Magazine article American Banker

First Union to Dip into Reserves; Analysts Skeptical

Magazine article American Banker

First Union to Dip into Reserves; Analysts Skeptical

Article excerpt

First Union Corp. is marching to its own drummer.

At a time when other banks are taking conservative steps to bolster reserves and shrink balance sheets to improve their capital ratios, First Union is moving in the opposite direction.

At a lively and sometimes contentious meeting before New York analysts on Wednesday, Edward E. Crutchfield, First Union's chairman and chief executive, said his bank would deplete what he viewed as "excess reserves" in order to spend more on technology and a host of other initiatives.

He also suggested that the bank has no current plans to reduce the size of the loan portfolio.

"We have $400 million more in reserves than our models call for," Mr. Crutchfield said, rejecting arguments that First Union should stay in line with other superregionals which have higher reserve ratios.

The issue of how much capital First Union should have on hand has become charged. Many analysts view the Charlotte, N.C.-based superregional as thinly capitalized. That perception, combined with concerns about deteriorating credit quality and the possibility that First Union might make yet another acquisition, have been putting pressure on the bank's share price for some time.

"If there's one thing that's clear to me it's that they have yet to develop a consistent capital management philosophy," said Nancy Bush, an analyst with Brown Brothers Harriman.

But Mr. Crutchfield told analysts to view his bank differently from others in its peer group. Even if the bank's reserve ratio is lower than at other institutions, he added, analysts making comparisons should keep in mind that about one-third of First Union's nearly $90 billion loan portfolio is in low- risk residential mortgages.

First Union has a loan-loss reserve of $1.46 billion, and a reserve-to loan ratio of 1.62%. …

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