Comerica Inc (CMA) 2016 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Comerica first-quarter 2016 earnings conference call.

(Operator Instructions).

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

Ma'am, you may begin.

Thank you, Regina.

Good morning and welcome to Comerica's first-quarter 2016 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 first-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 the filings with 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 will turn the call over to Ralph.

Good morning.

Before getting into our quarterly results, I'd like to directly address the recent discussions of our fundamental performance.

I've talked to many of our shareholders over the past several months and have listened closely to their feedback and suggestions.

I want to make sure everyone recognizes that I, along with the rest of the Comerica Board, hear and understand the desire for improved returns.

Rest assured we share the same goals as all of our shareholders for enhancing value.

I know that we must earn our right to remain independent every day and our management team and Board are committed to doing what is in the best interest of our shareholders.

We are a business bank at our core, dedicated to providing high-quality financial services and building lasting client relationships.

We operate Comerica for the ultimate benefit of our shareholders and all of our actions are directed to maximize value while not compromising our commitment to our clients, our culture, regulatory standing, responsible underwriting and strong risk management.

We have also always been a conservative commercial bank, which results in lower lending yields compared to many industry peers.

But our discipline has also meant less loss damage during economic contractions, which was proven through the last cycle.

Also, as a business bank, our model by its nature is more interest rate-sensitive, which clearly has hurt us.

Historically, we actively hedged our rate sensitivity, but ceased as rates fell.

In hindsight, we left too much yield on the table during a weak recovery with prolonged price competition.

However, our yield gap to peers has been slowly closing without any shift in our conservative culture and without relying on rising rates.

This is in no part small -- reflecting our greater emphasis and success in both sector specialization and middle market lending, which comprise over 50% of our portfolio and provide some of the highest returns.

Our growth opportunities align with our commercial bank model where client relationships are stickier.

Our business bank is national class and we are a trusted advisor with long tenured employees who have deep expertise in the businesses they serve.

Many of our high-caliber clients have banked with us for generations and beyond serving their business needs, we have integrated our strong retail and wealth management capabilities to further cement these relationships.

We also have a strong treasury management platform with an improved merchant offering and are one of the top commercial card issuers.

And through the cycle, we posted superior credit metrics.

At the same time, as you know, we have been managing for years in an extremely low rate environment, along with a slow-growing economy, a host of increasing regulatory and technology demands and more recently the energy cycle headwinds.

In light of the mounting challenges we have faced, we took actions to reduce costs, including judiciously renegotiating vendor contracts, reducing real estate and rationalizing some operations.

In addition, last year, our key senior leaders did not receive the normal merit increase, as well as our three-year incentive payment.

Our pay for performance comp structure reflects our strong alignment with shareholders.

As a result of these efforts, our 2015 expense to earning assets ratio was better than all but one of our peers.

However, we, along with nearly half of our peers, have not achieved double-digit return on equity.

As a result, we have been undertaking a more intense review of our expense and revenue base.

To help us in these efforts, we've engaged Boston Consulting Group, a globally recognized management consulting firm that is very familiar with the range of challenges the US banking industry is facing.

While this process is in its early days, we fully expect to identify meaningful opportunities to operate more efficiently and lower expenses, as well as drive increased revenue even in the current environment.

We are taking an expeditious yet comprehensive and thoughtful approach to executing this type of program with the goal of building a stronger, more competitive and more profitable organization.

Given the breadth of the review, we plan to provide more information around the opportunities identified by the next quarterly earnings call and we intend to deliver to our shareholders as soon as practical a broad, enterprise-wide plan designed to help reach tangible targets.

We are going to pursue this cost and revenue initiative with the urgency it deserves and continue to utilize our strengths and competitive position to improve our results.

And if other strategic alternatives present themselves that are realistic, achievable and will maximize shareholder value, we will not hesitate to consider them.

That said, it's important to realize that when considering any strategic alternative, timing, economic developments and industry condition, like what's occurring in the energy space, must all be taken into account.

Over the last five quarters, we have been impacted by the current oil and gas cycle.

We have been appropriately increasing our reserve allocation for energy loans over that time and we have significantly increased them in the first quarter to nearly 8% of total energy loans.

A year ago, our total energy commitments were $6.9 billion.

Today, they are $5.6 billion, a decline of $1.3 billion.

Outstandings have declined also during that time by $500 million to $3.1 billion.

Overall, our borrowers are aggressively reducing costs, cutting back on capital expenditures and preserving liquidity.

In addition, they are paying down bank debt through the sale of assets, which are generally sold at prices significantly higher than reflected in the borrowing base.

Utilization has increased slightly to 54% driven by the decline in total commitments.

While you are all very understandably following reserve to loan ratios across multiple energy portfolios in the banking system, it is important to understand the risk differences.

Our energy portfolio consists of 70% E&P, 16% midstream and 14% services.

Within E&P, the well or field diversity of our customer base is spread broadly across the major producing basins in the country.

We have very little deep water exposure and only two second lien loans totaling $18 million.

Typically, we do not make high-yield unsecured or second lien loans and less than half our E&P relationships have high-yield debt behind our senior position.

Our risk ratings and current reserve allocation for energy reflects our rigorous review of every relationship.

We have been prudently downgrading loans taking into consideration our customers' expected operating cash flows in a continuing depressed price environment and the resulting total leverage.

We believe we are being realistic in our assessment of the probability of default given our expectation that prices may remain lower for longer.

The provision increase in the first quarter reflected the high end of the range in our 2016 guidance for the incremental impact of energy loans adjusted upward for revised regulatory guidance and includes the results of the Shared National Credit Exam.

However, it is important to note that our fundamental view on the energy sector has not changed significantly.

While the current oil and gas cycle presents a challenge, we believe we are adequately reserved.

Keep in mind those reserves may not turn into ultimate losses.

We also look beyond direct energy risks and we remain comfortable with our Texas commercial real estate exposure.

We have not seen any noteworthy deterioration in our Texas portfolio outside of our energy book.

I believe that we have a framework for delivering enhanced shareholder value and are moving with urgency to execute against our strategic priority to drive meaningful improved returns for our shareholders.

Now I will move on to our first-quarter results turning to slide 4. Absent the impact of energy, our overall results were solid.

In particular, we saw a significant benefit from the December rate increase.

Average loans were stable at $48.4 billion.

Increases in commercial real estate and national dealer services were offset by decreases in general middle market, as well as a cyclical decline in energy and seasonality in mortgage banker finance.

Average total deposits decreased $3 billion to $56.7 billion, reflecting our relationship banking strategy, as well as purposeful pricing and strategic actions taken in light of the LCR rules.

Typical seasonality was also a factor as deposits declined in January and February followed by growth in March.

The majority of the deposit decline on a period-end basis was relative to our -- to an elevated deposit level associated with our government card product at year-end.

Net interest income increased $14 million, or 3% quarter-over-quarter.

The Fed's December rate hike is expected to add about $90 million for the year as the bulk of our loan portfolio is floating rate.

The benefit of the rate rise in the first quarter was partially offset by lower non-accrual interest, fewer days in the quarter and several other smaller items.

Aside from the provision for energy loans that I already discussed, overall credit quality continued to be solid.

Total net credit-related charge-offs were $58 million, or 49 basis points of average loans.

Excluding energy, net charge-offs for the remainder of the portfolio remained low at $16 million or 15 basis points.

Non-interest income declined $22 million following strong commercial lending fees in the fourth quarter, particularly for syndication fees.

Non-interest expenses decreased $24 million or 5% primarily reflecting a $14 million decrease in salary and benefits, as well as decreases in many other categories such as consulting fees, advertising and occupancy expenses.

Our capital position is solid.

In light of the earnings impact from the deterioration of the energy book, we remained disciplined and repurchased 1.2 million shares under our equity repurchase program.

We continue to return excess capital to our shareholders in a meaningful way as we have for many years.

Now I will turn the call over to Karen who will go over the quarter in more detail.

Thank you, Ralph and good morning, everyone.

Turning to slide 5, first-quarter average loans were basically stable at $48.4 billion compared to the fourth quarter.

We had good loan growth in our commercial real estate business driven primarily from construction draws on attractive projects with proven developers and continued conservative credit parameters such as high equity content.

Also, our national dealer business was seasonally higher.

This growth was offset by a decline in general middle market as we remain disciplined in this highly competitive environment, as well as seasonal decreases in mortgage banker loans and the continued cyclical decline in energy.

Importantly, positive growth trends through February and March resulted in period-end loans $1 billion above the average for the quarter and our stronger pipeline increased further.

Total loan commitments declined led by energy resulting in utilization increasing to 51%.

Our first-quarter loan yield increased 14 basis points reflecting the increase in short-term interest rates in December, continuing loan price discipline and wider spreads on energy loans., partially offset by lower fees in the margin and a decline in interest collected on nonaccrual loans following an extraordinarily high fourth quarter.

Turning to deposits on slide 6, our deposit costs remained low and stable at 14 basis points as we continue to prudently manage pricing.

We have not instituted any standard pricing adjustments in response to the December 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.

Of note, our loan-to-deposit ratio remains low at 87%.

Turning to slide 7, as you know, during the fourth quarter, we deployed a portion of our excess reserves into securities given the likelihood of rate increases occurring in small increments over a longer period of time.

As you can see in the diamonds on the slide, our portfolio yield declined modestly resulting from the mix impact of adding lower yielding treasury securities, along with continued depressed yields on replacement securities.

Going forward, assuming no change in the rate environment, we expect continued minor pressure on the average securities yield, primarily due to reinvestment of prepaids at slightly lower rates.

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

Turning to slide 8, the December rise in short-term rates positively impacted us in the quarter.

As Ralph mentioned, net interest income grew $14 million or 3% and the net interest margin expanded by 23 basis points.

The largest factor was a benefit from higher LIBOR and prime base rates on our loan portfolio, which added $20 million, as well as slightly wider loan spreads.

This was partially offset by lower interest received on nonaccrual loans and lower fees.

Other loan impacts included one fewer day and slightly lower balances.

A larger securities portfolio added $6 million.

The higher interest rate earned on Federal Reserve deposits was more than offset by lower balances, resulting in a $2 million negative impact.

Higher interest rates also resulted in a modest increase in our floating rate wholesale funding costs.

In total, higher rates contributed about $22 million to the increase in net interest income.

As we've indicated, we expect that if deposit rates hold at their current level, the upside from the first rate hike will be about $90 million for the full year over the 2015 level.

Turning to slide 9, as you can see in the bottom right table, aside from energy, our overall credit picture remains strong.

Criticized loans were $3.9 billion at quarter-end with close to half attributed to energy loans.

While the level of criticized energy loans continues to increase as we prudently downgrade, we are not seeing any meaningful negative migration in the remainder of the portfolio where less than 5% of the loans are considered criticized.

Close to two-thirds of our non-accruals are energy loans and the quarter-over-quarter increase is almost entirely from energy.

Net credit-related charge-offs were 49 basis points or $58 million, also derived mainly from energy.

Our other business lines had low charge-offs and strong recoveries.

The $148 million provision for our total portfolio reflected an increase in our energy reserves as a result of the negative migration, along with charge-offs and the preservation of a qualitative reserve.

Overall, our allowance for credit losses increased $91 million to total $770 million and our allowance to loan ratio increased to 1.47%.

Slide 10 provides further detail on our energy portfolio, which at quarter-end totaled $3.1 billion outstanding, equivalent to 6% of our total loans.

E&P loans comprised 70% of our energy portfolio and we are 26% through the spring redetermination process.

So far, borrowing bases have come down about 22% on average as a result of lower energy prices.

We had a handful of customers draw down lines as they prepare to restructure their high-yield debt, which resulted in period-end loans remaining relatively stable in the first quarter.

However, those balances have come down since quarter-end and we expect that trend to continue.

Energy services loans total $426 million or 14% of energy loans and less than 1% of our total loan portfolio.

These loans have declined 11% over the past quarter.

Energy services has been hit the hardest and 65% are rated criticized.

However, average balance sheet leverage for the bulk of the portfolio is under 2 to 1, which speaks to the financial wherewithal of these customers.

Although approximately 14% of our energy loans are nonaccrual, 89% of these nonaccrual loans are fully current on interest payments, including the three loans we have in bankruptcy.

The reserve for energy loans is close to 8% and as Ralph mentioned, those reserves may not turn into ultimate losses.

Aside from our energy business line, we identified early in the cycle about 100 customers and other businesses that have a sizable portion of their revenue related to energy or could otherwise be disproportionately negatively impacted by prolonged low oil and gas prices.

Those loans now total $534 million and have declined 14% since year-end and 28% from a year ago.

Losses this quarter were $3 million and we continue to monitor these loans closely.

However, we have not seen significant negative credit migration over the last quarter and balances are declining nicely.

Slide 11 outlines non-interest income, which decreased $22 million.

The biggest driver was a $10 million decrease in commercial lending fees following robust fourth-quarter activity, particularly in our syndication area, as well as a decline in unutilized fees due to the decrease in line of credit commitments.

In addition, we had several items that are difficult to predict, specifically a $7 million decrease in deferred compensation, which is offset in non-interest expense, a $2 million securities loss and a $2 million decline in BOLI income.

As you can see in the shaded area, excluding deferred comp, first-quarter non-interest income was in line with the same period last year reflecting seasonally softer fee income.

Turning to slide 12, non-interest expenses decreased 5% or $24 million reflecting our tight ongoing control of expenses.

Salaries and benefits expense was $14 million lower due to the $8 million decline in pension expense and a $7 million decrease in deferred compensation expense, which is offset in revenue, as I mentioned.

Lower technology and regulatory-related staffing, as well as one fewer day, were offset essentially by annual stock compensation.

Moving to slide 13 and capital management, we continue to return excess capital to our shareholders in a meaningful way with the repurchase of 1.2 million shares under the equity repurchase program.

While we prudently scaled back the dollar amount of our repurchases, we were able to repurchase a similar number of shares to the prior quarters and continued to decrease our total shares outstanding.

We submitted our CCAR plan for the 2016/2017 cycle earlier this month and expect to receive the results in mid-June.

As you would expect, we remain focused on returning excess capital to our shareholders through both dividends and share repurchases.

Turning to slide 14, you heard both Ralph and me mention already that we expect the year-over-year benefit to net interest income from the rate rise that has already occurred to be about $90 million, assuming deposit prices continue to remain stable.

The table on this slide gives some estimated additional upside to net interest income over the annual period following a rate rise.

For example, if the Federal Reserve raises its rates 25 basis points and our deposit prices begin to move with that rise at a 25% beta, we believe we would gain about $70 million more in annualized net interest income.

Of course, our interest rate sensitivities are based on many assumptions, not just deposit pricing assumptions.

Our standard modeling and the list of assumptions we use are included in the appendix.

Turning to slide 15 and our outlook, excluding the first-quarter energy impact to provision, our expectations for the year have not changed significantly.

However, as Ralph mentioned, with the continuation of the low rate environment and slow-growing economy, we are embarking on an initiative to reduce expenses and drive revenue.

Because it is still early in that process, we are not able to provide better insight into its impact on our 2016 outlook, particularly relating to revenues and expenses.

As far as credit, given the larger provision this quarter, we do want to provide color around our expectations for the rest of the year.

At this point, we believe we are adequately reserved.

Any movement from here will be driven by developments in the energy sector, which are inherently difficult to predict.

We expect continued solid credit quality for the remainder of the portfolio with metrics absent energy to remain better than historical norms.

With the significant reserve build we established in the first quarter, if the energy outlook remains stable, we would expect the provision for the rest of the year to reflect net charge-offs between 45 and 55 basis points similar to the last couple of quarters.

Additional reserve changes would depend on a variety of factors, the biggest being oil and gas prices, as well as our energy customers' ability to cut costs, raise equity, sell assets and reduce debt, among other things.

Now I will turn the call back to Ralph.

Thank you, Karen.

In closing, as I mentioned at the outset of this call, we are initiating an aggressive review of our expense and revenue base, which will take us a long way to our goal of a double-digit return on equity.

While rising rates will provide a significant benefit, we are neither waiting nor relying on that to drive improved returns.

Our focus is and has always been on our shareholders and delivering performance to maximize value and meet your expectations.

And now we would be happy to take any questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

Ralph, regarding the profitability initiative, is everything on the table as a part of that?

Could you sell off one of the regions?

Could you exit a key business?

What's the band that you are looking at here?

The band is very wide.

We are going to look at all opportunities not only for expenses, but also for revenue and what makes sense for us longer term in our model.

Okay.

Thank you.

And just on the reserve build this quarter, I was looking, the prior guidance was for $75 million to $125 million reserve build if oil stayed at $30.

It's now at $40 and the reserve build is at or above the upper end of that range.

Can you help me reconcile the differences?

I would have thought the reserve build would have been a lot less given where oil actually is today.

Well, as I mentioned in my remarks, the OCC came out with guidelines that all of us were looking at, even though we are not a national bank, as well as the Shared National Credit Exam and I think the guidance that came out did add to the provision and that was really looked at across the industry.

Pete, do you have anything to add to that?

Yes, I think given the fact that we have a heavily weighted portfolio toward E&P credits and the guidance was around the E&P portion of energy, combined with the fact that the drop in energy prices in the first quarter was pretty severe and it wasn't just the levels that it went to, it was the speed at which prices dropped.

I think that caused a little more damage than most people would've thought it was going to.

And I think we should reiterate that our fundamental view on the energy sector has not changed significantly.

Was that OCC review the reason criticized jumped as much during the quarter as well?

It played a part, but I would say we continued with our very tenured approach and conservative approach to making sure that we are recognizing all of the issues within the portfolio.

Okay.

Thanks for all the color.

Bob Ramsey, FBR.

Good morning.

I just want to be sure I understand the provision guidance from here.

I think you all said it would be consistent with 45 to 55 basis points of net charge-offs if energy is stable.

Does that mean that you would cover that amount and so your provision would be in the ballpark of $60 million a quarter and then give or take any energy fluctuations?

Yes, that's what it would be.

Okay.

So you basically will maintain the level of energy reserve that you all have built here and then cover any charge-offs on top of that as we go forward?

That's right.

And as we've said, we expect to see that portfolio continue to come down.

Okay.

Got it.

And then just back to the efficiency review, I was wondering if you could comment on what triggered the review.

I think it's a great path forward, but you all mentioned on the call sort of that you have not achieved double-digit return on tangible equity, but I think that's been the case ever since the crisis.

And so why now embark upon this new direction?

Well, as we've always talked about, we've been very judicious at looking at expenses and we think that it's time now to take a very broad view and look at everything again, especially with the use of someone from the outside, so that we make sure that we are not missing things that you get comfortable with, as well as on the revenue side from the same vision.

And I think that will be very successful.

It's only recently started, but there's certainly things on the table that I think could provide a good end product in expenses.

Okay.

And I know you will really give all the details next quarter, but is it fair then to think that the end goal of this is to get to a double-digit return on tangible common equity even in the current rate environment?

We are going to do everything that we can find to walk down that path and whether we will absolutely get to it or whether it will take a little bit of interest rate as well, it is our strategy to do everything from a revenue and expense standpoint to get as close as possible.

Okay.

Thank you for the questions.

Scott Siefers, Sandler O'Neill & Partners.

Good morning.

I don't mean to belabor the first-quarter provision numbers since you've given pretty good guidance for the rest of the year, but just want to make sure I understand the order of magnitude of what the upward revision based on the revised regulatory guidance and SNC was as a percent of the total provision.

Otherwise, I'm just trying to square that original $75 million to $125 million reserve build from a couple months back with what actually took place and just really trying to figure out what that upward -- what the total impact of that upward revised regulatory guidance in the SNC was.

Well, if you take the guidance at being at $125 million and then where we went to, the biggest portion of that was, as, Pete, you were saying earlier, relied on the fact that the guidance changed with the report that I was talking about, which is a public report from the OCC, as well as our continued view of where things are with the up-and-down of oil prices that we've seen.

And so when you add all that together, that's where we really came to.

Pete, do you want to add anything to that?

Yes, I think one thing to keep in mind, when there's new regulatory guidance that comes out and it impacts your risk ratings, our protocol is we will downgrade credits that we think are no longer in line with that guidance, but we don't upgrade credits that now may be allowed to be upgraded because the guidance is different.

That's not our protocol.

If we determine that a credit was substandard before that guidance came out, we kept it substandard.

And then the other thing, as I mentioned before, is the fact that when prices came down as fast and as severe as they did, there was a fair amount of migration in the energy services portfolio and you'll see that also reflected in our reserves this quarter.

The good news there is the services portfolio is only 14%.

That's right.

Right.

Okay.

All right, perfect.

Thank you very much.

And then if I can switch gears and just ask on the profitability program really quickly and of course, I understand you will give a lot more detail in 2Q, but at its base, would you intend for Comerica still to be a business bank primarily, one that's still biased toward higher interest rates?

In other words, would you anticipate this review to cause any meaningful underlying change in the business model from a very top level?

My perspective at this point is it will strengthen the model as we move forward, but we are very open to looking at other items that may come up that might be add-ons or types of business that, for whatever reason, we don't think needs to be a part longer term.

So having said that, really everything is on the table to look at to strengthen our model for the future.

Okay.

All right, perfect.

Thank you guys very much.

Michael Rose, Raymond James.

Just a follow-up on the program.

Is the goal to be kind of the top decile or top quartile performance?

Is that the end goal?

I know you are not going to give targets today, but is that kind of the goal you are shooting for?

We want to be at the strongest position to focus our business and model for the future, meaning dictating the highest return.

Okay.

That's helpful.

And then just one quick follow-up.

It looks like the share repurchases on a dollar basis are tracking a little bit below kind of the $393, which you are approved for.

Would you expect to fully utilize the full amounts that you are approved for?

As Karen mentioned, we are looking at the earnings today and keep in mind that the model that was used in the CCAR process had interest rates going up considerably more than they have.

That has not happened.

So we could see and probably will see a reduction in the amount that we actually use.

Okay.

Thanks for taking my questions.

Brett Rabatin, Piper Jaffray.

Good morning, Ralph.

Wanted to I guess first just talk about the regulatory environment you had mentioned with the SNC review in the first quarter.

Can you guys break out how much of the provision might have been related to the regulatory piece in 1Q from the energy perspective?

When I was mentioning the regulatory perspective, it was more the new guidance that had come out by the OCC that I mentioned, which is a public document.

It was not focused as much on the Shared National Credit Exam.

Pete, do you agree with that?

Yes, I would.

And we don't comment specifically on the results of the SNC Exam, but one thing to keep in mind I think is 95% of our portfolio are Shared National Credits and the nature of the Shared National Credit Exam in and of itself is fairly conservative in the fact that you get the lowest of three ratings -- our rating, the agent's rating and the regulator's rating.

And so given the fact that such a large portion of our portfolio are Shared National Credits, that certainly has an impact.

It's a conservative approach.

That's right.

Okay.

Thanks for that.

And then the other question around energy, there was a lot of concern during the first quarter about energy companies using lines drawing down and those companies already being in a bad situation, but that doesn't seem to be as big a concern.

How do you guys think about that going forward?

Is that something you worry about with undrawn lines, or how do we think about the remaining exposure you have that hasn't been drawn on?

We saw a little bit of that, but not much and don't expect to see it I think today.

Pat?

About two months ago, we had a list of credits that we thought we would be concerned about, defensive draws, if you will and I can tell you that list today is much smaller than it was a month or two ago.

First, a lot of those credits, their borrowing bases have been reduced as a result of redeterminations.

Others have agreed not to draw, which is a good thing and the vast majority of our borrowers are doing the opposite.

They are selling assets.

They are raising capital to make sure that they are staying within the confines of what they expect the new borrowing base to be.

So we are really pleased to see that and as Ralph mentioned, we really didn't have much in the way of defensive draws this quarter.

That's why our loans were flat; they didn't grow.

And I can also tell you that they've come down a fair amount since then.

We are down about $125 million this month over the peak of March, so we expect both loans and commitments to continue to decline this quarter.

One thing you might mention, Pete, too, is the sales that a lot of our customers are doing of property have been significantly higher than their value that's included in the borrowing base.

That's right.

Since really last summer, our borrowers have sold about $1.7 billion of assets and it actually goes back a little further than that, but on average the premium has been 93% above what we have those assets valued at in the borrowing base and in 2016, that premium is even higher.

It's about 120%.

So not only is there a lot of opportunity for our borrowers to sell assets to raise liquidity, but it's a very accretive process when they are doing it.

Okay.

That's great color, guys.

Appreciate it.

John Pancari, Evercore ISI.

Good morning.

A couple questions just around the drawdowns.

How much in actual drawdowns of unused lines on the energy side did you see this quarter and what is your current reserve for undrawn energy commitments?

Thanks.

We didn't see much of a drawdown at all.

As a matter of fact, our usage is about 54% on those lines.

Do you want to add to that, Pete?

Yes, we really just had a handful and the loans that resulted from that were not significant at all.

Yes, I think we had a total of four and one was over a weekend at quarter-end.

The borrower needed to meet a covenant test and informed us that the draw would be made prior to the weekend.

The money was repaid on Monday following the weekend.

So the drawdowns that we've seen have not been unanticipated and we remain in good touch with our borrowers.

You asked about our reserve for unutilized commitments.

Our total off-balance-sheet allowance is slightly under $50 million with a large portion of that allocated to energy.

Right.

Okay.

Thanks.

And then, secondly, regarding the profit initiative.

A, I just want to see if you can give me a little bit of color about how much you believe will come from the expense side of the equation versus the revenue side at all.

And then secondly, this is higher level, but, Ralph, as you thought about this and looked at this, did you consider at all -- was the larger strategic alternatives ever on the table for you in terms of a sale of the bank given the potential foreign bank interest, or was that even a consideration before you got to this decision around the profitability program?

Thanks.

Well, as I was talking earlier, we have to earn our right to be independent every day and looking at our model is one of the most important things and opportunities that I think we had and we were thinking about that and moving forward with that and we don't have a feel at this point how much could be revenue-related, as well as how much might be expense related, but I do have a feel that there is substantial opportunity there in moving forward.

And as I mentioned too in our remarks, we look at all of our opportunities that are out there and regularly review that at management and the Board level and review the opportunities, but one of the things you really have to look at is what are the current conditions, things like the energy issues that are in the market as well and the overall environment when you are looking at all opportunities.

Okay.

Thank you.

David Eads, UBS.

Good morning.

Looking at the expectation for energy-related charge-offs, the first-quarter charge-offs were very heavily weighted toward oilfield services.

Is your expectation that the energy charge-offs the rest of the year will also be primarily in oilfield services, or would you expect a little bit of a bigger mix between E&P and services?

I don't think we would see that big a change in the mix, do you, Pete?

No.

I think disproportionately we are going to see more charge-offs from energy services, but energy services is a very small portfolio for us, so I can't say that we are going to have the majority of our charge-offs in energy services, but the majority, vast majority of our E&P book are well-secured credits.

Some of them are having financial difficulty and some of them are going to go through bankruptcy, but we feel that given how well-secured so many of them are, we don't expect to take charge-offs on a lot of those credits.

The energy services side, as you know, is different.

The loss given default, if you will, is higher.

Those assets are less reliable in a liquidation scenario.

Great.

That's quite helpful.

And then maybe one on NIM.

It was a good start to the year.

Just curious what outlook we should expect if we don't see other rate hikes.

Should we be expecting a little bit of pressure on NIM each quarter or do you think you guys can keep it flattish for the next few quarters?

With growth, as we've talked about a lot, it's a very competitive environment out there.

Pricing being one and we've been very careful to focus on not stretching from that standpoint.

And so I think until you see rates actually move up, the -- probably would be more of a flat to looking at pressure.

Karen, do you want to add to that?

Yes, I would just add that if you are talking about rate NIM, David, the biggest wildcard on rate NIM is where our deposits and our excess liquidity go with the Fed and that is something difficult to predict.

That said, you did see a big increase this quarter and that is from a quarter-over-quarter perspective likely to be the largest impact moving forward.

Year-over-year, however, you will continue to see a year-over-year positive impact.

We talked about the fact that we expect net interest income to rise $90 million year-over-year just from the rate rise that has already occurred.

Right.

Maybe on that point, can you talk a little bit about the plans for -- you talked about some strategy to reprice deposits for the LCR and intentionally bring down deposit balances.

Should we expect that to continue, or is that kind of done or should we be seeing more of that dynamic play out?

We are still focused on making sure that we are doing the right things for the institution on the LCR side.

And as was mentioned earlier, we are well over the 2017 point where we need to be with a cushion as well.

But because of the cost that you can have to incur over certain parts of deposits that are included in LCR, we are taking, as we call it, purposeful valuing those deposits and pricing.

Karen, do you have anything to add to that?

I would just add that we have strength.

We start from a position of strength as it relates to deposit pricing and at the appropriate time, we will use that position to maintain balances, but we feel very comfortable with where we are today from a liquidity perspective, a balance sheet perspective and so we have been maintaining our discipline on holding deposit pricing.

As a result, just from that, balances could move down slightly, but if they do, that is obviously very purposeful.

All right, great.

Thanks so much.

Jennifer Demba, SunTrust.

Good morning.

I was wondering if you could talk about demand trends and asset quality trends within your technology and life sciences book.

Overall, we've seen what I would call steady demand and that is looking forward.

There's been a lot of discussions about things actually pulling back a little bit.

Pat, do you want to add to that?

Yes, this has been a very strong growth business for us.

Today, we are probably focusing more on credit quality, more on granularity.

You can see that our charge-offs declined this quarter in TLS.

The key to this business is our long-term team, as well as the solid long-term relationships with key venture capital providers.

We are in 14 cities.

It's a robust business and one that will be very important to us in the years ahead.

Okay.

Thanks so much.

Ken Zerbe, Morgan Stanley.

Good morning.

I guess the first question, just in terms of how -- when you think about the reserve balances, specifically for energy, I'm looking at the price of oil during the first quarter and I know you've referenced, or Karen has referenced that the oil price came down sharply in the first half of the quarter, but it also rebounded quite a bit in the second half of the quarter.

So when you think about the reserve that you need or when you think about where your borrowing bases are, what you are going to provision for energy, is it based on the low point, on the average, on the endpoint because I guess I'm kind of wondering if oil does track down to $30, is suddenly that a much worse scenario for reserving?

Thanks.

When we look at our reserves, we actually use price decks that are where we think it's going to be on the strip, but also it is stressed as well and you mentioned the prices that are pretty close to that.

Pete, I will let you expand on that a little bit.

Yes, I think when we were talking about the sharp decline and how that was different, even though it rebounded, it did impact the credit quality of a number of borrowers and that gets impacted in a number of ways.

It gets impacted by their ability to raise capital.

It gets impacted perhaps by their outlook.

And so -- particularly on the energy services side of the equation.

And so I think it was just that sharp drop, so it's not just the level, but how quickly prices dropped had a particularly detrimental impact on the energy services segment this quarter.

And does that rebound -- does the second half of the quarter rebound play into your provision expense guidance, meaning that your price decks have now reset higher, presumably, because you would need to reserve less?

Yes, our price decks are now higher and so when we are doing redeterminations this spring, the benefit of those increased prices is going to get factored into our risk ratings, but bear in mind that the prices today are still -- oil is down about 25% from our price decks in the fall.

Gas might be 30% down.

So prices are still lower than they were in the fall and then the other thing on the energy services side, I don't think there's going to be a big recovery in energy services until we see rig count go back up again and I don't think people are expecting rig counts to go up at these price levels.

The good news there again is that our energy services portfolio is small and there is probably about a half or a third of it that is performing just fine even at these low prices.

So while we've had certainly some severe migration in the energy services portfolio and we are going to have some more and we will have some more charge-offs, I think long term we don't expect to see the charge-offs there to be excessive.

We think they will be manageable.

I think when you look at rig count too, it's down to the lowest level it's ever been in Texas, but also in the country.

That's right.

Okay.

And then just one follow-up on the expense side or the strategic review.

When I think of Comerica, I don't think you are terribly inefficient by any means, but what are some of the areas at first blush of what are the most ripe areas I guess for potential cost savings?

You know what we've done and we've opened it up to everything and we are going item by item and looking at all of our expenses and that way, we don't miss things and I don't want to over cite any one particular item at this point in time because I want everything to remain on the table until we move down the road and make our decisions from a strategic standpoint of what will be best for our model going forward.

All right.

Thank you very much.

Ken Usdin, Jefferies.

Good morning.

Hey, Karen, I wanted to just ask you about the investment portfolio and one of the points that Ralph had made earlier about just having left a little bit of money having not hedged.

You -- it was up on average, but it was flat sequentially.

You talked about the rollover of yields, but just to that point exactly, do you anticipate that you will continue to consider pulling forward some of that asset sensitivity, whether it's part of the BCG plan or not, but in terms of just where we stand in the environment, what's your thought process from here when you consider loan growth versus securities growth and how you want the balance sheet to look?

Thanks for the question, Ken.

We have obviously been focused on having some upside in this prolonged low rate environment.

At the end of December, you will remember that we purchased -- took about $2 billion of our excess reserves at the Fed and purchased Treasury and Ginnie Mae securities, put those out longer term.

That added about $6 million this quarter alone from that move.

That did take a little bit of asset sensitivity off the table, not a lot.

You'll see in our standard model for asset sensitivity in the appendix that in that standard 100 basis point rise on average in an annual period, it's still about $200 million.

That is something that we continue to assess all the time.

We may end up purchasing more securities over time, but it will clearly be dependent on our balance sheet movement and any opportunities that are out there.

Since December when we purchased additional securities, rates -- longer rates have been near their three-year lows.

So it's not necessarily an opportune time right now, but we will continue to assess.

And as Ralph mentioned, in our history, we have used basic fixed to floating hedges on our portfolio and at some point, we will introduce that again.

You might want to comment too, one of the things that we have to do is maintain a high level of liquidity because we have customers that are very high in dollar amount transactions, like our government card program as an example that are in and out during a given period of time.

Yes, so when we think about the liquidity that we will have on balance with the Federal Reserve, we do take into account the fact that we do have large depositors that can move money in and out fairly easily.

So we do take that into account.

Okay.

And then just a quick question on loan growth.

Michigan down both on the sequential and a year-over-year basis.

Just wondering any updates in terms of the markets there and what you are seeing as far as just underlying growth opportunities.

Thanks.

If you look at Robert Dye's estimates, which is our economist, he is positive about Michigan and California being above the national average, which is about 2% that he's focused on on GDP and Texas he's got slightly positive, about 0.02% from that standpoint.

So we are looking at opportunities there, as well as we've seen continual growth and opportunities in California.

Would you like to add to that, Curt?

I might just say in the Michigan market on a positive front for many of our customers on the business bank side, they have experienced some liquidity events in this stronger economy in Michigan.

So positively we've captured some of that money in motion as fee income as we've gained those opportunities in the wealth management space and so there have been some liquidity events that have affected the portfolio overall.

One of the things, just to follow up too on our economist, is he publishes regular looks at the markets we are in that are very simple one page if you are interested.

They'd be worth -- they are available on our website.

Thanks, Ralph.

Mike Mayo, CLSA.

Just looking for more information on the Boston Consulting Group.

How long will their review take and once they complete the review, what will be the timeframe for Comerica's plan and also how many employees from Boston Consulting Group are going to be helping you out?

We have a number of people here on the ground and it's a beginning process and the process will evolve with when we see the opportunities, how we address those opportunities and who, if we need additional support, we will use going forward.

So we are in the very beginnings of that, so it's time where I can't answer that question with specificity at this time.

Even order of magnitude, is this three months?

Sometimes you have a review taking a year.

So is it three months, 12 months, 16 months or --?

It will start, and as I was mentioning, a lot of things will get done along the way, but other things will take longer.

So it could go certainly a year or two of implementation as well depending on what we get.

As we move down the road and as we look at the various things that are opportunities, we will keep everybody up to date with what we are focused on and what we think the results will be, as well as the timing with it.

We are only in the first couple of weeks at this point.

Got it.

Can you give just any more assurance though?

It looks to a degree a plan to have a plan and you are paying outsiders to have this plan.

And it kind of gives you another couple years after which almost a decade of returns below the cost of capital in every one of those years.

So can you understand that shareholders might be losing a little bit of patience and might want to see results sooner, maybe something more dramatic?

And I know you got a question earlier what about selling off a region, for example.

What are your thoughts about all that?

I think we will look at all the opportunities, as I was talking about and we are going to do it with the appropriate urgency.

We hear everyone, we understand it and we want to do it that way.

And it's high priority and it is an exciting priority as well.

And then, lastly, I look forward to seeing you at the annual meeting on Tuesday.

Will you be webcasting the annual meeting?

We don't webcast the annual meeting.

All right.

Well, if there's any way to change it, because some of your banks in the peer group like Key, SunTrust, [Zion], BOK webcast it and Wells Fargo, USB and PNC webcast.

So with a week away, if there's any way to do it, that would be great.

Look forward to seeing you.

Bill Carcache, Nomura.

Good morning.

Could you discuss what you'd expect to happen to your energy loan commitments over the course of the next year if oil prices stayed at these levels?

I'm just trying to understand what else will help you drive borrowing bases lower besides declining energy prices.

I think you'll see the borrowing bases reduce with prices where they are today.

As was said earlier, they reduced about 22% so far on the redeterminations now.

Right, yes.

And I think people, as we were talking about earlier, have pulled back significantly and are not looking at future drilling or expanding.

They are being very cautious and very smart about what they are doing.

We haven't seen much in the way of new requests at all recently.

I think the market is really trying to absorb where they are in this low-priced environment.

There is a lot of private equity on the sidelines waiting to jump in.

It's possible that new requests will be funded by private equity more than bank loans in the near future.

If I may just follow up on that, maybe could you give a little bit more perspective on the basis for your borrower who has received an unfunded commitment and it's been reset at the current prices where they are and it gets -- by the time that the next redetermination period comes along, if prices haven't moved, what would induce them to be willing to have that borrowing base decline assuming that oil prices have not fallen?

Aren't they basically giving up optionality, wouldn't they prefer to maintain that borrowing base where it is?

Just trying to understand a little bit better what is behind the thought process that those will come down.

Pete?

Well, there's two aspects to this.

There's the price and there's the amount of their reserves.

So if they are not building reserves and replenishing the reserves that they are pulling out of the ground, then in the fall redetermination, even if prices don't drop, their borrowing bases would need to reduce.

And we would expect that's not going to be a problem for most of our borrowers.

Again, most of our borrowers, even at these prices, are generating good strong positive cash flow to pay down their debt.

They are just not generating enough cash flow to replenish their reserves.

So we would expect that if prices remain where they were and borrowers did not do a lot of drilling and replenish their reserves, their loan balance and commitments would continue to come down.

And the redetermination process is not a surprise to these borrowers.

They are looking out six months, eight months, 12 months, way, way out in the future and anticipating liquidity if necessary to meet borrowing base declines.

Yes.

And if I can just add to that, we have about six asset sales that have been -- they are teed up to close and these are borrowers that are anticipating lower borrowing bases and so they want to remain within the confines of that lower borrowing base.

And that's where we've seen significant sale prices over what we have them in the borrowing base today --

Correct.

-- which is good from that standpoint and our customers have been very good about, as you said, Pat, planning ahead.

Yes.

Understood.

Thank you very much for that.

Finally, if I may, can you discuss whether the purposeful pricing actions that you took on the deposit side resulted in a severing of any relationships?

Just curious whether there may be any potential revenue implications.

There are always when we are doing purposeful pricing, whether it's a customer -- well, it's always customers from that standpoint and depending on the type of business it is, it could cause them to move and we have taken that into consideration when we look at the overall effect and the value of the customer because we value customers based on a total relationship.

Thank you.

It looks like we are out of time today.

We appreciate everybody's interest in Comerica.

For those of you still in the queue, I will follow-up with you and as always, I am available to answer any questions that anyone has.

My contact information is in the press release today and I will turn it back to Ralph.

We appreciate everybody's time today.

Thanks for your interest and I hope all of you have a good day.

Thank you.

Ladies and gentlemen, this does conclude today's call.

Thank you all for joining and you may now disconnect.