National City Corp. Story Unlikely to Have Happy Ending

After a big run up, it is not uncommon for a stock to surrender some of its gains. However, to surrender all of the gains racked up in the past 17 years is a little more dramatic. This has been the story of National City Corporation (NYSE: NCC). The 163 year old bank that employs 32,000 is the latest of big name victims in the well publicized financial/credit/subprime mortgage crisis.

While the financial community is digesting the future of NCC, the stock is trading around prices it has not seen since the early 1990s. A 50% reduction in the company’s dividend rate back to 1997 levels was not enough to preserve NCC’s market value and now outside financing is required to keep things going.

As a resident of Ft. Pierce, Florida, I was a long time (relatively speaking) shareholder of Harbor Federal. Harbor Federal was acquired by NCC in an all stock deal that seemed to make a lot of sense at the time. I have been a first hand viewer of the NCC fall out in a very dramatic and personal way. Financially, I was lucky enough to avert the losses on the past years events, but there were many that were not.

We are talking major changes for people – retirement plans and college funding plans significantly altered. Of course, ups and downs are part of the stock market and sometimes, a dip represents an opportunity to build a position, but unfortunately, for those in NCC via Harbor Federal, it is not going to head back to $38 anytime soon.

First, it is very likely that NCC will secure the necessary funding it is seeking. It seems to be widely known/accepted that NCC is looking for about $4B. We saw Bear Stearns (BSC) get saved by JP Morgan Chase (JPM). We saw Wachovia (WB), Citigroup (C), Washington Mutual (WM), and E*TRADE Bank (ETFC) all get infusions. We even saw grotesquely beaten up Thornburg Mortgage (TMA) get rescued and find access to the necessary liquidity to prevent an even larger fall out. The money is there – now we wait to see what deal comes to the table.

Rumors on the street have abounded that banks like KeyCorp (KEY) or Bank Nova Scotia (BNS) have been vying to fund NCC or outright offer a buyout. I hear many locals talk about NCC getting offered $12-$15 for its franchise. I would certainly like to see people get $15 rather than $8, but I think a deal will be closer in the $5-$8 range. Here is why and here is how I see it unfolding.

1. NCC may be worth $12-$15 or even more, but in their desperate situation and lack of time, they do not have many bargaining chips on the table. Imagine the negotiations:

   NCC: We want $12!
   Suitor: We’ll give you $6
   NCC: We are worth $12
   Suitor: If we don’t give you this $4B now, you are in real trouble – we hold the cards – how about $5.50?
   NCC: $12
   Suitor: $5.
   NCC: Ok, we don’t have a choice. Can we at least keep the roofs green?

2. Of all of the banks that have received emergency financing and deals – Bear Stearns, Countrywide (CFC), Washington Mutual, etc., the deal brought and ultimately recommended by the board has always brought more dilution and a lower price per share to the table. Certainly, this down side may already be getting priced into NCC’s stock price as the market may be expecting a cheap bid. Today’s (April 16) activity is very interesting and perhaps indicative of that. The Dow is up 2%, banks are on fire thanks to financial results and positive sentiment from JPM, and NCC is down 3%. This may be a downward overreaction, but all of the precedents show a deal down below the current market value and it would be foolish to bet against that trend. At the very most, perhaps NCC gets what it is trading for or a small premium.
3. Do you really think a board is going to approve an 80%-100% premium for a distressed bank in these market conditions?

I do not think anyone foresaw the magnitude of this collapse. Perhaps NCC outsmarted themselves with their deal making. From a Harbor Federal perspective, NCC got a steal on a very successful South Florida banking franchise. The $1B deal is worth $230M today – or what Harbor Federal was roughly worth in 2001. For those that have been hit hard by these events, I do hope for a deal with a big premium. Sound logic, however, suggests otherwise.

When the deal is announced (which is not a guarantee), I think there is a 75% chance of a minority interest stake for the $4B and a 25% chance of a full takeover. A full takeover might be preferred by some, but if the deal is done in stock (likely the case), expect those NCC shares that become XYZ (or whatever) to pay out less dividend per share and expect job cuts.

Short and simple, no matter how you slice it, even if NCC is offered $12, this story does not have a happy ending.

Disclosure: None

Comments

[Vij]

Unfortunately, this writer has more access than I am to all the facts and figures. How any website can allow anything like this to be published? What in the 'name of finance sector' is he talking?

[9899]

This sounds like a bitter former Harbor Federal employee and stock holder. I agree that the amount of 401K funds that have been lost is life changing but what do you think this negative article is going to accomplish. I am one of those people that have lost the major portion of his 401K and I am tired of all the negative reports that continue to beat down this stock. Is National City the only financial institution that has had to write down losses? Why not write an article like this about all the other banks that have has similar losses. Given a chance, National City will come back. Just like people, business learn from their mistakes.

[User 179809]

What kind of banker loans money to people without verifying their income or ability to repay the loan? Answer: the bankers at NCC.
Where were the "independent directors"? What were the internal auditors doing? Was the CFO playing golf? While the shareholders have lost thousands and had their income substantially reduced, the former CEO walked away with how many millions for his success in driving a once solid bank right into the ground? Seems to me there has been a serious violation of fiduciary duties by the board and senior officers of NCC.

[tchannon]

Thank you for your comments.

I wrote this article - I never worked for Harbor Federal; I have no inside information; it is purely speculation and observation.

I do however, have second hand knowledge of local people and how much stock they owned at time of buyout (SEC filings, Form 4s, etc. for directors and officers). If these people sold early, good for them and they may have - but from listening to people talk, a lot of people held on to it - shareholders big and small. I used to own the stock for years, but sold on the buyout news as it was no longer a "Ft. Pierce/Local Owned" bank.

NCC will not go away - been around for 163 years. However, I am merely suggesting that if someone is to bail them out, they are not going to do the NCC shareholders any favors. No bank or finance company has received that treatment when struggling in this market. Note the recent deals: BSC, CFC, WM, C, WB, TMA. All got aid - all had to sacrifice significant market/shareholder value to take the aid. CFC even ran up high on takeover talk only to have the deal come to life at a lower price than it ran up to.

I am not aiming to accomplishing anything - merely stating an opinion. I may be wrong, of course, but if anyone is holding out on an NCC buyout at $15, they might be waiting a long time. At least we can all agree that it is not going to be $38 anytime soon, especially after seeing 17 years of gains wiped out in less than a year.

Furthermore, if NCC is to turnaround (which they very well may(they've been through world wars, depression, etc.), more pain will have to come in the form of diluted aid from a 3rd party, job cuts, and/or reduced dividend.

If your take on the situation differs than mine, it may be time to buy more NCC if you expect a higher premium buyout and feel the bank has excellent long-term merits. Both of those scenarios are currently in questionable status, at best.

I encourage and welcome feedback...I'm not here to be right or wrong; just to share an opinion.

And yes, businesses can learn from mistakes and come back stronger; however, it does not mean you get a free pass or become exempt from paying the dues to learn from the mistake.

I have nothing to gain from this and if anything, offering a skeptical viewpoint to those that are loading up thinking $15 is going to happen tomorrow. I hope for their sake that it is the case. I think, however, we can agree that the NCC as we know it today will have to go through some serious changes to get back on track (e.g., buyout, restructure, back to the drawing board, etc.).

In the end, nobody knows, least of all me.

I welcome and enjoy discussion on the events surrounding this deal and many others. For the outsiders, it is all pure speculation and guesswork.

[Voice ofReason]

Oh, it was just "speculation and observation" and here I thought contributors unlike guys like me just commenting on what was said were suppose to offer up facts to back up their observations. Silly me.

No doubt about it NCC screwed up...big time. So did a bunch of other banks that should have known better. As long as anyone can jawbone, here's my opinion and I have a substational position (thousands of shares) in NCC so obviously I'm biased.

Something "good", a bail out of all or a substational portion, cash infusion between 4-5B, something, will happen and be announced by Tuesday at the latest when they are suppose to announce earnnings.

If a outright offer, no it won't be book value, maybe if lucky in the low teens at the high end. I'm just reading the tea leaves... I have no insider information any more than contributors do.

Seems there is considerable interest in NCC from several suitors, (always good) not just one nor is this a forced shotgun marriage ordered by the Federal Reserve like the Bears deal. While shakey NCC isn't about to go belly up.

I, like many don't view myself as a "trader" in fact I've come to hate that term. I'm an INVESTOR. I don't buy and hold, but I don't expect miracles either. NCC and most if the "big" banks this time next year will likely be much higher. But the heck what do I know.

[Rapscallion]

To the previous question, "What kind of banker loans money to people without verifying their income or ability to repay the loan?" The correct answer: Any banker who has an investor to buy that type of loan after closing. Which was almost every banker because there were countless investors who wanted the higher profitability that came with the risk. This wasn't a function of incompetence, greed or deception as much as it was providing a product that was desired by consumers. Every one of the borrowers who signed these agreements was of legal age and if they had legitimate questions about what they were doing they should have gotten assistance. Freedom and capitalism doesn't work well for idiots. A better question is: Who signs a binding financial document without understanding it or knowing they can't afford to pay it back according to the terms therein? Answer: Hundreds of thousands of people who now have curiously developed a victim mentality and want to find some way to avoid responsibility.

[jura]

I'm a National City employee. It is a great place to work, but I think many of us are more than ready for a "shake up". I just hope it won't mean major job losses (at least mine!).

[Voice ofReason]

I have sympathy for Jura and other employees that might get the short end of the stick up and down the banking industry. Especially when the big shots that made the bad decisions likely will walk away with a golden parachute probably worth millions.

As far as banks making loans and getting sloppy with the paperwork and checking the borrower out, a few years ago when prime was around 4% I walked into my local Chase bank more on a whim than anything else to apply for a line of credit. There was a MAFB (now NCC) branch right next store and so I figured what the hell, two offers are better than one. I got approved the next day by both banks for a $250,000 ARM. They didn't even appraise the house and no I didn't show them non do I have any income except for my investments being retired. Not complaining, but seems a bit too easy. The only "requirement"... was a clear title to the house and proof of home owners insurance so they could put on the policy.

[SeenIt]

Jura, I feel for your position. As a former employee I still have many friends and contacts within the bank. They have told me that NCB is systematically downsizing their departments one employee at a time. Some of their best performers are being transferred, put on probation (to avoid payment of incentives), and fired. I have even heard of departments lacking office supplies as their budgets are being cut. It's a catch-22 for employees. If you perform poorly the bank has an excuse to terminate you, thus decreasing payroll expense. If you outperform others (thereby earning significant bonuses and incentives) the bank may want to terminate you as well. Most executives will focus on the short-term issues since they are so crucial. Many NCB employees are updating their resumes in hopes of finding a more stable position. In times of crisis no one is safe.

[DRIP HOLDERWITH NCC]

I HAVE A DRIP THROUGH NATIONAL CITY. I CALLED TO GET INFORMATION ON AN ACCOUNT THAT I HAVE WITH THEM. THEIR VOICE MAIL NOW TELLS YOU TO WRITE TO TEH COMPANY. THEY HAVE NO LIVE PERSON THERE. I SUSPECT NATIONAL CITY IS ABOUT TO GO DOWN THE TUBES.

I AM GETTING MY STOCK OUT OF THAT PLACE TODAY.

[vodop09798]

Has everyone forgotten the bundle of Visa stock that NCC has? Has everyone checked the price of that Visa stock lately? Don't tell me another bank wouldn't love to have that cherry in their fruit bowl even if they have to stomach a few prunes to get it.

[65897]

Last time I checked, An infusion of 4 billion into a company that has a market cap of 5 billion would not result in a minority interest. If someone is going to offer up 4 billion for a stake of the company, there won't be any talk of "infusion," talk will be of a buyout.

[65897]

Hey User 179809, you have obviously never been an Internal Auditor at a bank, or any other Corporation for that matter. Internal Auditor's don't set the business model for the company, such as what the underwriting guidelines are for a loan in your example, that is done by the Executive Management - Internal Audit's role is to audit the policies and procedures set in place by Management. You should try to have, at the least, an elementary understanding of a Corporate job title before you make unsubstantiated claims such as this one.

[hunter53]

The problem with National City and a lot of other public companies, they manage their companies to maximize quarterly profits to meet their following analysts' opinion of earnings and success just breeds more pressure to perform and with this pressure comes more agressive methods of managing your business. Add in the fact that the short term fees justified the risks, heck, what risks, home prices have never went down. There is no risk to make a "ninja" to someone who will be bailed out by the sheer appreciation in the asset. (ninja - no income - no job applicant).

[Cher]

Believe me, I am astounded. The local branch in my neighborhood which is a small suburb of Milwaukee WI started out as a local Building & Loan (St Francis Building & Loan) then Savings & Loan, then Savings Bank when it was turned over to stock holders (St Francis Savings Bank, FSB). We were getting a fair price back then, must have in the early 90's about $10 a share, the stock split and the price doubled. When they sold to MidAmerica Bank in Chicago in 2003-04, the price was around $46 a share. MidAmerica sold to National City and the name officially changed in Feb 08. I was an employee of SFB until 2004 when MidAmerica offically took over. Thank God I took by stock and re-invested. Where would I be now????

[Cher]

Believe me Jura, I've been there when SFB sold to MidAmerica Bank. I was told very few would lose their job. I was told my servicing job was secure until about 2 months before the "official name change". I was out, however, when a window closes, another opens. I now work for Bank of America Business Capital and making more money. I don't want to see any of you lose your jobs, as I have a small investment in NCC. I know all the neighborhood branch employees and don't want to see them lose their jobs either.


On Apr 17 09:46 PM jura wrote:

> I'm a National City employee. It is a great place to work, but I
> think many of us are more than ready for a "shake up". I just hope
> it won't mean major job losses (at least mine!).

[jura]

Cher, I hope your investment is doing well (I am a Retail Investment Officer w/NCity)!

I know that as soon as we get information - which is supposed to come by Tuesday when our earnings are reported - I have a list of customers that will get a personal phone call from me...whatever that information will be.

In the event that an acquisition takes place, I know that my customers will have alot of questions. What will happen to my investment acct, if anything? What name will be on the statements? Will you still be my advisor? Should I transfer my account elsewhere? Are they keeping the investment division open?

Hmmmm....same questions I have. For a week now, we've been waiting for an announcement that could be "any day"... Hopefully we'll know by Tuesday.

I cannot believe that the former CEO can't have some sort of accountability/liabili... Was he the only one responsible for the bad decisions that were made? I sure hope not.

Accountability, Friendliness, Respect - National City's motto.... Will the individuals responsible for this mess be held accountable?

Hmmmm......

[pcpfinancial]

Please keep in mind that when a mortgage goes into default (mainly past due for 90 days) THE ENTIRE MORTGAGE MUST BE WRITTEN OFF!! This only applies to residential mortgages, not commercial. So in effect, these banks, like NCC, WB, C, UBS, BofA, WAMU, WFC, Chase, are writing off 100% of these mortgages. When the mortgage goes bad, the lien holder has the right to foreclose. Some value will be realized when the home is finally sold; 30, 40, 50, 60%. A lot of these write downs will come back as gains on their income statement.

It is my opinion that huge declines in one particular segment/industry happens once in a blue moon. This isn't steel industry. This isn’t the manufacturing sector. This isn't K-Mart, LTV Steel, Enron, or any other public company that could/would/has fail/failed. People will always be working. The need for a financial institution will always be there, whether a deposit, credit card, or loan. The institutions aren’t going to China.

Smart people are buying in now. Buy and shut the computer down. Shut the TV off; go read a book, play with your kids or grandchildren. The market is there for the long term! If you want a quick fix, go to Vegas and place 1/2 of what you own on “9” and the other half on “red.” Again, this is my opinion. I am just long on financials.

This to shall pass.

[Clyde]

Wake up people. NatCity has $27b in HELOCs and subprime mortgages that need writedowns, they have only taken a $400m haircut so far. Know it hurts, but you could have followed the growth of these portfolios from SEC filings since real estate topped in 2005, it's not rocket science. And anyone that could see the trouble coming in Florida, not sure why you were surprised. Could be the largest federal receivership in US history if the board does not take one of these lowball offers. Can't say enough about a management team that buys back its stock, raises its dividend, then lowers its dividend in the same year.

[Voice ofReason]

You got a mighty fine crystal ball there Clyde, where did you buy it?
To me, it seems to be on the fritz, maybe you cracked it?

Reality Check:

NCC in the quarter set to be reported 4/22 has a windfall profit from a 40% sales of it's Vista IPO worth $530 million. That represents roughly 60% of what it still holds in Vista stock. That asset alone is why NCC has several suitors. It's a big juicy plum. Other banks would kill to have something like 600+ million in Vista stock.

Also it has a much sought after Wealth Management division.

It has 1400 locations with about 100B in customer deposits.

It's recent purchase of MAFB is another plum in the Chicago area, mostly in well to do Western and Southwestern surburbs. No serious subprime worries there.

It also has been around a long time predating the Civil War. It has weathered a lot of bad times, including three major wars and many stock market crashes and housing slumps.

Does it have problems? Sure. What bank doesn't these days? Few. It is obvious the constant screaming from bears showing a very transparent wish to drive its stock price lower.

Yes, as I've said in several threads I'm long NCC. Shame all the people throwing cold water on NCC and other financials don't have the ball to say up front their short.

[currentemployeeCleveland]

I was among the first major downside which National City named 'Choice/ No Choice' and had 20 years service with the bank. Unfortunately I fell into the 'no choice' cagagorey because I was 30 days short for the early retirement offer ('choice'). I was recently hired back as a part time employee making just a fracton of what I made in the past. NC had a program named 'Vison' made by a previous CEO, the Vison has turned into a nightmare. I left money in my shares of stock and have been hammered by loss in the value of the stock. Normally I would have taken advantage of buy low and sell high. I do not have any faith left in the bank and will see just how much my losses with total up to. My belief is that a small bank of 25 years ago grew up to be a giant too fast, found that going from a $6 Billion corporation to a 200 plus billion happen to suddenly and the bank unfortunately lost its small bank values and a spending spree that led to its current condition. Too much too fast and many will pay the price for its collapse.

[patrickbrown]

greed greed greed They should all pay back their giant bonases of the past 6 years, be banded from working in the banking industry.

[Clyde]

Voice of reason, let's see if the stock closes below $8/share tomorrow. The bank is worth what other people will pay for it, and that is less than today's stock price, no matter how many assets it has.

I feel sorry for you if you continue to be long NCC. That means you have taken some significant losses. They have to take those writedowns eventually, perhaps as early as Tuesday.

[Voice ofReason]

Seems Clyde needs an investing basics lesson. Realized Losses or gains depends on you're costs. Maybe you want to write that down so you don't forget.

As I've said before I did't buy NCC directly, rather I was a long term MAFB investor. I got in just after their IPO many years ago. NCC bought MAFB last year. That's how I came to hold NCC.

So from a cost basis because of prior splits in MAFB my per share costs are under $2 a share meaning even at NCC's current depressed prices I'm still showing a substantial profit.

For all the goom and doom spreaders that put a negative spin on everything thicker than farmers spreading a certain brown substance on their fields about this time of year, you should understand at some point writedowns become writeups.

My guess... when we turn the corner many financials will stop writing down to market and revense the process as the excess home inventory starts to go away. It is a cycle that has repeated many times. I'm willing to wait. SMART investors are also patient. My goldern rule is I always buy low. I don't look at market downturns as bad, rather view them as opportunties to add to your positions. So I don't care what a stock closes at tomorrow or next week or next month even. I'm more concerned where it might be a year or two down the road. Accordingly buying financials at their current depressed values may be a golden opportuntity for those that don't panic everytime a stock retreats.