National City Corp.'s decade-long run of heavy mortgage lending that included risky subprime loans has placed the bank in the takeover sights of larger and stronger rivals.
Pittsburgh's second-largest bank is believed to be discussing a merger with several banks, including PNC Financial Services Group, the area's biggest, although spokespeople for the institutions refused to comment.
National City spokeswoman Kristen Baird Adams said the bank is "strong, stable and well-capitalized."
Analysts said regulators, concerned about weakened banks, likely would allow a PNC tie-up, despite the dominant Pittsburgh-market concentration it would produce.
A sale of Cleveland-based National City, the nation's 10th-largest bank, would continue a string of departures of giant U.S. banks.
JPMorgan Chase recently bought Washington Mutual, the nation's biggest savings institution. And it appears Wachovia Bank will be acquired by Wells Fargo after Citicorp said Thursday it would not pursue a competing bid.
Also talking merger with National City is Toronto-based Bank of Nova Scotia, the Wall Street Journal reported yesterday. Other reports included Banco Santander, Spain's biggest bank, as a possible suitor.
"At this point, a sale has to be considered a pretty realistic possibility. The decline of the stock price itself puts pressure on management to sell," said Sean Ryan, an industry analyst for Sterne Agee, New York.
Stock in the struggling bank dropped about 85 percent this year. National City slashed its dividend to one penny a share in April, when it raised $7 billion in capital to shore up its balance sheet. Shares of the bank closed at $2.15 yesterday, down 8 cents.
National City, which employs about 2,000 people in this region, posted a $1.76 billion loss for the spring quarter. Analysts expect more losses when the bank posts summer-quarter results in two weeks and another loss after the fall quarter.
"Do they need to be acquired? No," said Frank Barkocy, research director of Mendon Capital Advisors, New York. "They could survive on their own, unless we had a severe economic recession. But obviously, they probably could be better with a strong partner."
At yesterday's closing price, National City's total stock is worth about $4.8 billion. PNC spent more, $6 billion, to buy Mercantile Bancshares, Baltimore, in March 2007.
PNC spokesman Fred Solomon said PNC doesn't comment on rumors or speculation. Bank of Nova Scotia spokespeople did not return phone calls.
National City and PNC branches overlap mainly in three metropolitan markets, according to June 30 data from the Federal Deposit Insurance Corp.
In Pittsburgh, PNC ranks No. 1 with 96 branches and 37.1 percent of deposits, and National City has 158 branches and 15.5 percent of deposits. In Louisville, National City is No. 1 with 64 branches and 18.8 percent of deposits; PNC (No. 3) has 49 branches and 10 percent of deposits. In Cincinnati, National City (No. 3) has 65 branches and 5.2 percent of deposits, and PNC (No. 4) has 52 branches and 4.2 percent of deposits.
National City disclosed in January it hired Goldman Sachs Group to serve as "capital adviser," which usually signals a company might be willing to sell.
The bank has been subject to merger speculation before. JPMorgan Chase was rumored to be looking at National City earlier this year. The New York bank bought Washington Mutual in mid-September, a deal brokered by federal regulators.
"Regulators' concerns about antitrust issues have moved down a notch to preserve confidence in the overall system, particularly with large institutions," said Ryan.
Analysts note National City made real repairs this year. It raised the $7 billion in capital in April, which is now "well above its peers," said an Oppenheimer & Co. analysis. The bank has a "strong base" of deposits and "loan quality much healthier than WaMu," it said.
Analysts say the bank found itself in play because it was weakened by its concentration in home mortgage lending -- including risky subprime loans -- during the worst housing slump in more than 25 years.
"It was their excesses in the mortgage area. They were so focused on growing residential real estate that once things started to collapse, it was like a string of dominos," said Barkocy. Defaults and delinquencies started rising in early 2007, he said.
National City entered subprime lending in 1995 when it acquired Integra Financial, then one of Pittsburgh's largest banks. Its portfolio of subprime loans equaled $776 million in 1997.
The risky loans jumped to $3.9 billion by mid-2000. The bank stopped writing subprime loans in early 2001 but continued to service them. The portfolio grew to $5.5 billion by late 2000 when it added those originated by an affiliate, First Franklin in San Jose, Calif.
National City took a $120 million loan loss in fourth quarter 2006, and a $200 million loan loss a year later, when it set aside $700 million to cover bad loans.
"You had the First Franklin, subprime lending, an overconcentration in the real estate sector and a series of missteps, so that as the economy started to turn down, it caught them with an overexposure in these areas," said Barkocy.
"Some of their (loan) underwriting standards got a little lax, and that led to problems as well," he said.
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