Comerica Inc (CMA) 2002 Q3 法說會逐字稿

Good morning.

My name is Tamara, and I will be your conference facilitator today.

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

All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you, Miss Arsenault, you may begin your conference.

Good morning.

This is Helen Arsenault, Director of Investor Relations.

I am here with Ralph Babb, Chairman, President and Chief Executive Officer and Beth Acton, Executive Vice President and Chief Financial Officer.

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 the risks and uncertainties that can cause future results to vary from expectations.

I refer you to the Safe Harbor statement contained in the earnings release issued today which I incorporate into this call as well as our filings with the SEC.

Now I'll turn the call over to Ralph.

Good morning and thank you for joining Comerica's third quarter conference call.

I want to say a few things about our recent announcement and about the factors that are shaping our future outlook.

After that, I'll turn the call to Beth.

First, I apologize that we did not have a conference call at the time of the announcement.

Now, before Beth gets into a detailed discussion of our quarterly results, let me say a few words about the topic of credit quality.

As you know, two weeks ago we announced a charge to our second quarter earnings because we determined it was more appropriate to reflect certain provisions and chargeoffs in the second quarter than the third.

And a charge against our third quarter earnings because of the effects of the slowing economy on our customers.

The decision to sell certain loans and the effect of the downed stock market on the valuation of Munder.

Based on what we see in the economy today, we believe we have written down and reserved appropriately for the broader credit issues that are affecting our portfolio.

We entered this year with a degree of optimism that the economy would begin to improve in 2002.

Many others shared that view.

Clearly that improvement did not materialize.

As we began to note in our conversations with you at mid-year, this year is going to end as it began, in economic mediocrity.

David Lookman, our Chief Economist, is looking for 3 1/2 percent real growth next year.

That would launch an economic recovery.

But David's outlook is highly dependent on continued high levels of government spending, non-economic issues being resolved and continued consumer spending.

As a result of these uncertainties, we expect our credit costs to remain at a somewhat higher-than-normal level for the time being.

We have a history of good performance as a manager of credit quality.

That is important as we work our way through the economic slowdown.

We are taking steps to direct added resources both in human capital and technology to this area.

Times like this cause us to look hard at risk and credit.

They also cause us to look hard at strategy.

Comerica has made a major strategic committment to business lending.

We believe that our approach to business lending offers the potential for above-average returns over the life of the economic cycle.

Clearly, a weak economy presents challenges but it also provides opportunities, in particular, for a bank like Comerica.

As you know, our core focus is middle market and small business banking.

These segments are very relationship driven.

Strong relationships mean continuity of business.

They mean high share of wallet and they mean relative security against competition from players who move in and out of the market as economic conditions change.

Even though the economy has gone sideways for many in our sector, Comerica has been through several turns of the economic cycle and in each down cycle, we have been able to make important progress.

This is the time when we cement our relationships with existing customers and this is when we typically capture share of market and share of wallet.

We like the geographic markets we're in.

This is time to build share in those markets.

Second, we are refocusing on our core strengths.

We have evolved beyond pure middle market lending into large corporate lending and areas beyond our central geographic focus in recent years.

This is a good time to reassess that wider business focus.

Let's take corporate lending as an example of what I mean.

We are a capable player in lending to large corporations.

This has been a profitable business line for us.

We intend to continue to grow it.

However, the large corporate lending business we will pursue must be business that also gives us opportunities to deliver multiple products and services to the customer.

Relationship-building products and services.

That's the arena in which we really distinguish ourselves.

Third, we are more focused than we have ever been on our individual or retail bank.

The individual bank is increasingly central to our ability to enhance our overall profitability and our growth prospects.

Comerica can evolve into the personal banker for individuals while leveraging business relationships.

We do that through an initiative we call connectivity.

We are taking steps to enhance our culture to focus our entire organization on selling the full range of products and services we offer and to ensure that whether it's asset management or trust services or a loan, all our lines of business are well integrated so that the package we deliver to the individual or business is complete and marked by superior service.

Finally, there is one other watchword that we intend to emphasize and re-emphasize in the months ahead and that's execution.

Even down here in the economic trough, we will sharpen our focus on credit, grow market shares and stick to fundamentals.

Now let me turn the call over to Beth to review the third quarter.

Thank you, Ralph.

Good morning, everyone.

This morning, we reported third quarter net income of $24 million, or 14 cents a share.

Included in the quarter is the previously announced charge for provision for credit losses and goodwill impairment of $293 million, $190 million after tax or $1.08 per share in the third quarter.

These charges relate to the continued uncertainty of a economic recovery that affects many of our corporate customers, as well as the impact of depressed equity markets on the valuations of our investment management subsidiary, Munder Capital Management.

Net interest income declined $3 million in the quarter or 1% to $528 million.

While earning assets were up slightly to the second quarter, the net interest margin declined 10 basis points to 4.46%.

The margin decline was driven by three items.

Compressed loan spreads, about 6 basis points, driven by lower fees resulting from reduced loan activity, higher interest reversal on new non-accrual loans, 2 basis points and lower contributions from interest rate risk management hedging, 2 basis points.

Non-interest income declined $6 million to -- excuse me -to $216 million, down 3% from lat quarter and 4% versus the third quarter last year, resulting primarily from the volatile equity markets.

Market-related fees, a combination of fiduciary income, brokerage fees and investment advisory revenue, were down $10 million versus the prior quarter.

This includes a $5 million impairment charge on deferred distribution costs at Munder.

Preliminary assets and their management at Munder totaled $29.8 billion at September 30 versus $31.5 billion June 30.

Securities losses of $6 million result primarily from domestic and international lending activities.

Majority of the losses relate to securities we received in connection with a loan workout.

The third quarter included a $12 million gain on [INAUDIBLE] Official Payments Corporation, otherwise known as OPay, was a 55% owned consolidated subsidiary acquired as part of our acquisition of Imperial.

The sale was completed in August.

Non-interest expense increased $84 million to $433 million as a result of the $86 million charged for goodwill impairment related to Munder.

The efficiency ratio was 57.7%.

Excluding this charge, the efficiency ratio for the third quarter was 46.3%.

Average loans were up 1% or $300 million over second quarter and 2% or $900 million from year-ago levels.

This compares favorably to overall commercial and investor loan growth for the banking industry, which is down 8% from one year ago.

Growth in our middle market and commercial real estate loans in the quarter were offset partially by a reduction in large corporate loans.

Non-performing assets were down slightly, $2 million, from last quarter to $636 million or 1.53% of loans and other real estate.

The concentration in non-performing assets geographically is Michigan and the national businesses 49%, California 30%, International, 17%, and Texas, 4%.

In terms of the industry concentration of non-performing assets, non-automotive related manufacturing represented 21%, services 12%, automotive 11%, and entertainment, financial services and retail trade, 6% each.

As of September 30th, our non-performing loans have been charged down to 59% of the original contractual value, compared with recent levels of 75%.

At September 30, non-performing assets were $633 million and consisted of three parts.

Six hundred twenty million of non-accrual loans, $116 million of which are held for sale, $12 million of other real estate and $4 million of non-accrual debt securities.

During the quarter, $276 million of loans were transferred to non-accrual, including $74 million of performing loans that were moved to held for sale.

The new and non-accrual loans consisted of 35 credits over $2 million.

Six of these credits are over $10 million, totaling $124 million and are in the manufacturing and service sectors.

The loans held for sale, $116 million, have been reclassified from loans to short-term investments and are reported as non-performing assets.

These loans, totaling 11 credits have been charged down to the market value as of September 30, resulting in $104 million of the $258 million total chargeoffs for the quarter.

Since quarter end, $47 million, or about 40% of the total loans held for sale, have been sold and are in the automotive, retail and service sectors.

Net chargeoffs to the quarter were $258 million, 65% of the chargeoffs were in Michigan and the national businesses, 21% in California, 11 from the international portfolio and 3% in Texas.

Looking at the industry concentrations.

Manufacturing, non-automotive related accounted for 27% of the chargeoffs.

Automotive 17%, retail trade, 12%, services 9%, financial services, 8%, and entertainment, 5%.

In terms of lines of business, large corporate represents about half of the quarter's chargeoffs and middle market about 30%.

The reserve for loan losses increased $27 million to $789 at September 30 and totals 1.90% of loans, up from 1.85% in the second quarter.

Net chargeoffs were $258 million or 244 basis points.

The fourth quarter chargeoffs are projected to be in the range of $60 million to $80 million.

The projected full-year chargeoffs to average loan ratio ranges from 108% to 113%.

Nonperforming assets of $636 million are 153 basis points of loans and other real estate.

We expect non-performing assets to be in the range of $550 million to $625 million at the end of the year.

The allowance for credit losses as a percent of total non-performing assets rose to 124% from 119% at the end of June and 105% a year ago.

Our total exposure, Argentina is $103 million, down from $115 million at the end of the second quarter.

Non-performing loans were $39 million, up $15 million from the second quarter, with net chargeoffs of $10 million.

Our total exposure to Brazil is $576 million, down from $686 million at the end of the second quarter.

Non-performing loans were unchanged at $5 million, and we have experienced no chargeoffs.

We expect our Brazilian exposure to be about $500 million by year end.

Moving to the funding side of the balance sheet, average deposits were up $1.2 billion, or 3% from last quarter, and up 5% or $1.8 billion over last year's third quarter.

The mix of deposit changed relative to second quarter as growth in title and escrow deposits and technology and life science deposits replaced wholesale funding.

Given the uncertain economic climate, we believe it is prudent to maintain a strong capital position.

At September 30, the preliminary tier 1 common capital ratio was 7.3% above the target of 7%.

We purchased a modest amount of shares in the third quarter bringing the total shares purchased year-to-date to approximately 3.5 million.

Our remaining authority for the stock buy back is approximately 5 million shares.

Now I'd like to update you on our current economic outlook.

Our recession watch index continues to indicate expansion over the next 6 to 12 months.

Annual average GDP growth in calendar year 2002 is likely to be about 2.4%, largely as a result of stimulative fiscal and monetary policies. [Light vehicle] sales for this year projected to -at a strong pace of close to 17 million units with price and finance-related incentives continuing.

Michigans' economy is projected to expand modestly this year but with a slower rebound for manufacturing and automotive supplier sectors.

Economic indicators in Texas have exhibited weakness recently, although we see the makings of a rebound in 2003.

In California, high tech remains weak while defense and housing, especially in Southern California, is strong.

Despite positive growth indicators in the economy, non-economic risks are overshadowing the fundamentals.

These risks include stock market volatility and it's impact on business and consumer confidence, potential war in the Middle East, international instability and a delay in the capital spending recovery.

Based on our near-term economic outlook, we expect minimal loan growth for the rest of the year and continued uncertainty related to the stock market.

We expect full-year earnings to be in the range of $3.40 to $3.50, assuming the economy remains unchanged from current levels.

Now we would be happy to answer any questions you may have.

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Mike Mayo with Prudential.

Good morning.

Good morning, Mike.

First, it's a real technical question.

I guess you have $116 million of loans held for sale.

You said you sold 40% of that.

So wouldn't that imply that NPAs would go down even below the range you gave for year end or are you seeing additional problems?

Or is my math wrong?

In other words, you have $636 million in NPAs, $116 million in held for sale and I guess you've sold some of those already.

So that would indicate that you could be as low as $520 million in NPAs in the fourth quarter and you gave a range from $550 to $625?

Inherent in our projection or outlook for the year-end NPA levels is an assumption that there will be inflow into non-accruals.

If you look at some of the detail we've given related to that, you'll see that there is a core amount that will come in and likely will come in in the fourth quarter.

So our range is an estimate, assuming some also inflow into non-accruals.

And are you guys willing to give any guidance for 2003?

Not at this juncture.

We're in the midst of putting our budget together, and we'll have an indication of that in January.

And how much of the special chart for the provision that was taken was due to the SNC exam?

Of the -- if you look at the chargeoffs in the third quarter, about 60% of those are SNC related.

And the NPAs?

About 46%.

About half.

Okay.

Half of both.

And just more generally, Ralph, I guess you addressed this.

You know, how you're treating corporate lending now.

And I think back to th on-site conference you guys had, I think it was May of 2000 and you had the whole special segment of syndicated lending.

If we had a conference today at Comerica, would we have the same segment or are you kind of getting out of this syndicated lending business?

Kind of a little more color on, you know, three-to five-year outlook for corporate lending.

If you look at syndicated lending today it's about 20% of our portfolio, that's down from about 38% at the end of the year.

Clearly were gonna be more focused on those relationships that provide us with the opportunity to have more than just a loan.

And while we can not totally exit that and that's not what I'm implying because we do have a lot of large customers who are in our markets who are very good relationships, and we need to be able to sell or sell down our exposure in order to keep the appropriate risks.

So we'll still be in the market.

But it's going to be much more focused than it has in the past.

So where do you make up for that growth?

In other words, if you're going to target this segment a little bit less, should we revise our longer term growth down or is there an offset there?

I think the offset is the focus in the middle market and the small business as well as the focus that I mentioned earlier in the individual and retail bank for growth.

If you look at the loan numbers while they're small at this point, in private banking and small business, which are both in the individual and retail bank, the growth has still been pretty good.

In addition, international, where our exposures there, as Beth mentioned, both Brazil and Argentina.

That exposure will continue to come down.

I would expect Brazil to come down to at least that $200 to $300 million range over time.

Argentina and lesser companies we will likely exit over time.

Mexico will continue to be a very important area for us as is Canada.

But again, it will be focused on those customers that do business here or businesses that do business there.

And we have a lot of that in the manufacturing sector, especially in the automotive.

And last question.

How are you dealing with the credit hit internally?

I mean, Comerica has always been known for having pristine credit quality and this charge seems to be a little bit inconsistent with the long-term culture.

Are there any changes there?

Are you going back and re-examining your risk culture more generally?

What are you doing?

We, as I mentioned, are adding resources to credit because of the higher levels of troubled credits at the moment.

But also any time we have situations where we have losses, we go back and look and learn from our experience.

So we will continue to upgrade our procedures and policies as we always have in the past.

All right.

Thanks.

Thank you.

Your your next question comes from Mike Holton with Key Rowe Price.

Yeah.

I believe right up front, you mentioned that you thought that the actions taken in the quarter, had you reserved appropriately and, kind a, written down the appropriate amounts.

You know, I think investors look at the reserve ratios, they really didn't change much from where they were at the end of the second quarter and you clearly were talking about the environment being worse.

So the question basically is, I guess, why not do more?

And that's it.

I think we felt relative to what we saw in the portfolio, what we did was appropriate given our economic outlook.

We have seen, if you look over a number of quarters, our allowance to loans go up a fair amount from a few quarters ago.

And also our coverage of the allowance, NPAs has also gone up from about 100% to 124%.

So I think based on our current assessment of the economic situation, we believe we have done what's prudent at the time.

Obviously if things were to deteriorate, that's something we'll have to address.

But based on our present assessment that the economy is not going to deteriorate, we feel comfortable with what we've done.

Your next question comes from Gary Townsend with Freedman Billing.

Good morning.

Most of my questions have been asked.

But one final thing.

How much goodwill remains at Munder under the distribution costs.

The -- in terms of goodwill remaining at Munder, there's about $100 million.

And in terms of deferred distribution costs that remain about - it's 20.

Thank you.

Your next question comes from Dennis Leplant with Fox Pit Kelton.

Thank you.

Beth, you were just a fountain of information when you were talking about credit quality, but I was not quick enough to get all the numbers.

So, if you don't mind, could you recap?

Of the $116 million, what was the aggregate write-down?

$104 million.

I'm sorry?

$104 million.

Okay.

So you're down about - so you're carrying those credits at about 50% of value.

Correct.

Okay.

How would you look at the whole -- your entire non-performing asset portfolio, the 636 at quarter end?

In terms of looking at -- in terms of charging it down from the percentage of contractual value, we're at about 59% and that compares with more recent levels of about 75%.

So I think we've made an assessment that is based on our economic outlook that it made sense to move forward and take those kinds of chargeoffs down to those kinds of levels.

Okay.

Now, you said there were 11 credits in the disposition portfolio and you've sold how much of that $116?

$47 million, which is 40%.

Okay.

And the -- and the goal is to get most of that off by year end?

That is our goal, to have is off by year end.

And how have you find the secondary market in terms of pricing?

It's been okay.

For some names better than others, obviously, and it fluctuates in terms of on a daily basis.

But we have been able to do this at a pretty expeditious fashion.

So far, so good.

And the marks are holding?

The marks are holding.

In aggregate, we are at a small loss, relative to where we marked it.

Okay.

And I have a couple of other things real quick.

On allocated reserves, where would you stand at the quarter?

You've been running between 15 and 17.

Yes.

We're at about 32% on allocated.

Okay.

That's great.

Thank you.

Thank you.

Thank you.

Your next question comes from Yon McDonald with UBS Warburg.

Beth, I was hoping you could comment a little bit on your outlook for the net interest margin, specifically in a flat-rate environment.

And also, if you could comment on your strategy for managing the rolloff of some pretty high-spread swaps that have been contributing to net interest income this year?

Yeah.

Let me comment first before we talk about margin.

Really, our goal is to dampen the adverse effects of interest rate movements on net interest income, not the margin itself.

So that's -- when we do all of our simulations, that's what we targeted, is dampening those effect - the adverse effects on net interest income and I think you see some of that.

And while earning assets were up and margins were down 10 basis points, net interest income only declined $3 million in that context.

But we put in -- and we factor in swaps coming due and swaps coming on.

In addition, we have looked at the opportunity to add some more net interest income stability from -- on balance sheet hedging, if you will, using securities, as opposed to off-balance sheet swaps.

That will help in terms of interest income, although it will, obviously, dampen the margin effect because we're actually using assets as opposed to using swaps, which are not on the balance sheet.

So if you looked at our margin, where we were in the third quarter, I would say we would be around those kind of levels for the fourth quarter.

Next year, as I mentioned earlier, we are putting our budget together so I don't have a lot of detail on that.

But I see us around the levels we were in the third quarter for the foreseeable future.

Okay.

And if I could ask Ralph with regard to his comments on the strategic reassessment.

Specifically, what exactly does the increase focus on - consumer?

What is that going to entail?

Are you going to be adding branches or expanding your footprint?

Could you elaborate on that?

We are adding branches.

If you look here in Michigan, I think we have 11 that are scheduled to open.

In California, we are still digesting the Imperial acquisition so we would not have additional adds there of substance.

Texas, we are opening new branches as well.

Those fit right in to our strategy to grow small business and private banking as well as the retail bank.

So we are in a growth mode, as you would expect us to be.

You be looking to do more lending as well on the consumer side?

We will continue to do the lending the way we do it today, which is, we focus on private banking.

We focus on direct lending like home equity.

Real estate mortgage, as an example, we do through an alliance and do not hold it on our books.

So we will continue to provide the full array.

We do the same thing with credit card to our customers, without holding it on our books of products.

But not necessarily.

We will not go back into those particular segments.

Okay.

Thanks.

Our next question comes from Fred Cummings with McDonald Investments.

Yes.

Good morning.

Good morning.

Ralph, can you touch on, seems like, this incongruency with what's happening in the automobile sector.

We have, you know, record sales.

What's going on with the suppliers that's presenting so much in the way of problems and what happens to your automobile exposure once, you know, volumes possibly slows down next year?

And how did you factor that into these chargeoffs that were taken here in the third quarter?

When you look at our automobile -- or automotive exposure, it's really in two categories.

About half of it is dealer-oriented.

And as you know, the sales have been very strong.

That particular focus of business is secured by the cars on the various lots.

So that's about half our exposure.

The other half is suppliers.

And many of those suppliers are smaller suppliers.

Which have a more difficult time, especially when you have a manufacturing sector that is refocusing on how it does business in a way in which it needs to streamline costs.

So smaller has a much more difficult time in staying competitive with the larger suppliers.

And that's part of what we're seeing in this environment, even though car sales are high.

And if it continues at the current rate, you'll continue to see pressure on that particular segment of the business.

Until it shakes out and consolidates.

So -- so that's -- this could be a source of, you know, higher chargeoffs and higher non-performers next year, depending on, you know, what happens with volumes or production activity in the automobile business.

And that's one of the things that we've focused on.

Especially in this current economic environment.

Okay.

And then one other question, Ralph.

With respect to your loan loss reserves, you're at 190 of total loans and based on your projected chargeoffs for the fourth quarter, that's 3.3 to 2 1/2 times your run rate for chargeoffs.

Should we expect you guys to -- on a go-forward basis match the chargeoffs with the provision?

Or will you continue to build reserves in here?

We will at a minimum match the chargeoffs.

And I would expect that we will -- in the short term, probably exceed it to some degree, especially depending on loan growth.

And then lastly,you know, longer term Comerica, your chargeoffs have been as low as 30 basis points.

And the historic high has been in the net 50, 60 basis point range.

Is it realistic to expect, for, as we look out to 2003, for chargeoffs to get back down to the range of 30 to 50 basis points?

I don't -- we haven't really gone through that in great detail as Beth said earlier, Fred.

But I don't believe the economy will change that dramatically to expect any kind of dramatic decrease in credit costs next year.

Okay.

I think, Fred, if you'll look at what we said for the kind of outlook for the fourth quarter's chargeoffs in the $60 to $80 million range, I mean that, -- that kind of range is not -- is -- is -- a level that we would see going forward for the next few quarters, I think, without having some fundamental change in the economic outlook.

Right.

Okay.

Okay.

Thank you.

Thank you.

Just a reminder, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from Leo Harmon with Allstate.

Hi.

Good morning.

Most of my questions have been answered, but if you could elaborate a little bit on the international credit exam and talk about whether or not the auto portfolio was disproportionately affected by that exam from both a charge out level and a NPL level?

The auto sector was not disproportionate in the exam.

And in general, when we made the comment on shared national credits, remember that we took certain actions that may or may not have been examination-driven.

Thank you.

Thank you.

Your next question comes from Jeff Davis with FTN Securities.

Good morning.

Good morning, Jeff.

Beth, you touched on this.

But I want to make sure I'm clear.

One is, what I heard you say is, the margin is likely to be flatish for the next couple of quarters.

I think that's a pretty good assessment.

Okay.

And then it sounds like you didn't build the swap portfolio in shifting non-balance sheet buying bullets or whatever and the securities portfolio, is that happened here since quarter end?

We are looking at that more incorporating securities as part of the hedging mix in the second half of the year.

It's part of a mix.

Okay.

Let's -- I forgot who asked the question, but assuming a flat-rate scenario right now, is -- what happens to spread income then?

Are we likely to hold in the $525 to $530 million range per quarter for the time being?

I think that would be a decent run rate assumption.

Okay.

Depends what happens, obviously, in the loan growth in your scenario of flat interest rates.

But obviously that's a factor.

Right.

Okay.

And what happens if the Fed trims the short end 25 or 50 bits.

Let's leave the volume equation out.

What happens to the margin.

I don't think there's a big effect again.

We look at - we're really focused on net interest income, not the margin itself and so that's what we're protecting for and that all gets figured into our equation when you do the simulations.

Okay and then just to confirm, you ran through the stats fairly quickly.

The outlook for net chargeoffs fourth quarter, $60 to $80 million?

That's correct.

Okay.

Very good.

Thank you.

Thank you.

Your next comes from K.C.

Ambreck with Millennium.

Good morning.

Thanks very much for taking the question.

Good morning.

I guess a lot of the questions today have tried to - have analysts trying to get their arms around the credit quality and I was hoping if you could, kind of, give us some color on whether the jump up in provisions the last few quarters are more preemptive in nature or catchup?

I think they're really recognizing, as we said earlier, on the economic turn.

When you look back at what we thought was going to happen in the year and rolled into the second half of the year, especially in the August / September time frame, things really began to come down.

And that's really what we're recognizing here in the credit quality.

And I think until that turns, you're going to find, as Beth said, we're going to have higher credit costs in that, kind of $60 to $80 million chargeoff range.

So it's really recognizing the changes in the economy and the stress that that puts on our particular customer basis.

Okay.

And then you also mentioned that you'd like to eventually exit Argentina.

Is that another cost down the road?

Or how -- should we look at that?

We will do that in a very orderly way working out with the customers that we have down there.

The - A lot of those customers, as you may remember, we have talked about, I think about 80% of them have ownership that are external to Argentina.

So we're hopeful that, over time, we'll be able to work out of those.

And we don't have local operations that need to be shut down or anything like that.

It's loans that are handled, managed out of Detroit.

And what about exposure to energy companies?

Anything new?

Talk about that a little bit?

Our energy companies are basically in Texas and are the smaller producers.

And our total exposure is about 800? $800 million.

And of that, most of it is secured.

Okay.

And then finally, on the -- could you kid of give us some sensitivity to the capital markets in relationship to the deferred costs at Munder?

The...

In what sense?

Could you --

Well, if the market went down another 10%, would that have a --

Oh, yes.

Two million dollar write-downs.

There's $20 million of deferred costs left.

Another 10 percent moved at $2 million and another 5 above and beyond that would be another million.

Okay.

Thanks very much.

Thank you.

Your next question comes from David Katz with Matrix.

Two quick questions for you.

One, obviously you have some short-term issues.

Taking it out the the intermediate term, do you think Comerica is broken or you get back to being an historically strong bank.

And then two, with the stock market down as much, all of a sudden, the dividend starts to looks high.

Obviously you're not paying out any more.

Have you affirmed the dividend at these levels?

I do not think things are broken.

We have gone through economic cycles before and we'll move through this one in similar stead and come back to the levels we have been at before.

The dividend, when you look at it today, obviously that is a Board decision, but if you look at the projection that Beth or the guidance that Beth gave, the payout ratio for the year would be a little over 50%.

And given the charges we've taken, I don't think that is an issue.

Thank you.

Your next question comes from Barry Cohen with Maverick.

Hi.

Couple of questions, just for some clarification, too.

First off, the syndicated loan figure that I think you quoted, I think it was about 20%, I think you mentioned?

Yes.

Now, is that of the entire net loan book of $40.5 billion or is that of the commercial loans and international loans that that figure is coming out of?

It is the total book.

Okay.

So essentially -- okay.

That's helpful.

The other thing is, you mentioned that Argentina and Brazil are mostly handled out of Detroit.

Could one guesstimate that most of those loans are then syndicate, given how the credits are written down in those markets?

There is a -- I don't know the percentage, but there is a lot of direct lending.

We do have a representative office in Brazil.

And we do about half of our lending down there is through banks.

Okay.

If that's helpful.

Yeah.

That is helpful.

Can you also tell us what the reserve level is for loans in Brazil and Argentina and how much equity is underneath those two business lines?

Uh-huh.

Beth, do you want --

In terms of Argentina reserves, it's about $40 million underlying the exposure there.

And in Brazil, it's about - uhm- we have about 5% of the $575 million exposure reserved.

Okay.

Okay.

That's helpful, too.

And, I guess, two more questions.

You mentioned that one should estimate that there's going to be, kind of like, zero or flatish loan growth for the, I guess, next several quarters.

Could you give us a sense as we look at your portfolio?

Is there going to be zero on a netted basis but there's gonna be growth in some areas and shrinkage in others and if that's the case, could you kind of walk us through a little bit?

If you look at really the footprint that we've had over the last year so you see several things.

One is continued growth in the middle market arena, also growth in the commercial real estate.

The large, corporate levels are down significantly from 12, 15 months ago, more than $1 billion.

The dealer business is up.

Small business is up.

International is down.

Again, a fair amount from looking at it a year ago.

Private banking is up.

The tech and life science business is down a little.

So I would say if you look at growth, Ralph mentioned the small business arena, we're doing well.

And, I think we'll target more growth there, the dealer continues to be good business for us.

International, we're refocusing.

Large corporate, we're refocusing.

And the middle market is the bread and butter of what we do and the commercial real estate portfolio has been performing very well and we're mindful that people are focused on it.

And we're managing that with very little issues.

So I would say that all of those are -- that's kind of the fabric.

Okay.

And then maybe somewhat of a philosophical question because someone asked this earlier and I kind of caught the back end of the answer.

So I apologize for not hearing it all.

When it came to the special charge or essentially reserving up the balance sheet, given how strong your tier 1 status is and given how strong your tangible comment to equity status is, would it not have been better to create clarity, perhaps, for shareholders or potential shareholders on your balance sheet?

And even if you were essentially being more aggressive than you think you necessarily need to in this economic environment, wouldn't it have been better to kind of like take the economy out of the equation and if the economy stays stable or better, just take recoveries through your P&L, rather than just having to second guess whether your economic thesis is correct?

I think you have to do what's appropriate during the time frame and be reactive to the current environment versus trying to be reactive to the future environment that way.

And that's the tact that we took.

The one thing, too, I want to make sure you understood, when about Beth was giving guidance on flat loan growth, she was really talking about --

This year.

Fourth quarter.

Right.

We've not really talked about next year yet.

And I'm not sure where the economy is headed, as we said earlier.

So that will be highly dependent on the economy.

All right.

Well, thank you very much.

I appreciate your help.

Thank you.

If you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from Jennifer Thompson, with Putnam Labelle.

Hi.

Good morning.

Good morning.

I was just wondering if you could give us some color on credit quality trends you're seeing in the old Imperial footprint?

Actually, Imperial, when combined with our bank in California, and you look at the trends has been - very much met our expectations.

The middle market has been strong.

Technology, as you would expect, has been weaker.

But overall, it's been a balance between the two when you look at credit quality statistics.

Okay.

Thanks.

And if you can stand another question on the margin, you know, given your outlook, I was just wondering what the trends you saw in the net interest margin in September versus August, was it basically stable?

I would say generally, yes.

Okay.

Thanks very much.

Your next question comes from Jason Goldberg with Lehman Brothers.

Thank you.

I think most of them have been addressed.

If you could, you've just -- one follow-up.

You mentioned about the expected uptick in NPAs in Q4.

Could you maybe give us some color in where those are coming from?

If you look, it wasn't an uptick it was a- .

When we talked about the level of the outlook we gave for year-end NPA, assuming that the loans held for sale get sold and there are a certain level of chargeoffs, which we also shared with you.

Based on an earlier question, my comment was that we've also assumed that there will be inflow.

And I think it will be across a number of our sectors.

If the economy continues to be weak, which it could very well be, then we will see -- and I think it will be across our sectors.

It will not be in particular segments.

Because, if you look broadly, the data we gave you today, this is not housed in a particular area.

It's across industries and across our geography -- geographic footprint.

So I think we're cautious in this climate to say we think there will be further inflows of new NPAs and I think it will be across the footprint geographically and industry.

Okay.

Thank you.

Your next question comes from Dennis Leplant with Fox Pit Kelton.

Thank you.

I thought I heard Tom Johnson whispering some things to you during the call so this could be addressed to him -or by him or Ralph.

Can you quantify the non-relationship piece of the $8 billion, and keep in mind that a significant part of the SNC portfolio, which you'd call that SNC of $8 billion are really club deals, at least that's how I interpreted a lot of your lending.

So can you kind of quantify that for us?

That's very true.

And historically, about 75% of that portfolio, we've had other relationships.

And so that goes back to your comment, Dennis, about club deals and the ability to develop relationships.

Also, 25% of it is originated by us on the dollar side.

So those are relationships as well.

That should give you a pretty good feel.

Okay.

So how much of the $8 billion that you see could run off because it's non-relationship in nature?

Well, if you say 75%, we have other business.

Then it could be as much as 25%.

Those numbers are a little bit old.

So -- but some were clearly in that range.

Do you have a target time that you expect that to try to get that done?

I don't.

Okay.

It's more do it in the appropriate way because that's very important.

And one follow-up because there seems to be some concern about the incoming non-accruals.

Over the last preceding three quarters, your run rate of transfer to non-accrual has been between $130 to $150 million.

I suspect that based on your commentary, you're not really expecting a major deviation from the next quarter or so?

No.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from Tim Ryan with CSAM.

Yeah.

Hi.

I just want to talk real quickly about the second quarter restatement.

Historically, you guys have been very proud of the fact that you aggressively charge things off.

So how do you reconcile that with the need to restate your chargeoffs in Q2?

Well, as we mentioned, the additional provision in chargeoffs, we determined based on a regulatory examination in one of our subsidiaries that it needed to be done and we did it.

But -- how do you reconcile that with the fact that you've historically said you were aggressive?

I mean, how did you miss this, I guess is the question.

Well - when additional facts come to light, you deal with the facts, and that's what we did.

Okay.

Thanks.

Thanks.

Your next question comes from John Coffey with Citigroup Asset Management.

Yeah.

I just wanted to clarify something about the reserves.

You said your non-performing assets are written down to 59 cents on the dollar and 32% of your reserves are unallocated?

That's correct.

What is the accountant's comfort level for unallocated reserves in light of a such a dramatic writedown of your non-performing assets?

I think if you look at the economic environment today, and you look at -- when you look at unallocated, it's to look at a lot of different risk factors in it.

And, obviously, as part of that, you have risk factors related to industries and economics and also related to things that develop.

Brazil is an indication.

Where is Brazil headed and how do we think of Brazil in the unallocated piece.

I think if you look at the total given where we are in the economic environment is being worse than it was even a few months ago, relative to our portfolio, then I think that makes sense.

Okay.

And then historically, say, over the last, I don't know, whatever time period you guys can give us, as long as possible, what has been the average write-down, you know, when you ultimately charged off loans on your commercial portfolio?

That's -- the number we had talked about is pretty consistent.

That marking it down to about a 75% level, percent of the contractual values is about right.

So when it's ultimately resolved or written off completely -- or when the loan is ultimately resolved, your loss is about 25% of the value?

25, 30.

Okay.

And is there anything substantially different in the mix today?

Relative to that historical mix?

I don't think so.

No.

Okay.

Thank you.

Your next question comes from Gary Townsend with Freedman Billing.

Hello again.

Hi, Gary.

Okay.

So we have $2 billion in non-relationship.

How much of that would be currently NPA?

I don't know that number, Gary.

Okay.

And if --

I don't know that it would be out of line.

I mean, nothing has popped up.

And would it -- you talk about disposing of it in an appropriate way or allowing it to -- selling it, disposing it, allowing it to run off, refinance, whatever, would it be safe to -- it seems to me that that's at least a multi-year process, at least two years to get it through the queue, wouldn't that be about right?

I agree with that, just as a ballpark.

Thank you.

Uh-huh.

There are no further questions at this time.

Well, thanks, everyone, for joining the call this morning.

We appreciate it very much.

Hope everyone has a good day.

This concludes today's Comerica conference call.

You may now disconnect.