Comerica Inc (CMA) 2016 Q4 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 fourth-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.

Good morning and welcome to Comerica's fourth-quarter 2016 earnings conference call.

Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Chief Financial Officer, Dave Duprey; and Chief Credit Officer, Pete Guilfoile.

During 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 in 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 factors that could cause actual results to differ.

Also, this conference call will reference non-GAAP measures and in that regard, I would like to 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.

Today, we reported fourth-quarter 2016 net income of $164 million or $0.92 per share, which included $0.07 in restructuring expenses.

Quarter-over-quarter, our earnings per share increased 10%.

For the full-year 2016, we reported net income of $477 million or $2.68 per share, which included $0.34 in restructuring charges.

2016's financial performance reflects a turning point on a number of fronts.

We began to reap the benefits of our GEAR Up initiatives, as well as rising rates.

As the year went on, the energy loans continued to reduce and credit quality remained strong.

Also, we increased the size of our equity buyback by 25%.

Turning to slide 4 and highlights from fiscal year 2016, average loans were close to $49 billion.

Excluding the $641 million reduction in energy loans, average loans increased over $1 billion or 2%.

The most notable increases were in commercial real estate, national dealer services and Mortgage Banker Finance.

Average non-interest-bearing deposits grew $1.7 billion or 6% while interest-bearing deposits declined $2.2 billion.

In total, our average total deposits declined 1% to $57.7 billion.

This reflects adjustments we made in light of the new LCR requirements early in 2016.

Deposits grew significantly in the back half of the year.

We generated almost $1.8 billion of net interest income in 2016, an increase of over 6% over 2015, primarily a result of the increase in interest rates combined with loan growth and a larger securities portfolio.

Overall, credit quality continued to be strong with net charge-offs at 32 basis points, which is at the low end of our historical norm.

The provision for credit losses increased $101 million with the allowance for loan losses increasing $96 million compared to 2015.

This was primarily due to increases in reserves for energy loans recorded in the first quarter of 2016, partially offset by improvements in credit quality in the remainder of the portfolio.

As far as non-interest income, customer-driven fees increased $22 million while non-fee categories declined $6 million.

We had a large increase in card fees, as well as growth in fiduciary, foreign exchange and brokerage fees.

This was partly offset by lower commercial loan fees and investment banking income.

Excluding restructuring charges of $93 million, as well as a $33 million release of litigation reserves in 2015, non-interest expenses declined $23 million.

Our GEAR Up initiative drove over $25 million in expense savings primarily in salaries and benefits.

We also benefited from an additional decrease of pension expense.

This was offset by merit increases, one additional day, increases in technology expenditures, outside processing fees tied to revenue-generating activities, as well as FDIC expenses.

We repurchased 6.6 million shares in 2016 under our equity repurchase program.

Through the buyback and dividends, we returned $458 million or 96% of 2016 net income to shareholders.

This reflects our strong capital position and solid financial performance.

On slide 5, we provide an overview of our fourth-quarter results.

Average loans declined $291 million, including a $157 million reduction in our energy portfolio.

We also had the typical seasonal activity with a decline in Mortgage Banker Finance and year-end growth in National Dealer.

Average deposits increased $1.6 billion driven by strong non-interest-bearing deposit growth.

The growth was broad-based with nearly all business lines posting increases.

Net interest income increased $5 million to $455 million.

This included the benefit of the increase in interest rates, lower debt costs and interest earned on higher excess balances at the Fed.

Credit quality was solid.

The provision and net charge-offs increased from the very low levels of the third quarter.

Net charge-offs were $36 million or 29 basis points, which is at the low end of our historical norm and included $15 million in energy and $14 million in energy-related charge-offs.

Total criticized loans declined over $400 million.

Over the past year, Energy loans have declined over $800 million or 27% and commitments have declined nearly $2 billion or 30%.

The overall performance of this portfolio has improved, including a $319 million decrease in criticized loans in the fourth quarter.

Therefore, we have modestly reduced our reserve currently allocated to Energy loans to just over 7% of Energy loans as of December 31.

Non-interest income declined $5 million from the third-quarter record levels as a result of a decline in commercial lending fees, which was partly offset by increased card fees.

Non-interest expenses declined $32 million with our GEAR Up initiative driving the majority of the decrease.

Expenses included $20 million in restructuring charges related to our GEAR Up initiative similar to the third quarter.

Restructuring expenses came in lower than forecasted as the related charges for some initiatives were better than we anticipated and for a few initiatives, realization of restructuring expenses is expected in 2017; however, we continue to fully believe we should meet the ultimate savings as scheduled.

Our capital position remains strong.

In line with our CCAR plan, we increased our share repurchases to $99 million or 1.8 million shares.

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 6, average loans in the fourth quarter were relatively stable compared to the third quarter.

As a result of seasonality, our Mortgage Banker business decreased almost $200 million due to the fall slowdown in home sales while our auto dealer floor plan portfolio increased 300 million as dealers took delivery of the 2017 models.

We had a reduction of over $150 million in the Energy portfolio.

We also saw more [modest] (corrected by company after the call) declines in Environmental Services and general middle-market, partly due to some customers taking advantage of attractive valuations to monetize their investments.

Finally, the strong growth in commercial real estate earlier this year has slowed as we remain focused on well-structured attractive opportunities with existing customers, as well as maintaining the diversity of our total portfolio.

Growth in November and December resulted in period-end loans above the average for the quarter.

As you can see, the quarter ended with loans at $49.1 billion, down from the third quarter with Mortgage Banker contributing the largest decline.

As of December 31, commitments decreased $576 million, including a $220 million decline in energy, an almost $300 million seasonal decline in Mortgage Banker.

Average line utilization was stable at 51%.

Interest earned on loans increased $1 million quarter-over-quarter and our loan yield increased 3 basis points.

The increase in interest rates provided a $6 million benefit, which was partially offset by a lease residual valuation adjustment and lower loan balances.

Deposit growth was robust again this quarter as you can see on slide 7, increasing almost 3% over the third quarter.

Our deposit costs remained low at 14 basis points as we continue to prudently manage pricing for our relationship-oriented deposits.

We have not instituted any standard pricing adjustments in response to the increase in short-term rates.

We are closely monitoring our deposit base, as well as the market and we believe we are well-positioned.

We continue to maintain our securities book at about $12.5 billion as shown on slide 8. The yield on the portfolio is stable.

Recently, the increase in yields has allowed us to invest prepays at a higher rate than the portfolio average.

For example, in the last couple of weeks, we purchased some mortgage-backed securities in the 2.30s with only modestly longer duration and extension risk than the portfolio average.

Hopefully, this marks the end of the yield erosion we had been experiencing.

The recent rise in mortgage rates has not had a significant impact on the pace of prepayments and the estimated duration of our portfolio sits at about 3.5 years and the expected duration under a 200 basis point rate shock extends it modestly to 3.9 years.

Finally, the increase in rates resulted in a swing in the portfolio position to a small net loss of $42 million.

Turning to slide 9, net interest income increased $5 million while the net interest margin decreased 1 basis point.

As I discussed earlier, all loan-related impact netted to $1 million and added 2 basis points to the margin.

Wholesale funding costs decreased $1 million as the increase in six-month LIBOR was more than offset by the benefit from the maturity of $650 million in sub-debt that was repaid in mid-November.

Finally, the $1.5 billion increase in average balances at the Fed contributed $2 million, but had a 4 basis point negative impact on the margin.

Our overall credit picture remains strong as outlined on slide 10.

Total criticized loans declined over $400 million and are now under $3 billion at quarter-end.

This includes a $49 million decrease in non-accrual loans, which now represent only 1.2% of our total loans.

Net charge-offs were $36 million or 29 basis points, which is at the low end of our normal historical range.

Our allowance for credit losses and allowance to loan ratio remains stable.

Our reserve is built from the bottom up every quarter and takes into consideration changing economic risk factors that may have an impact, but have not yet been reflected in our risk ratings such as the recent strength of the US dollar.

Energy loans now represent less than 5% of total loans.

E&P loans make up about 70% of our energy portfolio.

Fall redeterminations have resulted in an increase in borrowing bases of about 11% on average as many of our customers have increased reserves through acquisitions, improved production and new drilling, as well as slightly higher prices.

As criticized and non-accrual Energy loans continue to decline and charge-offs remained manageable, the reserve currently allocated for Energy loans declined slightly.

Slide 11 outlines non-interest income, which fell slightly from very robust levels seen in the third quarter.

We had nice growth in card fees, as well as fiduciary and foreign exchange income.

This was offset by a decline in commercial lending fees primarily due to a slowdown in syndication activity.

In addition, non-fee categories declined, including a $2 million net securities loss related to an adjustment for our Visa derivative and a decline in deferred compensation plan asset returns.

The reduction in expenses as shown on slide 12 was a highlight in the quarter.

Non-interest expenses decreased $32 million with our GEAR Up initiative contributing more than $25 million to the decline.

Salaries and benefits expense declined $28 million primarily due to the reduction in workforce, as well as reduced pension expense as a result of the redesign of our retirement program we announced last quarter.

In addition, a decrease in consulting expense and a gain on the early termination of certain leverage lease transactions more than offset the increase in outside processing expense, which is tied primarily to growing card fees.

Moving to slide 13 and capital management.

We continue to maintain strong capital ratios while returning excess capital to our shareholders in a meaningful way.

As we have previously indicated, our 2016 capital plan includes share repurchases of up to $440 million and the pace of our buyback will be dependent on balance sheet movements, our financial performance and market conditions.

In the fourth quarter, we again increased our share buyback.

Through the buyback, together with the dividend, we have returned $139 million to shareholders or 85% of our fourth-quarter net income.

Of note, as a result of warrants and employee options exercised during the quarter, we issued 5.1 million shares.

Also, our average diluted share count increased by 1 million shares to 177 million as a result of a rise in our share price during the quarter.

Turning to slide 14, there are a number of potential developments that could enhance our financial performance.

On the left side of the slide, we outlined the impact of rising rates.

As I mentioned earlier, with our asset-sensitive balance sheet, we have benefited from the recent increase in rates.

Over 90% of our loans are floating rate.

Therefore, as rates move, our loan portfolio reprices relatively quickly.

Assuming our deposit prices move with a 25% beta, our model indicates that with the recent Federal Reserve rate increase of 25 basis points, we should 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 a range of possible outcomes as rates continue to rise based on various assumptions around deposit betas, pace of deposit decline and the incremental funding days.

Additional scenarios, other key variables and a list of assumptions are in the appendix.

In addition, there has been much discussion about the new administration and Washington's plans to reduce taxes, provide regulatory relief and fiscal stimulus to drive economic growth.

While there is no certainty as to what changes may prevail, the table on the right provides a reconciliation of our 2016 income taxes to assist you in your analysis.

We believe we are well-positioned and can act quickly no matter what changes are enacted.

Now I will turn the call back to Ralph.

Thank you, Dave.

Turning to slide 15 and an update on our GEAR Up expense and revenue initiative that we announced this past July.

Many of our larger initiatives have been completed or are well underway and already are driving an improvement in our bottom line.

We estimate that the GEAR Up initiative will drive additional pretax income of $270 million in 2018 relative to when we kicked off the initiative.

In 2017, we expect to drive expense savings of $150 million, including the $25 million in savings we realized in 2016, as well as an incremental non-interest income of $30 million.

Even without the benefit from increases in rates, the actions we are taking are improving our bottom line.

Our target is for the efficiency ratio to be at or below 60% by year-end 2018.

We expect to achieve or exceed our goal of a double-digit ROE in 2018 with sustained growth net of investment, normal credit costs, continued share buyback and only a modest increase in rates.

We believe that the recent increase in rates will help us reach our goals faster.

At the bottom of the slide, you can see three major drivers to the savings we have achieved so far.

Our largest initiative has involved streamlining our workforce.

We took an expeditious yet thoughtful approach in order to minimize the disruption for our colleagues.

Nearly 700 positions have been eliminated, or most of our expected reduction.

Managerial positions were reduced by 30% and we consolidated functions and responsibilities while ensuring we maintain our high standards for customer service and deep expertise and experience.

Our total workforce at year-end was below our target as a result of additional controls we have in place to reevaluate positions when they become open.

In most cases, we expect those positions below our target to be filled over time based on business needs.

We have also begun carefully pruning our banking center network as the chart in the center shows.

We remain committed to our footprint; however, with advancing technology, we are consolidating 38 banking centers or about 8% of our network, of which four were closed in the second quarter; 15 were closed in the fourth quarter.

We have replaced our current pension and retirement account benefits with a newly redesigned defined-benefit retirement program.

This is expected to contribute approximately $33 million in savings in 2017.

Our new retirement program continues to provide highly competitive benefits.

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.

Finally, on slide 16, we provide our outlook for the full-year 2017 based on a continuation of the current economic and interest rate environment.

We expect average loans to increase in line with GDP growth.

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

If oil and gas prices remain stable at current levels, we believe energy loans should continue to climb, but at a much slower pace.

Also, we fully intend to maintain our relationship focus, as well as loan pricing and credit discipline.

We expect our net interest income to increase reflecting the recent rise in rates along with loan growth.

As Dave mentioned, our model indicates that the full-year benefit to net interest income of the recent increase in short-term rates with a 25% deposit beta would be about $70 million.

And while not included in this outlook, we are well-positioned to benefit from any further rate increases.

We also expect minor impacts from higher funding costs, as well as limited loan yield compression resulting from the competitive environment.

We expect our provision to be lower in 2017 as we believe the worst of the energy cycle is behind us.

Assuming energy prices continue to be stable, we expect non-accruals and charge-offs to remain manageable.

For the overall portfolio, with continued strong credit quality, we expect the provision and net charge-offs to be within our historical normal range of 30 to 40 basis points.

As far as non-interest income, we expect it to increase 4% to 6%.

This is primarily due to execution of our GEAR Up initiatives, which are expected to add about $30 million by accelerating growth in card and treasury management fees, as well as brokerage services fees and fiduciary income.

Noncustomer categories such as bank-owned life insurance, warrant income, hedging ineffectiveness and deferred comp are difficult to predict and therefore are assumed to remain stable in this outlook.

Non-interest expenses are expected to decrease 4% to 5%, including a reduction in restructuring expenses, which are expected to be approximately $25 million to $50 million in 2017.

Remaining non-interest expenses are expected to decline 1% to 2%.

This includes about $150 million in savings derived from GEAR Up, including the $25 million achieved in the fourth quarter, which is therefore already in the run rate.

Offsets to this are expected to include increased outside processing, consistent with growing card revenue, as well as higher FDIC expenses.

Inflationary pressures are expected to have an impact on annual merit, staff insurance, occupancy and marketing.

In addition, technology project expenses will continue to rise as we invest to meet customer demands, as well as continuous enhancements in our cyber security.

Also $13 million in leverage lease terminations that benefited 2016 are not expected to be repeated.

Finally, we expect our effective tax rate to be approximately 33%, which is higher than last year due to the expected increase in net income with about the same amount of tax credits, as well as expectation that discrete items that benefited 2016 will not be repeated.

In closing, 2016 was a pivotal year with the development and implementation of our enterprise-wide GEAR Up initiative.

We have made significant progress in executing the expense savings and are fully committed to delivering on the efficiency and revenue opportunities to further enhance our profitability and shareholder value.

We also benefited meaningfully from increased interest rates and our overall credit metrics remain strong as we continue to navigate the energy cycle.

We believe we are well-positioned for the future as our geographic footprint is well-situated and our relationship banking strategy can drive superior growth of loans, deposits and fee income over time.

Now we will be happy to take any questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

Good morning, everybody.

Ralph, I had a high-level question first on GEAR Up.

If we look at the macro environment this year and next, let's just assume for some reason the pace of Fed hikes comes in faster than expected and you get to double-digit ROTE faster than expected, could you see yourself easing on some of the cuts you've identified for GEAR Up or is that plan set in stone at this place irrespective of the macro?

That plan would go forward as we've been saying.

Okay.

That's helpful.

And then on business sentiment, seems to improve since the election almost across the country.

Could you guys comment on sentiment specifically in Michigan given several larger companies now talking about reinvesting in the region to Texas given what's happened with energy?

And we used to look -- this was quite a few years back -- at a metric called commitments to commit as a leading indicator for loan growth.

Has this changed post the election?

Thanks.

I think we have seen it in what I would call the strengthening mode and it will be contingent on what we see and the changes we see, I believe, in the first quarter or two, but it is a positive attitude and we've seen good increases in the economic indicators in all three states as well.

California really leads that, but Texas and Michigan are catching up, especially with our state indexes that our -- Robert Dye, who is our economist, use to measure current activity.

So I think it's a positive move in the right direction and could accelerate quickly if we see, as was mentioned by Dave, the right things begin to happen in the first and second quarter.

Curt, do you want to comment on the markets at all?

Ralph, I just would echo what you just said, that we are starting to have conversations with clients that are indicating they are more optimistic -- business owners -- around possibilities of increased economic growth and maybe some tax relief or other things that might come with a new administration -- yet to be determined.

And we saw that some in activity in November and December heading into the end of the year.

As Ralph said, all three of our markets, I think, remain fairly robust.

California would lead that charge in the high-tech sector.

I think after maybe pausing a little bit in 2016, it seems to be coming back, IPO activity, etc.

The California market real estate values remain strong in California, both in Northern and Southern California.

And then Ralph already mentioned the Michigan market continues to benefit from the strong auto sales numbers that we have seen, some tightening in real estate values there as well.

And then Texas really outside of the Houston market remains a good story and as everyone knows is a more diverse economy than it was during prior energy down cycles.

Okay.

That's helpful.

And maybe just one final one.

Are there any updated thoughts if the SIFI threshold does get lifted what expense saves could look like for you guys?

Thanks.

If that were to happen, we will have to know the exact terms and what of the existing will change going forward to put a proper estimate on that, Steve.

Okay.

Fair enough.

Thanks for all the color.

Erika Najarian, Bank of America.

Good morning.

My first question is on the potential revenue upside from a rising rate environment.

You've cited that you expect a $70 million increase in net interest income with a 25% deposit beta, but you haven't changed pricing and your deposit costs haven't moved at all over the past year.

I'm wondering if the better number for us to use as we think about rate hikes for this year or just the previous December is that $85 million.

And I am wondering why you decided to give us guidance on the 25%?

Do you think we are close to changing the pricing?

I don't think we have a feel that we are close at this point in time, but I think taking the conservative approach that at some point as interest rates increase, you will see pricing start to increase.

And that's the reason we also include all of the other comparisons on similar, whether it's 25% or 50% data, so that you have it in your mind as well.

And just as a follow-up question, as we think about how quickly that repricing may come, as we think about your deposit base and how much it has grown over the past several years, how much of your deposit base would you classify as operational?

We don't ever really look at it that way.

We really focus more and look at the non-interest-bearing, which is predominantly our commercial customers.

And while we certainly have a large base of customers that drive that significant balance, there clearly are a dozen, two dozen customers that carry very significant balances with us that do tend to move week to week, month to month.

But in any event, to re-emphasize Ralph's point, we are not looking to be changing our deposit pricing, but we will be watching, as I said in my prepared remarks, we will be watching for the market, our competition very, very, very closely.

But let me make it clear, we won't be leading the way, but we certainly will be looking to match competition if there is risk movers.

And just as a follow-up question, the $1.5 billion in cash, is that something that you expect to come out on the deposit side over the next few quarters?

The excess cash that came in?

I think that will be determined by how much investment begins to start and if customers feel that growth is going to pick up and start to invest in their companies and prepare for higher volumes then you will see some of that come down over time.

Great.

Thank you so much.

Jeffrey Elliott, Autonomous Research.

Good morning.

Thank you for taking the question.

I wondered if you had any thoughts on how the environment for M&A is evolving in the sector after the election.

Maybe start at a high level for the sector and then any thoughts on Comerica specifically and things you might do.

I think we will have to see how it plays out over time.

As things get better, typically in history, you see more acquisitions and you also see more institutions newly chartered than we have in the past, which has actually slowed way down compared to what it used to be and I think that will drive what happens going forward.

It'll be all based on the economy and the pickup as we move forward.

And then your sell price is much higher than it was at the start of last year.

Things are looking a lot better in terms of the outlook.

Does that change the way you think at all about Comerica either as a potential acquirer or as a potential seller?

We look at all alternatives as we move forward and we are focused on what we control.

And in addition, as we talked about earlier, being in Texas and California, which are two of the largest markets in the country and adding Michigan to it, which has been very robust, especially with the auto industry coming back and a great market for us as well, we are well-positioned for growth as we move forward, which is what we control.

We always look for opportunities and we've done that over time, but it's not necessary to fuel our growth going forward.

Great.

Thank you.

Ken Usdin, Jefferies.

Good morning.

A question related to efficiency ratios and progress.

I'm presuming -- we understand that your net interest income outlook has the December rise and we know what each incremental rate hike would do for net interest income.

So the first question is, as we get additional rate hikes, or if we do, how much do you expect that to be incremental margin, meaning how much of that is -- of extra rate hikes are built into your expense forecast?

And if we get additional rate hikes, is there any delta to the expense side, or should that all fall to the bottom line?

I will let Dave comment on this as well, but we haven't built in future interest rate hikes as we look at it.

It's focused on expenses and the current growth profile.

Dave.

No, I would echo that, Ken.

The forecast is assuming no incremental rate hikes throughout the balance of 2017.

We would be pleased to see them, but they are not embedded in the forecast.

At the expense side, it would be absolutely de minimis.

Okay.

And then on the follow-up on the expense side, so I just wanted to ask you to parse out a little bit more.

We get the GEAR Up savings part, $125 million of helper and I am just wondering can you talk about the core side a little bit more in terms of what type of inflationary costs do you expect and is it more just that you expect some of the fee revenues to come with expense growth as you mentioned in card?

Just trying to understand the delta between the GEAR Up saves and underlying growth.

Ken, you did actually just pick up on the biggest piece of it and that is the revenue side, a lot of that being card fee, merchant-type activity.

As you are well aware, there is outside processing associated with that and in fact, the single biggest impact that we expect to see in expense growth next year is in fact that very point, is the cost of outside processors.

Do keep in mind we do also expect to see the growth in not only fees, but growth in loans.

Accompanied with that is increased incentive payments, as you would expect as we grow that book.

We also have standard merit increases just due to inflationary pressures, which I know our employee base appreciates.

We also have the FDIC surcharge coming through for the full year.

And then quite frankly we just have ongoing increases, albeit well-controlled, in technology.

So on balance, that's kind of the framework of what we expect to see.

I should add, remember, we also had $13 million -- Ralph mentioned this in his prepared remarks -- $13 million in lease termination gains last year that we do not expect to repeat.

Right.

And then just bringing those two points together then, your target for 2018 is a sub-60% efficiency ratio.

Do you have any thoughts on what type of progress you might make this year on the way to that sub-60%?

Well, our GEAR Up initiatives are completely underway.

We will be significantly focused this year on elements of GEAR Up, that being the technology piece.

That will be a significant contributor in 2018.

So we do, as Ralph said, we do fully expect to execute on every element of GEAR Up.

Okay.

Great.

Thanks a lot.

Michael Rose, Raymond James.

Good morning.

Just wanted to get some context on your expectations for the Mortgage Banker house as we move into next year and maybe how that ties with NBA forecasts.

And then as a follow-up, just as it relates to energy, where do you think the energy bottoms as a percentage of the portfolio and if prices recover to the $60 or even $70 price range this year, could we expect to see balances actually begin to increase this year?

Thanks.

Curt, do you want to take that?

Michael, on the Mortgage Banker side of the equation, as we always say on these calls, we have the normal seasonality so we would expect our volume to build in spring and summer and then back off into fall and winter timeframe and that's what we saw in 2016 and we expect in 2017.

The most recent MBNA forecast that we have shows a drop of refi activity somewhere in the 17%, 18% factor, but we are hearing that the forecast could call for an increase in purchase volume somewhere in the 10%-type range.

That bodes well for us.

Our portfolio versus the industry runs about 67% on the purchase side with the most recent logistics.

The industry runs about 49% and so if we do see some purchase volume kick in in 2017, we believe that would bode well for us in terms of volume and activity.

The second thing I would say would work in our favor is we continue to be a net acquirer of new relationships in the mortgage warehouse space and so we hope that leads to increased activity for us in 2017 as well.

That's very helpful.

And then on the Energy side?

Energy.

On the Energy side, well, that continues to, as you saw in 2016, a headwind for us with a significant decline both in balances and commitments that we shared earlier on the call.

As we head into 2017, we are expecting that that will start to slow down.

We are starting to see a few new opportunities with existing customers and we are going to take care of our existing customers.

That portfolio for us now is down below 5% at period-end and we think it will start to level off and be less of a headwind for us in 2017, again as we see both the decline in -- reductions in the portfolio, as well as some new opportunities with some existing clients.

Thanks for the color, guys.

Appreciate it.

Terry McEvoy, Stephens.

Good morning.

Maybe just a follow-up on the Mortgage Banker portfolio.

I can't remember, do you disclose average yields in that business, or if not, would they be above or below that 3.3% average rate in 4Q for the total commercial portfolio?

Curt?

We do not disclose average yields for the portfolio and I don't think I could give you a specific answer on whether the yield would be above or below our overall portfolio yield.

I would say that we get attractive pricing in that business line and we have very good connectivity in terms of opportunities to sell additional products and services, depository services, treasury management, etc.

So the returns for us overall in the business are attractive.

Great.

And then just as a follow-up, we are hearing more optimism from small businesses.

Do you have any comments on what you saw or heard in the second half of the fourth quarter from those clients specifically and would you expect that, I think it's a $4 billion portfolio, would you expect that portfolio to show faster growth than that general middle-market book over the course of the next year?

Curt.

It is a smaller portfolio and it's a more granular portfolio for us and I would expect the portfolio to grow in line with middle market overall.

We are hearing very similar comments from small business owners that we are hearing from middle-market business owners as well in terms of increased optimism.

The pipeline and portfolio remains pretty strong for us overall.

So again, it is a smaller portfolio, but we are anticipating growth in the portfolio in 2017.

Thank you.

David Eads, UBS.

Good morning.

Maybe you guys have talked a little bit about the strong deposit inflows at the end of the year and the more attractive opportunities to deploy (inaudible) securities.

I just wanted to see if the recent rate hike and the expectations for a better environment have led any kind of change in the way you guys are thinking about deploying excess liquidity.

I think at this point in time our strategy is going to remain the same there.

I see no changes, especially with the potential of the other things we've been talking about, the economy beginning to pick up, and if that continues, then we will certainly want to use our liquidity to be focused on the lending side of that.

Dave, do you have anything to add to that?

No, I would agree.

Remember, David, we have recently picked up some mortgage-backed in the 2.30s and quite frankly, remember, you are locking into that for a 3, 3.5 year period.

So if we continue to see rate increases, that could be a challenge in terms of not having locked into that fixed rate.

I would much rather see that build into loan growth and, as Ralph said, we will continue to stay with our standard pattern here until a better picture emerges.

Okay, great.

And then can you maybe talk a little bit about capital and capital return?

You had an increase in the buyback this quarter, but you also had a pretty big increase in capital ratios.

Do you think that -- one, is the plan to continue to use the entire authorization in this year's CCAR cycle?

Can you give any early thoughts into how you might approach capital returns in the next CCAR cycle?

Dave.

I think our confidence level is certainly increasing as it relates to completing the $440 million buyback as our CCAR plan has articulated.

The increase in the capital ratios we did indicate we did have warrant conversions and employee stock option conversions, which added a little over 5 million shares.

That is certainly a significant increase to the capital ratio and then quite frankly our risk-weighted assets calculation also declined, so both contributing to that increase.

In terms of next year, obviously, we will take a very hard look at that knowing where our capital ratios are, knowing our confidence in our forecasts, including the expense saves and revenue enhancements coming from GEAR Up.

We will have to coalesce all those thoughts as we work through our CCAR plan for its submission here in a few months.

All right.

Thanks for the color.

Ken Zerbe, Morgan Stanley.

Great.

Thank you.

Good morning.

Maybe just a little more pointed question on the loan growth.

Your guidance is for loan growth to be up in line with real GDP, which I guess our Morgan Stanley economist is looking for something like 1.9%.

Why is it not a bit stronger?

I understand it sounds like Energy is starting to level off.

Earlier in the call, you talked about solid growth in your markets, but I'm just trying to reconcile the total average loan growth versus the more robust environment that a lot of people are expecting.

Thanks.

Curt, do you want to --?

Ken, I think we are encouraged by what we are hearing from our customers and a lot of that though has yet to play out.

There is encouragement around potential for additional economic growth that might lead to more CapEx spend, possible tax relief or other changes with the administration and so if we are seeing growth, we will have opportunities to revise this comment as we go along.

But, at this point, I think growth in line with GDP expectations is realistic and we are going to continue to focus on our relationship approach where we can get good connectivity with our customers and good pricing, continuing with our credit discipline overall.

I think the growth areas for us would be middle market, commercial real estate, our dealer business, technology/life sciences and I mentioned earlier Mortgage Banker Finance maybe a little bit slower than we saw in 2017, but still growth opportunities there as well.

I was just going to say and just to be super clear, it's real GDP of call it roughly 2%, not nominal GDP of say 4% for the guidance?

That's right.

Although I would say that our economist is a little more bullish about GDP going forward.

Got it.

Understood.

The other question I had, just in terms of the tax plan, with the higher tax rate, I understand higher income, stable tax credits.

Would you guys consider implementing any new tax credits or other tax strategies this year or is it better just to wait to see what comes out of Congress before you do anything?

Thanks.

Dave.

I think we are going to stand down, Ken, and wait and see what, if anything, is actually moving through Congress and what, if anything, the new president may be inclined to sign.

It's obviously very difficult to do any kind of real forecasting with taxes other than to use today's tax regulation to focus on.

All right.

Thank you very much.

Brett Rabatin, Piper Jaffray.

Good morning.

Wanted just to follow up on the loan growth guidance question one more time.

Just wanted to make sure I understood the increased optimism.

It's a little bit early to maybe be more aggressive with your guidance in terms of growth this year, but I was curious if any of that is reflective of the large corporate market and maybe your concerns or just thoughts on that might not grow that much this year?

Curt?

I don't think there's any negative on the large side, but --?

No, I don't think so either.

What I would say about the large corporate space is, while we play in that market, we are selective.

Pricing is pretty competitive in the large corporate end of the equation and so we are expecting some growth there in 2017, but probably more growth from the businesses I outlined previously.

Okay.

And then just a follow-up on CCAR and the share buyback and capital.

Would you anticipate being more aggressive with your CCAR plan next year?

Dave.

I think we have been saying right along that part of our strategy here is to manage the level of capital and, as I said earlier, we need to look at all those factors as we pull together the CCAR submission here for this year.

Obviously our confidence level is higher.

The impact of GEAR Up, the fact that the economy is improving, we have some positive interest rate movement here in December.

We may or may not see more increases.

It certainly increases our level of confidence when it comes to making that submission.

And historically, we've been fairly aggressive with our ask and buybacks even before the CCAR regulation and we will, with current levels, as Dave was saying, of our capital, we will certainly be evaluating that as we go forward and look at the ask for return.

Okay.

Great.

Thanks for the color.

John Pancari, Evercore ISI.

Good morning.

On the tax topic again, it certainly looks like you are making some decisions based upon the outlook here around the tax rate.

I know you indicated that the guidance excludes any discrete items that benefited last year, but you also had a good number of discrete items that helped keep that tax rate in the 30% to 32% range over the past several years.

So I guess what I am getting at is does this consider that you expect a material benefit to your bottom line with a tax cut coming from the new regime and that's why you are making decisions around the discrete items now?

Dave.

No, John, the 33% that we are telegraphing is simply a result of an expectation of a higher level of pretax earnings being offset with the same level of expected low income housing tax credits and the current same level of tax-exempt income, which in our case is bank-owned life insurance.

The other discrete items we don't expect to repeat, which is mainly the lease termination transaction and then you will remember there is about a 1% or 1.5% impact from state income tax that is embedded in that 33%.

Right, right.

No, I get it.

It's still just a 100 basis point stepup from even the higher levels you've been at in prior years and I get the higher income, but again just getting at the stepup -- I guess another way to ask it would be if you did see a benefit from a tax cut under the new tax reform, how much of it that you would really expect to fall to the bottom line versus any other form of offset that you can see coming structurally or for Comerica specifically?

Well, there's four pieces that could impact that.

One, what would be the new corporate tax rate?

Today, it's 35%.

What does that corporate tax rate move to?

The second would be does any congressional action modify the ability for us to fully utilize low-income housing tax credits?

Don't know.

The third would be bank-owned life insurance.

From time to time, over the last 20-plus years, Congress has entertained either limiting or eliminating the benefit of that tax-exempt income.

And then, lastly, if this would be a one-time adjustment, but, remember, we have a net deferred tax asset and that net deferred tax asset is recorded at 35%.

So to the extent corporate tax rates decline, you have to write down that deferred tax asset to whatever the new corporate tax rate would be.

That's a one-time item, but there's significant moving pieces so you can probably use whatever assumptions you choose to use as you see Congress move on tax legislation and that will give you a good idea of what the impact would be to Comerica.

Right, but implying that there are some good offsets there that you may not see a material benefit to the bottom line ultimately?

If all remained the same -- in other words, if the bank-owned life insurance, which is about $15 million, $16 million for us on an annual basis, low-income housing tax credits worth about $22 million for us, if they left those alone, it would be a significant benefit to us to see the corporate tax rate reduce.

And then on that line though, do you expect any of that benefit to be competed away?

Yes, all of it.

Okay.

Thank you.

Scott Siefers, Sandler O'Neill.

Good morning, guys.

Was just hoping you could spend a moment or so on the level of the energy reserve.

It is still very elevated, I guess, as I look at things with the exception of maybe that roughly $9 million or $10 million uptick in charge-offs.

Everything is pointed in the right direction in terms of the quality of the energy portfolio, yet you still have a pretty healthy reserve.

Just curious for your thoughts on rationale behind keeping it so high and over what period of time you might draw it down to maybe a more typical level.

Pete.

Scott, we've been very encouraged at what we are seeing in the energy space, but we did have a rather large energy-related charge-off this quarter and so we just want to see what is going to go in that space before we do anything major to our reserves around energy.

I will say though that we did reduce the amount of our energy reserves both in terms of dollars and in terms of percentages this quarter.

Okay.

And is that -- the large energy-related charge-off you referred to, is that just a single relationship?

That's nothing broader, right?

Yes, it was a middle-market credit in Houston and we are seeing some migration in the energy-related credits a bit and that's why we are being cautious with regard to our reserves, but our energy-related portfolio is rather small.

It's about $390 million, but the bulk of it is investment-grade refineries.

So we think the charge-offs there are going to be modest, but we are seeing some migration in the portfolio and so we are just being cautious.

Okay.

All right.

That sounds good.

Thank you very much.

Dave, do you want to --?

Yes, I want to clarify because I'm not 100% sure I heard the last statement that John made correctly.

I want to make sure I'm very clear on this corporate tax rate.

To the extent there is a reduction in corporate tax rate that drops to our bottom line, we expect that to enhance EPS.

I think, John, I may have misunderstood you.

You may have been suggesting that we would trade that away in competition.

That was not my intent to answer, yes, all of it.

Yes, all of it falling to the bottom line, to EPS.

I just want to make sure I'm clear because I'm not 100% sure I heard the last component of your question correctly.

Okay.

Bob Ramsey, FBR.

Good morning.

I just wondered if you could talk a little bit, with the share price appreciation, how that affects the way you think about share repurchases and whether there could be any shift in mix (technical difficulty) in the future.

Dave.

Well, clearly, balance sheet growth would be a great use of capital, but, at the moment, given where we are with balance sheet growth, we continue to believe stock buyback is an appropriate use of our excess capital.

So if we begin to see those dynamics change, we will obviously reevaluate.

But given the alternatives, we continue to believe stock buyback is the right action for us to be taking at this time.

And we have been walking up the dividend as well.

That's correct.

And we will continue to focus on that dividend and that will be another consideration as we look at next year's CCAR submission.

Okay.

Fair enough.

I know we've talked a lot about efficiency and GEAR Up.

Just curious, to ask it a little bit differently, the sub-60% efficiency target, is it reasonable to expect you guys will be there in the back half of this year if you exclude the GEAR Up-related costs from the calculation?

Dave.

Well, there's a couple ways you could approach that.

One is with or without restructuring charges.

So I will focus on the GAAP component, which would be including restructuring charges.

Absent at least one more, if not two more rate increases, I would say that that would be a high hurdle, but again our focus remains more on driving that number to or below 60% for 2018.

But excluding the restructuring charges, would that be reasonable?

If all other elements of our forecast fall in place exactly as we would expect, I think we will be extremely close.

Another rate increase would make it a lot easier as a layup as opposed to a longer shot.

Great.

And then just last question.

I guess it's reasonable to assume that you will get the remaining full benefit of the December rate increase here in the first quarter?

The vast majority should come through in first quarter because I believe about 70% of our floating rate loans reprice every 30 days.

There are some that are 90 days.

There's a real handful that go out to I believe six months, but the vast, vast, vast majority should reprice throughout the first quarter.

Great.

Thank you.

Gary Tenner, DA Davidson.

Good morning.

Wanted to talk about loan growth again for a second.

You seem to be very positive with regard to the emerging economic outlook and maybe what loan growth could be over time, but still at least for 2017 forecasting loan growth, as you said, in line with real GDP so presumably somewhere in the low single digit range.

What would the scenario have to look like for loan generation and growth at Comerica to more fully reflect what seems to be a more positive view of what your footprint and business mix could support?

I think we are using the current line to be -- looking back over history, that's a good way to look at growth in loans versus GDP and our experience has been that if you are out growing that substantially then that in general causes an issue, whether it's from a credit standpoint or a business standpoint, but there will be variances from GDP in any given year as things begin to pick up.

If the things that we were talking about and Curt was talking about move in quicker and things accelerate, then we would expect it to outpace GDP.

I think that's fair.

Dave, is it not?

No, I would agree.

And so we are at that point of where -- is it going to start up from here or not.

And if it starts up then I think we will see loan growth that may jump ahead of it in the short term.

Okay.

That's helpful.

Thank you.

Jon Arfstrom, RBC Capital Markets.

Good morning.

Dave, a quick one for you.

Back on deposit beta assumptions, on the 25% deposit beta assumption you are using, are you seeing anything different on deposit behavior today that's different than what you saw a year ago after the last increase?

I guess what I am getting at is why can't it be under 25% like the last hike?

Is there anything that is different with this hike so far?

So far, no.

The pattern has been the same.

But keep in mind we are only a month into the rate increase and, like I said, we won't be a first-mover on standard pricing, but we will watch the competition.

Anytime there is a rate increase, we do have, as I said, we have some very, very, very large corporate customers.

They tend to reach out to see if -- they are willing to park some of those funds for an extended duration, if we might be willing to be somewhat more competitive in terms of pricing.

We tend to be very focused on that.

We had a handful of calls last year; we've got a handful of calls again this year, but nothing in that pattern has really changed.

Okay.

Good.

That's good to hear.

And then just quickly on the incremental revenues from GEAR Up, the $30 million, are you starting to see that show up already and if so, what are the maybe one or two most material categories?

Most of that is really our treasury management and the way we have that rolling in in 2017.

We are just beginning to roll that program out.

We did a fair amount of site testing throughout the third and fourth quarters in various markets with various customers and we just will begin the full rampup of that here early in 2017.

So I think it's reasonable to expect some minor component of that in the first quarter, but you can expect the balance of that to really be more second half as opposed to first half.

Curt, do you agree with that?

I do.

Just to build on what Dave said, in addition to treasury management, it really is across a number of our fee income categories.

A subset of treasury would be our card platform, merchant services.

On the wealth side, fiduciary and brokerage, and a lot of it comes down to us just doing I think a better job than we have historically done.

We've done a good job in the past, but just accelerating cross-sell opportunities, using more analytics, more data-driven information, more needs-based approach with our customers, new profiling tools, some additional training we've done.

So really across all of our fee income areas, but those would be the primary ones and I agree that I think it will ramp up and be more of a second-half 2017 phenomenon.

Okay, okay.

Fair enough.

Thank you.

I will now turn the call back over to Ralph Babb, CEO, for any concluding remarks.

Well, I would like to thank everyone for joining us and your interest in Comerica and I hope you all have a good day.

Thanks very much.

Ladies and gentlemen, this concludes today's call.

Thank you all for joining.

You may now disconnect.