National City Corp. lingered in purgatory after reporting its fiscal third quarter 2008 earnings, and then went to bankruptcy hell dancing with an imp disguised as a merger with PNC. But if the road to hell is paved with good intentions, then National City Corp.’s was paved with good intentions and pot marked by subprime trespasses. A regional bank in business since 1845 National City Corp. came to tower over Cleveland’s business, political and social skyline as it rode the crest of the credit bubble to become the 11th largest bank by deposits in the US. But then the bubble burst in the summer of 2007 and blasted by the shock wave National City has lost more than $3 billion, taken another billion dollars in write-downs and has seen level 3 assets swell to over $3 billion. The bank's market cap is a fraction of what it once was in its share price has fallen nearly 90% this year.
National City, once among the nation's top 10 subprime lenders, joins Washington Mutual Inc. and Wachovia Corp. in submitting to takeovers after losses tied to failed home loans. Cleveland-based National City lost more than $3 billion during the past five quarters, and its stock plunged 87 percent this year. PNC is still profitable.
For National City Corp. the end began in 1999 when it bought subprime specialist First Franklin from Bank of America. By the time it's sold the First Franklin to Merrill Lynch for $1.3 billion first Franklin accounted for a quarter of National City's mortgage volume. But Merrill refused to take an additional $10 billion worth of loans because they were deemed too risky for subprime. So the toxic assets festered on National City Corp.'s balance sheet and exploded there in August 2007.
While it’s true that the weakened housing and credit markets made the most dramatic impact on National City in 2007, the crime for which it now faces the gallows was committed in 1999. That’s when former chief executive David Daberko changed the bank’s business mix by accumulating higher-yielding, but riskier, loans (most notably subprime mortgage loans). 1999 is the year National City bought the original sin of subprime originators: First Franklin Financial.
But it would take nearly a decade for the acrid sent of First Franklin blow back to air, and investors who could see only rising profit margins and share prices as the blind eye was turned to the ever expanding credit bubble and what no one would admit could not go on forever.
In the first sign of real trouble at National City, the bank says a division with 450 employees and $1 billion a month in loan revenue will stop offering second mortgages through brokers because the loans, being used as down payments, are too risky. It's the first sign of real trouble at the bank. Other lenders, like American Home Mortgage Investment, Countrywide Financial and Washington Mutual, are already in distress.
The bank says its home equity division, with 450 employees, is closing. About 300 of the jobs are in Greater Cleveland.
But as National City continued to swim in waters roiled by the credit crisis it was dragged into the descending spiral of disasters which now threaten all banks: the quarter over quarter earnings massacres, dividend cuts, job cuts, capital raising events, loan loss reserve buildups and credit write-downs all piled up, and up on the bank until four days in September in which they all came crashing down. In those four tumultuous days the stock market crashed more than 700 points in a single day, as long ailing Washington Mutual and Wachovia finally failed, imploding National City's share prices more than 60% in sympathy. So sudden was the fall that by the time management looked for a deal the banks rating was nearly junk.
There were several suitors US Banc Corp among them, but in the end the U.S. government pushed National City to sell itself to PNC.
Around 11 a.m., Mr. Rohr called to say an offer, for more than $2 a share, would be forthcoming, pending authorization by PNC's board. The board met around 4 p.m. and gave the deal its blessing. Mr. Rohr told Mr. Raskind that PNC was willing to pay about $2.25 a share. Starting around 8 p.m., Messrs. Rohr and Raskind sat down together in a Cleveland hotel room and agreed on a deal within the hour. At 9:30 p.m., National City held a board meeting and approved PNC's offer.
And so there in a Cleveland hotel room ended the 163 year history of a bank, an employer and supporter of charities and non-profits, a pillar, National City imploded before regulators could get to the bar for a drink.
The 11th largest bank did not do business for 163 years in a Cleveland vacuum, nor will Cleveland be void of loss or repercussions of the banks implosion. The losses of course will not show themselves on the balance sheet, they are the assets for which there are no metrics of finance, the goodwill paved on the road to hell.
National City's sale is churning stomachs at charities and cultural nonprofits here and across its nine-state market.
The bank is a philanthropic force, doling out an average $20 million-plus yearly to hundreds of good causes, from the local chapter of the American Red Cross to the City Club of Cleveland.
National City employees contributed $3 million of the $43 million raised in the area's last United Way campaign through its in-house campaign and other events, officials said.
Those charities -- as well as a long list of community events that National City sponsors -- face uncertainty.
Cleveland Mayor Frank Jackson says the sale of National City to Pittsburgh-based PNC is disappointing but not surprising,
Jackson says it's too early to know what the sale means in terms of job cuts, branch closings and the effect on Cleveland.
The mayor says he took a walk downtown Friday and spoke with several National City employees. He says the most troubling aspect of the announcement is the uncertainty in the lives of those employees.
There is that uncertainty again, uncertainty does not show itself on a balance sheet. To the city of Cleveland National City was a home bank and whether Pittsburgh-based PNC attempt to fill the void, is another big uncertainty.
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