Wells Profit Off 37%; Misplaced Deposits Cited
Wells Fargo & Co. said Tuesday that its quarterly earnings fell 37% because of a series of operational snafus, including misplaced deposits and a continuing exodus of customers.
The San Francisco-based banking giant, which had warned Wall Street last week that its earnings wouldn’t be as strong as expected, said its income fell to $228 million, or $2.49 a share, for the second quarter, down from $363 million, or $3.61, during the same time last year. Analysts had estimated the bank would earn $3.09 a share.
This is the fourth time in the last five quarters that California’s second-largest bank has disappointed Wall Street since it purchased First Interstate Bancorp 15 months ago, and a further sign that the bank is having trouble absorbing its acquisition.
“The earnings reported this morning are clearly a disappointment,” Wells Fargo Chairman Paul Hazen said in a statement. “We are confident we will work through our current issues and establish momentum in the second half of 1997.”
Wells Fargo took the unusual step of admitting that it incorrectly posted some customers’ deposits to the wrong accounts and now can’t find the money, although customers were given credit for the missing deposits.
“In many cases, we have been unable to locate the account to which the deposit was incorrectly posted,” providing windfalls for other customers, Hazen said. Though some customers who received the surprise deposits have come forward, others have not, and the bank has written off the misplaced money.
The bank’s operating losses for the quarter totaled $187 million, more than triple the $42 million posted in the first quarter, the company said. The bulk of the loss, or $150 million, was attributed to overall operational glitches, Wells said, including the lost deposits. Wells would not reveal the exact amount of the incorrect postings.
“This is an awful thing for a bank to come forward on,” said Michael Abrahams, banking analyst with Sutro & Co. in San Francisco. “It’s not just bad lending, it’s bad basic banking. And it seems pretty widespread.”
Though Wells executives stressed that the bank’s second-quarter woes are one-time problems, analysts cautioned that the bank must curtail operational glitches if it wants to retain and attract customers.
“Once these customers are gone, they’re gone,” Abrahams said. “Wells paid a premium for First Interstate and its customers and now they are losing them. It’s like buying a fancy new car and driving it into a pole.”
Wells’ core deposits in the second quarter dropped to $73.5 billion from $83.3 billion during the same period last year. Deposits also fell $2.6 billion from the first quarter of this year, the bank said. Most of the customer losses at the bank have come from other Western states such as Oregon, Washington and, to a lesser degree, Arizona and Nevada, said Rod Jacobs, chief financial officer at Wells.
Although known for other successful acquisitions, Wells has had trouble digesting First Interstate, in part because of the size and different cultures at the two banks, analysts said.
“We probably had too much confidence in ourselves as miracle workers,” said Jacobs. “We didn’t do it this time.”
Jacobs said the customer exodus has begun to stabilize in the last three weeks and that the bank is seeing “some signs of a pickup in business.”
Since the merger, the operational glitches at Wells have been well-publicized. In August, computer problems delayed the deposit of $40.3 million in direct-deposit payroll accounts, including employees at the University of California. In September, Wells’ 24-hour automated telephone banking system went down.
“These types of things don’t leave a warm and fuzzy feeling with customers,” said Sandra J. Flannigan, banking analyst at Merrill Lynch & Co. “Wells recognizes the need to rebuild; we’ll have to see if they can do it.”
Wells’ shares closed up $1.50 at $267 on the New York Stock Exchange on Tuesday after trading as low as $260.38.
At a Glance:
The nation’s two largest banks reported big gains in second-quarter earnings despite disappointments in their credit card businesses. Chase Manhattan Corp. said its operating earnings rose 12%, while Citicorp’s earnings were up 8%.
Chase Manhattan, the nation’s largest banking corporation, said operating earnings for the second quarter, not counting continuing costs of its merger with Chemical Banking Corp., rose to $969 million, or $2.11 per share, from $869 million, or $1.83, in the second quarter of 1996. Including merger-related restructuring costs, net income was $925 million, compared with $856 million.
Operating income from global banking rose 24% on total revenue gains of 8%, primarily on the strength of trading profits and a rebound in investment banking fees.
Chase’s results exceeded analysts’ estimates by about 4 cents per share.
Meanwhile, No. 2 Citicorp said its profit for the three months ended June 30 came to $1.02 billion, or $2.10 per share, up from $952 million, or $1.86, a year ago.
Net income from Citibank’s global consumer banking business fell to $471 million from $486 million, largely because of a rise in credit costs to $922 million from $762 million. The rise in costs was primarily due to a decline in U.S. bank card earnings.
Citicorp’s profit edged out analysts’ expectations by a penny.
Banc One Corp. said second-quarter earnings fell 0.9% to $391.6 million, or 67 cents a share, after two one-time charges, from $395.2 million, or 66 cents, a year earlier. It took a one-time $130-million charge stemming from its acquisition of First USA Inc. to boost its loan loss reserves for First USA credit cards.
Freddie Mac said second-quarter earnings rose 10%, in line with expectations, to $340 million, or 46 cents a share, from $309 million, or 41 cents, in the year-ago period.
City National of Beverly Hills reported second-quarter net income of $19.5 million, or 41 cents, compared with net income of $16.0 million, or 36 cents, in the year-ago period.
Mellon Bank Corp. said second-quarter earnings rose 10% to $186 million, or 72 cents a share, from $169 million, or 63 cents, a year earlier.
Comerica Inc. said second-quarter earnings rose 10% to $129.7 million, or $1.16 share, from $118.2 million, or $1, a year ago.
* More earnings: D8
