Quarterly loss up to $2.8 billion expected

The news keeps getting worse for Wachovia Corp.'s financial statements.

The Charlotte-based bank said Wednesday evening that it expects to report a second-quarter loss of $2.6 billion to $2.8 billion, or $1.23 to $1.33 per share, based on current estimates. That's almost quadruple its first-quarter loss of $707 million, or 36 cents per share. That quarter marked Wachovia's first trip into the red since 2001.

“Big loss, but not a big surprise,” said James Early, an analyst at The Motley Fool. “I'd be surprised if this is the last of the bad news.”

The losses were largely related to the bank's setting aside $4.2 billion for potential future loan losses. The bulk – $3.3 billion – is related to its controversial Pick-A-Payment mortgage loans, which Wachovia inherited when it bought Golden West Financial Corp. in 2006. The defaults on those loans, where borrowers choose how much they pay each month, have risen faster than traditional loans, and Wachovia said last week it would largely abandon those loans.

Wachovia also will take an expected charge of $855 million related to leasing transactions that it has since stopped originating. It also said it's paying more in legal fees; the bank has been named in lawsuits alleging rigged bidding for municipal bonds and failed auction-rate securities, among others.

Wachovia expects $1.3 billion in charge-offs, or loans that it doesn't expect to collect on, in the second quarter. That accounts for about 1.1 percent of all its loans and includes about $500 million related to the Pick-A-Pay portfolio and $280 million related to commercial real estate.

Overall, those charge-offs are almost double what they were in the first quarter: $765 million, or 0.66 percent.

The second-quarter estimates don't include an undetermined accounting charge the bank plans to take. That loss is likely related to the Golden West purchase, analysts said.

Early, at The Motley Fool, thinks losses will continue through at least this year. Gary Townsend, a former analyst who has launched a Maryland-based investment firm, said the stock is likely to continue falling; it closed Wednesday at $14.29, compared to $48.32 a year ago.

“The big issue is whether they will cut the dividend to virtually nothing and raise more capital,” said Dick Bove, an analyst at Ladenburg Thalmann.

This year, Wachovia slashed its quarterly dividend by 41 percent. Its new chief executive, Robert Steel, is formerly of Goldman Sachs.

“My guess is that with Goldman Sachs behind them they will raise more capital immediately,” Bove said.

The bank will announce second-quarter earnings on July 22.