Is WaMu the Next Countrywide?

National City Bank's level of capital is relatively lower than Washington Mutual's, with a risk-based capital ratio of 10.64% as of June 30. If we again look at where the capital level would be if the bank were to charge off all of its nonperformers with a recovery rate of 70%, the institution would remain well-capitalized with a risk-based capital ratio of 10.32%.

However, loans past due 30-89 days totaled $2.1 billion, compared with $376.3 million in June 2006. This represents significant additional risk to capital if a good portion of these move to nonperforming status in coming quarters.

Looking at capital levels, holding company stock buybacks and dividends paid out over the past year, it is clear that National City Bank is trying to manage its capital as efficiently as possible. If a bank holds a high level of capital, it is in a stronger position if credit quality declines, but will have a lower return on equity. Over the past year, the institution has paid out dividends exceeding its earnings, and it has maintained a risk-based capital ratio below 11%. For the first half of 2007, dividends kicked up to the holding company totaled $950 million, on net income of $670 million.

It's quite reasonable to see a threat to the holding company's 5.8% dividend on common stock, if the bank is forced to significantly increase its reserves. That being said, on the holding company's second-quarter conference call, CFO Jeffrey D. Kelly said that the buybacks would likely be suspended during the third quarter as the acquisition of MAF Bancorp is completed, "allowing the tangible equity ratio to move up."

National City's strategy has been to reduce capital, as it restructures to "a business model oriented largely to direct businesses with a smaller, more efficient balance sheet."

Countrywide on the Downside

Countrywide can't stay out of the headlines. It recently announced that it was speeding up its plans to move most of its mortgage lending to the thrift, away from its mortgage company. This was expected to build confidence in Countrywide's liquidity, since the thrift would fund new loans primarily with deposits, rather than bank credit lines.