National City Corporation Q1 2008 Earnings Call Transcript

Apr.22.08 | About: National City (NCC)

National City Corporation (NCC) Q1 2008 Earnings Call April 21, 2008 11:00 AM ET

Executives

Thomas Richlovsky - Senior Vice President and Treasurer

Peter E. Raskind - Chairman, President and Chief Executive Officer

Jeffrey Kelly - Vice Chairman and Chief Financial Officer

Robert Rowe - Senior Vice President and Chief Credit Officer

Jill Hennessey – Investor Relations

Clark Khayat - Head of Corporate Development

Analysts

Mike Mayo - Deutsche Bank

Matthew O’Connor - UBS

Brian Foran - Goldman Sachs

Nancy Bush - NAB Research

Terry McEvoy - Oppenheimer

Gerard Cassidy - RBC Capital

Scott Siefers - Sandler O’Neill

Operator

Welcome to National City Corporation’s first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Tom Richlovsky, Senior Vice President and Treasurer of National City Corporation. Please go ahead, sir.

Thomas Richlovsky

Thank you and good morning, everyone. Welcome to National City Corporation’s first quarter earnings conference call.

Before we get started, please note that the presentations and commentary that you are 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 10-K and in our other filings with the Securities and 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.

Given the transaction we announced this morning we will be taking live questions in addition to the usual email. Instructions for the live Q&A will be forthcoming following the presentations. As always, you can also send an email to investor.relations@nationalcity.com. We will take as many questions as time permits.

Here with me this morning are Peter Raskind, our Chairman and CEO; Jeff Kelly, Vice Chairman and CFO; Dale Roskom, Chief Risk Officer; Rob Rowe, Chief Credit Officer; Jill Hennessey, Investor Relations Manager, along with several other members of the senior management team.

Finally, I will call your attention to the slide deck posted on our website, NationalCity.com, which you may want to have at hand during the presentation; in particular, the credit discussions.

With that, I will turn the microphone over to Peter.

Peter Raskind

Thanks, Tom and good morning, everyone. As you know, we announced on April 1st that we were evaluating a range of strategic alternatives for National City. After thorough exploration of a wide range of alternatives, last evening our board took two important actions: it approved a plan to increase our equity capital base by $7 billion and it also reduced this quarter’s dividend to $0.01 per share.

The dividend reduction was obviously not a pleasant decision but totally appropriate given the net losses recorded for the last three quarters and our desire to strengthen our capital base. However, coupled with the $7 billion of new capital, we believe the total result is clearly in the best interest of shareholders and is indeed transformative for National City. With these actions we have stabilized and protected our investment grade debt ratings and we’ve made a very powerful statement about our ongoing strength and stability.

Over the last few months in view of market concerns of our real estate exposures and rating agency actions we found ourselves playing defense, defending against rumors and market speculation -- much of it false -- which was distracting to both the employees and customers. Pro forma for this transaction, our tier 1 capital ratio increases to 11.4%, which will be among the highest, if not the highest, among large banks by a fairly substantial margin.

Having a substantially stronger balance sheet is a game changer, meaning we can now go back to playing offense rather than just defense. Among other things, it positions us to navigate through potential additional declines in the housing and credit markets including scenarios significantly more stressed than our current outlook; and to explore alternative disposition strategies for problem assets. It reassures customers that we are here for the long haul and able to meet all their financial services needs. It allows employees to focus 100% on what they do best: serving customers and representing the bank in all of our communities.

A few words about the transaction. Corsair Capital is a well-established private equity firm focused exclusively on long-term investing in the financial services industry. It has a solid track record of making successful long-term investments and productively working with the boards and management teams of the companies in which it invests. Dick Thornburgh, Vice Chairman of the firm, will join our board. In addition, we intend to name a new second independent director as well.

Behind Corsair’s investment of $985 million will be just over $6 billion of equity issued to other investors, including many of our largest institutional stockholders. The response by these investors to the offering was very strong. In fact, we ultimately upsized the transaction from an initially smaller offering.

We can happily cover more in the Q&A if you like but in the interest of time, let’s go right to the discussion of first quarter results which Jeff Kelly will handle.

Jeffrey Kelly

Thanks, Peter. Let me make some brief comments on our financials for the quarter. Obviously, the provision for loan losses overshadowed the other fundamentals in the quarter which for the most part were good. Net interest income was roughly flat to that of the fourth quarter despite a decline in the net interest margin.

I would attribute the narrower margin really to three factors:

First, the increase in non-performing loans and the tenant interest reversals is exerting some drag on overall earning asset yield.

Second, deposit costs have declined less than earning asset yields and in particular, the Fed funds rate reflecting a competitive deposit environment and a rapid reduction in short-term rates. This dynamic of rapid reductions in short-term rates is not unusual in that these declines in short-term rates tend to adjust loan yields more quickly than deposit yields.

Third, given the unsettled state of the capital markets over the last several months coupled with downgrades or review for downgrades of our debt ratings, we have learned anecdotally from certain market participants that their authorization to lend to us and similar borrowers has been reduced. As a result, we have deliberately positioned the balance sheet to be much more liquid by borrowing more term money and issuing retail CDs among other things. We’ve been successful in those efforts, such that we have been a significant net seller of Fed funds during most of the first quarter and currently.

However, the cost of that liquidity and being a seller of Fed funds in a declining interest rate environment definitely affects the margin.

That said, with the capital raise and the stabilization of our debt ratings coupled with the overall liability sensitive position of our balance sheet, we would expect to see less pressure on the margin and indeed some improvement in the margin going forward.

In terms of unusual items during the quarter, I would highlight the Visa gain and associated reversal of litigation reserves. We still own restricted shares in Visa that at the current conversion rate and trading price for Visa public shares have a nominal value of around $900 million carried on our books at zero. We intend to explore options to monetize this stake but with the new capital in place we have more time if needed to maximize the value of that stake.

We also incurred some integration costs during the first quarter of around $19 million associated with the February conversion of MAF Bank in Chicago and Milwaukee. In general, we will be watching costs carefully to make sure that the overall cost structure of the company is properly aligned with the revenue opportunity at hand.

A final comment about the balance sheet. Clearly the capital raise dramatically improves our capital position and as Peter said, allows us to start playing offense instead of just defense. That said, I would tell you that the financial turmoil over the last nine months has definitely sharpened our focus on capital allocation and the use of the balance sheet. As a result, we are less inclined to pursue credit-only customers without a clear path to a fuller and broader relationship.

Let me just make a couple of comments on the line of business results. Generally I would say that the core business lines performed in line with expectations. In retail banking, generally good performance there. We did see growth in core deposit balances and particularly and more recently in time deposit. We did see a larger than normal loan loss provision there reflecting a general softening of consumer credit conditions.

In the commercial bank some net interest margin pressure owing to the increased cost of funds and I would say the general competitive pressure on deposit rates, but generally non-interest income and non-interest expense pretty much on target.

In mortgage banking, as you know we have downsized our origination significantly from the fourth quarter. That’s reflected in those segment results, and clearly the loan loss provision here was elevated and that was primarily related to the construction firm book which may be discussed later on in Dale or Rob’s comments.

With that, let me turn things over to Rob Rowe.

Robert Rowe

Thanks, Jeff and good morning, everyone. My comments this morning will summarize the first quarter performance of the loan portfolio by major segment, including the ongoing businesses of National City and the liquidating portfolios.

In the ongoing businesses, the commercial and industrial loan portfolios continue to perform well. Please note that there has been some softening in the core retail portfolio. I will address both of these segments in a minute. I will also give an update on the higher risk liquidating and residential real estate portfolios where performance has been generally worse than expected.

Please turn to slide 10 which provides an overview of first quarter performance for the $116 billion portfolio by segment. In total, net charge-offs for the quarter were $538 million, compared to a $1.4 billion provision charge, increasing the allowance for loan losses to $2.6 billion or 2.23% of loans at quarter end.

During our last call we indicated a range for 2008 losses of $1 billion to $1.3 billion. We are updating that guidance to a range of $2 billion to $2.4 billion. In response, our reserve builds for the quarter was $855 million.

Deterioration in broker-sourced national home equity, the non-prime mortgage book and the residential real estate construction firm portfolios exceeded expectations, resulting in higher first quarter charge-offs and provision charges. Net charge-offs in the quarter included approximately $53 million related to adopting new policies that accelerate loss recognition in the non-prime portfolio and $12 million of charge-offs recognized in the branch home equity portfolio as acquired portfolios were trued up when they were converted to National City application systems.

Excluding the effect of these items, the first quarter charge-off rate in the branch home equity portfolio was 77 basis points and 6.35% in non-prime mortgage.

The C&I portfolio continues to post strong results with a charge-off rate of 27 basis points for the quarter. The one area of concern in this book is the small business segment of the Florida portfolio which is showing some early signs of stress.

The charge-off rate for the commercial real-estate portfolio was 44 basis points for the quarter. Increased reserves in CRE are influenced by our view of higher future charge offs in a residential development portfolio, particularly in Florida. The majority of the ending CRE allowance for losses relates to this residential development segment.

Slide 11 shows the detail of commercial real estate by geography and by product class. The delineation of performance along geographic lines continues with much of the stress in Florida and Michigan. Please note that Florida’s NPA percentage has exhibited significant deterioration since the last earnings call.

The first shaded row at the top of the slide titled “residential development including land” is where most of the stress is in the portfolio. Of the roughly $4.1 billion of outstandings, approximately $1.1 billion is in condos, $1.6 billion is in homes being constructed in single-family home developments and $1.4 billion in the land and lot loans tied to the aforementioned single-family home developments. Of the $1.1 billion in condos, approximately $350 million are in Florida, most of which will come on-line in the near future. For the most part these condos are on the waterfront and have had strong presales activity with little fallout in deposits.

The $750 million balance of the condo portfolio comes on-line in late 2008 and 2009. The geographic split is Chicago, New York, Boston and D.C. Of the $758 million of Florida exposure inherited from the Harbor and Fidelity acquisitions, approximately $225 million is spec homes that are currently performing because the developer is paying interest carry out of pocket. We believe that many of these developers are feeling liquidity pressure and as the length of the housing contraction continues, many of them may default. Should this happen, we would expect loss severities around 35%.

Slide 12 summarizes our overall home equity exposure of $26 billion at March 31 broken into the same three segments as we did the last quarter. All of the national home equity portfolio, but in particular the most recent vintages, titled here as “originated for sale”, posted higher charge-offs and delinquencies than we had expected.

To expand on comments from last quarter’s update, the segment of broker loans that combined stated income, high-cost high HPA markets such as Florida, California and New York, and product originated on a standalone or cash back basis are charging off at elevated levels. This subset of the national home equity portfolio represents about 15% of balances but accounts for about half of first quarter losses. The first quarter reserve building actions reflected on slide 10 reflect our view that charge-offs will persist at this higher level over the next year.

The $15.7 billion branch and direct portfolio also posted growth in charge-offs. Again, adjusting for charge-offs related to systems conversions, the charge-off rate in Q1 was 77 basis points. We do anticipate losses in this portfolio will run at a higher level over the next year. Borrower characteristics in the branch portfolio, which we reviewed in some detail last quarter including the depth of cross-sell, long tenure relationships and generally lower CLTV levels continues to suggest it will be more stable and perform better than the national broker-originated portfolios.

Please turn to slide 13 and the construction firm loan portfolio originated through the mortgage company. A significant portion of this portfolio is in Florida and California. The NPA and 90 plus day past due level increased $50 million to $493 million in total at March 31. Delinquency has extended to borrowers building their primary residence, not just those building second homes or investment properties. We now expect losses to continue at about $100 million a quarter for the next year based on severity assumptions of 75% for undeveloped plans, 95% for in-process homes and 50% to 55% for near completion projects.

Slide 14 provides performance information on the non-prime balances related to the former First Franklin business. These balances continue to liquidate from $6 billion at year-end to $5.3 billion at March 31. From a risk perspective, there are two portfolios here: $4 billion of first mortgages and $1.3 billion of second. The second liens have and will continue to drive the bulk of the losses. As you can see from the middle of the chart, it is apparent that the trends in the 90-plus day dollar delinquency number have deteriorated since midsummer when liquidity for this asset class dried up.

We believe that a significant factor behind growing second lien delinquencies and losses are rate resets on the underlying first lien. Through the end of the first quarter, many of the seconds have had a first in front of them reset. We did significantly increase our loss reserves for this portfolio in the fourth quarter and further added to loss reserves in the first quarter. We also adopted new charge-off policies that accelerated loss recognition in the portfolio, including recognizing 100% loss severity on second liens at 180 days past due and reflecting recoveries from mortgage insurance proceeds on a cash basis. Incremental first lien charge-offs include the effect of higher loss severity assumptions.

This slide show the pro forma effect of this policy and assumption changes on first quarter results. The slide also recasts on a pro forma basis net charge-offs in earlier quarters to affect both credit charge-offs and reinsurance loss.

On slide 15, we are summarizing remaining expected losses on these three higher risk and liquidating portfolios. The remaining cumulative loss amounts noted are reduced in part by the losses reserves noted on slide 10. We expect remaining losses in national home equity of $2 billion to $2.4 billion from the $10.8 billion portfolio based on normal future draws against the $5 billion undrawn HELOC commitment, two-thirds of which relates to the originated portfolio segment, one-third relating to the originated for sale segment; and continued severity rates in the high 90s.

The non-prime portfolio losses shown here at $750 million or net of expected mortgage insurance recoveries. Gross losses before mortgage insurance would be approximately $1.2 billion. For the second lien portfolio cumulative lifetime gross losses are expected to be approximately 50% of the beginning static pool.

For the construction term portfolio the combination of normal construction schedules and the severity rate assumptions reviewed earlier lead to an expectation of $550 million to $625 million of remaining losses principally over the next 15 to 18 months.

In summary, the core commercial portfolio is performing well with a modest stress emanating from the core consumer portfolios. The outlook for 2008 losses as well as the remaining expected cumulative losses in the three higher risk and liquidating portfolios remain subject to a higher than usual degree of volatility. The outlook is subject to trends in home price depreciation and in potential shifts in consumer behavior as a result, as well as the impact of a weakening economy and the extent of liquidity in the mortgage capital markets.

This completes the end of our prepared remarks and I will hand it off to the operator for question and answers.

Thomas Richlovsky

Rob, thanks. This is Tom Richlovsky. Before we go to the live Q&A we do have several email questions that we’ll handle first and then we will go to the live. Jill?

Question-and-Answer Session

Jill Hennessey

Thank you, Tom. Peter, a few questions for you.

First, please address the very dramatic dilution imposed upon existing shareholders by the just-announced capital action. Selling material interest in the company at more than a 50% discount from tangible book value suggests a desperate need for capital. Given the company’s liquidity and earnings power of the retail bank, wasn’t a more palatable alternative available to management?

Peter Raskind

Thanks, Jill. First of all stating the obvious, there is no question that this transaction is substantially dilutive to the current shareholders. That is factual and irrefutable. But I have to say our objectives for this transaction were severalfold.

First, it was very important for us to provide ourselves with sufficient flexibility to deal with our problem assets we felt in a more expeditious fashion than simply over the passage of what would probably have been a relatively long period of time. While we’ve made no particular decisions as to exactly what actions we’ll undertake to do that, what we now know is that we have the flexibility to move through these problems more quickly than we otherwise would have.

Secondly, it was also very important and Jeff referenced this in his prepared remarks for us to stabilize our debt ratings beyond a shadow of a doubt, in order to head off some of the rumors that were circulating. And as Jeff mentioned, anecdotally some cases where we knew that we had counterparties who were uncomfortable interacting with us. That had to stop.

So on both counts, it was clear to us that the answer to that was incremental capital and definitionally and unfortunately because it’s not something we’re pleased about or proud of but definitionally that was going to mean dilution to the current shareholders.

Jill Hennessey

Peter, by any fair measure the shareholder value lost under the leadership of the current management team represents an unacceptable record. What is the board’s reaction to this situation and how can shareholders expect a better performance in the future without material changes in leadership?

Peter Raskind

I think that’s a very fair question and I will respond in a couple of ways. First, I think we would all agree we -- the management team and the board -- that this is an unacceptable record and not something that we are remotely again pleased about or proud about. The questioner asked about the board’s reaction, and I think it’s fair to say the board is equally displeased with this record for our shareholders and I’m comfortable with it.

That said, the fact is we actually have made a number of material changes in our management team over the last six months. For example, the entire management team of our mortgage operation is newly in place. We’ve made very substantial changes in management at the top of our risk management and credit organization; changes as well in our finance organization, and in our regulatory and compliance framework in addition a number of other changes elsewhere.

So actually I think we have made a number of significant changes over the last six or eight months in very material positions. Obviously, the proof will be in the pudding in terms of better performance in the future based on the performance of that talent. I think we can all assume and presume that the board will monitor closely our performance and at any point that the board felt that a change further near the top was required they would do so.

Jill Hennessey

Peter, how was it you chose to raise capital as opposed to merging with another organization?

Peter Raskind

Well, as I’m sure you can understand I can’t go into too much detail about the processes that we’ve undertaken. But as I said in my prepared remarks, what I can assure you of is we and the board together did in fact explore quite deeply a wide range of alternatives and ultimately the board unanimously concluded that this alternative was the best in terms of serving the interests of our shareholders.

Jill Hennessey

Thank you, Peter. Clark, I have a few questions for you. Roughly how many common shares do you anticipate will be outstanding assuming conversion of the Series G preferred stock?

Clark Khayat

Assuming that conversion there would be approximately 2.034 billion outstanding.

Peter Raskind

I think we have failed to introduce Clark Khayat, our Head of Corporate Development, who was leading the charge with respect to this transaction and therefore very well positioned to respond to detailed questions about the transaction.

Jill Hennessey

Clark, how many warrants will be issued in this transaction?

Clark Khayat

63,690.

Jill Hennessey

When do you anticipate the special shareholders meeting to take place?

Clark Khayat

June 23rd.

Jill Hennessey

Will there be a mechanism for individual shareholders to maintain their present ownership?

Clark Khayat

Existing shareholders broadly –I presume that is the question -- the answer to that at this time is no. This was a privately placed deal and therefore that option does not exist broadly to the shareholder base.

Jill Hennessey

Thank you, Clark. Tom or Jeff, were there any accounting deficiencies? If so, can you please discuss them?

Thomas Richlovsky

Thanks, Jill, I will take that one. We have and had no material weaknesses as that term is defined under the Sarbanes-Oxley 404 rules. We did however have a significant deficiency and for those of you not versed with that term of art, significant deficiency is defined as one that in combination with other deficiencies -- internal control or financial reporting, which is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.

In my group, we do conduct that oversight responsibility in conjunction with our internal audit group. We did identify one matter that we have deemed to be a significant deficiency as that term is defined. It had to do with the documentation of our reserving for some of our liquidating portfolios.

Partially responsible for that is the fact that these portfolios were moved in from held-for-sale portfolio in the fourth quarter and frankly the staff was somewhat overwhelmed in dealing that initially. That deficiency was duly reported to the audit committee as is required. A remediation plan has been put in place and is being executed. We are required to test that plan for two consecutive quarter end closes and we believe it is well on the road to mediation.

Given that we flag this as a significant deficiency, we do perform alternative tests and processes to make sure that the numbers in the financials are in fact stated in accordance with our polices and with GAAP. So we are not in effect relying on the system as advertised to us. That is the only significant deficiency that we have in place.

Jill Hennessey

Thank you, Tom. A few questions for Rob Rowe. The allowance to net charge-offs fell meaningfully in the first quarter suggesting that either a peak in the level of charge-offs is close or that a further build in reserves is necessary. Assuming the latter is the correct outlook in the current environment, please discuss the implications for provisions in the second quarter and the remainder of the year?

Robert Rowe

It is true that the allowance for net charge-offs fell but that’s more a reflection of the mix of the allowance. As many of you know in the consumer books it’s typical for the industry to have a next-12 month look but a corporate book would have a longer look, probably around two years or so. So as our allowance mix shift has been more towards the consumer side, which is a one-year look, you will end up with this metric just dropping because of that.

I will discuss briefly that in terms of the implications for the provisions in the second quarter -- and we’ve received this question from a couple of others folks -- we’ve given guidance on a charge-off forecast to the extent that delinquencies were to rise significantly, in particularly the second lien books which have 100% loss severity, now obviously that would reflect in reserve building on a continuing basis. But that’s what I would be looking at, but other than that I don’t want to give more guidance.

Jill Hennessey

Rob, 90-day past dues were stable. How should we interpret that and what was the impact of the methodology changes?

Robert Rowe

Well, on the First Franklin book we moved $120 million of loans that were in the 90 plus bucket into non-performing status. So obviously that was a reduction of 90 plus by that number and an increase by MPAs by that number. We obviously are looking very hard at the 30 to 89 day buckets, and the 90 plus buckets.

I would not want to say that they have flattened out per se, but the rate of growth has obviously slowed in those. However, as Dale and I are looking at the stressed asset portfolio we include the MPAs as well, and certainly between MPAs and 90 plus there was a significant increase in the first quarter.

Jill Hennessey

Thank you, Rob. A question for you, Jeff. Have your core deposits increased or decreased since 3/31/08 and what is the current balance?

Jeffrey Kelly

I don’t have the current balance right at hand but we have seen a steady increase in the retail core deposit base, particularly in the time deposits category. We’ve seen an overall decline in corporate deposits but those tend to be considerably more volatile and are down slightly as are escrow deposits. But generally speaking, the largest category far and away, of retail core deposits continue to grow steadily.

Jill Hennessey

Thank you, Jeff. Clark, a few more questions for you on the capital raise. Why didn’t you use a shareholder rights offering to allow all shareholders to participate in the capital raise? Do you expect any lawsuits from shareholders who were not invited to participate?

Clark Khayat

Before I answer that, Jill, let me just clarify a previous answer I gave. The 63,690 shares is actually the amount of contingent convertible shares issued, not the number of warrants. The number of warrants is 61.8 million. So I apologize for that misstatement there.

As it pertains to a rights offering, given the review of alternatives that we went through and the timing related to that process in conjunction with the current market uncertainty, the timing required to execute on a rights offering was deemed to be not the best answer for shareholders at this time, and that was unanimously viewed by the board.

As far as it pertains the lawsuits, I wouldn’t pretend to be able to speculate as to what will come out of this.

Jill Hennessey

Did the investors that were invited to participate in the offering get an opportunity to look at your non-public financial statements and internal projections before they made their decision to invest? If that is true, were any of them already shareholders?

Clark Khayat

Taking the first question first, the answer to that is yes, but let me make a significant distinction here. Corsair on behalf of the private equity investors was able to see a more expansive view of material non-public information. The follow-on institutional investors then reviewed information that will be made public and is made public or has been made public as of this call. So they are effectively cleansed from that material non-public status. And, yes, I think Peter mentioned earlier that several of our current shareholders participated in this.

Thomas Richlovsky

Jill, before you go to the next question, we’ll do one more email question then we will go to live.

Jill Hennessey

Peter, final question for you then from the email. Every additional dollar raised further hurts National City’s shareholder base. What would be the necessary return on equity to justify raising these funds, and why would you not limit the offering to what was necessary and prudent?

Peter Raskind

Well it’s a great question and I think the answer to it really revolves around the estimate of what is necessary and prudent. I think it is fair to say that as we went through this process and talked with a large number of significant potential investors -- and very sophisticated investors -- there was a very wide range of views as to what the right sizing was for this capital raise.

Of course the pivot point there, as you might expect, was very widely varying views around ultimate loss expectations. So the answer as to what was exactly the right size and what was prudent frankly was not at all obvious. But as I said earlier, certainly one of the key objectives for us was to make sure that we had the proper flexibility to deal with loss content in the liquidating portfolios comfortably and in an expeditious way; as well as I said earlier to make sure that we stabilized debt ratings as well.

So again, recognizing fully that at any significant magnitude whether it be $7 billion or less than that, the dilution to current shareholders would be substantial we did conclude that conservatism in this regard would serve us well, and that another trip back to the capital markets in the near future would be inadvisable.

Thomas Richlovsky

Before we go to live Q&A, I think Jeff wanted to add on to his response earlier.

Jeffrey Kelly

Yes, thanks Tom. This is an add-on to the question related to core deposits and particularly the balance of where we are today. Total core deposits as we stand or actually as we stood Friday were $87.9 billion, which is about $1.6 billion below the level that existed on March 31. About two-thirds of that decline or a little over $1 billion was in escrow balances and again escrow balances tend to vary a lot during the course of a month and as it relates to re-fi activity and other activity in the mortgage company.

As I said also, corporate deposits are also quite volatile, and similarly as we sit here today we are just after a tax date so that is probably another factor driving down deposits.

But in retail, those are up significantly some $500 million above the level at the end of March.

Thomas Richlovsky

Thanks Jeff. With that, operator, can we go to the live questioners please?

Operator

(Operator Instructions) Our first question comes from the line of Mike Mayo - Deutsche Bank.

Mike Mayo - Deutsche Bank

What is the pro forma tangible book value?

Clark Khayat

The pro forma tangible book value per share is $7.02. Let me do the math there.

Mike Mayo - Deutsche Bank

As far as deals, there’s a lot of reports in the press and we never knew what was true and what wasn’t. Was it a matter of you getting offers and saying no or did you not get the offers? Can give any more color on that?

Peter Raskind

Unfortunately I can’t provide a lot more color on that. All I can tell you is again is we did thoroughly explore a wide range of alternatives and ultimately it was clear to us that this alternative was the best for the shareholders. I just can’t provide much detail beyond that.

Mike Mayo - Deutsche Bank

What about the idea of selling off pieces of the firm, like selling off Florida for example, and therefore needing to raise less capital?

Peter Raskind

Again all I could tell you is we evaluated a wide range of alternatives and concluded unanimously that this was the best among them.

Mike Mayo - Deutsche Bank

Then asset quality, as far as reserve builds, why not more? Page 15 of your presentation, the loss expectations, I guess you’re saying around $3.5 billion more. So why not just put in there an additional reserve of $3.5 billion so you’re covered for any loss that you expect?

Thomas Richlovsky

The loss expectation, or cumulative loss that’s displayed on the slide is essentially our view looking out to the future based on events which we think or presume or expect might occur over an extended timeframe. Our requirement under GAAP is to try to measure the expected or actually the probable current impairment in the loan portfolio as of the balance sheet date; a very different time concept, and it’s not something that’s contingent on future events, but what is the current impairment?

As a proxy for that or as a way to get to that answer, we typically tend to look at on the consumer side a 12-month forecast of losses as a basis to try to estimate or triangulate to what is the current impairment.

Mike Mayo - Deutsche Bank

Around the accounting requirement; just in terms of economic value, when you see that $.5 billion of additional expected loss was that one of the reasons why you thought it necessary to raise $7 billion?

Thomas Richlovsky

Fair enough.

Peter Raskind

Certainly, that kind of loss expectation and the potential for variation around it because none of us certainly have the crystal ball. So absolutely that and loss expectations around the other portfolios as well, absolutely was input into the size of the capital range.

Mike Mayo - Deutsche Bank

If you were to give that same sort of data, cumulative loss on parts other than the high risk portfolios, could you give us any other of the economic analysis that you came out with?

Peter Raskind

We’re not planning to provide guidance on the non-liquidating portfolios in that regard.

Thomas Richlovsky

Mike, we’re going to try to get to another caller. If you can come back later if there is time, I do want to give other callers a chance to ask their questions.

Operator

Next we have Matthew O’Connor - UBS.

Matthew O’Connor - UBS

Thanks for taking live questions here, I think it’s really helpful. Peter, you have exited or reduced the number of mortgage-related businesses and now that you’ve reloaded on the capital side and my guess is that will stabilize some of the issues, or at least perception issues, does it make sense to do a broader restructuring from either a business point of view or some of your geographies?

Peter Raskind

Matt, as we push ahead here, we’ve now provided ourselves some flexibility and job one will certainly be to choose the most effective ways to deal with the very real asset quality issues we have, particularly with the liquidating portfolios. But I think it’s fair to say that as we push ahead we’re going to be taking a critical eye of the entire business in every way, whether it be the mix of businesses we are in, et cetera. That will be a continuous process.

Matthew O’Connor - UBS

Any sense of if it will be more geared towards exiting certain businesses or geographies?

Peter Raskind

I wouldn’t comment on that at this point. We’re not prepared to talk about that.

Matthew O’Connor - UBS

A separate question, I think the key here is not only managing the risk portfolios going forward but also maintain the franchise value of the retail bank, the commercial bank, asset management. Just give us a sense of how you keep your employees engaged, how you retain customers?

Peter Raskind

Well, it’s a great question and I think it ties back to some of the comments I made in my prepared remarks. Frankly that is one of the key pieces of rationale behind this transaction and frankly the size of this transaction. As I said in my prepared remarks, there was no question and some of this got played out in the press that we found ourselves on the defensive in many respects; in many cases, reacting to rumors and reports that weren’t necessarily factual, but definitely had an impact on customers and in turn on our employees. That had to be put to rest.

So among other objectives, as I’ve already talked about and as I mentioned in my prepared remarks clearly that has been one of our goals. Now that said, I think it’s fair to say on behalf of the entire management team here we’ve been just remarkably impressed with the commitment of our front line employees, all employees. Their engagement through this time, their patience and flexibility let’s say through a time of enormous uncertainty as we were evaluating the alternatives and as press reports were occurring that were often times not factual.

But certainly one of our goals today, in fact our communication internally today has been that it’s time to get back to business. We’ve got some very important and difficult issues to deal with and they haven’t gone away by virtue of this transaction; far from it. But what we have, we think, done today has provided us the flexibility to deal with them effectively and expeditiously and get back to, as I said, doing what we do best, which is serving our customers and growing the business.

Operator

Your next question comes from Brian Foran - Goldman Sachs.

Brian Foran - Goldman Sachs

Peter, you mentioned potentially dealing with problem assets more quickly. Can you just clarify whether that means potentially selling the liquidating portfolios at a loss or what else might be under consideration there?

Peter Raskind

Well, sure. I think I said earlier and I’ll repeat: we’ve made no decisions in this regard at all, none. But there is a series of different alternatives that one could imagine. For example, one could imagine selling some or all of these assets, although as you know the market for selling these assets right now is quite punitive. Other possibilities could include reclassifying them as held-for-sale and taking marks and then selling them as we can and would. Other possibilities could include several different variations of good bank/bad bank kinds of structures.

I think the common theme here is that whatever vehicle or vehicles we ultimately choose, all of them are enabled by capital or require capital to execute in a market like this. Conversely, prior to this transaction, while we certainly met the regulatory tests as well capitalized, we did not have sufficient capital flexibility to make much material progress against any of the alternatives I just discussed. So again, that’s one are the key pieces of rationale for this transaction and we’ve got work to do here in terms of evaluating those options and whatever others may make sense and making good sound economic choices.

But I think what’s clear is we would like to move through this process a bit more quickly than just working it out over a long period of time.

Brian Foran - Goldman Sachs

On the cumulative loss assumption from the liquidating portfolios you presented, can you give any color on home price assumptions you’re using to come up with those numbers?

Jeffrey Kelly

We are assuming that home prices as they have depreciated over the last three to six months, that that trend would continue. We’re assuming that if there are behavioral things that have gone on that belie those home price depreciations that would continue as well.

Brian Foran - Goldman Sachs

Roughly speaking, are you assuming we’re about halfway through home price declines, or more or less than that?

Jeffrey Kelly

Probably a little bit less than that.

Operator

Your next question comes from Nancy Bush - NAB Research.

Nancy Bush - NAB Research

Peter, I would ask you looking forward, how long do you think it’s going to take to get this company back to normal, whatever the new normal may be for National City? I mean, what are you looking at as the timeframe to get liquidating assets liquidated, et cetera?

Peter Raskind

I probably won’t get super specific about that because that’s very much in the direction of probably guidance that we have historically shied away from. But I would tell you this -- perhaps this will be helpful -- if one year from now our balance sheet didn’t look materially different than it does today with respect to these higher risk assets, I would be very disappointed. Again, the purpose of this capital raise and the dilution that it invokes is to create the flexibility to move that along more quickly and we hope by implication to begin to lift the cloud of uncertainty that we think hangs over the company and its valuation; and it’s a cloud we completely understand.

Nancy Bush - NAB Research

The company as I recall had to raise capital I think back in the mid 90s. I can’t recall the exact reason, but I know that it was after a very aggressive share repurchase program and here we are again and I think we certainly would say that part of this lack of capital was due to very aggressive share repurchase.

I would reflect everybody’s question here about where was your board during all this? And whether the board has now restructured itself, either at its own behest or the behest of regulators? I mean, what is going to be the level of oversight going forward on the part of your board?

Peter Raskind

As I mentioned earlier, we’re of course adding Dick Thornburgh to the board from Corsair and as I also mentioned we’ll be adding a second independent director as well. I’m very confident going forward that the board will be exercising all of its obligations with respect to oversight of the management team and of the company.

Operator

Your next question comes from Terry McEvoy - Oppenheimer.

Terry McEvoy - Oppenheimer

Out of the $5.3 billion of the non-prime liquidating portfolio what percent has insurance, specifically the $1.6 billion of second liens? Also, could you maybe update us on the relationship with those two insurance companies?

Robert Rowe

The second liens all have a form of mortgage insurance. The way it works at the current time is it’s essentially a 50-50 deal with the MI carrier so to the extent not all of the claims are paid, then we would have less than 50% of our losses in the form of recovery.

Those carriers are paying, I think insurer A as we have described before is paying more readily and is paying stable as well. The first liens also have mortgage insurance, I think it’s around $1.3 billion or so have mortgage insurance on them and that’s down to 60% loan-to-value.

Peter Raskind

Rob, did you mention insurer B as well?

Robert Rowe

Insurer B has always paid readily.

Peter Raskind

It’s the other way around...

Robert Rowe

It’s the other way around, I apologize for everybody. So both insurers are paying readily at the current time.

Terry McEvoy - Oppenheimer

Was any of the increase in your full year ‘08 credit losses related to the core commercial lending portfolio at all?

Robert Rowe

The core commercial lending portfolio, we think is performing is fine. Other than my initial comments upfront about some of the stress in the small businesses portfolio in Florida, we would expect that to continue.

Now as you know, if we’re clearly in some type of slowdown in the economy, a significant slowdown in the economy, and charge-offs in the commercial book would lag that as they always do so we don’t see that as a big ‘08 event, but if things slow down, it would be a later event.

Operator

Your next question comes from Gerard Cassidy - RBC Capital.

Gerard Cassidy - RBC Capital

I also want to say thank you for doing live questions, we find this very useful. Going to the federal regulators, Federal Reserve in particular, have you guys seen them become more proactive in this economic downturn versus the ‘01 or ‘02 downturn or the ’90-‘92 downturn in terms of dealings with you folks?

Peter Raskind

We can’t comment -- we never can -- on the specifics of the regulatory relationship between our regulators and National City in particular. I mean stating the obvious, obviously the Fed has been fairly active on a widespread basis with, I’d say, a certain degree of innovation in terms of trying to deal with creaky liquidity in the capital markets.

But I think it’s also fair to say and it has been widely reported that the regulators in general have been, I think, concerned about the environment, concerned about the effect of particularly early on the housing price slowdown on portfolios across the country and typically encouraging more attention to real estate secured loans. And typically, I think, encouraging more significant capital cushions to absorb losses.

Gerard Cassidy - RBC Capital

Could you -- and if you can’t answer this, will you put it in your next 10-Q filing -- are you guys operating under a regulatory agreement with the regulators?

Peter Raskind

We can’t answer that, never can answer that and we’d never put it in a filing. That’s actually a matter of law, regulatory matters are absolutely protected.

Gerard Cassidy - RBC Capital

If you can give us more color, I think in your prepared remarks you guys mentioned that some lenders backed away from lending to you during the recent crisis? Can you give us more color of what went on there?

Jeffrey Kelly

We did see, I mean, we normally in any environment go through and test lines, money market lines. We have been, as I said and I think in my prepared remarks, a net seller of Fed funds during the first quarter, even more so in the month of March. That said, we continue to test lines to see what lines were available to us and we have anecdotally heard through brokers that some lines to us had been cut by other counterparties and some direct dealings had encountered that.

So I don’t think that was terribly surprising given the downgrade and review from downgrade from Moody’s at the beginning of March. That seems to have stabilized here of late, but it was a fact. We anticipated that but we did hear some money market lines and counterparty lines having been reduced or eliminated.

Peter Raskind

Operator, we have time for one more call.

Operator

Your next question comes from Scott Siefers - Sandler O’Neill.

Scott Siefers - Sandler O’Neill

Jeff, I just had a question on one of the comments that you made on Visa specifically. You said you guys were looking at alternatives to monetize the remaining piece of that. Just given the lock-up and to the extent that you can talk about it, what are some of those options that you would have if presumably an outright sale would be not doable for some period of time? Can you transfer ownership to some other former member bank, something like that? I guess just broadly speaking what would be some of the alternatives?

Thomas Richlovsky

The Visa shares are restricted for the shorter of three years or whatever period it takes to settle the covered litigation which could be an extended period of time, presumably longer than three years. So not less than three years and their ultimate value is not just the trading price of Visa stock but also the exchange rate is subject to adjustment again depending on how the litigation plays out relative to the escrow funds that have been established already.

So the restriction, again the shares relate to our former status as a member bank of Visa and as a result of that being a member we became a stockholder in the reorganization. As we understand it those shares would have the capacity to be assigned to another Visa member bank which would be one straightforward way to do the transaction. There are,

as you might expect with a number of investment banks that are exploring on our behalf and I assume on behalf of others, various kinds of synthetic structures which would be within the bounds of assignments and so forth but then synthetically create the monetization event and those are among the things we’ll be looking at.

Peter Raskind

But to the point that I tried to make in my prepared comments, I think the capital raise diminishes any sense of urgency to do that and we’ll look to strike the best deal we can.

Operator, it’s high noon, so we’ll conclude the call now please.

Operator

Do the speakers need to make any closing remarks at all?

Peter Raskind

No, other than to thank everyone for their participation, especially on short notice this morning.

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