Has First Union Found Religion?

Again?

First Union (FTU Quote) has once more slashed earnings estimates and promised to reform. This new recovery effort -- which includes selling big chunks of itself and taking almost $4 billion in charges -- is far more drastic, honest and farsighted than two previous restructuring efforts, in January and May last year, analysts and investors say.

In a bat of an eyelid, however, they warn that this is First Union, whose ability to consistently disappoint is bettered only by the Boston Red Sox.

Following a strategic review instituted by the bank's recently appointed chief executive Ken Thompson, First Union said Monday that it's shutting down The Money Store, the consumer lending firm acquired for $2.1 billion just two years ago, as well as selling its mortgage and credit card operations. The after-tax charge relating to the nixing of The Money Store totals a mammoth $2.59 billion.

"First Union had more issues than we had thought," says Chris Marinac, banks analyst at Robinson-Humphrey in Atlanta.

The nation's sixth-largest bank said it's departing from consumer finance, mortgages and credit cards because they underperformed. The new First Union aims to focus on wealth management, capital markets and its so-called general bank, which caters to individuals and businesses. "This gives our company a sharper focus and a stronger platform for growth," says Thompson, who in April took over from the embattled Ed Crutchfield.

Not everyone's sold. Thompson's new resolve and strategy wasn't worrying a senior officer at a bank that claims to have wooed many customers away from First Union. "They have a poor track record at executing. It's going to take a long time for them to change," says Ed Jordan, finance chief at Cherry Hill, N.J.-based Commerce Bancorp (CBH Quote). "We call First Union the gift that never stops giving."

First Union stock didn't nosedive Monday, as it has after previous preannouncements. Instead, it edged up 1/16, or 0.22%, to close at 27 7/8 on thrice-average volume. However, reflecting widespread anticipation of trouble, the stock has recently taken a beating, and is now nearly 30% below its 2000 high of 38 7/8, set in April.

First Union is also taking a $412 million charge for losses on sales of underwater bonds and more than $350 million to clean up some bad loans and protect itself against an expected rise in doubtful credits (TheStreet.com touched on First Union's bad loan reserves in a recent article ).

Combined, the charges total $3.8 billion, which the bank aims to offset with an estimated $1 billion of gains that it pockets from selling businesses and assets. It announced Monday that the mortgage business is in the process of being sold to Wells Fargo (WFC Quote) for an undisclosed price.

That makes the net hit to the bank $2.8 billion, and it will be taken mainly in the second quarter. Putting that number into perspective, it's equivalent to 80% of the bank's $3.5 billion in operating earnings for all of 1999.

The market often views a barrage of such hefty charges as a sign that a troubled bank has hit bottom, and is ready to take aggressive steps to set the stage for a revival. Analysts, however, were stunned by the size of the second-quarter earnings shortfall, which also was disclosed Monday.

First Union says that, excluding the restructuring charges, it likely will make 72 to 74 cents per share this quarter, well below the 85 cents predicted by analysts surveyed by First Call/Thomson Financial. And the bank added that core earnings, which also exclude income from nonrecurring balance sheet and tax maneuvers, probably will come in at 63 to 65 cents.

The bank blamed the core-earnings shortfall on industrywide factors, such as a slowdown in capital markets and higher interest rates, as well as internal problems, primarily at The Money Store.

In 2000, the bank probably will earn $2.50 to $2.60 per share, excluding the restructuring charges and the nonrecurring income, according to Robinson-Humphrey's Marinac.

That's well below the $3.50 per share for 2000 he says the bank had been guiding analysts toward at the end of last year. (Monday, Marinac downgraded First Union to a neutral from an outperform. His firm hasn't done recent underwriting for First Union.)

But some former bears are heartened by Thompson's strategy. "This is exactly the medicine the bank had to take," says Edwin Johnston, head of research at Buffalo, N.Y.-based asset manager Harold C. Brown, which is long First Union shares. "It's also a sign that First Union is now fully Ken Thompson's bank, not Crutchfield's."

Still, some wonder just how strong First Union is in its three core businesses. After 2001, the Charlotte, N.C.-based institution wants to achieve 10% to 12% earnings growth. It hopes to return 15%-plus in its wealth-management arm, 12% to 15% in its capital markets operation, and 4% to 6% at the general bank.

However, the general bank includes much of the former CoreStates, an East Coast commercial bank whose acquisition has been tough to digest, says Lanny Thorndike, a manager on the (CENSX Quote)Century Shares Trust, a financial services mutual fund that has no position in First Union's shares.

Despite those problems, CoreStates survived this latest purge because its business is closer to First Union's core operations, according to a bank spokeswoman.

Marinac accepts that First Union's capital markets' operations have done quite well, but the marketwide slowdown in investment banking could depress profits here in the future. He adds: "If the economy maintains a steady pace, First Union can probably follow through. But if it doesn't..."