updated 4/21/2008 3:56:31 PM ET 2008-04-21T19:56:31

National City Corp. announced Monday it secured a $7 billion capital infusion from equity investors to help it survive the home mortgage crisis, at least temporarily quashing speculation the nation’s 10th-largest bank would have to be sold.

But the move did not appease investors who sent National City’s stock tumbling 28 percent to its lowest level in about 17 years after the bank also posted a $171 million first-quarter loss and slashed its dividend.

National City said it secured $985 million from New York-based Corsair Capital LLC, which has experience with troubled financial institutions internationally. The remaining balance will come from other investors, including current institutional shareholders.

The bank, which operates largely in the Midwest, cut its dividend to 1 cent per share from 21 cents to help strengthen its capital position.

National City’s Chief Executive Officer Peter Raskind told analysts in a conference call that the capital infusion will help stabilize the bank.

“It reassures customers we are here for the long haul,” he said.

On April 1, the company hired New York investment bank Goldman Sachs to look into strategic alternatives. Analysts thought one option was putting National City up for sale, and several banks were viewed as potential buyers.

“We found ourselves on the defense against rumors and market speculation,” Raskind said in Monday’s conference call.

It is raising money amid deterioration in the credit and mortgage markets that has plagued banks since the middle of 2007 and cut into capital positions.

“We did thoroughly explore a wide range of alternatives and concluded unanimously this alternative was best,” Raskind said. “We will be taking a critical look at the business in every way.”

Oppenheimer & Co. analysts Terry McEvoy and Erik Zwick said in a report Monday that a merger involving National City still might happen.

“Over time, the old banking culture of National City, which at one point reflected strong Midwestern values and decision making, may emerge. Unfortunately, our guess is that, prior to that, National City will be a part of a much larger financial institution,” they wrote.

The Cleveland-based bank lost $333 million, or 53 cents per share, in the fourth quarter of 2007.

On Monday, it said it lost 27 cents per share in the January-March period of 2008. A year earlier, it earned $319 million, or 50 cents per share, in the quarter.

Analysts polled by Thomson Financial expected on average a profit of 31 cents per share for this year’s first quarter.

Its shares fell $2.33 to $6.00 in late trading after sinking to a 52-week low of $5.92 earlier in the session. Its shares are about 85 percent below their high for the past year.

National City will issue 126.2 million shares of common stock at a purchase price of $5 per share. It also will issue 63,690 shares of preferred stock that will automatically convert into 20,000 shares of the company’s common stock.

Corsair Capital and certain other participating investors will receive warrants with an exercise price of 115 percent of the company’s average closing price for the five-trading-day period beginning Monday, with a cap of $8.50 per share.

The moves allow the National City board to remain in control. Corsair Capital Vice Chairman Richard Thornburgh, who will represent the company on National City’s board, said the bank has strong core services.

National City, Ohio’s largest bank holding company with assets of $155 billion, was heavily exposed to the nation’s troubled mortgage and housing woes, but it has cut jobs and moved away from broker-originated subprime lending.

On Jan. 2, National City disclosed it was shutting down its wholesale mortgage division, eliminating 900 jobs, due to weakened housing and credit markets. In all, National City eliminated about 3,400 jobs over the past few months.

Raskind said in January that National City remained fundamentally strong and well capitalized and expected to meet its challenges.

On Monday, the company revised future loss expectations and said it significantly increased reserves, in particular liquidating portfolios of nonprime mortgage and broker-sourced home equity loans.

As of March 31, the allowance for loan losses was $2.6 billion, or 2.2 percent of portfolio loans, compared to $1.8 billion, or 1.5 percent of portfolio loans, at the end of last year.

The mortgage losses in the first quarter outweighed a gain of about $500 million from Visa Inc.’s initial public offering and solid financial performance in retail banking, commercial banking and wealth management businesses.

National City operates about 1,400 bank branches spread mostly across Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania and Wisconsin. It’s Florida presence, the result of recent acquisitions, is part of a strategy to enter a growth market.

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