You can watch the way the subprime mortgage crisis has worked itself into both the economy and the market when you see its effects on specific companies. While Citigroup’s (NYSE: C) nightmarish immersion in the subprime waters has been copiously documented, as it was front-and-center on not just financial media but mainstream media, many regional banks and mortgage companies, though they didn’t have tens of billions of dollars in writedowns, were still hit hard. One such regional bank is National City Corp (NYSE: NCC).
National City does most of its business in Ohio, Michigan, Indiana, Kentucky, Missouri, and Pennsylvania—the midwest heartland. With a market cap of $10.6 billion, and assets of $142 billion, this regional financial holding company, which began decades ago as a local Cleveland, Ohio bank, has historically been a stable if not staid company, and a dull but steady investment for dividend and long-term value investors. Now, it finds itself spinning on the edges of the subprime whirlpool, caught in a maelstrom by its own poor judgment and the perfect storm of the mortgage ocean.
In relatively short order, National City, which does a brisk mortgage business in such economically depressed areas as Michigan and Ohio, rust belt areas which at the very least usually feel recessions first admitted to holding a much more sizable chunk of a subprime portfolio than it had otherwise indicated (class action lawsuit dutifully to follow), then announced a $333 million quarterly loss, -53 cents per share, compared with an $842 million profit the prior year’s quarter. National City then shut down its wholesale mortgage unit (it still does consumer mortgage loans), laid off workers and did what loyal long-term investors dreaded, cut the dividend. The quarterly dividend was sliced from 41 cents per share to 21 cents per share. The aftershock saw the stock’s ongoing punishment continued by investors, who have driven it down from a twelve-month high of over 38 to as low as 12.84, though it has recently rebounded slightly to trade in the $13-$16 range.
The stock currently yields a still-impressive dividend of around 5%, but long term, dividend and value investors have to be shaken over the slash of the payout and the uncertain prospects of near-term earnings. Although analysts’ projections still look for a profitable 2008 and 2009, with projections of $1.50 and $1.70 per share respectively in earnings—a welcome though unspectacular relief for shareholders, as it’s roughly half the profit the company was earning before all this mess—investors are still nervous as the case of the mega-financials (see Citigroup NYSE:C, Countrywide NYSE: CFC) is too fresh in their minds. With half the profits and the dividend halved, it’s as if National City is half the company it was before the subprime revelations started.
While the company implies that we’ve reached the end of the bad news, isn’t this what the assurances were along the way with Citigroup and with the poster-child of bad financials for revealing chilling, ongoing loses: Countrywide? In any event, it’s going to take the regionals some time—years not months—to rebuild the kind of business, revenue and income they were doing before most investors ever had the term “subprime” rammed into their consciousness.
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