National City's 3Q loss widens; job cuts planned

[October 22, 2008]  NEW YORK (AP) -- National City Corp. on Tuesday reported a third-quarter loss and said it will cut 4,000 jobs, as the regional bank continues to struggle amid the ongoing downturn in the mortgage and credit markets.

Despite the larger-than-expected quarterly loss, National City shares were higher in morning trading, rising 9 cents, or 3 percent, to $3.01.

National City's net loss available to common shareholders was $5.15 billion, or $5.86 per share, during the third quarter. The bank lost $19 million, or 3 cents per share, during the same period last year.

The Cleveland-based bank recorded a one-time dividend of $4.42 billion on preferred shares issued in April related to its $7 billion capital raise, nearly all of which was a non-cash charge. Excluding the preferred dividend, the quarterly loss was $729 million, or 85 cents per share. The dividend had no impact on cash, total capital or net income, the bank said.

Analysts polled by Thomson Reuters, on average, forecast a loss of 31 cents per share for the quarter. Analysts typically do not include charges in their estimates.

The bank also said it plans to cut 4,000 positions, or about 14 percent of its total work force, over the next three years as it works on a previously announced initiative to reduce costs. The bank expects this initiative to result in annual savings of between $500 million and $600 million by 2011. National City said it expects to realize $240 million in savings, and $80 million to $100 million in associated charges in 2009.

"Our view is the macro environment continues to be very challenging" and is likely to get worse before improving, Chief Executive Peter Raskind said in an interview. Raskind said the cost reduction initiatives are aimed at long-term success of the company and not just working through the current downturn.

Recent reports suggested National City could be considering a sale or merger of the bank, though Raskind declined to comment on the speculation. Multiple banks, including Wachovia Corp. and Sovereign Bancorp Inc., have agreed to be acquired over the past month amid the ongoing mortgage and credit crisis.

Problems in the mortgage and real estate markets since the middle of 2007 have hit National City especially hard. National City set aside $1.18 billion during the third quarter for loan-loss provisions, compared with provisions of $368 million during the same quarter a year earlier. Loan-loss provisions declined from the prior quarter, when National City set aside $1.59 billion to cover potential losses.

"National City's nonperforming assets were up only 13.1 percent from the prior quarter, which we consider fine in this environment," Sandler O'Neill & Partners LP analyst R. Scott Siefers wrote in a research note. "Credit costs were actually lower than we had anticipated, despite National City continuing to build the reserve."

The majority of the third-quarter provision, or $678 million, was set aside to cover losses in the bank's "exit portfolio," which consists of loans from businesses National City exited or products it stopped selling.

An $8.4 billion portion of the $19.4 billion exit portfolio has been "driving a disproportionate amount of charge-offs across the entire bank," Raskind said. That portion, which amount to about 8 percent of the bank's total loans, account for 40 percent of total charge-offs.

Nearly all banks have been forced over the past year and a half to sharply increase their reserves for loan losses as customers increasingly default on loans, especially mortgages and other real estate-related loans. Much of National City's exit portfolio is tied to real estate lending.

Net charge-offs - loans written off as not being repaid - totaled $844 million during the third quarter, and included $134 million in write-downs as the bank transferred its marine lending portfolio to "held for sale" status.

Charge-offs totaled $141 million during the year-ago period.

With nearly all banks facing mortgage losses, the government recently approved a plan to directly invest in banks to help boost their capital reserves and try to spur the nearly dormant credit markets. The plan calls for investments in banks in return for preferred stock and warrants to purchase common shares.

Raskind said National City is currently reviewing the government's plan to determine if the bank will participate. Raskind noted that even without the government investment, the bank's capital reserves are among the strongest in the nation.

National City's Tier 1 capital ratio is 11 percent, and $6 billion above the regulatory requirement to be considered "well capitalized."

Deutsche Bank analyst Mike May wrote in a research note that the government program "will benefit National City as much as any bank."

While credit losses increased, net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money to customers, dipped slightly to $1.02 billion in the third quarter from $1.1 billion during the year-ago period.

Non-interest income, or money derived from fees and other charges, fell to $386 million from $624 million during the same quarter last year. Most of the decline in non-interest income came from hedging losses on mortgage servicing rights, the bank said.

[Associated Press; By STEPHEN BERNARD]

AP Business Writer Sara Lepro in New York contributed to this report.

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