As Washington Mutual Inc. on Tuesday sealed a deal to sell $7 billion of equity securities to a group of investors led by TPG Inc., it laid bare the depth of its troubles and the pressing need for the capital infusion.
Under the deal Wamu sold 176 million shares of common stock at $8.75 a share. It also issued 55,000 shares of convertible preferred stock that, if shareholders approve, will be converted into common stock at $8.75 a share.
The Seattle thrift company unveiled preliminary results for the first quarter, saying it probably will report a loss of $1.1 billion, or $1.40 a share, dwarfing the 50-cent loss that was the average estimate of analysts surveyed by Thomson Financial. It also said it expects to take a first-quarter loan-loss provision of about $3.5 billion — in December it had forecast $2 billion — and net chargeoffs of $1.4 billion.
Wamu also confirmed that it would, starting this week, quit the wholesale lending business, closing its remaining 186 stand-alone home loan centers, with the loss of roughly 3,000 jobs by the end of this quarter. The employees were notified Monday. These cuts are in addition to Wamu's move in December to shut about 190 home loan stores and trim about 3,100 mortgage and corporate jobs.
"We are now focusing all of our mortgage lending through our retail banks, which is a fundamental shift but a sensible one," Wamu spokesman Derek Aney said in an interview Tuesday. "First, we're really, really focused now on cross-selling, and second, mortgage volume is down across the industry, so we're confident we can handle everything in our retail centers."
Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC, said closing the remaining home-loan centers was necessary because most high-risk mortgages originated by Wamu came from those stores. "This is where you can trace most of the losses to, so it's a positive decision," he said in an interview Tuesday.
Wamu, meanwhile, is in the midst of a push to expand its national retail banking network as it winds down its mortgage business; it previously announced it would open as many as 150 branches this year. The company said Tuesday that, in the first quarter, it added about $8 billion in retail deposits, but it gave no more detail on its progress. On Dec. 31, it reported total average deposits of $185.6 billion, down 6.5% from the end of the third quarter.
Wamu also on Tuesday slashed its quarterly dividend to a penny, which it said would preserve about $490 million of capital annually. In December it had cut the dividend to 15 cents, from 56 cents, before reporting a $1.87 billion fourth-quarter loss. The company has been battered by bad mortgage bets in Florida and California, and it has cautioned investors to expect large loan-loss provisions throughout this year.
The mortgage business moves and dividend cuts, coupled with the capital injection from the TPG-led group, give Wamu "every confidence in our ability to deal with today's market conditions and restore shareholder value," Kerry Killinger, the chairman and chief executive officer, said in a press release. Mr. Killinger, who declined an interview request, added in the release that Tuesday's moves "will position us for a return to profitability as these elevated credit costs subside."
Scott Fenn, the managing director of policy at Proxy Governance Inc., an independent proxy advisory firm in Vienna, Va., that advises Wamu shareholders, said the cash injection is good news "on a short-term basis."
However, "this deal also means you are betting on existing management. And you have to wonder about that — if that's good in light of how this company got into so much trouble," Mr. Fenn said in an interview.
Mr. Fenn noted, though, that TPG founding partner David Bonderman, a former Wamu board member who helped forge the deal, knows the Seattle thrift well and probably has good reason to believe in the company's turnaround plan. Wamu's directors plan to reappoint Mr. Bonderman to the board next week.
Meanwhile, Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets unit, said that, at the $8.75 share price, the deal will dilute current shareholders' stake in the company. "It tells you how desperate [Wamu] was for the money," he said. On Tuesday, its shares fell 10%.
