Comerica Inc (CMA) 2015 Q4 法說會逐字稿

Good morning.

My name is Brent and I will be your conference operator today.

At this time I would like to welcome everyone to the Comerica fourth-quarter 2015 earnings call.

(Operator Instructions).

Thank you.

I would now like to turn the call over to Darlene Persons, Director of Investor Relations.

Please go ahead.

Thank you, Brent.

Good morning and welcome to Comerica's fourth-quarter 2015 earnings conference call.

Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Vice Chairman and Chief Financial Officer, Karen Parkhill; Chief Credit Officer, Pete Guilfoile; and Executive Vice President of the Business Bank, Pat Faubion.

A copy of our press release and presentation slides are available on the SEC's website as well as in the investor relations section of our website, Comerica.com.

As we review our fourth-quarter results, we will be referring to the slides which provide additional details on our earnings.

Before we get started, I would like to remind you that this conference call contains forward-looking statements and in that regard you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations.

Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements.

I refer you to the Safe Harbor statement contained in the release issued today as well as slide 2 of this presentation which I incorporate into this call as well as our filings at the SEC for factors that could cause actual results to differ.

Also this conference call will reference non-GAAP measures and in that regard I would direct you to the reconciliation of these measures within this presentation.

Now I'll turn the call over to Ralph who will begin on slide 3.

Good morning.

Today we reported fourth-quarter 2015 net income of $130 million or $0.71 per share and full-year 2015 net income of $535 million or $2.92 per share.

We remain focused on the long-term and executing on our relationship banking strategy as we navigate our way through a modestly growing US economy and increasing regulatory and technology demands.

Turning to slide 4 and highlights from fiscal year 2015, we had good broad-based loan and deposit growth in 2015.

Average loans increased $2 billion or 4% to $48.6 billion.

Most notable were increases in technology and life sciences, mortgage banker finance, national dealer services and commercial real estate.

Our average total deposits grew $3.5 billion or 6% to a record $58.3 billion.

This included a $3.1 billion or 12% increase in non-interest bearing deposits as well as a $474 million increase in interest bearing deposits.

We saw growth in all business lines and all three of our major markets as our customers have a lot of liquidity and choose to hold it at Comerica.

We generated close to $1.7 billion of net interest income in 2015, an increase of $34 million or 2% primarily the result of our solid loan growth.

Overall, credit quality continued to be strong with net charge offs of $75 million or 15 basis points of average loans for the full year which remains well below normal historical levels.

The allowance for loan losses increased $40 million compared to 2014 primarily due to increases in reserves related to energy and technology and life sciences, partially offset by improvements in credit quality in the remainder of the portfolio.

This resulted in the provision for credit losses increasing from the 2014 cyclical low of $27 million to $122 million for 2015.

Year-over-year, non-interest income was stable excluding the change to the accounting presentation for a card program.

We had increases in card fees, deposit service charges and fiduciary income.

This was offset by lower investment banking income primarily due to less activity in the energy market as well as decreases in certain categories impacted by regulatory changes such as letters of credit.

Excluding the impact of a change to the accounting presentation for our card program, non-interest expenses increased $38 million primarily due to increases in technology, regulatory and pension expenses as well as outside processing fees tied to revenue-generating activities.

This was partially offset by the release of litigation reserves and cost savings realized in 2015 from certain actions taken in the second half of 2014.

We repurchased 5.1 million shares and 500,000 warrants in 2015 under our equity repurchase program.

Through the buyback and dividends we returned $389 million or 73% of 2015 net income to shareholders.

This reflects our strong capital position and solid financial performance.

Our tangible book value per share increased 4% over the past year to $39.41 as we continue to focus on creating long-term shareholder value.

Turning to slide 5 and an overview of the fourth quarter, average loans were relatively stable at $48.5 billion compared to the third quarter and average deposits increased $596 million driven by a $1 billion increase in non-interest bearing deposits.

Revenue increased more than 2% compared to the third quarter.

This was the result of growth in net interest income which benefited from higher nonaccrual interest recoveries and the rise in rates late in the quarter as well as an increase in fee generation particularly commercial lending and card fees.

Technology and regulatory costs drove non-interest expenses higher as anticipated.

Negative credit migration in our energy exposure continued as expected while overall our customers have been acting prudently as evidenced by declining loan balances.

The remainder of the loan book continues to perform well.

Finally, we benefited from lower taxes as a result of the early termination of certain leveraged lease transactions.

Turning to slide 6, most US economic data at year end showed ongoing momentum which we expect to continue through 2016.

Looking at economic conditions within our primary footprint of Texas, California and Michigan, we continue to see the advantages of our geographic diversity.

While Texas is facing headwinds from the energy cycle, California and Michigan provide an important counterbalance.

Average loans in California were up 8% compared to 2014 while deposits were up 10%.

California continues to be a leader in bringing new technology to market.

Housing markets should remain strong.

Low regional unemployment rates will contribute to wage growth supporting the state's large consumer sector.

We expect the California economy to grow at a moderate pace in 2016.

Average loans in Michigan were relatively stable compared to 2014 while deposits were up 4%.

Michigan's economy has benefited from the recovery of the US auto industry.

We expect ongoing job growth to keep labor markets tight and wages improving.

Average growth slowed in Texas with loans up 2% and deposits relatively stable compared to 2014.

The overall Texas economy should feel the weight of reduced oil and natural gas drilling activity through 2016.

However, the state's economic diversity and business-friendly environment aided by a healthy U.S. economy should support economic growth through 2016 albeit at a slower pace.

As we look forward to the year ahead, we remain keenly focused on growing loans and deposits along with managing expenses as we make necessary investments.

With the Federal Reserve increasing its benchmark rate 25 basis points in December, our revenue picture looks better as our balance sheet remains well-positioned to benefit from potential rising rates.

With oil prices at a cyclical low, we have been closely monitoring our energy customers and have increased our reserves in each quarter of 2015.

Well into the cycle, we continue to feel comfortable with our energy portfolio and believe charge-offs will remain manageable.

In summary, we are committed to providing high-quality financial services and building lasting customer relationships which combined with our diverse geographic footprint will continue to assist us in building long-term shareholder value.

And now I will turn the call over to Karen.

Thank you, Ralph.

Good morning, everyone.

Turning to slide 7, fourth-quarter average loans were relatively stable at $48.5 billion compared to the third quarter.

We had strong loan growth in our commercial real estate business as well as our national dealer business which typically rebounds in the fourth quarter.

This was more than offset by a seasonal decline in mortgage banker loans along with declines in general middle-market and corporate banking as we remain disciplined in this highly competitive environment.

In addition, energy continued to decline as expected.

Positive growth trends through November and December resulted in period end loans above the average for the quarter.

As you can see, the quarter ended with loans at $49.1 billion.

Total loan commitments were relatively stable and utilization was unchanged at 50%.

Importantly, our pipeline remains strong.

Our fourth quarter loan yield increased 7 basis points as shown in the diamonds.

We had higher interest collected on nonaccrual loans and benefited from a 25 basis point increase in short-term interest rates late in the quarter as the Fed raised its benchmark rate on December 16th.

Turning to deposits on slide 8, average deposits increased $596 million in the fourth quarter from a $1 billion increase in non-interest-bearing deposits.

The primary driver was a large increase in corporate banking which was partly offset by declines in technology and life sciences along with general middle-market as we adjust pricing on municipal deposits to reflect the impact of the liquidity coverage ratio.

Period-end deposits also increased $1.1 billion to $59.9 billion.

We continue to prudently manage deposit pricing and have not instituted any standard pricing adjustments in response to the increase in short-term rates.

We are closely monitoring our deposit base as well as the market and we believe we are well-positioned with predominantly operational relationship-oriented deposits.

As we discussed at a recent investor conference during the fourth quarter, we deployed a portion of our excess reserves into securities as shown on slide 9. Given our continued deposit growth and the likelihood of rate increases occurring in small increments over a longer period of time, in the fourth quarter we added almost $2 billion primarily in treasury securities.

This strategy generates some additional income while maintaining our asset-sensitive position.

At this time we expect to potentially and modestly add to our securities portfolio based on the movement of our balance sheet and interest rates along with market opportunities.

By carefully managing the overall portfolio, we have maintained an estimated duration of under four years.

As you can see in the diamonds on the slide, our portfolio yield was stable resulting from a small decrease in the MBS premium amortization offsetting the mix impact from adding lower yielding treasury securities.

Going forward assuming no change in the rate environment, we expect continued minor pressure on the average securities yield primarily due to the mix shift.

As of quarter end, our estimated LCR ratio continues to meet the fully phased in 2017 requirement plus a buffer.

Turning to slide 10, net interest income grew $11 million or 3% in the fourth quarter.

The biggest driver came from the loan portfolio which contributed $5 million.

Higher interest received on nonaccrual loans and an interest in loan yields due to the rise in rates was only partially offset by the decline in lower loans and lower accretion.

A larger securities portfolio, lower funding costs and higher interest earned on short-term investments including higher Federal Reserve deposit balances each added $2 million.

The decline in our wholesale funding costs was driven by a debt maturity late in the third quarter along with lower interest paid due to the decline in interest-bearing deposits.

Our net interest margin increased 4 basis points with higher loan yields offset by higher balances at the Fed.

Turning to slide 11, our overall credit picture remains solid.

Net charge-offs were 21 basis points or $26 million derived mainly from loans related to energy and to a lesser extent, technology and life sciences with strong recoveries in a number of our business lines.

Our criticized loans grew $295 million to $3.2 billion which is less than 7% of total loans and continues to be below our average historical level.

The increase was driven by a $372 million increase in criticized loans related to energy.

Total nonaccrual loans were relatively stable at $367 million or 75 basis points of total loans with energy comprising $161 million, up from $126 million in the third quarter.

The fall redetermination process is essentially complete for our E&P customers which comprise 69% of our energy business line.

Borrowing bases have come down about 10% on average as a result of lower energy prices.

About 45% of our customers have improved or stable loan to value ratios and there have been few new collateral deficiencies since the prior redetermination.

Overall, our borrowers continue to act prudently in this environment.

They are aggressively reducing costs, cutting back on capital expenditures, reworking their hedging contracts to provide more runway and preserving liquidity.

In addition, they are paying down bank debt through the sale of assets.

As a result, our loans in our energy line of business declined by $173 million this quarter and are down approximately $700 million from the peak at the end of February.

And utilization remained essentially unchanged at 49% as of the end of the third quarter.

Importantly, we have virtually no second lien exposure and our energy services portfolio is a relatively small amount of our total loans.

However, given persistently low oil and gas prices, we continue to see negative migration in the energy book which has resulted in an increase in criticized loans, nonaccrual loans and charge-offs.

As of quarter end, 38% of the loans related to energy were considered criticized including 4% on nonaccrual.

We had $27 million in charge-offs in our energy business line and $6 million in energy-related loans.

The $35 million provision for our total portfolio reflected charge-offs as well as an increase in our energy reserves in conjunction with the negative migration and preserving a healthy qualitative reserve.

As of quarter end, our reserve allocation for energy loans increased and is now greater than 4% of our total energy and energy-related loans.

Overall, our allowance for credit losses increased $9 million to total $679 million and our allowance to loan ratio increased to 1.29%.

Slide 12 outlines non-interest income which increased $6 million or 2%.

The biggest driver was an $8 million increase in commercial lending fees due to robust year-end closing activity particularly in our syndication area.

We also had increases in card fees due to higher revenue from merchant processing along with letter of credit and foreign exchange income as we continue to focus on cross-sell opportunity.

We did see declines in service charges on deposits due to five fewer business days in the quarter as well as fiduciary and brokerage income which were impacted by a poor market environment.

In addition, we had several items that are difficult to predict, specifically a $6 million increase in deferred compensation which is offset in non-interest expense, a $4 million decrease in customer related warrant income, and a $3 million benefit in the third quarter from hedges on our debt that was not repeated in the fourth quarter.

As a reminder, the year-over-year view of both non-interest income and non-interest expense is not directly comparable.

Each quarter this year reflects an accounting presentation that reports gross revenues and expenses rather than net revenue for a card program.

Turning to slide 13, non-interest expenses increased $28 million.

Included in the increase were $6 million in benefits in the third quarter that were not repeated from legal reserve releases and forfeiture of executive stock awards.

In addition, deferred compensation expense increased $6 million and is offset in revenue as mentioned.

Staff insurance and consulting expenses were seasonally higher and salaries expenses increased with higher technology and regulatory related staffing including contract labor.

Also of note, outside processing fees declined with vendor credit and an unusually large collection of customer reimbursements.

Moving to slide 14 and capital management, as the chart indicates, we continue to return excess capital to our shareholders in a meaningful way with a payout of 79% of fourth-quarter earnings.

In the fourth quarter we repurchased 1.5 million shares for $65 million under the equity repurchase program reflecting a moderate increase from the $59 million repurchased in each of the past six quarters.

Turning to slide 15, as typical, we provide our outlook for the full year based on a continuation of the current economic and interest rate environment.

Overall, we expect our average loan growth to be in line with GDP growth.

We expect loan growth in most businesses led by commercial real estate, auto dealer and technology and life sciences.

If oil and gas prices remain at low levels, we believe energy loans should continue to decline.

Also keep in mind competition remains stiff particularly in corporate banking and we fully intend to maintain our loan pricing and credit discipline.

We expect our net interest income to increase.

Assuming current rates do not change, our model indicates that the full-year benefit of the recent increase in short-term rates should increase our net interest income by more than $60 million.

And while not included in this outlook, we are well positioned to benefit from any further rate increases which I will discuss on the next slide.

We also expect the growth in loans and securities net of funding costs to have a positive effect.

We expect continued solid credit quality with net charge-offs remaining below historical norms.

As far as provision, we expect an increase in reserves in conjunction with loan growth and potential further deterioration in overall credit quality including an increase in net charge-offs from cyclically low levels.

If energy prices remain at these very low levels, we would expect to see further reserve build and ultimately higher charge-offs.

But remember, our energy business strategy is underwritten to withstand typical volatility in the sector.

So we continue to expect the credit impact from energy to be manageable.

Overall, we expect non-interest income to grow modestly primarily due to growth in merchant processing services, government card and commercial card fees as we continue to focus on cross-sell opportunities.

And assuming that the market conditions improve, we expect an increase in wealth management-related income such as brokerage service fees and fiduciary income where we continue to see a strong pipeline from our Trust Alliance program.

Non-customer categories such as warrant income, hedge ineffectiveness and deferred comp are difficult to predict but are expected to have a small negative impact.

As far as non-interest expenses, we have been and will continue to manage through some near-term expense headwinds.

2015 benefited from a $33 million legal reserve reversal that will be essentially offset by an equal decline in our pension expense primarily due to a rise in long-term rates.

As we have indicated, we expect technology projects and regulatory expenses will continue to rise and together increase by about $25 million to $30 million in 2016 as we continue to invest to meet increasing industry compliance and regulatory demand as well as enhancements in our cyber security.

Outside processing expense is expected to increase in line with growing revenue particularly card fees.

Also a recent regulatory proposal for an FDIC surcharge may drive that expense up and a forfeiture of restricted stock and leverage lease terminations that benefited 2015 are not expected to be repeated.

Finally, we expect to see typical inflationary pressures on several line items including annual merit, staff insurance and occupancy.

Rest assured that as we continue to navigate through this low-rate environment and even as rates rise, we are focused on maintaining our expense discipline, carefully managing our workforce and driving efficiency for the long-term through continuous review of processes, judiciously negotiating contracts and leveraging technology when possible.

We expect these efforts will be apparent in several line items such as consulting, telecom, travel and entertainment and legal fees.

Lastly while not on the slide, I would point out that we estimate our tax rate will be approximately 32% of pretax income.

Turning to slide 16, as I mentioned, our outlook assumes the current rate environment and no rise in rates.

For illustrative purposes we've run a simulation using the implied forward curve for 30-day LIBOR, the rate to which we are most sensitive.

On the left side of the slide we show the forward curve that assumes 30-day LIBOR reaches about 100 basis points at year end or 90 basis points on average in the fourth quarter.

In this case, which incorporate a dynamic balance sheet assuming historical relationships, our net interest income could increase a further $55 million to $60 million for the full year.

The right side of the slide provides our standard asset liability case and shows that a 200 basis point increase in rates over a one-year period equivalent to 100 basis points on average, would result in a benefit to net interest income of about $210 million.

There are also several alternative assumptions to our standard case including the pace of deposit, loan and rate changes and in all cases we remain well-positioned for rising rates.

In closing, we are pleased with the increase in our revenue and continued deposit growth.

And our overall credit quality has remained strong as we've been navigating the energy cycle.

While it remains a challenging environment for us and the industry given the persistently low rates and energy price environment combined with increased regulatory requirements and technology demand, we will continue to be keenly focused on the long term and the things we can control.

And with the first rate increase behind us, our revenue picture looks better.

Now, operator, we would like to open up the call for questions.

(Operator Instructions).

Scott Siefers, Sandler O'Neill.

I think first question I was hoping you could address the energy reserve in a little more detail.

So the 4% reserve could certainly prove sufficient.

But just given that others are now disclosing higher reserves than I think the credit markets are suggesting even higher loss potential, just would be curious to hear your expanded thoughts.

And then I think the second part of that question is just that there is of course now an enormous mismatch between what it might cost you guys to beef up the reserve even more materially versus the market cap that's been lost on concerns about the reserve.

So if you can do sort of address both of those, that would be great, please.

Okay.

Pete, do you want to start?

Sure.

So every energy portfolio is unique and I think it would be inaccurate to say that every bank has to allocate the same amount of reserves to their energy portfolio.

So for instance, Scott, when you take a look at our portfolio, as Karen mentioned, we don't have any second lien debt in our portfolio.

For the most part it's well secured E&P credits.

We don't have much in the way of energy services and the portfolio continues to contract and is throwing out a fair amount of reserves.

The other thing I would mention that's important is that when we're calculating that allocation, included in the denominator is all of our energy-related exposure, which includes investment-grade credits.

It includes middle-market credits that may or may be impacted all by energy prices.

And then I guess the last thing that we look at is we have $680 million of reserves in total and because we don't have other issues going on in the portfolio, we look at that entire reserve as available to address any issues that come up in energy.

And I would add, Scott, that remember our reserve at year-end of over 4% does continue to include a healthy qualitative reserve and we recognize that prices have dropped a decent amount since year-end.

It is really difficult to say with any degree of certainty what that impact could be because prices are only one component on our reserve.

There are lots of other components that impact our customers' performance.

They would include continued reduction in cash costs, an ability to sell assets, extension of hedges and access to the capital markets.

But know that because prices have dropped precipitously particularly since year-end, we have done an analysis with oil prices remaining at $30 for the entire year.

And based on that analysis and conservatively assuming a static portfolio, we would estimate that the impact to our energy reserves could be $75 million to $125 million, which we still believe remains manageable.

And I would also want you to keep in mind that ultimate losses could be much less than that amount.

Our energy business line is very granular and we do expect energy loans to continue to decline which does free up reserves plus our allowance is also impacted by the performance of the remainder of the portfolio, which does continue to improve.

Okay.

That's all perfect color.

Thank you very much.

Ken Zerbe, Morgan Stanley.

I want to make sure I heard the number right, did you say that from the December rate hike you expect $60 million of increase in II in 2016?

That is correct.

We said we expect more than $60 million next year.

And keep in mind that that's based on the fact that 85% of our loans are floating rate and we are assuming deposit assumptions fairly similar to history.

Because we have seen minimal deposit impact both on the amount and on pricing with the initial part of the rate rise, there could be upside to that number.

Got you.

Then the question I had though on that was, if you look at slide 16, you went through on the LIBOR -- if LIBOR goes up I think it was 90 basis points by the end of the year, and I'm going to annualize your fourth-quarter 2016 number of I think it's $25 million higher NII, just help me understand, so $60 million from 25 basis points but then a 100 million annualized from 90 basis points in LIBOR.

Is that just because you expect deposit (inaudible) to go up, or what's the offset there that would make that disproportionately smaller increase in NII?

Yes, so keep in mind that the model is dynamic and some of the key drivers are the deposit assumptions.

So according to our standard model, we do assume that as rates rise we would see a moderate decrease in our deposit balance or could see a moderate decrease and that deposit pricing goes in line with history.

Because of a small increment on this rate rise, perhaps the deposit impact may be less than what we've assumed.

So it is a dynamic model.

Got you.

Then just one more question for you.

Just in terms of page 11 when you talk about the energy loans, just want to make sure I think about the energy exposure correctly because you break it out separately.

You have the $3.1 billion of energy loans but then a $625 million of other business or other loans that are related to energy that I think you say could be disproportionately negatively impacted.

What do you think is structurally different with that $600 million of other energy related loans?

From our perspective should we just be lumping the $3.1 billion and the $600 million together in terms of your total exposure?

Ken, that $650 million is actually performing better than the line of business.

It consists of a lot of credits that are really not impacted by energy prices.

We include in that number any one of our borrowers that derives 50% or more of their revenue from the energy sector, some of which is really not impacted by energy prices, so included in that $650 million are investment-grade refineries and really just other middle-market companies that are fairly not that impacted by low energy prices.

So it is actually performing better the energy book.

Okay.

Thank you.

Geoffrey Elliott, Autonomous Research.

The Shared National Credit Report talked about banks showing flexibility in working with [auditors] by relaxing leverage covenants and allowing time to curtail borrowing base over advances.

Could you talk about how that process works in practice at Comerica?

The SNC conference?

Yes, it was just out of the SNC report from November, and I wondered if you could talk about how that process works at Comerica?

As far as the Shared National Credit Exam?

No, more in terms of showing flexibility when you're working with oil and gas borrowers who are coming up against covenants and where the borrowing base needs to come down.

So we work very closely with the rest of the bank group in going through the redetermination process.

We're all reviewing the same information.

We have our own separate engineers that review the engineering reports but there's a sharing of information that takes place on that analysis.

We each do our own risk ratings and so we all determine independently what we think the appropriate rating should be.

But I can tell you that we talk a lot and so I think we have a good feel for where the other banks are with regard to their view of those credits and they have a good view of where we're -- what our view is.

Does that answer your question?

I guess partially.

And then the follow-up would be, if you're kind of thinking about how you're sharing flexibility with borrowers this time versus in prior cycles, say 2008, 2009, do you think there are any differences in how you and the other banks are behaving?

No, I think we're working together with our borrowers to give them flexibility of course, but at the same time I think we're acting prudently to make sure that we're protecting on credit losses.

I think what's been really remarkable throughout this downturn is just how well the borrowers are working with the banks as well.

And if you take a look at it, Geoffrey, last spring when prices were dropping the access to capital markets proactively to make sure they were not in violation of borrowing bases.

In the fall when the capital markets were largely closed, they sold assets to reduce their loans outstanding to make sure they were in compliance with the borrowing bases.

So it's a two-way street.

I think the borrowers are working well with the banks to make sure they are staying in compliance with the banks, and the banks are working with the borrowers to make sure that they have the liquidity they need to operate their businesses.

Thank you.

Erika Najarian, Bank of America.

My first question is just clarity on expense guidance for 2016.

Karen, could you take us through what the puts and takes are relative to the $489 million fourth-quarter expense base as we think about the quarter ahead?

And also Wells Fargo gave us a pretty significant dollar number for the estimated quarterly FDIC expense base and I was wondering if you could similarly share your projection with us?

Sure.

So on expenses we talked about the fact that 2015 did benefit from the legal reserve release and we will have lower pension expense that is pretty much equal to that legal reserve release.

We talked about the fact that we've got increases in technology and regulatory expense of about $25 million to $30 million and outside processing in line with growing revenue along with typical inflationary pressures and the potential for the FDIC increase.

Relative to the fourth quarter I would say the fourth quarter is a decent guide but keep in mind there's lots of moving pieces particular on a quarterly basis.

Number of days impact a quarter.

The first half typically has higher stock and incentive comp and higher seasonal payroll taxes.

The second half is impacted by merit raises and increasing staff insurance costs.

Plus the fourth quarter had items that are not expected to repeat like deferred comp, and we continue to manage expenses everywhere that we can.

On the FDIC expense in particular, as you know, the FDIC did put a proposal out there to increase their deposit insurance fund per Dodd-Frank mandated standard by increasing the rates to the larger banks.

While that proposal has -- the comment period has just ended on that, so it's uncertain what the timing or ultimate impact could be.

A good rule of thumb would be approximately maybe $10 million to us in the year.

Got it.

And as I just put your guidance together, there's clearly a little bit more hesitation by the market to think about rising rates given what's been happening to the economy outside of the United States.

And as I think about your guidance for higher revenues and higher expenses for this year, I'm wondering if you are committed to generating positive operating leverage even outside of the potential impact of any further increases to the short end of the curve?

So we are always very focused on generating positive operating leverage.

We have been very focused on managing our expenses as prudently as we can while we need to invest in increased regulation and technology.

That said, our ultimate performance particularly in 2016 will be dependent in part on where rates go.

Keep in mind that we have a good benefit from the rate rise that has already occurred and will ultimately depend on the energy sector.

But regardless, we remain very focused on positive operating leverage, particularly over the long term.

Got it.

Thank you.

Steven Alexopoulos, JPMorgan.

I wanted to start, looking at the $1.2 billion of criticized energy loans, could you give us the breakdown of that into E&P, midstream and services?

Sure can, Steven.

It's 45% E&P, about 9% midstream, and 48% services.

And then there's 30% that's in the related category.

Okay, perfect.

That's very helpful.

I wanted to talk about hedging for a second.

Could you, just looking at your customers, talk about what level of production was hedged in 2015 and how that's going to change in 2016?

Right now we have 59% of our borrowers that have 50% or more of the revenue hedged out one year and then it drops off to 30% after that.

And so those percentages really haven't changed a lot over the last several quarters.

Now the value of those hedges has dropped as borrowers rework their hedges to get -- extend the runway.

But I think the good thing here is that borrowers are actively working to extend the runway and as they extend the runway, they are making good progress on reducing their cost structure.

Okay.

So you are saying 50% in 2015 and then that falls to 30% in 2016 -- that's what you're saying?

I'm sorry.

Say that again, Steve.

Did you say 50% was hedged in 2015 and that's falling down to 30% in 2016?

Yes.

So -- no, 30% two years out beyond 2016.

Yes, beyond 2016; 30% have 50% or more of their revenue hedged.

So those percentages I just gave you are only customers that have 50% or more of their revenues hedged.

We are not counting in those percentages companies that have less than 50% of their revenue hedged and a lot of them do.

Okay.

Just one other question.

Looking at the technology life sciences business, it looks like balances were down sequentially both loans and deposits.

Can you talk about the impact that that vector is having on that business?

Thanks.

We have seen a bit at a softness in the BC market.

That's because firms are exercising more cautious following several years of really strong investment and high valuations.

There had been some challenging verticals like cyber security ad-tech, so we're watching that carefully and we do expect a good year in 2016 in our technology (inaudible).

Okay.

Thanks for all the color.

John Pancari, Evercore ISI.

Back to energy.

Want to get a little bit more detail on the reserve adequacy.

Can you give us the breakout of the reserve as it pertains to E&P versus oil service?

Yes, we don't typically give that kind of detail.

We have talked about we've got greater than 4% of reserves against both energy and energy-related and that we believe that reserves from here could be manageable.

Maybe I could give a little bit of color depending on, John, what you'd like to understand better.

But obviously while we were doing the redeterminations this fall, energy prices were dropping.

And so the price decks that we were using on a regular basis to do those redeterminations ultimately ended up being higher than where prices ended up at the end of the year.

And so we made up that difference with a qualitative reserve at the end of the quarter to adjust for the fact that prices had dropped from the time we were doing the redeterminations to the end of the quarter.

Okay.

All right.

And do you break out the qualitative versus the specific?

No, we don't give specifics on that.

But again we do maintain a qualitative reserve.

Okay.

And then another thing, I know you mentioned this in your comments, or you referred to it, but do you have what percentage of your energy book is investment grade versus non-investment grade borrowers?

We would say most of the investment-grade borrowers would be in the energy related and many of those borrowers don't borrow a lot of money.

And so in terms of the actual dollars outstanding, I don't have a figure for you but it's not a huge amount.

Okay.

And then lastly, thanks for the sensitivity on oil remaining at $30.

However, since we did see oil break into the $20s for a little while there, what if oil drops and remains in the $20s?

Can you give us that sensitivity because that's where you get a big change for a lot of these producers where they really have a problem with the production costs, etc.?

Thanks.

Yes, our reserves and our pricing analysis take into account the forward curve, which is typically upward sloping.

So the number that we gave you on the $30 for 12 months has a flat curve, not upward sloping.

So keep that in mind.

These are rough numbers so I'm not going to give you one that's in the $20s but you can assume slightly worse than the one we gave you if it's in the $20s, but keep in mind this is a very dynamic equation, and very typically the price environment forward curve is going to be upward sloping.

Okay.

If I can ask one housekeeping, non-energy?

Loan balances at the end of period came in a good amount above the average.

Which is a better one to work off of?

We focus on average more than we focus on end of period mainly because that's what drives our financial statements.

We do see end-of-period activity in both loans and deposits and that's one of the reasons why we don't focus on it.

But I do think it's a good thing that our end-of-period balances are above our average for the quarter.

That bodes well for the start of this quarter.

Okay.

Thank you.

Terry McEvoy, Stephens.

Just to take a step back and a question for Ralph.

In the past when there's been some weakness in Comerica's business, the Company has moved resources and capital to some other markets or other lines of business.

So you were in Michigan, you moved to Texas, when commercial loans were a little soft you talked more about wealth management, etc.

So my question is, strategically if Texas continues to contract, how do you fill in that hole in terms of where or potentially some additional products?

I think you described it well.

We are always looking at where our resources are, and we move those resources and where we invest based on what's going on partly because of the economy in the short term but also on the longer term.

And when Karen was talking about expense management earlier, a lot of that is built into that and we're looking all the time at where we need to be, where we need to add people.

At the same time where we don't need additional people, as an example.

And we've got a very tenured, good team and that's very important and that's the reason they are movable as well.

Pete, you've moved around a couple of times, as an example.

Yes, all three markets.

Curt, would you like to add something to that?

Just maybe to reinforce what you're saying there, Ralph.

The California market is continuing to do well overall.

Real estate value is firming in both the North and the South, a very diverse economy.

Technology is still doing well despite a little bit of softness, and so some of our resource reallocation is to California right now as we continue to round out the large urban markets there.

But we also beyond just line of business continue to focus on the fee income businesses within the corporation, so we've been a net investor in wealth management adding additional advisers especially in the trust and brokerage area.

We've been adding resources in some of the card areas, merchant added a new vendor there.

So we're looking at it all the time.

It is a constant process of reviewing our lines of business.

The ROEs that are being generated by the respective businesses and where we think we have the greatest good opportunity but also where that matches up with where our greatest customer needs are as well.

Thanks.

And then just as a follow-up, you did release reserves in the non-energy portfolio and based on your outlook today for 2016, do you foresee additional reserve releasing outside of energy really to help offset that potential $75 million to $125 million incremental reserves in energy that Karen identified earlier on the call?

Yes, we continue to see really great results outside of energy and as you mentioned, about one-third of the migration in energy was offset by improvements elsewhere in the portfolio.

The further you go in the cycle the harder and harder it is to get those kinds of [great] dividends but the rest of the portfolio is just really strong and I do expect us to continue to see some improvement there.

Thank you.

David Eads, UBS.

Maybe just one question on NII and NIM.

Just in thinking about the outlook as a starting point for heading into next year, is the right way to think about it that you kind of back out some of the benefit from the nonaccrual interest in 4Q and then you would add in the benefit from the first rate hike, which very little of that was seen in 4Q and then you'd have the day count impact in 1Q?

Is that kind of the right puts and takes to think about starting off next year?

No, those are the right high-level puts and takes, yes.

Okay.

And then for the share buybacks, should we think about the 4Q level as kind of the right run rate for the first two quarters of the year, or could there be a little bit of increase related to the income from rate?

And then I guess do you have any flexibility on when you could do the buybacks in the last two quarters of this cycle?

So on share repurchase, we have said that we will be monitoring that on a quarterly basis and that it will follow our financial performance and our balance sheet movement including our capital levels.

So it is something that we will be looking at and monitoring every quarter.

As you know, we had $393 million not objected to in the last capital plan.

We obviously did increase our share repurchases this quarter and we'll be looking at each quarter in isolation but against our performance.

Okay.

And just finally, there was this fall SNC review for the largest banks.

Were the results for that included in 4Q results and was there anything interesting coming out of that?

Yes, they were included in the fourth quarter; and no, there is really no major impact on our portfolio at all.

Great.

Thanks.

Bob Ramsey, FBR.

Just a few follow-ups.

One, I know you talked about how strong credit has been outside of the energy book of business.

I'm just curious, are you seeing any signs of softness or any areas where there might be signs of any sort of concern?

We are always on the lookout for pockets or deterioration.

I can tell you that we have thoroughly reviewed our commercial real estate portfolio, particularly with multifamily.

We feel very, very good about that.

We've reviewed our technology sector.

We feel good about that despite a bit of increased credit costs.

Middle market is really, really performing quite well.

Dealer is superlative.

I can go down the list.

We have a really, really strong credit culture here and we work very well between our credit partners and the line.

Yes, and if I could just add, one of the reasons why we very proactively moved a number of credits from other business units into this energy related portion of the book is that we expected that some of those credits might show some deterioration as energy prices decreased and so we lumped those in with our energy exposure.

And so everything outside of that ex-energy, if you will, has really not been very impacted.

Okay.

No, that's helpful.

On the share repurchase question, I know you guys said you look at it relative to the balance sheet every quarter.

Just curious if trading below tangible book, if that in any way affects your appetite to put something in one quarter versus another, or if that is one of the bigger determinants of when you decide to buy?

Clearly we like buying our stock back at these very low prices.

That said, our capital plan is done on a quarterly basis and any changes to timing or amounts would require regulatory approval.

Okay, got it.

Last question, back to margin, just want to be sure I understood correctly the numbers you guys break out on slide 16 of the slide deck, that is on top of the $60 million benefit that you already expect to achieve from the one rate increase that already taken place, correct?

That's correct.

Okay.

And is it fair to take that $60 million and just run rate it at $15 million a quarter and we should see a $15 million lift here in the first quarter?

Yes, you could think about the $60 million or more than $60 million that we have from the rate rise that has already occurred to be fairly even each quarter.

Obviously we would expect the biggest impact quarter over quarter to be in the first quarter given that we'll have a full quarter impact of the rate rise as opposed to just a few week impact.

Sure.

Okay.

Great.

And then I'm just curious how you all are sort of thinking about rates from here.

If you could maybe share your interest rate forecast through the end of the year?

It's very difficult to predict rates and we don't have a crystal ball, just like you don't.

And that's the reason that we give our outlook assuming rates don't rise because it's not really something that we can predict.

Right.

Okay.

Great.

And last question around rates, for the next 25 basis points if we get another 25 basis points -- I know you have given sort of the LIBOR scenario on that slide 16 but do you see something similar to that $60 million benefit from the first on the second, or does it start to diminish?

I get there are moving pieces with deposit assumptions.

Yes, there are moving pieces with deposit assumptions and our model that we've shown on that slide 16 does include a deposit decline and betas moving in line with history.

So who knows how it will actually go but we do expect less pressure on deposits in the early rate rises, particularly this first rate rise and perhaps maybe the second 25 -- we'll see.

Okay.

Great.

Thank you very much for taking the questions.

Brett Rabatin, Piper Jaffray.

Wanted just to circle back to Texas and I think last quarter you kind of talked about recession and some of the markets in Texas not doing as well.

Can you maybe give us an update on how you feel about the markets in Texas?

And then just thinking about the loan growth guidance that you are giving for this year, obviously energy is a downdraft.

Would Texas in general also outside of energy be a headwind?

Or can you give us some thoughts on how you see that market?

Pat, do you want to start that?

Sure.

Texas has tempered somewhat with respect to the robust growth that we experienced a number of years ago.

We were seeing 10% loan growth year after year.

We saw 2% last year and deposits were stable, but Texas is still experiencing positive population growth.

We have a business-friendly environment, low-cost housing, clinical labor, so don't count Texas out of the equation.

And I would like to say we still had positive loan growth in the fourth quarter from our other businesses, had it not been for energy.

Regarding the specific geographies, Houston will be the most impacted.

Dallas has a very robust economy as does Fort Worth.

Austin is a technology-oriented city and government being the capital city.

They're not immune, but other than Houston we're seeing really relatively less impact compared to Houston.

We're overall looking at a positive GDP for the state, even though it's going to be significantly lower from where it's been, was the last numbers I saw from Robert, our economist.

Yes, and the direct percentage of energy impact attributed to energy is about 15%.

Obviously, the ripple effect is much larger than that.

Right.

Okay.

And then just wanted to go back to energy for a second.

I know you guys don't have that much exposure on second lien-type facilities, but as we've seen change here with the Company's underlying fundamentals in the credits where you're SNC related, has there been efforts to keep those companies from dealing those type of credits?

Or are you guys letting those facilities increase?

And maybe give us some thoughts on how you view leverage at your client base on the energy portfolio.

So when you go through the redetermination process with these E&P companies, if there is a violation of the borrowing base, the loan agreement typically requires that they get back within that borrowing base within six months.

And so far with very few exceptions, that has happened.

And so we are not seeing the bank being asked to take on any kind of second lien piece or something like that.

Having said that, in addition to the half-dozen or so companies that have collateral deficiencies right now, we probably have another 10 or so that have what we would call elevated loan to values.

And some of those we might be fairly comfortable with because of there is other mitigating factors.

But I wouldn't call them second-lien pieces at all.

They are just higher loan to values for a variety of lesions.

Okay.

Thanks for the color.

David Darst, Guggenheim.

Could you comment on the dealer finance business?

Looking at the past year, what percentage of the growth has been market share versus your dealers holding more inventory?

Well, we clearly benefited in dealer because our dealerships are growing.

I don't have a breakdown of new credit relationships.

With auto sales reaching a record in 2015, that clearly buoyed our loan production.

And do you have a perspective from talking to your dealers on what they might hold in inventory the next 12 months and where we are in the audit cycle?

The outlook for the auto cycle continues to be very strong, so we are expecting a good year in 2016.

The dealer business overall is a consolidating business and hopefully we'll be on the positive end of the consolidation as well.

Okay, got it.

And then just in your technology investments, is the government card program requiring any larger level of investment than it has in the past for cyber security?

No, I think it would be the same as we would see across all of our businesses and all of our businesses that are card related.

Okay, got it.

Thank you.

Mark Holland, CLSA.

Good morning.

Actually, my questions have been covered already so I am all set.

Thank you.

Peter Winter, Sterne, Agee CRT.

I just had a couple questions on the loan growth.

Commercial real estate including residential construction was very strong, first time in a while.

And I'm just wondering what's going on there and if it's sustainable?

And then conversely, general middle-market continues to be a little bit weak but you've got nice growth in the California and Michigan economies.

On commercial real estate, we are finally seeing some good growth in the portfolio as projects burn through the front-end equity and get into the draw period.

And we hope to benefit from that in 2016.

What we've experienced is a tremendous amount of churn in the portfolio.

Our approvals and fundings have remained at a very high level but previously projects have been paid off just as soon as they reached the stabilization point.

So our visibility into the CRE line is pretty good and we do expect goods fundings for the year.

Regarding middle-market, you are correct that California really did lead our growth across all the markets.

We had great growth in our market in California as well as in deposits.

What we are seeing across the portfolio is a very competitive environment and we're holding to our credit standards and our credit pricing.

Got it.

Thank you.

Laurie Hunsicker, Compass Point.

I wanted to follow up on where Bob Ramsey was going and I just wondered if you could help us think more broadly, Karen, about potential contagion and maybe if you can just put some numbers around your $3.8 billion of commercial real estate, how much of that is operating in the oil patch areas?

And maybe what reserves you see or how you see that going if oil stays at $30.

Thanks.

Our commercial real estate portfolio is not (technical difficulty) in the oil patch except if you consider Houston in the oil patch.

Houston is obviously a large urban market.

We do have a number of multifamily projects in the Houston market.

We've taken a very good look at that.

They are on plan.

They are with proven developers, well located.

We have seen some amount of rent concessions but our projects are really on track.

With respect to the rest of the portfolio, it's in densely populated areas with proven developers with lots of equity in front of us.

And if I could just add a little bit of that, Laurie, to what Pat said, we did a pretty extensive stress test on the Houston commercial real estate portfolio this quarter and we're quite pleased with the results.

And we stressed it under three different conditions, the worst, the severely adverse case under conditions that we've never seen before and even under those conditions we didn't see any credit losses in the portfolio.

So that commercial real estate portfolio in Houston has really been built to withstand the ups and downs of the oil and gas cycle.

And then again as I mentioned before, any credits at all that we were concerned about that could be impacted by low energy prices we are moved into that energy related book.

And so we count that in our energy exposure even though a large number of those credits have not been impacted, we were concerned that they could be.

So I think that's way you not seeing a lot of contagion outside of that energy exposure that we report.

Got it.

And I guess to that point, so how much of your $3.8 billion in CRE sits in Houston?

And then of the $625 million of related loans, how much of that is commercial real estate?

So our commercial real estate book in total is about $3.8 billion in loans outstanding.

About $300 million of it is in Houston, and as Pat mentioned, the vast majority of it is multifamily in Houston.

We have virtually no office in Houston.

It's primarily an apartment construction book.

Great.

Okay.

And then of your $625 million in related loans, was there any from that $300 million Houston bucket?

No, our definition of energy related is the borrower has to generate 50% or more of its revenue from the energy sector and by definition, commercial real estate really doesn't fall into that category.

That's why we stress test the commercial real estate book in Houston because it kind of fell outside of that energy related piece and that's the one piece outside of energy related that we have our eye on.

And so we wanted to just satisfy ourselves that there weren't issues there.

Okay, great.

And then just one last point of clarity, so your call it $1.1 billion of total Texas commercial real estate exposure, the rest of that is Dallas, Austin -- it outside of oil patch?

Correct.

About one-third of it is Dallas, 25% is Austin.

We don't have any exposure in West Texas.

Perfect.

Thank you very much.

John Moran, Macquarie.

Just a quick ticky-tack one for Karen on the securities that were added.

Were all $2 billion (technical difficulty) evenly spread to the quarter?

No, the vast majority of it was added in the month of December more toward the end of December as opposed to the beginning.

Okay, that's helpful.

And then one other one just on the taxes and I understand that the leverage lease termination had an impact.

Was there an offset elsewhere in the P&L there, anything on OpEx?

No, the leverage lease termination did have an impact of about $5 million on a gain and there are other offsets based on the numbers that we reported.

Okay.

Thanks very much.

Thank you.

I'd like to turn the call back over to Mr. Ralph Babb, Chairman and CEO, for any closing remarks.

Thanks for joining our call today and your interest in Comerica.

We appreciate it.

And hope you all have a good day.

Thanks.

Thank you.

This concludes today's conference call.

You may now disconnect.