Nat City Statement Soothes Street

The bank said the recent disclosure of federal scrutiny stemmed from problems that existed before it raised capital.
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Shares of

National City


surged more than 10% early Tuesday after the troubled bank said federal scrutiny of its activities stemmed from conditions that existed before it raised capital in April.

The Cleveland-based company said in a statement that it had entered a so-called Memoranda of Understanding with the

Federal Reserve

on April 29 and with the Office of the Comptroller of the Currency on May 5. Nat City's comments come four days after

The Wall Street Journal

reported that the

company had entered into an MOU

, a type of agreement which typically is not disclosed to the public.

"Generally, the relationship between a bank and its regulators is characterized by confidentiality," Nat City Chairman and CEO Peter Raskind said. "Unfortunately, however, someone has breached the confidential relationship between National City and our regulators. Given the potential concerns and misunderstandings that this breach could cause for our many stakeholders, we can confirm that National City entered into Memoranda of Understanding."

"These MOUs address the issues of capital management, risk management, asset quality and liquidity management which have already been publicly disclosed and discussed," Raskind added. "There have been no material developments since our capital raise, and the MOUs focus on issues that existed at the time of the capital raise. Further, the MOUs have no material impact on our ability to serve our customers and communities."

The company will not release "actual language" from within the MOU documents, Raskind said. Still, the news appeared to calm investors who may have worried that the MOUs indicated new problems that have emerged since the bank in April announced

it would raise $7 billion

in capital.

"The recently severe pressure on the stock has been driven by concerns that the

MOUs were the result of developments after the capital raise," writes Kevin St. Pierre, an analyst at Sanford Bernstein, in a note to clients. "We expect the company's statement should calm those concerns."

Nat City "is now a well-capitalized bank trading well below a reasonable estimate of pro-forma tangible book value," he adds.

Raskind said following the capital injection, the company now has the highest Tier 1 capital ratio among the largest U.S. banks and has solid investment-grade debt ratings.

The bank stands "ready to serve our customers and communities with confidence, and we are determined to rebuild value for our stockholders," he said.

Nat City has been hobbled by the housing and mortgage downturn after getting into the business of higher-return, yet risky subprime mortgages, as well as its decision to expand into Florida. The company has said that it is looking to shed problem mortgages.

Nat City was not alone in its decision to recapitalize.

Washington Mutual

(WM) - Get Report


Wachovia Bank

(WB) - Get Report



(C) - Get Report

were among a litany of other banks to also raise money after poor first quarters. Nat City was also rumored to be looking to sell itself, before the capital injection.

Shares of Nat City recently were up 7.2% to $4.79, after hitting a high of $4.95 Tuesday.

The bank's stock has performed dismally in recent weeks. Shares shed nearly half their value since April. The stock fell an additional 9.6% on Friday after the


article was published.