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Nye Lavalle

National City Talks to Key
Credit Crunch Drives
Ohio Banks to Consider
Idea Dismissed in Past
April 2, 2008; Page C1
As National City Corp. tries to dig itself out from deepening loan problems, one option is getting some unexpected consideration: turning to a neighbor for help.

The big Ohio bank is considering a plan to sell itself to hometown rival KeyCorp., according to people familiar with the matter.

Such a transaction would be complicated by a range of factors and is far from certain to take place. If it is to occur, the resulting combined entity could also receive a capital infusion from private-equity behemoth Kohlberg Kravis Roberts & Co., these people said.

A deal with Key is one of several options on the table at National City, which has seen its stock fall more than 70% in the past 12 months amid concerns about its viability as mortgage delinquencies rise. One person familiar with the matter warned that such a deal would be fraught with difficulty, but also said, "You can't rule out any possibilities, because they're all long shots."

The prospect of a deal between National City and Key highlights how the banking industry's strain is forcing institutions to consider things that were once off-limits. The two Cleveland-based banks have long been the subject of merger rumors that both have dismissed.

Representatives of National City and Key both declined to comment on the prospect of a merger, as did a senior executive at KKR.

Regional financial institutions are under enormous pressure as a result of the credit crunch. Many of these banks averted the initial subprime-mortgage problems last year, but now face enormous exposure from softening residential real-estate markets. The prospect of a downturn in commercial real estate also bodes poorly for them in coming months.

National City has been one of the hardest hit. Headquartered in Cleveland, National City's footprint is concentrated in the struggling regions of Ohio and Michigan. It has also suffered from an ill-timed expansion into Florida real estate, and sits on a portfolio of troubled loans. It posted a loss of $333 million in the fourth quarter.

The bank has about $150 billion in assets, about 50% more than Key, and has long been seen as the would-be acquirer, should the banks combine. But its recent litany of problems has taken a toll on its stock-market value, shrinking it to $6.5 billion, compared with Key's $8.8 billion.

Key's balance sheet is stronger, though not significantly. Its capital cushion of 7.4% of assets is higher than National City's 6.5%, as of the end of 2007.

Regional banks are expected to attract great scrutiny in the next couple of weeks as they prepare to report first-quarter earnings. A number of financial institutions -- including besieged Washington Mutual Inc. -- are desperately trying to raise capital before these reports.

Private-equity firms have been sniffing around regional banks, intrigued by their large bases of low-cost deposits and unusually low stock prices.

Unlike many other regional banks, National City has already taken a series of actions to shore up its balance sheet. In recent months, it cut its dividend by 49% and raised $1.6 billion by selling debt and preferred shares to outside investors.

Key, meanwhile, has largely avoided the types of mortgage and home-equity loans that weigh on National City.

On Tuesday, National City confirmed what has been well known throughout the industry for several weeks: that it is "reviewing a range of strategic alternatives for the company." Goldman Sachs Group Inc., which already had been working with the bank to seek capital, is assisting it in the review.

One of the major appeals of a deal would be the prospect of enormous cost savings. Both banks have headquarters and other office buildings in downtown Cleveland, and both are among the region's biggest employers.

Before approving such a deal, regulators would likely demand that the combined bank sell overlapping branches in Ohio and other parts of the Midwest.

Key executives take pride in its asset-management business and its investment bank for midsize businesses. National City is known as a commercial and mortgage lender, and at the height of the housing boom, it attributed as much as half its profit to its mortgage and home-equity arms. National City also is a significant lender to residential developers in Michigan, California and Florida.

National City has 1,300 branches in 13 states, led by Ohio, Florida and Illinois. Key has 955 branches in 13 states, with more than a third of those in the Northwest and Rocky Mountain regions. National City has 32,000 employees to Key's 18,500 employees. National City has deep roots in Cleveland, where it was founded in 1845. Key moved its headquarters there with the acquisition of Cleveland's Society Corp. in the mid-1990s.

In the past two years, National City has spent more than $4 billion to purchase community banks in Florida and Chicago, while Key has largely stayed off the acquisition trail.

Cultural issues -- such as the combined bank's potential name and whose executives would be in charge -- are potential obstacles. But similar cultural questions didn't stop the merger of Birmingham, Ala., rivals Regions Financial Corp. and AmSouth Bancorp two years ago.

National City had long maintained that it could stay independent, but Chief Executive Peter E. Raskind surprised analysts at a September investor conference when he said the company would need to be "materially larger" to remain competitive.
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