Comerica Inc (CMA) 2016 Q3 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 third-quarter 2016 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Miss Persons, you may begin.

Thank you, Regina. Good morning and welcome to Comerica's third-quarter 2016 earnings conference call. Participating on this call will be our Chairman Ralph Babb, President Curt Farmer, Chief Financial Officer Dave Dupree, and Chief Credit Officer Pete Guilfoile.

Through this presentation we will be referring to slides which provide additional details. The presentation slides, as well as our press release are available on the SEC's website as well as on the Investor Relations section of our website, Comerica.com.

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 with the SEC for further factors that can 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 who will begin on slide 3.

Good morning and thank you for joining our call today. Before we discuss our third-quarter results I would like to give you an update on our expense and revenue initiative which we call GEAR Up.

As we announced on our last earnings call, we have identified more than 20 work streams that are expected to drive a significant improvement in our bottom line. At that time we also indicated that there was more to come as we were still identifying and analyzing other opportunities.

We have now determined that those new opportunities add about $40 million in savings to our initial 2018 target. We now estimate that the GEAR Up initiative will drive additional pretax income of $180 million in 2017 and $270 million in 2018. Our total restructuring charge estimate remains unchanged at $140 million to $160 million.

Without any increase in rates we believe the actions we are taking will improve our efficiency ratio to the low 60%s by the end of 2017 and at or below 60% by year-end 2018. The walk forward at the bottom of the slide illustrates how we expect to achieve our goal of a double-digit ROE in 2018.

By adding our 200 basis points to our ROE the actions under GEAR Up take us a long way towards achieving that goal. And we expect to meet or exceed this goal with sustained growth net of investment, normal credit cost, continued share buyback and only a 25 basis point to 50 basis point increase in rates.

We are not relying on a significantly better economic environment or a substantial increase in interest rates. We have already begun to execute our plan and many of our larger initiatives have been completed or are well underway. The top of slide 4 outlines some of the progress we have made.

We remain committed to our footprint. However, with customers migrating to a broader use of digital channels we are consolidating 38 banking centers or about 8% of our network. We estimate these consolidations will result in $10 million to $13 million per annum in savings. This is net of attrition which is expected to be nominal as we have another banking center within 2 to 5 miles from the bulk of locations that are being closed.

Also with the advancement of technology and reduction in our workforce we need less office and operation space to run our business. We have developed a plan to consolidate colleagues in central locations, implement alternative work solutions and shed the space we no longer need.

We are targeting a 500,000 square foot reduction in real estate which should result in approximately $7 million in savings in 2018 and more beyond 2018. At the bottom of the slide you can see the two major drivers to the $40 million increase in our GEAR Up target.

We are replacing our current pension and retirement account benefits with a newly redesigned retirement program. This is expected to contribute approximately $35 million in additional savings in 2017 and 2018 relative to our expected 2016 expense prior to this change.

As a result of the redesign we were able to avoid a substantial increase in our pension expense in 2017 that was expected due to the drop in the discount rate. Comerica retirees and our colleagues in the pension plan who are nearing retirement will not be impacted by this change. Our new retirement program will continue to provide highly competitive benefits.

And as we discussed last quarter, our largest initiative involves streamlining our workforce. At the end of September we completed the review of our management structure. We have eliminated about 30% of managerial positions in order to get closer to customers and accelerate decision making.

This also included consolidating functions and responsibilities while ensuring we maintain our high standards for customer service and deep expertise and experience. So far nearly 700 people have been notified that their positions were eliminated or most of our expected reduction.

Separately, in terms of new initiatives, we streamlined some of our backroom operations and administrative support functions which added approximately $5 million to our initial target. In total we expect these workforce-related initiatives to result in more than $15 million in savings in the fourth quarter.

We remain confident that we will drive enhanced shareholder value and achieve the level of returns that our shareholders deserve as we deliver on our GEAR Up initiative. In fact, since we announced our GEAR Up initiative on July 19, the date of our last earnings call, our stock is up 8% and it is up 16% year to date, significantly outperforming nearly all of our peers, the [KeyBanc] Index and the S&P 500.

Now turning to our third-quarter results on slide 5, third-quarter 2016 net income of $149 million, or $0.84 per share, included after-tax restructuring charges of $13 million or $0.08 per share. Quarter over quarter our earnings per share increased 45%; this reflected strong credit quality, a reduction in restructuring charges, solid revenue growth and well managed expenses.

Slide 6 provides further detail on our results. Average loans declined $263 million including a $337 million reduction in our energy portfolio. We also had the typical seasonal decline in national dealer as our customers reduced their inventory in anticipation of delivery of 2017 models.

In addition, there was a modest decrease in technology and life sciences. This was partly offset by a seasonal increase in mortgage banker financed and continued growth in commercial real estate albeit at a slower pace. Our commercial real estate business continues to be driven by construction draws on existing projects with proven developers.

Average deposits increased $1.5 billion driven by strong non-interest-bearing deposit growth. The growth was broad-based with most business lines posting increases. In addition, period end deposits benefited from elevated activity associated with the government card program on the last day of the quarter.

The recently released FDIC data, which captures market share as of June 30 reflects our low point for the year as well as our focus on LCR friendly operational deposits. Net interest income increased $5 million to $450 million; this included the benefit of the increase in LIBOR, one more day in the quarter and interest earned on higher excess balances at the Fed.

Credit quality was strong with net charge-offs of $16 million or 13 basis points, which is well below our historical norm, and included $6 million in energy charge-offs. Criticized loans declined almost $300 million, which contributed to a reduction in our provision expense to $16 million.

Over the past year energy loans have declined almost $800 million, or over 24%, and commitments have declined nearly $2 billion, or nearly 30%. Criticized energy loans declined $79 million.

While the overall performance of this portfolio has improved and oil prices have remained in the $45 to $50 range for the past several months, we remain cautious and continue to maintain a reserve allocation of over 8% for energy loans as of September 30.

Of note the results of the recent shared national credit exam have been reflected in our credit metrics. We had record noninterest income, the increase of $4 million or 2% included growth in commercial lending and investment banking fees.

Non-interest expenses included $20 million in restructuring charges related to our GEAR Up initiative. The $33 million decrease in restructuring charges was partially offset by a smaller gain on sale of leased assets and increased outside processing expenses.

Our capital position remains strong, in line with our CCAR plan, we increased our share repurchases to 2.1 million shares or a total of $97 million compared to $65 million in the second quarter. Restructuring charges are not expected to have an impact on the pace of our share buyback.

Recent Fed announcements regarding the removal of the risk of qualitative failure and proposed tailoring of the stress test for regional banks like Comerica are certainly positive. Of course details in the final rule as well as how it is interpreted and actually implemented will be key in determining the ultimate benefit.

As far as our third-quarter results compared to the same period a year ago, our earnings per share is up over 13%. This includes a 6% increase in revenue which reflects the increase in short-term rates, a larger securities portfolio, as well as growth in a number of fee categories including card fees which has been an area of focus for us.

Expenses were impacted by the $20 million restructuring charge we incurred this quarter as well as higher FDIC expense and technology investments.

Putting these items aside you can see that expenses have been well-managed. And of course our strong credit metrics have resulted in a lower provision for credit losses this year.

Also noteworthy, last month our Board appointed a new independent director Michael Van de Ven, who is the Chief Operating Officer of Southwest Airlines. He brings to our Board a number of key skills including a background in risk management and, as a CPA, deep understanding of financial planning and accounting.

We have a strong and diverse Board with a good mix of industry, financial and leadership backgrounds. Given the highly regulated nature of our industry as well as its cyclicality, we believe it is important to have long tenured directors with a deep understanding of our business and environment.

However, we also recognize the importance of bringing fresh perspectives and we are pleased to welcome someone of Michael's caliber to our Board.

And now I will turn the call over to Dave who will go over the quarter in more detail.

Thanks, Ralph. Good morning, everyone. Turning to slide 7, following a $1.1 billion increase in average loans in the second quarter, third-quarter loan growth was challenging for us, particularly since we had a reduction of over $300 million in the energy portfolio. Coupled with seasonality in our auto dealer business, which decreased about $200 million.

Technology and life sciences also declined about $150 million due to the summer slowdown and our disciplined focus on maintaining a granular portfolio. Partly offsetting this was loan growth in our Mortgage Banking business, which benefited from summer home sales combined with robust refi activity.

In addition, growth in our commercial real estate business continues to be driven by well structured attractive opportunities with existing customers. Quarter end loans were down over the second quarter with the largest declines in Energy and Dealer.

As of September 30, commitments decreased about $700 million with the largest decline in Energy, and average loan utilization declined 2 percentage points to 51% with the largest decreases in dealer and Energy. However, our pipeline remains strong.

Interest earned on loans increased $5 million quarter over quarter and our loan yield increased 2 basis points. There was a benefit from one more day in the quarter, an increase in LIBOR and a second-quarter lease residual valuation adjustment that was not repeated. This was partially offset by lower loan balances and minor impacts from nonaccrual loans, lower fees in the margin and other portfolio dynamics.

Turning to slide 8, deposit growth was robust, as Ralph described, increasing almost 3% quarter over quarter. Our deposit costs remain low at 14 basis points as we continue to prudently manage pricing for our relationship oriented deposits. We have not increased our standard deposit pricing.

Turning to slide 9, we maintained our securities book at about $12.5 billion. The estimated duration of our portfolio sits at about 3 years and the expected duration under a 200 basis point rate shock extends it modestly to 3.9 years.

Seasonally higher pre-pays in the third quarter combined with the current rate environment put minor pressure on our security portfolio yield as we invest pre-pays at a lower rate. To help combat this we continue to selectively purchase securities with modestly longer duration.

For example, over the last few weeks we have purchased some Ginnie Mae CMOs in the [170]s with modestly longer duration and extension risk than the portfolio average.

Turning to slide 10, net interest income increased $5 million while the net interest margin decreased 8 basis points. As I discussed earlier, all loan-related impact netted to $5 million and added 1 basis point to the margin.

Wholesale funding cost increased $2 million due to the increase in six-month LIBOR along with the $2.8 billion in FHLB advances we added during the second quarter. This had a 1 basis point impact on the margin. Also securities income declined $1 million as a result of continued yield pressure.

Finally, the $2.3 billion increase in average balances at the Fed contributed $3 million but had an 8 basis point negative impact on the margin.

Turning to slide 11, our overall credit picture remains very strong. Total criticized loans declined almost $300 million to $3.3 billion or less than 7% of our total loans at quarter end. Nonaccrual loans represent about 1.3% of our total loans and increased slightly with Energy loans driving the increase.

Net charge-offs declined to 13 basis points or only $16 million. Our allowance for credit losses remains stable at $772 million and our allowance to loan ratio was 1.48%. Energy loans declined 10% to under $2.5 billion at quarter end. E&P loans make up about 70% of our energy portfolio.

As far as the fall redeterminations, we expect burrowing bases to decrease another 5% to 10% on average, which is much less than the 22% decline resulting from the spring redeterminations. Energy services accounts for about 15% of our portfolio and is most impacted by the cycle. It has had a 35% decline in loans over the past year to about $330 million or less than 1% of our total loan portfolio.

Energy net charge-offs were only $6 million, down from $32 million in the second quarter. The reserve for Energy loans continues to be over 8% and, of course, those reserves may not turn into ultimate losses.

Slide 12 outlines non-interest income which increased 2%. Commercial lending fees grew with continued strong syndication activity and an increase in commitment fees. Investment banking fees were also up. Partly offsetting this was a $2 million decline in fiduciary income following seasonally strong personal trust fees in the second quarter.

In addition, non-fee categories increased modestly, primarily due to an increase in income from bank-owned life insurance, partially offset by a decrease in deferred compensation plan asset returns.

Turning to slide 13, excluding the $20 million in GEAR Up related restructuring charges, non-interest expenses increased $8 million primarily due to a $6 million reduction in the gain on sale of leased assets following a relatively large gain received in the second quarter. The remaining increase was primarily due to higher outside processing expense.

Salaries and benefits expense was unchanged. There were many moving pieces including the impact from one more day, an increase in stock comp following a stock forfeiture in the second quarter, seasonally higher staff insurance as well as the effect from the initial phase of workforce reductions related to GEAR Up and a decline in deferred comp. As Ralph discussed, we expect to clearly see the benefits of our GEAR Up initiative starting in the fourth quarter.

Moving to slide 14 and capital management, we continue to maintain strong capital ratios while returning excess capital to our shareholders in a meaningful way. Our 2016 capital plan includes share repurchases of up to $440 million.

The pace of our buyback will be dependent on the balance sheet movements in our financial performance. And as Ralph previously stated, restructuring charges are not expected to have an impact on the pace of our share buyback.

In the third quarter we increased our share buyback and raised the dividend 4.5% to $0.23 per share reflecting our confidence in the business. Through the buyback, together with the dividend, we returned $137 million to shareholders or over 90% of our third-quarter net income.

Our book value per share increased to $44.91 and has been steadily increasing over the past several years as we continue to focus on creating long-term shareholder value.

Turning to slide 15, our balance sheet continues to be asset sensitive. As I mentioned a moment ago, we have benefited from the recent increase in LIBOR. About 70% of our loans are LIBOR-based with the bulk driven by 30-day LIBOR.

Therefore as LIBOR has increased over the past couple of months our loan portfolio repriced relatively quickly. Partially offsetting this is our wholesale funding of which about 45% is based off of six-month LIBOR.

Separately, as shown on the table, 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 net interest income over a 12-month period.

Of course, deposit pricing is only one assumption in our interest rate sensitivity modeling. We have provided additional scenarios, other key variables and a list of assumptions in the appendix.

While the outlook for a rate increase in the near-term continues to fluctuate our balance sheet is well positioned to benefit from any increase in rates. Now I will turn the call back to Ralph.

Thank you, Dave. Our outlook for the fourth quarter relative to the third quarter is shown on slide 16. We expect average loan balances to be stable with a seasonal increase in National Dealer Services, a rebound in Technology and Life Sciences and small increases in several other businesses.

This is expected to be offset by a seasonal decrease in Mortgage Banker and continued reduction in Energy. Our expectation is that we will see our loan growth resume next year on pace with GDP growth and with less of a headwind from Energy. We plan to provide our full outlook for 2017 on our earnings call next quarter.

Our net interest income is expected to increase slightly in the fourth quarter. This includes the effect from the recent increase in LIBOR as well as the November maturity of $650 million in sub debt. With continued strong overall credit quality we expect the provision in net charge-offs to remain low and range between second- and third-quarter levels.

As far as the Energy portfolio, assuming prices and the environment remain relatively stable, we expect nonaccruals and charge-offs to remain manageable.

Overall we expect noninterest income to be relatively stable, excluding the expected declines from third-quarter levels of bank-owned life insurance and deferred comp, both of which are difficult to predict. Overall we expect fourth-quarter fee income to remain at the strong level we saw in third quarter.

Non-interest expenses are expected to be lower excluding estimated restructuring expenses of approximately $30 million to $35 million. We expect about $25 million in savings derived from GEAR Up including the benefit from the redesign of our retirement program.

Typical seasonal increases in staff, benefits, outside processing, marketing and occupancy are expected to be partially offset by a decline in deferred comp which was $2 million in the third quarter. And since it is difficult to predict, we are assuming it will not be repeated.

Given recent industry headlines I would like to take a moment to discuss Comerica sales culture. Overall measurement of our bankers' performance and compensation is based on a balanced scorecard that includes growth, customer satisfaction, operations, risk management and compliance.

While we occasionally run special programs that focus certain products, these do not represent a significant portion of a bankers' compensation and are not central to a banker's performance.

Our incentive plans are reviewed regularly to help ensure they motivate the appropriate behaviors and operating results. In addition, they are closely monitored including reviews by our compliance, human resources, audit and finance divisions.

Importantly, for the last -- past 167 years our business has been built on providing high-quality financial services and establishing lasting client relationships.

In closing, we believe we are well positioned for the future. We benefit meaningfully from any increase in interest rates. And as we continue to navigate the energy downturn, our overall credit metrics have remained strong. But we are not waiting for the environment to improve.

We are moving with urgency to execute our GEAR Up initiatives and are fully committed to delivering on these efficiency and revenue opportunities to further enhance our profitability and shareholder value. Now we will be happy to take any of your questions.

(Operator Instructions). Scott Siefers, Sandler O'Neil & Partners.

Hey, good morning, guys this is actually Brendan on line for Scott. How are you this morning?

Oh, good morning.

Just wanted to ask you quickly about the proposed changes to the CCAR process. I know you said it is a positive for you guys which is certainly understandable. And I know it is still early on in this change here, but could you maybe spend a few minutes discussing how you think about capital return in light of these proposed changes?

Dave, do you want to take that?

Yes. Obviously the NPR has just been issued and obviously there have been some speeches that give us some real positive expectation. But as Ralph indicated in his comments, how it ultimately ends up in final rules and quite frankly how it is implemented and viewed by the regulators will be the ultimate.

But candidly, we certainly expect to be in a position to continue to look to have the opportunity to do stronger stock buyback and continue to push for that ask. And candidly, we are also pleased to see that there may be more flexibility in terms of our ability to move the dividend.

Understood, thank you for the color.

Mike Mayo, CLSA.

So, you had 20 work streams and out of those 20 work streams you have $40 million of additional targeted expense benefits in 2017 and 2018. So $35 million of the $40 million would be the replacement or the retirement plan, is that correct?

That is correct.

Okay. And you plan to reduce headcount by 7% in the second half of this year and 4% is done. Do you have a total targeted headcount reduction, has that changed at all?

It has not changed. We don't really have a total per se.

Okay. And then I know we have talked about this -- as far as being open to strategic moves, open to a sale of the bank, clearly you are taking some tough actions. When you say that you are still open to strategic moves, the sale of the bank do you actually solicit other banks to see what you are worth or are you just talking about inbound phone calls?

And my analogy is and if our family wants to renovate our house or maybe move sometimes you say, oh, what can we sell our house for, or find out, before we actually do a big renovation. And to push the analogy you are certainly renovating the house to quite a degree. But have you found out maybe what you would be worth under a sale?

What I would say to that, Mike, as I have said before, we are always open to alternatives that present themselves. And when they do we look at that very carefully and look at it from the perspective of the long-term value to the shareholder.

And it is reviewed not only by management and the Board of Directors, as well as we use outside people from time to time to make sure that we are evaluating appropriately.

All right, thank you.

David Eads, UBS.

Maybe just wanted to kind of confirm the strategy around cash balances and the AFS portfolio. Is it correct to kind of expect that you guys are basically just looking to reinvest prepayments at this point and keep the securities portfolio roughly flat and therefore you would be happy to let the cash balances grow if that is what happened on the deposit side?

Yes, that is where we are today. But we are always looking at the alternatives. Dave, do you want to add anything to that?

Yes. No, as Ralph said, we are always looking at the alternatives. Candidly, we keep waiting and obviously as we get closer here to December we will ultimately see whether the Fed moves or not and we will be watching that very closely. But for the time being we are continuing to just take the pre-pays and repurchase from that stream.

All right, great. And then maybe if you could comment a little bit on the credit side, it seems like things have really stabilized on the Energy and E&P side. Wondering if you have seen any change to kind of the broader business conditions and economic conditions in Texas and what you are seeing there.

Pete, you want to take that?

No, David, we really haven't seen any deterioration in Texas at all. The portfolio in Houston continues to perform well in middle-market and small business, commercial real estate down there, that portfolio is holding up really well. So we are very encouraged by that.

I would add to that too, as we look at Texas and the expectations for the general economy, while oil and gas is a big part of the economy it is less than 15% today. And Robert Dye, our Chief Economist, is projecting a GDP for the state for the year to be slightly down about 1/10 of a percent. But it is stable.

All right, great. Thanks for taking my question.

John Pancari, Evercore ISI.

On the credit side, on the shared national credit portfolio, I noticed it was down to about $360 million from June. And how much of that decline was Energy and was there any other influence there in terms of pushing those balances lower, anything from the regulators? Thanks.

Pete?

John, most of the decline in our SNC balances were in the Energy portfolio. It was just the typical runoff that we have been seeing in the portfolio for the last several quarters. And we think that is going to continue.

Our borrowers in the energy space continue to find it attractive to sell assets and reduce debt, get their leverage in order. And we expect that to continue for at least the next couple of quarters. So that is where the bulk of it is coming from.

And on that, with shared national credit at 20% of your loan book is there any influence by the regulators to temper that growth?

No, we have not received that feedback from our regulators at all.

Okay, good. And then separately, also on the credit side, the reserve ratio stands at around 148 basis points of loans, that is up a little bit from last quarter. And I know your NPAs edged up a little bit.

Just want to get an idea of basically your longer-term expectation for the reserve ratio, should we expect that it remains relatively stable here in the 145 to 150 range as a percentage of loans just given what you are seeing broader for the economy? Thanks.

Well, we look at it every quarter from the ground up, credit by credit. And Energy has been playing a big factor in the level of our reserves. So a lot of it will have to do with what happens with Energy.

There is a lot of positive things happening in Energy right now, prices have been stable, capital markets are improving. Asset sales remain very robust; we're getting a lot of pay downs on our criticized credits. And of course you know this quarter our charge-offs were down as well.

But on the other hand there is still a number of these E&P credits that are in bankruptcy, we want to see what happens there. Drilling activity has been coming back, but it is not as robust as we would like to see it.

And then speaking of the shared national credit exam, it is very easy to downgrade credits that are shared national credits. It is a little bit stickier upgrading them because, first, we have to decide we want to upgrade a credit, but then also the agent and the regulators also have to decide.

So the upgrades come more slowly than the downgrades. I think one thing that we feel pretty confident about though is that our losses continue to be much less than what we were reserving for or allocating to that Energy portfolio.

Okay, thanks. If I could ask one more question on the margin side actually. If you could just talk a little bit about what you're seeing in terms of underlying margin trends -- aside from what we saw with LIBOR, aside from the impact of the excess liquidity, or any of your assumptions for the Fed, what they're going to do. Just in terms of underlying margin trends from the standpoint of competition on loan pricing, etc., what are you seeing there?

I would say, as I know you have heard many times from the industry, that it is very competitive out there. And especially with growth as we are seeing in the industry today looking for good credits and taking care of your current customer is a very big part of the competition today. Curt, would you like to add something to that?

I think you said it well, Ralph. I think the main thing for us is just making sure that we are staying true to our strategy, which is very relationship focused, and really trying to focus on those opportunities both with existing clients and new opportunities where we think we have a chance to expand a relationship and sell additional products and services, treasury management derivatives, deposit services, etc.

So, we are being selective sort of business by business and market by market. But it is a very, very competitive environment.

All right, Curt. Thank you.

Erika Najarian, Bank of America.

You mentioned on the prepared remarks that there are moving pieces to your expenses. I am wondering as we look forward if we exclude the restructuring charges and the $180 million in savings that you have identified already, what would be the business as usual expense trajectory?

Dave?

Well, you can pretty much assume that you are going to have the ongoing cost of merit increases, I mean that is an expectation that we have built in. There are other challenges in terms of headwinds. The FDIC surcharge clearly comes into play.

We continue to make the required investments in our technology infrastructure. And obviously there is not only a capital outlay to that but there is obviously the cost associated with the amortization of those investments going forward. So that just gives you a little bit of flavor for a few of the headwinds that we will be looking to face in 2017 and beyond.

I would underline though that given the GEAR Up and our process that has gotten our whole team motivated at looking at all expenses and making sure that we are providing the investments, as Dave mentioned, in the right places for the right returns moving forward.

Good point, thank you.

Got it. And so, if I exclude the restructuring charge but add back the gain in there, the quarter-over-quarter expense growth was 2% and year over year was 3.5%. Is that a fair range that we should assume for 2017 in terms of core expenses ex restructuring and ex GEAR Up?

We will have a far better opportunity to provide you a lot more color on the 2017 outlook in January. We are just now to the point where we are being very focused in our forecasting for 2017. And candidly, Erika, we haven't even completed that process.

But kind of follow the direction of the points I gave in terms of where we think the headwinds are going to be coming from and I think that will give you at least a sense of direction. And we will provide better clarity on that in January.

And just if I could squeeze in one more follow-up to John's question. I mean clearly if your Energy portfolio had driven the volatility in your reserves.

And as we think about going forward I was wondering could you give us a little bit more color in terms of whether or not you released dollar reserves in the Energy portfolio this quarter. And how we should think about that going forward if energy prices stay at this level?

Pete?

Well, I think the thing that we disclosed is that our reserves are still over 8% of the portfolio, we think that that is a good level for now. We are going to look at it at the end of this quarter and see what is going on with prices, what is going on with the portfolio, what is going on with these credits that are in bankruptcy.

The other thing that is important, Erika, as we look at the entire reserve in relationship to our -- what else is going on in the portfolio. And right now everything looks pretty good. But we have to see what is going to be happening a quarter out with regard to commercial real estate or whatever the case may be. So we just take a look at it one quarter at a time.

Thank you so much.

Ken Usdin, Jefferies.

Just one more follow-up on the cost side. I understand you are going to get the guidance on next year at a later time. I just wanted to make sure I understood what the fourth quarter looks like.

We have got that GEAR Up and then the absence of that deferred comp expense. Can you just help us understand the trade-off between those seasonal increases and some of those other line items and just the magnitude of expense decline? Just to help everyone get a kind of good base for the start of the first quarter with GEAR Up.

Dave?

Well, if you look at -- you said ex-restructuring, so if you kind of just start with that as the base, which I think will give you a number of about $473 million, obviously we have communicated a $25 million reduction from GEAR Up. But there are some seasonal items that will come into play.

We tend to have a much stronger marketing campaign in the fourth quarter. We do have some seasonally higher occupancy expense as we kind of come into the winter season coming into the fourth quarter. We also would expect as we have seen the trend coupled along with rises in revenue, but our outside processing will continue to move up.

And I think that will kind of give you a general flavor. I think we also commented in the narrative portion that we also typically see staff insurance bump up a bit in the fourth quarter as people have worked through their deductibles and looking to potentially take care of certain issues before they move into the next year.

Okay, but all of that is still not enough to offset the positive of the $25 million GEAR Up savings. So all of that netting is still lower, but modestly lower (multiple speakers).

Not even remotely close to offsetting that $25 million.

Okay, got it. So it is a decent decline, okay, great. Second question just on the loan growth side, if I set aside the seasonal businesses and Energy, and I'm just looking at general Middle Market, Corporate Banking, Business Banking, all flat sequentially down year over year.

Ralph, you made the point about growing with GDP and how tough it is; Dave, you mentioned earlier just on the competitive side. So where do you expect to see kind of the core business growth coming from?

And what are the challenges just in terms of kind of keeping up with the industry on that? Is it choice given the competitive side or is it just you are getting paid down a little bit more? Just color on that outlook for kind of the core commercial loan growth side.

Well, I think what we have seen to date is people are being a lot more conservative than they have been in the past. They are sitting on a lot of cash, they are in a good financial position.

And as things begin to pick up, which we are hopeful they will, and that is the reason we focus on GDP and where GDP is going, that our customers will begin to invest more in the future as well as some of the new products and services that Curt was talking about that we have or we have upgraded.

That gives us opportunity as well, not only with our current customer base, but also in looking for new customers and growing with the markets where we are.

When you look at the economies today in California and I mentioned here and Michigan, and the growth that is expected for the year, they are in a very good position and our footprint is in a very good position. And that is the reason we feel comfortable that we will be able to grow along with that GDP number. Curt, do you want to add to that?

I might just add a couple of comments. Ralph in the narrative earlier and Dave as well talked about what we would expect in the fourth quarter with some rebound in [TLF] coming off of a somewhat soft quarter in Q3. The natural sort of seasonality we see in Dealer with new model sales.

Both of those I think will be the headlines for the fourth quarter. Of course we have still got energy working against us as that portfolio continues to decline.

Ralph also shared in sort of the outlook going forward that as we think about 2017 we do think that Energy decline will start to lessen. And we are seeing a few new opportunities that we are selectively looking at with existing clients. And we also expect sort of loan growth across the portfolio which would step back in line with GDP.

The final thing I would say just from a customer perspective beyond just the competitive environment we face, customers with commodity prices being down, we are certainly seeing less line utilization.

And in some of our markets we are seeing a fair amount of M&A activity, which is inuring to the benefit of our clients in terms of liquidity events. I think you see that reflected in some of our deposit growth.

Thanks for all the color, guys.

Ken Zerbe, Morgan Stanley.

I guess first question just in terms of the buybacks. On slide 14 you mentioned the buybacks depend on [finished] performance, etc. But can you just remind us what financial performance and/or market conditions do you need to see above and beyond what we are already seeing that might enable you to actually buy back the entire approved CCAR amount?

Dave?

Well, I am certainly not going to project that we are not going to buy back the entire amount. But we do need to watch it quarter over quarter. I mean obviously we are not anticipating any negative events in Q4, but unfortunately I can't predict the future. So we will be watching that very closely.

Do keep in mind that the way the CCAR process worked, rate increases were built into that baseline, we would certainly hope that we will see a rate increase here in the not-too-distant future.

But even without that we are continuing to work diligently, obviously our provision coming down this quarter certainly helps that picture. As we implement GEAR Up that certainly helps add some strength to our financial performance.

So on balance we remain very focused on executing against that plan. But again, I have to be -- speak caution here and say we have to monitor that quarter over quarter.

And again, the restructuring charges will not be a part of that as we go forward.

That is our anticipation, that is correct.

All right, got it. And then just the other question I had in terms of the deposit growth, obviously really strong this quarter. How much of that is transitory? Because it looks like you put a lot of it into cash rather than into securities.

Curt, do you want to take that?

Yes, I mean where we have seen the primary growth has really been in core deposits and it has been pretty broad spread across our businesses led by the Business Bank and specifically middle market. But we also had a nice growth sort of in core retail, Wealth Management.

So we have seen some runoff in what I would call interest rate sensitive or sort of non-LCR friendly deposits in the first half of the year. But following that in the third quarter, and we sort of expect that to continue into the fourth quarter, we have seen nice deposit growth really across the board and across the markets.

Got it. So -- okay. So essentially you are saying because it is core it is not transitory and that deposit growth will stay -- or that deposit balances will stay on your books going forward?

Well, I would say that we normally see kind of heading into the first quarter some dip -- some seasonality dip in the first quarter and then kind of building as the year goes on. So you really probably in Q3 and Q4 see sort of peak deposits with some slight reduction in the first quarter or so of the year with it building in the second half of the year.

Got it, understood. Thank you.

Gary Tenner, D.A. Davidson.

Two quick questions. One in terms of Houston office, you sort of alluded to it a bit, hoping for some additional color on what you are seeing in terms of pressure on rents with increased vacancy and how that has maybe begun to drift down to impact different groups of office space?

Pete?

Sure. In Houston the portfolio is holding up very well. We've had actually two projects pay off this past quarter so we are down to 17 apartment projects. We are primarily an apartment construction lender in Houston. We don't do office or other product types, it is primarily apartments.

And most of those apartments that are in lease up are leasing up well with one or two months worth of concessions which is substantially less probably less than half of what we assumed in our severe, adverse scenario under the stress test. So we are very pleased with what is going on there in Houston.

And we are actually seeing some signs of rents stabilizing. If you take a look 12 months from now there is really no new supply coming on for another additional 18 months or so. And so we think that is going to bode well for rents in the market.

And then last thing to keep in mind there is we built that Houston commercial real estate portfolio to withstand the ups and downs of the oil and gas cycles. And each one of those projects has 30% to 40% cash equity in them. So there is a lot of room for rents to drop before we are going to see issues with our projects.

And a lot of these customers are longtime customers of ours, national as well as --.

Exactly, (inaudible), yes.

Okay, thank you. And then I missed the comment on the expected decline in borrowing base here in the fall.

Yes. We are still very early on in our process. But we would expect to see maybe a modest decline in borrowing bases this time around. Our price deck is fairly conservative; it is about 20% below the strip right now.

And so, we would expect maybe a modest decrease, but nothing significant. And I would also expect that we will see more borrowers with stable to improved loan to values this time around than we saw in the spring.

Very good, thank you.

Dave Rochester, Deutsche Bank.

I know you mentioned going through the budgeting process now, and I don't mean to belabor the expense side, but I was wondering if you would be surprised if expenses actually grew next year versus 2016 given the decent decline you are talking about in 4Q and then all the expense saves you have highlighted that are coming next year. It just seems like that decent dip should position you for lower expenses in 2017 versus 2016. Is that fair?

Dave?

Well remember, we are communicating here; we expect GEAR Up to drive $150 million in expense saves. Our headwinds won't even come close to those numbers. What I am communicating to you, again, first of all we haven't finalized 2017. We will see some line items that will have some pressure, we typically have merit increases. We'll expect that.

You are going to have increased costs with the investments we are making in technology. But those will be minor detractions to that $150 million, so you are still going to see an overall reduction of a significant magnitude.

Yes, great. Thanks for the color. And then just outside of the roll off of the $650 million in borrowings you are talking about in 4Q, can you just talk about any other benefits on that front you see coming next year?

Could you repeat --?

Sure, are you guys looking for any other roll off on the funding side that should support the NIM next year?

Maturities.

(inaudible) sub debt.

Well, keep in mind that sub debt won't get paid off until mid-November, so you are only going to pick up six weeks of benefit of that pay off, so that will carry over throughout all of 2017.

And then in terms of other debt, I think there is one more maturity coming up in 2017 which we will do a replacement funding for -- at least at this point we anticipate doing replacement funding for. It is about a $300 million -- 500 -- excuse me, $500 million debt replacement.

Great. All right, thanks, guys.

Steven Alexopoulos, JPMorgan.

I want to start on GEAR Up. Given the additional $40 million you guys identified this quarter, at this point are there still more opportunities you are looking at or has the review of that program largely been completed?

I wouldn't say it is ever completed, but I think we have gotten close to the major opportunities. But we will continue to look as we are working through it. But don't expect any big changes. Dave, do you agree with that?

I agree. Steve, our focus now is making sure each and every one of those initiatives gets implemented as planned. That we stay very focused on our internal controls, we execute against the strategy.

Is there an opportunity to maybe generate within each one of those initiatives another $1 million, another $0.5 million? Absolutely. We are going to focus on that.

But I want to make sure that we don't leave the pressure or the point here of there is going to be another umpteen millions of dollars because we have 5 or 10 more initiatives that we have not yet identified, that just is not the case. The main focus is there and it is now all about execution.

Okay. And then in terms of the changes you are making to the retirement plan, can you just run through those? You are essentially just changing the retirement age, is that what is happening here?

No, we are shifting to a new construction of the plan. And one of the things I mentioned earlier was that -- keep in mind that the individuals that are 60 and over and retired individuals today are not being affected and we are moving to a new plan which will be very competitive as it is put together for the beginning of the year with our competitors.

Okay. Is this moving from a defined benefit plan to basically defined contribution, is that what you are changing?

Yes. [The redesigned plan is actually a cash balance pension plan, a form of defined benefit plan.] (Corrected by company after the call.)

Okay, that makes sense. And separately, at $50 oil how are you guys viewing incremental pressure on the Energy portfolio here? And is $50 basically high enough to see a material reduction of those inflows into criticized each quarter? Thanks.

Pete, do you want to take that?

Yes, I think we are getting to a point where the inflows are stabilizing with prices in this general range. And we don't expect necessarily prices are going to stay at $50 or above, they will fluctuate between probably $40 and the mid $50s.

But as long as it is in that trading range that it has been in the last three months I think you are going to see some stabilization of inflows to criticized.

Borrowers are doing a great job of reducing their breakevens. And those that can't get their cost structure in line are selling assets to others that have lower cost structures and/or lower leverage. So we are seeing a lot of that.

Did you see a material reduction in inflows of the criticized this quarter?

We still had some inflows into criticized, but we also had a lot of reductions too. So we are very encouraged.

Okay.

Pete, you might mention how the loans that are not only in bankruptcy but also on not accrual are performing.

Yes. So we have about a dozen or so E&P credits in bankruptcy, another one or two in energy services. All but one of those is -- in fact, all but one of our non-accrual loans is current [on interest] and performing. So another very encouraging sign.

Okay. Thanks for all the color.

Bob Ramsey, FBR.

I appreciated when you were talking about loan demand earlier as sort of the comments around commodity prices and M&A as headwinds. I am just curious what else you are hearing from your borrowers.

We have seen some deceleration in the Fed HA C&I loan growth data. Do you think political uncertainty is a piece of it and that that's short-term when things were bound or are there other factors, other concerns you are hearing from customers?

I think the uncertainty that is out there continues. And until that gets more taken into effect and removed we are not going to see growth that is going to exceed GDP as an example. And that is one of the reasons we are using the GDP as kind of a forward indicator. Curt, you want to add anything to that?

No I think you said it well, Ralph. Certainly the election adds some uncertainty as well, the regulatory environment and just overall economic environment just a real lack of CapEx investment, really.

And I think across the board as we have managed through the last couple years the investment corporations have managed down expenses a fair amount. So they are operating with a lower operating base kind of across-the-board.

And we have seen as well they are very liquid today and that is one of the reasons loan balances are where they are. And they are watching with that uncertainty.

Okay, thank you.

Geoffrey Elliott, Autonomous Research.

I wondered if you could give a bit more detail on the Technology and Life Sciences balances, what drove the decline there? I know you mentioned the (inaudible) being smaller, but if I look at 3Q 2015 it looks like you had $200 million or $300 million of growth sequentially versus a $150 million decline. So why the decline and why you think it recovers going into 4Q?

Curt, do you want to take that?

Yes, I mean, so for whatever reason we normally see a little bit of seasonality in TLS in the third quarter, as we see in a number of our businesses including sort of core C&I. I think the [VC] activity slowed a little bit in the quarter but I think still remains robust.

Our pipeline is pretty strong especially in equity fund services; the market there remains healthy overall, the takeout of permanent market looks good as well. And so, I think from our perspective we would expect to see continued growth in TLS overall coming off of a little slower quarter.

Great, thank you.

Brett Rabatin, Piper Jaffray.

Just wanted to ask, we have seen some movement in lenders in the Texas market especially. And so, I was just curious what your experience had been so far through this process in terms of retention of lenders and how you think about if that is any kind of initiative you might have with some of the growth in 2017 is adding additional people? Any thoughts on that?

We are always focused on our people and as well as our pipeline and how we do things from hiring especially new individuals from college and into our credit college as an example.

And that is a process we have had that I think is very important to our future both in credit and as well as in always having the right number of people that we need to do the things we want to do in the market. Curt, do you want to --?

Yes, I might just add on top of that that the GEAR Up initiative in terms of headcount reduction for us really has been -- we have tried to focus it on non-revenue producing individuals.

So it has really been about increasing spans of control within our management ranks and reducing some of the layers in the Corporation, reducing operational staff, but trying to keep our relationship managers fully engaged.

We typically do not do a lot of lift out type hiring, but we will hire where needed in selective markets. And while we have reduced staff overall, we certainly will look for opportunities to reallocate staff and selectively add staff where we have growth opportunities including Texas.

Okay. And would you say your net production people are about the same as when you started this process or has there been much of a change there?

I would say all in all about the same from where we were previously. It would depend on sort of line of business and market by market. But the overall net relatively the same -- with the exception that we are down some producers in our banking centers, which is as much about just sort of long-term trend with digital and technology as it is anything else.

One of the key pieces with the whole process though was, as Curt underlined, it was focused on removing the spans and layers and not removing the individuals that take care of the relationships. That is very important going forward and having the ability and the depth so that we continue to grow as we were talking about earlier.

Okay, great. Thanks for the color, Ralph.

John Moran, Macquarie.

So, just one to [ticky tack], one on the OpEx for 4Q, the $25 billion in GEAR Up savings, that is inclusive of the $4 million or $5 million on the pension credit, correct?

The pension credit is expected to be about $7 million.

Sorry, okay, so $7 million, so that is inclusive of that, okay. And then the -- okay, perfect. And then the only other one that I had was just circling back to securities, and I think you guys kind of alluded to watching what happens here in December.

But what do you need to sort of invest that cash? And I think in your words you were saying waiting for -- to see something to change the philosophy. Is it simplistic to just say if we get 25 basis points in December, January we start to reinvest it at a more robust rate?

Dave, do you want to take that?

A lot of that will depend on whether or not we actually see an increase in December. And what commentary do we hear from the Fed -- quite frankly last year, if you recall, we did move about $2.5 billion in the fourth quarter from cash, which has worked well for us this year.

And we did that in part also anticipating from the commentary back in December that there would be multiple rate rises in 2016. That hasn't happened. So we are going to remain cautious but, again, December could be all telling here in terms of our direction with that strategy going forward.

Got you. Thanks very much, guys.

Jon Arfstrom, RBC Capital Markets.

Just one last question here on GEAR Up. Any early progress to report on the revenue side of GEAR Up? And maybe an update on confidence and expected timing of those revenues flowing in?

Curt, do want to take that?

Yes, I will. Jon. The revenue side will -- as we shared I think previously, will layer in over the next two years. And so it is not sort of a one and done type scenario. And it really -- it cuts across a combination of strategies that we are pursuing, the first of which is really about freeing up sales capacity for relationship managers.

So we have been working intently to try to identify opportunities to centralize some tasks and functions that are taking up time from our relationship managers today and time from the sales process and that is kind of an ongoing initiative.

The second is that we have worked with a consultant that we were leveraging, Boston Consulting Group, to develop some new tools that are much more data-driven around customer information, helping us to really take more of a needs-based approach in assessing our customers and where we think we have opportunities to provide additional services to our clients.

We are very focused on a number of products where we think we have greater contribution margin. And that would include some products that have been revamped for us like our merchant bank card product set and a whole number of what I would call products that complement our commercial lending activities from treasury management and card services, all of our capital markets activities, syndication derivatives, etc.

And then I think wrapping all that up is we're very intent around just making sure that we've got the right sales training with all of our bankers across the board. And so, that when you look at it sort of in summary there is not one product, one idea, but it is a combination of things that we're doing.

And we feel pretty confident -- or very confident that we can achieve the overall target that we've set from a revenue standpoint. But again, it will be layered in over the course of the next 24 months or so.

Okay, basic message is it is still a bit early to start to call that out specifically, is that right?

Yes, I think that is fair.

Yes, okay. Okay, thanks for taking my question.

Michael Rose, Raymond James.

Just two quick Energy-related questions. On the slides it looks like a year ago your Energy reserves were about 3%, 8% today. Given the changes in some of the underwriting guidelines put out at the beginning of the year, how should we think about having a normalized energy provision assuming prices remain around these levels or potentially increase in the next year? Thanks.

Pete, do you want to take that?

Yes. I think if prices stabilize I think what we would expect to see is that our criticized would start to improve, we would get some stabilization of loan balances. So things that drive reserves are pay downs and risk ratings.

And so, what we have been seeing right now, Michael, is lots of pay downs, but we haven't upgraded a lot of credits yet. And so I think you are going to see an opportunity to reduce our allocation for reserves on Energy once we get pay downs in combination with improved risk ratings.

And if prices stay -- remain stable over the next quarter or two, I think we are going to start to see the risk ratings start to improve.

Okay, so the provision allocation going forward should be relatively minimal then, correct?

Right now we feel like we are adequately reserved and we don't see us adding additional reserves for Energy or really anything else at this time.

Okay, that is helpful. And then you mentioned kind of the pay-down activity, asset sales, things like that, driving balances lower. When do you think you hit that inflection point and maybe not -- I know some of the larger competitors pulled out of the market. What does the competition look like now for new energy credits and are you guys still playing in that space? Thanks.

Curt, do you want to (multiple speakers) that?

Yes. Well certainly what we want to do is make sure we are taking care of our good clients. And Energy is certainly core to the Texas economy overall. We are I think we will start to see a little bit of slowing in the decline in the portfolio overall.

And as Pete has alluded to, our customers I think have behaved very well in terms of reducing expenses and line utilization has gone down with the redetermination process. Having said that probably different than prior quarters; we are starting to see some select new opportunities with our clients.

They have got very strong equity support, kind of modest advance rates, very strong hedging, kind of deals that we would want to participate in. But again, it is a very modest pace.

And so, I think that the pace of reduction will continue to slow and we will selectively see some new opportunities. But that I think on average will keep us kind of in that range of about 5% of our portfolio overall.

Okay, that is great color. Thanks for taking my questions.

I will now turn the conference back over to the Company for any further remarks.

I would like to thank everybody for joining us today and your interest in Comerica. And hope you all have a great day. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may all disconnect.