Ghost of First Franklin Helps Swing National City to Q4 Loss
National City Corporation may have sold off its subprime mortgage unit, First Franklin Financial, but the lingering effects of First Franklin's loan portfolio -- as well as weaknesses in home equity loans -- are proving costly for the Ohio-based bank. National City posted a quarterly loss of $333 million on Tuesday, or $.53 per diluted share, citing mortgage-related concerns. The Q4 loss compares to net income of $842 million, or $1.36 per share, one year earlier. Mortgage banking operations lost $445 million, National City said, swamping gains in retail banking and steady performance in commercial banking. A $691 million provision for mortgage loan losses contributed to the quarter's poor results, while National City also took a $181 charge to goodwill associated with its mortgage business, and lost $149 million on the value of loans it held for sale. Peeking at credit quality Charge-offs rose to $319 million, up from $189 million in Q3; $122 million of Q4 charge-offs were in residential real estate, National City said. Despite increasing charge-off activity, total loan loss reserves ballooned to $1.76 billion, cushioned by the large provision for future expected losses. Non-performing assets continued their steep upward climb, rising to $1.52 billion from $1.21 billion one quarter earlier; NPAs are now up 90 percent from their year-ago levels. The vast majority of the increase in NPAs is being seen in loans originated by National City Mortgage -- these are primarily home equity loan products, and the bank reported that NPAs in this area rose from $193 million in Q3 to $307 million in Q4. While it's clear that First Franklin is hurting National City's mortgage book -- NPAs in the former subprime unit's loan portfolio jumped from $86 million to $119 million on a linked-quarter basis -- it's worth remembering that First Franklin loans comprise just 20 percent of the bank's $30.2 billion residential real estate portfolio. The good news? National City appears to be raising its loan loss allowance in step with NPAs, as loss coverage (loan loss allowance as a percentage of portfolio loans) reached 1.52 percent in the fourth quarter against an NPA percentage of 1.31 percent of loans. Those numbers stood at 1.23 and 1.08 percent, respectively, one quarter ago. National City has been slashing headcount in its consolidated mortgage operations, with the bank most recently confirming three weeks ago that it will exit wholesale mortgage origination while it continues to reduce headcount in its National City Mortgage subsidiary. The bank has announced cuts to more than 2,700 mortgage jobs in 2007 and early 2008. For more information, visit http://www.nationalcity.com. Disclosure: The author held no positions in NCC when this story was originally published.