National City posts $1.76B loss in second quarter

Bank earnings suffer as it sets aside $1.59 billion to cover loan losses.

NEW YORK (AP) — Regional bank National City Corp. on Thursday reported a $1.76 billion loss for the second quarter, as mortgage loans soured and it took a big charge related to previous acquisitions.

Over the past year, mortgages have increasingly defaulted, forcing banks to set aside more cash to cover current and future losses. National City was no exception as its geographic footprint — mainly the Midwest and Florida — has been among the hardest hit by the downturn in the housing cycle.

For the quarter ending June 30, the bank reported a loss of $1.76 billion, or $2.45 per share, compared with a profit of $347 million, or 60 cents per share, in the second quarter of 2007.

The results included a $1.1 billion goodwill impairment charge related to previous acquisitions. Goodwill typically reflects the value of an intangible asset such as a brand name.

Excluding the goodwill charge, the loss was 94 cents per share, according to a National City spokeswoman.

That compares with a loss of 26 cents per share, on average, expected by analysts polled by Thomson Financial. Analysts typically exclude one-time charges from their estimates.

The bank increased its provision for loan losses, more than tenfold, to $1.59 billion, from $145 million last year. Loan-loss provisions cover both current-quarter charge-offs and additional reserves held to cover future losses. Charge-offs are loans written off as not being repaid.

The Cleveland-based bank said the larger provision reflects additional loss reserves for loans secured by residential real estate. The reserves include a $478 million supplemental reserve on loan holdings it is liquidating, including construction loans to individuals, and broker-sourced nonprime mortgage and home equity loans.

Analysts widely agreed the provision was higher than expected, and one of the primary causes for the quarterly loss.

“Reported earnings per share was much worse than we expected, due to a loan-loss provision that was more than three times higher than we anticipated, a steep decline in net interest margin and much higher nonperforming assets and net charge-offs in the quarter,” RBC Capital Markets analyst Gerard Cassidy wrote in a research note.

Net charge-offs shot up to $740 million, more than seven times the $98 million in the 2007 quarter. National City said $527 million of the charge-offs reflected consumer loans associated with products or origination channels, like broker-sourced subprime mortgage loans and construction loans to individuals, that it no longer handles.

Subprime mortgages are loans given to customers with poor credit history.

Nonperforming assets more than tripled to $3.13 billion, from $848 million last year.

Goldman Sachs Group Inc. analyst Brian Foran said the quarterly results were worse than anticipated, but the bank has enough capital to handle the problems.

“The company is absorbing big credit losses with more to come, but still seems to have enough capital,” Foran wrote in a research note.

Citigroup analyst Keith Horowitz said the bank’s strong capital position will allow it to handle the downturn as well, noting that the company’s shares are trading “well below” intrinsic value. In a research note, Horowitz reiterated a “Buy” rating on the stock despite the quarterly results.

Shares of National City rose 1 cent to $4.72 in afternoon trading.