Comerica Inc (CMA) 2003 Q1 法說會逐字稿

Good morning, my name is Mary Ann and I will be your conference facilitator today.

At this time, I would like to welcome everyone to Comerica's first quarter earnings conference call.

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

After the speaker's 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 one on your telephone keypad.

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

Thank you.

At this time, I'll turn the call over to Helen Arsenal, Director of Investor Relations.

You may begin the conference.

Good morning and welcome to Comerica first quarter earnings conference call.

This is Helen Arsenal, Director of Director Relations.

I am here with Ralph Babb, Chairman, President and CEO; and Beth Acton, EVP and CFO.

A copy of our earnings release, financial statements and supplemental information is available in the Edger section of the sec's website as well as on our website.

Before we get started, I'd like to remind you that this conference call contains forward-looking statements and in that regard you should be aware of 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 in to 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 first quarter earnings conference call.

I'd like to Mac a few comments and ask Beth to review the first quarter results.

Throughout the first quarter, Comerica focused on strengthening its course strategy, relation ship-based middle market lending and continued to lend during the current economic environment.

Our loans and deposits grew as we deepened current relationships with our connectivity efforts.

New branches and branch refurbishments are in the works to help us meet the needs of our small business and our private banking customers.

We are actively controlling our expenses.

As I said in January, this year, we're working on strengthening our fundamentals so we'll be well positioned for growth when the economy rebounds.

Recent credit trends have served to reinforce our efforts to enhance our risk management processes.

For example, we are now implementing a system to enhance measurement and management of credit and operational risk and we're confident these initiatives will pay off significantly over the long run.

Nonetheless, we are not immune to the world in which we do business.

Loan volume is growing, but not accelerating and there is fierce competition for quality loans, thus adding to margin pressure.

From our vantage point, economic conditions have weakened.

The uncertain economic and geopolitical environment affects our customers' borrowing decisions and for number of them challenges are cash flow.

In addition, the weak equity markets affect our assets under management.

By extension, our performance is affected.

There are a number of unknowns that will affect our performance in the near term and it is hard to predict when our customers will start investing and borrowing again.

Given the unusual economic and geopolitical uncertainties, Comerica will not provide a full year's earnings per share outlook.

We'll continue to provide trend and sensitivity information as we expect growth and credit quality to parallel the economy.

Beth will talk more about that in a moment.

We are confident in the underlying potential of our business model and the attractive markets we serve and we will continue to use this time to strengthen our fundamentals so that when the economy does rebound, we're well positioned for strong growth and loans , deposits and non-interest income.

And now I'll turn the call over to Beth to discuss first quarter results.

Good morning.

Thank you, Ralph.

Today we reported first quarter 2003 net income of $176 million or $1 per share compared with $206 million or $1.18 per share in the fourth quarter of 2002.

I'd like to discuss in more detail the first quarter results.

Net interest income of $511 million decreased $22 million from the fourth quarter.

While average earnings assets were virtually unchanged, the net interest margin declined 11 basis points to 4.30% in the first quarter from 4.14% in the fourth quarter.

The margin decline was primarily due to the ongoing restructuring of the investment portfolio and a narrowing of commercial loan spreads.

During the last two quarters, we restructured the investment portfolio by purchasing securities with more stable cash flows to insulate it against rising rates once the economy improves.

As a result, the investment portfolio carries a lower yield.

Non-interest income was $220 million for the first quarter, compare d with $254 million for the fourth quarter.

Market related fees which include fiduciary income, foreign exchange, brokerage, and investment advisory revenue were up approximately 3% for the quarter.

Activity-based fees, service charges, commercial lending, and letters of credits were virtually unchanged from the fourth quarter.

Net gain from security sales contributed $13 million to the first quarter compared with $47 million -- excuse me, $57 million for the fourth quarter.

Other non-interest income increased $8-40 million reflecting several factors. $5 million of incremental income from ongoing hedging activities, the absence of any loan sales in the quarter, the fourth quarter included a $5 million loss on the disposal of loans held for sale.

These two items were offset partially by $2 million of incremental of net write-down of venture capital and private equity investments.

Non-interest expenses were $367 million for the first quarter, compared with $373 million for the fourth quarter.

Salaries and employee benefits were up $8 million in the first quarter, largely explained by higher pension expense.

Other non-interest expenses decreased $17-73 million reflecting the absence of certain large expenses that were seen in the fourth quarter.

Average loans at $43.5 billion for the first quarter were up 2% or $800 million over the fourth quarter with the largest growth coming from California.

The international portfolio remain unchanged, quarter over quarter at $2.8 billion, though we continue to focus on reducing our exposure to Argentina and Brazil.

Our exposure to Argentina is basically unchanged at approximately $90 million and our exposure to Brazil is down $67 million to $444 million at March 31.

We expect to further reduce our Brazilian exposure to $300 million by the end of this year.

For the business bank, loans were up $500 million in the first quarter, reflecting growth in middle market and national dealer services, those combined about $1.1 billion which was offset partially by a reduction in large corporate loans, $700 million.

The individual and investment bank experienced loan growth of $300 million during the quarter.

At the end of the first quarter, our loans outstanding [Inaudible] national credits were $7.5 billion or 17% of total loans.

This level is down from $7.8 billion or 18% of total loans at year end 2002.

And $8.4 billion or 20% of total loans at March 31, 2002.

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

Nonperforming assets were up $62 million from last quarter to $641 million.

The concentration of nonperforming assets geographically, Michigan and other markets, 51%, California, 28%, Texas, 6%, and international 15%.

Nonperforming assets by line of business are middle market, 43%, large corporate 15%, global finance which includes loans to companies located in foreign countries as well as U.S. subsidiaries of foreign companies, 14%.

Small business 9% and commercial real estate 7%.

Shared national credits represent about 25% of total nonperforming assets.

As of March 31, our nonperforming loans have been charged down to 60% from the original contractual value unchanged from year end.

The nonperforming assets consisted of $624 million of non-accrual loans, $13 million of other real estate and $4 million of non-accrual debt securities.

During the quarter, $187 million of loans were transferred to non-accrual.

The new non-accrual loans consisted of 21 credits over $2 million.

Five of these credits totaling $106 million are over $10 million and are in the transportation, real estate, manufacturing, professional services and whole sale trade sectors.

The level of nonperforming assets in the first quarter is consistent with the first three quarters of 2002.

The reduction in nonperforming

assets during the fourth quarter resulted from significant loan sales.

Net charge offs for the quarter were $96 million. 48% of which were in Michigan and other markets, 27% in California, 20% from the International portfolio and 5% in Texas.

Looking at net charge offs by line of business, the middle market represented 47%, large corporate 23%, global finance 19%, small business 5% and technology and life sciences 3%.

The concentration of nonperforming assets based on industry classification is manufacturing 19%, professional services 11%, real estate 10% and transportation and automotive each at 9%.

Net charge off industry concentrations are technology related which includes loan in both our technology and life science line of business as well as technology-related loans in other businesses that was 16%, manufacturing 16%, automotive 14%, and finance and entertainment each at 7%.

The allowance for loan losses increased $10 million to $801 million at March 31 and totals 1.88% of loans up slightly from 1.87% At December 31.

The allowance for credit losses on lending-related commitments, which are letters of credit and unfunded commitments decreased slightly in the first quarter to $34 million.

Reflecting weak economic conditions nonperforming assets as a percentage of total loans of the real estate and non-accrual debt securities increased to 1.51% from 1.3% at the end of the first quarter.

The allowance for loan losses is the percentage of total nonperforming assets decrease to 125% from 136% at December 31.

Moving to the funding side of the balance sheet, average deposits were up $200 million or 1% from last quarter and up 14% or $4.8 billion from a year ago.

Deposits from a Title and Escrow customers in the financial services group are up 63% or $3.2 billion from year -ago levels.

Commercial real estate, technology and life sciences and private banking deposits also experienced significant growth over the past year.

Un interest bearing deposits represents 33% of total deposits.

We believe it is prudent to maintain a strong capital position.

At March 31 the preliminary tier one common capital ratio was 7.44% up from 7.39% at December 31.

During 2003 we expect tier one common ratio to be in the area of 7.5%.

Our outlook for the second quarter 2003 includes modest loan growth, lower net interest margin, net charge offs and nonperforming assets remaining at levels similar to the first quarter and expense pressures related to pension costs, the expensing of stock options and our enterprise -wide risk management program.

Due to the unusual economic uncertainties, we will not provide full year earnings per share outlook for the year.

We will continue to provide trend information as we furnished today.

I'd be happy to answer any questions that you may have.

As a reminder, if you have a question, please press star then the number one on your telephone keypad.

We'll pause for a moment to compile the q & a roster.

Your first question is from Gary Townsend of Friedman Billing Ramsey.

Good morning Gary.

Good morning and Ralph how are you today.

I am doing all right.

Just having gone thru the numbers.

I noticed that average deposits fell sequentially.

Was that due to any reduction in title escrow balances from the fourth quarter or -- what am I missing?

Title escrow was down about $300 million, Gary, on average quarter-to-quarter and there is seasonal aspects to it, too.

But the financial services groups were down about $300 million.

Okay.

Thank you.

Thank you.

Your next question is from Jeff Davis of FTN Security.

Good morning.

Good morning, Jeff.

Beth, could I get more color on the restructuring of the securities portfolio, what's going on there and secondly, does that include what have you done with the swap book this quarter on the restructuring there?

In terms of restructuring the swap book?

Yeah, let me talk about first about the investment portfolio.

We took actions in the fourth quarter, later in the fourth quarter as well as again in the first quarter to really purchase self-securities and purchase securities that had more stable cash flow that had less extension risk in once the economy turns and interest rates begin to rise.

So it's really finding -- selling certain securities and finding ones that have more, as I said, stable cash flow.

So more things like planned pack-related securities or hybrid adjustable rate mortgage-type product.

It's product that has more consistent cash flows.

And in terms of the swap book, we're just doing the normal thing of, as they roll off , replacing them with new.

And our typical swap book would be two to three-year kinds of swaps.

Okay, but you're not, unless I'm looking at the release incorrectly, you're not bulking up the balance sheet with the material amount of securities, correct?

No.

There has been -- the numbers because of changes in the fourth quarter and first quarter because of sales and purchases have had some -- the numbers look a little different because of the activity that's gone on , but I would say there's a gradual trend up a little on securities , because we are -- have been using them and are using them a little more in our hedging activity, but not in a major way.

Okay.

I know the hedging's a dynamic process, but the swap piece that rolls off this year, I guess in effect , what I'm hearing you say you're not going to try to offset it by doubling down or tripling down on securities on balance sheets.

What goes away goes away?

That is correct.

Again, through the modeling process, we look the our sensitivities there and make judgments around our hedging activities.

We have, as I said, on the margin, if you will, are using securities in a little more in that fashion, but not in a material way.

Okay.

Then Beth, did much of the swaps mature this quarter?

I know the swap income was up a little bit, but we had the full quarter impact of the rate cut last quarter, which I seen flowed through.

That's correct.

Did much mature this quarter or do we get more into the maturities next quarter.

It's about a billion a quarter.

Very good.

Thank you.

Your next question comes from Don McDonald of UBS Warburg.

Good morning.

Hi, John.

Ralph wondering if you could give us an update on your strategic thinking of the business model, the balance between small business, commercial lending and consumer and whether there's a change in your geographic focus.

There's no change in the geographic focus on those particular items.

I think the major change, if you look at the slide that Beth spoke to on loan balances, you'll note that large corporate and international are down from last year about 1.7 billion.

And there we are continuing to refocus into that small business middle market relationship focus that we've spoken to in the past.

How about on the consumer side in previous calls you mentioned a little bit more of a focus on consumer.

Is that something you're still thinking about?

What I was speaking to there is balance in opening branches in Michigan, Texas and California.

Along with the growth in the markets, specifically in Michigan, we are a large full-service bank and , therefore we grow with the market in order to gain and Garner market share in the consumer side.

In Texas and California, we locate the branches strategically first for small business and then we leverage that on the individual and investment bank side around that location.

And that's not changed.

But that will provide better balance to us in the future.

Okay.

Second, wondering if you could give us an update on your relationship with the regulators.

You mentioned in the 10-K the possibility of facing higher deposit premiums.

I was wondering if that was a generic statement or that reflects your outlook for may be changing [Inaudible] rating or other discussions that you're having?

No, that was not focused on us specifically.

That was an industry comment because of the discussions in the industry about where the FDIC is going and what they may or may not have to do in order to maintain reserves.

Okay.

Last thing for Beth, do you have any expense cut opportunities?

You mentioned the higher pressures you're facing on number of funds there, do you have some room [Inaudible] some place in the organization.

We are, as Ralph mentioned in his introductory comments, closely monitoring expenses and are being very cautious in terms of adding and replacing people.

That's a big part of our expense base obviously.

Also, traveling and entertainment, we're literally across the whole organization making sure we are carefully monitoring expenses.

Thanks.

Thank you.

Your next question comes from Fred Cummings of McDonald Investment.

Good morning, Ralph.

Good morning.

Can you elaborate just a bit on the new inflows into the non-accrual, the 185 million, in terms of; is that the industry sector, where is that coming from?

Particularly interested in your automobile supplier portfolio and any incremental weakness you might be seeing in your commercial real estate business.

A couple thing there's I could comment on.

One, the inflows in the first quarter into new non-accruals are pretty consistence with the fourth quarter in terms of the size.

And they are pretty reflective, I would say, as they were in that quarter with our geography -- with our geographic footprint and also across industry sectors.

It is not contained solely in one area.

And think if you looked at the data, too, you would see our automotive charge offs as a percentage of the charge offs is in fact a little less than automotive represents as a percentage of our portfolio.

It's not housed in automotive, it's across all of the manufacturing sectors and really the detail we gave you across the industry sectors.

There's no lumpiness, if you will.

It's pretty broad.

Then commercial real estate, that continues to hold up pretty well for you?

It does.

The non -- in the commercial -- in the real estate construction arena, we did have an increase in MPA s, nonperforming assets of 2 million quarter over quarter that is one project only relates to a California condominium project that we don't anticipate significant loss on.

That is one project.

It's not across a number of them.

We don't see -- we think that area is holding up quite well.

One last question.

With respect to the loan growth you're seeing, particularly in middle market was fairly strong this quarter, what's your sense as to why you're getting that business?

How -- I know the pricing environment is pretty competitive out there.

Do you believe that this is a function of your consistent calling efforts?

Are you pricing more aggressively, what are you doing differently to generate this type of growth?

Yeah, I would say it is a reflection of the approach that we have taken for a long time and execute very well on the relationship management front.

In some instances we've been calling on prospects, if you will, longer than the relationship manager of the bank that handles them has.

These are not things that drop into our lap and suddenly we have an opportunity.

These are relationships we've been developing for a period of time.

And we are able to capitalize on opportunities where other banks have had turnover or a change in strategic direction or just haven't been responsive.

And that is frankly the hallmark of what we do.

Okay.

Thanks, Beth.

Your next question comes from Brian Hagler of Bank of America.

Good morning.

Good morning Brian.

Can you tell us what we expect the margin to decline to a similar degree in the second quarter as it did in the first and also what data points can you give us to give us confidence that credit costs are going to remain stable and the second quarter to the first quarter.

On the margin, we believe there will be decline in the margin in the second quarter and it will be impacted by a couple of, really, the things that impacted it in the first quarter the restructuring of the investment portfolio as well as continuing competitive situation for loans and deposits.

I would say directionally that the degree of decline will be pretty similar to the first quarter.

The second you had was related to credit quality and the data point there's.

If you look at the first quarter data, it would indicate to us that credit quality is not improving, but it's also not deteriorating.

We see our watch list, for instance, the loans we watch carefully, as a percentage of loans isn't growing.

It's not reducing either, but it's not growing.

And the inflows continue, though of new nonperforming assets continue at a relatively high rate.

So I think based on not seeing a -- our watch list grow, that I think we're pretty comfortable that the second quarter looks a lot like the first quarter.

Thank you.

Thank you.

Your next question is from Steve Wharton (ph) of [Inaudible].

Good morning, Steve.

Good morning.

A couple quick questions.

The first one I just wanted to make sure, if you can refresh my memory, is there any seasonality in your fee revenue in the first quarter, positively or negatively.

No, don't think so.

No.

The other thing I wanted to ask, in regards to the balance sheet, I know you have the swaps rolling off.

It looks like you brought down the duration and size of investment securities portfolio.

At this point, how would you characterize the liability sensitivity of the balance sheet.

Yeah, I think if you look in our annual report, we were about 7% asset sensitivity, asset sensitive.

We had taken action.

And that largely was higher than it had traditionally been because of, again, the restructuring actions that we began on the portfolio in December.

That -- the estimate of that as of the end of March, that's about 3.5%.

It's really been cut in half.

It's about 1.8 billion asset sensitive.

So the asset sensitivity was less than it was at year end, but clearly asset sensitivity.

Can you explain that to me?

The fact that you shrunk your investment securities portfolio, that would actually make me think you would be more asset sensitive, not less.

No.

There is -- you have to look at all the pieces of, it the loan growth side of it.

And you look at a point in time of the assets, the securities portfolio, the liability makes, all of that, we put the math together and that's what it says.

Okay.

Then finally, on the MPL’s, did you have any MPL sales this quarter?

There were $3 million.

That's very small.

Okay.

Thank you.

Again, I would like to remind everyone, if you have a question, please press star then the number one at this time.

Your next question is from Casey Embre of Millennium Partners.

Ralph and Beth good morning.

Good morning.

Hope you having a good day.

Can you give us anecdotal evidence on the footprint and businesses and kind of true that up with loan utilization rates?

You mean from an economic standpoint?

Exactly.

Just kind of big picture.

If you start in California, Southern California has remained relatively strong.

And a big indicator for us and we do a lot of business in the housing market, as houses in that $300,000, $400,000, $500,000 range.

There is still very significant demand and little market and likewise is doing quite well.

Northern California is weaker, obviously partly driven by the technology side.

Moving to Texas, Texas is stable.

And I would say acting much like the national economy.

There appears to be good backlogs there, but the growth has really not come forward at this point.

In Michigan, unemployment, the latest numbers were about 6.6, if I remember right.

Manufacturing still is an issue here, especially the non-auto manufacturing or the smaller end of the auto manufacturing.

So we're kind of watching and waiting for the economy to turn here in the manufacturing sector.

Okay.

And then can we get your thoughts on stock buy back?

I know you haven't been active too much in the quarter and you have a fair amount of capital.

I was wondering what you think about that.

I think one of the things that Beth mentioned earlier was in an economic times like this it is prudent to build capital.

And I think if you look at the industry, you'd see that all of the average industry ratios are moving up.

We think that's appropriate as well at this point in time.

So Beth mentioned, we're headed toward about 7.5 as a tier one common ratio and I think that's prudent.

And until we see the economy turn, I think we will continue to build capital.

Okay.

Thank you very much.

Thank you.

Your next question is from William Wick [SIC] of Prudential.

Hi, it's Mike Mayo.

Hi, Mike.

You talked about the inflow to [MPA’s] not getting better not getting worst.

What kind of mix are you seeing in the composition of MPAs?

Few years ago it was mostly a [Inaudible] loans, large corporate loans.

I imagine it's more middle market today.

Is that correct?

I think the inflows, new Non-performers are pretty reflective of what we do nor a living.

It's pretty geographically consistent and pretty consistent with our lines of business.

So we don't see anything that's out of balance.

Anyway, to break it down between the syndicated loans and all other loans?

We haven't broken it down that way.

We have talked about what our syndicated book looks like in terms of our shared national credit.

It's about $7.5 billion.

And of that, 25% of the total NPAs are represented by credits.

We have been bringing that book down.

It's down almost $1 billion over the last year.

Okay.

Just a question I get a lot, what's your exposure to Ford?

You would know.

The question, will you tell us.

We have had a practice that we've had of not talking about specific customers.

And then separately, in terms.- You said you're not going to give a full-year outlook.

That means the 420 to 440 guidance no longer apply? [Audio gap].

Our focus really is to continue to provide trend and sensitivities in our businesses via the earnings calls and the filings that we make with the sec.

We believe we have made a conscious effort to give more information about the business.

And we have provided you an outlook for the second quarter and frankly, we frankly we think however that we want to move away from focusing on one number called earnings per share.

Understood.

With regards to the second quarter then, why would there be more expense pressures?

I thought the step up in expenses was pretty much in this quarter.

There will be a couple things in the second quarter.

One would be merit increases, another would be the awarding of additional stock options in the second quarter that would flow into the numbers as well as the ramping up of our efforts on enterprise -wide risk.

How much could those expenses cost?

Well, what we said in January there were three big pieces we talked about.

Pension expense year over year was going to be up $25 million.

Stock option expense -- these are all pre-tax -- stock option expense was going to be up $14 million and enterprise management was going to be up 15.

So the stock option expense is a factor that starts to impact on the second quarter.

The first quarter versus fourth quarter was consistent.

It's because of the wording of additional options in the second quarter where we award our merits and our stock options.

Of the 54 million increase in your expenses, how much of that was in the first quarter?

Probably between $7-10 million.

Pension is about $5.5 million of it.

Okay.

Stock option expense hits in the ensuing quarters for the balance of the year and enterprise is ramping up.

Lastly, you said lower net interest income, I guess for a while with your good middle market loan growth is mitigated by the margin pressure conceptually.

Yes, correct.

When do you think that might turn positive the way you think about it?

In terms of the margin pressures.

In terms of the -- yeah.

I think we'll -- how we end up the full year in terms of margin really is a function of obviously where earnings growth goes -- sorry, earning asset growth goes and the mix in liabilities and what the fed does.

I think if there's no actions on the federal reserve side and we see more limited asset growth because the economy is weaker, we'll see more deterioration in the margin.

So -- it's hard to say what the full year looks like.

I think we -- the second quarter will be an important assessment related to where credit quality is headed and also if the economy is going to respond at some point to perhaps, some clarification on the geopolitical things and we see better loan demand.

Until we get clarity, really credit quality trends and loan demand’s it's hard to say.

Can you cut your asset sensitive test in half because of the economy or because you wanted to reduce risk?

No, it was almost a number at year end that was wider than it would have normally been because of the actions we took in December.

So it was really bringing it down to a more normalized level.

Okay.

Thank you.

Your next question comes from Jeb Gore of Soneva Capital.

Good morning Jeb.

Good morning.

You mentioned swaps come off at about a billion a quarter.

I was wondering, besides waiting for the economy to improve in [Inaudible], do you have any game plan to defend the margin throughout the year.

I know you are building the capital that will help.

I was thinking more along the operating basis.

Do you think the positive growth you have in this quarter is sustainable?

As on any landing side that you can do to expect to see any growth to continue.

I think when we do our hedging plan and it's obviously a dynamic process, we look at all the variables you just talked about, where deposits are heading, particularly on the financial services group side where we have large title and escrow deposits which are impacted by the refinancing activity that's happening in the economy.

So we keep a close monitor on that.

We obviously look at where our expectations are for loan growth.

All of those go -- and the mix of liabilities in total, go into the model to then fest the interest rate sensitivity and in turn make our judgments around what hedging we ought to do.

There really isn't -- it's just our normal course of how we look at managing our interest rate risk.

As you fall out on your scenario, you're coming in, I assume , at the more conservative end in terms of more loan growth and deposit growth when you make a forecast that the margin be down.

I think it's fair to say that we are cautious about what we're assuming for loan growth.

Absolutely.

Thanks, Beth.

Your next question is from Bob Ex of [Inaudible].

My questions have been asked and answered.

Thank you.

Thank you.

Thank you, Bob.

The next question is from Jeff Davis FTN Securities.

Beth question for you is you're an old auto execrate.

What's your thoughts on how the auto industry is playing out with regards to, you talked about recovery and manufacturing but Ford and GM had a good year last year.

How do you see that cycle playing out and how does that impact your various borrowers that work around the majors?

Yeah, I would say that I think the -- our expectations are that the industry sales rates will continue to be pretty healthy.

We've had a bit of a dip here because of what was going on in the Middle East, but I think we'll see -- we're still expecting more than a 16 million unit industry this year.

I think the auto manufacturers are poised and focused on ensuring that there is a good industry year.

I think the incentive situation will stay relatively -- from the consumer's vantage point relatively healthy.

I think there are a lot of good things going on in the auto industry to focus on improving the overall profitability.

But it takes time.

To work on rationalization of platforms, to work on cost efficiencies, to work on better ways to really take the product from concept to customer.

So I think the industry knows what it has to do from an efficiency standpoint.

I think it will take a little time to get there.

I think in the end it can get there.

It's a question of hard work to get it done.

It's not rocket science.

With regards to CMA, though, if production is still at a good clip this year, does it not at some point or have we already sort of seen the benefit to the extent that it was going to insure, an improvement in loan demand among the companies that are in the industry, not the majors, but that work around it and secondly asset quality in that portion of the loan book?

In terms of I think there will be -- I think there has been, because of the, if you will , the -- a lot of the [Inaudible] variables, there has been a reluctance on the part of borrowers in that side of the business to invest in lot of additional capital expenditures.

There has been a lot of getting the house in order of becoming more efficient auto suppliers and doing what they needed to do to reset the bar, if you will, on efficiency.

I think once you see some of this uncertainty go away and the economy hopefully come back to life a bit that I think -- and more than just for one quarter, that we will then see at some point corporate borrowers want to be coming back in to borrowing more to be investing for the future.

But I think until we see clarity around the trends here, I think there will be -- I think corporations are still going to sit on the sidelines until there's more clarity.

In terms of asset quality, I think, you know , our automotive book in terms of losses, contribution of losses to our overall charge off, has been pretty, if you look at the first quarter in fact, charge offs relative to total charge offs for the auto sector in fact is less than the percentages of loans that represents in our portfolio.

If you take charge offs in our auto customers as a percentage of total charge offs , that's less than the total portfolio represents as a percentage.

I don't see outline issue there's broader than what it represents as a percentage of our portfolio.

Fair enough.

Thank you.

Your next question comes from Denis Laplante of CFA FOX-Pitt Kelton.

Good morning Denis Laplante.

How are you doing.

Good.

Tax rate was down, is that permanent?

I think, if you look over the last several years on the information in the annual report we have seen an improvement in our tax rate from two factors, really, increasing contribution to the lower tax rate from tax exempt income, largely the bank-owned life insurance.

The others through affordable housing credits.

I would say, if you looked -- and our tax rate was a little below 32% in the first quarter.

I would say that's a pretty good assessment for the full year.

Okay.

Two, mid-quarter, I got the sense from talking to management that growth, middle market growth was not coming through.

You were putting on lines, but you weren't getting much usage.

Yet your balances actually grew at a pretty nice clip here in the first quarter.

Could you describe, is it a function of people existing customers drawing down lines, was it new business, can you give a little color there?

It's both, Denis Laplante.

There have been opportunities, as Beth described earlier, whenever you see this kind of downturn in the economy, historically, we have done a very good job of moving market share because of our willingness to understand and lend to middle market-type companies.

So the last numbers I saw on C&I lending in the industry was down about 7%, yet as you mentioned were up slightly.

And that says to me, we're moving that kind of market share.

As well as Beth mentioned the auto industry, especially on the larger end with the car sales where they are, the suppliers have in many cases done quite well.

On the smaller end is where the pressure really is, because of cost and consolidation.

On that small end of the supplier network.

And I think we saw a good growth as we represented in the numbers in California, which contributes to the middle market piece, too.

Right.

Especially southern California.

On syndicated credits, you've gone from 8.4 to 7.5.

Can you set a target?

I've heard different numbers from management in terms of what -- how much is left to go on the syndicated credit.

Can you elaborate from a Non-relationship type credit?

We have about $1 billion that is non-relationship.

We will always have some.

Because we need to be able to sell down exposures and so we will participate in that market.

The likely range is somewhere between 500 and 1 billion.

The important thing to note on syndicated credits when you look at our total balances as we showed there?

A slide, is that if you look at large corporate and back large corporate out, many of those credits are in our bread and butter lines of business, whether it be real estate or middle market.

So being there is very important.

So it could be anywhere from 500 to 1 billion, but the majority of the comedown I think is done.

Denis Laplante, to frame that a little, about half of the portfolio is large corporate and international and about the other half is commercial real estate and middle market.

So those are very different, you know, complexions.

Okay.

Just a follow-up on the swap income discussion you've had so far.

You had indicated last year that at roughly about -- the swap income, the swaps that were maturing this year basically came in roughly equal installments by quarter.

And the fact we didn't see a swap income decline is largely because spreads widened on the stuff that was remaining.

Is that a fair way to look at it?

Yes.

Okay.

Have you been replacing any of the stuff that's been going off?

Is that your intent?

Yes, we always are looking at 12 to 24 months of what's rolling off, what we put on.

Again, in this dynamic model.

Yes, we are adding swaps.

Are you putting them on at a higher volume because obviously the stuff coming off is coming off at a widespread compared to what you can put on today.

Are you increasing the level of swap?

No, I wouldn't say so, on an absolute basis.

We are on the margin, using securities a little more.

I think that will become more apparent.

We've done a lot of repositioning over the first couple of quarters.

As we see on going it will be a little bigger role.

I would say it's consistent with what we've done in the past.

The last question, if I may.

You mentioned your pension expense was roughly 5.5 million in the quarter.

You're saying you had zero options expense incremental from what you talked about?

The quarter over quarter impact from fourth to first is the same for stock option expense.

There's no incremental piece in the first quarter.

Okay.

So the roughly 13 -- the way I looked at it, pensions and options were roughly 13 million a quarter.

Incremental for the whole year.

You know, per quarter and you didn't get all of that?

No, because the stock option expense, the incremental piece year-over-year includes the impact of additional awards that happen in April of every year.

Okay.

Great.

Thank you.

Thanks.

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

Good morning.

I have a couple questions around the same point.

The point is, it seems like and with what you all are saying and what we've been reading, in the press release last couple quarters kind of painting yourselves as victims of a weak economy.

It seems like obviously your peer banks have to do with that same weak economy.

Explain two things.

Number one why is your credit trend so much worse than what we're hearing from your pier banks who are dealing with a tough economy.

And number two, given things are weak, are you taking incremental actions to try to offset maybe a top line that's not growing as fast as you would like or some of the incremental expense pressures that you've been outlining over the course of the call?

Yeah, a couple things.

On the credit trend, your comment, worse than perhaps others are seeing, I'd make a couple comment there's.

One, is as part of our strategic model, we are focused largely on the business sector, small business, middle market.

That's what we do for a living.

And because of that, because the way the economy has worked itself through and it's really been a recession, if you will, in the business sector, and it's been a very pervasive recession in that sense that it's -- obviously manufacturing has been hard hit, but , which is in the core of what we do and it's been across industries and across geographies.

It's been a more, if you will, pervasive recession or slowdown than in prior recessions.

So because of the nature of what we do from a strategic business model, we have been hurt worse.

And in fact I would make an argument in some cases in prior quarters where we saw things, we've seen others to begin to see some of the indicators that we see.

I think we see it early and we see it regularly because of the nature of what we do.

So I think -- I think in terms what have we said is we don't see it improving.

We haven't seen a big deterioration, but we're concerned and carefully keeping track of things.

In terms -- on the expense side, we are, I think we did make good efforts in the first quarter to be carefully controlling expenses.

And I think we'll continue to see that as we go into the next quarter with cautiousness around hiring or replacing people, which is obviously a big part of our expenses and controlling some of our other travel and things that make sense to control.

But we also want to make sure we don't cut off expenses as it relates to making sure we're keeping track and taking good care of our customers.

It's a fine balance there.

Understood.

Have you taken kind of -- have you been incrementally more tough on expenses over the last couple months or is it the same focus today than it was six, nine months ago?

No, I would say it's a closer control.

I'm not liked as well as I used to be.

Fair enough.

Your next question is from Rodrigo Quintanilla of Merrill Lynch.

Good morning.

I was wondering if you could discuss your reviews on the reserve coverage , both loans and MPAs.

How should we be looking at these ratios?

We build reserves from the bottom up.

We increased the reserve in the quarter about $10 million to 1.88.

And reserves to nonperforming are at about 1.25.

We're comfortable at that level, given the outlook that Beth talked about earlier in that we don't secret costs changing a lot from first quarter to second quarter.

Okay.

Thank you.

Uh-huh.

Your next question is from David George of A.G. Edwards.

Good morning just one quick question.

Most of my questions have been answered.

We've seen proliferation of security gains the last couple quarters.

How should we look at that as it relates to your 2003 earnings, I guess, to what extent to you expect securities gains to contribute to your numbers this year?

Thanks.

That's not a number that's easily, I guess, predicted.

I think what -- when we -- we made some decisions in the fourth quarter to begin to reposition the and restructure the portfolio to really anticipate, hopefully, a recovery in the economy this year.

And at some point rising interest rates.

So the restructuring of that frankly impacted the level of securities gains.

If you look at over a number of years, there is a certain level that's been in our earnings.

So I don't think we would be dissimilar from looking over the last several years.

Okay.

Appreciate it.

Your next question is from Roger Lister of Morgan Stanley.

Yes.

What's happening to business deposit growth?

I noticed that your non-interest bearing deposits dropped slightly from the fourth quarter.

That drop -- I think Beth mentioned earlier, was really focused in the title escrow business, in our financial services business.

Especially right at quarter end.

It came down and on average was down, if I remember the number, about 300 million.

And that will follow housing sales and refinancing.

Right.

In the various companies that we do business with.

So are you still seeing growth in business deposits?

Or is that also flattened out?

Yes.

No, we're still seeing growth there.

In terms of decline in net interest margin, how much opportunity do you think you have in upcoming quarters from rolling off CDs?

Well, I think when we gave you an indication for the second

quarter that the margin would be headed downward and perhaps commensurate with the decline in the first quarter, all of the different factors on the liability side as well the asset side are factored into that expectation.

So those are one element of many elements that go into our outlook for the margin.

Yeah, because clearly there was a bigger runoff last year than it looks like you're getting so far this year in terms of CDs, you know , versus the growth in money market deposits and N.O.W. accounts.

Yes, particularly given the growth we've had in our financial services group deposits, we haven't had a need on the CD side.

On the CD side.

Okay.

Thank you.

Our next question is from Daniel Foley of Flowcrum Global Partners.

Good morning, guys, how are you?

Good morning.

Beth, I had one question for you.

The $21 million nonperforming California condo project, wherein California was that located?

In the southern part.

Thank you very much.

You're welcome.

Thank you.

Your next question is from Eric Schartz of Morgan Stanley.

Hi, guys.

Good morning.

Good morning.

Ralph, I want to ask you about the loss content of the non-performers and how that changes over time.

Other banks [Inaudible] was depending on what the asset was, Telecom losses was greater than merchant energy is going to be.

I'm wondering, the contractual value of the MPAs is still at the same kind of rate at 60%.

I'm wondering if the new stuff coming on, the 180 million is of the same loss content, do you think, or if the base had bigger losses?

And how you expect that to change over time or is the 60% level of where you write it down to, is that something that is going to stay stable over time?

Really, that 60% is a number that we report based on a credit by credit buildup.

So it really depends on what's in the portfolio at any given time as to whether it may be 60% or 70% or 50%.

And there's no way to gauge that until you know which loans are going to be in the portfolio.

The loans that migrated in there in the last quarter were very much in line with the type of credits that had been migrating in and, therefore, it happen ed that it came out at very close to the same level that it was in the fourth quarter.

But that was more by hap and stance than it was anything else because you have to go credit by credit.

Okay, thanks.

Uh-huh.

Your next question is from Mike Holton of T. Rowe Price .

Somebody asked about stock Buyback earlier and I just want to ask a follow-up question on that.

Given that your stock price is at the same level it was in 1997 does it really make sense not to be, you know, using at least some capital to buy the stock while it's depressed now versus waiting for the economy to pick up and you would hope, you know, before the economy picks up, the stock actually starts moving up.

Could you comment on that a little bit?

I understand your point and the opportunity, but I go back to what I said earlier, which is the industry as well as ourselves feel it is very prudent in this point in the economy to build capital.

And that's looked on externally.

For the industry and for us, for funding, from agency standpoint.

It's very important to maintain and build those capital positions.

And think I if you look today, the overall average in the industry is right in line with where we're headed.

Except it seems like the industry is also probably generating a little more excess capital so people are building, it but they're also buying back a little bit of stock at the same time.

Anyways, thanks for the response.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Are there any closing remarks?

We appreciate all of your questions and being with us this morning and thank you very much and have a good day.

Thank you for participating in Comerica's first quarter earnings conference.

You may now disconnect.