National City Signals Worst Is Over for Loan Losses

National City, the ninth-largest U.S. bank, said Monday it is reserving $700 million for fourth-quarter loan losses, but indicated the worst may be over.

National City said that at the end of November the balance of the loans in its warehouse were deemed to be readily salable and no additional losses "of significance" were expected.

Analysts such as Goldman Sach's Lori Appelbaum said the announcement had led them to believe that National City's loans had been sufficiently marked down. But Oppenheimer's Terry McEvoy said that because of the drop in National City's third and expected fourth-quarter earnings, the bank may be forced to cut its dividend.

In afternoon trading, National City's shares were up 13 cents at $16.75 on the New York Stock Exchange.

The bank said the credit quality of its commercial and consumer portfolios, including direct home equity loans, remained satisfactory, but runoff portfolios of non-prime mortgages - among others - continue to have "elevated risk."

National City said home equity loans and non-prime mortgages moved to its balance sheet from two current and former units during the third quarter deteriorated beyond the $361 million it announced when its Sept. 30 loan loss provision was established.

"Risk continue(s) to be in the run-off portfolios of First Franklin non-prime mortgages," the bank said in its filing. Non-prime mortgages were often given to homeowners with poor credit.

Also hurting the balance sheet was a portfolio of home equity loans originated by a stand-alone broker network that was merged into National City's mortgage unit in August.

National City sold its First Franklin Financial subprime unit to Merrill Lynch last December, for $1.3 billion, but kept $10 billion of loans and is winding them down.

Thus far, major banks including Capital One and Bank of America have announced more than $50 billion of write-downs and losses.


The company also said in its filing with the Securities and Exchange Commission that its mortgage business "continues to be under stress." It said charges of about $200 million were incurred in October and November.

Loan and deposit growth remain steady in its retail and corporate banking unit, while net interest income is likely to be flat to slightly down for the fourth quarter relative to the third, the bank said in the filing. In the third quarter, National City reported net interest income of $1.1 billion.

Cleveland-based National City, which operates mainly in the Midwest states, as well as in Florida, has struggled with losses related to mortgages. It has said it is eliminating 2,500 jobs, 1,700 of them in mortgage banking.

Bank of America is cutting 3,000 jobs, many of them in corporate and investment banking, while Capital One Financial is eliminating 1,900 jobs. Citigroup, the largest U.S. bank by assets, plans to cut 17,000 jobs and is facing write-downs of as much as $11 billion from subprime exposure.