October 28, 2008 – 2:50 pm

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 paved their way with subprime trespasses.

A regional bank in business since 1845, National City came to tower over Cleveland’s business, political and social skyline. During the credit bubble, it became the 11th largest bank by deposits in the US. But then the bubble burst in the summer of 2007. Since then, National City has lost more than $3B, taken another billion in write-downs and watched level 3 assets swell to over $3B. The bank’s market cap is a fraction of what it once was and its share price has fallen nearly 90 percent this year.

National City, once among the nation’s top 10 subprime lenders, joins Washington Mutual and Wachovia in submitting to takeovers after losses tied to failed home loans. PNC is still profitable.

For National City, the end began in 1999, when it bought subprime specialist First Franklin from Bank of America. By the time it sold the First Franklin to Merrill Lynch for $1.3B, First Franklin accounted for a quarter of National City’s mortgage volume. Merrill refused to take an additional $10B of loans because they were deemed too risky for subprime. So the toxic assets festered on National City’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). In 1999 National City bought the original sin of subprime originators: First Franklin Financial.

But it would take nearly a decade for the acrid scent of First Franklin to blow back into the air, and investors who could see only rising profit margins and rising share prices turned a blind eye to the ever-expanding credit bubble. No one wanted to admit the bubble would end some day.

In the first sign of real trouble at National City, the bank said its home equity division, with 450 employees and $1B a month in loan revenue, would stop offering second mortgages through brokers. The bank claimed the loans, being used as down payments, are too risky. It was the first sign of real trouble at the bank, and other lenders like American Home Mortgage Investment, Countrywide Financial and Washington Mutual, are already in distress.

But as National City continued to swim in waters roiled by the credit crisis, it was dragged into the descending spiral of disasters now threatening all banks: the earnings massacres, dividend cuts, layoffs, capital raising events, loan loss reserve buildups and credit write-downs.  Then the whole house of cards came crashing down four days into September, when the stock market crashed more than 700 points in a single day. Long-ailing Washington Mutual and Wachovia finally failed, imploding National City’s share prices more than 60 percent in tandem. So sudden was the fall that by the time management looked for a deal, the banks rating was nearly junk.

Several suitors came along, including US Banc Corp, but in the end the US government pushed National City to sell to PNC.

At about 11 in the morning, 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. to bless the deal, and Mr. Rohr told Mr. Raskind that PNC was willing to pay about $2.25 a share. Starting around 8 that evening, Messrs. Rohr and Raskind sat down 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 in a Cleveland hotel room ended the 163 year history of a bank, an employer and supporter of charities and non-profits. National City imploded before regulators could get to the bar for a toast.

The 11th largest bank did not do business for 163 years in a Cleveland vacuum, nor will Cleveland be void of loss or repercussions from the bank’s implosion. The losses will not show themselves on the balance sheet because they are the assets for which there are no financial metrics: the goodwill cobblestones that pave the road to hell.

National City’s sale is churning stomachs at charities and nonprofits across its nine-state market.

The bank is a philanthropic force, doling out an average $20M to hundreds of good causes every year, from the local chapter of the American Red Cross to the City Club of Cleveland. National City employees contributed $3M of the $43M raised in the area’s last United Way charity drive 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. He 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.

Uncertainty does not show itself on a balance sheet. To the city of Cleveland, National City was a home bank. Whether Pittsburgh-based PNC will attempt to fill the void, that’s another uncertainty.

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