Wachovia posts $8.9B loss, will cut 10,750 jobs

Wachovia Corp. has posted a second-quarter loss of $8.9 billion, slashed its dividend and will cut 10,750 jobs as part of a turnaround plan.

The job cuts are part of an expense-initiative launched in June. The bank will eliminate 6,350 active jobs and 4,400 open positions and contractors as it works to find $1.5 billion in cost savings by 2009. About 40 percent of that will come from personnel.

Most of the job losses will come from the company’s mortgage business. Wachovia expects to cut 4,400 mortgage employees over the next 12 months and announced it is exiting the wholesale mortgage lending business, meaning it will no longer offer home loans through brokers. Through June the company had eliminated 2,000 mortgage jobs.

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Some analysts had expected the bank to announce a new capital raise due to rising losses in its mortgage portfolio, but newly appointed Chief Executive Bob Steel said he expects steps such as the dividend cut and expense reductions, as well as other potential measures such as the sale of “noncore assets” to make that unnecessary.

“That’s not part of the program, period,” he said of selling more stock. The company raised $8 billion earlier in the year through the sale of common and preferred stock, an action that dilutes the value of existing investors’ shares.

Steel cautioned that the company will be taking additional measures in the future as the company continues to work through its issues and challenges and added the road to improving the company’s financial condition may not be smooth.

The net loss of $4.20 per share includes a $6.1 billion noncash goodwill impairment charge reflecting declining market valuations and asset values.

The goodwill impairment charge has no impact on Wachovia’s tangible capital levels, regulatory capital ratios or liquidity, the company says.

In the second quarter of last year, Wachovia earned $2.3 billion, or $1.22 per share.

In the latest quarter, the Charlotte-based bank (NYSE:WB) added $5.6 billion to its loan-loss reserve to cover net charge-offs and increased the reserve by $4.2 billion.

Interest income fell to $4.3 billion from nearly $4.5 billion in the second quarter of 2007.

Noninterest income fell to nearly $3.2 billion from $4.2 billion in the same period.

“These bottom-line results are disappointing and unacceptable,” says Lanty Smith, Wachovia’s chairman. “While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility. Our company is facing up to these issues, is addressing the challenges head-on and has redirected near-term strategic priorities.”

Immediate changes at the bank include cutting the quarterly common stock dividend to 5 cents per share, which will conserve about $700 million of capital per quarter. In May, the company had cut its dividend to 37.5 cents per share from 64 cents.

Earlier the company ceased offering its “pick-a-payment” mortgage product that it acquired with its purchase of Golden West Financial Corp. The bank discontinued the minimum-payment option on all new loans, a process that allowed a borrower to make payments lower than the interest due on the loan. By not covering the total interest due, the borrower’s monthly payments and loan balance can increase over time.

Wachovia says some 1,000 mortgage-origination personnel are being shifted in the company’s efforts to assist customers to refinance and restructure the pick-a-payment mortgages. The objective is to assist customers in avoiding foreclosures and reducing the company’s risks in the mortgage area.

The loans have become a source of misery for the bank:

Wachovia added $5.6 billion to its loan loss reserve in the second quarter, including $3.3 billion for the pick-a-payment portfolio. Executives say they now expect loan losses of 12 percent on the $122 billion pick-a-payment portfolio over the life of the loans, up from a previous forecast of 7 percent to 8 percent.

Overall, net charge-offs, or loans that are uncollectible at the company, increased to 1.1 percent of total loans in the latest quarter from 0.14 percent a year earlier. Nonperforming loans at Wachovia increased to 2.41 percent from 0.49 percent a year earlier.

Steel, who became CEO this month, most recently was Under Secretary for Domestic Finance for the U.S. Department of Treasury and spent the vast majority of his career at Goldman Sachs & Co. He succeeded former CEO Ken Thompson, who retired in June at the request of the bank’s board.

Wachovia’s stock closed at $16.79 per share Tuesday afternoon, up 27.4 percent from Monday’s closing price of $13.18 per share.