National City Corp., which kept $7 billion of nonprime loans when it sold its First Franklin Financial Corp. unit in December, said declining gain-on-sale margins hurt the company's first-quarter performance. Results, released Monday, also were blurred by the integration of two deals the Cleveland company completed in Florida.

Nat City warned on March 14 that low bids had forced it to move $1.6 billion of nonprime loans to its portfolio from held-for-sale status. In an interview Monday, chairman and chief executive David A. Daberko said he expects $600 million to $700 million of the retained loans to run off each quarter. Related Links Complete 1Q 2007 Earnings Coverage
Nat City's 1Q Earnings Press Release
Nat City's 1Q Earnings Webcast
"Some of the enormous profit we made in First Franklin over the years is being given back here in the quarter," he said. (Nat City bought First Franklin in 1999 for $266 million and sold it for $1.3 billion to Merrill Lynch & Co. Inc.)

Moving the $1.6 billion of nonprime loans into its portfolio pushed net chargeoffs in the quarter to $147 million, or 14.8% above the fourth-quarter level and 21.5% above a year earlier; almost the entire increase is attributed to its nonconforming mortgage book.

Nat City remains committed to the mortgage business, according to president Peter E. Raskind.

"Is our approach going to be any different, aside from the sale of First Franklin? I think not," he said in an interview Monday. "It's a cyclical business, always has been, and this is the unpleasant part of the cycle."

The Cleveland company earned $319 million, or 50 cents a share, in the quarter, 11 cents below the average of 21 analysts' estimates compiled by Thomson Financial. Nat City earned $842 million, or $1.36 a share, in the fourth quarter and earned $459 million, or 74 cents a share, a year earlier.

Comparisons with prior quarters were made difficult by the First Franklin sale and by the purchases of Harbor Florida Bancshares Inc. in Fort Pierce in December and Fidelity Bankshares Inc. of West Palm Beach, Fla., in January.

Mr. Daberko said Nat City continues to look for targets in Florida as well as in St. Louis, Cincinnati, and Chicago. It has 67 branches in Chicago, and Mr. Daberko said he is aiming for 125.

"We are quite interested in getting to that 125-or-more level and continue to look for opportunities to get there," he said.

After selling First Franklin, Nat City changed the way it reports line-of-business results. The old National City consumer and small-business financial services line item has become retail banking; wholesale banking was split into regional and national commercial banking; and National City Mortgage has become mortgage banking and includes the national home equity business.

Nat City's retail banking business contributed $173 million, or 46%, of first-quarter earnings. The retail results improved 30% from the fourth quarter because of the Florida deals but declined 2.2% from a year earlier.

Regional commercial banking recorded net income of $160 million, up 29% from the fourth quarter and 13.5% from a year earlier. National commercial banking earned $58 million in the quarter, down 4.9% from the fourth quarter and 12.1% from a year earlier.

The asset management division, which was left unchanged in the financial reporting shuffle, earned $26 million, or 24% more than in the fourth quarter and 18% more than a year earlier. Mr. Daberko said on a conference call with analysts Monday that Nat City might consider selling the smaller institutional part of its asset management business "if our growth plan that we put in place a couple of years ago didn't work." However, he said in answer to an analyst, Nat City has no plan to divest the personal side of that business.

Though Nat City's management said it expects better results this year, Keith Horowitz, an analyst at Citigroup Global Markets Inc., trimmed his full-year earnings estimate by 15 cents a share, and Oppenheimer & Co. Inc.'s Terry J. McEvoy cut his full-year estimate by 40 cents.

With its Florida purchases, analyst Richard X. Bove of Punk, Ziegel & Co. wrote in a research note, Nat City should look "more like a retail bank" as it grows in that state.

At the end of the quarter, Nat City had $99.6 billion of loans, up 4.3% from the fourth quarter but off 12.9% from a year earlier, reflecting the company's exit from indirect auto lending, among other things.

Nat City bought back 55 million shares in the first quarter and another 20 million in April. Chief financial officer Jeffrey D. Kelly said on the conference call that he expects the share repurchases to continue throughout the year. The board on April 24 authorized the company to buy back up to 40 million shares.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.