April 14 (Bloomberg) -- Wachovia Corp., the fourth-largest U.S. bank, sold $7 billion of stock and cut the dividend after bad home loans in California triggered an unexpected first-quarter loss.

The $393 million loss compared with profit of $2.3 billion a year earlier, Wachovia said in a statement today. Wachovia fell the most intraday since the 1987 crash in New York trading after the bank disclosed plans to sell shares at 14 percent less than last week's closing price and cut 500 investment banking jobs, mostly in New York and Charlotte. The stock ended the day down 8.1 percent.

Chief Executive Officer Kennedy Thompson, 57, said he was ``deeply disappointed'' as Charlotte, North Carolina-based Wachovia posted its first quarterly loss since 2001. The bank's market value has dropped about 50 percent since buying Golden West Financial Corp. in 2006 for $24.6 billion at the peak of the housing boom. Thompson said today the housing slump may not end until sometime next year.

``They obviously didn't take a close enough look at Golden West,'' said Andrew Seibert, a portfolio manager at Nextier Wealth Management in Pittsburgh, which oversees $400 million in assets. The lender's adjustable-rate mortgages, which let borrowers skip payments and add the unpaid interest on to the principal, were ``a formula for disaster by anyone's standard.''

Terms of Sale

In a May 8, 2006 interview with Bloomberg News, Thompson called Golden West ``a very conservative lender'' that would do well even if housing prices went down. ``You would have to have huge unemployment and a huge downdraft in home values before this product got hit in any big way,'' he said.

The bank fell $2.26, or 8.1 percent, to $25.55 at 4:15 p.m. in New York Stock Exchange composite trading after reaching a low of $24.65. The quarter's per-share loss of 20 cents compared with profit of $1.20 a year earlier and estimated earnings of about 40 cents a share, according to a Bloomberg survey of analysts.

The share sale included new common stock priced at $24, and convertible preferred stock that pays 7.5 percent interest, according to a company statement. The preferred shares can be swapped for 32.0513 shares of common stock initially valued at $31.20. Many of the bank's largest stockholders bought shares in the offering, said Lanty Smith, the bank's lead independent director.

The quarterly dividend was cut to 37.5 cents a share from 64 cents, which will preserve about $2 billion in capital, according to a report today from analyst Brian Foran at Goldman Sachs Group Inc. With the new funds, the bank will have raised about $13 billion since the credit crunch began, Foran wrote.

Lower Earnings

``Dilution from new equity combined with plans to build reserves a further $4 billion by year-end 2009 should significantly hurt earnings,'' Mike Mayo, an analyst at Deutsche Bank Securities Inc., said in a report today. He rates the bank at ``hold.''

Washington Mutual Inc., the largest U.S. savings and loan, got $7 billion last week from investors led by David Bonderman's TPG Inc. In all, banks and securities firms, including Citigroup Inc. and Lehman Brothers Holdings Inc., have raised about $140 billion since last year after more than $245 billion of losses tied to the collapse of the subprime mortgage market, data compiled by Bloomberg show.

Seattle-based Washington Mutual reported a first-quarter loss of $1.1 billion, cut its dividend and announced plans to eliminate 3,000 jobs.

First-quarter revenue at Wachovia declined 5 percent to $7.9 billion. Return on equity, a gauge of how effectively the company reinvests profit, was negative 2.1 percent, compared with 13.5 percent a year earlier.

California, Florida

Wachovia set aside $2.8 billion for credit losses in the three months ended March 31, mainly because of deterioration in the housing markets of California and Florida. Non-performing assets, including loans held for sale and foreclosed properties, totaled $8.4 billion, or 1.7 percent of loans, widening from 0.4 percent a year earlier.

The allowance for future loan losses was 78 percent of its total nonperforming assets the end of the quarter, down from a ratio of 189 percent a year earlier.

``Wachovia is now looking almost as bad as Washington Mutual on the mortgage side,'' said David Hendler, an analyst at CreditSights Inc. ``This shows investors have to be more cautious and not take management's word for granted.''

Wachovia said reserves were more than twice uncollectible loans during the quarter.

Golden West

Golden West, based in Oakland, California, specialized in so-called option adjustable-rate mortgages, which allow borrowers to decide to skip some of their monthly payments and add the amount to their principal.

From March 2000 through March 2006, Wachovia stock gained 50 percent, compared with a 34 percent gain in the 24-stock KBW Bank Index. Since March 2006, shortly before the Golden West acquisition, Wachovia has lost half its value, while the KBW Index is down about 26 percent.

More option-ARM borrowers are defaulting and further price declines are likely to worsen the problem, Wachovia said. Fourteen percent of the option-ARM loans matched or exceeded the value of the underlying property in February with three-fourths of those loans in California, the bank said.

Overdue Loans

Late payments on Wachovia's option-ARM loans were 3.1 percent, double the previous record during the early 1990s real- estate recession in California, Moody's Investors Service analyst Sean Jones said in a report today. The annualized rate of losses was four times the previous high, he said.

Morgan Stanley analyst Betsy Graseck said Wachovia's estimate of a 7 percent to 8 percent loss on its option-ARM loans may be optimistic. ``We don't think this reflects a `kitchen sink' as we expect housing values to continue to sharply deteriorate,'' said Graseck, who rates the company at ``underweight.''

Wachovia said the estimate is its best at this time, though it shouldn't be viewed as a ``worst-case scenario,'' Chief Risk Officer Donald Truslow told reporters on a conference call.

Profit at the division which includes retail, small business and commercial customers fell 17 percent to $1.2 billion. Wachovia set aside $422 million more for credit losses because of ``rapid deterioration'' in consumer real estate and auto loans, especially in California and Florida, where prices are falling and foreclosures are increasing.

Investment Bank Loss

The profit decline and credit losses, along with ``unprecedented consumer behavior,'' prompted Wachovia to increase its assumptions about how many of its option-ARM home loans will go bad.

The corporate and investment bank lost $77 million, the second consecutive deficit after a $431 million loss in last year's fourth quarter. The unit earned $550 million a year earlier. Wachovia cited $1.6 billion in writedowns of securities that included subprime and consumer home loans, commercial mortgages, consumer mortgages and leveraged buyouts. Revenue at the unit declined 54 percent from the year-earlier period.

The wealth management unit's profit rose 9.5 percent to $92 million.

Thompson orchestrated First Union Corp.'s September 2001 acquisition of North Carolina rival Wachovia Corp., defeating a hostile bid from SunTrust Corp. of Atlanta. The merger combined First Union's capital markets unit with Wachovia's retail and commercial bank, giving the company a diversified mix of businesses that impressed investors.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: April 14, 2008 17:55 EDT