Two years ago David A. Daberko, National City Corp.'s chief executive and chairman, said "you must reinvent the company in major ways every couple of years to stay competitive."
On Tuesday, a day after it said it may sell its nonprime mortgage unit, First Franklin Financial Corp., and related operations, the Cleveland banking company announced it was buying the thrift holding company Harbor Florida Bancshares Inc. of Fort Pierce for $1.1 billion.
Mr. Daberko told American Banker on Tuesday that the events are separate, but some analysts saw a connection. They said the announcements show Nat City is becoming more diverse and less reliant on mortgages, which made up 30.5% of its profit in the first quarter including First Franklin and 12.2% excluding it.
David Hendler, an analyst with CreditSights Ltd., said: "They're trying to position themselves for more growth while lessening their exposure to credit risk and the cyclicality of the markets. It's the beginnings of a total body makeover."
Lana Chan of Bank of Montreal's BMO Capital Markets Corp. said in a research note that, at the very least, a divestiture of First Franklin could "fund this as well as future bank deals."
On a conference call to discuss the Harbor Florida deal, Mr. Daberko said the decision to review strategic alternatives for First Franklin "is part of an ongoing process consistent with our review of other businesses over the past several years."
"In some cases, such as national processing and indirect auto, the decision was made to divest," Mr. Daberko continued. "In others, such as credit cards, we decided to retain and more closely integrate with the retail bank." A decision about First Franklin's future is expected by the end of the third quarter, he said.
Anthony R. Davis of BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. said in a research note issued Tuesday that Nat City's management "is making progress in reorienting the company from mortgage finance toward traditional commercial and retail banking."
National City, a midtier company that has grappled with a sluggish Midwest market, would gain its first retail operations in Florida by buying the $3.2 billion-asset Harbor Florida - 40 branches along the state's eastern coast.
It would be a "meaningful entree for National City into a market with good demographics and growth potential," Mr. Daberko said on the call.
He said the Harbor deal is comparable to Nat City's $500 million acquisition of Allegiant Bancorp of St. Louis in April 2004. Aside from size similarities - Allegiant had assets of $2.1 billion and 36 branches - Nat City also has the opportunity to offer Harbor customers new products, such as personal wealth management, credit cards, and commercial leasing, as it did with Allegiant.
Harbor, however, has a hefty mortgage portfolio, with residential mortgages making up 46.5% of its total loans of $2.75 billion in the second quarter, which ended March 31. Construction loans made up nearly a third of the portfolio, and Keefe, Bruyette & Woods said Tuesday that construction may be softening in the Southeast. (See story on page 19.)
However, Mr. Daberko said that he had examined the loans - which primarily back multifamily projects - and that Harbor's long-standing relationships with local developers made him comfortable with the loans' composition.
Michael J. Brown Sr., Harbor's chairman and CEO, said in an interview that his company does not finance high-rise condominium projects or lend in Miami, Broward, or Dade counties - areas frequently said to have too much construction.
Mr. Brown, who would become the chairman and CEO of Nat City's Florida business, said his company wanted to expand its product offerings and resources.
"This was certainly not a distressed situation on our part, and not even a sought-after situation," he said. "It's something that just happened, and I think it's best that way sometimes."
Mr. Daberko said the number of households in Harbor's eight-county market is expected to grow perhaps three times faster than in Nat City's healthiest markets in the next four years. New-household growth in two markets that Nat City sees as high-growth - St. Louis and Chicago - is expected to be 5.5% and 4.9%, respectively, in that period, versus a projected 16.8% for Harbor's region.
But Mr. Daberko said there's more to the deal than demographics.
"Demographics do not determine success, but given our proven business model, greater resources, and dedication to execution, combined with Harbor's well-situated, well-run franchise, we can and will compete effectively in this market," he said on the conference call.
The $1.1 billion all-stock deal is a 20% premium to Harbor's closing stock price Monday, or 3.24 times its tangible book value.
"It was a high price relative to where our stock trades and where other transactions have been done, although very reasonable relative to Florida transactions," Mr. Daberko said. "Here you have a company whose compounded growth in net income is 17% and its deposit growth has been double digits. That is clearly worth a great deal."
The deal is expected to close in the fourth quarter. Harbor's shares closed up 18.1% Tuesday. National City's lost 1.5%.
