April 21 (Bloomberg) -- National City Corp., Ohio's biggest bank and subprime lender, slumped in New York trading after it slashed the dividend to a penny and agreed to sell a $7 billion stake to investors led by Corsair Capital LLC at a 40 percent discount.

National City fell $2.30, or 28 percent, to $6.03 at 4:15 p.m. in New York Stock Exchange composite trading after the Cleveland-based company cut the dividend from 21 cents and reported a third straight quarterly loss.

Chief Executive Officer Peter Raskind is scraping for capital after the bank's strategy of acquiring banks in Florida at the height U.S. real-estate boom backfired. Florida had the third-highest foreclosure rate last month, and Ohio ranked seventh, data compiled by research firm RealtyTrac Inc. show.

``The situation at National City is very tough,'' said Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida. ``The issue people are worrying about is will it go under. I don't think that will happen now.'' He rates the stock ``market perform.''

National City plans to raise $6.37 billion selling convertible securities to investors including Corsair, a private- equity firm founded in 1993 by JPMorgan Chase & Co. and run by executives including former Credit Suisse banker Richard Thornburgh. Thornburgh and another independent director will join National City's board. The remainder of the money will come from selling common stock.

Michael Dell

The Corsair-led group is contributing $985 million, the bank said today in a statement. One of the participants is MSD Capital LP, which manages the fortune of Dell Inc. founder Michael Dell and his family, said a person with knowledge of the investment who asked not to be identified because it wasn't disclosed. The remainder is being sold to investors, including some of National City's largest institutional shareholders, the bank said.

The bank reported a first-quarter net loss of $171 million, or 27 cents a share, compared with profit of $319 million, or 50 cents, a year earlier, the company said in a statement today. It lost more than $300 million in the second half of 2007.

``There's no question this transaction is substantially dilutive,'' Raskind said on a conference call today. He said the bank needed to quickly stabilize its debt rating, quell market rumors of insolvency and gain flexibility to deal with problem assets. The board unanimously approved the equity sale.

Florida Acquisitions

National City acquired Florida's Fidelity Bankshares Inc. for $1 billion and Harbor Florida Bancshares for $1.1 billion in deals struck in 2006. The lender last year acquired MAF Bancorp for more than $1.8 billion to expand in Chicago and enter Wisconsin.

The infusion will boost National City's Tier 1 ratio -- a measure used by regulators to determine a bank's ability to repay loans -- to 11.4 percent from 6.65 percent as of March 31. A 6 percent ratio is considered well capitalized by regulators.

Each convertible share will be worth 20,000 shares of the common stock. The bank is also offering shares of common stock for $5 apiece. The stock closed at $8.33 on April 18.

``Shareholders continue to get penalized,'' said Gerard Cassidy, a Portland, Maine-based analyst at RBC Capital Markets, in an interview yesterday. ``It's another major company going to the capital markets to enable them to survive in this incredibly deflationary environment.''

National City lost about 84 percent of its market value in the past year and ranks as the worst performer in the 24-member KBW Bank Index during the past 12 months.

The bank is ``a leading provider of core banking services,'' Corsair's Thornburgh said in the statement.

Subprime Loans

National City ranked among the 10 biggest originators of loans to people with poor credit histories in 2006. The lender sold its subprime loan unit, First Franklin Financial, at the end of that year to Merrill Lynch & Co., where it contributed to a record loss at the New York-based securities firm. National City kept some of the loans made by First Franklin, saddling it with losses.

National City set aside $1.4 billion in the first quarter to cover bad loans, more than double the $691 million set aside in the fourth quarter of 2007. Net charge-offs, loans the bank doesn't expect to be repaid, rose to $538 million in the quarter from $275 million in the previous quarter.

The net interest margin, the difference between interest paid on deposits and received from loans, narrowed to 3.18 percent from 3.30 percent at the end of 2007.

Goldman Sachs Group Inc. was the financial adviser to National City, while Sullivan & Cromwell LLP and Jones Day served as legal advisers. RBS Greenwich Capital, a division of Royal Bank of Scotland Group Plc, was the financial adviser to Corsair and Simpson Thacher & Bartlett LLP was the legal adviser.

To contact the reporters on this story: David Mildenberg in Charlotte, North Carolina, at dmildenberg@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: April 21, 2008 16:40 EDT