Nat City Posts Loss, Raising $7B in Offering

Updated from 2:20 p.m. EDT

National City (NCC Quote) said Monday it no longer is considering a merger and instead has raised $7 billion in equity and plans to drastically cut its quarterly dividend to strengthen depleted capital levels.

National City was the latest in a string of major U.S. banks to report a first-quarter loss due to the fizzling housing market and say it has raised billions to shore up capital levels. The Cleveland-based bank will issue the equivalent of 1.4 billion shares of new stock for the cash infusion, thereby depleting existing shareholders' stake, and will lower its quarterly dividend to a penny from 21 cents.

Investors reacted swiftly, taking back a quarter of National City's market value in recent trading. Its shares plunged $2.22, or 26.7%, to $6.11.

Rumors recently had circulated that KeyCorp(KEY Quote), Fifth Third(FITB Quote) and Canada's Bank of Nova Scotia had each considered a pairing with National City. Without citing specifics, CEO Peter Raskind responded to conference call questions about a buyout by saying that National City "did thoroughly explore a wide range of alternatives" but found the equity offering and dividend cut to be the best decision.

Private-equity firm Corsair Capital is contributing $985 million, with the remaining $6.02 billion coming from other investors, including some of National City's biggest institutional shareholders. In return, the bank will appoint the firm's vice chairman, Richard Thornburgh, as a director. Another independent director will also be named.

The company will issue 126.2 million common shares at $5 apiece and 63,690 preferred shares at $100,000 apiece. Each share of preferred stock will automatically convert into 20,000 common shares.

National City stock has lost about 80 percent of its value over the past year as the company grappled with exposure to subprime mortgages and its decision to expand into Florida's housing market just before it took a turn for the worse.

The company said Monday it lost $171 million, or 27 cents per share, last quarter, compared with earnings of $319 million, or 50 cents per share, a year earlier. Analysts polled by Thomson Financial expected profits of 31 cents per share, on average. Those estimates typically exclude special items.

The loss came as National City boosted its provision for loan losses to $1.4 billion, which was partially offset by redeeming stock from Visa's (V Quote) initial public offering. The company's net interest income -- the difference between the interest it receives and what it pays out -- fell about 4% to $1.1 billion. Net interest margin dropped to 3.18% from 3.69%.

The latest results come on the heels of a fourth-quarter loss of $333 million, or 53 cents per share, due to the housing crisis. Raskind called it "an unacceptable record" and "not anything we're remotely pleased about or proud about."

Raskind characterized the equity offering and dividend cut as painful but necessary decisions to stabilize operations and protect its credit ratings. "We can now go back to playing offense instead of just playing defense," he said.

Both S&P and Fitch affirmed National City's investment-grade ratings after its report, but each maintained a negative outlook.

Investors were clearly not impressed. One emailed to ask the executives whether there wasn't a "more palatable alternative" to reducing existing shareholders' stake in the company. Others wanted to know whether the board was planning to make any top-level management changes and whether it would have a stronger level of oversight going forward.

Management and the board decided that issuing new stock was in the best long-term interest of shareholders, Raskind said. He added that the board, with its two new directors, will be "exercising all of its obligations in regards to oversight."