Comerica Inc (CMA) 2003 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Comerica, Inc. 2nd Quarter Earnings Release Conference Call.

All lines have been placed on mute to prevent 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.

Ms. Arsenal, you may begin your conference call.

Valerie?

Yes.

There's other people on the line that are speaking?

Okay, their lines are muted now.

Okay.

Well, good morning, this is Helen Arsenault, and welcome to Comerica's 2nd Quarter Earnings Conference Call.

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 statement, and supplemental information, is available in the FCC's website as well as our website.

Before we get started I would like to remind you that this conference call contains forward-looking statements.

In that regard you should be mindful of the risks and uncertainties which could cause future results to vary from expectations.

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

Now, I'll turn the call over to Ralph.

Good morning and thank you for joining Comerica's 2nd quarter conference call.

You've seen the 2nd quarter results we announced this morning.

Let me spend a moment to put them in context.

The 2nd quarter was a slow one for many involved in business lending as we are.

The country's lackluster economy affects many customers' capital investment decisions and creates cashflow challenges for others.

And the historically low interest rates are compressing net interest margins for Comerica as well as others in the banking industry.

In recent quarters, we have taken a number of actions related to our investment portfolios and releases in short term liquidity as a result of strong growth in deposits.

These actions, while negatively impacting the margin in near term, position us appropriately for the long term.

During this past quarter, focused on our risk management processes, strengthening our customer relationships, controlling expenses and building capital.

Credit quality continues to be a major focus.

We are well down the road of enhancing our credit technology platforms and building a robust operational risk management program.

As always, our focus is building relationships with our customers.

Our sales culture and extensive calling efforts, particularly in times like these help us to grow market share.

Deposits are increasing as are households and we continue our branch expansion program to support not only our retail customers but our small business, private banking and middle market customers too.

All of our customer relationships are deepened through our connectivity efforts.

And the initial success of this initiative is generating enthusiasm among our employees.

When connectivity is fully ingrained in our culture it will help us counter pressures like the current prolonged weakness in commercial loan demand.

As planned we continue to reduce our exposure in large corporate and international lending.

These declines, however, mask the year-over-year growth in our other lending businesses.

Our expenses were well-controlled even as we continue to invest in both our technological capabilities and our branch system.

Finally, we believe it is prudent to maintain strong capital ratios and we are building capital.

We remain confident in the underlying potential of our business model and the markets we serve, and we continue to strengthen our fundamentals so that as the economy turns, we are well positioned for strong growth.

Now we'll turn the call over to Beth to discuss second quarter results.

Thanks, Ralph.

Good morning.

Today we reported 2nd quarter 2003 net income of $170 million or 97 cents per share, compared with $176 million or $1 per share in the 1st quarter.

Net interest income of 493 million decreased 18 million from the 1st quarter.

While average earning assets increased 1.5b to 49.8 billion.

The net interest margin declined 32 basis points to 398 in the 2nd quarter from 430 in the 1st quarter. 11 basis points of the decline was the result of anticipated maturing swaps with wider spreads available in the market today.

And the residual effects of 1st quarter portfolio restructuring action. 21 basis points of the decline was a result of additional risk mitigating actions.

These actions include managing excess liquidity and further portfolio restructuring.

Our excess liquidity position is partially reflected in the $1.2 billion increase on average per term investment for the quarter, primarily overnight bank transactions.

Unprecedented mortgage refinancing volumes and market conditions in the quarter drove our deposit totals higher.

We know that a substantial portion of the deposits from our title and escrow customers are not long lived.

Thus, we are being conservative in investing this cash on a short-term basis, despite its negative impact on the margin.

Now I'd like to give you more details on our securities portfolio restructuring.

During the last three quarters we restructured the development portfolio available for sale with more stable cashflows, to insulate it against rising rates once the economy improves.

As a result, the average yield in the investment portfolio declined 114 basis points to 3.6% during the quarter.

The average yield will move lower during the 2nd half of the year, reflecting actions taken in the 2nd quarter.

Looking ahead, we will receive an additional $1.4 billion in mortgage backed securities in July, as 2nd quarter sales are replaced.

While the amount of U.S. treasury bills will adjust as liquidity levels change.

As for our short term liquidity needs, we estimate the average life of the entire portfolio will be 2.3 years with mortgage-backed securities accounting for about 90% of the total.

Maintaining stability of cashflows in the mortgage-backed portion of the investment portfolio is paramount.

The portfolio has been structured to pay to pay more predictable cash flows, and a shorter average life, as well as to limit extension risk.

At the present time, the average life of a portfolio is 2.4 years.

This compares with an average life of 2.9 years at June 30, 2002.

Applying a 200 basis point rate increase to the portfolio, it extends to an average of 4.2 years compared to a generic 30 year collateralized mortgage obligation portfolio which would extend to 6.1 years.

We have consciously moved to lower yielding securities with these favorable characteristics.

At a cost-to-current income in order to better position ourselves for the future.

Non-interest income of $226 million for the 2nd quarter compared to $220 million the 1st quarter with most categories of income unchanged.

The 3 million increase in bank-owned life insurance for the quarter was due to incremental death benefits.

Net gains from from security sales contributed to 29 million for the 2nd quarter compared to 13 million for the 1st quarter.

Other non-interest incomes decreased 10 million to 30 million, primarily as a result of 9 million of cash flow ineffectiveness losses.

As indicated in our 1st quarter 10-Q, we had accumulated gains of 13 million from cashflow cash ineffectiveness that were expected to reverse in the near term. 9 million of the gains were reversed during the 2nd quarter and we took action to mitigate the reversal of the remaining 4 million.

As a result, there are no remaining accumulated ineffectiveness gains as of June 30.

Our non-interest expenses were 360 million for the 2nd quarter, down in a number of categories, the largest reduction being -- the largest being a reduction in [debit] compensation.

Average loans at 43.2 billion for the 2nd quarter were down 1% or 300 million for the 1st quarter and were up 1.2 billion or 3%, year over year.

Compared with a year ago, the loan portfolio was up against most geographic markets.

Internationals, where we have been targeting reductions and exposures is down 12% from year ago levels.

We've continued to make progress in downsizing targeted commercial exposure as evidenced by combined decreases in large corporate and global finance of 300 million for the quarter, and $1.6 billion from year ago levels.

The declines in these businesses have muted the year-over-year growth in the following loan portfolios.

Middle market, up 900 million Commercial real estate, up 600 million.

Small business banking, up 200.

And private banking, up 400 million.

We remain focused on pursuing our course strategy of building relationships with our customers and continue our calling efforts.

We strongly believe that these efforts are already paying off.

Nonperforming assets will down 60 million from last quarter to 581 million.

The geographic concentration of nonperforming assets is broadly consistent with the mix of the overall loan portfolio and is as follows.

Michigan and other markets, 51%.

California, 27%.

Texas 6%, and international 16%.

Nonperforming assets by line of business are middle market, 47%.

Global finance, which includes loans to companies located in foreign company countries as well as U.S. subsidiaries of foreign companies, that equated to 17%.

Large corporate 11%, small business 10%.

And commercial real estate 7%.

Shared national credit represent about 20% of total nonperforming assets down from 25% last quarter.

And as of June 30th, our nonperforming loans have been charged on to 58% of the original contractual values, compared with 60% at the end of the 1st quarter.

Nonapproval loans were 559 million at June 30 of $65 million decrease.

This decrease is primarily a function of three things, lower level of transfers to nonaccruals is down 39 million.

Increased chargeouts of 18 million.

And increase loan sales up 53 million.

During the quarter, 148 million of loans were transferred to nonaccruals, compared with 187 million in the 1st quarter, included in the amount were 34 million loans that were sold during the quarter, the largest of which was 20 million and was in the transportation industry.

This loan was also the only new nonaccrual loan over 10 million in the quarter.

Last quarter there were 5 new nonaccrual loans over 10 million representing 106 million.

During the quarter, we took the opportunity to exit 13 credits that we felt would continue to deteriorate.

These sales generated total proceeds of 56 million.

Prior to sale, these credits were charged on a market value which accounts for 12 million of the quarter's total net chargeoff.

Chargeoffs for the quarter were 110 million. 51% were in Michigan and other markets. 25% from California. 16 from the international portfolio and 8% in Texas.

Looking at net chargeoffs by line of business, middle market represented 50%, and about 10 million of the middle market chargeoffs related to the old Comerica Entertainment portfolio.

Global finance represented 16% of net chargeoffs.

Large corporate 14%.

Small business 8% and commercial business 4%.

Shared national credits represented about 20% of total net charge offs about the same as last quarter.

The concentration of nonperforming assets based on industry classifications were nonautomotive manufacturing, 17%, services at 14, automotive 12.

Real estate 8 and wholesale trade 8%.

Looking at net chargeoffs, industry concentrations for wholesale trade, 16%, automotive 10%, entertainment 9.

And nonautomotive manufacturing and services each at 8%.

The allowance for loan losses increased slightly to 802 million at June 30, and totaled 1.89% of loans.

The allowance for credit losses on lending related commitments, which are letters of credit and unfunded commitments, decreased modestly in the second quarter to 33 million.

Nonperforming assets, as a percentage of total loans, other real estate and nonaccrual debt securities, decreased 1.37% from 1.51% at the end of the 1st quarter.

The allowance for loans is a percentage of total nonperforming assets increased from 138% to 125% at March 31.

Moving to the funding side of the balance sheet, average deposits were up 1.6 billion, or 4% from last quarter, and up 16% or 5.9 billion from a year ago level.

Deposits in the financial services group are up 9% or 800 million from the 1st quarter and up 61% or 3.5 billion from year ago levels.

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

Average non-interest bearing deposits represented 33% of total deposits.

These deposits were up 800 million during the quarter and 3 1/2 billion year over year.

At June 30, the preliminary Q1 common capital ratio was 7.61%, up from 7.47% at March 31.

Until we see an improvement in credit quality, we believe it is prudent to continue to build capital.

Now I'd like to give you our thoughts on current trends.

As the business climate improves we would expect to see increases in loan activity until aggregate loan volumes increase, we anticipate higher than normal levels of liquidity on the balance sheet through year end.

Other factors impacting the margin are loan mix among our lines of businesses and the potential for continuing compression of loan spreads.

Absent a meaningful change in our fundamentals, the margin decline for the remainder of the year could be broadly consistent with the 1st half decline of 43 basis points.

As was evident in the 1st quarter, compression of the margin is linked to the level of liquidity.

Due to the challenging current business environment, particularly in the manufacturing sector, credit quality will improve slowly.

Now, we'd be happy to take any questions that you have.

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

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

Your first question comes from Gary Townsend of Friedman Billings.

Good morning Ralph and Beth.

Good morning.

Good morning.

My first question would be with regard to the outlook for net interest margin, you're saying approximately 40 basis points, 40 to 50 basis points in addition to what we've seen is possible in the 2nd half.

What we've said is it is the 2nd half we would anticipate could be broadly consistent with the 1st half decline, which was 43 basis points.

Tempered by recognition that liquidity levels will play a part of what that number turns out to be.

It's broadly consistent would be our expectations with the decline in the 1st half.

With the decline in new inflows from the nonperforming asset and non-accrual side of things, do you think you are at a tipping point with respect to improvement in credit quality?

If you look at some of the credit quality statistics as you just mentioned, it did show some small signs of improvement in the quarter.

Certainly lower inflows of new nonaccruals and we had a small decline in our watch lists, credits, as a percentage of the portfolio.

Having said that, many customers continue to struggle in the current environment until we see the business recovery take hold.

We think improvements in credit quality will be slow to come.

I would echo that, Gary, that really that's going to depend on where the economy goes, especially in the manufacturing sector.

And we're seeing it fairly slow in all markets, both California and Texas as well.

California's slowing down even in the south, where it had been fairly strong up until now.

And a question with respect to deposits if we could.

How much of the growth would you attribute to account analysis as opposed to market share expansion?

If you look at the growth in just liquidity as I call it, a big share of that in the second quarter about half of it was driven by the title and escrow business, so it's increasing the number of relationships we have there, as well as increasing the penetration of those relationships.

Apart from that, it's adding of mew households that Ralph mentioned in his opening comments on the retail side.

Retail, small business and private banking.

Have you taken the title and escrow into new markets as you indicated you would.

Yes, we are doing that.

Hiring people and that is already under way and we are making progress there.

And those markets are?

We have focused on Texas and somewhat in Florida and in Michigan.

Thank you.

Thank you.

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

Good morning, a couple of quick questions.

At the end of the quarter how much unrealized securities gains do you have, and to what extent do you expect those to manifest themselves in your numbers in the 2nd half.

Also, are you willing to say what your margin was in the month of June?

Thanks.

I think in general, the -- because of the actions we've taken over the last several quarters to reposition the portfolio that there's not a lot of gain inherent in the portfolio, that is the important elements of the last several quarters was to get us positioned properly in light of hopefully, a recovery coming and higher rates coming in, mitigating our risks when it does.

We've captured those gains through the market rally and in particular through the 2nd quarter, and so it's not a significant factor for us going-forward.

Okay.

And are you willing to indicate what your margin was for the month of June by chance?

No, we just get quarterly data.

Just one quick follow-up if you don't mind.

Could you characterize your working capital line of credit utilization today in your core middle market and where that compares to a more normalized usage rate?

It's not much changed in the quarter, from the 1st quarter, and not materially different over the last several.

Yeah, it's been very steady.

Do you know what a number is today, by chance, relative to say when relative to periods when C&I loan demand was a little more robust?

The usage has been around 50%.

Okay.

And it really hasn't moved much more than 2 or 3% through the cycle as I remember back.

Certainly over the last few quarters anyway.

Okay.

Thank you very much.

Your next question comes from Roger Quintinella from Merrill Lynch.

I was wondering if you could comment on your potential recoveries.

It seems you've been charging off gradually your loan portfolio to -- versus the initial contractual values, most recently to about 58%.

So the two questions would be, how much lower do you think you may go and secondly, what type of recoveries might you expect once the economy turns.

The -- we review the portfolio quarterly and look at the values and make adjustments and chargeoffs accordingly.

So projecting a percentage there without knowing what would be in a portfolio at any particular time would not, I think, be note worthy or provide you any real guidance.

As far as chargeoffs, or as far as recoveries, I'm sorry, you know, a lot will depend if the economy begins to pick up.

Those that have been charged off and not sold may provide opportunity for recovery.

At this point in the economy, I wouldn't predict that pickup at the moment.

Obviously, we've had higher loan sale activity in the 4th quarter as well as the 2nd quarter, and obviously, those -- they're not recovery opportunities related to those.

Okay.

Thank you very much.

Thank you.

Your next question comes from Fred Cummings of McDonald Investment.

Good morning, Fred.

Good morning.

Can you talk about what impact you expect the mature of national credit to possibly have on nonaccruals and net chargeoffs?

I know some banks have given us a feel for their views on the credits for which they were the agent bank.

We have reflected all of the results in our numbers from that exam where we were the agent, and I would paraphrase it really to say that we really had no material surprises, either there or anything we've heard on shared national credits at this point.

Okay.

And, Ralph, of the 13 credits that were sold this quarter, were any of those shared national credits?

About half of those are.

Okay.

Thank you.

Thank you.

Your next question comes from Jeff Davis of FTN Midwest Research.

Good morning.

Two questions, first, Beth, with regards to the margin guidance and understand the 40 bits plus or minus has to do with the amount of liquidity in part.

But if we looked at it from a little different perspective, spread revenues were down on a TE basis, down roughly 40 million from the 4th quarter, is that a magnitude of order we should be looking at for the 2nd half of the year with --

To me, you know, obviously, net interest income's a function of overall loan and earning asset levels.

It's -- when we gave some indication of the spread compression in the 2nd half, it's really a function of several things, one is, as we mentioned the high level of liquidity.

The second is potentially compressing loan spreads because we've seen a very competitive -- as we've commented in past quarters, we've seen competitive pressures for good quality credits.

We also see a follow through impact from the second quarter restructuring actions of the portfolio flowing into the 3rd quarter and obviously we have swap maturities also in the 2nd half of the year.

It's really all of those together that are driving the -- that are -- our estimate of a compression in this margin for the balance of the year.

Okay.

But from a magnitude standpoint as -- what --

That -- it really depends on earning assets in the mix and loan growths and all those things.

Right.

I'd rather just tell you the margin estimates.

And then Ralph, a second question.

From -- aside from the quarters in and out, what are your thoughts on what is the company's longer term earning power potential, we looked at that in terms of return on assets and return on equity.

Well, if you look at the repositioning we've been doing, which has been substantial, which is -- Beth just mentioned as an example to the reflection that it is subdued, the real growth in the lending side and as the economy begins to pick up, I think longer term, we will certainly be able to return above and grow above the inflation rate, you know, two or three percent in loan volume.

I think spreads will return to more normalized levels and returns will be appropriate.

We're really looking at growth profile to position ourselves in that upper third of what I would call the peer group we're in, which is regional banks.

I haven't put a long term return on assets or return on equity at this point on that, and really don't want to estimate that at this time.

And then just the last follow-up, Ralph.

You touched on California and Texas slowing.

Does it -- I guess what I hear you saying is, you -- this doesn't necessarily feel like we're in an inflexion point in the economy, do you -- not not to put words in your mouth.

It doesn't.

I would say people are less pessimistic.

But I would not call the turn on what I've heard, and it -- I think recently in testimony, if you follow -- if you've had a chance to read the articles on Mr. Greenspan, I think he has referred to the economy as lackluster as well, or at least was quoted as saying that, so --

Okay.

Thank you.

Again, if you would like to ask a question at this time, press star, then the number one on your telephone keypad.

Your next question comes from Roz Looby of Credit Suisse First Boston.

Quick question on your portfolio structuring, I want to make sure I understand.

You said you were planning on adding 1.4 billion MBS in July to replace those that were sold.

Should we assume that then is not going to be added to developments in the third quarter?

Can you comment on whether that's fixed rate or some of this floating high-bred that you have broken out in the slide portfolio.

The 1.4 billion that we're taking delivery of in July is replacing the sales that we made in the 2nd quarter.

And obviously, the overall complexion if you will of the portfolio will be a function of underlying liquidity levels whether we need additional treasury bills that we had in the portfolios of June 30.

If you look at the kind of product we're adding a mixture of fixed rate and floating and hybrid arms.

So it's a blend.

It's really looking at how we can get the cashflow structured in a way to mitigate the extension risk in a kind of consistent with the dynamics that I described on one of the charts.

That helps.

One more quick question if I may, Ralph, I understand you may have had some management changes in the tech and Life Sciences division.

Can you talk about whether the new gentleman who's going to head that group up, Greg Bellinger I think is his name, will there be any change in strategy there?

No.

Greg worked along with our TLS group prior to the acquisition of Imperial, and he has experience there.

There's a very talented group in the TLS group and it will continue to follow the strategy that we've laid out.

So you're going to continue to grow that loan portfolio?

Yes.

Okay.

Thanks very much.

Your next question comes from Jason Goldburg of Lehman Brothers.

Thank you, good morning.

Good morning, Jason.

Can you give us a sense in terms of how much more kind of planned downsizing we should expect in your part in both the large corporate and global finance arena, absent what the economy does?

We are, as you saw from the numbers be, down about 1.6 billion from last year.

As we've indicated in the past, the focus is really -- especially on the large corporate on relationship lending.

We have about $1 billion of non-relationship lending there.

We will always have some, whether it's 500 million or 250 or somewhere in that range, because you use that to develop the relationship for longer term.

And so we are approaching that number.

I doubt that you will see it get below about 15%.

And it's about at 17% today.

On the international side, we've been pretty clear that we are downsizing our exposure in Brazil.

We're down to about 340 million today.

We would expect that to be around 300 million by the end of the year.

That's more than half.

It has declined more than half from actually a year ago.

The smaller countries in Latin America like Argentina, we are exiting.

We will continue in Mexico and Canada, those are good markets for us and good relationship there.

So the decline will begin to lesson, but there's still a bit more to go.

But not as significant as we've had over the last year.

Right.

That's helpful, and then secondly, it's -- I know you had restated the second quarter of last year results, but it looks like the numbers in the press release kind of differ from what the restatement was by a couple pennies.

No.

Those are consistent with the restatement.

The 88 cents from a year ago.

Okay.

Stock options expenses is a different factor, I think.

Thank you.

Your next question comes from Michael Granger of KBW Asset Management.

Hi, Michael.

Good morning.

Good morning.

Back on this liquidity thing, I wanted to get a sense for kind of the moving parts here.

You know, relative to the balance sheet at June 30th.

You've got June 30th, 5.2 billion of investment securities available for sale.

About 4.2 billion in short term investments. 4 1/2 billion in what's called cash in different banks.

Am I understanding this correctly, including the purchases of the 1.4 billion that you just referenced of mortgage backs, that's going to come out of short term and go into the available for sale portfolio as we look forward?

Actually, the 1.4 billion of mortgage-backed securities that we're taking delivery on in July will be in the available for sale and will replace at least partially the treasury bills that are in that portfolio.

So I'm not going to see a shift?

No.

Going-forward?

Are you expecting additional liquidity?

Additional cash to come in over what you see on the June 30th balance sheet?

I would think that, you know, escrow balances would be near their peak.

Do you expect a further increase there?

If you look at it, and you have to really look both at the quarter end and average to average.

If you look at it on average, if you look at cash -- the items you just mentioned, cash induced, short term investments and investment securities available for sale.

On an average quarter-to-quarter basis we're up about a billion 8.

About 800 million of that is explained through the title in business.

If you look at the period end we're up $3.2 billion and the title and escrow business accounts for 2.6 billion of that.

So my expectation would be -- you can see the dynamics of the quarter is, as we move to the very end of the quarter, we continue to see very large, particularly even as the quarter was ending, very large flow-in from the financial services group, title and escrow business.

Having said that, we've also seen in the last two or three weeks interest rates back up.

You can take a 10-year as a proxy over 100 basis points.

So I think that will obviously, to get -- assuming those levels change that we'll begin to trickle into the mortgage refinancing.

But I think for many of us across the industry, the mortgage refinancing has been in levels that are not anticipated.

The speed with which it -- the air comes out of it, it's very difficult to predict.

Level will depend on rates, absolutely.

You're obviously investing that cash at very short levels?

Right.

So the spread's got to be fairly low, I would think?

That's correct.

And that's what's helping bring down the margin.

We think that's an appropriate thing to do, in terms of where we are in the refinancing cycle as well as the interest rates.

I'm just trying to get an understanding of the dynamics between percent margin and dollar margin here.

And that's just the reason for the question.

Good.

Your next question comes from Dennis la Platt of Keefe, Bruyette & Woods.

Two-three things.

On middle market growth, in the 1st quarter you talked about link quarter growth, I'm not sure if you want to address averages or a period of numbers, you had indicated that the -- obviously the commercial loan balances are down, but what was it linked to the quarter.

If you're talking specifically middle market?

Yeah, I'm interested in what you saw in the middle market.

Okay.

Let me put it in a broader context too and then I'll answer middle market.

If you look at the quarter itself, in total, we were down about 1% quarter over quarter.

If you exclude large corporate and global finance, which is the international.

We were basically flat.

If you look at year over year, again to put some context around this.

We were up 3% in total loans year over year, but if you exclude again the targeted reductions in large corporate and global.

We would be up 8%.

And within that context, we didn't see much growth in the middle market and 2nd quarter but year over year we've seen pretty good growth of 6%.

I think -- I don't think one could make a blanket statement about trends based on the quarter.

We saw very good middle market growth in the 1st quarter which had pulled back a bit in the 2nd quarter.

Part of it could have been related to all the war and other things going on.

So we'll see how this quarter comes out -- but I think for us, we really look at year over year, because one quarter is hard to distinguish the trends there.

Your third quarter tends to be a very seasonally low one for a variety of reasons, including summer.

You get a floor plan that tends to run down.

The dealer business typically.

Okay.

So several of my companies that I follow have indicated that line usage has not moved very much, but they're actually signing customers up for, you know, people -- people lining up their lines they're not using them.

Is that a fair characterization what's going on with you guys?

That is true.

Are you a seeing a pick up at all in that pipeline of trying to get the lines up?

The pipeline has been, I think, steady but it is at historically very good levels is I guess the right way to put that.

They're not drawing down.

Okay.

Geographically is there any sense of trends there?

No, it's the same way in Texas, California has been a little bit stronger, and I would say it's the same here in Michigan.

Okay.

A couple questions on [Alco].

The fact that the long end has moved up quite considerably.

Does that have much impact in terms of either strategy or spreads in things you're doing?

Particularly in the swap book?

No.

How does that change things.

It really is a function of, again, when we look at managing -- we look at managing net interest income and not the margin, and in that context then we evaluate using swaps, which would be in the two to three year area, or using investment securities.

And so we look at the different scenarios and different elements of that to evaluate which is one versus another.

So there's a blend of interest rate swaps and investment securities.

To the extent we're in that kind of two to three-year area for swaps, the long end doesn't really have an impact.

Okay.

Given that you've put on -- I understand you're moving more into the cash book than the swap book, but are you replacing the widespread swaps that are coming off with any -- are you replacing the volumes at all?

Albeit at narrower spreads?

Some, yes.

Dollar for dollar, or is there less than --

Well, from the past we've made more of a shift into using the securities.

And there will be a blend of that.

There will be a modest bias toward the investment securities.

So if you had initial amounts say for argument sake, a couple billion dollars of the swaps rolling off, you would replace maybe half of that in the swap book and you would do the other stuff in the cash book?

It's hard to just say that blanket, because at the time we actually simulate these things, we look at all the different factors that impact net interest income and in turn the scenarios and the yield curve, all those things, it's hard to blanketly say, that's the case.

Okay.

But I I don't think you could expect that suddenly we're going to balloon up our investment portfolio to be immensely larger than it is today.

On the margin, it's probably going to be a few hundred million higher than where it is in a kind of steady state over the next few quarters.

And the swap book differential in the spreads, the stuff you're putting on today versus the stuff rolling off -- you're putting on 150 basis points versus losing at 4 plus.

Some of the ones that rolled off in the second quarter were over 500 basis points.

Okay.

And spreads could be anywhere from 40 to 80 depends on where you are on the curve.

Is Dale Green on the call to answer any questions?

No.

I'm interested in the auto -- in your auto supplier book of business, whether you -- what kind of sort of trends you're seeing there, the volumes and the car business are holding up maybe a little better than I thought.

But they're still down from what people's expectations were going into the year.

And how are they holding up?

The supplier is fairly stable.

I'll split it into really two groups.

The larger diversified suppliers are doing quite well with the volumes that you see -- that you just mentioned.

The smaller suppliers who don't have that kind of diversity are feeling the pressure in this environment.

And the longer the time and the longer the pressure stays there, the worse it gets.

Time to -- kind of becomes the enemy there.

So larger ones doing quite well.

And the smaller ones are having the issue.

How much of your book would you say is represented from the smaller end of the middle market versus the upper end of the middle market which may be more diversified.

I don't know what that number would be, we have about 2 1/2 billion that's in that total -- and I don't have a breakdown on that.

Okay.

And I wouldn't -- I wouldn't want to guess.

Okay.

Thank you.

That's pretty good -- pretty spread, though.

Appreciate it.

Thank you.

Your next question comes from Jed Gore of Sonovah Capital.

I was wondering if you could recap your credit outlook, and just your outlook for chargeoffs and whether you expect them to stay up around the $100 million level for the rest of the year?

What we've said about credit quality is, if you look at some of the quarters' credit quality statistics, we saw some small signs of improvement as we mentioned on accruals and a small decline in our watch list credit as a percentage of our portfolio.

Having said that.

We don't see whether that -- a trend base will be more clear as the third quarter goes on.

So I would say that improvement will come only very slowly.

Okay.

We haven't given a number out for those levels, but we saw some modest signs of improvement, whether those continue to follow through in 3rd quarter, frankly will be a reflection of the business recovery.

Business recovery, but also inflows are down, corporate bond spreads are at a 53 week low, and there appears to be significantly improved liquidity in the loan sale market.

And we're hearing that the [INAUDIBLE] exam has been pretty benign as well.

I'm surprised your outlook is as muted as it is.

I would call it cautious.

That's the word I was going to use.

I hope that what we're beginning to see is strengthening, but we've been there before with the economy, and it hasn't.

So I think cautious is the right word.

Maybe optimistic pessimism is a good summation. [ Laughter ]

Thank you.

Again, if you would like to ask a question at this time press star, then the number one on your telephone keypad.

Your next question comes from K.C.

Embrich from Millennium.

Ralph, you've commented before about the economy.

You mentioned throughout the calls, I was wondering if you could give us a sense of how far we're away from what the outlook is, is there a -- is there anything that's giving you hope that's down the road?

You know that -- you've seen a lot of published numbers and I think we're not far away from a GDP number in the 2 1/2% range really in all of the markets, that's a little different than it had been in the past, I would say California's slowed down a bit and there's some well-publicized issues in the economy out there.

Texas has pretty much been along the national economy.

Kind of referring back to the discussion earlier, I would almost say people are a little less pessimistic rather than optimistic, but people are not ready, especially in the manufacturing sector, because there is excess capacity that's going to have to be used up before people are optimistic enough to reach out and begin to invest in capital and additional capacity.

So I think we could be on an inflexion point, but we're just going to have to wait and see.

Okay.

Thanks very much.

Thank you.

Your next question comes from John McDonald of UBS Warburg.

Good morning.

I apologize if you covered this, but do you have to do any rethinking structurally of your expense base in light of how weak the business volume is doing, any thinking around that?

We have been cautious about certainly hiring new people, and back-filling positions.

We have -- certainly have people a lot more careful around a lot of other expenses, and I think if you look at our -- obviously our expenses were down in the 2nd quarter versus the 1st quarter and up only 2% compared with a year ago.

So our feeling is, it's pretty good expense control.

In an organization that's historically had pretty good expense control.

Having said that, if we don't see things coming to be a more robust environment, we will have to evaluate other things in more explicit ways than we have in a way to just put a tighter -- a tighter focus on things.

So we do not have any specific programs that we've announced related to people.

People are very important part of what we do, and we're focused on being prepared for when things do change.

So I think if you look at it overall, one from a absolute standpoint, the organization's a pretty productive one.

And second, looking over the last year, we've been able to hold expenses only to a 2% growth, which is pretty good.

Any time frame, Beth, for how long you might give it to see business come back before you think about something more structural?

I think that we'll have to evaluate -- if things are not turning and they sure begin to feel like they're gonna, that it's an ongoing thing we look at, but I think we'll continue to monitor closely in this quarter and next quarter.

Thanks.

Your next question comes from Mike Shipp of Crest Investment.

Good morning.

Good morning.

Sorry to make you repeat yourself.

In the title and escrow businesses, balances increased how much period end to period end?

They were up $2.6 billion.

And I just want to find out, what's your strategy regarding growing the securities portfolio in excess of the title and escrow business?

I think I mentioned earlier that our investment portfolio is not -- at June 30, is not too far off of likely where it will be over the next several quarters.

And obviously, growing the investment portfolio, at this time in the cycle, I don't think is exactly what we want to do.

So I think we're pretty comfortable with it.

It's a 5 to $5 1/2 billion area, and that is what I would anticipate over the next few quarters.

Great.

Thanks.

Thank you.

There are no further questions.

And this concludes today's conference call.

Thanks everyone.

We appreciate you being with us.

Have a good day.