Smith: Not good news for National City Bank

Dear Scott: I've been banking with National City Bank for some time now, but I hear they are having trouble. Can you tell me what's going on? I also noted that they have been offering higher CD rates. Any connection?

-- A.R., via the Internet

Dear A.R.: Bingo! That's what banks typically do when they can't raise capital because no one will lend to them. That all changed after you sent your e-mail though as National City (NCC) announced last Monday an infusion of $8 billion in equity capital from a variety of sources, including current institutional shareholders.

It couldn't have come at a better time. Cleveland-based National City got itself in deep doo-doo by engaging in high-risk real estate loans before the sub-prime mess caused capital markets to collapse.

In the most recent quarter, NCC lost $171 million, or 27 cents per share. The company has seen its stock price plummet 80 percent from a high of $38.32 to its current price of around $6. On Jan. 2, National City cut its dividend by 49 percent. Then recently they cut it again from 21 cents per share to a penny a share. It also closed its wholesale mortgage division and eliminated 3,400 jobs.

National City operates 1,400 branches spread mostly across Illinois (including a number in Lake County), Ohio, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, Wisconsin and Florida.

In January, CEO Peter Raskind (who has held the job just nine months) stated that NCC remained fundamentally strong and well capitalized and expected to meet its challenges. Now that melodic tune has turned to something resembling a dying calf in a hail storm, as Raskind is now admitting that the bank is "exploring strategic alliances."

Most often mentioned as a suitor is Key Corp. (KEY), which is also based in Ohio. Another name that has surfaced is Wells Fargo bank (WFC), although less prominently. The smart money says Key Corp. would dismantle National City and keep the most valuable assets. Only time will tell if there is a deal.

Whether the $7 billion bailout has saved National City or just bought the bank time is anyone's guess. As for share price, my sympathies to those who put $10,000 into NCC five years ago and now have $2,000 to show for it. And even at these depressed levels, I would not be a buyer. The share price is going to do one of three things. Go up...go down...or stay the same. My instincts tell me you can eliminate the first one for some time to come. Besides, I don't buy "penny" stocks, and this one is almost there.

U. Scott Smith is with Wealth Management Services at Waukegan Savings Bank. Write him at 1324 Golf Road, Waukegan, IL 60087

or usmith@moneyconcepts.com