National City Corporation Q2 2008 Earnings Call Transcript

Jul.24.08 | About: National City (NCC)

National City Corporation (NCC) Q2 2008 Earnings Call July 24, 2008 8:00 AM ET

Executives

Tom Richlovsky - Senior Vice President and Treasurer

Peter Raskind - President and Chief Executive Officer

Jeffrey Kelly - Vice Chairman and CFO

Rob Rowe - Chief Credit Officer

Dale Roskom - Chief Risk Officer

Dan Frate - Vice Chairman and Head of Retail and Consumer Businesses

Analysts

Brain Foran - Goldman Sachs

Scott Siefers - Sandler O’Neill

Vivek Juneja - JP Morgan

Jason Goldberg - Lehman Brothers

[Nick Elsner] - Wellington Management

Matt O'Connor - UBS

Paul Miller - FBR Capital Markets

Terry McEvoy - Oppenheimer

Michael Rogers - Conning Asset Management

Mike Mayo - Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by, and welcome to National City Corporation’s Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. Later there will be a question-and-answer session and instructions will be given at that time.

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.

Tom Richlovsky - Senior Vice President and Treasurer

Thank you and good morning, everyone. We would like to welcome all of you to National City Corporation’s second quarter earnings conference call and we thank you for joining us today.

Before we begin let me remind you 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 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.

This morning you will be hearing form Peter Raskind, our Chairman, President, CEO; from Jeff Kelly, Vice Chairman and CFO; and Rob Rowe, our Chief Credit Officer. We are also joined here by several other members of the Senior Management Team including Dale Roskom, Chief Risk Officer and Dan Frate, Vice Chairman and Head of our Retail and Consumer Businesses as well as a number of others.

Following the comments from presenters this morning, we will be taking as many questions as time permits. As always you can send e-mail inquiries to investor.relations@nationalcity.com and we will cover those during the Q&A as well.

Finally, I want to draw everyone's attention to the slide deck which is posted on our website, NationalCity.com as well as the earnings press release, each of which contains more detailed information on our results this quarter and we will be referring to one or both of those documents throughout the call.

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

Peter Raskind – President and Chief Executive Officer

Thanks Tom and good morning everyone. There is no doubt that the entire banking industry continue to face unprecedented and very challenging market conditions over the last quarter. However, against this backdrop, we are pleased to report that National City has made substantial progress in strengthening our balance sheet, mitigating losses in our liquidating portfolio, and sharpening the focus of our core businesses, which continue to be profitable.

While we obviously posted a loss of $1.8 billion for the period, I want to emphasize upfront that this was largely due to the aggressive actions we took to build reserves against future losses on liquidating loan portfolios. These include a supplemental reserve of $478 million to reflect the difficult environment in the housing market. Our provision for the second quarter was 1.6 billion versus actual charge offs of 740 million, resulting in a reserve build of 853 million. Looking ahead, we expect the provision for loan losses to decline in the second half of 2008.

Our reported loss also reflects a $1.1 billion aftertax goodwill impairment charge. Importantly, this is a non-cash item that has no impact on our tangible equity, regulatory capital or liquidity. Excluding these items and net MSR hedging results, our pretax pre-provision operating earnings were 610 million in the second quarter of 2008, up 19% from 512 million in the first quarter.

We fully recognized that we need to improve performance. Let me briefly highlight some of the actions we are taking to address the ongoing market challenges, strengthen our business and position National City to compete well in this volatile market.

First, with the completion of our $7 billion capital raise, National City is the best capitalized of all major US banks and by far the best among its peer group.

In fact, our capital level is 7 billion above the minimum required to be considered well capitalized under the regulatory capital framework, and our capital raise was significantly larger than the level required by the rating agencies to affirm and stabilize our investment grade debt ratings.

As of March 31st, our pro forma Tier 1 risk based capital ratio was 11.3%. Even after the 1.6 billion provision we took this quarter, as of June 30, our Tier 1 risk based capital ratio of 11.1% was highest among the nation's large banks by a significant margin. Perhaps most important, the capital we raise significantly exceeds the requirements indicated by the current trajectory of our portfolio performance, our stressed loss expectations, the stressed loss expectations of third parties who have reviewed our portfolios, and our loss experience during tighter credit cycles. A strong balance sheet is the foundation that will see us through difficult times and we are highly confident that we are now issuing capital to write out turbulent credit markets. State it another way, we have no intention, plan or need to raise additional capital.

Second, we have isolated and contained our liquidating portfolios, which are performing inline with our expectations and are not impacting our core businesses. Nonprime net charge offs and non-performers were flat and delinquencies were down this quarter. National home equity losses were as expected with unfunded lines cut by over $2 billion in the first half of 2008, and residential construction loans declined. We continue to make solid progress in managing these portfolios. They declined 1.4 billion during the second quarter while mitigating losses.

We also continue to review opportunities for accelerated disposition of these portfolios. We will be very disciplined about this effort and we will not rush to move things off the balance sheet if it doesn’t make sense for our investors. A strong capital position gives us the flexibility we need to realize appropriate value from these portfolios over whatever time frame makes the most sense.

As I mentioned, we have aggressively build reserves against future losses in these areas. As a result, we increased our loan loss reserves by 1.7 billion in the first half of this year to a total of 3.4 billion. The reserve on the liquidating portfolios is now over 9% of outstanding balances.

Third, our core businesses: commercial and retail banking and wealth management remain solid and profitable and we are continuing to invest for growth in these areas. The strong results and synergies of these core businesses exemplify the benefits of our diverse customer base and the strength of our directed integrated business model, which is based on long term customer relationships, covering the full spectrum of customers' financial needs.

Given the highly challenging economic environment, we believe that the pretax pre-provision income for the quarter demonstrates the fundamental strength and resilience of our core businesses, which we are continuing to build through profitable relationship growth and expansion. For example, our retail banking business, which serves nearly 4 million households through 1,400 retail branches today, continues to meet critical business objectives including household acquisition, household expansion, and strong organic deposit growth.

Our retail home equity portfolio is performing well. Charge offs and past due loans are low in absolute terms. Delinquency is flat and charge offs actually declined from quarter to quarter. Our CI and commercial real estate portfolios by and large continue to perform well with the obvious exception of commercial real estate loans tied to the housing markets. We have been able to continue disciplined lending activity through our strong commercial franchise.

And finally, we strengthened our leadership team and we are intensely focused on managing risk, cutting expenses, and improving profitability. With the addition of a new Chief Risk Officer and new Heads of the Mortgage and Corporate Banking units as well as our new board member, Dick Thornburgh, the former CFO and CRO of Credit Suisse, we making significant investments in our risk management processes, talent and technology. At the same time, we have made good strides in cutting expenses and are now undertaking a rigorous methodical review of our expense structure.

From September 30th of last year to June 30th of this year, our employee headcount is down by 11% and personnel costs were down quarter over quarter. We are committed to achieving competitive operating efficiency ratios over time.

With that, I would like to turn the floor over to Jeff Kelly who will walk us through a more detailed explanation of this quarter's results.

Jeffrey Kelly - Vice Chairman and CFO

Thanks Peter and good morning everyone. The second quarter results included some unusually large or infrequently occurring items and we try to lay those out in the table on Page 3 of the earnings release. Two points, I would make about that table. First, many of the charges are associated with past activities that aren't part of our future. A large portion of our provisioning, for example applies to businesses we have exited for products we no longer offer. Second, underneath the charges shown on that table, the company is generating core income from its ongoing businesses. The goodwill impairment is of course non cash and has no effect on tangible or regulatory capital. With the stock trading below book value and with the issuance of equity below book value, obviously from a market perspective, goodwill has been impaired. In fact, these events require us to test for impairment and as a result we wrote off about $1.1 billion of goodwill from past acquisition that had been allocated for the commercial regional banking business in the quarter.

We also incurred unusually large net MSR hedging losses for the quarter. While we always have some net gains or losses during a quarter, this quarter was unusual and most of the losses occurred in a very short time period. Specifically, most of hedging losses occurred as a result of the capital markets volatility following the Bear Stearns failure in mid March. So as it relates to this quarter's hedging results, the quarterly loss was largely concentrated in the first couple of weeks of April when mortgage rates fluctuated significantly as did the relationship between mortgage rates and the rates on other capital markets instruments we use to hedge the MSR. Hedging costs were not substantial over the remainder of the quarter.

With respect to the recourse provision, it was driven by our view that repurchase requests are likely to increase on those loans repurchased will be worse than historical patterns we have seen and we try to capture that in building this reserve.

I think the most important story in the second quarter was the balance sheet. It was materially strengthened by the $7 billion in capital we raise. We now have all the capital we need to deal with our liquidating portfolios and equally important to move our core businesses forward.

Our Tier 1 capital is $7 billion over the well capitalized minimum and we have nearly $3.5 billion in loan loss reserves. Our loan loss provision for the quarter significantly exceeded charge offs thus building loan loss reserves another 850 million to a total of $3.4 billion.

Over the past three quarters, we have taken major steps to ensure that the allowance for the loan losses is appropriate for the loss content in the portfolios. We expect provision expense to decline in the second half of the year. The capital raise along with deposit growth and loan run off materially improved our liquidity position during the quarter. In anticipating a likely question, deposit growth continued through the first half of July but we did see some net deposit outflows in the days following the publicity around the IndyMac failure. The pattern to those outflows was very similar to what we saw around the Bear Stearns announcement in March a day or two of very peak transaction activity and then progressively trending back towards more normal levels each successive day. This time the amplitude was a bit higher but the pattern was very similar and we were extremely well prepared both financially and operationally to deal with it.

On more fundamental basis, we did see some margin decline during the quarter. About 2 basis points of the decline was due to the capital raise and about 6 basis points was due to a policy change implemented in March where we now move certain past due residential real estate loans and non-accrual faster than we used to. Beyond that, funding costs have been relatively sticky in a falling rate environment due to intense deposit competition particularly in time deposit. Loan spreads are improving but have not moved enough to compensate for tighter deposit spreads.

I know you are all intensely interested in the credit story, so I will stop here and let Rob Rowe, our Chief Credit Officer walk you through the portfolios.

Robert Rowe - Chief Credit Officer

Thank you Jeff and good morning everyone. My comments this morning will summarize the second quarter performance of the loan portfolio in the whole and will also briefly touch on various major segments including the core businesses of National City and the liquidating portfolios.

Please turn to Slide 11, which provides an overview of the quarter's performance for the entire $113 billion loan portfolio. Net charge offs for the quarter were 740 million compared to 538 million in the first quarter. Most of the increase was due to residential real estate related activities and over three quarters of the increase resulted from the liquidating portfolios. We took 1.6 billion provision expense, increasing the allowance to loan losses to 3.4 billion or 3.03% of loans at period end. As Peter stated, the reserve building of 853 million includes a supplemental reserve of 478 million, all of which is targeted to the liquidating portfolios. We also built reserves quite significantly in the first mortgage portfolio and the residential development segment of the commercial real estate book.

Before I discuss the various segments of the loan book, please note that non-performing loans increased by 330 million during the quarter, but 90 plus past due declined by roughly 160 million. Thus the rate of stressed asset growth has slowed markedly during the past two quarters. We are encouraged by the leveling off of stressed assets, but believe it is still too early to forecast the sustainability of this trend given the weak economy and continuing house price depreciation.

The next three slides will discuss all of our core loan portfolio. Please turn to Slide 12, which illustrates the performance of the 36 billion commercial and industrial book. Non-performers were essentially flat and charge offs increased modestly from 27 basis points to 43 basis points. A few large charge offs were the driver of the increase. Our automotive related segment, which totals 2.3 billion of outstandings, continues to perform satisfactorily to minimus charge offs and virtually no increase in non-performing assets. Although the internal watchlist has increased slightly for the overall C&I segment, we would characterize the portfolio as stable. This portfolio's performance has historically co-related with the economy's performance over cycles. As such, we could envision C&I charge offs moving towards more normalized levels but to be sure the second quarter loan performance was excellent.

Page 13 exhibits the breakdown in performance of the 24 billion commercial real estate portfolio by geography and product type. Since this is a different look than in past quarters, please note for your reference that the 3.7 billion residential development portfolio, which continues to exhibit most of the stress in the commercial real estate loans, is comprised of approximately 1.4 billion of single family homes, 1.3 billion of land, and 1 billion of condos under construction.

NPAs for residential development, primarily single family homes and land, rose by approximately 225 million during the quarter. The major theme is that the stress in residential book continues with pressure increasing in all geographies for most of the year in Florida and Michigan. We believe this trend will continue through the middle of 2009. Because of this, we built reserves by 177 million in commercial real estate during the quarter, most of the increase due to residential development. The 21 billion balance of the rest of the commercial real estate portfolio, which is comprised of non-residential construction, income-producing and owner occupied properties, has held up fairly well to this point with some minor stress exhibited in the 1.5 billion retail segment.

Page 14 depicts the performance of the branch and direct home equity book during the quarter. Charge offs were down and delinquency was stable. Please recall that we discussed on the first quarter call that approximately 12 million of charge offs in the first quarter we trued up due to a conversion of acquired portfolios to National City Application System. Absence this effect, charge offs were slightly lower in the second quarter compared to the first quarter. While we expect some growth in branch home equity loss rates in particular from the 2007 vintage, we do believe that is becoming increasingly clear that there is a market delineation between the performance of our direct home equity portfolio and the broker based indirect home equity portfolio. Because our 2007 vintage performance is modestly weaker than prior vintages, we have tightened the underwriting over the past 69 months.

In summary, our 96 billion core loan portfolio had 223 million of net charge offs in the second quarter, a satisfactory charge off rate of approximately 93 basis points annualized.

Now, I will discuss 17.5 billion liquidating portfolios, which represent approximately 15% total loans outstanding. These loans consist of our national home equity book, our nonprime book, and our residential construction portfolio at the mortgage company. Please turn to slide 15 which details the performance of national home equity. Overall, the results for the portfolio are generally consistent with our previous view. Growth in delinquency is slowing and the older originated portfolio of segment is showing some signs of stability. We have been very active in reducing unfunded line, a decrease of over 2 million during the first half of the year. Variability performance particularly for the $5 billion 2007 vintage related to residential real estate market condition contributed to increased loss reserves being established for this segment.

Please turn to slide 16 for the 4.8 billion nonprime book, which dropped another 0.5 billion in size from March. The dollar declines and delinquency for the first liens and second liens is consistent with our view from last quarter. Loss content is a little higher due to increasing home price depreciation affecting the collateral values in the first lien segment. As we stated last quarter, the nonprime segment is exhibiting strength consistent with the seasoned portfolio (inaudible) note that the last production to be placed into the portfolio with March of 2006. This book has also experienced a significant majority of its rate resetting.

The slide on page 17 is a review of the first quarter loan performance for the residential construction loan segment originated at the mortgage company. We had expected losses of 100 million a quarter this year based on loss severity assumptions of 75% for undeveloped plan, 95% for in-process loans, and 50% for near-completion projects. Charge offs in the second quarter were 223 million. 129 million of these charges were taken on loan in the 180 day plus cash due bucket to reflect the aforementioned loss severities on those non-performing loans. The 95 million base level of charge offs during the second quarter were taken on loans that went 180 days past due during the quarter. This level is consistent with our continuing view and loss severities will remain high for the lifetime of this portfolio, that lifetime would be approximately 18 months and that charge offs will approximate 100 million a quarter for the next few quarters.

Like all of our portfolios we are working closely with our customers to provide solutions to aid their willingness and finish construction on their home even though there has been significant price depreciation in states like Florida and California where a sizable portion of this portfolio resides.

Finally, we would revise our charge off projection for 2008 from our current guidance of 2 to 2.4 billion to our new range of 2.5 billion to 2.9 billion. In essence, we are stating that the charge offs in the back half of the year should be roughly inline with the first half of the year. For details on our updated lifetime loss forecast on the liquidating portfolios, please see page 18.

This completes my prepared remarks. I will now turn the call back to Peter Raskind for some final thoughts.

Peter Raskind - Chairman, President and Chief Executive Officer

Thanks Rob. Before we go to Q&A, I wanted to reiterate four key points that we hope you will take away from this call today.

First, our early and aggressive efforts to raise capital and build reserves have provided us with more than sufficient resources to write our turbulent credit markets. Second, our liquidating loan portfolios are isolated, contained and performing inline with expectations. Importantly, they are not impacting our core business. Third, our retail, commercial and wealth management franchises are showing solid performance and are well positioned for continued profitability as the credit cycle turns. And finally, we have strengthened our leadership team and we are intensely focused on risk management, cutting expenses and improving profitability.

We greatly appreciate the confidence our investors have expressed in the underlying value of National City's franchise and in the fundamental strengths of our business model that we believe will drive a return to profitability. We are confident that we are taking the appropriate actions to deal with the difficult challenges facing us and we remain fully committed to the task of serving our customers and our communities while building long term value for our shareholders.

Let's go to Q&A.

Thomas Richlovsky

Well, thanks Peter. This is Tom Richlovsky. We have got a number of e-mail questions coming in that would be along the lines of several recurring themes and Jill why don’t we do those first and then we will do the live Q&A following that.

Question-and-Answer Session

Jill Hennessey

Thank you, Tom. Peter I will start with you. What is the size of your remaining Visa stake and is there anyway you would be able to monetize that stake prior to 2011. How and would you step into those early?

Peter E. Raskind

Thanks Jill. Obviously, the dollar size of our Visa stake varies with Visa stock price, but based on today's Visa stock price it is valued somewhat slightly in excess a billion dollars pre-tax and of course that’s carried as zero value on our balance sheet. There are in fact ways that we are aware of to monetize that stake if that became advisable or necessary. But again as I said earlier, we are very confident that the strong capital position that we have placed ourselves in is sufficient to see us through this period, even under highly stressed scenarios. So given that there is really no reason to consider monetizing that stake right now, and in fact there is no reason right now to consider any transaction solely for the purpose of generating capital.

Jill Hennessey

Peter could you comment on the types of positive actions you are pursuing that differentiates National City from other affected banks?

Peter E. Raskind

Well ignoring the definition of what's an affected bank. You know, as I said I think we have undertaken quite a long series of actions to deal with the very real challenges we face. First and most important as we have said a number of times this morning, we've raised a substantial amount of capital early and of course a great cost to our shareholders, but raised it early which I think has proven to be a good decision in light of a continued difficult environment. We have discussed and have discussed again here on this call this morning the many actions we have taken with respect to containing and mitigating losses in the liquidating portfolios, while maintaining the health of our core franchise. And then again I would add very importantly we have made some significant changes to our management team and to our focus now are predominantly are geographic footprint. And I think the combination of all of those actions will see us through this period and allow us to emerge as a strong predominantly footprint oriented bank.

Jill Hennessey

Peter why is National City is selling of its Individual Investor Mutual Fund Division?

Peter E. Raskind

Well there was apparently an article in the Wall Street Journal according to source speculate to the affect and as always we never comment on that form of rumor or speculation.

Jill Hennessey

Thank you, Peter. I will direct this question to Dale Roskom our Chief Risk Officer. Dale, given now the National City has eliminated its indirect mortgage origination channel, what safeguards have been put in place from a credit administration standpoint relative to the direct mortgage channel in order to minimize future losses from new business?

Dale Roskom

Thanks Jill. We have done a few things. Certainly, we are narrowing down to just the retail channel. We have also narrowed down product, agency eligible product only. And the loss content, the principal loss content we have seen in our portfolio has been from non-agency product. So we have narrowed the product set. We have to put more resources against the credit administration team just in total down at the mortgage company. We have also beeped up and put a lot more resource against the quality assurance function at the mortgage company as well to ensure that the funded loans meet all the underwriting standards and guidelines that we have in place. So we think we have taken 2 or 3 pretty affirmative actions there that are going to stand us well.

Jill Hennessey

Thank you, Dale. Rob, what are your cumulative loss assumptions for the various liquidating portfolios?

Robert Rowe

Well the underlying assumptions on the cume loss estimates for the liquidating book would be continuation of housing price depreciation for the foreseeable future. We have as you know, revised our forecast, the total increased on the cume loss estimates are around $300 million that is not a huge difference. When you think about life time of these loans being upto 10 years, but nonetheless the difference was really driven by loss severities that we were seeing that are a little bit greater than what we would have taught a quarter ago.

Jill Hennessey

Rob, there has been some rumors that National City's cumulative losses at 12 billion or over 16 more quarters of losses, does that number make any sense to you?

Robert Rowe

Well, I think by the question the right or would have been assuming and to the entire portfolio, certainly they would not have been thinking of just liquidating portfolios. So making the assumption of 3 billion a year for the next 4 years, certainly we don’t give out forecast guidance for 4 years. But having said that that type of situation would be in my mind highly unlikely because we believe some time over the next 12 months we will see the loss curve flatten out on the liquidating portfolios and then you will have National City's traditional book and we believe that would perform based on it has historically, which certainly is not reflex of those type of numbers.

Jill Hennessey

Thank you, Rob. I will direct this question to Dan Frate, Vice Chairman and Head of Retail and Mortgage Banking. Dan, can you please speak to the deposit competition, your position for deposit growth versus deposit shrinkage?

Dan Frate

Sure Jill. I will talk to the second quarter specifically around competition. Early in the quarter, I could tell you that we stood in a fairly strong position competitively with regard to our longer term CD rates. We saw an opportunity there and took advantage of it early in the quarter. As the quarter progress we saw the competition continuously heat up and as Jeff alluded to in his opening remarks, there is fairly intense competition today on the CD front unless so with regard to money market savings. But we did in fact have good organic quarter-over-quarter growth as well as posting a overall result of 19% increase in our deposits quarter-over-quarter. I will not comment on our go forward deposit strategy here, but only to say that we will remain competitive in the market even as the competition is heated up.

Jill Hennessey

Dan, thank you. I have three questions and I am going to address to Tom, and then Tom you can turn it over to live Q&A following that.

Thomas Richlovsky

Okay.

Jill Hennessey

How much bully do we have on our books and can you describe its content?

Thomas Richlovsky

We have somewhere in the vicinity of 1.5 billion or so dollars worth of bully on our books. It is very different than the bully you have been reading about some other companies which in those cases where there were taking impairment charges of something called separate account bully. There were dedicated investments. Ours is not that type. It is general obligations of the insurance companies and the insurance counter parties are all very highly rated entities. And so the risk is their ability to pay claims into the future not the market value of some underlying investment portfolio. So we are very comfortable with our bully position.

Jill Hennessey

What will be the number of shares outstanding following the conversion of the preferred?

Thomas Richlovsky

Approximately 2.1 billion and that should be in effect by the end of the third quarter. We have the shareholder meeting scheduled for September for the approval of the conversion.

Jill Hennessey

And finally what is the tangible book value per share fully adjusted for the capital raise?

Thomas Richlovsky

That would assume the conversion of the Series G preferred stock and that would be $6.47 if the questioner would go to page 14 of the supplement you can see that in some other numbers that we pro form a book value in some other metrics to help to mention the effects of the capital raise.

Jill Hennessey

Okay.

Thomas Richlovsky

Are we ready to go live?

Jill Hennessey

Yes we are.

Thomas Richlovsky

Operator, you would queue up the live questions, I would appreciate it. Thank you.

Operator

(Operator Instructions). We will go to Brain Foran with Goldman Sachs. Please go ahead.

Brian Foran

Hi, guys, how do we assess the total [written] warranty risk for repurchase reserve risk, you have going forward, are there any metrics you can give on how many loans are currently being put back to you or what the reserve level is and what the cumulative amount of loans you expect to put back over the next couple of years?

Robert Rowe

This is Rob Rowe, I will take that. The pace of the repurchase request has picked up slightly during the past six months as you would imagine. However, it has not been a flood of repurchase request, we do go loan-by-loan in those situations, and in most situations we view that our documentation was satisfactory and we do not repurchase the loan. We did during the quarter increase the reserves, however, for both the National home equity book and the mortgage finance and we believe those reserves are adequate for what we see. One point, I would make there is part of the increase of the reserve was that we do think that this going to be an elongated situation compared to a more normal cycle and thus far the reason for the increased reserves.

Brian Foran

And then secondly, as we kind of all think about a burn down analysis of your capital cushion, your referenced a 7 billion cushion relative to the 6% well capitalized minimum, is there kind of a shadow minimum of 8% or whatever the number is where you would kind of become uncomfortable having a capital level below that?

Jeff Kelly

This is Jeff Kelly, I would say that over a longer term timeframe when conditions allow, I think we would contemplate a potentially a slightly lower Tier-1 in that level, but for the foreseeable future we anticipate it being above that level.

Brian Foran

Okay, thank you.

Operator

We will go to Scott Siefers with Sandler O’Neill. Please go ahead.

Scott Siefers

Good morning guys. I guess, I was just curious on the overall loss assumptions for 2008 about 500 million higher than they had been before. I am assuming you could help me just think about the various dynamics there, in other words, how much of that is sort of front end loading losses on the liquidating portfolios versus any higher expectations from the core portfolio how are you guys thinking about that dynamic?

Robert Rowe

Scott, this is Rob. We would say that about half of it would be related to the core book and half would be related to the liquidating. In the liquidating it's kind of spread out among those portfolios. In the core portfolio, it would be some in the first mortgage book, some in commercial, particularly in small business, and then a little bit in the other areas. Its get very granular when you break it down after the core and the non-core, kind of just spread out.

Scott Siefers

Okay. Thank you.

Operator

And we will go to Vivek Juneja with JP Morgan. Please go ahead.

Vivek Juneja

Hi, a couple of questions. Could you talk a little bit your jumbo mortgage portfolio, you have extremely high loss rate 11.5% this quarter which jumped 3%. So could you talk about the geographic mix, the vintage, some more color on it? And then, besides jumbo mortgages what else is going in within the core first mortgage portfolios and NPOs and 90 day past deals were up to pretty significant numbers, what I could tell I think your 90 days past deals were up to 7% of first mortgages and NPOs to 5% on the core stuff when you leave on liquidating?

Robert Rowe

Well Vivek, you would have to clarify your source on the jumbo mortgage, because I am not familiar with the metrics you said. I will give you a broad view on our first mortgage book as you know, its not a portfolio that we built by design, it was a portfolio that we had through the acquisition of Harbor, Fidelity and MAF, I would tell that that piece of it is most of its 2005 and earlier vintages and performing okay. But we do have a fair amount of repurchases in that book. We also have some of the construction finance stuff at the mortgage company when it comes out that does go into the first mortgage portfolio and we are seeing increased delinquencies even in the termed out stage, which is why in my upfront remark, I made the point that we are starting to work very closely with our clients, because we want to get them into their home, their dream home, and we want to get them in when they get, so that they can repay. So that’s and some of the underlying trends that we have seen.

Robert Rowe

Just one second, just to clarify the question and we apologies we didn’t catch the source of your question. The 11% jumbo mortgage loan rate that you said is based on $39 million portfolio so we are talking about pretty teeny tiny dollars here.

Vivek Juneja

I thought that was 39 million in net change-offs, not $39 million portfolio.

Robert Rowe

Yeah, charge-offs, right. I am sorry, charge-offs.

Vivek Juneja

And the portfolio is about a 1.4 billion?

Robert Rowe

That’s okay, that’s fair.

Vivek Juneja

Okay. So on the 1.4 billion is what I was asking for some color. And where you are seeing such a large jump since the portfolio is 1.4 billion and not 39 million, and what's the geography and what's the vintage and what's cause it to go from 3% to 11.5% in one quarter? And what should we see as the outlook?

Robert Rowe

Vivek, we will followup with the precise answer to your question. But once again, a fair amount of the construction loans that termed out those are jumbo loans and they have had a high and elevated degree of loss contents in them.

Vivek Juneja

Okay. Let me jump to another question, your cume loss assumptions, can you talk about what your assumptions are for unemployment in that?

Robert Rowe

We have unemployment, it would be rising as it has risen over the last year. So we have that continuation of a trend. But we don’t – I would not say that this is a 1982 recession style scenario.

Dale Roskom

Generally, I think we are back. It's Dale Roskom. Generally, I would say that our assumption is that our forward view of the economy in the key market dynamic and real estate for example would be as Rob as just said, continuation of what we have been operating and we see weak economy generally. We see a continuation of housing price declines consistent with the forecast that Case-Schiller and some of the other sources would have in view. We don’t have in mind a significant rebound or recovery in housing prices and we don’t have a significant softening in the economy. We also don’t have in view any meaningful economy recovery over the forecast period that we are talking about.

Vivek Juneja

Okay. All right, thanks.

Operator

We will go to Jason Goldberg with Lehman Brothers. Please go ahead.

Jason Goldberg

Thank you. Hey Peter, a bunch of times you mentioned your robust capital position, can you just talk to the ability to maybe accelerate the disposition of some of these liquidating portfolios against that and just kind of how you are thinking about that now and are there any opportunities to do that?

Peter E. Raskind

Sure. Yeah, as I said in my remarks, we certainly believe we have sufficient capital to see us through. And philosophically, we would love to accelerate the disposition of this portfolios and the reductions of these portfolios, if we can identify avenues to do that and transactions that make economic sense for our shareholders. And the definition of economic sense here would be, we have obviously our own views as to what assets are worse and even what they are worth under stressed scenarios. And if the bid -- if you will at the bid as spread between our own view or even stressed of what assets are worse and what we could, for example sell them for in the market against the whole loan sale kind of transaction. Would we like to do that? Yes we would. That said, in the case of our particular group of troublesome assets and in particular the later of vintage home aquatic assets, we just haven’t seen evidence yet that the market has sufficiently developed and firmed for those assets that that bid as spread has narrowed to a comfortable enough level to where it would be sensible for us to sell assets, consume capital obviously in the process and do right by our shareholders. But we are right on top of it, we are in contact with Wall Street on this on a very, very regularly and continues basis. And if you and when that our opportunity present itself, we would certainly be motivated to take advantage of it.

Vivek Juneja

Okay. And if you know, unrelated, to net interest margin this quarter I guess fell a bit more than expected. Can we just talk to kind of your outlook there?

Jeffrey Kelly

Yeah, Jason, this is Jeff Kelly. First, I would say it's probably useful to describe, maybe expand a bit on why decline in the second quarter at least from the remarks I gave a little bit earlier. So we did see much of the -- probably almost half of the decline on the margins this quarter be a function of moving residential real estate loans from 90 days plus our past due to NPA faster more accelerated basis, and we did see a mix change in the core deposit base as well as both Dan and I have mentioned increasing competition particularly on the time deposit side. So I think looking forward our best guess is that it probably stabilizes around this level and then it's relatively flat for the remainder of the year.

Vivek Juneja

Okay. And then just lastly, I guess you talked about charges I guess being flat to up in the back half of the year and the provision lower, but if directionally we kind of know where things are headed, but I mean how could -- I guess should we think about in terms of you obviously have a very sizable reserve in terms of over-provisioning versus at some point obviously using that reserve?

Dale Roskom

I would say -- it's Dale Roskom. I would say that we got to take a -- you are right. At some point there will be a more normal relationship between provision and charge off levels than what we have exhibited over the past three quarters. And as you note and as we have said, we have done substantial reserve building last three quarters, $2 billion. We do expect provision charge to come down in the second half of the year. I think there is enough vagary about how the markets are going to treat residential real estate in particular to give us caution about being overly precise about how far down they will come at this point in time. But we do feel like we have taken very affirmative steps to stock away reserves to deal with loss content that we see today and the potential that we could see over the next window time.

Vivek Juneja

Thank you.

Operator

And we will go with [Nick Elsner] with Wellington Management. Please go ahead.

Nick Elsner

Hi. Just from the fixed income perspective, you have obviously kept the A, AAA credit ratings, got 11% Tier 1, but there is kind of a disconnect in the fixed income markets with some of your holding company bonds having recently traded $0.50 on the dollar, probably gone up a bit from there. But is there any reason you can consider any possible, you consider an accretion involved in buying bonds at that level for your capital markets and trying to generate some confidence in the mean time, reducing some holding company maturities and taking a gain?

Jeffrey Kelly

This is Jeff Kelly. We have done a modest amount of repurchasing of short term bank notes at the bank level. I think it's a possibility. I think our sense at this point is just with the seaming fragility of the capital markets at this point. We have thought it best at least to this point to warehouse substantial [more shafts] of liquidity and that’s what we have done.

Nick Elsner

And you have got some holdco maturities coming out and you have got adequate funding to meet those in the next couple of years?

Jeffrey Kelly

Yes.

Nick Elsner

Okay. Thank you.

Operator

And Matt O'Connor with UBS, please go ahead.

Matt O'Connor

Good morning.

Peter Raskind

Good morning.

Matt O'Connor

Hi. Just to follow up on the reserve question. You have got little more than half of the expected losses in the liquidating portfolio already reserve for, so it seem like just a couple of different -- with respect to that book, you can either reserve or pay as you go. Any sense on what we should be assuming whether you've build additional reserves for the liquidating book or not?

Dale Roskom

Again, it's Dale. I probably just repeat myself here significantly. We did -- I think as we described the $478 million of supplemental reserves we took in the second quarter, we aimed those at to liquidating portfolios. We were very conscious of both the severity of loss and how that could change over the next period of time that we look for setting reserves as well as the impact of you know, severity loss is driven by housing prices in our view of housing prices as well as variability around unit loss rates that could be driven more by macroeconomic factors. So we try to take a view about variability of outcomes as we have set up there supplemental reserves. I think that you could read from that that we would expect again provision to moderate to start to move more to Florida in normal relationship with net charge-offs. But as you know, and as we read everyday there is a lot of uncertainty about housing prices in the economy and how that’s going to impact borrowers. So, I am trying to hedge here a bit to be sure, but I think you could properly read that the reserve building we have done in the first half of the year we wouldn’t expect to on the liquidating portfolios have to take that same level of action in the second half of the year.

Matt O'Connor

Okay. And then separately, you mentioned the cost savings initiative underway, also some more details that you can provide on that in terms of the magnitude of the savings and potential charge and if not, if its too early to give us a sense of when we will here more about that?

Peter E. Raskind

It's Peter, Matt. It is premature to be specific about opportunity there or timing or any other aspect of it. We are just as you would expect we would and should, they said undertaking rigorous review of our cost structure and when we have completed that review and we have a good sense of what we can or should do and what was the financial are associated with that we will be back to you.

Matt O'Connor

Okay. And then just lastly, maybe this is being a little nitpicky, but when you give us the pre-provision earnings power in 2Q versus 1Q it seems like you adjusted for the MSR losses, but you didn’t adjust for the derivative gains. I am just wondering why you do one or not the other and if we should think about derivative gains being sustainable from here?

Peter E. Raskind

The numbers are published in the supplement. Anyone is free to kind of add or subtract. We were just trying to give just update a bit of baseline peak behind the headline numbers which really don’t tell the operating story. But you know, there are any number of things which we disclosed that you can add or subtract to try to discern your own view of operating rate. And I just leave it at that.

Matt O'Connor

Okay, all right. Thank you.

Operator

And we will go to Paul Miller with FBR Capital Markets. Please go ahead.

Paul Miller

Yes. Can you give us a little color on what type of severity rates you are seeing out there? Especially, you talked about Michigan and the Florida being some of the toughest markets that you are in right now. What do you experience in the severity rates and how will you have been able to move the inventory out of their States?

Peter E. Raskind

Well the severity rates are rising in Florida. They are not really rising in Michigan except in particular the City of Detroit, where there is just really no buyer, there is not many buyers and there is a huge amount of product on the marketplace. I would say also in California the severity rates have been increasing. So to the tune of around 35% in California, probably a little bit more than that in Florida. Although, when we are referring to Florida that’s the National City mortgage production which was really on the West Cost of Florida between Naples and Sarasota. So that has been rising and that’s in excess of 35%. In the core Midwest we have not a huge increase in loss severity rates at all. As a matter of fact when you look at half of our footprints home prices have pretty much been stable over the last 12 to 18 months.

Paul Miller

And then have you been able to -- I mean we are hearing some story that we are seeing some inventory ticking up or seeing some foreclose property to start to move. I was just wondering how well you have been able to move some of these foreclosed properties out the door and have you seen a lot of activity pick up?

Peter E. Raskind

Well inventory really hasn’t ticked -- inventory has grown larger, but that’s only because the case of stuff going into it has become larger. So the month of inventory is still around 5 months for us. We have been doing more bulk sales. So there has been some increased in activity in that, but I wouldn’t want you to discern from that comment that we believe that there is enough activity to now establish a core on home prices.

Paul Miller

Okay. Thank you very much guys.

Peter E. Raskind

Thank you.

Operator

And we will go to Terry McEvoy with Oppenheimer, please go ahead.

Terry McEvoy

Thanks good morning.

Peter E. Raskind

Good morning.

Terry McEvoy

Could you just provide a little bit more color on the goodwill write down that happened in the quarter, was it some specific acquisition that you targeted or was it through overview of the goodwill that was already on the books?

Thomas Richlovsky

Sure Terry this is Tom. The goodwill would be based on for the most part of acquisition of the last four years which were purchases, a purchase acquisitions generate goodwill. Given as Jeff noted the impairment indicators, potential impairment indicators that was observe by the market price of the stock, clearly the market by trading under book effectively as written off the goodwill we require to test impairment we do – that happens, the goodwill was housing for the most part in two business units the retial bank and the corporate bank and you make an assessment and you take the charge, and its based on a long term discounted cash flow value and assumptions about the fair value of the business relative to the goodwill that’s on the books.

Terry McEvoy

And then..

Tom Richlovsky

But to be clear it isn’t per se attached to specific past acquisition, the past acquisitions generate the goodwill and that’s why we have as much as we have, but the – it’s a separate valuation exercise that determine to be impairment.

Terry McEvoy

And Peter could you just talk about the role of management we will play looking ahead at this new National City that’s emerging, could you talk about the role that it will play and then whether you can please with some of the recent results in wealth management and would you look to make any changes in that business?

Peter Raskind

Well, I would say generally that wealth management play a very important role in the National City in the future. And to be very specific we have vibrant private banking business that I think quite obviously is a footprint oriented business and it integrates beautifully with our retial banking and corporate banking businesses, it is a pillar or a footprint oriented bank should be about. And frankly it’s a business that I think for us historically has been somewhat smaller then we would have wished. We brought new leadership to that business about three years ago, and we have been very pleased with the revision that have been made in the business model and how we go to market today. So it is a crucial part of the new National City, and we would be looking for growth rates in that business, frankly, particularly given that its coming out from a relatively smaller base growth rate that would be somewhat greater than perhaps some of our other larger businesses.

Terry McEvoy

Thank you.

Operator

We will go Michael Rogers with Conning Asset Management, please go ahead.

Michael Rogers

Oh yes, good morning, Could you please provide a little bit more specifics on holding company cash versus debt maturities in the next two years please?

Tom Richlovsky

Sure this is Tom Richlovsky, holding company cash versus maturities, the holding company has sufficient cash up to the beginning of 2011 to accommodate debt maturities, interest payment, operating expenses under the assumption that there would be no, under the stress assumption that there would no bank dividend, no access to the commercial paper or capital markets. So its about 32 months of unencumbered liquidity relative to all obligations including dividends at the current rate.

Michael Rogers

Does that also assume that you will not be required to sent down any additional liquidity or capital to the banks?

Tom Richlovsky

Correct, we have already sent, we have already recapitalized the bank following the capital raise.

Michael Rogers

Thank you very much.

Operator

And we will go Mike Mayo with Deutsche Bank, please go ahead sir.

Mike Mayo

Hi just a clarification, you said you expect charge off in the second half look like the first half?

Robert Rowe

Mike, this is Rob. In my upfront section I said in essence the charge-offs in the second half will be similar to what we experienced in the first half of the year.

Mike Mayo

Does that would imply almost a touch less then the low end of your new guidance for the year, I am just trying to reconcile this, the 2.5 to 2.9 billion of losses for the year, with stating that the second half losses would be like the first half?

Robert Rowe

We are looking for a point estimate that -- what that statement would be, but we gave you the range and I certainly don’t want to do that in the third quarter within the range.

Mike Mayo

Okay. And the housing bill, what impact could that have on your guidance and how do you interpret that?

Rob Rowe

Mike, it's Rob again. The housing bill to the extent it can create order in the market would be a positive, but as you know when you have legislators who have differing dues on how this problem should be resolved, whether it should be resolved heavily with government interaction or be resolved with no government interaction, the ultimate bill looks like all the different individuals and their vote. And so the question is how many homeowners could be helped by the bill and it's not clear that it's going to be a number that would be enough to stabilize the market in my personal view. I know Joe Cartellone is going to speak also on this.

Joe Cartellone

Sure. Thank you, Rob. The one thing I would add to it, our perception in general is that the bill could actually in fact provide some needed confidence and stability to the market especially relative to GSE Reform and the emergence of a new regulator that actually will provide more structure than has been in the past. So we actually view it as a positive, very supportive of the bill and actually think it will help the overall stability in the market.

Mike Mayo

What it would do for National City or is it kind of a non-event, it's nice for the overall market, but you are still going to have losses you always have or do you think it would have a meaningful impact?

Peter Raskind

Well, Mike, I mean obviously then the impact where it will be meaningful would be in the first mortgage space, all right. I mean because that’s where in essence if you could stabilize the market, the loss severities would stabilize, so that would be a big positive. I don’t think and we don’t believe that on the second mortgage or the second lien space that it would be necessarily huge positive, but nonetheless anything to stabilize the marketplace would be positive.

Operator

And we have no further questions at this time. Please continue.

Tom Richlovsky

Operator, we are past our adjournment time or right at our adjournment time. So if you would give the closing instructions, we will adjourn.

Operator

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