Wachovia Corp announced a whopping second quarter loss of $8.9bn this morning, with plans to shake up its mortgage unit, slash its dividend payout to shareholders and cut thousands of jobs.
Chief executive Bob Steel, hired less than two weeks ago to bring the struggling bank back to its former glory, had hinted that he envisioned a smaller, leaner Wachovia. Today, in his first earnings announcement, he kept his word, announcing numerous other plans to preserve capital.
Wachovia announced this morning that it plans to cease making mortgages through third-party brokers. At the end of the first quarter, about 30% of the bank’s mortgage loans were made through third-party brokers. As recently as last month, the bank said it remained committed to using those brokers, especially in areas where it doesn’t have brokers.
But in a memo to employees yesterday, Tim Wilson, the head of loan origination for Wachovia Mortgage, wrote: “Going forward, we will primarily focus on customers who have relationships with the bank, and who are located in geographies where Wachovia branches are located.”
The change in strategy is part of a larger plan to rein in mortgage losses, which have been on the rise since Wachovia’s $24bn purchase of Golden West Financial, a troubled California mortgage lender, in 2006. The so-called Pick-a-Payment loans, which Wachovia inherited from Golden West, have proved a headache for the bank and a lightning rod for shareholders, defaulting at higher rates than other mortgages.
In April, the bank tightened underwriting standards, and last month, it stopped offering the “negative amortisation” option for Pick-a-Pay loans, which let the borrower pay less than the interest owed. Wachovia has also said that it will help customers with Pick-a-Pay mortgages refinance into traditional mortgages.
As part of today’s announcement, Wachovia stepped up that effort, saying that about 1,000 employees in mortgage lending will be redeployed to help customers refinance and restructure Pick-a-Pay loans.
CEO Steel, a veteran of the US Treasury and Goldman Sachs, has been www.carolinapaydayloans.org on the job since July 10. Former chief executive Ken Thompson was asked to retire June 1, taking the fall for the Golden West deal, though board members had signed off on it.
Things have gone from bad to worse for Wachovia in the past year. In the first quarter, the bank recorded its first trip into the red since 2001. But that was minuscule compared to today’s second-quarter loss, which is about 12 times as large.
The bank’s $8.9bn loss in the second quarter represents a loss of $4.20 per share. 3bn, or $1.22 per share.
“These bottom-line results are disappointing and unacceptable,” said Lanty Smith, the board chairman. “While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility.”
Those loans are criticised by consumer advocates because their balance can increase instead of decrease
On a conference call with analysts on July 10, Smith said the board acknowledged “that Golden West was a mistake and that we have to deal with the consequences of it”.
Like many of its peers, Wachovia also struggled in corporate and investment banking, which offers Wall Street-style services such as stock and bond offerings. Earnings there fell 73%, to $209m.
A year ago, the bank earned $2
Wachovia’s shares have fallen precipitously in the past 12 months ago, closing at $ yesterday. A year ago, they were $.
Also this morning, Wachovia announced additional plans to shore up another $5bn in capital, including reducing expense growth and capital expenditures, repositioning the CD book and generating growth in low-cost core deposits. The company is also taking steps to reduce the number of credit-only commercial borrowers and to sell certain assets.
The bank’s second-quarter loss includes a $6.1bn noncash accounting charge, which has no impact on tangible capital levels, regulatory capital ratios or liquidity. Analysts believe the charge, called a goodwill impairment charge, is largely related to Golden West.
Wachovia noted continued strength in its traditional bank, with growth over the year in revenue, interest income, fee income and loans.