANCISCO -- In a dramatic move reflecting its regulatory real estate exam, Wells Fargo & Co. announced on Thursday that it would add $700 million to reserves in the fourth quarter, resulting in a loss of up to $239 million.
Wells also slashed its quarterly dividend in half, to 50 cents a share.
Wall Street Approves
The moves were received favorably by Wall Street, which was concerned how Wells would fare in the exam. Wells shares closed Thursday at $60.50, up $3.25, or 6%, in heavy trading.
"There was anticipation that a large provision was coming," said Campbell K. Chaney, analyst with Sutro & Co., San Francisco. "The number was higher than the consensus range, but not enough to shock investors into dumping the stock."
Wells' stock was also supported by the disclosure that the company's problem assets would rise less than 10% above the third-quarter level of $2.3 billion and that reserve coverage would amount to 80% of problem loans.
Analysts had anticipated a fourth-quarter provision of about $500 million, reflecting California's deep real estate recession and the widely publicized review of Wells' realty loans by the Office of the Comptroller of the Currency.
Moody's Reviewing Debt
Moody's Investor Service Inc. said it was reviewing Wells' debt for a possible downgrade. And several analysts said they were trimming their 1992 earnings estimates for Wells.
"I had been at $9 per share" said Lawrence R. Vitale of Kemper Securities. "But [Wells] management has pulled back on expectations for next year, and I might have to, too."
Wells said its fourth-quarter loss would range from $218 million to $239 million, compared with $156.7 million in the corresponding period a year earlier. But in an effort to accent the positive, Wells officials pointed to the company's ability to earn a profit for the year despite additions to loan-loss reserves totaling $1.3 billion.
"It comes back to franchise strength and core earnings potential," said Rodney L. Jacobs, Wells' chief financial officer, in an interview.
The Comptroller's office annual examination of Wells had been billed as an key indicator of how regulators perceived the depth of California's recession. Although the company consistently refused to comment on the review, analysts have viewed it as a climactic showdown between regulators and one of the state's top-quality real estate lenders.
Observers said that it is too early to conclude that the corner has been turned in California. But some suggested that the Wells' results signal that regulators may have slightly eased their standards for evaluating real estate loans, a stance that would bode well for California lenders.
"Regulators might be taking a more realistic view [of real estate values], not a liquidation approach," said Livia Asher, an analyst with Merrill Lynch & Co.
But longtime Wells bear George M. Salem, an analyst with Prudential Securities, said Wells' announcement doesn't mean the company's problems are over.
Economic Deterioration Seen
"California is in year one of a multiyear economic deterioration a la Texas and New England," said Mr. Salem. "There are going to be several more disappointing quarters for Wells going forward."
Indeed, Wells is still downbeat about short-term prospects. "There is little evidence of an upturn in the economy, so we remain cautious at this point in the business cycle," said Carl E. Reichardt, Wells' chairman and chief executive.
Wells' efforts to hold down the increase in problem loans got a big boost through a recent sale of highly leveraged transaction loans to an investor group led by Bear, Stearns & Co. The sale amounted to $230 million of credits still on Wells' books, including about $200 million on nonperforming status, Mr. Jacobs said.
With the Comptrollers' office examination out of the way, Wells is widely expected to resume its aggressive search for acquisitions, including such possible targets as First Interstate Bancorp; regional banking powers such as U.S. Bancorp, Portland, Ore.; and Valley National Corp., Phoenix; and large thrifts sold by the federal government. Analysts said the dividend cut may in part reflect an effort to build an acquisitions war chest.
PHOTO : Carl E. Reichardt, Wells chairman, CEO