Wachovia Meets Earnings Targets, but Credit Quality Issues Linger

The bank cites worries about a slowdown's effect on some corporate customers.
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Updated from 9:38 a.m. EDT

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Wachovia

(WB) - Get Report

Wednesday reported third-quarter earnings that were in line with Wall Street's expectations, as the bank continues to deal with credit-quality issues.

Shares of the bank slipped a quarter to close at $50.

Third-quarter net operating income, which excludes nonrecurring charges, totaled $270.2 million, up 3.9% from $260.9 million a year ago. The per-share operating earnings of $1.32 met the 21-analyst estimate compiled by

First Call/Thomson Financial

and showed a small gain from the year-ago profit of $1.27 a share. Including charges for merger integration and resource realignment, the bank reported earnings of $1 a share and net income of $205.3 million.

Wachovia came under considerable pressure in the second quarter when it announced it was adding an eye-opening $200 million to its loan-loss reserve, which is essentially a financial cushion to protect banks against bad loans. Nervousness spread through the banking sector as Wachovia said the credit issues could translate into an earning shortfall.

In the latest quarter, Wachovia said as anticipated, the provision for loan losses as well as nonperforming assets rose as a result of continued concerns about the slowing economy's impact on some corporate customers' financial performance. The provision for loan losses was $124 million, up from $76.8 million in 1999 and in line with net loan losses in the quarter. Nonperforming loans, which are loans that are past due but have not been written off yet, rose $163 million to $462 from the preceding quarter. Compared with the third-quarter 1999, nonperforming loans were up $230.3 million.

Confidence

Including the provision for loan losses, net income fell 6% to $506.8 million in the latest quarter. One aspect of Wachovia's credit quality that may leave investors feeling a bit more confident amid credit worries is that the company has bulked up its loan-loss reserve in the past year. The ratio of reserves to total loans now sits at 1.47, a jump from the year-ago 1.16, which may help to quell some of the longstanding criticism that Wachovia maintained a low loan loss reserve compared with its peers. The latest quarter's ratio is down a notch from 1.5 in the second quarter, when the $200 million provision was taken.

"We believe the quality of the overall loan portfolio is very good," said CFO Robert McCoy in a conference call. The action to increase the provision is "appropriate for this environment," he said, noting softer business conditions. "We recognize the credit issues in our numbers. Our fundamentals and our markets remain favorable," said McCoy.