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Executives

Jill Hennessey – Manager Investor Relations

Peter E. Raskind – Chairman of the Board, President & Chief Executive Officer

Thomas A. Richlovsky – Interim Chief Financial Officer, Senior Vice President, Principal Accounting Officer & Treasurer

Robert C. Rowe – Chief Credit Officer

Dale Roskom – Chief Risk Officer

Daniel J. Frate – Vice Chairman and Head of Retail Banking

Richard Michels – Vice Chairman and Head of Corporate Banking

Analysts

Mathew O’Connor – UBS

Michael Mayo – Deutsche Bank Securities

Kevin St. Pierre – Sanford Bernstein Co.

Nancy Bush – NAB Research, LLC

Vivek Juneja – J. P. Morgan

[Steven Laner] – Morgan Stanley

[Tom Kitell] – American Financial Group

[David Kunusin – Legal & General]

National City Corporation (NCC) Q3 2008 Earnings Call October 21, 2008 8:00 AM ET

Welcome to National City Corporation’s third quarter 2008 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions to be given at that time. (Operator Instructions) Also as a reminder, this teleconference is being recorded. At this time we’ll turn the call over to your host, Manager of Investor Relations, Ms. Jill Hennessey.

Jill Hennessey

We would like to welcome all of you to National City Corporation’s third quarter earnings conference call and we thank you for joining us today. Before we begin let me remind you that the presentations and commentary you’re about to hear will contain forward-looking statements. In making these statements we base them on presently available information and current expectations.

We believe these statements to be reasonable but they are subject to numerous risks and uncertainties as described in our Form 10K and other filings with the Securities & Exchange Commission. As a consequence actual outcomes could differ materially from the views expressed today. We may elect to update forward-looking statements at some future point, however, we specifically disclaim any obligation to do so.

This morning you will be hearing from Peter Raskind, our Chairman, President and CEO, from Tom Richlovsky, CFO and Rob Rowe, Chief Credit Officer. We are also joined here by several other members of the senior management team including Dale Roskom, Dan Frate, Vice Chairman and Head of our Retail Banking Business, Rick Michel, Vice Chairman and Head of Corporate Banking, as well as other members.

Following comments from the presenters this morning, we will be conducting a Q&A session and will take as many questions as time permits. Finally, I want to draw everyone’s attention to the slide deck which is posted on our website www.NationalCity.com, as well as the earnings press release each of which contains more detailed information on our results this quarter. We will be referring to one or both of these documents throughout the call.

With that, I’ll turn the call over to Peter Raskind who will provide some top line thoughts on our third quarter results.

Peter E. Raskind

Clearly, the banking sector experienced unprecedented challenges over the past quarter that were largely unthinkable just six months ago. But, despite the incredible market turbulence that continues to shake our industry, we maintained strong capital and liquidity and continued to build our core franchise.

Our retail deposits remained stable in the quarter and grew year-over-year reflecting steady household growth and expansion. We also made progress in managing down our exit portfolio while laying a strong foundation for sustained profitable growth as a more efficient and effective organization. While we reported a net loss of $729 this quarter, this reflects the continued prudent actions we took to build loss reserves.

Given our earlier reserve building, loan loss provisions declined by 25% from the second quarter consistent with our expectation expressed on this same call three months ago that loan loss provisions would decline in the second half relative to the first half. We reiterate that belief today. Not surprisingly, the larger macroeconomic environment continues to affect credit quality.

That said, overall net charge offs were flat versus last quarter excluding the write down for reclassification of marine loans we intend to sell. Importantly, pre-tax pre-provision core earnings of $636 million held steady with our second quarter performance and were up 17% over the prior year period. This underscores the strength and resiliency of our core banking franchise even under stressed market conditions and in particular reflects strong performance in retail banking.

We currently have underway a performance improvement initiative to further increase our competitiveness, reduce costs and accelerate the benefits of our direct and integrated strategy across our businesses. With this initiative we are targeting annual cost savings of $500 million to $600 million by 2011 and expect to reduce our workforce by approximately 4,000 positions over the next three years.

Before I turn the call over to Tom for further details on our results, I want to quickly highlight some strengths and accomplishments this past quarter in a very challenging environment. First, our healthy Tier-1 capital ratio of 11% remains among the highest of all major banks. As capital markets have tightened the prudence of having acted early to raise substantial capital well in excess of what was necessary became even more apparent this quarter. With approximately $6.6 billion over the well capitalized minimum we remain confident that we have more than sufficient capital to ride out the continued turbulence in the credit markets.

Second, our exit portfolios are performing in line with expectations and we are continuing to actively manage down and mitigate losses while evaluating a range of strategic disposition alternatives. A limited number of segments in our exit portfolio loans generated the majority of our net charge offs for the quarter. Specifically, $8.4 billion of these loans representing 8% of our total loans accounted for 40% of total net charge offs recorded in the third quarter.

The remainder of the exit portfolio loans showed stable to improving trends. It’s worth noting that we began to exit the subprime market in 2006, somewhat earlier than others and we have no exposure to Option ARMs. In addition, with a footprint largely concentrated in the Midwest, we have relatively low exposure to the most distressed real estate markets. Our exited business portfolios are managed separately from our core businesses under the new leadership of Jim [LaCachman].

By creating a separate business segment for these assets where we are able to better focus on effective management of these portfolios. These assets have been declining by about $500 million a month. We also continued to manage down undrawn home equity exposures in the exit portfolio by freezing lines where permitted and in some cases offering incentives to customers to close undrawn lines.

As a result total available credit under home equity lines has been reduced by $2.9 billion since January. Third, the competitive position of our franchise is strong despite market turbulence. By executing on our direct and integrated strategy we continued to gain market share, leverage more cross sell opportunities, add new customers and establish deeper, more robust customer relationships across our businesses.

In addition to growing deposits year-over-year, our retail bank grew net new households, expanded existing households and posted double digit revenue gains. We also saw an increase in deposit account fees, debit card revenues and participation in our industry leading bank at work and points from National City programs. In fact, September was the strongest sales months for new checking accounts in our history.

In corporate banking we increased market share and maintained a stable client base in a volatile market environment while realizing higher returns on new business. Our private client group has attracted $4.8 billion of new assets under management along with more than 400 net new relationships year-to-date and has maintained one of the industry’s highest asset retention rates.

Fourth, to further enhance the competitive strength of our core franchise and accelerate our efforts to transform National City in to a more integrated and streamlined organization, we’ve begun to implement a new performance improvement initiative. As we discussed in July, we began a rigorous and comprehensive analysis of our operations and cost structure last quarter. Preliminary analytic work has been completed for the full range of $500 million to $600 million of annual savings identified.

We are confident that a minimum of $240 million of this reduction will be realized in 2009 with the potential for this number to increase in the coming weeks as we continue to refine our plans. We expect to take charges in the range of $80 million to $100 million in connection with this plan. We’ve also placed Dan Frate and Jon Gorney in charge of leading the initiative. These two executives whose units comprise 60% of the banks costs both have very strong track records for driving operational rigor and results.

Jeff Tengel who previously ran our National commercial business is leading this effort on a day-to-day basis full-time. Building on the actions we’ve already taken over the past year, this initiative will be the centerpiece of our efforts to implement our direct and integrated strategy, further reduce costs and increase our competitiveness. To achieve this we are immediately executing on a serious of tactical high impact expense reductions to reduce procurement and headcount related costs across our business.

These actions are worth approximately $165 million to $200 million in annual savings. While employee impact is still being assessed, the company expects this initiative to result in the reduction of approximately 4,000 positions or 14% of our total workforce over the three year period. At the same time, we’re systemically streamlining and consolidating our operations to optimize our middle and back offices, better integrate our sales effort across our footprint and improve our ability to serve customers more efficiently and cost effectively.

This is worth approximately $285 million to $350 million in annual savings. Additionally, we are reshaping our organization to simplify our management structure and extend the impact of our direct and integrated strategy. This will result in annual savings of approximately $50 million. I know that you’ll likely have many questions but first I’d like to turn the floor over to Tom who will walk through the financial highlights.

Thomas A. Richlovsky

My comments will address three areas. First, I’ll touch on some of the noteworthy items affecting our reported results. Second, some observations on fundamental performance and finally, balance sheet trends. Page 5 in the slide presentation if you have it please refer to that. Page 5 in the slide presentation entitled EPS reconciliation was addressed in our earnings release but it’s worth spending a minute on here.

Normally and intuitively one would expect earnings per share to equal reported net income divided by average common shares outstanding. In our case, that math works out to an $0.85 per share loss for the third quarter on a base of 877 million average shares outstanding. However, because the Series G preferred shares issued as part of our $7 billion capital raise last April, were convertible at less than the then quoted market price of the common stock.

That discount to market valued at $4.4 billion is treated as a one-time non-cash preferred dividend at the time of conversion for the purpose of computing earnings per share. No impact on cash, total capital or net income but it does create an unusual EPS outcome of $5.86 loss per share for the quarter. Also, with the conversion of the Series G occurring near the end of September, our post conversion share count is now slightly over 2 billion shares, markedly higher than the third quarter average of 877 million.

Doing the math on a post conversion share base, the $1.00 loss for the third quarter would equate to $0.37 per share. Page 6 of the deck titled pre-tax pre-provision operating earnings calls out a number of items included in our quarterly results to aid in understanding the pre-tax earnings power of the company on a core basis before credit and impairment charges. While many of these items are obviously recurring, their unusual size or volatility does affect period-to-period comparisons.

A few that bear additional mention, MSR or mortgage servicing rights hedging results were significantly negative $189 million continuing a trend that has been in place all year. There are several reasons for the loss. First, elevated market volatility this year has increased the cost of hedging. In particular, the cost of purchasing interest rate options which are an important part of our hedge portfolio.

Second, the historical basis relationships that we rely on in the course of setting our hedging strategies have not held up in the markets this year consistent with the extreme volatility pervasive across the financial markets. Finally, in terms of the MSR itself, the projected cash flows underlying the mortgage servicing rights have gone up as prepayments have slowed.

All else equal, higher cash flows would increase the expected value of the asset but the reality is that the market value has not increased to the extent predicted by the cash flow model. All of these factors have led us to undertake a fresh look at all aspects of managing this asset including valuation and hedging strategies with the help of an outside firm with extensive expertise in this area. That work should be completed later this quarter.

Moving down the page, the higher OREO, other real estate owned losses this quarter $122 million reflect a decision to be more aggressive in valuing the expected losses on dispositions of properties essentially assuming a bulk sale strategy. So, we would expect to take larger losses compared to individually managed sales but move the assets off the books faster.

Securities losses in the third quarter, $77 million represent other than temporary impairment charges on a variety of relatively small items in our investment portfolio mainly inherited through recent acquisitions. The write down of the roughly $12 million of Fannie Mae and Freddie Mac preferred stock exposure is included in that item.

The Visa indemnification charge, $87 million was driven by the recently announced tentative settlement of Visa’s Discover Card litigation. Recall that we and other Visa member banks have taken similar charges in the past year related to Visa litigation subsequently offset by the cash escrow established in conjunction with Visa’s IPO earlier this year.

That mechanism provides for the sale of shares by Visa followed by an adjustment to the conversion rate on the Class B Visa shares that we own and carry at zero value on our books. At such time that Visa would replenish the escrow account we would then be permitted to reverse this liability to the extent of the replenishment.

On to fundamental performance, as Peter mentioned, underlying operating results speak to the strength and resilience of the core banking franchise. Net interest margin held up reasonably well in the quarter, 2.99% versus 2.97% in the second quarter despite the drag from non-performing assets and the cost of maintaining extra liquidity. Those factors have clearly hurt the margin on a year-over-year basis and we believe will continue to weigh on the margin for the time being.

Deposit service fees continue to be strong. Moving to the expense side, in addition to some of the items I just spoke to, we are incurring relatively high levels of third party service expenses. These relate to a number of consulting arrangements we have underway including the MSR study I referenced earlier. Also, a lot of work around potential asset disposition strategies and diagnostics around the cost initiatives that Peter spoke about.

Turn now to the balance sheet. Based on questions and dialogs we’ve had with investors, there’s a lot of interest around liquidity and deposit flows especially these last three months. In our case it’s something that we’ve paid a lot of attention to not just in the past three months but well in to last year, back in July and August of 2007 when the markets began to malfunction. Since then, we have deliberately repositioned ourselves from a net buyer of overnight and short term wholesale funds to a net provider of excess funds to the market.

A position we have been in all year continuing today. We got there partly through capital raises, August of 2007, January, 2008 and April of 2008, all of which helped liquidity. Our exit portfolios pay down every month and overall loan volume is down so the left hand side of the balance sheet is also a source of liquidity. Further, we adjusted strategy in the retail bank to focus more on time deposits as a stable funding source.

We also spent a lot of time educating customer facing employees. Being prepared in these ways served us well in the face of several systemic stress events that have played out over the course of the year. A good illustration is on Slide 9 of the deck titled core deposit trends. What we’ve charted on that page is the end of day balance of total core deposits and total retail deposits every business day since the beginning of March up to and including the close of business last week.

The data is right out of our general ledger. Several interesting points on this chart, first total deposits depicted on the top line of the chart fluctuate as corporate customers move money in and out according to their business needs. Second, external events that are highly publicized such as the Bear Sterns failure in March, the Indy Mac failure in July and Lehman, AIG, WaMu and Wachovia in September, they do affect deposit flows but not necessarily all to the same degree and the effects do tend to be short lived.

We did lose deposits traceable to the combination of those events. But, the losses tended to be concentrated around a relatively smaller number of larger balance accounts. The broader base of our nearly four million retail customers depicted in the lower line on the chart was and is significantly more stable even prior to the recently announced enhancements to FDIC insurance coverage.

These enhancements already appear to be having a beneficial affect across the business. So, to sum up liquidity, we feel that both the bank and the holding company were well prepared financially and organizationally for the recent stress events. We’ve learned from each of these events over the past year and adapted accordingly.

While the recent government efforts to restore stability and increase liquidity to the markets have clearly been helpful and could mean from a systemic perspective that much of the worse is over, our ongoing preparations and readiness do not incorporate that assumption. On the capital front, we remain very well capitalized at 11% Tier-1 and nearly 9% tangible common equity to assets. Risk weighted assets declined proportionality to the dollar decline in capital and as a result the Tier-1 ratio was essentially unchanged from the second quarter.

With that, I’ll turn the floor over to Rob Rowe to discuss credit.

Robert C. Rowe

My comments this morning will summarize the third quarter performance of the loan portfolio in the whole and will also briefly describe various major segments including the core businesses of National City and the exit portfolios which we previously called the liquidating portfolios. Please turn to slide 19 which provides an overview of the quarter’s performance for the entire $110 billion loan portfolio.

Net charge offs for the quarter were $844 million compared to $740 million in the second quarter. We transferred approximately $1 billion of marine loans in to the held-for-sale account which resulted in a charge off amount of $126 million. Without this transfer, charge offs would have been roughly flat with the previous quarter.

We took a $1.2 billion provision expense boosting reserve by $340 million, our sixth straight quarter of bolstering the reserve. As we had forecasted on our last call, the provision building was lower in the third quarter than the second quarter. This action increased the allowance for loan losses to $3.7 billion which is 3.4% of loans. As you can see, most of the reserve building was in the core book particularly in the residential development portfolio and to a lesser degree in commercial and industrial.

Also, please note that the exit portfolios now include $1 billion of completed construction loans to individuals and $1.3 billion group of 2007 vintage first mortgages that were initially originated for sale and ultimately marked and placed in to the held-for-investment portfolio in the third quarter of 2007. Before I discuss the various segments of the loan book, please note that non-performing loans increased by $434 million.

Much of the increase was related to residential real estate activities. 90 day past dues declined again slightly during the quarter. A fair amount of the delinquency increases which were wide spread across the $20 billion of exit portfolios leveled off this quarter. Our concerns for continued dollar delinquency increases in the exit portfolio are now focused on approximately one half of that portfolio which I will describe in more detail as we discuss those slides.

The next several slides depict the loan performance of the core book. Please turn to slide 20 which illustrates the performance of the $26 billion commercial and industrial book. Net charge offs increased by $14 million to $53 million. Most of the increase was in our leasing portfolio and small business segment. One half of the rise in non-performance for C&I was the result of our downgrading one shared National credit in the energy industry whereby the borrower was alleged to have committed fraud.

Having said that, we did build reserves in the C&I book during the third quarter as the portfolio as weakened slightly. As you know, this portfolio’s performance is historically correlated with the economy’s performance over cycles. As such, given the continued decline in consumer discretionary spending and industrial production, we envision C&I charge offs increasing towards more normalized levels.

Page 21 exhibits the breakdown in performance of the $23 billion commercial real estate portfolio by geography and product type. The broad theme of continued increase in NPAs for the residential book with worsening loss severities continues particularly in the state of Florida. Although, there has been an increase in non-performers in our Midwest footprint, the loss severities remain lower because housing and land prices didn’t escalate as much as some of the states on the east and west coast.

Please note that although the level of charge offs remain low in the non-residential and income producing product types, we have seen an increase in our internal watch list for the retail portfolio. The retail portfolio totals $2.6 billion between construction and income producing. The balance of the commercial real estate portfolio has held up fairly well to this point.

Page 22 depicts the performance of the branch and direct home equity book during the quarter. On last quarter’s call we forecasted that charge offs and delinquencies would be up modestly which was the case. Given employment loss, we would expect this trend to continue but still believe that this portfolio will demonstrate a significant delineation in performance to the broker based home equity portfolio.

Please note that much of the increase in loss percentages from the back half of 2007 to the first nine months of 2008 was a result of deteriorating performance in the acquired Florida and [MAF] segments. Even though there has been increased job loss in our footprint states, the legacy National City portfolio continues to demonstrate stability with a charge off rate of approximately 60 basis points.

As we described on the second quarter call, we expect home equity charge off rates to increase some in particularly from our 2007 vintage. Moving on to page 23, there are few points worth mentioning on our first mortgage portfolio. First, more than 70% of the portfolio was originated in 2005 and earlier periods. Second, we have no exposure to Neg AM or Option ARMs. Lastly, during the quarter we transferred $100 million of first mortgages which were in the foreclosure process to held-for-sale which resulted in an incremental $8 million of charge offs.

When a sale is consummated the non-performing asset number will decline by the net balance. Please also note that delinquencies in the 30 and 90 plus buckets were flat during the quarter. Now, I will discuss the $19 million exit portfolio which represents a little less than a fifth of the overall loan portfolio. For the most part, these loans consist of residential real estate oriented activities.

As I stated earlier, about half of the exit portfolio is exhibiting stable to improving delinquencies. Even with the headwinds of home price depreciation and rising unemployment, the delinquency curves have flattened for the non-prime business and the older vintage of our National broker based home equity portfolio. Let’s move to Slide 24 which describes more fully the indirect home equity book.

I’d like to orient you to the 90 day past due graph in the bottom left corner. We have again broken out the portfolio in to two segments which are described as originated for portfolio and originated for sale. The $4 billion originated for portfolio segment has had three quarters in a row of stable delinquency. This was expected because the delinquency curves are seasoned enough to provide some clarity.

The originated for sale portfolio which is primarily 2007 production continues to exhibit rising delinquency and loss content which also has been expected and the reason for our significant reserve building in this portfolio over the last few quarters. We have been very aggressive in reducing the open lines in the later vintages such as there is only $500 million open to buy remaining in the 2007 vintage.

We believe the actions taken are prudent yet may have resulted in accelerating charge offs in this segment as some troubled borrowers loss access to liquidity more quickly than they otherwise would have. Let’s turn to page 25 to discuss the non-prime portfolio. As you can see, the chart at the bottom which depicts both charge offs and delinquencies reflects improving trends accept for first lien charge offs which are a reflection of higher loss severities particularly in certain areas of California.

The newest production in this portfolio is now 30 months old. Because of the seasoning of this portfolio there is increased clarity with respect to future loan performance which continues to highlight our view that even under difficult macroeconomic conditions and housing depreciation, older vintages stabilize at the periods they have historically. The following slide depicts the third quarter loan performance for the $2.7 billion residential construction loan segment originated at the National City Mortgage Company.

Whether during construction or post construction, delinquency is high as borrowers have loss significant equity in their current home which has impacted their ability to move in to their newly constructed home. We have updated our cumm loss projections in this portfolio to $800 million to $850 million to take in to account the high delinquency on the borrowers who stayed current on their financing during the construction stage yet defaulted upon completion.

The last slide I will speak to is page 28. I’ve already discussed the net remaining charge offs for the residential construction book and now provide for your review our lifetime loss expectations on the indirect home equity portfolio as well as the non-prime segment. The estimated cumulative loss for these two segments is up by slightly more than 10% from the last quarter primarily due to the increased delinquency in the later vintages of the indirect home equity portfolio and higher loss severities uninsured non-prime firsts.

Finally, we continue to estimate charge offs for the full year to be in the $2.5 billion to the $2.9 billion range excluding the aforementioned charge offs which resulted from the reclassification of the marine portfolio to held-for-sale. I will now turn it back to Peter Raskind for some closing remarks before the Q&A.

Peter E. Raskind

Before moving on to Q&A, I’d like to reiterate the four key points that I believe sum up where we stand today and how we tend to succeed moving forward. First, our healthy Tier-1 capital ratio of 11% is substantially higher than our peers and $6.6 billion above the regulatory minimum. This strong capital position combined with the large and stable deposit base puts us in good stead to deal with continued financial market turbulence and continue to build our franchise for the future.

Second, our portfolios from exited businesses continue to perform in line with expectations. Specifically, $8.4 billion of the exit portfolio loans account for a disproportionate amount of charge offs while the remainder of these loans are stable to improving. We are continuing to actively manage down and mitigate losses in the exit portfolio and we have flexibility in considering various asset deposition scenarios by virtue of our strong capitalization and prudent reserve building.

Third, the increasingly competitive performance of our core franchise in an extremely challenging market underscores the resilience and vibrancy of our operations. By aggressively executing on our direct and integrated strategy, we achieved year-over-year growth in retail deposits, net new households and household expansion. We gained market share and we established deeper more robust relationships across our business.

Finally, we intend to further enhance our earnings power and ability to grow in a scalable manner through the performance improvement initiative that we have underway. We expect to achieve annual savings of $500 to $600 million by 2011 with $240 million to be achieved in 2009. In sum, while fully recognizing the challenges that we face, we believe that we’ll emerge from this difficult environment as a much stronger organization.

With that, I’d like to turn the call over to Q&A.

Question-and-Answer Session

Jill Hennessey

We have a few question that were submitted via email prior to the call which we’ll cover first and then turn it over to live Q&A. The first question is for Rick Michels. Rick, is the company actively seeking to lend money in its local markets to C&I customers and prospects?

Richard Michels

As you know, lending continues to be a very important part of our ongoing relationships with our clients. Many of our clients don’t have access to the capital markets and those that do probably don’t have access today so lending continues to be a very important part of those relationships. However, we’re working very hard to fully realize the direct and integrated strategy which Peter has talked about this morning and on prior calls.

In corporate banking, that means making sure that we’re taking a holistic approach to our relationships and looking for opportunities to not only lend money but also to add non-loan revenue fee based business to increase the return on capital that we have in the entire portfolio.

Jill Hennessey

The next question is for Joe [Carloney] of our mortgage company. Joe, overtime the fundamentals of our mortgage lending have strayed away from the fundamentals of lending. What are the guidelines being followed in your direct mortgage channel relative to debt-to-income ratio, written income verification and non-borrowed down payments.

Joe [Carloney]

We do continue to strictly adhere to Fannie Mae, Freddie Mac secondary market guidelines as well as HUD for the FHA programs. Those programs have been tightened up over time and in some cases we’ve actually instituted above those guidelines more conservative requirements on top of those agency requirements.

We do not originate any stated income loans, those have been ceased. As far as down payment programs, the only programs that allow any non-borrower funded down payment programs and it’s only partial non-funded is the FHA so according to HUD guidelines those programs are in place but it’s clearly more stringent than it had been.

Jill Hennessey

Tom, I have a question for you, do you support a roll back of mark-to-market accounting rules?

Thomas A. Richlovsky

I can tell you that the proposed mark-to-market rules or revisions to the rules don’t have a lot of relevancy to us. We do not have a lot of hard value assets on our balance sheets or specifically loans held for sale are not difficult valuations because they essentially consist of conventional mortgages with a ready market value. So, it’s not an item that’s particularly relevant for us and as a consequence we do not have a strong opinion on those developments.

Jill Hennessey

A question for Rob, what were the net new in flows in to NPAs in the third quarter?

Robert C. Rowe

I don’t have a precise number but the way to kind of back in to it would be to look at the increase in non-performing assets quarter-over-quarter, add the charge off number to that number and since we didn’t do a lot of sales of non-performing loans during the quarter, that would be kind of your flow rate. When you look at the third quarter compared to the second quarter it would be relatively consistent.

Jill Hennessey

Peter a couple of questions for you, will you accept the governments offer to buy toxic mortgages?

Peter E. Raskind

Well, I presume the question relates to the TARP program that arises from the Economic Stabilization Act and as we’ve indicated on a number of occasions, we are quite interested in that program, quite interested in how it will evolve as the program gets up and running. If ultimately it proves to represent a fruitful avenue for disposition of assets we of course, would be interested in pursuing it.

Jill Hennessey

A second question, is your staffing appropriate for the amount of business that you are currently writing?

Peter E. Raskind

Well, I think the best way to respond to that question is to refer back to the performance improvement initiative that we’ve talked about on this call. As we’ve indicated going back to July and frankly earlier than that, we have done quite a rigorous review of our cost structure working with a very reputable outside consulting firm resulting in the conclusions that we’ve described this morning.

So clearly, we believe that we can and should take some actions to improve our efficiency and effectiveness. We’ve described those this morning in terms of $500 million to $600 million of annual savings to be achievable over the next three year period. And, as we said this morning, we expect while we’re still refining approximately 4,000 positions to be affected over the three year period.

Jill Hennessey

Operator, that’s all the email questions that we have at this time. I’ll turn it back to you for instructions for the live Q&A.

Operator

(Operator Instructions) Our first question comes from Mathew O’Connor – UBS.

Mathew O’Connor – UBS

With the potential to offload some of the riskier mortgage assets, I think a lot of us are stepping back and saying what kind of capital levels would you need to ex that portfolio in the current environment? I was just wondering if you could provide some color in terms of Tier-1 you’d want to target or common capital you’d feel comfortable with if you did not have the liquidating portfolio?

Peter E. Raskind

I think as we’ve indicated in the past, up until probably very recently, we’ve said in an equilibrium state meaning defined as you just did, without the liquidating portfolios, we would probably be thinking about a Tier-1 ratio in the 8% to 8.5% range. Now, the landscape keeps changing and in particular the announcement last week of the new efforts and new programs from the government to inject capital in the banks may impact over time what we all think of as the proper level of capitalization that would reflect strong levels of capitalization.

We’re just going to have to see how that evolves. If it becomes clear that the threshold for strong capitalization is drifting up because of those capital injections we will obviously need to be mindful of that.

Mathew O’Connor – UBS

Then separately you talked about the $500 to $600 million of cost savings. I would assume there’s some additional benefit from credit related expenses going away? I think this quarter had $100 million or so of OREO costs. Do you have an estimate of what the total credit related expenses were in this quarter?

Peter E. Raskind

When you say credit related expense you’re thinking of default management, foreclosure, OREO management and so on?

Mathew O’Connor – UBS

Exactly, what would show up in operating expenses or non-operating expense, the non-interest expense?

Peter E. Raskind

I’d say the following, that specific number you’re requesting, we don’t have at our fingertips, we could get. But, I think it’s fair to say that the cost initiative that we described earlier does not incorporate, does not address the credit related expenses you’re referring to. So, if your question is would a reduction over time in those kinds of credit related expenses be additive to the performance improvement initiative impact, the answer would be yes.

Thomas A. Richlovsky

If I could just add to that, the table on page 6 delineates some of those credit related expenses. Obviously, loan loss provision at $1.2 billion for the quarter, OREO losses of $122 million, recourse provision of $61 million, it’s fair to say that a good bit of the asset impairments of $41 million are credit related as well. Those are on the surface and then wouldn’t address sort of the infrastructure underneath that of people that are in workout and so forth which we don’t have at hand.

Mathew O’Connor – UBS

Then just last one if I may and I know it’s always a sensitive question but your name has been brought up in the paper of late in terms of potentially looking for a merger partner. I’m just wondering if you could comment on your desire to remain independent from here?

Peter E. Raskind

As you I suspect would expect, we have a long standing policy of not commenting on merger rumor speculation and we would adhere to that policy this morning.

Operator

Our next question comes from Michael Mayo – Deutsche Bank Securities.

Michael Mayo – Deutsche Bank Securities

Just going back to TARP, when do we find out if and how much of presumably your exit portfolio you decide to sell?

Peter E. Raskind

Well, I think the answer to that Mike is first only a portion of that lies within our control. So, it requires a counterparty on the other side that is ready to transact and there’s also obviously a pricing discovery process to be had as well. I think you heard Neal Kashkari last week talk about how they are organizing to get the TARP up and running.

It’s clear that the treasury department is still only in the organizational stage and it remains to be seen I think kind of when they’ll be ready to transact and on what basis they will be ready to transact. There has been discussion of reverse auction processes and also discussion of direct purchasing processes but the details of that and how exactly that will flesh out is not clear that we or anyone else know yet.

So, I would repeat what I said earlier, is this a potential avenue of interest for us? Absolutely. But, it is just too soon to tell how it will set up and much less what pricing will look like and whether it makes sense for our shareholders.

Michael Mayo – Deutsche Bank Securities

And your outlook for loan losses for the fourth quarter or for next year?

Robert C. Rowe

We reiterated the 2.5 to 2.9 so what that would mean is I think we could have around $800 million of charge offs in the fourth quarter and still be in the range that we have highlighted for the year and we are not prepared at this point to provide a forecast for 2009.

Michael Mayo – Deutsche Bank Securities

Lastly, it kind of goes to the question about would you partner up with another bank. What do you consider your kind of long term earnings power? I’ll give you just a couple of adjustments, sub question one is what do you consider normalized loan losses? Question two, how much of the new $500 million to $600 million savings from the new expense plan should hit the bottom line? Number three, any other one-timers you’d like to highlight?

Peter E. Raskind

As you know, we are not an organization that has or will provide earnings guidance and we don’t plan to this morning. I think the one-timers I think that have historically been embedded in our income statement, I think we’ve done a pretty good job of highlighting including this quarter. Then, the last point I’d make is as it relates to the performance improvement initiative and the cost savings resulting from it, we expect all of them to impact the bottom line.

Michael Mayo – Deutsche Bank Securities

For my own purpose of building a normalized earnings model [inaudible] after tax and that should be the EPS guidance or the earnings [inaudible].

Thomas A. Richlovsky

Less the charges. There are charges Mike, like we disclosed we would expect to take so [inaudible] you’d have to [inaudible].

Operator

Next we will go to the line of Kevin St. Pierre – Sanford Bernstein Co.

Kevin St. Pierre – Sanford Bernstein Co.

Peter, just to address some of the issues the last two callers asked from a different perspective, it looks like your stock is going to open down again today, market price of about $3 per share and a bit below and tangible book value of just over $6 so the market is clearly pricing in a non-zero probability that National City has to either fail or partner up in a take under.

With the performance improvement initiative and with deposits apparently stabilizing since the end of September, you don’t sound to me like a company in a panic mode or running to a partner to rescue you. Could you comment on that assessment?

Peter E. Raskind

Well, I guess I’d say the following, first I would profess to comment on what the market is or is not thinking about with respect to pricing our stock. Secondly, we are doing what we think are all the right things to take this company forward in to the future as we have described this morning including the performance improvement initiative of course.

All that said, as we have always said and I’ll repeat again today, this will always be the case, we will always do what’s best for our shareholders. In any given point, if there’s a transaction that makes more sense for our shareholders than continuing on, of course our board will fulfill its obligations by considering that and acting upon it if appropriate. That has always been the case, it remains the case today.

Kevin St. Pierre – Sanford Bernstein Co.

You’ve said in recent quarters that there’s no need for additional capital. Would you say that there is no need right now to partner with another organization?

Peter E. Raskind

Kevin, I’m not going to comment on that. We never comment on merger related stuff and I won’t this morning.

Operator

Our next question comes from Nancy Bush – NAB Research, LLC.

Nancy Bush – NAB Research, LLC

I guess I’d have to ask on the new expense reduction performance enhancement initiative, I’m still sort of thinking a couple of years ago where you guys had I think a billion effort going. Refresh my memory here on the numbers but of expense reductions, revenues, synergies, etc., did that achieve something? Did it go away? Has this blended in to the new one? I’m losing track of the expense initiatives here.

Peter E. Raskind

I think what you’re referring to is the initiative that we had called best in class. My recollection is that it was designed to achieve about $750 million of benefits with a disproportionate focus at that point on revenue oriented benefits and a lesser focus on cost oriented benefits. What we would tell you is that many of the cost oriented benefits, actually most of the best in class effort actually were achieved.

The revenue oriented benefits as always are far hard to track and trace because so much else in the business changes. But, I think you didn’t phrase it this way but I’ll phrase it back to you this way, so what’s different about this? I’d say the following, first this is a cost focus initiative, pure and simple. There may well be revenue benefits that arise and we have identified some but we’re not talking about them this morning and it’s not the focus of the initiative. It’s a cost oriented initiative.

I think we’ve attempted to convey that by being concrete about the savings and frankly even the number of positions to be impacted. Secondly, the initiative is being led by two executives whose responsibilities constitute 60% of the cost structure of the company. The purpose of that is to elicit engagement of the entire management team in particularly those areas where most of the costs lies and I think in the few months since we’ve been working on this, that’s been extremely effective.

Our view is that these numbers are very achievable. We have a very detailed and granular sense of how we will achieve the numbers frankly, far beyond the detail that we’ve supplied publicly today and therefore we have a high degree of confidence that we’ll be successful.

Nancy Bush – NAB Research, LLC

My other question here would just go back to the previous question and obviously with your stock at $3 or whatever, there are concerns about viability and I would just reflect that at the time that Wachovia failed they were also telling us that they had adequate capital but the issue seemed to be debt downgrades and these silent runs by corporate customers.

Do you think that the environment has changed sufficiently now that a) the Moody’s indicated that they might downgrade your debt that the rating agencies will look at you differently and are you fairly sanquant that corporate customers are a little more comfortable now than they were a month ago?

Peter E. Raskind

Well, it’s hard to forecast what Moody’s will or won’t do. You’re quite right, they do have us in review for downgrade and we’re in very, very close contact with Moody’s and the other rating agencies on a regular basis as we have always been. As it relates to corporate customers, we’ve tried this morning to be as trans as we can be about what we’ve experienced over the last quarter.

We do think that the actions taken last week specifically the FDIC guarantee now of all transactions accounts without limit is a very powerful mechanism to calm corporate customers who may be concerned whether it’s for National City or any other institution in the country. As I think Tom mentioned in this remarks, I mean we have already seen in the early going a greater sense of calm on the part of our customer base whether they be corporate or consumer.

So, we’ll see how that plays out over time. I would remind you that while the share price is $3 as you point out, in terms of market cap, that translates to over $6 billion of market cap given our new share count after the conversion of the Series G preferred in September. Those are all the comments I would offer. We stand by our comments this morning.

Nancy Bush – NAB Research, LLC

I would just also ask at what point do you think you kind of come out of all of this. Now, I know we’re looking at a worsened economic scenario right now but are we talking about 2011, 2012 when you see yourself out of the exit portfolios and more or less looking like a normal company?

Peter E. Raskind

Well, we wouldn’t forecast that here this morning. I would say that do we continue to expect a challenge environment for the foreseeable future? We do. There’s no question that the credit environment broadly is becoming more challenging, unemployment is on the rise, all the usual factors that challenge any bank and so we are not expecting any particular respite environmentally in the foreseeable future.

But, I don’t think we’d be offering any forecast this morning in terms of to use your term when we come out of it.

Operator

Our next question comes from Vivek Juneja – J. P. Morgan.

Vivek Juneja – J. P. Morgan

Peter, you made several comments as it regards to capital with the respective questions coming out. I guess I’m trying to triangulate all of those including no need for more capital, TARP asset sales, comments on M&A. You didn’t comment on the TARP capital part of it. Can you clarify what your thinking is on – since there’s been bits and pieces I’m trying to figure out what that all means in terms of your interest in participating in the TARP capital part of it?

Peter E. Raskind

Previously I spoke to the TARP asset purchase portion. With respect to the TARP capital program that was announced last week, I think what we’d say at this point is we are interested in it and analyzing what the implications would be for our shareholders of participating. As we said a number of times, prior to that program being announced I don’t think we felt that we were in a position of needing more capital.

But, given the announcement of the program and trying to understand the landscape as it will impact broadly the industry, I will tell you we’re in analysis mode and studying it and attempting to determine whether we think applying for that capital would be in the best interest of our shareholders or not.

Vivek Juneja – J. P. Morgan

When you say you didn’t believe previously you didn’t need more capital was that more a function of where you see credit going or are you thinking of doing anything on the lending side? Could you talk a little bit about how you intend to come up with that answer?

Thomas A. Richlovsky

I think our view on capital is a function on our view as expressed in the slides this morning of the loss content in the exit portfolios. We have pretty clear internal views and opinions about what those loss contents are. That’s what drove the capital raise of $7 billion so that the choices are continue to manage the assets as we have and collect the dollars as they come in or look at strategic alternative pieces of the portfolio whether that’s the TARP or private sales.

But, the point of having the $7 billion of extra capital was to give us the flexibility to consider a range of options.

Peter E. Raskind

I might just add to Tom’s comment that I think the other relevant factor her is pre-tax pre-provision earnings. We’ve done obviously detailed forecasts and projections over a multiyear period of how the bank would evolve with respect to loss content in the portfolios, the steady liquidation of the exit portfolios, growth in other aspects of the business and the earnings that would result and try to take an integrated look at all of that against the capital position we want to achieve. It’s that kind of analysis that gives rise to the statements we’re making.

Vivek Juneja – J. P. Morgan

In your plans Peter and Tom, what was your unemployment forecast that you’ve assumed going in to ’09 that was beneath your $7 million capital raise that you did?

Robert C. Rowe

Vivek, the unemployment forecast that we have over the next 12 months is to rise to around 7% or so and that would be underlying our thoughts for the consumer portfolios.

Vivek Juneja – J. P. Morgan

Is the piece of increase you’ve seen this far and how much is spreading, is that in keeping where you were in your original plan or is that different?

Robert C. Rowe

It’s pretty consistent with our original thoughts to your point of the capital raise.

Operator

Our next question comes from [Steven Laner] – Morgan Stanley.

[Steven Laner] – Morgan Stanley

I have a couple of housekeeping questions. When you breakout the holding company balance sheet in the 6/30 Q there are investments in non-bank subsidiaries of $700 million and non-bank receivables of $971 million. Can you shed some light on what these are?

Thomas A. Richlovsky

I’m not going to be able to shed detailed light but I can tell you sort of generically the holding company’s non-bank subsidiaries include a community development corporation, a smaller broker-dealer and then some of our private equity merchant banking activities are in the holding company, part of that portfolio. So, those are typically advances to fund the inventory of the broker-dealer or the real estate development assets of the community development corp. Pretty plain vanilla stuff.

[Steven Laner] – Morgan Stanley

How about the $1.1 of other assets that you show there?

Thomas A. Richlovsky

Would be a variety of things including accrued interest receivables, some corporate owned life insurance, miscellaneous assets. We can get you a list but I just don’t have it at hand.

[Steven Laner] – Morgan Stanley

Lastly, have there been any transactions in the quarter, capital injections if you will between the hold co and the bank?

Thomas A. Richlovsky

No. The hold co’s cash position is as we described it three months ago, three months later.

Operator

Our next question comes from [Tom Kitell] – American Financial Group.

[Tom Kitell] – American Financial Group

The previous caller was hitting on some of the things I was going to ask about, one was the hold co cash level and secondly as I recall you’ve come out prior recently with the number of months if you will that you will not have to finance in the unsecured market. Where are we looking on the unsecured front given where the debt prices are of that and how you kind of view your hold co cash and that type of story?

Thomas A. Richlovsky

It is exactly the same as it was last July less three months. So, essentially through January, 2011 the hold co is funded for all contractual cash outflows plus dividends at the current rate on all securities. Assuming, no access to capital markets, commercial paper or upstream dividends from the bank.

[Tom Kitell] – American Financial Group

The second question then would be are there any restrictions on you to the extent that you would have excess liquidity via the TARP capital raise or whatever avenues you have, the $500 million coming in on the exit portfolio that you would consider going out and buying some of that back at advantageous prices?

Thomas A. Richlovsky

We have done a little bit of that over the last few months and would continue to be opportunistically interested in individual one off transactions.

Operator

Our next question comes from [David Kunusin – Legal & General].

[David Kunusin – Legal & General]

You talked about the study by the consultants for the strategic disposition of assets and you mentioned private sales in addition to the TARP. How far along is the consultant in the preparation or in the final report? Could you shed maybe a little more color on that particularly as it relates to private sales.

Peter E. Raskind

Just to be clear I don’t think we did mention a consultant in relation to asset disposition. I think we mentioned a consultant relationship to our MSR hedging program and in relationship to the performance improvement initiative project that we have underway.

Thomas A. Richlovsky

I said that.

Peter E. Raskind

But, I think with or without a consultant it is frankly not that relevant. We think we’re in a place where we have a very, very good and detailed understanding of the assets, particularly those in the exit portfolio with respect to their characteristics, our own perspectives as to valuation, our own perspectives as to valuation under stressed scenarios so that we have a very good database t work with in terms of evaluating disposition alternatives whether those alternatives are TARP related or privately related.

So, we think we’re in a good place in terms of a firm and detailed understanding of the assets and what we think they’re worth so that we can do the best job possible if we do pursue disposition alternatives of doing so in a way that as we’ve said in the past is reasonably economic for our shareholders. I guess the consultant point isn’t really relevant to that but, that’s where we are and whether we would ultimately sell assets to the TARP or not or sell assets privately or not we have a good firm base of information in place to access those alternatives.

[David Kunusin – Legal & General]

Two other real quick questions, the FDIC program came up the increase in the deposit guarantee and then the unlimited for non-interest bearing accounts, can you give us an idea of what that does in so far as reduce the uninsured deposits at the bank in terms of a percent or a notional amount?

Daniel J. Frate

In relation to our core retail deposit base, the percentage of our deposits now that would be greater than $250,000 I believe is a little bit over 5%.

[David Kunusin – Legal & General]

Is there any decision yet regarding opting out of either one of those two programs? The FDIC guaranteed debt program or the deposit guarantee program?

Peter E. Raskind

I think the straightforward answer is no decision yet.

[David Kunusin – Legal & General]

The last question is you mentioned I think a couple times on the call that you continue to be a net seller of overnight funds. I just want to make sure that, that’s overnight Fed funds number one? And secondly, with LIBOR now actually below Fed funds would you expect that to be somewhat mildly accretive to your [NIM]?

Thomas A. Richlovsky

When we say overnight funds it’s either Fed funds sold or deposited at the Federal Reserve Bank as reserves which are now being paid a modest rate of interest. But, if I understand your question correctly, it’s a drag on margin either way because the Fed funds rate is still significantly lower than LIBOR.

Operator

At this time we have no additional questions. Ladies and gentlemen this conference will be available for replay after 10 am eastern time today through October 28, 2008 at Midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 893755. Again, that telephone number is 800-475-6701, using the access code 893755.

That does conclude our call for today. We thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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Source: National City Corporation Q3 2008 Earnings Call Transcript
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