BANKS

Takeover by PNC Heralds Fall of a Cleveland Institution

By Michael A. Fletcher
Washington Post Staff Writer
Saturday, October 25, 2008

CLEVELAND -- This city's biggest bank and a bedrock institution decided it faced a choice a decade ago: Find a way to grow or risk takeover. National City chose growth, a path that ended yesterday when it agreed to sell itself to Pittsburgh's PNC.

When it abandoned the conservative philosophy that had sustained it through the Civil War and the Great Depression and expanded by wading into the subprime mortgage market, National City was a solid company, its shares selling in the $30 range. Yesterday, PNC Financial Services Group agreed to buy the bank for $5.2 billion in PNC stock, paying $2.23 per National City share, and $384 million in cash.

Cleveland is still home to another large regional lender, KeyCorp, but the loss of one such venerable institution was a blow to the city and is emblematic of the way the financial crisis is rippling through communities. Cleveland's prospects had soared with property values during the mortgage boom earlier this decade, then collapsed in the subprime meltdown.

Last year alone, 8,000 homes went into foreclosure in the city, whose population has shrunk below 450,000. With tax collections shriveling and a recession looming, the city is in its worst shape in years.

Mayor Frank G. Jackson (D) likened the impending departure of National City, with more than 7,000 employees in the region, to the loss of a steel mill or other major employer, as well as a stalwart corporate citizen that has been engaged in almost every philanthropic endeavor in the city.

"It's not good news for Cleveland," he said yesterday. "However, it is not news that we did not think may happen."

When National City was trying to figure out how to expand in the mid-1990s, Cleveland was dormant, its population sliding and its vital industries contracting. Banks were reluctant lenders, and in many neighborhoods, it was nearly impossible to get a mortgage.

At the time, the mortgage business accounted for only 5 percent of the bank's profit. All of that changed when National City decided to turbocharge its earnings by going deeper into the riskier parts of the mortgage business. The bank began working more closely with mortgage brokers to bring in more business from faster-growing parts of the country. In 1999, it bought the California-based subprime lender First Franklin. By 2003, the bank was the nation's sixth-largest mortgage lender, and home loans accounted for about half of its $2.1 billion in profit.

In Cleveland's old neighborhoods, property values began to soar. Wood-frame houses built nearly a century ago were fetching $70,000, $80,000 and even $90,000 -- multiples of their previous peaks. Tax revenue accelerated, punctuating Cleveland's claim as a comeback city. National City got in on what turned out to be a national boom, as it rapidly expanded its mortgage business into the fast-growing Sun Belt and ventured deeply into the subprime lending market. For a time, the strategy was wildly profitable, as the bank reported profit of more than $13 billion from 2000 to 2006.

And then the boom fizzled, leaving both the bank and its home town faltering. Overall, nearly 10 percent of the city's properties have gone into foreclosure.

National City has lost more than 80 percent of its market value this year. On Tuesday, chief executive Peter E. Raskind said 4,000 positions would be eliminated from its overall workforce of 29,000 over the next three years. The bank slashed 3,400 jobs a year earlier.

The cuts were announced as the bank posted a third-quarter loss of $729 million -- its fifth consecutive quarterly decline -- and executives set aside precious capital to cushion it against expected losses from its bulging portfolio of toxic loans.


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