Comerica Inc (CMA) 2002 Q4 法說會逐字稿

Good morning.

My name is Anthony and I'll be your conference facilitator today.

At this time I would like to welcome everyone to the Comerica's fourth quarter 2002 earnings release conference call.

All the 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, please press star then the number 1 on your telephone key pad.

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

Thank you.

Miss Arsenault you may begin your conference.

Thank you.

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.

A copy of our earnings release, financial statements and supplemental information is available on our web site.

Before we get started I would like to remind you that this conference call contains forward-looking statements and in that regard you should be mindful of the risks and uncertainties that could can future results to vary from expectations.

I refer you to the Safe Harbor statement contained in the earnings release today which I incorporate into this call as well as our finding - filings with the S.E.C.

Now I'll turn the call over to Ralph.

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

I'd like to take a few minutes to briefly review last year's results and let you know what we're most focused on at Comerica as we enter 2003.

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

As you know, 2002 was a difficult year for the nation's economy, for the banking sector and for Comerica.

We tackled and addressed a number of issues in 2002, issues that emerged in part from the slow economy and the weakness in the financial markets.

I think we have made progress in those areas, including credit quality but we will remain alert and disciplined as we enter 2003.

Our earnings last year should not obscure the fact that, on many fronts, Comerica took steps that will benefit the bank when our economy improves.

We are positioned for stronger growth.

First, our core commercial lending business generated modest growth at a time when many were unable to grow.

Our continued presence in the lending markets we serve in times like these helps us to capture market share.

We saw improved rates of growth in small business banking, private banking and retail transaction accounts, which translates into relationships.

We also saw a resumption of growth in new investment assets at Munder in part through joint efforts across Comerica, proving that our initiative to enhance teamwork and cross-referrals which we refer to as connectivity can help us grow these revenue-producing assets.

We took the steps we had to to take - to refocus and begin reducing our exposure in large corporate and international lending which thereby reduced our exposure to Shared National Credits.

Finally, we continue the process of investing company-wide in the technological capabilities that Comerica needs to ensure that it is well positioned to be an even stronger competitor when the economy improves.

We know the economy will improve but none of us knows when.

We entered 2003 with a great deal of economic uncertainty and risk.

This uncertainty has impacted our outlook for 2003.

We expect growth and credit quality improvement to parallel the economy.

And as I noted earlier, we will use this time to strengthen our fundamentals so that when the economy rebounds, we will be positioned for future growth.

During 2003, we plan to continue to refine our strategy to grow the individual and investment bank.

In 2002 we opened new branches, renovated existing ones, and enhanced the technology throughout the branch system.

This year we'll continue investing at similar levels to sustain our leading franchise in Michigan and capitalize on select opportunities in some of our other higher-end markets.

The branch network provides us the means of supporting our small business and private banking businesses in addition to our retail customers.

We also will continue to focus on connectivity, focus our technology spending to enhance the connectivity initiative and our portfolio analytics in the credit process.

We'll continue to lend in the current economic trough but we won't lend at the expense of credit quality and we will focus on improving our productivity.

We are confident in the underlying potential of our business model and the attractive markets we serve and now I'll turn the call over to Beth to discuss fourth quarter and full-year results.

Beth?

Thanks, Ralph.

Good morning.

This morning we reported fourth quarter net income of $206 million or $1.18 per share.

Because of the continuing slow economy during the quarter, we added to our reserve position and increased our capital ratios which I'll discuss later in the presentation.

Net income for the full year of 2002 was $601 million or $3.40 per diluted share, compared with $710 million or $3.88 per diluted share for 2001.

Net interest income increased $5 million or 1% from the third quarter, as the growth in earning assets, about 2%, was partially offset by a five basis point decline in the net interest margin from 4.46% in the third quarter to 4.41% in the fourth quarter.

The margin decline was due primarily to a competitive deposit rate environment during a period of decreasing interest rates.

Noninterest income was $254 million for the fourth quarter, compared with $216 million for the third quarter.

Market-related fees which include fiduciary income, foreign exchange, brokerage, and investment advisory revenue were unchanged for the quarter.

Activity-based fees, commercial lending, service charges and letters of credit were up about 5% from the third quarter.

Net gain from security sales contributed $57 million to the fourth quarter.

We took opportunities, given the very favorable fixed income markets, to sell some mortgage-backed securities which have a shortening average life from pre-payments to buy more predictable cash flows in terms of mortgage-backed securities, albeit at a lower coupon.

It provided us with a steadier cash flows looking out into this year.

Other non-interest income declined $11 million to $32 million, reflecting a $5 million loss on the disposal of loans held for sale.

A net $3 million write-down of private equity inventure investments and $3 million of lower income from unconsolidated subsidiaries and warrants.

Noninterest expenses were $373 million for the fourth quarter compared with $443 for the third quarter.

Included in the third quarter was an $86 million charge for goodwill impairment at Munder.

Other noninterest expense increased $13 million to $90 million, primarily reflecting higher legal costs, consulting expense for our enterprise-wide risk management program, and increased insurance premiums.

Average loans at $42.7 billion for the fourth quarter were up 1% or $400 million over the third quarter.

This compares favorably to the overall commercial and industrial loan growth for the banking industry, which is down about 7% from year-ago levels.

Growth in loans for commercial real estate and national dealer services during the quarter was offset partially by a reduction in large corporate loans.

As of year-end 2002, our loans outstanding to Shared National Credits were $7.8 billion or 18% of total loans.

This level is down from $8.2 billion or 19% of total loans since September 30 and $8.5 billion or 21% of total loans at the end of December 31 of 2001.

We will continue to monitor closely this portfolio and focus on relationships where we presently have other business or are confident we can garner additional business.

Nonperforming assets were down $61 million from last quarter to $579 million or 1.37% of loans and other real estate, compared with 1.54% as of September 30.

The concentration of nonperforming assets geographically is Michigan in the national businesses, 44%, California 32%, international 20% and Texas 4%.

In terms of the industry concentration of nonperforming assets, manufacturing non-automotive related represented 19%, real estate 12%, 2/3rds of the nonperforming real estate represented properties that are owned and occupied by our commercial customers.

Automotive represented 11%, Services 10%, followed by technology-related loans at 6%.

Shared National Credits represent about 25% of total nonperforming assets.

As of December 31, our nonperforming loans have been charged down to 60% of the original contractual value compared with 59% at September 30 and about 75% in recent prior periods.

At December 31, nonperforming assets were $579 million and consisted of $565 million of nonaccrual loans, $10 million of other real estate and $4 million of nonaccrual debt securities.

During the quarter, $185 million of loans were transferred to nonaccrual.

The new nonaccrual loans consist of 26 credits over $2 million.

Three of these credits are over $10 million, totaling $46 million, and are in the automotive and manufacturing sectors.

Of the $116 million of nonaccrual loans held for sale as of September 30, $115 million were sold during the quarter at a $5 million loss.

Net chargeoffs for the quarter were $82 million, 48% of the chargeoffs in Michigan and the national businesses, 32% in California, 17% from the international portfolio, and 3% in Texas.

And looking at industry concentrations, manufacturing in nonautomotive related accounted for 22% of the chargeoffs.

Technology-related, 16%, automotive, 13%, real estate 11%, and contractors 10%.

In terms of lines of business, the middle market represented about 48% of the quarter's chargeoffs and large corporate about 10%.

The allowance for loan losses increased $33 million to $791 million at December 31, and totals 1.87% of loans, up from 1.82% in the third quarter.

So up 5 basis points.

Beginning with the fourth quarter results, we have begun reporting the allowance for credit losses on lending-related commitments, which is defined as unfunded commitments and letters of credit, as part of accrued expenses and other liabilities on the balance sheet.

This allowance is classified separately from the allowance for loan losses relating to outstanding loans.

We have adjusted all prior periods in our financial statements to reflect this change.

Nonperforming assets as a percentage of loans declined to 1.37% from 1.54% at the end of the third quarter.

The allowance for loan losses is a percentage of total Nonperforming assets, rose to 136% from 118% at September 30, reflecting both lower nonperforming assets and higher reserves.

When we reflect on the credit date from the fourth quarter it does not suggest to us that the business climate is improving.

Turning to our exposure to Argentina is $91 million, down from $103 million at the end of the third quarter.

Nonperforming loans were $37 million which was down $2 million from the third quarter, with chargeoffs of $4 million and one new $2 million loan added.

Nonperforming securities were $4 million down from $8 million at September 30 reflecting a write-down to market value of the securities.

Our total exposure to Brazil is $506 million, down from $576 million at the end of the third quarter.

Nonperforming loans were reduced to $3 million due to a $2 million chargeoff.

We expect our Brazilian exposure to trend lower this year, reaching about $300 million by year-end 2003.

Moving to the funding side of the balance sheet, average deposits were up $2.9 billion or 8% from last quarter, and up 11% or $4 billion from a year ago.

Deposits from our title escrow customers continue to increase, up 27% to $8.6 billion.

Private banking and technology and life science deposits also experienced double-digit growth.

Noninterest bearing deposits increased to 34% of total deposits, up from 32% at September 30.

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

At December 31, the preliminary Tier 1 common capital ratio was 7.42% up from 7.32% at September 30.

During 2003 we expect the Tier 1 common ratio to be in the area of 7.5%.

Our outlook for 2003 E.P.S., is $4.20 to $4.40 and is predicated on an improving business climate.

With this as a backdrop, we see low single-digit loan growth, lower net margin given the current level of deposit rates, improvement in the nonperforming assets tied to a recovery of the business sector, net chargeoffs in the near term remaining at levels similar to the fourth quarter without an improvement in the economy, non-interest income tied to a modest recovery of the equity markets in pace of loan growth, and expense pressures that will center around a $25 million increase in pension costs, largely driven by lower return assumptions, a $14 million increase due to our election last year to expense options, and a $15 million -- and $15 million in enterprise-wide risk expenses.

And with that I'd like to open it up for questions.

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

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

Your first question comes from Gary Townsend of Freedman Billings.

Good morning, Gary.

Good morning.

How are you, Ralph?

Good.

Hello, Beth.

Good morning.

A couple questions.

The sale of securities in the year, what was the amount sold that generated 21 cents worth of earnings, and what was the average yield on those securities sold?

The average sold was about $2 billion, and the coupon varied but it was around 6-ish.

And you alluded to future impact on net interest margin.

Can you quantify that?

Yes.

Well, what we have said about the margin for this year is that we expect it to be lower, and really that's a function of a number of things.

Obviously, one is that we're kind of in uncharted waters here relative to deposit rates and elasticity so some expectation that there will still be a pretty competitive environment for deposits.

Obviously, the lower security yield that we just referenced will be a drag on this year.

Having said that, we are -- have begun last year and will continue to think about a higher percentage of securities in our asset liabilities management program, compared with swaps.

While that will hurt the margin, it will benefit net interest income which is really what we target in our asset liability program, is not the margin per se, but the absolute level of net interest income.

So we do see pressure on the margin this year from a variety of those factors that I mentioned.

But it will be a function of whereas set growth is and the mix of liabilities and deposits.

One other brief question, the size of your syndicated loan runoff portfolio is now what?

Well, in terms of Shared National Credits?

Correct.

As we mentioned in the -- earlier, the loans outstanding were about $7.8 billion dollars in the fourth quarter which is down about $700 million.

I think where we see ourselves strategic, so - we're down about 18% of our portfolio.

I was speaking to the non-relationship syndicated.

Oh.

Okay, I'm sorry.

On the relationship side, I think we're down somewhere around a billion dollars.

I think over time, you'll see that number could be anywhere from 500 to a million to a billion because there are times at which we're getting new relationships that that's all we have.

But our expectation would be working with new relationships, that if we can't garner additional business over a reasonable period of time, then we would exit those relationships.

So there will always be some non-relationship piece in the portfolio, but we have been working, as you saw, both large corporate as well as Shared National Credits down.

I think we'll continue to see some work-through of that, but the Shared National Credits are an important element for us to be involved with just to some extent and I think we will see us involved in that market,albeit at lower levels than we are today.

Ralph, when we spoke in October, we discussed the non-relationship runoff portfolio, and it seemed at the time that it might take as much as two years for that to roll off.

Are you ahead of schedule in terms of disposition?

No.

I think we're on schedule.

I think, as Beth mentioned, that portfolio now is about a billion dollars and I would expect it to roll down to about half of that amount.

But it will move back and forth, especially keeping in mind that it's not just large corporate.

It's also in the middle market and in our real estate markets, as well.

And it's important that we have that ability to develop customer relationships and sell down our own being able to sell to those that we buy from in order to limit our exposure.

So I think we're kind of right with where we expected to be.

Thank you very much.

Thank you.

Your next question comes from John McDonald of UBS Warburg.

Good morning.

Good morning.

Hi, John.

Hi, Beth.

I was wondering if you could give us just a little feel for how much margin pressure you expect this year, if you could quantify that a little bit?

And then also, you gave us some sense of guidance on the chargeoffs but how much reserve-building would you expect to be doing this year?

Related to the margin pressure, frankly, it is -- I guess where I characterized, we gave an earnings outlook and that earnings outlook can be delivered in a number of ways.

And I think we are faced with a situation as the industry is, as most business people are, with, I think, a time where it is extremely difficult to make forecasts.

And I -- so as a result of that, we have not given the fine detail by line item for each of the elements that go into the earnings.

Having said that, we gave you some guide posts about directional.

So at this juncture, I really can't quantify the margin pressure but there will be lower margins on average for this year than last year.

And the second question about reserves, as you saw, we increased reserves as a percentage of loans at the end of the fourth quarter.

Obviously, we will carefully monitor that overall level which was 1.87%, as we go into this quarter and next, and we need to make a judgment around whether things are improving or deteriorating.

It's in that context that we would decide whether that ratio needs to change.

And that's how we - And it will be a quarter-by-quarter look.

We're comfortable with where it is today, but as Beth mentioned, a lot will depend on where the economy goes.

At this point in time, we're not optimistic as to when the economy is going to begin to pick up.

Our observations and, David Litman, our economist feels that things will begin to pick up toward the end of the third quarter, end of the fourth quarter but with all of the gee owe-political overhang that is out there, it is very difficult to count on the numbers producing the kind of results that they would have historically.

So if the economy contends - continues to bump along here toward the bottom, that will clearly put more stress on the portfolio, and credit costs will remain high, and therefore reserves will need to be appropriately viewed as we move through the year.

And I think to reinforce what Ralph said, the data from our fourth quarter results, the credit data does not suggest that there is an improvement going on.

Okay.

Just a quick followup for Ralph, you recently established a new position, someone to manage your regulatory affairs and manage your relationships with the bank regulators and the securities regulators.

Uh-huh.

I was wondering if you could comment on your current relationship with the regulators and whether you've had any issues or are under any kind of regulatory action at this time.

We are not under regulatory action.

I believe we have a good relationship with all of our regulatory agencies, and we strife to produce that kind of relationship.

Jon Bilstrom, in the announcement of bringing him on in the new position, I think, in this particular day and time, with the amount of change that's going on and whether it be with the new requirements of the S.E.C. or [Sarbains-Oxley] or the New York Stock Exchange, it is very important that you be out front and making sure that you're in full compliance with all of the various new proposals, as well as tracking them.

And then ongoing, it is very important that we always monitor to make sure that we're out front in the compliance with all of the new rules and proposals.

And I believe that today takes the kind of emphasis of a full-time position, as well as the work of a lot of other -- of our areas in the bank to make sure that we are out front on those particular issues.

Okay.

Thanks.

Your next question comes from Roger Lister of Morgan Stanley.

Thank you.

Good morning.

Good morning.

Can you give us a sense of the trajectories in terms of nonperformers and I guess more importantly in terms of the watch list and the inflow of new names, and differences between say middle market and small business and differences regionally both between the midwest and California and then maybe between northern and southern California?

When you talked about credit not improving where do you see the bright spots and where do you see the weak spots?

Overall, and you referred to the watch list.

I would say that the watch list has been stable.

The pressure is really on those credits that are in the end of the watch list with the most stress, and it continues to be there.

And the longer the economy labors here, the more pressure it puts on that particular segment.

So overall, a watch list is not increasing, but those credits that have had issues continue to be the problems, and, you know, sooner or later, even though they have done a good job of getting prepared for it, whether that means reducing costs and paying down debt and so forth, you have to have additional sales and business in order to survive.

Clearly in the non-auto manufacturing sector, that's where we see the most stress, adding the two together, there is stress as well, especially on the consolidation and the focus on reducing costs in the overall output.

When you look at the regions that we're in, certainly starting with California, northern California has felt a little more stress due to the technology side, feeling it both in real estate and in the overall business climate.

Southern California has remained relatively strong in both housing, as well as the middle market.

Texas is, I would call stable, and has been, continues to be.

Michigan, we've seen a good rebound from two years ago, but still, there is significant pressure in the manufacturing sector here.

I think an important factor on -- you mentioned about NPAs in seeing NPAs to come down is to reduce the inflow of new.

And, I think, again if you look at the data we gave you, that the inflow of new nonaccrual loans in the fourth quarter was still at high levels so that will be the key to getting NPAs down.

Any signs of problems in commercial real estate?

No.

The - And we highlighted in the nonperformers, we did see our nonperforming assets in real estate increase in the fourth quarter, but as I mentioned earlier in my comments, that two-thirds of that increase was a function of what we call owner-occupied properties.

It's our commercial customers that we're financing their properties.

So it's really a function of the underlying weakness in our customer base in terms of manufacturing-type customers.

But other than that, there are a few examples here and thereof real estate problems, but they are small, relative to the overall portfolio.

We have a very granular portfolio, too.

About 80% of the mortgage portfolio, commercial mortgage portfolio, is less than a million dollars with the largest individual credit around $30 million, and about 40% of the construction portfolio is in the same, below a million.

So the granularity, as well as it's in primarily the markets where we are, we also limit spec-type lending and so I think we're fairly well-positioned,.

Having said that, if the economy continues to labor here, I think you will see issues in the industry, in the commercial real estate market.

Thank you.

Your next question comes from Jeff Davis of FTN Securities.

Good morning.

Good morning, Jeff.

Hey, not to beat a dead horse, Beth, I understand with your comment a different way to skin a cat and to get to the $4.20 and $4.40, but question, I know I'm sot of persona non grata on it, but on the swap book.

The swap story material component of your spread revenues, and we have heavy maturities this year, which means, I'm going to assume means, as we go into next year, we're - unless the economy picks up, we're going to have substantially lower swap income, and therefore lower spread income.

Is that something that you can really offset with a little additional security purchases given the spreads are pretty tight, or are we really going to have to see the Fed come in and raise rates later in the year and loan growth to pick up offset?

No.

I think within the context of the earnings outlook that we gave you, obviously, we have clearly factored in a variety of assumptions around the things that I talked about.

One of which is we were assuming a lower interest margin than last year so the fact that close to $5 million have swaps that have larger spreads on them are maturing, is already factored into the guidance - the outlook that we gave you on earnings.

So if -- yes indeed that's coming off, and that's the negative.

But it's factored in to how we manage our -- the hedging of our asset liability management, and we take action as we go through the year and see how asset growth comes, what the complexion of deposits look like.

We do the modeling on a regular basis so that we can continue to understand the impact to protect against adverse impacts of net interest income.

So that's all factored in, and to the equation within the context of the $4.20-$4.40 we gave you.

Okay.

Fair enough.

Thank you.

Thank you.

Again I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone key pad.

And your next question comes from Mike Mayo of Prudential Securities.

Hi, Mike.

How are you doing?

Hi, Mike.

I just want to understand kind of the run-rate earnings a little better.

I thought you said you had $3 million writedowns of venture capitals.

Do you expect venture capital to be flat going ahead or where does that stand and also that other $13 million of legal costs, consulting expense, higher insurance premiums.

Is all that one-time?

The -- go ahead.

The -- if you look at venture capital, we -- the $3 million was the difference between the third quarter and the fourth.

The absolute writedown was 4 1/2 million in the fourth quarter.

I think, again, depending on where the economy goes, it's a function of whether we have more that we'll need to take.

But in the scheme of things it's relatively small if you put it in that context.

You also asked the question related to other - legal and some of the other things we talked about, and in terms of the things that happen in the fourth quarter.

Insurance premiums will continue to be at higher levels for this year, and I think the increase we're seeing in the fourth quarter is indicative of where we're seeing into this year.

How much was insurance only?

How much was that increase?

It's just a small amount within the fourth quarter.

And in the scheme of -- again, it will be -- it's a small amount in the fourth quarter of both pieces that is we talked about.

In terms of the legal costs, those come and go depending on the quarter, what's happening in the business.

They just happen to be particularly higher in the fourth quarter.

So I wouldn't read any -- necessarily any run-rate kinds of things there.

I think the key thing we talked about on the expense equation for this year was the three elements that we highlighted, pension expense being up $25 million because of lower return assumptions.

The $14 million increase related to the election to expense stock options and we have quantified that the enterprise-wide risk initiative will increase costs about $15 million dollars this year.

So, I guess the question is, if you take out the securities gains offset by the loan sale, in other words 19 cents off of your $1.18 headline number you get down to 99 cents with those pension stock options and risk expenses.

That's another nickel off each quarter, you're down to a 94 cent run rate of earnings.

Tell me what I'm doing wrong with that analysis or maybe that's correct, and if you have a 94-cent run rate, we're talking $3.75 annual run rate number, which is far below the $4.20- $4.40.

If you can just -- if I'm making a mistake with that kind of core run rate quarterly number correct me, then separately, if that's correct, how do you get from $3.75 all the way up to from $4.20- $4.40?

As I mentioned before, the $4.20- $4.40 is a function of a number of assumptions inherent in that and it all relates around a low single-digit loan growth.

It assumes a lower net interest margin.

It sees credit quality improving from last year tied to an economic recovery, and it does see expense pressure.

So all of those things are factored in on the net interest income line, the noninterest income and noninterest expenses.

So those are all the elements that go in to help us produce the $4.20- $4.40.

Without giving you the exact elements and giving you an outlook for each of those, it's kind of difficult to go there.

I guess we're saying inherent in all of those assumptions, when we put it together, we're at the $4.20- $4.40.

Just a last followup.

Does anything else depress your quarterly earnings even a little bit?

You mentioned the legal costs come and go.

I think we have highlighted all the things that we did, reserves we took up.

We highlighted the noninterest income differences.

We highlighted the noninterest expense differences, quarter-over-quarter that were important.

So I think those are the major elements.

Okay.

Thanks a lot.

Thanks, Mike.

Your next question comes from Mike Holton from T. Rowe Price.

On the reserve front, if the economy improves as you all have incorporated on your plan, as your economist is speculating, would you anticipate adding to reserves under that scenario?

If the economy improves, I think if you go back to Beth's comments earlier, that improvement we're forecasting to be late in the year, so certainly, we've seen credit costs historically always lag the improvement in the economy by a couple of quarters at a minimum, maybe three-quarters.

So I would expect that the run rate continues to be at a higher level or at or around the fourth quarter-type level certainly around the first half of the year and trailing into the third quarter.

Okay.

And if we take that one comment and kind of incorporate that into the $4.20- $4.40 earnings guidance, if we're looking at a buck 05 to a buck 10 run rate, does that run rate hold throughout the year?

So kind of Q1-Q4 fall somewhere within there or could we see Q1 and Q2 weaker than that and you're betting on a second-half pickup?

Well, we haven't calendarized that forward, I mean, again, when you look at the various assumptions we have in the estimate that we gave you, we see things would get -- based on what Ralph said, would be a little weaker in the first half than the second half.

But again, it depends on how that all unfolds.

We're not expecting a significant ramp-up.

It is more of a gradual movement throughout the year.

Okay.

Your next question comes from Ken [inaudible] of Standler O'Neil.

Good morning.

Hi, Ken.

Just two questions.

I wonder if you can kind of go through what you did with the loan loss reserve again.

It looks like he transferred about $31 million the way I calculate it.

What was that all about?

The allowance for loan losses, from the past when you think about it, is now in two pieces.

The allowance related to outstanding loans is in the allowance for loan losses.

The allowance related to off balance sheet items like unfunded commitments and letters of credit which previously was incorporated into the allowance for loan losses, is now a separate component and is in other -- in accrued expenses and other liabilities in the balance sheet.

So --

Was I correct it was about 31 million?

It was $31 million at the end of the third quarter.

It's $35 million at the end of the fourth quarter.

And we laid that out -- we reflected all of that data, that separation, if you will, of those two into two different buckets in the prior periods also.

So they are consistent.

Okay.

And Beth, I wonder if you can explain a little more about this enterprise-wide risk expense.

It looks like it's going to cost you about 6 cents next year.

What kind of expenses?

The expense relates to really a number of fronts.

Before I talk about that piece, let me just talk about it in general.

As you know, for the banking industry in general, there is a move to get really banks to an even more quantitative and based on its own results focused for credit and operational risk.

Enterprise-wide for us includes credit, operational, market risk and interest-rate risk, and it's -- and those are a focus from [Bosley], the international regulators, as well as from the Federal Reserve.

And it's really taking those different -- those four aspects of risks and managing it and ensuring that we're managing it on a well-integrated way across the organization and linked to the determination of capital.

In connection with that, we've been managing all those risks I mentioned already.

It's a matter of providing a more formal governance process across enterprise-wide risk.

And in connection with both operational and credit risk in particular, working on developing better tools to measure and assess risks.

It's all about not changing what we do but using better tools to assess the risk we have.

This wasn't at all something that the regulators insisted that you put in as a result of an exam or whatever?

No.

This is, frankly, an industry-wide effort by the international and U.S. regulators for the whole industry.

In fact, there have been industry-wide meetings with the regulators on them talking about the importance of these efforts.

Besides the regulatory environment in any event, we think these are good things to be doing, as we've mentioned in some of our various filings.

These are things that we think make sense and are helpful in managing our process.

And just one final thing, I didn't hear you clearly when you said how much the goodwill impairment charge was from Munder this quarter.

There was none.

Okay.

Thank you.

Your next question comes from Dennis La Plant of Spot Pit Kelton.

Hi, Dennis.

Good morning.

I hope everything's well.

Just a clarification on two or three things.

Insurance premiums, I assume you're talking about property casualty not F.D.S.E. insurance premiums.

That's correct.

Okay.

Good.

Two is, you indicated that your loan challenges have increased in the real estate side related to the owner-occupied yet it's been your fastest-growing asset class over the last three years and it grew up 12% annualized this last quarter.

Is there some sort of connection with the relatively fast growth there and some of the deterioration you've seen?

Is there any change in underwriting going on in that segment?

No.

The underwriting standards are the same and in fact, I would say that we have had well-defined underwriting standards related to real estate for a long time so that we narrow the scope of lending to any particular project, that we ensure that we've got the right loan-to-value ratios, that we have other support.

We tend to not be project so much but focused on the relationships that we have.

And so therefore, there are additional kinds of -- whether they are guarantees or other corporate relationships that exist related to the real estate piece.

That's on the traditional real estate.

The other piece that I mentioned, the owner-occupied is really an outgrowth of our overall relationships with small and middle market customers.

It's financing not only their inventory and working capital but it's also financing their plants, if you will, and the properties.

And so the weakness that we saw in that -- in the nonperformings going up in the fourth quarter was really largely a function of the owner-occupied, which is not a surprise in the sense that we have weakness across our manufacturing customer base.

I understand that.

Many times when you lend to a middle market, small middle market or small business you take the real estate as collateral and therefore it gets classified as a real estate loan even though it may be being used for -- the proceeds, really, for cash flow.

I understand the nature of the lending, you've been doing it for a long time, but it's interesting that you're starting to see a creep in that segment of your nonperforming category and it's been your fastest-growing asset class over the last several years.

I just wanted to know if there's, in times when you take that incremental collateral on the real estate are you maybe taking on is that collateral trying to get too much comfort from taking that at this point, because it has been a very fast-growing asset class.

I think if you look at it in the context, while it was up in the quarter, it is still miniscule, the percentage of our - if you add all our real estate on the balance sheet between construction and residential and the commercial real estate portfolio -- mortgage portfolio, $11 billion.

So it's a small increase.

And I think it is reflective of what's happening with our small and middle market customer base.

Okay.

In terms of the 8-K filing you made in the latter part of the fourth quarter related to the restatements in the second quarter, and I want to get to the kind of regulatory action.

I acknowledge you have a good relationship with your regulators and seems to be a confluence of events and I just want to make sure, is there any risk between Jon Bilstrom coming on, the incremental 8-K disclosure, the restatements.

Obviously, investors are nervous about a number of things.

You've had a couple of your competitors, or at least -- industry brethren, have had regulatory agreements slapped on them for various things.

Are you currently in discussions where, even though you may have good relationships, that there is a risk of that, something coming on or is that behind you now and we're just moving forward into 03?

Well, I answered the question earlier about we don't have any agreement with the -- I think the question was the Federal Reserve.

We're always in discussions with our various regulatory agencies, but there are no agreements.

I understand that, but is that - are all those issues behind you now, related from their standpoint and we're just moving forward or is there still ongoing discussions going on in terms of risk measurement changes going on in the organization, and is there any risk of something coming on in the future?

Well, I'm not sure exactly how to answer that, Dennis, because, you know, you understand the banking industry.

We are always having discussions and examinations that move forward, and so foretelling the future is very difficult.

Clearly, the 10-Q I think you're talking about and the added disclosure that was in the 10-Q came up in a routine review by the S.E.C. which was doing the top 500, Fortune 500 companies, and we agreed to add to the disclosure that we had previously provided, and we did that and filed that accordingly.

And I don't know that I can go any further than that.

So from your standpoint, all of the restatement in the second quarter, the California issues, and the changes you've made essentially is, from your standpoint, behind you now?

I think we've fully complied with everything that's been brought forward.

Thank you.

Once again, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone key pad.

And your next question comes from John Otis of Deutsche Bank.

Hi, John.

Hi.

Good morning.

Good morning.

I just wanted to go over a little bit of what's going on in Latin America with Argentina.

How you view your reserves at this point?

Do you think there could be extra reserves or do you think there could be potential for additional reserves there?

And also on Brazil, your outlook for the asset quality there, do you think you'll remain as good as it is now, and to get down to that $300 million level do you expect to take any charges in that process?

Any what in the process?

Any charges?

Okay.

You faded out.

Sorry.

John, I think to start with Argentina, I think our reserves right now allocated to Argentina are about 46%, and that one is a country, over time, we will exit.

We have said in the past that nonperforming could increase there.

A lot of the customers we have there have foreign ownership, and we're working with that and feel comfortable with where the reserves are today.

But there is a lot of turmoil there, and we will watch that closely as we move forward.

In Brazil, we have about 9% of the outstandings allocated in reserves.

That's about 15% of the non-trade, and with what we see in Brazil today, the environment seems to be improving.

The new government in transition seems to be doing the right things, and that seems to be being accepted by financial community on a positive note.

So I think we're cautiously optimistic there, having said that, we will continue to let our outstandings run down and as Beth mentioned it should be close to $300 million.

There will be a base of relationship customers that we will have in Brazil longer-term because of the customers that we have, either Brazilian companies that come here or certainly the manufacturing companies that have significant operations in Brazil.

And we would like to continue to facilitate those customer relationships, but it's somewhere below that $300 million number.

Okay.

And that would just run down naturally, not through loan sales or...

That's correct -- it will run down naturally.

In fact, how it's run down from - when you look at it, it was over $700 million at the end of - a year ago, December of '01.

So we've been able to work it down to the $500 million level largely because, as we indicated before, a lot of that is trade-related and in fact, still there's about two-thirds of the outstandings that we have that is trade-related.

Over time, those are self-liquidating transactions and that's how we've been able to work it down.

And so what's bad flexibility with the trade relator, which is short-term focused, we think we can get down there without a lot of disruption with customers.

Okay.

Then another thing I was trying to figure out, you had mentioned potential reserve building in the first half, I'm assuming that means the provision would be exceeding the net chargeoffs, but then the economy out there you don't see it turning until the third quarter and perhaps the after call indicator's lagging.

Would that imply a peak in the net chargeup sometime in '04?

I don't think we mentioned reserve building in the first half.

I think what we said is if you look a the reserves we have presently, which we increased in the fourth quarter, that we will be looking at, obviously, as we go through every quarter to see what makes sense.

Based on our present assessment, we're comfortable at the 187 level of allowance to loans, which again is up five basis points from September.

I think we'll have to judge, as the quarters go on, if there is weakness continued.

If there's not improvement in the economy I would see us remaining at those kinds of levels.

If there's deterioration then we'll have to address whether there needs to be additional reserve-building.

Okay.

So it's sort of in the guidance you're giving, it seems like the provisions would just be tracking the net chargeoffs although there could be potential at some point to drop the provision below the net chargeoffs back to - late in the year?

I think we'll have to see how things develop in terms of the inflows of new nonaccrual loans.

That's the key indicator, and in turn them how nonperformers then subsequently chargeoffs fall off.

We will be cautious in addressing that and feel -- we'll want to feel comfortable that the turn has come and this is not just one quarter affect, and there is a lag between nonperformers coming down and chargeoffs.

So we'll see chargeoffs lag a bit.

But I think we'll want to be cautious in not making a judgment over just one quarter of good data.

Okay.

Thank you.

Thank you.

Your next question comes from Fred Cummings of MacDonald Investments.

Hi, Fred.

Good morning.

Good morning.

Ralph, just a longer-term strategic question.

Clearly Comerica has proven to be a little more cyclical than other banks here in the midwest, owing to your concentration in commercial lending.

You've talked about building up the branch network.

Ralph, might you and the management team consider getting back in the mortgage banking business, start emphasizing home equity business, home equity lending in a bigger way over the next couple years in order to make Comerica less cyclical to the economic cycle?

Because we've seen other companies in the midwest weather this downturn better owing to more diversified business mix.

What's your thoughts on that?

Fred, I think that we do home equity lending now to our customer base, both private banking and retail and we'll continue to do that.

We exited the mortgage business some time ago mainly because we didn't have scale.

We provide the products to our customers, but we do it through an alliance with Countrywide, and I don't see us getting back into that business, where I see the opportunity is through our branch network and through our small business and middle market in leveraging the number of relationships that we have with the individuals that are involved.

Both individuals with the companies, whether they be senior or individuals that work for the various companies.

And I think there is a tremendous opportunity there, as well as further leveraging those branches that we have in developing market share in markets outside of Michigan where we won't compete for the mass market.

But we have a real, I think, advantage in the local around the branch to be, what I would call, a very strong competitor, especially on the higher end.

And that's where we're focused and that's what we call the connectivity initiative.

And I think we're just beginning do tap that and we're having some real success with it.

And so you think even -- I know as we come out of this cycle, clearly you'll do better when, you know, credit quality costs come down and then your volumes pick up, but even longer-term, Ralph, you think you guys can generate, you know, pure return on equity and even growth rates given your current business mix over the economic cycle?

I think we can, especially when you reconfigure the portfolio as we're doing.

Taking down international, taking down the large corporate, and now when you begin to look at the mix, especially in the higher growth areas like California, which is now 30% versus only a couple years ago where it was at a 10% level, that the growth in those markets will add to the historical growth that we have, and I think that will bring us to the right level.

Okay.

Thanks, Ralph.

Thanks, Fred.

Your next question comes from Gary Townsend of Freedman Billings.

The question's been answered.

Thank you.

At this time there are no further questions.

Okay.

We appreciate it very much.

Thanks for attending the conference call, and we at Comerica wish everyone a happy new year and have a good day.

Thank you for participating in Comerica's fourth quarter 2002 earnings release conference call.

You may now disconnect.