National City Blew It

How did National City Corp. (NCC) arrive at its present sorry state? It wasn’t just its subprime mortgage exposures and expensive out-of-market Florida thrift acquisitions. Rather, on the heels of its under-the-wire fourth-quarter sale of subprime lender First Franklin, former Chairman David Daberko chose to light the candle at its other end, too, by raising the common stock dividend and accelerating share repurchases. And for good measure, before he retired as CEO last July, Daberko engineered National City's purchase of MAFB Financial, an $11 billion (asset) Chicago-based savings bank with a history of mediocre performance, and even boosted the dividend in the third quarter by 2 cents, to 41 cents.

Recall that 14 months ago, after a dreadful fourth-quarter, 2006 earnings report (when it missed my operating estimate by 40%), National City announced a Dutch auction tender offer in which it repurchased 40 million shares at $38.75 apiece. In 2007, National City repurchased another 75 million shares at a total cost of $3.2 billion. Oh, for access to that capital today!

There is a lesson here for other large commercial banks, some of which continue to disgorge precious capital in the form of extraordinarily large common stock dividends that their earnings do not support. Some are now paying the price. Wachovia (WB) won't likely be the only large bank to cut its dividend in the near future. Fifth Third (FITB), whose common yields 8.10%, could be another. While the high payouts might help some CEOs keep their jobs, they're not sustainable, in my opinion, and increasingly harm banks' capital positions and street credibility.

While Daberko made his narrow escape to a happy Florida retirement, his successor, CEO Peter Raskind, has had his hands full with the aftermath, which has included a stock price collapse, shareholder lawsuits, a 49% cut in the quarterly dividend, and word that the company is pursuing “strategic alternatives.” National City's stock repurchases fell to a meager 190,000 shares in the fourth quarter. The company's Tier 1 ratio (6.53% at year-end) threatens to fall below the 6% minimum regulators require for an institution to be deemed well-capitalized. What else could explain such a public and chaotic sales process?

Press reports have Fifth Third and KeyCorp (KEY) offering take-under bids in proposed deals that would likely result in difficult integrations and, in the end, the dismembering of this 163-year-old institution. A private equity investor or a foreign bank may surprise with a substantial capital infusion, but not without diluting current shareholders as much or more than Washington Mutual’s (WM) shareholders experienced.

There’s value inherent in National City’s franchise, but in today’s market, and in its precarious state, that value will likely be realized only by its acquirer.

Comments

[Titan:]

Dabs needs to go to prison.

2008 Apr 15 08:40 AM

[DSX Lover:]

NCC is selling for .39 cents on Book. Where do you get the 6.53% Tier one capital, if the Bank had 13.4 Billion in Capital over 150 Billion in assets, thats way more than 6.53%, and it will have a huge profit in Q1, because it has a $406 Million profit for 1/3 of its stake in VISA. The other 2/3 of its stake will be unrealized, and is worth more because VISA shares are up. The Buybacks were stupid, but the dividends were not, all these Banks paying high dividends were paying about 50% of earnings, while growing at lower levels, so those dividends were sustainable, as long as the asset quality did not deteriorate. NCC, FITB, WM, C, WB have had horrible risk management, in the other hand, RF, USB have high dividend yields, and asset qualitiy is still excellent for USB, and manageable for RF, I would like to see when CMA reports on Thursday, how are their assets, because after today's reports of USB, and RF, the credit conditions, are manageable by most financial institutions. NCC is worth more than the $7.5 it closed for yesterday, Is is not the same JUNK as WAMU, NCC has a strong franchise, and corporate clients, unlike WAMU who only has mortgages, as earning assets, and horrible credit risk management.

2008 Apr 15 09:03 AM

[Voice of Re...:]

I agree NCC is worth way more than it's current badly battered stock price BECAUSE of it's underlying assets, deposit base and hundreds of location, some in very prime Chicagoland area locations.

I also have to say as a very long time Mid American Federal stock holder I have absolutely no use for NCC's gross mismanagement and will vote the entire board out on their stupid asses. They're lucky they don't face criminal charges for such grossly reckless conduct in not protecting shareholder interest while paying executive millions for running the bank into the ground.

I also take major exception with Townsend comments about MAFB.

Mediocre performance? Yea right over the time I've held the stock a 2 for 1 and if I rember correctly a 3 for 2 stock split and the stock price going from roughly $7 to $43 before the merger was announced and a $14 spike after. Don't you wish other banks did as well.

2008 Apr 15 11:26 AM