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National City, which has suffered significantly from the credit crisis, has been forced to set aside higher provisions for loan losses due to increasing default on mortgages. In April, the company announced plans to raise capital and slashed its dividend to bolster its liquidity. In addition, the company is working to restructure its mortgage business and exit all broker-based mortgage and home equity operations following the deterioration in the housing and credit markets. The company is also curtailing its exposure to commercial real estate loans.
Second Quarter Results
The Cleveland, Ohio-based company's net loss for the second quarter was $1.76 billion, or $2.45 per share, compared to net income of $347 million, or $0.60 per share in the previous-year quarter. On average, twenty analysts polled by First Call/Thomson Financial expected a loss of $0.26 per share for the quarter.
The company said that the loss for the quarter was driven by actions to increase loss reserves on liquidating mortgage loan portfolios and a non-cash goodwill impairment charge of $1.1 billion related to previous acquisitions.
Excluding unusual and non-operating items, pre-tax pre-provision operating earnings for the quarter declined to $610 million from $690 million in the prior-year quarter.
Tax-equivalent net interest income for the quarter declined 7% to $1.02 billion from $1.10 billion in the year-ago period due to lower net interest margin. Noninterest income fell to $431 million from $764 million in the prior-year quarter. Analysts had a consensus revenue estimate of $1.78 billion for the quarter.
The decline in noninterest income for the latest quarter resulted from mortgage servicing right hedging losses of $146 million, a mortgage recourse provision of $215 million and a $532 million gain on the partial redemption of Visa shares in the first quarter of 2008.
Peer Performance
Among the company's peers, KeyCorp (KEY | Quote | Chart | News | PowerRating) reported a loss for the second quarter of $1.13 billion, or $2.70 per share, compared to a profit of $334 million, or $0.84 per share in the year-ago quarter. Results for the latest quarter were impacted by a one-time charge of more than $1 billion related to an adverse court ruling on leveraged lease transaction, in addition to a higher provision for loan losses to address current economic conditions. Total revenue for the quarter fell 66.4% to $455 million from $1.36 billion a year ago.
Fifth Third Bancorp (FITB | Quote | Chart | News | PowerRating) reported a loss in the second quarter compared to a profit in the prior-year quarter, dragged down by higher credit costs and a leveraged lease charge. Net loss for the second quarter was $202 million, or $0.37 per share, compared to a profit of $376 million, or $0.69 per share, in the year-ago period. Net interest income was nearly flat at $744 million, compared to $745 million in the prior-year quarter. Noninterest income increased 8% to $722 million from $669 million in the same period last year.
Other Metrics
National City's net interest margin for the quarter was 2.97%, down from 3.59% in the previous-year quarter. The lower margin in the quarter reflects higher levels of nonperforming loans and lower interest rates, which moved loan yields more than funding costs.
The provision for loan losses during the quarter was $1.59 billion compared to $145 million in the same period last year. The company said that of the provision for the latest quarter, $1.0 billion pertained to liquidating portfolios of brokered home equity, nonprime mortgage, and construction loans to individuals. The provision also includes supplemental reserves of $478 million, reflecting the difficult environment in the housing market.
Net charge-offs, or loans written off as not being repaid, rose to $740 million from $98 million in the same period last year. The net-charge offs in the latest quarter were predominantly in the liquidating portfolios and were less than half of the second quarter provision, resulting in a significant increase in the allowance for loan losses to 3.03% of portfolio loans.
Average earning assets for the second quarter of 2008 were $137.8 billion, up 13% from the prior-year period, largely due to an acquisition completed in the second half of 2007. Nonperforming assets were approximately $3.1 billion at June 30, 2008, up 14% from the preceding quarter, with the growth primarily in mortgage- and broker-sourced home equity loans, as well as commercial construction loans to residential real estate developers.
As of June 30, 2008, the company's Tier 1 risk-based capital ratio was approximately 11.08% compared to 6.56% at the end of the year-ago quarter and significantly in excess of the well-capitalized minimum of 6%. In the preceding quarter, the company announced that it would receive a $7 billion capital infusion from an investment consortium led by Corsair Capital.
National City's Chairman, President and CEO, Peter Raskind said, "In this very challenging environment, we have made significant progress during the quarter in strengthening our balance sheet, mitigating losses in our liquidating portfolios and positioning National City for long-term growth when the credit cycle turns."
Year-To-Date Results
The company's net loss for the six months was $1.93 billion, or $2.86 per share, compared to net income of $666 million, or $1.09 per share in the same period last year.
Tax-equivalent net interest income for the half year declined to $2.09 billion from $2.21 billion in the year-ago period. Noninterest income for the period increased to $1.57 billion from $1.39 billion in the same period last year.
Looking ahead, the company said it expects the provision for loan losses to decline in the second half of 2008 as it has identified and segregated its portfolio of non-core assets. The company noted that it has much better visibility regarding loss estimates than it did earlier in the year.
Stock Quote
In Thursday's regular trading session, NCC is trading at $4.89, up $0.18 or 3.82% on a volume of 16.91 million shares. The stock has been trading in a range of $2.99-$31.58 in the past 52 weeks.
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