Comerica Inc (CMA) 2003 Q3 法說會逐字稿

Good morning.

My name is Rebecca.

I will be your conference facilitator today.

I'd like to welcome everyone to the Comerica third quarter earnings release 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 would you like to withdraw your question, press the pound key.

Thank you.

Helen Arsenault (ph), you may begin your conference.

Good morning.

Welcome to Comerica's* third quarter earnings call.

This is Helen Arsenault, director of Investor Relations.

I am here with Ralph Babb, Chief Executive Officer , Beth Acton, and Dale Greene, chief credit officer.

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

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

You should be mindful 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 into this call as well as our filings with the SEC.

Now I'll turn the call over to Ralph.

Thank you, and good morning, and thank you for joining Comerica's third quarter conference call.

You've seen the third quarter results were announced this morning, and in just a moment, Beth will discuss them in detail.

While there are signs of economic improvement, business lending remains weak and we continue to be cautious in the short-term.

During the quarter, we made significant progress in formulating and refining our corporate objectives.

Let me spend a few moments to update you on where we are.

Going forward, our objectives are, we're going to increase the * contribution from small business and personal financial services.

We'll do the same for wealth and situational management.

We're going to build a concentrated branch network in California and Texas.

We'll continue to build on our Michigan leadership position, and we'll continue to improve our risk profile.

Our goal is to generate over time above average returns for our shareholders and we believe these objectives will help us reach that goal.

What all this adds up to is greater balance.

So you may be thinking that we're pulling back from our commercial lending franchise.

That's definitely not true.

First, commercial lending is, over the cycle, a very attractive business, and the last couple of bottom of the cycle years haven't changed that picture.

Second, as we have developed our business, commercial lending is * the entry point that feeds our wealth management and personal financial services business.

Our leadership position in Michigan remains equally important.

Strong relationships or profitable relationships wherever they may be, and no one has better relationships than we do in Michigan.

Where*strong retail relationships all give us fee income and low cost funds key if you're a big lender.

We're already seeing steady progress towards achieving our objectives as a result of what we are accomplishing on our corporate priorities.

Let me give you a few specifics that suggest how we're moving forward.

We plan to build about 50 new branches over the next three years, two-thirds of which will be in Texas and California.

We're moving toward a standardized product platform and delivery system, as well as national branding and marketing programs for all our markets.

This means the customer experience will be seamless and our look will be consistent throughout all our markets.

For example, we have developed common sales and service models for how we run our retail, small business, and private banking businesses across our quick print markets.

Within this model, we are developing common business approaches, product offerings, merchandising, branding and expansion processes.

To increase our share of the affluent market we have established private banking units in all of our markets to provide comprehensive private banking services.

Through our enterprise wide risk management program, we're centralizing the integration and management of risk.

As many of you know, our greatest area of emphasis is enhancing credit risk management and our goal is to become an industry leader.

How will we measure our success?

We're well along in forming and reporting those metrics.

We plan to move from the 70/30 earnings split that exists today between the business bank and all other businesses, and California and Texas will constitute a greater portion of our earnings streamed than they do today.

Greater balance will help reduce the sensitivity to fluctuations in the economy, and core deposits from fund loans and help margin stability, and we are building better state of the art tools with which to make decisions about the composition of our loan portfolio, including analyzing lines of business, size of loans, and industry and geographic concentrations.

As we go about all of this, we continue to reaffirm our commitment to the markets we're in, and to the concept of relationship banking with quality customer service, which is our hallmark.

I look forward to sharing even more information and some initial results with you in the near future.

Now I'll turn the call over to Beth to discuss third quarter results.

Good morning.

As I review our third quarter results, I will be referring to slides that we have prepared that provide additional details on our earnings.

These slides may be found on the financial report page within the Investor Relations section of our corporate website, as well as the report on form 8K filed this morning.

On slide 4, we highlight the major components of our current earnings as compared to prior periods.

Today we reported third quarter 2003 net income of 157 million or 89 cents per share, compared with 170 million or 97 cents per share in the second quarter.

The adoption of FASB financial interpretation number 46 in the third quarter resulted in a consolidation of one entity and recharacterization of certain debt, neither of which was material to either the balance sheet or the income statement.

As depicted on Slide 5, net interest income of 465 million decreased 28 million from the second quarter, while average earning assets increased 90 million to 49.8 billion.

The net interest margin declined 28 basis points to 3.70% in the third quarter from 3.98% in the second quarter.

The margin decline was due to several factors. 11 basis points due to anticipated maturing swaps with wider spreads and rates available in the market today in the accrual impact on our swap book from having one more day in the quarter.

9 basis points is attributable to an increase in short term liquidity driven by strong deposit funding.

The decline in average total loans of 1.35 billion was offset by additional short term investments of 1.1 billion, and average investments securities available for sale of 295 million.

Four basis points resulted from a lower impact of net non interest bearing sources of funds, and three basis points resulting from the residual effects from last quarter's completion of the securities portfolio restructuring.

The margin decline during the quarter was consistent with our expectations.

Slide 6 details the components of non interest income.

Non interest income was 221 million for the third quarter compared with 226 million for the second quarter, with many categories of income modestly higher.

Net gain from security sales contributed 4 million to the third quarter compared with 29 million for the second quarter.

The securities sold during the third quarter related to our lending activities.

Other non interest income increased 14 million to 44 million primarily as a result of the absence of 9 million of cash flow ineffectiveness losses that affected the prior quarter, and lower venture capital write downs net of income recognized of 3 million.

Non interest expenses as detailed on Slide 7 were 377 million for the third quarter, primarily a result of increased business unit incentive compensation, and pension expenses.

Due to consolidation in early exit of a leased California facility, occupancy expense increased 4 million.

The consolidation will provide synergies in the affected businesses and reduce cost on an ongoing basis.

Moving to the balance sheet and slide 8, average loans at 41.9 billion for the third quarter were down 3% or 1.35 billion from the second quarter, and were down 400 million or 1% year over year.

International, where we have been targeting reductions in exposures was down 16% from year ago levels.

Slide 9 provides detail on line of business loan growth.

We've continued to make progress in downsizing targeted commercial exposures, as evidenced by combined decreases in large corporate and global finance of 600 million for the quarter and 1.9 billion from year ago levels.

The declines in these businesses have muted the year over year growth in the following portfolios, middle market up 700 million, national dealer services up 50 million, private banking up 300 million, and commercial real estate up 200 million.

Absent the targeted reductions year over year growth in the loan portfolio would have been 3%.

Average loans outstanding and national dealer services declined 400 million this quarter.

This seasonal decline is a result of the annual model year changeover experienced in the automotive industry.

Slide 10 takes us into the credit quality portion of our results.

Nonperforming assets were up 46 Million from last quarter to 627 million and include 598 million in non accrual loans, 4 million in non accrual securities and 25 million in other real estate.

The geographic concentration of nonaccrual loans is broadly consistent with the mix of our overall loan portfolio and is as follows -- Michigan and other markets 52%, western division 32%, international 12%, and Texas 4%.

By line of business, middle market, global finance and small business accounted for 78% of nonaccrual loans.

Shared national credits represent about 20% of total nonaccrual loans, the same as last quarter.

As of September 30, our nonaccrual loans have been charged down to 60% of the original contractual value, compared with 58% in the second quarter.

Slide 11 walks you through the changes affecting the balance of nonaccrual loans.

Nonaccrual loans increased 39 million to 598 million at September 30.

The increase is primarily a function of three things.

Higher levels of transfers to nonaccrual, up 63 million, decreased charge offs down 24 million, fewer loan sales down 19 million.

During the quarter, 211 million of loans were transferred to nonaccrual, compared with 148 million in the second quarter.

The new nonaccrual loans consisted of 26 credits over 2 million.

Three of these new credits totaling 80 million are over 10 million and are in the automotive retail trade and manufacturing sectors.

During the quarter, we took the opportunity to exit eight credits that generated total proceeds of 37 million.

Slide 12 depicts net charge offs by geography and line of business.

Net charge offs for the quarter were 83 million, 47% of which were in Michigan and other markets, 32% in western division 15% from international and 6% in Texas.

By line of business, middle market and global finance account for 76% of this quarter's net charge offs.

Shared national credits represented about 32 million of the total net charge off compared to 33 million last quarter.

Slide 13 provides credit quality data based on industry classification.

Automotive related and Non-automotive manufacturing represented the largest concentration of non-accrual loans at 19% and 15% respectively.

These two industries also represent the largest concentration of net charge offs with automotive accounting for 27% of the total, and nonautomotive manufacturing 22%.

Slide 14 shows the trend in our reserves for loan losses.

Year over year the reserve has increased 44 million in absolute terms and 15 basis points as a percentage of total loans.

The allowance for loan losses remain unchanged at 802 million, at September 30, and total 1.97% of loans.

Moving to the funding side of the balance sheet on Slide 15, average deposits were virtually unchanged for last quarter but were up 13% or 4.8 billion dollars from a year ago, while deposits in the financial services group were up 30% or 2 billion from year ago levels.

These deposits steadily declined during the quarter, a direct result of reduced mortgage refinancing volumes.

These deposits moved directionally with the mortgage origination and refinancing indices, like in the indices by approximately 30 days.

Non-business bank deposit growth continues to be strong increasing 1.2 billion over the second quarter, average non-interest bearing deposits represented 35% of total deposits.

These deposits were up $1 billion during the quarter and 3.2 billion year over year.

Slide 16 outlines our capital position at September 30, the preliminary T1 common ratio was 7.94%, up from 7.61% at June 30.

Many factors play a role in our evaluation of capital management including the pace of economic recovery, relative positioning compared with peers, rating agency considerations, and alternative uses of capital.

Now I'd like to give you our thoughts on current trends as outlined on Slide 17.

Through the remainder of this year, we expect loan demand to remain sluggish.

The strategic repositioning of our large corporate and global finance portfolios is largely complete.

Liquidity levels trended down during the quarter.

As a result our current expectation is that the net interest margin will be largely unchanged from third quarter levels.

We expect net charge offs in the fourth quarter to be similar to the third.

On Slide 18 we want to provide our preliminary thoughts on 2004 and we'll provide an update in our earnings conference call in January.

In aggregate, we anticipate low single digit loan growth for the coming year.

We anticipate certain lines of business such as middle market and small business will grow at higher levels offset by slower growth in areas such as large corporate and global finance.

On average, the net interest margin of 2004 will be modestly lower than 2003.

Assuming higher activity fees and growth in market values, non-interest income should post modest growth, absent security schemes which we don't expect to be a major contributor in 2004.

Due to the continuing challenging business environment particularly in the manufacturing sector, credit quality improvement will be tied to our business recovery.

Now we'd be happy to answer any questions you have at this time.

At this time I would like to remind everyone if you would like to ask a question please press star one on your telephone keypad.

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

One moment while we queue the roster.

Your first question comes from Jeff Davis of FTN Financial.

Good morning.

Ralph, this is the same question I asked you last quarter, and you touched on it in your opening comments.

What are your thoughts.

Comerica did a little bit under 13% ROE this quarter.

You talked about over time producing above average returns.

What are your thoughts, leaving aside the numbers went up and down each quarter, stepping away from the quarterly and what sort of returns can this institution produce as it's configured or where you're trying to push the configuration?

Well, I've not set a target, as I think we talked about last time, for ROE at this point in time, but if you look at history, and factor in a couple of things.

One, we're at a high now in capital, which Beth spoke to the 7.94 that we're at in tier one capital, which is approaching 8% and I think given where we are in the cycle, that likely is close to the peak of where you'll see capital, and as credit quality improves, which I expect it to do, given the economic recovery that I believe will begin to start here or has started and will pick up, you'll see that capital levels begin to rationalize in, I think, a lower level going forward, and therefore, you would expect ROE to move up.

At this point, until we have the portfolios completely restructured, which, as Beth mentioned, I think were close to that, and at that point, using the new techniques and tools that we have to understand what the loss content is going forward in the new mix of our portfolios, at that point I'll feel more comfortable at picking a target, if you will, for ROE going forward.

Okay, if I could just ask a follow-up.

Okay.

One is on the earning power, would it be safe to say that in your mind, that the company is reaching close to a four, whether it bounces around a for a little bit with regards to earning power, and then secondly what I'm hearing you saying that you're likely to begin to repurchase stock, if not this quarter, sometime in the first half of next year?

I think the answer to the first part of your question is, given my belief that there is an economic recovery here, I think that is correct, that we are close to the bottom of that earnings power, and as the recovery picks up and as Beth mentioned in the trends going forward, we should see, begin to see credit quality improve, which means lower provisions, which then interprets the greater leverage and improved earnings.

Your second comment on the Buy back, I think we are probably as I mentioned with my comments, as to where we stand with the state of capital in the industry as well as with us, that we're getting close to that peak, and that would imply that, as we have in the past, we will look at capital either to reinvest and if we can't reinvest it at an appropriate return, then we will do as we have in the past and return it to the shareholder through buyback.

Very good, thank you.

Thank you.

Your next question comes from Gary Townsend of Friedman Billings.

Good morning.

How are you both?

Good.

Good morning.

I was somewhat surprised by the level of infos and MPAs.

I was hoping you could give some color as to just what is, has really transpired in the background, and if you could give some view into what we could expect in 2004, whether you would think that it would moderate from here.

Okay.

Why don't -- this is Dale Greene, Gary.

Let me take a run at that.

We have at this point really there are seven loans we have in the MPAs that are over 10 million.

Those have all been restructured and a couple of those loans came in really the third quarter.

And those are all performing according to the terms of the restructure.

Those loans in that category are largely secured.

There's a few that are unsecured so we feel pretty comfortable with our view of what's in there today.

There are obviously, therefore, a number of loans that are below that 10 million threshold, a number of which are middle market kinds of transactions, again, generally secured, and so I feel reasonably good about, one, the loss content, but two, what's there.

As it relates to inflows, I'm going to sound like a broken record.

It's very much tied to the nature of our economic cycles here.

We are seeing signs of an economic improvement, but there are still some companies out there, particularly as it relates to auto and non auto manufacturing that will continue to struggle, but we believe that we would certainly believe the inflow should moderate as the economy continues to improve.

Well, we're a few weeks now into the fourth quarter.

Can you give some view as to how things are progressing, at least this far into the quarter?

Pretty early in the quarter.

There really isn't any material change from what we're looking at the third quarter, that is to say we're not seeing any, at this point, inflows of any significance.

It will always be the small ones.

We're beginning to see some improvement.

We're seeing that both in terms of our new business opportunities, as well as the quality of our portfolio, but again, I think that this economy here is still showing its stripes.

I'm not absolutely convinced we've seen a turn.

I think it's still somewhat spotty.

Thank you.

Thank you.

Your next question comes from Joe Dubon of Fox-Pitt.

Good morning.

Beth you didn't comment on non-interest expenses in the 2004 outlook.

Could you maybe specifically address the branch expansion and other investment initiatives?

Yeah, a couple of comments.

We, in fact, are beginning the process of the detailed bottoms-up planning process for next year, so I will be giving you more color around expenses in the January call.

Having said that, we will be, if you look at on a broad brush basis, we will be obviously continuing to experience expense related to stock options and pensions, and those are driven by some of the assumptions that underlie and market assumptions that underlie those things which we will give you more color on as we get closer to that.

We will see less of an expenditure next year than this year related to enterprise wide risk management that those expenses are close, to you know, $17 million, $18 million, this year, will be substantially less than that next year.

Apart from that it's really people and it's around merit increases and it's around finding other ways to have efficiencies, and I think if you look at, if you look at our expenses year-to-date, excluding some of those elements that have market-related factors, be it stock option expense, pension expense, or enterprise wide risk which has been incremental this year, really our expenses are up really less than 2%.

So it's those extra factors that will continue to exist for us next year also.

In the case of enterprise wide to a lesser extent.

All right, thank you.

And have you quantified the impact of these investments in the bottom line the next year or two even is there a targeted break even point?

We will have some incremental -- we are targeting more branches next year than this year, and therefore, there is some modest incremental, modest expense.

It will be very small, because more of those branch locations will be open toward the back end of next year and therefore, the change year over year is very small.

All right, thank you.

We're doing about eight a year now, so that's the increment, Joe.

All right, thank you.

Your next question comes from Ross Looby of CSFB.

Good morning, guys.

Good morning.

I wanted to ask a question about Munder (ph).

Obviously we've had a couple of quarters of improving equity market conditions.

Your fees in that area seem to shown somewhat less this quarter.

Can you comment on how quickly we'll start to see if there's any sort of lag in terms of how improved market conditions will trickle down into revenues and contributions for that business?

Part of that is a function of the mix of assets that Munder manages.

Obviously, to the extent it's more weighted in equities, there is more of a pickup in revenue as a result of the equity market improvement, but given the last couple of years, we've seen investors shift more out of equities and into fixed income and cash kinds of instruments, so the mix that Munder has been in the last year or two more -- includes obviously equities, but also a bigger proportion in fixed income, and cash, which carries lower fees.

So we can't just say the equity market was up "X" and so therefore that would translate immediately in Munder's revenues being up an equivalent amount.

We have seen, continued to see through the year inflows into Munder in terms of new business, and that's been a positive, and so I think, assuming the positive momentum in the market continues, we will continue to see improvement in those fees.

Thanks, and one follow-up, if I may.

In the past you've talked about the percentage at which your MPAs are carried as a percent of contractual value.

Can you comment what that might be for the third quarter end?

That number was 60%.

Thank you.

Your next question comes from Scott Siefers of Sandler O'Neill.

Good Morning, I had a quick question on the $13 million quarter increase in commercial mortgage non accrual, I was just hoping for a little color on the increase specifically and then more broadly if you could comment on this year your thoughts on the quality of the commercial real estate portfolio.

Yes, I'd be happy to.

The increase you saw there was owner occupied within our middle market customer base.

So we had a middle market customer or two that went to non performer, we had a few of those, and real estate is a component of the collateral base which it usually is, that would be reflected as real estate owner occupied real estate as part of a total collateral package within the middle market portfolio.

As it relates to commercial real estate, there were no in our commercial* real estate development construction lending portfolios, no inflows to MPAs.

In fact the* few that we have are performing very much according to the agreed upon plan and schedules, and I am optimistic as to our ultimate resolution of those few names and at this point, the portfolio continues to perform very well.

Okay, thank you very much.

Thank you.

Your next question comes from Roger Lister(ph) of Morgan Stanley.

Thank you.

Your accumulated other income was down about 70 million from last quarter.

What drove the decrease?

That largely is a reflection of the mark-to-market on the investment portfolio because of rising interest rates.

Okay, so basically you're just having to write down the gains you had it in already?

It's just marking -- they're unrealized positions, but they flow through other comprehensive income.

So because interest rates have risen, those are less valuable than they were in the prior period.

Right, okay, now that makes sense.

Secondly, is the focus of your bonds expansion more on retail or sort of is it related to small business and middle market and how does this tie in with, I think you mentioned the synergies between private banking and middle markets small business activity?

The branching activity is very much keyed into small business and middle market.

In fact, if you look at the statistics that we watch, you'll find that our middle market clients visit our branch 40% of them visit that branch weekly, and it's a little over a third on the small business side visit the branch weekly.

So location of the branch for the small business middle market is key.

Once the branch is located, then appropriately leveraging that branch for the personal financial services is the piece that we are really focused on as well as the opportunities that small business and middle market provide in wealth management.

We have not focused on that as much as we are today.

Having those customers and having the relationships, it's a natural to bring the additional focus, and we think there's a great opportunity there.

So it's driven by the business, and a very close second is the way you configure the branches, and that's what I meant by concentrated , when I was giving my comments, so they also appeal to the retail segment in a specific area.

So that then makes sense with expanding more in Texas and California?

That's exactly right.

And that just couples right in with private banking, because of the location provides the opportunity to prosecute that strategy, not only to the business customers, but then to the customers in that area.

Because on the initial reactions dramatic expansion, well not dramatic but expansion of branches is the time when everybody else is expanding branches, raises the question why not just do an acquisition?

Well, acquisitions we've always viewed as really a tactic and if an acquisition fit, in other words, where we want to be and where we've looked at from a strategic standpoint, then you would consider that, and have you to consider all of the things that go with it, price and location and so forth, but the focus is at the moment internally, where do we need to be, and where do we want to be over the next three years.

Thank you.

Thank you.

Your next question comes from Eileen Rooney(ph) of KBW.

It's Denis Laplante.

Hi, Dennis.

A couple of questions.

How does your criticize classified in your auto supply book compared with past cycles right now?

This is Dale Greene, Denis.

It compares probably fairly well with the proviso this economic down turn has in some ways been a little more pervasive, as I've said before and has hurt particularly the auto and non auto manufacturing sector a little harder and it's hit really all segments.

Generally in the past there's been more concentration in one area or the other.

So we really had for a period of time a somewhat higher classified than we would have otherwise like to have seen historically.

It's now come back down on our watch loan substandard nonaccrual are down below the 10% target around 9.4, 9.5%.

So that's the good news, but, so it's improving, which is exactly what you want to see as this economy begins to, we think ramp up, as the economy ramps up.

It's consistent with the last downturn but perhaps more heavily concentrated in the sectors I just mentioned.

So the criticized classified of about 9.5, 10%.

Right, 9.4 --

Is that for the whole portfolio for just the auto book.

No, for the whole portfolio.

Ok, so within auto, just within the auto segment, if you're uncomfortable giving me a percentage, are we above the last several cycles or we below the last several cycles?

No, we are not above.

We're pretty much on course with where we have been in the past.

This is not any different from what we've seen historically.

Okay, but within criticized classified, has it been rising in the last couple of quarters?

The five, six and seven loans in total have actually come down.

Obviously you've seen the nonperforming numbers bounce around a little bit which is where we focus most of our attention.

The overall portfolio trends in criticized classified are tending down but within auto they're still holding steady?

They're still steady with some improvement being witnessed as we speak.

Okay.

One question in your comments earlier in the call and centralizing risk.

And this say process I know you've been under way for probably a year or so as I understand.

Are you changing loan authority in the field?

We have not changed loan authority in the field.

As we go through the process, one, we've addressed all of our major policies, and certainly loan authorities and loan committees would be one of those and those were updated and refined, but loan authorities were not changed.

As we go through and implement our new risk rate and tools, which will give us probability before loss in the event of default and other kinds of metrics we will evaluate what loan authorities ought to be, and we, as we have revamped our current policies, we have clearly looked at enhancing the makeup or the composition of our committees, and we have revised our committee structure and really added, I think, additional strength and additional disciplines to the committee process.

So while the authorities haven't changed, we clearly have beefed up a lot of our structure around loan authority.

And we use a committee system.

We have very low individual loan authorities.

Okay.

One last question.

Or maybe a reflection on the trend and inflows.

It was very interesting that your inflows for the last three years have spiked in the third quarter, which happens to coincide with the shared national credit exam, and I guess it's disappointing, it almost implies that you have a period of time where regulatory, the regulators come in and then you see your numbers go up.

Could you comment on that and am I interpreting that a little incorrectly?

I think you are interpreting it a little incorrectly.

It may have been true historically with the [inaudible] review there were some downgrades we were required to take.

I will*tell you there were no surprises in this exams that we went through, we were very much in front of everything.

We had taken the appropriate steps to downgrade, and to charge off when we needed to.

We weren't mandated to do anything.

So frankly, we were in good shape as it related to that.

To me, it maybe more at least this third quarter coincidental than anything.

I will tell you that really, there were three large loans.

Beth already mentioned that, in the third quarter, that were the bulk of the inflows, and frankly at this point in time, while no one's happy about the inflows, I think it is what it is, and hopefully, we'll begin to see some improvement in that as this economy picks up.

And SNIC loans, as a percentage of non accruals is flat quarter to quarter.

Right, 20%.

20%.

Thank you.

Thanks.

Your next question comes from Mike Holton(ph) of [inaudible].

I actually got a couple of questions on some of the things you've talked about so far.

The first is on the non interest expenses.

You highlight in your press release it was up from the Q2 of this year due to an increase in business unit incentive compensation.

I'm kind of curious why incentive compensation is going up.

Because I don't think there's anything in the bank that's growing at all.

Could you talk about that a little bit?

The largest driver there relates to deposit-related incentives and as you can see over the last number of quarters we've had very strong deposit growth and that's what it primarily relates to.

Okay, and on the flipside, again, given the environment remains stubbornly sluggish for you all, is there any sort of, I don't know, greater sense of urgency in terms of bringing expenses down or controlling expenses today versus three to six months ago, anything you're doing incremental?

Well, we have been doing a number of things incrementally over the last year.

As you can see from our press release, we've continued to be holding the line on headcount, headcount is, in fact, down slightly from a year ago levels.

But if you look at it, where a lot of the driver for us relates to the people expense, with merit increases in pension and stock option expenses, as well as the end prize-wide expense this is year were all important elements of the expenses.

Some of those things particularly on the enterprise wide will be less of a spending item for next year.

We are being cautious on travel and entertainment, and all of the things that go with making sure we're also taking care of the customers.

So we are cutting expenses selectively in certain areas.

We've downsized for a second time our technology and life science business based in California.

Recently we also integrated some of our asset-based lending that was carried out through a separate division back into middle market so selectively we are continuing to do those kinds of things.

But we do not see a wholesale or more formal expense reduction program, because we, at this point in the times, we need to make sure we're retaining the, our people and make sure that we're providing them with attractive compensation to drive the revenue face as it comes back with the economy.

Okay, it certainly sounds like a good place to work.

Second question, I think is for Dale on MPAs.

I found your answer to couple of peoples questions unsatisfactory.

You obliviously been reading the paper and seeing other people's earnings releases.

Credit quality is getting incredibly better for almost everybody in the world but yet its not for you.

Could you again, I know there's three big loans.

Is it just you guys are big into a couple of really bad credits and others aren't there.

What is it about Comerica that it's such an outlier this quarter on the MPA front.

Right.

Clearly given the composition of our revenue stream that is primarily commercial loans, we are and said it before quite a bit different as it relates to a number of institutions.

We have a large commercial book.

That's the first point.

Second point is, we do have a lot of, by definition, auto and non-auto manufacturing types of companies who have been very impacted by the downturn and done a lot of things to shore up their balance sheets and expense structures.

A number struggled .

I think because the economy is slow to get started again it will take a quarter or two more to get a little more traction.

We are beginning to see it.

So it's clear that the NPAs have gone up because of those kinds of factors.

When I look at what is in those NPAs and we look on a deal by deal basis I believe the lost content within the NPAs is better than it's been recently primarily because it's middle market companies and they generally are secured.

But again, we need to see some continued economic improvement for me to feel good about continued improvement in inflows and charge offs.

Sure, okay, and then last question for Ralph or Beth, whoever wants to answer it.

What corporate defenses do have you in place against the hostile takeover?

What corporate defenses do we have in place?

I mean, is there -- if something like that occurred in the future, are there a number of things you have in place that would prevent that?

Well, one, we have a shareholder rights plan that is a standard, I believe, in the industry that is there.

We have a staggered board that is pretty typical.

We have protected a number of our executives, which is very standard, and you know, I think the key is that we believe the strategy we have in place and the things we're doing are going to begin to provide the kind of returns that are appropriate, and that is the best defense.

Okay, thanks.

Your next question comes from Barry Cohen of Maverick Capital.

Good morning.

Thanks for taking my call.

Good to hear from you again.

One or two questions if I may get some clarification.

My understanding is that you usually will designate a credit, auto or auto-related at 50% or better of their revenues are based on that business.

Is that right?

Yes, it is.

In your manufacturing NPAs in the losses that you broke out for us, could you make give us a little bit of granularity to those companies that are manufacturing but don't fall above that 50% hurdle rate for auto that may have a reasonable auto component of their business?

I wouldn't have right in front of me the kind of composition.

Clearly we have companies in the portfolio we might designate as non auto manufacturing that might have some either direct or indirect auto revenue associated with them, but typically, it is not as large a percent as obviously it would be for the auto manufacturing segment.

Typically those companies that are in non auto manufacturing and a variety of other industries, usually have if anything a small percentage of the auto-related business.

And you had mentioned that the seven loans that are in the NPAs with $10 million or better in terms of out standings on them had some form of security, some of them had some form of security.

Could you give us a better clarity as to what that is?

Is that essentially the machine tools themselves or are you started to take essentially a lean against the mortgage of the property?

How should we look at what that security is?

When we have collateral, and they're not all secured, but those that are secured, in that we would typically have pretty much all of the collateral, the receivables, the inventory and fixed assets and also have some guaranties, and sometimes we had those when we went into the non performing and sometimes we picked those up after the fact.

Okay.

And maybe an '04 question if I could.

You know, as you guys think about your P&L a little bit, and this is just rough kind of stuff.

I mean, do you think that you're going to start to lower your provision relative to your charge off rates as we go through '04 or do you not think that we're going to do that?

There are a couple of banks that have started migrating that way because of their view of the credit book.

Were you thinking along those lines yourself?

I think we will look at that on a quarter-to-quarter basis as we do every quarter.

For us at this moment, we're at a point where we haven't seen the turn, and I think to the extent we do see several quarters coming up, the next several quarters of much better GDP growth and that translates into better industrial production and capacity to utilization, then I think we'll have seen, get this credit cycle will begin to get behind us, and I think at that juncture and connection with looking at the credit statistics inflows, NPA levels, the charge off levels, then we'd make an assessment about that*.

At this juncture it would be premature to say quarter one we're going to start providing less than what we're charging off.

I think we want to be cautious in making sure that the turn has come, and that it's not just a quarter worth of turn.

And two maybe more follow-up questions.

One of them is going to be really easy.

What are you seeing in terms of your utilization rates or take rates on credit issuance these days?

We have not seen much change over the last several quarters in terms of utilization.

Okay.

And then my other question is a little kind of more straightforward, which is when you look at your capital generation rate, you know, you guys have your earnings are your earning*s but your capital generation rate is still above what your balance sheet demands are, and I guess what I'm trying to understand philosophically, you don't want to have a problem with your balance sheet and equity.

You haven't bought back any stock this year and still earned at a rate significantly above your balance sheet growth demands and significantly above your ever-increasing dividend pay out.

What is going on in terms of essentially the hoarding of capital?

If you were to buy down stock, you would have never been in a position where you'd never put the bank at a credit risk or something along those lines because your losses haven't materialized to the extent some of the other large share national credit players have.

If you look at our capital ratio, and I don't have the data for the industry for obviously the third quarter, but if you look at our capital ratios for the second quarter compared with peers, they're very much in line and the whole industry, frankly, over the last couple of years, has moved to a higher capital position, and appropriately so during a period of uncertainty.

I think as Ralph indicated earlier that as we see that uncertainty dissipate, that we will see actions, I think as an industry as a whole to start to bring capital levels down, and I think we are cognizant of that as we go through as we mentioned.

We look at the pace of the economic recovery.

We look at how we compared with our peers.

We looked at where we stand with the rating agencies, and what alternative uses we have for the capital.

All of those go* into our thinking every quarter as we look at it.

What is your marginal rate of reinvestment then?

That's been the basic question.

When you look at your marginal and interest margin that spread, what right now is your marginal reinvestment rate or marginal spread on your capital that you're turning on your balance sheet then?

In terms of the return of keeping the capital as opposed to --

Well, I mean, essentially you could either grow your assets or keep your assets at the same level, right, or you can return the capital to us without doing that with your balance sheet, and so the question then really becomes what is your marginal net interest spread on your reinvestment?

If we were to take a look at all the capital that you generated this quarter, and how your assets have turned, you know, pay downs, payoffs, losses, however you want to view like the generation or the turn of the capital on your asset side, what essentially was your marginal spread on what was reinvested through?

Well, I guess I'm not exactly clear how I would answer that question.

Obviously, we know the overall return on the business in terms of ROE.

We also clearly are raising capital levels at a time when we continue to see uncertainty.

So frankly, it's been not so much a number drilled down on the investment returns.

It's been a perspective on what the industry is doing and how we're positioned, and the uncertainty that surrounds our business.

Those were the drivers in our thinking of the accumulation of capital over the last year.

Okay, well, I appreciate your help.

Thank you.

Your next question comes from Mike Mayo of Prudential Securities equities.

Hi, Mike.

Hi.

Just with regard to 2004 guidance, it looks like it's kind of tough to get to consensus of $4.05.

Can you comment on that?

I think at this juncture, we've given you the trends that we have, and from our point of view, we're not giving -- we tend to feel it's important to give you trends and sensitivities, and give you enough information about our business to make an assessment, and we don't have all the pieces yet for '04.

We will be giving you more clarity around some of those things in our January call.

So at this juncture, these are the main drivers that we see.

And then separately, I guess this is for Ralph.

Regarding the new strategy, if you can give some more clarity.

You say you're going from 70% business banking to where, what kind of changes do you expect in California and Texas?

That's the kind of the first part of that, and then national branding and marketing strategy, had you considered perhaps selling, you know, Texas or California as part of the new strategy?

It seemed like you're going the other way as far as the national branding approach, and then how long do you have to make the whole strategy work out?

Thanks.

Yes, I think, Mike, in talking about the California and the Texas strategy, I mean, clearly today, as a percentage of our earnings, they're pretty much in line with the loan totals that you previously saw.

So we currently have about 40% of our revenue and earnings in California and Texas.

Those are markets where we don't have what I'll call significant market share in the middle market like we do here, which is approaching 50% in southeast Michigan.

So the opportunity there not only because those markets have higher growth profile, is better because we have opportunity to move market share, which we've always done in the past.

So moving our investment to California and Texas makes sense from that standpoint.

Because the opportunity is there.

We have the recognition there especially in Dallas, and now in the major metropolitan areas of California.

So I believe that makes sense to take the model.

40% of earnings in California and Texas are going where over the next three years to 50%, 70%?

Well, we'd like to move that 70/30 down.

I don't have a target for that and I'll tell you why, because as things pick up here in the economy, the business bank will begin to grow as well, and as it grows, it will likely grow at a level somewhat equivalent to or slightly behind the focus on the personal financial services and wealth management.

So while you get more balance, you don't get a change in the percentage.

It will take time.

It will take a number of years for that to move.

And then is this a plan that was presented to the board?

Is this kind of a new strategy of a name for it?

When will we hear more about the strategic evolution?

This plan has been thought through and is not far off of the focus that we've had for some time now, and it will continue to evolve, and I, as I mentioned in my remarks, will continue to keep you informed as to how we're moving forward with it, and the metrics we're using to measure.

We've put in a lot of new systems that will begin to give us metrics that we have not had before, like number of products per customer, as well as revenue per product, and revenue per customer and so forth.

And we will begin to roll those out, as I mentioned, in the not too distant future, and in the spring, I think we will likely have an investor day, which we will take people through in detail what we're doing in all the various business units.

And lastly, how long do you think you have to make this strategy work?

Some other banks will say we'll give it two or three years.

If it doesn't work we'll reevaluate.

How long do you kind of give yourself?

Well, I believe we're already starting to see the improvements that are taking place, and so I think it's beginning to work.

Mike it, is not a radical change from the way we approach the relationship today.

It is what I'll call more of a refocus, and refocus mainly in California and Texas.

Because we were focused here in Michigan.

Okay, thank you.

your next question comes from Leo Horman (ph) of All-state insurance.

Good morning.

Most of my questions have been answered.

Could you go through the three large loans that were the big piece of NPA and whether or not there's commonality among the loans either outside or middle market there were other commonalities there?

Yes, basically we typically don't comment on the specific names.

We talk about the industry.

Beth did talk about those.

One was an auto supplier, one was in really a retail trade, and the other was in sort of the manufacturing non-automotive manufacturing sector.

So I would say that there was very little commonality in those names.

And they were not all in Michigan either.

Right.

Okay.

The second question, and a couple of people have already alluded to this before.

Given that you guys are changing sort of your strategic focus, and given that you really have a great niche in the mid-west and commercial lending, would it or at what point would it make more sense to diversify that strategic focus through a partner, and kind of walk through how you guys think about that alternative versus going alone versus doing that with another partner.

I think we're capitalizing on the strengths that we've had.

As you mentioned, on the relationship building, which has been very strong for us in not only Michigan, but California and Texas, and that's what we're known for.

We are bringing out more focus, products and services, to those relationships which we believe will increase the profitability longer term, and provide us in markets where we don't have the kind of market share we do here, the growth potential that we feel is appropriate.

Given that, I think that strategy longer term will provide the kind of returns that are appropriate for our shareholders, and that's the strategy we're following today.

Thank you.

Your next question comes from Charles Cascarilla(ph) of Claire Bon(ph) capital.

A question on the expense side.

How should I think about your expense base.

Revenues are down the last six quarters and expenses are basically at an all-time high on a quarterly basis*.

Is there any flexibility to cut costs?

Is it up 2% on a quarter basis I know you mentioned.

Shouldn't there be real room to cut costs?

We continue to be mindful of making sure we're delivering the business to our customers and as in an efficient manner as we can.

If you look at our expense base a very large pro*portion of our expense base is people and that is the secret to, frankly, the success that Comerica's had, and while we can make reductions certainly in, whether it's in staff roles or bringing some of these synergies together, we've talked across our geographies, there will be efficiencies that come out of it.

There will be efficiencies that come out of our better tools on the risk management side in terms of collection of data analysis, and following of credits.

So I think there will be things that we're conscious of and we will continue to do, but we're not about going in and saying we need to take a 10% headcount or 20% headcount reduction particularly now, at a point where we believe the economy is coming back, and those are revenue producers.

Those are people out on the line developing relationships and growing the business.

So are there things we can be doing?

Yes, and we are continuing to try to work on that, and but we also are mindful that we need to protect the very important employee base we have to deliver the revenue in the future, and we are making some investments for the future that will bring, one, revenue, and two, efficiencies in other arenas.

So we haven't lost sight of it.

I think we're continuing to make sure we're mindful of that as we move forward.

You know, I appreciate that, but if you think about, you know where the revenue trends have been and, you know where the employee expense trends have been it doesn't really foot with you know, sort of the compensation you want to have versus your revenue generation.

I mean, at least from the outside, and so I mean, I'm just trying to understand, you know, where are you willing to take the expenses if revenues sort of stay flattish.

I think part of what's getting maybe related to your comments, certainly we've seen some added factors that have impacted expenses over the last couple of years, including our decision to adopt the stock option expensing, also with the, if will you, the perfect storm of returns on the pension fund being at low returns for pension funds in general, and low interest rates all combined have pension expense, be it at higher levels than it would have been in normal kind of state.

So I think those, plus enterprise-wide risk, those are kind of three things that have been a driver, an important driver to our year-to-date expense increase compared with the year ago.

Some of those are harder to, are things we evaluate certainly on stock options, how those interact with the total compensation package for employees.

I also mentioned that enterprise-wide risk will be reducing next year, but if we were to say that we were going to have a prolonged economic situation where it's pretty weak over the next 12 months then I think we'd have to reassess it.

It's not our current perspective at the moment.

And we are looking business by business.

If you remember what Beth said earlier about our asset base lending business, which we are reducing also TLS, we're reducing those businesses that aren't returning or under the spotlight.

If, not in our long-term strategy, then we are consolidating and eliminating, including space, as was about $4 million of the expenses this quarter was consolidation of space which will lower expenses going forward.

That process won't stop, and that will be a continuing process to bring that expense base down.

Your point is a good one.

And I guess one other question sort of unrelated to that, is you mentioned sort of an 8% being your bogey on the capital ratio.

You should basically hit that sort of next quarter on your internal capital generation.

You know, what do we expect you to step in and start buying back stock?

I know you've been asked this question but it seems you're at the capital ratios you want to hit.

You know, with the 12% or 13% return by buying your stock, your ROE, doesn't make sense for you to be basically using some of the capital generation to keep your capital ratios at 8% instead of building above that which is what you'll be doing.

What I said earlier was that we're approaching 8%, and that it was my feelings that in the industry now, and where we're positioned, if you go back to the comments about that earlier, that I think we have positioned ourselves at the right point, and as we begin to see improvement on the credit quality side, then I think certainly the point is, do we have appropriate use of the capital or do we return it to the shareholder, and we have been very forthright in doing that in the past and I would expect that to be the same in the future.

Okay, great, thanks a lot, guys.

Your next question comes from Fred Cummings of McDonald Investments.

Good morning.

Beth, just a quick question for you.

What type of interest rate assumption are you assuming, and are you making in coming up with the forecast for the margin next year?

I'm assuming you guys are asset-sensitive.

I just want to know how much help would you get if the fed were to start tightening say in the second half of next year?

The perspective I gave you on the margin for next year, on average it would be modestly lower than this year's because we've seen a decline, a fairly steep decline this year.

That is driven off really looking at having this excess liquidity that we had for a good part of this year, will largely dissipate next year and it factors in obviously swap maturities which we have a $3.5 billion of swaps maturing next year, $3 billion of that in the second half of next year so more loaded toward the back end.

We'll see some variability around the margin as we go through the quarters next year but there is not a large assumption or we're not betting in terms of making an estimate for you on next year related to interest rate increases in giving you that outlook for the margin.

I think to the extent there is increases in interest rates, it will be helpful to us.

From an underlying economic standpoint, David Litman, our economist is forecasting there will be increases in the fed funds rate in the second quarter and also the fourth quarter such that, by the end of the year, we'd be at 2% on fed funds.

Okay, thank you.

But we're being conservative in how we're estimating that relative to the margin outlook that we gave you.

Okay, thank you.

your next question comes from gay Jason Goldberg from Lehman Brothers.

They've all been addressed at this point.

Thank you.

Next question from Jeff Davis of FTN Financial.

Follow-up question on the margin, Beth, to the extent the guidance for this*quarter is flattish on the margin and the excess liquidity draining off on which we don't have much spread.

What about spread revenues?

We gave up, what, 25 million, 28 million this past quarter.

I would assume that for this coming quarter, spread revenues are going to be down, but not down as much.

Yes, I think an important driver obviously to the net interest income in the fourth quarter is absolute level of loans and earning assets as opposed to the margin.

So as you know, we had a decline in our loan base in the third quarter, and we've indicated that the fourth quarter will be pretty sluggish in terms of loan growth.

I think that is an important driver to the net interest income number in the fourth quarter.

Okay, but I'm not off base in saying that we shouldn't look to see a give-up in spread revenues of the magnitude we saw this quarter?

This would be the hope, yes.

Thank you.

Your final question comes from Mike Holton.

Just wanted to follow up on some of the comments about kind of the new strategy working and the progress that you're making and you know, your true progress on the front is hard to find.

Sometimes you think you have true progress and catch a tough economy or soft credit costs and it double teams your earnings prospects.

As investors, we look for progress in terms of earnings and stock price amongst other things.

We look at Comerica, stock price struggling while other banks are hitting 52-week highs.

As investors we look at earnings which you're still under pressure while a lot of other banks are showing for various reasons very good quarters and I guess, Ralph, and Beth, what I'd be interested in hearing is, do you have any sort of quantitative targets or goals that you all can share or will share in the near future with investors so that we can, again, measure that progress on a quantitative basis?

Beth gave you earlier the trends that we're expecting, and if you think back what I've been talking about is better balance, and exactly the strategy that we're putting in place is growth in the areas that leverage on the business we have.

One of the things coupled with that is enterprise wide risk management, and if you look historically at where our losses have been in our commercial lending versus where they were in this cycle a clear component of the future is that those losses don't peak anywhere near what they did in this cycle, and that's the kind of controls we're putting in place, and as I mentioned earlier, while I don't know whether the peak number is 60 basis points in charge offs or 70 or 50, because I want to see the final metrics and numbers out of the systems we're putting into place, but we will have a much better understanding of where that is going forward.

Once you have that feeling, then I think you can begin to forecast forward as to what we think the ranges are both at the top of an economy and the bottom of an economy, and the key for shareholders and shareholder benefit is that that be a fairly narrow range, as it had been historically.

The other strategy is really just focusing on the customers we have and the business that we do, and making sure that it is at peak profitability.

So yes, we will, as we get through these various initiatives, come forward with what I think will be a little more straightforward for you focus on the future.

Okay.

All right, thanks.

At this time, have you no further questions.

Are there any closing remarks?

No, thank you very much.

And I hope everyone has a good day.

This concludes today's Comerica third quarter earnings release conference call.

You may now disconnect.