Wells Says Bad Loans Will Increase by 28%

SAN FRANCISCO -- Wells Fargo & Co., which until now had avoided the credit-quality problems plaguing most other big commercial lenders, said Tuesday that its nonperforming assets would soar by 28% in the second quarter.

Wells said it would add $350 million to its reserve for possible loan losses. The provision, four times as large as in the first quarter, will slash quarterly earnings by 94%, to $15 million.

Wells Shares Plummet

The surprise announcement caused the company's high-flying stock to plummet and sent a chill across the industry.

Wells said that it was increasing its nonperforming assets by $450 million in the wake of a regulatory examination of syndicated loans that other banks participate in. The company said that $200 million of the increase was from loans financing highly leveraged transactions.

Wells' stock closed Tuesday at $74, down $7.50. With its $6.375 slide on Monday, the shares have declined by 16% in two days.

The stocks of other major California banks also fell. First Interstate Bancorp slipped $2.375, to $42.50; Security Pacific Corp. declined $1.25, to $23.375; and BankAmerica Corp. fell $1.375, to $35.75.

But investor nervousness was not confined to the West Coast. Most major lenders were hurt, apparently because investors, already jittery about upcoming earnings reports, were scared by the grim disclosure from Wells, said analyst John Mason of Interstate Johnson Lane.

Analysts stressed that the credit-quality decline at Wells was much worse than expected. Several noted that the company, which has $55.7 billion in assets, was continuing to encourage second-quarter earnings estimates of $2.75 to $3 a share as late as two weeks ago.

How Good Was Underwriting?

"The assumption was that Wells' underwriting was better than most banks'," said Livia Asher, an analyst with Merrill Lynch & Co. "Now that will come into question."

Wells declined to account for $250 million of the expected $450 million rise in nonperforming loans, which would bring the total to $2.04 billion.

Analysts said the lack of detailed information made it impossible to predict whether additional problems would surface in the quarters ahead. Company officials were scheduled to speak with analysts in a conference call late Tuesday afternoon.

"The question is, is this it or is there more to come? We don't know yet," said James Rosenberg, an analyst with Shearson Lehman Brothers Inc.

San Francisco-based Wells said higher problem loans in part reflected a recent Shared National Credit Regulatory Examination, an annual interagency audit of syndicated loans, including HLT participations and commercial real estate.

The implications of Wells' loan problems for other banks are difficult to judge because the information provided by the company is so sketchy, analysts said. But some noted that the $200 million in increased HLT nonperformers raised a warning flag for other leveraged-deal lenders.

"I would be concerned about others with lots of HLTs," said Carole Berger, an analyst with C.J. Lawrence Inc. According to BankWatch, an affiliate of the American Banker, Wells had the ninth highest ratio of HLTs on its loan portfolio among the country's large banks.

Wells said nonperforming assets will rise to about 4.1% of total loans and foreclosed property, up from 3.3% in the first quarter. In addition, Wells said it was charging off $180 million in unspecified loans in the second quarter, compared with $67 million in the period ending March 31.

In its announcement, Wells failed to provide data on its real estate portfolio. As a result, analysts said it was impossible to tell the extent to which the company's problems reflect troubles in the California commercial real estate market that could hurt other Golden State banks.

Weaknesses Recognized

The riskiness of Wells' focus on leveraged deals and commercial real estate has long been recognized. "They have the highest risk exposure of any of the largest 50 banks," said Ms. Berger. She estimated that HLTs and commercial real estate represent 484% of tangible equity and reserves, higher than any other large bank.

Wells had about $3.5 billion in HLT loans on its books at the end of March, represneting some 7.2% of total loans. Late last year, Wells closed several corporate lending offices outside California and has since drastically reduced its new HLT lending.

Wells was a lead lender in several shaky leveraged deals, including Revco D.S. Inc.'s 1986 buyout and William F. Farley's 1989 purchase of West Point-Pepperell. Revco, a drugstore chain, later declared bankruptcy, while Mr. Farley fell behind on interest payments. Wells at the time stressed it was protected in both deals by its status as a senior lender.

Real estate construction loans and commercial mortgages, meanwhile, totaled 13.1 billion at the end of March, or 27.2% of total loans.

Areas of Strength

While the extent of Wells' loan problems remain uncertain, observers said the company was considerably protected by strong core earnings and its low overhead. The company said its net interest margin for the second quarter would be above 5.2% and that noninterest income would rise.

Analysts, who had estimated 1991 earnings for Wells at $10.50 to $12 a share, said that they would have to trim their projections to between $6 and $9.

Wells has been one of the country's top-performing banks in recent years. Last year the company earned $711.5 million, or $13.39 a share representing a return on assets of 1.39%.

In the stock market Tuesday, other big losers in late afternoon trading included U.S. Bancorp, off $1.675 at $32.125; NCNB Corp., down $1.125 at $38.375; Bankers Trust New York Corp., off $1.625 at $50.625; Bank of New York Co., minus $1.375 at $28.50; and Manufacturers Hanover Corp. off $1.625 at $21.375. [Graphs Omitted]

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.