NEW YORK Wachovia Corp, the fourth-largest U.S. bank, on Tuesday posted an $8.86 billion second-quarter loss, slashed its dividend and announced the elimination of more than 10,700 jobs after losses tied to mortgages soared.
Its shares fell $1.25, or 9.5 percent, to $11.93 in premarket trading.
The net loss for the Charlotte, North Carolina-based bank equaled $4.20 per share, and compared with a profit of $2.34 billion, or $1.22, a year earlier.
Excluding items, the loss was $1.27 per share, compared with the average analyst estimate of $1.30, according to Reuters Estimates. Results included a $6.06 billion write-down of goodwill because asset values declined, and reflected a $4.19 billion increase in reserves for bad loans.
"The credit deterioration was worse than expected," said Gerard Cassidy, an analyst at RBC Capital Markets, who has a "sector perform" rating on the bank.
"Wachovia is in capital-preserving mode, which means it has to shrink its balance sheet, leading to a vice-like effect on income statement," he added. "Revenue growth will likely shrink, even as operating expenses rise. This will lead to lower earnings, or possibly losses, in the future."
Results included a $975 million charge related to the tax treatment of leveraged leases, $936 million of losses from disrupted capital markets, a $590 million charge for other legal matters, and $391 million of losses on securities sales.
"These bottom-line results are disappointing and unacceptable," Chairman Lanty Smith said in a statement. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility."
Wachovia slashed its quarterly dividend 87 percent to 5 cents per share from 37.5 cents, and has now lowered it 92 percent this year.
The bank said it plans to cut 6,350 jobs, affecting more than 5 percent of its roughly 120,000 employees. Wachovia said it will also eliminate 4,400 open positions and contractors.
Wachovia said it has cut 2,000 retail mortgage jobs, and plans to eliminate 4,400 more in the next year. It said it plans to sell at least $20 billion of loans and securities by year's end, and cut 2009 expense growth by $1.5 billion.
Robert Steel, the bank's new chief executive, is trying to unload troubled assets and slash costs following Wachovia's disastrous $24.2 billion purchase in October 2006 of Golden West Financial Corp, a specialist in option adjustable-rate mortgages.
Steel is a former U.S. Treasury undersecretary for domestic finance. Wachovia hired him two weeks ago to replace Ken Thompson, whom it ousted a month earlier.
"In the short term, the entire organization is focused on protecting, preserving and generating capital, reinforcing Wachovia's strong liquidity position, and reducing risk," Steel said in a statement.
Wachovia said it ended the quarter with a Tier 1 capital ratio, which measures its ability to cover losses, of 8 percent. Regulators consider 6 percent sufficient. Wachovia raised $8.05 billion of capital in April.
On July 9, Wachovia had projected a $2.6 billion to $2.8 billion quarterly loss, equal to $1.23 to $1.33 per share, excluding goodwill items.
Fitch Ratings on Tuesday lowered the bank's credit rating.
Wachovia's increase in loan loss reserves included $3.3 billion related to the $122 billion portfolio of "Pick-a-Pay" mortgages in which Golden West specialized, and which enticed Wachovia to buy Golden West in the first place.
The bank has since stopped making those loans, and on Monday said it will stop offering home loans through brokers.
Wachovia is setting aside $10.96 billion for credit losses, up from $6.77 billion in the first quarter and $3.55 billion a year earlier. Net charge-offs increased more than eight-fold from a year earlier to $1.31 billion.
The corporate and investment banking unit had a $209 million profit, down 73 percent, reflecting write-downs tied to subprime mortgages, commercial mortgages, non-subprime debt and consumer mortgages.
Profits in consumer and business banking, Wachovia's largest unit, fell 23 percent to $1.12 billion, hurt by rising credit costs, mainly for mortgages.
Capital management profit fell 5 percent to $297 million, hurt by the liquidation of an Evergreen Investments fund, while wealth management profit rose 9 percent to $98 million.
Through Monday, Wachovia shares had plunged 65 percent this year, compared with a 30 percent drop in the KBW Bank Index.
(Editing by Maureen Bavdek)