Comerica Inc (CMA) 2017 Q1 法說會逐字稿

Good morning, my name is Regina, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Comerica First Quarter 2017 Earnings Conference Call.

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

Ma'am, you may begin.

Thank you, Regina.

Good morning, and welcome to Comerica's First Quarter 2017 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 detail.

The presentation slides and 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.

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 in today's release in Slide 2, which I incorporate into this call, as well as our filings with the SEC for factors that could cause actual results to differ.

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

Good morning, and thank you for joining our call.

Today, we reported first quarter 2017 net income of $202 million or $1.11 per share, which included $0.04 in restructuring expenses, as well as a tax benefit of $24 million or $0.13 per share.

Quarter-over-quarter, our net income increased 23%, which helped drive a double-digit ROE and 1.14% ROA for the quarter.

Relative to the first quarter of last year, our earnings per share increased significantly due to improved credit quality in our Energy portfolio, higher interest rates, as well as successful implementation of many of our GEAR Up initiatives.

Turning to Slide 4 and an overview of our first quarter results.

With a $900 million decrease in average mortgage banker loans and $290 million decrease in Energy, total loans declined compared to the fourth quarter.

Apart from these 2 business lines, average loans increased $176 million.

As far as deposits, we saw the typical first quarter decline following very strong growth in the fourth quarter.

The decrease was mainly in noninterest-bearing deposits.

Net interest income increased $15 million to $470 million.

This included the benefit from increased interest rates and a lower level of wholesale funding, partly offset by lower loan balances and 2 less days in the quarter.

Overall, credit quality continued to be strong.

Net charge-offs were $33 million or 28 basis points and included $13 million in Energy charge-offs.

Total criticized loans declined again this quarter and included a $283 million decrease in Energy.

Based on the continued improvement in credit metrics, we modestly reduced our reserve allocated to Energy loans to about 7% of Energy outstandings, and our allowance for credit losses for our entire portfolio declined about $17 million.

The lower net charge-offs, coupled with the reduced reserves, resulted in a $19 million decline in the provision to $16 million.

An increase in fee income and a reduction in expenses demonstrate that our GEAR Up initiative continues to reap benefits.

Noninterest income increased $4 million with growth in deposit service charges, investment banking and fiduciary, partly offset by a seasonal decline in card fees.

Noninterest expenses declined $4 million.

Expense savings resulting from GEAR Up and a decrease in related restructuring charges were partially offset by an increase in salaries and benefits, primarily due to annual stock compensation.

During the first quarter, warrants and employee option exercises, as well as vesting of employee stock grants, added 4.1 million shares.

The stock compensation activity resulted in a credit to our income tax provision of $24 million.

A new accounting standard requires us to recognize the tax impact from stock compensation activity in the tax line, whereas it was previously recognized in equity.

We repurchased 1.5 million shares for $105 million under our equity repurchase program.

We have approximately $140 million remaining under our 2016 CCAR plan, which we expect to execute in the second quarter.

We have been steadily increasing our buyback, which reflects our solid financial performance and strong capital position.

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 5. Mortgage banker loans decreased $902 million due to winter slowdown in home sales and lower refi volumes.

Our portfolio volume was approximately 77% purchased versus refi compared to the industry average of 59%.

As expected, mortgage banker balances began to rebound in the quarter and are expected to continue to grow through the spring/summer home buying season.

We had a reduction of $289 million in Energy loans.

As anticipated, balances have continued to decrease as customers deleverage through asset sales and capital raises.

We expect the pace of reduction in loan balances to slow up as energy prices have stabilized and the rig count has increased.

Also, we've started seeing a few excellent relationship opportunities with E&P companies that have performed well for the downturn and have been conservatively underwritten.

Our auto Dealer Floor Plan portfolio increased $144 million as dealers continued to build inventory in preparation for the pick-up in spring sales.

Growth for the total loan book began to return in late February.

And average loans for March were better.

This resulted in period-end loans above the average for the quarter.

As of March 31, commitments decreased to $51.3 billion, and average line utilization was stable at 51%.

We've had a broad-based increase in our loan pipeline, and our commitments to commit grew 44% to $1.2 billion.

Overall, customer sentiment is positive, reflective of the improving economy and anticipated changes coming out of Washington.

Yet, they remain cautious.

Our loan yield increased 21 basis points, primarily due to a 22 basis point increase in average 30-day LIBOR.

Reflecting typical seasonality, deposits declined $1.9 billion relative to the fourth quarter, including a $1.6 billion decrease in noninterest-bearing deposits, as you can see on Slide 6. Period-end deposits of $58.9 billion were well above the average, indicating a positive trend.

Also, deposits have grown over $1 billion relative to the first quarter last year, with noninterest bearing increasing $2.4 billion.

Noninterest-bearing deposits now represent 53% of our mix.

Our relationship-oriented deposit base has helped us keep our deposit costs low at 14 basis points.

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

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

We continue to maintain the size of our securities book, as shown on Slide 7. The total yield on the portfolio increased 1 basis point as we actively managed the portfolio.

Recently, we have been able to invest prepays at a slightly higher rate than they are running off.

For example, we have seen MBS yields in the 2.40s, with only modestly longer duration and extension risk than the portfolio average.

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 4 years.

Finally, the portfolio is in a relatively small unrealized net loss position of $43 million.

Turning to Slide 8. Net interest income increased $15 million, while the net interest margin increased 21 basis points.

Our loan portfolio added $9 million and 17 basis points to the margin.

The increase in interest rates provided a $23 million benefit, which was partially offset by 2 less days in the quarter and lower loan balances.

In addition, we had a lease residual adjustment of $2 million in the fourth quarter that was not repeated.

Balances at the Fed contributed $3 million and 3 basis points to the margin.

The increase in the Fed funds rate added $4 million and was partly offset by the $1 billion decrease in average balances.

Wholesale funding costs decreased $2 million as the increase in 6-month LIBOR was more than offset by the benefit from sub-debt that was repaid in mid-November.

Finally, deposit costs declined $1 million due to the reduction in CD balances.

Our overall credit picture remains strong, as outlined on Slide 9. Total criticized loans declined over $200 million and are now about 5.5% of total loans at quarter-end.

This includes a $61 million decrease in nonaccrual loans, which now represent only 1.1% of our total loans.

Net charge-offs were $33 million or 28 basis points, which is below our normal historical range.

Reflecting the continued strong credit quality and improving energy credit metrics, our allowance for credit losses declined by $17 million, while the allowance-to-loan ratio remained relatively stable at 1.47%.

Of note, our assessment of the recent Shared National Credit exam is reflected in this quarter's metrics.

Energy loans at quarter-end were about $2 billion and now represent 4% of our total loans.

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

Spring redeterminations are approximately 12% complete and have resulted in modest increases in borrowing bases.

Many of our customers have increased reserves through acquisitions, improved production and new drilling as well as slightly higher prices.

As criticized and nonaccrual Energy loans continue to decline and charge-offs remain manageable, the reserve currently allocated for Energy loans is now about 7% of energy outstandings.

Slide 10 outlines noninterest income, which increased $4 million or 2%, and was up 11% to the first quarter of last year.

We had strong treasury management deposit service charges, driven by the early success of our GEAR Up initiatives, as well as receipt of annual fees.

In addition, stronger market conditions resulted in increases in investment banking and fiduciary income.

This was partially offset by a decline in card fees, primarily due to the seasonally lower volume and timing of pay periods for our government card programs.

Changes in non-fee categories essentially offset each other.

Expenses declined $4 million, as shown on Slide 11.

Salaries and benefits increased $14 million, primarily due to the annual stock compensation and higher payroll taxes.

In addition, the gain on the early termination of certain leveraged lease transactions that we realized in the fourth quarter was not repeated.

This was more than offset by declines in most other expense categories, including a $9 million decrease in restructuring charges and a favorable litigation-related settlement of $2 million.

We also had a typical seasonal decline in advertising cost.

Overall, expenses remain well controlled and the realization of our GEAR Up initiatives continue to be evident.

Moving to Slide 12.

In line with our 2016 capital plan, we again increased our stock buyback with $105 million of repurchases in the first quarter under our equity repurchase program.

Through the buyback, together with the dividend, we returned $147 million to the shareholders.

As a result of our higher stock price, there was significant exercise activity of stock options and warrants.

This activity, combined with the first quarter employee stock awards, added 4.1 million shares during the quarter.

Also, these issuances, and along with a higher stock price, resulted in our average and our period-end diluted share count increasing to 180 million shares.

We submitted our CCAR plan for the 2017-2018 cycle earlier this month and expect to receive the results in mid-June.

With our strong capital ratios and increased profitability, we remain focused on returning excess capital to our shareholders in a meaningful way.

Turning to Slide 13.

Our asset-sensitive balance sheet positions us well to continue to benefit from increases in rates.

Over 90% of our loans are floating rate.

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

In our outlook for 2017, we previously indicated that we had expected the December rate rise would contribute $70 million, assuming a 25% beta.

Given that we have been able to manage our deposit pricing, we are updating this outlook and now expect $85 million in additional net interest income over a 12-month period.

And with the further 25 basis point increase in rates last month and assuming our deposit prices move with the 25% beta, which has yet to materialize, we should gain about $70 million more in net interest income over a 12-month period or over $50 million for 2017.

We currently estimate that the next 25 basis point increase could provide an additional $40 million to $85 million in annualized net interest income.

The outcome depends on a variety of factors, including deposit betas, balance sheet movements such as deposits declining as companies use the cash in their businesses.

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

Now I'll turn the call back to Ralph.

Thanks, Dave.

Turning to Slide 14 and an update on our GEAR Up expense and revenue initiatives that we announced last July.

We continue to be on track to reach our goals.

The recent increase in rates should help us reach our targets faster for an efficiency ratio below 60% and an ROE consistently in the double digits.

And we remain committed to achieving our target for an additional $180 million in pretax income in 2017 and $270 million in 2018 relative to when we kicked off the initiative.

With pilot programs underway, we are moving forward with our revenue initiatives, which include training, relationship management tools and fine-tuning incentives.

On the technology front, we are rationalizing applications and designing ways to enhance back-office efficiency.

Also, we are initiating implementation of our end-to-end credit design project, which will increase our relationship managers' capacity and enhance customer satisfaction.

This includes simplifying the governance process, introducing new technology to support a digital approach and pooling of back-office resources across all of our markets.

On the right side of the slide, you can see some of the major drivers to the savings we have achieved so far.

Our largest initiative involving streamlining our workforce.

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

Finally, we are carefully pruning our banking center network and rationalizing our total real estate requirements.

On Slide 15, we provide our outlook for the full year 2017.

Assuming continuation of the current economic environment, we now expect total average loans to increase 1% to 2%, including a reduction in mortgage banker and Energy loans.

We expect to see the typical second quarter seasonal rebound in mortgage banker, but average mortgage banker loans for the full year are expected to be below last year.

If oil and gas prices remain at current levels, we believe Energy loans could stabilize by the end of the year.

Aside from mortgage banker and Energy, we expect the remainder of the portfolio to grow 3% to 4%.

As far as net interest income, our model indicates that the benefit in 2017 from the recent increases in short-term rates is expected to be more than $135 million.

As Dave mentioned, there are numerous assumptions that are included in this calculation such as deposit betas and the pace of LIBOR increases.

Also, while not included in this outlook, we remain well positioned to benefit from any further rate increases.

In addition, loan growth and lower wholesale funding are expected to contribute to net interest income.

With continued strong metrics, our credit outlook is slightly better than what we have previously indicated.

We now expect the provision for the full year to be between 20 and 30 basis points and net charge-offs to be similar to the 28 basis points we had in the first quarter.

Our outlook for net interest income and noninterest expenses has not changed.

We expect noninterest income to increase 4% to 6%, and excluding restructuring expenses of $25 million to $50 million, remaining noninterest expenses are expected to decline 1% to 2%.

Finally, assuming no further tax benefit from employee stock activity, we expect our effective tax rate for the remaining quarters to be approximately 33%.

In closing, 2017 is off to a good start.

We are benefiting meaningfully from increased interest rates, and our overall credit metrics have remained strong.

We have already reached significant expense savings from our enterprise-wide GEAR Up initiative and are committed to fully delivering on the efficiency and revenue opportunities to further enhance our profitability and shareholder value.

In addition, while there is no certainty as to what may prevail in Washington, we believe we are well positioned and can act quickly to benefit from changes that reduce taxes, provide regulatory relief or fiscal stimulus that can drive economic growth.

Now we'll be happy to take any of your questions.

(Operator Instructions) Our first question will come from the line of Steven Alexopoulos with JPMorgan.

Ralph, I'm trying to better understand the significant increase in the loan pipeline, and I'm looking at the 44% increase in commitments to commit.

If many businesses are in wait-and-see mode, right, waiting to see what comes out of Washington, one, why are they building commitments so aggressively here?

And two, have you seen other periods where businesses increased these commitments, but ultimately don't draw on them?

Curt, do you want to take that?

Steve, I think that, really, when you think about the loan portfolio, you've got to think about it more broadly, so across really all of our business lines, as Ralph and Dave alluded to, with the exception of mortgage banker and Energy.

And when you think about sort of the path we've been on, there is definitely a lot more optimism than we saw in the third quarter or fourth quarter of last year, even though some of that may have waned a little bit.

And really, across all of our geographies, across all of our business lines, we are seeing increased activity and increased optimism with our customers.

Now some of that still is cautious on the part of many of those clients, but I think it's a lot higher than we have seen in the last 6 or 12 months, and again, broad spread across all of our businesses and across all of our geographies, with the exception of mortgage banker and Energy.

Okay.

And then just, Curt, on my second question, have you seen other periods where the commitments have increased but you did not see businesses follow-through, and ultimately, at some point, draw on those commitments?

Well, it's always there, as you know, a factor that could come to play.

Not all of these will result in booked transactions.

And so through the cycle, we probably experienced this before where some clients might -- we might have commitment or term sheet out there that would not come to fruition, but you have to assume a fair amount of it will book based on the sort of historical trends with our client and the conversations that we've had.

Okay.

And just one separate question on deposit costs.

We now have another quarter of deposit costs staying completely flat.

Now in the outlook, you do assume a 25% beta following the March hike.

Are you just being conservative?

Or do you see something that leads you to believe betas might move up fairly materially from here?

Dave?

Steve, quite frankly, I prefer to think of the former, that it's the conservative outlook.

We have not seen anything that would indicate that those prices are going to move at this point.

Your next question comes from the line of Ken Usdin with Jefferies.

I was wondering if you could just talk about the auto business and Michigan a little bit.

More specifically, all the talk about softer sales.

So just one question is, can you talk about your confidence in growing that floor plan book this year?

And then secondly, can you just talk about any signs of slowing in this broader Michigan economy or worries you may have just about the auto complex?

Curt, do you want to talk about the demand?

Yes.

The SAR rate glides down slightly from its peak of over $18 million.

We're still expecting annual SAR rate somewhere in the $16.6 million range, which, by historical standards, it's still very high.

When you think about the floor plan business, actually, a little bit of slowing helps us because vehicles stay on the lots longer.

So borrowings under our facilities end up being higher because of that.

You also look at some other factors.

I mean, I think average life of the vehicle or the average age per vehicle on the road is still about 11 years, so there's still probably a lot of pent-up demand there.

We are still a net acquirer of additional dealerships as you see some roll-ups in the industry occurring, and so that's helping us grow the business overall.

So we still remain pretty optimistic about the business.

We're heading into a busier season in the spring from activity on terms of new purchases.

And then in terms of sort of the Michigan market overall, we really have not seen any pullback.

I think the activity that you're seeing with the larger car manufacturers is having a halo impact across the Michigan market.

The Detroit market certainly is enjoying some resurgence, both in terms of job creation, real estate values, et cetera.

The auto suppliers that we work with still are going very strong.

And so we remain pretty optimistic about Michigan at large, including Detroit.

Okay, great.

And then a quick follow-up, just on the mortgage side.

You guys have now almost 3/4 of your originations are purchased.

But given that switch to purchase and expected purchases, I think you're still expecting to grow in MBA.

Do you still think that, that book will be down?

You can't outgrow that with just your better mix?

Yes, we're heading into the spring-summer buying season, and so from a mix perspective, that will help us a great deal.

But just the decline we saw in the first quarter was larger than we normally experience, it's possible that there were some clients that sort of pushed refinances into the fourth quarter, so that might have sort of helped volume in the fourth quarter, but hurt volume in the first quarter.

And so while we're expecting that business to grow for the remainder of the year, we're overcoming sort of the headwinds we had in the first quarter.

But to your point, the fact that we are more oriented towards purchase money will definitely help in the spring-summer buying season.

Your next question comes from the line of Geoffrey Elliott with Autonomous Research.

On the deposit side, when you start to see repricing kick in and betas kick up, where do you expect to see it coming through first?

That's been question that is often posed.

Remember, we're really in uncharted water here.

We've been in these very low rates for a very long period of time.

There is substantial liquidity in the system.

Once that liquidity begins to be utilized through economic expansion, then I suspect, at that point, we'll begin to see those betas begin to actually move.

As I said numerous times, we'll continue to say we're not looking to be the leader in repricing.

We'll certainly be competitive.

We've always been competitive.

And quite frankly, that's just the way we're going to follow it.

And then on the decline in balances in 1Q, can you just kind of help us understand how much of that drop is the normal seasonality?

It looked like a pretty big decline.

Does that sort of close to $2 billion drop in average deposits?

Is that what you normally see in the first quarter?

Or was there some competition taking deposits away and you just chose not to reprice to hang onto them?

I'm certainly not aware of competition pulling that away from a pricing perspective.

We do typically see declines in the first quarter.

I think it is important to note that this quarter actually was a $1 billion improvement over where it was a year ago.

Now remember, a year ago, we actually intentionally encouraged some deposits that exit because of the lack of capability, if you will, in terms of how they're treated under the LCR calculations.

We did not have that repeat here this particular quarter.

Yes.

And a lot of that volatility, those are corporate customers that we see.

Yes, that could have temporarily park some very substantial balances at the end of the year and they tell us in advance, that those will be with us for a week, 2 weeks and they're going to move them out, and that's very typical of what we see in December.

And then in early January, those ones move out.

Your next question comes from the line of Scott Siefers with Sandler O'Neill and Partners.

Dave, just actually a follow-on question on the deposit base.

So I think in your prepared remarks, you had made some comments about the way you sort of trended toward the end of the quarter, which looks like sort of a favorable outlook for the year.

Is your sense that loan growth will outstrip deposit growth this year?

Or do you see sort of such appetite on the deposit side that deposit growth would maybe even be stronger than loan growth for the full year?

Quite frankly, I hope that loan growth isn't that stronger than deposit growth.

We are sitting on, as you well know, a considerable amount of excess liquidity.

Deposits are so difficult to predict because, again, we tend to see large movements with some of these very large corporate customers.

But on balance, I assume as the economy continues to grow, you're going to begin to see in the industry an amount of that excess liquidity begin to be deployed into the businesses.

I think that will begin to happen, too, if in -- if uncertainty continues to improve overall because -- I think right now, as was said earlier, that there's a lot of caution out there.

People are waiting and watching to see, although the U.S. consumer confidence picked up, and that could help in a number of ways, especially the auto industry.

Yes.

Okay, perfect.

And then maybe if I could switch gears just secondly.

Maybe, Pete, on the energy portfolio, I mean, everything is pointing in the right direction.

We've got some stabilization in prices.

Do you have a sense for how rapidly you would be willing to draw down that -- the roughly 7% reserve here as we continue to look forward?

Scott, as you know, we've been releasing reserves on energy now for a few quarters and a lot of that has really been as a result of payoffs and pay-downs.

Now we're starting to see the risk rating upgrade.

And I think you're going to see that happen in an even bigger way this quarter.

We have the redetermination process occurring this quarter.

And of course, a lot of these credits are Shared National Credits, so they're a little bit sticky to upgrades.

So that whole process will probably take us through the end of the year.

So I think throughout the end of the year, we'll be -- as long as energy prices remain relatively stable, we'll be seeing upgrades and pay-downs [ approved ] as credits.

And therefore, there will be an opportunity for us to release more reserves on Energy.

The amount of those though are dependent upon a lot of factors, including loan growth.

And as you know, we had a -- our first quarter is the seasonal down quarter for us in terms of loan growth.

We're hoping we're going to see a fair amount of loan growth the rest of the year.

So some of that released reserves in Energy will get absorbed by, hopefully, some loan growth.

Your next question comes from the line of Dave Rochester with Deutsche Bank.

Just back on the deposits, not to beat a dead horse, but I know balances were down a little bit last year on both an average and in a period basis and were down this quarter as well.

I know there's some seasonality.

I know these are a little tough to predict, but it just sounds like you're thinking deposit growth trends could continue to be somewhat challenged just given the use of liquidity by businesses as the economy continues to ramp up, as you mentioned.

So should we expect at this point deposits decline this year as well maybe a little bit more just given that ramp-up in the economy?

I think it's reasonable to assume, Dave, that if the economy continues to grow, if -- and those funds do get deployed, that, yes, you could see some drop in those deposit levels.

Hopefully, in our case, we see that also move into loan growth as well.

But obviously, time will tell.

But I think it's reasonable to assume that, at some point, we're going to start to see those deposit levels begin to decline.

I know you have to maintain a certain level of HQLA.

How much cash can you reallocate into funding loan growth over time?

We haven't disclosed our specific percentage, but let me simply say I'm not concerned about that at this time.

(inaudible) loan-to-deposit ratio (inaudible) is about 82%.

Okay.

So maybe we see a little bit of cash flowing in, so loan growth incrementally over time, and then the rest will be funded by, I guess, wholesale funding?

Exactly.

As Ralph just said, if you didn't hear him, if you see on one of the slides there, we indicate our loan-to-deposit ratio is at 82% here a moment.

Yes.

And so in terms of how you're thinking about funding on the wholesale side, given your asset sensitivity, are you primarily looking at funding with overnights, or would you term some of that out a bit?

We have a variety of options depending on the need and what we see in terms of loan growth, what type of loan growth, et cetera, will drive how we make that determination.

Okay.

But safe to say it will probably be a mix?

I think that's reasonable.

And we've done that through a lot of ups and down over the years to manage that.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Question on the asset -- sorry, in the deposit beta, the Slide 13 that you guys have.

The $85 million from the December rate hike, you're assuming is 0 deposit beta, but a 25% deposit beta for the March hike.

I just want to make sure like the way I would understand that, that's just conceptual, right?

Because there's -- I believe that there's probably no fundamental reason why one should have 0 beta, one should have a 25% beta, like your rates go up and say, I don't know, September, they're all going to kind to have -- they're all going to be impacted in the same way.

Is that the right way to think about it?

I wouldn't disagree with that.

Okay.

So it's -- and this is just right now what your sort of best guess is, assuming low betas over the course of the year?

Okay.

We're trying to provide a conservative outlook.

Right.

Got it, okay.

And then just a quick question on the Energy portfolio.

Obviously, oil has been pretty stable.

You're releasing reserves.

Things are better.

In terms of loan growth in Energy, is it a matter that there's just not enough demand to grow Energy loans more aggressively?

Or is this more of a risk issue on your side that you don't want to grow Energy loans?

That's a very good customer base for us.

And over time, we will grow it.

It's a matter of balancing it with the overall portfolio.

Curt, do you want to add to that?

No, I think you said it well, Ralph.

It is a good customer base for us, and we're going to take care of our good customers.

And we are seeing some, what we call, new to existing opportunities as well as some selective new to new opportunities in the energy space.

But also, as Dave said earlier, asset sales, tapping the capital markets, et cetera, these companies that are still in existence are a lot stronger than they were before.

They have more options available to them, and so there is a little bit of supply-and-demand factor at play.

But again, we are seeing some select new opportunities.

We do believe that the -- if oil prices stay where they are or in this range, if rig counts stay high, the net portfolio will start to level off here at some point in 2017.

Your next question comes from the line of Bob Ramsey with FBR.

Just a quick follow-up on credit and reserve release, I guess, sort of taking your comments earlier and the guidance together, I guess it sounds like we should expect net charge-offs to exceed provision for the remaining 3 quarters of 2017.

How should we think about the pace of that?

With the spring redetermination, is more of that in the second quarter than the fourth?

I mean, is it more sooner than later?

Or is it kind of equal through the year?

Pete?

Bob, it's hard to pinpoint it.

Certainly, we expect the way redeterminations are going that there'll be a number of credits that we feel should be upgraded.

And to the extent that we feel comfortable upgrading them this quarter depends on if they're Shared National Credits or not.

And if they are Shared National Credits, yes, there is an additional process that we may feel like we need to go through to make sure that other people agree.

And so that process could take -- could push off some of these upgrades.

But also saying that there are credits that we're going through the process now that we probably aren't comfortable upgrading them yet.

We want to see, perhaps, another couple of quarters of performance before we're going to upgrade them.

So that's perhaps a long way of saying that I think the whole upgrade process could take us really through the end of the year as long as prices remain stable.

You might want to comment just overall your feeling of how strong the portfolio is today.

Yes, yes.

We're seeing a lot of strength there.

And we're -- companies are deleveraging, and they're deleveraging fairly quickly.

They're showing they have the ability to raise capital.

And they also have the ability to generate liquidity very quickly by selling assets.

So we're seeing a lot of good things in the portfolio right now.

Great.

One other question around loan growth.

I know you guys talked a lot about borrower optimism and the pipeline.

Industry-wide, it sort of seems like there's been a real deceleration in growth once you strip the seasonality out of it.

I'm just kind of curious, outside of the Energy and Mortgage Banker Finance books, if you think about year-over-year growth, have you all seen that same deceleration?

Or have things been more stable?

I think you're seeing the stable to up slightly when the need is there.

They are moving to take care of current demand, but not, in my terms, not investing in the future because the uncertainty that we were talking about earlier doesn't project that the economy is going to start growing at a more rapid pace than we are today.

Robert Dye, our economist, when you look at the various markets we're in and if U.S. forecast is about 2.3% GDP and [ 2 to 1 ] gets to 3, that's not a rapid increase to be thinking about for the future.

Curt, do you want to add anything to that?

No.

I think when you -- as you said, when you take out the seasonality of businesses, for us, that would be primarily our dealer business and Mortgage Banker Finance.

If you look at more their core business lines for us, I think I said it earlier in the call, there's definitely more optimism and our pipelines are stronger than they were 6 months ago, 12 months ago, but there is still caution out there, and that's got to translate into volume for us, but we're having good conversations with customers.

Some of those were in the early planning stages and some of those will translate into volume if we see the economy continue to grow and some of the things that are proposed by the administration may be coming to pass will help fuel that as well.

Okay.

And I guess, I know you said in March balances did start to grow again.

Is it your expectation that in the second quarter, you all are at that sort of positive 1% to 2% year-over-year average balance growth in total, everything all together?

I think we definitely feel more optimistic about the second quarter versus the first quarter just given some of the businesses that are seasonal in nature.

Mortgage Banker Finance and dealer should kick in.

But again, if you look at the pipeline we have right now and many of our core businesses, including the markets, Small Business, et cetera, then we are anticipating growth in the second quarter.

Your next question comes from the line of John Pancari with Evercore.

On the loan growth side, just want to talk a little bit about your normalized expectation.

So like as we see some of the benefit of, hopefully, some economic improvement under Trump and some business optimism materializing into loan growth, where do you think is a good normalized level in next year, should we say, when it comes to loan growth?

Are you still expecting more like GDP?

Or do you think now given the GEAR Up efforts and your rationalizing of your business base, everything, you could do GDP plus 100 basis points?

Well, how would you describe that?

I think that always a good bellwether for us is to grow in line with GDP.

And I think that's proven throughout various economic cycles to be the appropriate way to manage our balance sheet and protect us on the risk side as well.

Having said that, at any given time, there are certain geographies and/or certain business lines, it may grow at a higher rate than GDP.

But when you average out the portfolio, you take into consideration some of the seasonality in our portfolio in line plus or minus slightly, GDP is a really good measure for us.

Okay.

So that didn't change at all given the GEAR Up efforts and everything?

No.

Okay, all right.

And then, separately, in terms of betas, I know there's a lot of focus around what's going to happen...

John, we're having a hard time hearing you.

Sorry, can you hear me better now?

Yes, John.

Okay, sorry.

So on the beta set, I know there's a lot of focus on deposit betas, but how do you view the impact of intensifying loan pricing pressure?

I know you've got some of the big universal banks like JPMorgan and some of the super-regionals that are dialing up competitive pressure.

Is that something you expect could weigh on your ability to see rate hikes help your loan yield pricing as you move forward?

I think we've always seen the competitive environment and especially as Curt was talking about the slow growth environment that we've been in for the last number of years.

And going forward, we are very focused on building relationships for the long term.

And a lot of what we're doing in Europe supports that effort and provides additional tools to our people and additional time to our people to be able to develop those relationships.

And that's not changing in the culture of our institution.

And opportunities will be there.

And appropriate pricing, people will pay for the type of services they get, and that's a very important, and it's a very important part of our model.

Your next question comes from the line of Jennifer Demba with SunTrust.

This is actually Kevin on for Jennifer this morning.

Just a quick follow-up on Energy.

Do you mind just providing the cumulative loss in the portfolio to date since oil started declining?

I'm sorry, could you repeat that question again?

Sorry.

Can you just give some detail on the cumulative loss in the portfolio since oil started declining?

Cumulative charge loss?

Yes.

(inaudible)

And then they can figure it out.

Yes.

Yes.

Yes.

I don't have that number in front of me at this time.

Okay.

And then maybe, what's a good target for the size of your Energy book going forward as a percentage of loans this year?

Maybe trying to make it not as large as it was previously?

Curt, do you want to talk about that?

Yes.

We don't have a specific target that we're trying to hit.

We -- again, we're going to take care of our good clients.

We like the business.

We want to be in the business.

Having said that, I think we're comfortable where we are for the time being.

And that, I think, is about 4% of our total loan portfolio.

Your next question comes from the line of David Eads with UBS.

Maybe another just quick Energy follow-up.

When you guys gave the provision outlook for the rest of the year, is that just assuming that the energy reserve, that the reserve releases come down -- or come out related to the shrinking in the portfolio and the potential upgrades?

Or does that embed some level of reducing the reserve percentage from the 7% it is now?

Pete?

Yes.

David, it would be both.

We expect that we're going to be reducing reserves on the Energy portfolio as a percentage of the entire portfolio.

And that will be as a result of some payoffs and pay-downs, which certainly reduces the denominator, but also as a result of upgrades.

And that's really where you get the acceleration in -- we think a reduction in reserves is when you start to see the upgrades.

Okay.

That...

Actually, you're seeing things even on the criticized side and nonaccrual side that are acting very favorably for the future.

That's right.

And absolutely.

And so those credits, we expect that our criticized levels, probably by the end of the year, will be significantly lower than where they are now, which is still relatively high levels, 45%.

All right, great.

That's helpful.

On a different note, on expenses, if I strip out the restructuring charges this quarter, I've got you right at a 60% efficiency ratio for the quarter.

And just kind of thinking going forward, if the revenue outlook is a little bit better, are there areas where you guys might consider increasing investments and sort of thinking about expenses and efficiency more from the efficiency ratio standpoint and potentially investing more?

Or are you guys pretty set on thinking about it from the expense dollar standpoint?

I think we're pretty set on -- when we went through the whole GEAR Up process, we were looking at our model from a growth perspective and what we wanted to do in the future and rightsizing and making sure that we were putting our expenses in the most efficient way in the businesses that were most important and the support to those businesses.

So I think it all falls in line as we're moving forward.

Curt?

I might just add, Ralph, that in addition, part of our GEAR Up focus was to look for opportunities to do things better, smarter and faster and look at centralization opportunities for some of the tasks today that might be weighing on our relationship managers that we could remove from them to create more capacity.

So we feel good about our ability to increase volume on the lending side, on fee income side, et cetera, with the staff we have in place now because we have really looked at fundamentally changing with the way that we do business today, freeing up more capacity with our salespeople.

Your next question comes from the line of Brett Rabatin with Piper Jaffray.

Wanted to just go back to the tax rate actually and just the guidance around that.

You're essentially saying with the 33% for the rest of the year, no obvious additional impact from stock options and restricted stock.

Would it not be fair to assume that there would be some impact from that in the next few quarters?

Or can you give us some more color around what might transpire there?

Yes.

Brett, the challenge there is, to be quite frank, we can't really predict stock option exercises.

The best thing, that typically occurs in the first quarter, so we wouldn't expect anything through the balance of the year in terms of vesting of awards.

It would strictly be a result of option activity, which is totally driven by stock price and employee or former employees, retirees desire to prosecute transactions.

Okay.

So restricted stock for the rest of the year,[ this thing ] is limited?

I believe, it's exclusively first quarter here, first quarter of '17 and begin now first quarter of '18.

Okay, great.

And then also, I want to follow up on Technology and Life Sciences, kind of flattish linked quarter.

It seems like there's been some softer industry trends in that business maybe in 1Q.

Can you give us an outlook and then just what you guys saw in the first quarter?

Curt?

Yes.

I'd say that TLS states overall, the component that we have continued to see growth within has been our Equity Fund Services where we provide capital call and subscription lines to venture capital and private equity firms.

So that business has consistently been growing for us.

On more the traditional Technology and Life Sciences business, we saw some calls 12, 6 months ago in the business with a little bit of slowdown.

But I would say activity has definitely picked back up.

The IPO markets were stronger than they were.

So we are anticipating growth overall in TLS when you balance toward the traditional business and the Equity Fund Services business on a go-forward basis.

I don't have a specific growth target that I would share with you, but we continue to feel very good about that business longer term.

Your next question comes from the line of Scott Valentin with Compass Point.

Just a quick question on Commercial Real Estate.

It's not a big part of the portfolio, but the retail is about 11% of Commercial Real Estate.

And given the pressure we're seeing in that segment, any trends you're seeing?

Any concerns you have maybe with vacancies or rental rates?

Pete?

No, actually, our Commercial Real Estate portfolio is performing extremely well.

And it's heavily weighing toward Class A multifamily construction, and we like that product a lot because particularly how it performs not only in the good times, but in the downturns as well.

We do have a small amount of retail, but the vast majority of that retail is in what we call neighborhood shopping centers, so this would be the construction of small shopping centers, the patrons of which are within 5 miles of the center.

It's the grocery stores, restaurants, hair salons, that type of tenants.

And that portion of retail actually has been holding up pretty well and that would be a very large majority of that retail segment.

You might talk just a little bit about the customer base, the long-term customers that we do business with.

Yes, yes.

We're highly selective in terms of the developers that we're doing business with.

And I would say we're especially very selective about the developers that we're doing business with in the retail space.

It's a small handful of developers who are very high caliber, very strong and have proven track records.

Seeing a lot of equity now compared to the past as well upfront.

Yes, that's right, that's right.

And just on Commercial Real Estate, any thoughts there?

It's about, I guess, almost $5 billion.

It's been pretty stable.

Any thoughts that maybe given sounds like more equity, maybe underwriting is a little -- is more positive from your perspective?

Are you getting more down payment, maybe terms are better?

Is there any thought to maybe increase that lending segment?

Well, one of the things that's very important to us is the thing that Pete was just talking about, it's our long-term customer base that we have done business with for a long time and have a good relationship.

There is a lot of upfront there, and we're there for them.

But -- and they are doing new projects and moving forward, and we'll continue to provide for them and others that we know that have been not as aggressive during the period.

Okay, all right.

And then just a quick follow-up.

Another way to think maybe about deposit pricing.

I think, Ralph, you mentioned that the loan deposit ratio is around 82%.

At what point -- or how high can you drive that?

And secondly, at what point do you think that starts to put pressure on your deposit pricing that you still have to pay up maybe to keep deposit growth?

Well, I think, if we see the economy pick up and you start to see demand pick up, then I think we go into the mode that we've been in in the past in funding and layering in the funding that is there.

The competition for deposits will go up as well.

And that's part of the reason we use the beta and talk about the beta going forward.

But we've done it many times in the past.

And it's hard to predict exactly how that will happen and how fast it will happen, but we're prepared to appropriately do the funding that we need.

Okay.

And how high would you let the loan deposit ratio drift?

Could it going to be 95%, or is that too high?

We really haven't set a point for that.

If you go back in history, and I know history was a long time ago, at this point in time, it was not unusual to see banks above the 100%.

I'm not sure that, that will happen today.

Your next question comes from the line of Terry McEvoy with Stephens.

The first one would -- is it safe to assume that Comerica would expect to see a similar increase in loan yields from the rate hike we just had in March here in the second quarter, and that's based on what we just saw in Q1 following the December rate hike?

Dave?

The only caution I would put to that, Terry, is at the moment, LIBOR is actually trailing that FOMC rate rise.

It's about 3.5, 4 basis points behind at the moment.

We hope to see that gap close, but again, there's a lot of liquidity in the system, so that would be the only factor at this point.

It's not a huge number, but it's certainly an impact.

And then as a follow-up, do you expect to complete the remaining authorization on the buyback, the $139 million?

And I mean, the average diluted share count had some changes in Q1.

Any sense for what that number will be here in the second quarter?

Well, first of all, I'm highly confident that we will complete the remainder of that CCAR plan, that remaining $139 million at this point.

Share count, obviously, that buyback absolutely will be impacted somewhat by the stock price.

And then, again, in terms of actual shares outstanding, it's hard to predict how activity could impact that.

It's fully baked into the dilutive number today, although, again, that's impacted by share price.

Your next question comes from the line of Peter Winter with Wedbush Securities.

Just on the capital, it had a very nice solid increase in the first quarter.

And I'm just wondering, 2-part questions.

Do you guys target a capital ratio?

And then, secondly, I'm just curious how you think about dividends versus buybacks.

Because I look at the dividend payout ratio and you're a little bit below peers, and I'm just wondering how you think about that.

We haven't set a target that we've disclosed.

But historically, we've been very aggressive at returning both in dividends and on the buyback side and would foresee that we will continue to be aggressive with the opportunities that avail themselves.

Okay.

And then just a separate question.

The loan pipeline, which had a very nice increase, can you talk about what's driving that increase?

And then secondly, have you seen Small Business also contribute to that loan pipeline?

Curt?

Yes.

It is broad based, as I said earlier, across our business lines and across our geographies.

So it would include Small Business, as you just mentioned, Middle Market, Commercial Real Estate, Technology and Life Sciences, even some of our national businesses like our U.S. banking business line.

And also, in our -- as we head into the seasonal spring-summer, in our seasonal businesses as well, dealer and Mortgage Banker Finance.

So I wouldn't point to one business, it's sort of outrunning another, but it is broad based across our business lines and across our geographies.

Your next question comes from the line of Brian Klock with Keefe, Bruyette, & Woods.

Just a real quick question then.

Thinking about commercial loans and the Dealer Floor Plan book and your C&I book, so the first quarter was down a little bit, but then usually you guys have the pickup in the second quarter as more the -- you know, cars get that a lot.

Just wondering if you think about -- when we think about second or third quarter also, as usually when you get to pay-downs, when obviously, with the strong summer season, you get to selling off the lots, but it seems like the cars are sitting on the lots longer, so maybe just give us your thoughts on what you think that Dealer Floor Plan book might do.

Do you think it may actually not decline as much even though car sales are expected to decline a little bit this year?

I guess, where your thoughts on the Dealer Floor Plan book.

Well, I think as Curt was talking about earlier, it really depends on demand.

And we saw the consumer sentiment picked up a bit.

If that flows through, you'll see, I think, a buying increase in cars.

If it doesn't, then as you said and Curt said earlier, it will cause a slowdown and you will see more on the lots for longer.

It really depends what happens overall.

Curt, do you want to add anything to that?

No.

It's difficult to predict.

The third quarter is normally when we see some pullback and then we start seeing some acceleration into the fourth quarter as the new model year starts rolling out.

And assuming that these SAR rates would hold and the consumer confidence that Ralph alluded to earlier, then we would expect there to be decent volume across the industry in 2017.

As I said earlier, for the short term, if there is a slowdown, you don't necessarily see a drop-off in volume as cars just sit in the lot a little bit longer.

But that does eventually is where it will work its way out if you see a significant downturn.

But again, the SAR rate that's anticipated for the year, it's still very high on a relative basis.

I will now turn the conference back over to Ralph Babb, Chairman and Chief Executive Officer.

I would like to thank everyone for your time and your interest in Comerica, and I hope you all have a great day.

Thanks very much for being on the call.

Ladies and gentlemen, this concludes today's call.

Thank you all for joining, and you may now disconnect.