Comerica Inc (CMA) 2003 Q4 法說會逐字稿

Good morning.

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

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

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

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

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

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

Thank you.

Miss Arsnault, you may begin your question.

Thank you.

Good morning and welcome to Comerica's fourth quarter earnings conference call.

This is Helen Arsenault Director of Investors Relations.

I am here with Ralph Babb, Chairman, Beth Acton, Chief Financial Officer and Dale Green, Chief Credit Officer.

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

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

And an effort [inaudible] should be reminded of the risks and uncertainties that can cause future results to vary from expectations.

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

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

Good morning.

Thank you for joining Comerica's fourth quarter conference call.

First I'll briefly review our results and then tell you where our focus will be in 2004.

After that, I will turn the call over to Beth.

The quarter ended as we expected, given the challenges our customers faced as a result of the economy.

Net interest income was down and fee income was flat compared to third quarter.

While expenses were up slightly for the quarter, we have put in place a number of actions to keep expenses flat this year.

For 2003, loans increased 6%, excluding global corporate loans, and deposits were up 10%.

I believe we are now seeing the turn in credit quality based on lower net charge offs, lower inflows into non-accruals, and lower ending non-performing assets that we reported for the fourth quarter.

And I anticipate even more improvements in 2004.

The business recovery appears to be taking hold and we are well on our way with projects like enterprise-wide risk management.

This year, we intend to capitalize on our strengths and grow our businesses as we continue our efforts to recapture our historical position in efficiency and credit risk management.

Beth will provide more details on the trends we expect in 2004.

Looking beyond 2004, I'd like to reiterate our performance objectives for expected growth rates for the longer term.

Our objective is to grow revenues by 5 to 7% while holding non-interest expenses at a 2 to 3% growth rate to achieve a 50% efficiency ratio.

We want to report predictable credit quality, meaning net charge offs should average between 40 and 60 basis points and peak at 75 basis points.

We will continue to maintain a strong capital base with tier one common equity of 7 to 8%.

Thus, our goal as a return on equity of 15 to 18%.

I am confident we have a solid foundation now in place from which we can grow profitably and provide attractive returns for our shareholders.

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

Good morning.

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

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

Today we reported fourth quarter 2003 net income of $158 million or 89 cents per share, compared with $157 million or 89 cents per share in the third quarter.

For the full year of 2003, we reported $661 million in net income, or $3.75 per share compared with $601 million, or $3.40 per share in 2002.

As outlined on slide five, net interest income of $457 million decreased $8 million from the third quarter while average earning assets decreased $2.4 billion or 5% to $47.5 billion.

The net interest margin increased 13 basis points to 3.83% in the fourth quarter from 3.70% in the third quarter.

There are several factors that led to this quarter's higher margin.

Ten basis points attributable to a decrease in short-term liquidity driven by reductions in the title and escrow deposits, 6 basis points from lower core deposit rates and partially offset by a negative 4 basis points due to anticipated maturing swaps, with wider spreads than the rates available in the market today.

Slide six details the components of non-interest income which was $220 million for the fourth quarter, relatively unchanged from the third quarter.

On a combined basis, fiduciary income, commercial lending fees, and brokerage fees were up about $5 million from the third quarter.

These increases were largely offset by a $4 million decrease in foreign exchange income.

Other non-interest income increased $3 million to $47 million primarily as a result of higher investment banking fees, and warrant income.

Non-interest expenses as detailed on slide seven increased $2 million to $379 million for the fourth quarter.

Legal fees were up $4 million this quarter, however these expenses were largely offset by declines in various expense categories.

Full-year 2003 expenses were impacted by a few key drivers: Pension, stock options, and enterprise-wide risk management initiatives.

Thirty six million dollars between the three of those of incremental expense.

Excluding those changes and the goodwill impairment in 2002, expenses were up 1% from the prior year.

Having said that, our goal is to hold expenses flat in 2004.

In the second half of last year, we initiated multi-pronged efforts related to expense containment which will be in full force this year and will help us achieve our 2004 target.

The resulting actions include requiring approvals at the highest management level to hire or replace positions, initiated review of organizational structure and effectiveness, tightened our travel and entertainment policies to restrict scope and scale, additional sharing of rising health care costs with the employees and other personnel-related costs, and we reviewed key income statement line items with recommended actions for containment.

Moving to the balance sheet and slide eight, average loans at $40.9 billion for the fourth quarter were down 2% or $1 billion from the third quarter and were up $300 million or 1% for the full year.

The western region reported 5% average loan growth over the last year, resulting primarily from increases in dealer, commercial real estate, and middle market lending.

Slide nine provides detail on line of business loan growth.

In the fourth quarter, we reported modest increases in average loans of small business and personal financial services. $200 million on a combined basis.

Loans were up 1% year-over-year including the $1.8 billion decrease in global corporate banking, which includes large corporate and global finance.

Excluding global corporate banking, year-over-year loan growth would have been 6%.

This demonstrates our continued ability to garner additional market share during periods of declining commercial and industrial loan volume for the industry.

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

Non-performing assets were down $89 million from last quarter to $538 million, and includes $507 million in non-accrual loans, $1 million in non-accrual securities and $30 million in other real estate.

The geographic concentration of non-accrual loans is broadly consistent with the mix of our overall loan portfolio, and is as follows: Midwest region and other state, 57%, western region, 28%, international, 10%, and Texas, 5%.

By line of business, middle market, global corporate banking, and small business account for 80% of non-accrual loans.

Automotive-related and services represent the largest industry concentrations of non-accrual loans at 17% and 15% respectively.

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

As of December 31, our non-accrual loans have been charged down to 58% of the original contractual value compared to 60% in the third quarter.

The higher level of recovery this quarter, $21 million, indicate a benefit of an improving economy on our non-performing borrowers and the efforts of our workout team.

Slide eleven walks you through the changes affecting the balance of non-accrual loans.

Non-accrual loans decreased $91 million to $507 million at December 31.

This decrease is primarily a function of lower level of transfers to non-accruals.

During the quarter, $114 million of loans were transferred to non-accrual compared to $211 million in the third quarter.

The new non-accrual loans consisted of 12 credits over $2 million, $3 million excuse me, three of these new credits totaling $42 million are over $10 million and are in the automotive sector.

During the quarter, we took the opportunity to sell six credits, three of which were on performing status.

Slide twelve depicts net charge offs by geography, line of business and industry.

Net charge offs for the quarter were $76 million, 58% of which were in the midwest region and other states, 29% in the western region, 11% from international, and 2% in Texas.

By line of business, middle market, global corporate banking, and small business account for 91% of this quarter's net charge offs.

Automotive represents the largest industry concentration of net charge offs at 36% of the total, with technology related loans representing 19%.

Shared national credits represented about $1 million of total net charge offs compared to $32 million last quarter.

Slide thirteen provides credit quality by line of business for the full years 2003 and 2002.

Global corporate banking and our specialty businesses saw the most improvement in credit quality during 2003.

As you would expect, our middle market and small business borrowers continued to be challenged by the economy.

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

Year-over-year, the reserve has increased $12 million in absolute terms and 12 basis points as a percentage of total loans.

The allowance for loan losses at December 31 totaled 1.99% of loans.

Moving to the funding side of the balance sheet on slide 15, average deposits decreased $2.2 billion, or 5% from last quarter.

More than explained by a decline in deposits from our title and escrow customers, included in specialty businesses.

These deposits were up 25% or $1.6 billion for the full year, but has steadily declined during the fourth quarter, a direct result of reduced mortgage refinancing volumes.

Slide sixteen outlines our capital position.

At December 31, the preliminary tier one common ratio was 8.06%, up from 7.92% at September 30.

During the quarter, we resumed our share repurchase program, acquiring approximately 500,000 shares, for $27 million.

With credit quality improving, the need for higher capital levels has been reduced.

Our ongoing target for tier one common ratio was in the 7 to 8% range.

Within that context, we will continue to be an active capital manager.

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

Slide seventeen outlines some broad trends for 2004.

In aggregate, we anticipate average loan volumes for the coming here to be flat with 2003 and low to middle single digit growth between the end of 2003 and 2004.

Average earning assets will be modestly lower in 2004 compared to 2003 due to reduced levels of short-term investments, resulting from lower title and escrow deposits.

On average, the net interest margin in 2004 will be relatively unchanged from 2003.

Assuming higher activity levels and growth in market values, non-interest income should post modest growth absent securities gains which we do not expect to be a major contributor in 2004.

There could be some variability between the quarters, as the first quarter has fewer business days and often lower activity-based fees.

As mentioned earlier, we expect 2004 expenses to hold flat with 2003 while continuing to invest in strategic initiatives.

Finally, we believe that the credit statistics reported for the fourth quarter are generally indicative of overall improving credit quality conditions.

We anticipate improving trends throughout 2004 with lower non-performing assets and full year average net charge offs nearing 60 basis points, the high end of our anticipated range in reasonable economies.

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

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

At this time, I would like to remind everyone, in order to ask a question, please 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 Rodrigo Quintanilla of Merrill Lynch.

Hi, good morning.

Good morning.

I was wondering whether you could also give us your outlook for reserve releases?

For '04.

We obviously build the reserve from the bottom up.

And depending on how the credit, the pace of the credit quality improvements, and longer, there are a lot of dynamics that go into looking at it.

But starting from the core of building the reserve from the bottom up, our expectation would be at least for the foreseeable future that we will continue to provide for charge offs in our quarterly provision.

Okay.

Thank you so much.

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

Good morning.

Good morning.

Ralph, in light of the Morgan One deal announced yesterday, any thoughts on interest on the behalf of CMA with regards to its own acquisition program?

Which I guess we haven't had much of, of late?

You mean our acquiring others?

Correct.

As we've said in the past, for us, acquisitions are a tactic.

And we've mentioned our growth aspirations, especially in light of our positions in both California and Texas.

And what we do is really model from an internal standpoint and if acquisitions then come available and meet the various criteria, we would certainly be interested in looking at them.

But they've got to fit very specifically where we are and where we want to be.

Are you -- and so should I read that as there's nothing really imminent, whether small, or modest in size?

Well, I wouldn't comment specifically on any transactions, but you know, we're always looking, and as I've indicated over the last several calls, we are focused now on growth, and especially in the California and Texas markets, and maintaining our share here.

Okay.

Fair enough.

May I ask a follow-up question?

You sure can.

Beth, with the regards to the balance sheet management, any shifts in how you manage the balance sheet, given that it looks like we're going to stay in a low rate environment for a while longer?

No, I think while we gave you an indication of where we believe margin will be for this year, which is fairly comparable with last --

Right.

But are you getting there differently?

No.

Our strategy related to managing our interest rate risk is consistent with the past.

Okay.

For the quarter, how much in swaps did you put on?

And what's the roughly average spread versus what you were putting on earlier this year, which I know was modest?

Yeah, we put on $1.5 billion in the fourth quarter and it's about 135 basis points of those swaps put on.

If you look at swap spreads back in June, they were maybe 50 basis points.

Right.

And today, they're about 150.

So there has been an improvement and that's in part why our forecasted margin in the fourth quarter, we indicated could be about the same as the third.

In fact, it was better in the fourth quarter.

And part of the reason, well, one part obviously, was lower deposit rates but the other part was swap spreads were better than what we had expected.

Okay.

And you had $800 million rolloff this quarter?

We did.

Okay.

Very good, thanks.

Thank you.

Your next question comes from Ros Looby of CSFB.

Good morning.

Good morning, guys.

Good morning Ros.

A couple of questions for you.

Just starting with the title escrow business, obviously those balance did come down in the quarter.

I know that -- I see that they're no longer broken out specifically in your deposit table.

I guess, Beth just because they're such a big piece of the puzzle for 2004 can you either give us the percent by which they when down from last quarter or the absolute amount?

Yeah.

The total amount of deposits for the financial services group was $6.4 billion on average in the fourth quarter.

That was down from $8.8 billion in the third quarter.

We have indicated that generally speaking we think those deposits will come down to some kind of steady state, about $4 billion-ish.

So there will be, we would anticipate some additional decline this year in the financial services deposits.

Okay.

And one more, if I may.

Your 2004 guidance is based on a flat rate environment or are you assuming some level of rate increases?

We have an assumption that rates will rise this year, that we will see 50 basis point increase in the second quarter, and 50 basis point increase in the fourth quarter.

When you look at the averaging effect, it's an average of about 21 basis points higher, fed funds rate this year versus last, but it is only a minor positive contributor to the margin for this year.

But you are still in net net an asset sensitive position?

Yes, we are.

If rates though do change, are pushed out to rise later in the year or don't rise as much, there is obviously a little sensitivity to net interest income but it's very small.

Well, that would be biased down?

Right, 1% or less effect.

Okay.

Fair enough.

That's very much, guys.

Thank you.

Your next question comes from Jason Goldberg of Lehman Brothers.

Thank you, good morning.

Good morning.

Just one point of clarification.

Your net interest margin guidance when you said stable, is that stable with the fourth quarter of '03 or stable with the full year 2003?

Stable with the full year.

The full year was 395.

Perfect.

And then secondly, I guess transfers to non-accrual, net new loans to non-accrual this quarter were a lot lower than last quarter.

Can you just extrapolate in terms of the composition last quarter versus the composition this quarter and kind of where you see the most improvement?

Yes, I'd be happy to answer that.

I would say a couple of things.

One in terms of just the size of the deals that moved in, they were much lower, size, I think we indicated that there were really three over $10 million.

They were all in the automotive sector, if you will.

By and large, the transfers in last quarter were fairly consistent in terms of the types of industries that would be -- that we'd be looking at primarily the automotive sector.

What we really saw this fourth quarter was we have as you know been working very hard to reduce problem credits, and clearly, the traction, the actions we've taken have had a major impact.

So I would say that the composition in general was not that dissimilar to what we've seen in the past.

It's just that we got the numbers down substantially in terms of the average size.

Great.

Thank you.

You're welcome.

Thank you.

Again, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad.

Your next question comes from Gary Townsend of Freedman, Billings.

Hi, Gary.

Good morning, how are you both?

Good morning.

Could you just quickly discuss market differences as you talk about improvement generally in the tenor of business in your marketplace, but is California still particularly different from say the midwest markets?

California has been I would characterize as more resilient throughout the downturn, especially in southern California, and one of the industries that we have a special emphasis in there is home building.

And that has continued to be hot all the way through the cycle.

Especially in what I would call the beginning home buyer, those type of homes.

Middle market likewise has been good.

In southern California, beginning to strengthen in northern California.

Technology is beginning to come back as well.

And so the backlogs there, I think, indicate that there is a building of what I'd call traction.

In the Texas market, same thing is beginning to happen.

We're seeing a lot of activity there.

Not coming on the books yet, but in preparation.

And here, it's been a little slower.

The manufacturing sector has been hit the hardest.

And it is, I would say, stable, but has not shown a real traction to begin to put on earning assets at this point.

So when you say the business recovery appears to be taking hold you're speaking more to California and Texas than you are in your home market?

Yes.

And I would add to that, we're seeing obviously pickup in fees, loan fees, seeing pickup in the smaller end, especially in the small business, and that's really in all the markets which typically is kind of the beginning of things to happen.

I'm not predicting, as Beth said earlier, a large increase in loans, especially in the beginning of the year.

I think it's going to build through the year slowly on the base in total, and as Beth mentioned, we'd be up mid-single digit from year end to year end, while we'll be, because of the run-down in large corporate and international, on a comparative basis, be flat to down.

The important thing to me is the mix has changed.

It is back to our traditional customer, where we have a real relationship focus and profitability there is much better and our ability to provide additional products as well provides additional opportunities.

I think Gary, too, the comment on the business recovery taking hold is not just related to loan demand coming back, but it's also focused around credit quality.

And we certainly saw those improvements in the fourth quarter, which as we said, we are optimistic that those improvements will continue.

So that's another part of the equation.

Thank you.

Thank you.

Your next question is a follow-up question from Ros Looby of CSFB.

Thanks, one more, if I may.

You mentioned Beth, that you guys had sold I believe six credits during the quarter.

Can you give us the total dollar amount and how much of that was out of non-performing assets?

Yeah, we had sold, for proceeds of $63 million, and of that, 15 were performing credits.

Okay.

Are you going to continue to pursue sales, do you think, going forward?

Or are you pretty much --

Oh, we will.

This is Dale Greene.

We will continue to use that tactic when it's appropriate and we have found it to be highly effective.

If the market rebounds, we find that it's in some ways even more attractive for us, so, as it makes sense for us to continue to work down our problem credits so we will continue to do that.

Okay.

Thanks very much.

Thank you.

Your next question comes from Chris Mutascio of Legg Mason.

Good morning.

Good morning.

Most of my questions have been answered but I wanted to ask you about the tax rate in the quarter, somewhat lower than I guess I anticipated.

Is that sustainable?

It's, the lower rate in the fourth quarter was due to adjustments related to state taxes.

We typically, as we near the end of the year make adjustments for apportionment factors related to states so that it is a fourth quarter phenomenon.

So you expect it to go back to a more normalized level in the first quarter?

Yes.

I think for this year we'd be looking at 31 to 32 kind of effective tax rate for the year.

Thank you.

Thank you.

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

That's okay.

Actually Chris just covered mine.

Thanks.

Thanks.

Your next question comes from Bob Axe of KBW.

I apologize if you went through this on the call already but could you give us an update on what you plan to do with capital management next year, as in buying back stock or have you discussed this previously?

Yeah, what we said is, well, obviously, we resume resumed the buy back program in the fourth quarter, and we've indicated with credit quality continuing to improve, that the need for higher capital levels obviously will be reduced.

So we'll want to get back into that ongoing target range between 7 and 8% for our common tier one ratio.

At the end of last year, we ended at 806.

So obviously we will, within the context of that 7 to 8% tier one common ratio, we will be an active manager of capital.

Your next question comes from Michael Schiff of Kress Investment.

Good morning.

A couple of questions.

One point of clarification.

Your guidance for earning assets, Is that full year over 2003?

And in addition, are you planning on replacing title and escrow with investment securities in the balance sheet?

The lower average, lower earning assets is on average '04 versus '03, to your first question.

And as we see title and escrow continue to come down, obviously, we are looking at growing, looking at deposits strategically in terms of additional branches that we will be opening over the next several years in California and Texas and Michigan, continuing to mine the small business and grow that business more, which happens to be deposit rich.

Also we have a very good involvement in the technology and life science business which also is a deposit-rich business.

So in terms of the securities portfolio, when we say average earning assets we envision that the short-term investments that are on the balance sheet today will come down from where they are today because of the lower title and escrow deposits.

So it's really that, not the available for sale portfolio but the short-term investment piece that will come down to more normalized levels.

And Ralph, your longer term goal of an ROE of 15 to 18%.

When do you project you can get to the low end of this?

Well I think certainly we're looking out into '05 and '06 and with the expectation we're going to be back in a reasonable economic environment.

I'm optimistic about this year, although I'm optimistic from our standpoint as to everything we've put in place and the improving credit quality, the unknown there is how quickly the economy will pick up.

So it's really a function of the economy.

I think we've put things in place so that we're prepared, as we come out.

Your next question comes from Sandy Chin of Raymond James.

Good morning.

Good morning.

I just had one question.

Would you tell us more about your syndicated loan portfolio?

What remains on the book and where do you eventually want to see this portfolio?

Thank you.

Sure.

Well our syndicated loan portfolio has come down, particularly the non-relationship piece.

It's roughly about 14% of our loan portfolio at about $6 billion.

We have worked hard to really cultivate relationships, cross-sell, as most folks have, and we've done a pretty good job of that.

And we've taken the non-relationship piece down to less than a billion.

And I would guess it would stay in that, below that number, probably as we've said before $500 million to $1 billion because that's an important balancing mechanism, if you will, in risk management.

We need to be in the game to be able to sell participations or be in another syndicated deal, and then we always look for the opportunity to cross-sell.

So I would say that with improved credit statistics on the syndicated loan portfolio, they were really modest in terms of charge offs, we really accomplished our objectives, and I would say that you will probably see syndicated lending be around 15% or thereabouts for the foreseeable future.

And that's down just for context, from $8.5 billion two years ago to $6 billion today.

So we've had a major restructuring there.

Right.

Great.

Thank you.

Thank you.

You're welcome.

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

Beth, could you give us a little more detail on the warrant portfolio?

How many positions are there?

And what are the prospects for monetization this year and maybe looking out to the following year?

Yeah, we have about 900 positions.

We had warrant income in the fourth quarter of $3 million, that compared with $1 million in the prior quarter.

And if you look at the three prior quarters to that, there was nothing.

And so I take again as a little indicator of things coming back, the fact that we're seeing warrant income.

Is it going to be in large numbers?

You know, a lot more substantial?

It's anyone's bet.

But I think we are seeing improving trend, but it's not going to be a major contributor, at least we're not counting on it being a major contributor.

Okay.

So no positions in companies that are in the IPO calendar right now where, I can't remember the company was but you all had a pretty good lick, maybe six, seven quarters ago, might have been eight now?

Yeah, and I think the fact that we're seeing more income begin to come back and as I said the last two quarters is a positive sign and so I think we'll see more, the question is how much.

And when.

And when, yeah.

Thank you.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

Thank you very much.

We appreciate you taking the time this morning.

And everybody, have a good week.

Thank you.

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

You may now all disconnect.