Wachovia Sinks on Loss, Plans to Raise $7B

Updated from 2:22 p.m. EDT

Wachovia(WB Quote) shares sank as much as 11% Monday, after the bank said it was raising $7 billion through a stock offering and cutting its dividend, while swinging to a big first-quarter loss.

Wachovia, which has been hobbled in the credit crunch since last summer due to its acquisition of option adjustable rate mortgage specialist Golden West near the height of the housing bubble in 2006, reported a loss of $393 million, or 20 cents a share, vs. a profit of $2.3 billion, or $1.20 a share in the year ago period. Analysts polled by Thomson Financial had expected a profit of 40 cents a share.

The Charlotte-based bank blamed the loss on higher credit costs and "continued disruption in the capital markets." As a result, the bank commenced concurrent offerings of common and preferred stock totaling $7 billion. It also slashed its quarterly dividend by 41% to 38 cents a share, which it said will preserve another $2 billion in capital annually.

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Wachovia said the proceeds from the sale of common and preferred stock would be used for general corporate purposes. The bank said the money will increase capital ratios and provide flexibility. CEO Ken Thompson said in a company press release that he was "extremely pleased" with the level of interest from investors so far.

"I know these actions are not without cost and I wish these actions were not necessary, but they are," Thompson said during a conference call to discuss the capital raise and earnings.

As the housing market worsens and the credit crisis deepens into mortgages beyond subprime consumers to include prime borrowers and commercial real estate, banks large and small are seeking capital infusions to brace themselves against further loan losses. Last week, Washington Mutual(WM Quote) said that a consortium of investors led by TPG would invest $7 billion into the struggling thrift.

Midwest banking outfit National City(NCC Quote) is also said to be looking at a private capital injection or potential sale.

Wachovia acquired California mortgage lender Golden West in 2006. The lender was best known for originating Option ARMs, in which borrowers could choose one of several payment options. But the housing market has soured since the purchase, particularly in California.

While Wachovia has acknowledged that it expects to see increased losses there, management has been predicting the losses to be muted given the better underwriting standards at Golden West. Still, analysts have been wary.

The bank increased its provision for credit losses to $2.83 billion in the quarter, from $177 million in the year-ago quarter "largely reflecting more severe deterioration in the residential housing market, particularly in specific markets in California and Florida," it said.

Wachovia said approximately $1.1 billion of the reserve build was specifically for potential losses in its $121 billion option ARM mortgage portfolio. Actual loans charged off in the first quarter totaled $765 million.

"The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses," Thompson said in a separate release, in which he said he was "deeply disappointed" in the bank's quarterly results.

Wachovia also took mark-to-market writedowns of $2 billion on its structured securities portfolio in the latest quarter, fueling the company's $77 million loss in its corporate and investment bank compared to a profit of $550 million in the first quarter of 2007.

Wachovia had $339 million of market valuation losses in its subprime residential asset-backed collateralized debt obligations, compared to $818 million in the fourth quarter. It also had another $521 million of losses in its commercial mortgage structured products and $251 million of losses in the consumer mortgage-backed products. Additionally Wachovia recorded $309 million of losses in leveraged finance loans, net of fees, among other things.