Comerica Inc (CMA) 2004 Q1 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 Incorporated first quarter 2004 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.

Ms. Arsenault, you may begin your conference.

Thank you, Valerie.

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

This is Helen Arsenault, Director of Investor Relations.

I am here with Ralph Babb, Chairman;

Beth Acton, Chief Financial Officer; 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 Web site, as well as on our Web site.

Before I get started, I would like to remind you that this conference call contains forward-looking statements, and in that regard you should be mindful of the risks and uncertainties that could 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 findings with the SEC.

Now I will turn the call over to Ralph.

Good morning.

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

As I indicated in our press release, continued improvement in credit quality and expense control contributed to higher earnings per share in the first quarter compared to the previous quarter.

Loan demand in the first quarter remains soft as our business customers were still cautious about investing in that economic environment.

This resulted in a decline in earning assets and net interest income while the net interest margin remained unchanged.

While noninterest income was flat from the previous quarter, core fee income was up from a year-ago levels excluding security gains.

Our expenses were controlled and down from the previous quarter.

The total number of employees was lower in the first quarter versus the fourth and year over year while we continued to invest in our businesses.

We will continue to target more reductions in expenses unless we see an uptick in revenue.

Our credit quality trends continue to improve, specifically net charge-offs were lower, new and ending nonaccrual loans were lower, and watchlist loans were down.

We expect this improvement will continue throughout the year.

As a result of our modest decrease in earning assets and our improving credit quality we remain an active capital manager through share buy-back and we continue to target tier one common capital between 7% and 8%.

We are presently at the high-end of that range.

We are beginning to sense that the commercial businesses are becoming more optimistic and this should translate into improved loan demand as the year progresses and excess capacities diminish.

Now I will turn the call over to Beth to provide more details on our results and what we expect for 2004.

Good morning.

As I review our first quarter results, I will be referring to slides that 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 first quarter 2004 net income of $162 million, or 92 cents per share, compared to $158 million, or 89 cents per share, in the fourth quarter of 2003.

As outlined on slide five, net interest income of $445 million decreased $12 million from the fourth quarter, while average earning assets decreased $700 million, or 1 percent, to $46.8 billion.

The net interest margin remained unchanged at 3.83%.

There are two primary factors which led to this quarter's stable margin.

First, our short term liquidity position remained relatively unchanged from the fourth quarter levels as a result of title and escrow deposits only declining $200 million during the quarter and, secondly, the margin contribution from our swap book was sustained at fourth quarter levels.

Slide six details the components of noninterest income which was $220 million for the first quarter.

This was unchanged from the fourth quarter.

On a combined basis, market-related fees which are fiduciary fees, foreign exchange income, brokerage fees and investment advisory revenues, increased $4 million over the fourth quarter.

Other noninterest income decreased $4 million to $39 million, primarily a result of reduced Investment Banking fees.

Noninterest expenses, as detailed on slide seven, were $369 million for the first quarter, down $10 million from the fourth quarter.

Business unit revenue related incentive, pension expense, and customer service expenses, all contributed to the decline in the first quarter, partially offset by increased severance expense.

Other noninterest expenses of $68 million decreased $3 million in a variety of categories.

Also affected noninterest expenses this quarter is an item for which I'd like to provide further explanation.

In late 2003, the State of California announced a program for settlement of tax liabilities related to registered investment companies.

The program ends today.

Some of you may recall Imperial Bank created a registered investment subsidiary in April 2000.

Shortly after purchasing Imperial in 2001, Comerica liquidated the subsidiary.

Earlier this month, we amended previously filed Imperial state tax returns and paid the taxes and late payment interest due.

To align our accounts as of March 31 with the settlement payment, we recorded in other noninterest expenses $2.4 million of late payment interest and reduced the provision for California income tax by $5.9 million.

The amount by which our reserve for this tax liability exceeded the tax due.

The net result is a pretax benefit of $3.5 million, or $2.3 million after tax.

Moving to the balance sheet on slide eight, average loans at $40.4 billion for the first quarter were down 1%, or $500 million, from the fourth quarter, and were down $3.1 billion, or 7% compared to year-ago levels.

Driving the decline in the Midwest, International and other categories is global corporate banking consistent with recent quarters.

The remaining businesses in this category were relatively unchanged.

Slide nine provides detail on line of business loan growth.

In the first quarter we reported a healthy increase in average loans in National Dealer Services, up $400 million.

And continued to see growth in small business and private banking loans, up $200 million on a combined basis.

Slide ten takes us into the credit quality portion of our results, nonperforming assets were down $16 million from last quarter to $522 million, and include $489 million in nonaccrual loans, $1 million in nonaccrual securities, and $32 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: Midwest, International and other, 65%, Western regions, 31%, and Texas, 4%.

By line of business, middle market, global corporate banking, and small business accounted for 84% of nonaccrual loans.

Automotive-related and services represent the largest industry concentrations of nonaccrual loans at 24% and 13% respectively.

Shared national credits represent about 16% of the total nonaccrual loans, down from 20% last quarter.

As of March 31, our nonaccrual loans have been charged down to 56% as the original contractual value, compared to 58% in the fourth quarter.

Slide 11 walks you through changes affecting the balance of nonaccrual loans and reflects continued improvement in credit quality.

During the quarter, $92 million of loans were transferred to nonaccrual, compared to $114 million in the last quarter of 2003.

The new nonaccrual loans include three credits over $10 million, totaling $44 million.

These loans are to a contractor and companies in the automotive and technology-related sectors.

During the quarter we took the opportunity to exit 12 [ph] credits, four of which were on performing status.

Our watchlist is down approximately $190 million, now representing less than 8% of total loans.

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

Net charge-offs for the quarter were $70 million, including $14 million of recoveries.

By geography, 58% of the net charge-offs were the Midwest, International and other, 38% in the Western region and 4% in Texas.

By line of business, middle markets, leasing, and global corporate banking account for 93% of this quarter's net charge-offs.

Technology-related loans represent the largest industry concentration of net charge-offs at 18%.

Shared national credits represented about $6 million of total net charge-offs.

Slide 13 shows the trend in our reserves for loan losses.

The reserve decreased $5 million in absolute dollars during the first quarter.

The allowance for loan losses at March 31 remained at 1.99% of loan.

Moving to the funding side of the balance sheet, slide 14 details average deposits by line of business which decreased $700 million, or 2% from last quarter.

Slide 15 outlines our capital position at March 31, the preliminary tier one common capital ratio was 7.98%, down from 8.04% at December 31.

During the quarter we repurchased 2.4 million shares and obtained 10 million of additional authorization, bringing our remaining authorization to 12.4 million shares.

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

Our ongoing target for tier one common is in the 7% to 8% range, within that context we will continue to be an active capital manager.

At this time we anticipate purchasing an additional 2 to 2.5 million shares during the remainder of 2004.

Slide 16 outlines some broad trends for the full-year 2004.

In aggregate we anticipate average loan volumes to be slightly lower compared to 2003 with low single-digit growth between the end of 2003 and 2004.

We expect average earning assets to be slightly lower for the year.

In 2004 we anticipate low single-digit noninterest income growth excluding securities gains.

On average, the net interest margin will be relatively unchanged from the first quarter of 2004.

We have revised our outlook on the margin based on two primary factors; the anticipation of our short term liquidity position remaining on the balance sheet longer than previously projected, and the loan mix and spreads we are presently forecasting on the 2004 balance sheet.

As we stated in January, our plan is to hold noninterest expenses flat with 2003.

We are targeting up to an additional $20 million reduction in expenses should the pace of revenue growth be slower than our expectations.

Finally, we expect steady improvement in credit quality trends throughout the year, with full-year average net charge-offs of approximately 60 basis points.

Now we'd be happy to answer any questions you may have.

Are there any questions?

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 Mike Mayo of Prudential Equity.

Good morning.

Hi.

I had a question on the modified guidance, if you could give more color on the margin.

You said lower mix of spreads on the balance sheet, that could be for a lot of different reasons.

Is that due to commercial loan spreads, what does that do?

And second, just the expenses, where do you expect to get the extra expenses from?

And third, Ralph started off talking about, he senses commercial lending is coming back.

Is it back or is it just because the economy is getting stronger?

Thanks.

Okay.

In terms of the margin, there were two, really two factors that led to our revised outlook there.

One is higher liquidity remaining on the balance sheet which is largely a function of the title and escrow deposits remaining at relatively higher levels than what we had expected.

Second is, based on what we saw in the first quarter there is some compression in terms of loan spreads and fees and, therefore, we are assuming in our outlook that that will maintain itself at those reduced levels.

So we are seeing a little more competitive environment on the lending side.

How competitive is that or can you quantify that?

Well, those two factors together make the outlook change from really in the low 390s in terms of margin into the low 380s.

Those two together.

You had you a question on expense.

As we indicated to you in January, initiated late in the second half of last year, really a multi-primed effort looking at expenses and really developed, if you will, champions across all the income statement items and it's really across all of those that we are looking at getting the additional -- potentially the additionally up to $20 million.

It's a function of where we end up coming out.

If you look at the first quarter and took just a straight annualization of that, we'd be at a level below last year slightly.

So it would be as we go through the second quarter we will be focused on those teams that are looking at all those income statement items, but it's cross the board.

So that's where we will literally get it out of each of the categories that we can.

And the last was on commercial lending coming back.

Mike, your question there is we've seen gradual increase in line usage over the last three quarters.

In addition, we are beginning to see our middle market customers improving in their sales and optimism both booked and unbooked and I will call that an unscientific survey.

It's those that we met with here recently.

It feels stronger and so as things begin to pick up and Michigan has been lagging in the pick up in the nation in total, we would expect for it to begin to increase in demand.

California, especially Southern California is a little bit stronger.

Northern California seems to be picking up a little bit, and Texas is picking up.

So that's a general view.

What's the line usage today versus where it was three or six months ago?

It's up about three quarter percent at about, if I remember the number right, about 45%.

Thanks a lot.

You're welcome.

Your next question comes from Jason Goldberg of Lehman Brothers.

Good morning, Jason.

Good morning.

I guess maybe talk to, you kept the reserve to a loan ratio at 2%, yet I guess a lot of your forward credit-looking indicators sounded like they've been improving.

Any more color around that?

I think they are improving as we had formerly indicated and we expect them to continue to improve and if your question really is, will we maintain the percentage at 1.99 if two things happen, one, depending on loan demand and how it affects the total outstandings, but, two, as credit continues to improve and, as you know, we build reserves from the bottom up, you could expect that to continue or again to decline.

Dale, you have anything to add to that?

No, basically as you said, we look at the detail of the portfolio.

We assess the risk factors, we assess the loss content.

We then establish the level of reserve we think is appropriate based on that and plus on certain industry segments.

And essentially that builds to the reserve that we need, and based on that, we adjust.

So I would expect, as Ralph said, credit quality will continue to improve and if loan demand stays relatively modest, I would suspect we would be in a position to recommend some additional freeing of reserves.

That's helpful.

Thank you.

Thank you.

our next question comes from Casey Embreck of Millenium Partners.

Hi, Ralph, Beth, how you doing?

Good.

Good morning.

Thanks for taking the question.

Just quickly, I think basically it was asked, but any real change from what was discussed during analyst day to kind of fast forward a month?

No, I think things are pretty much in line with the conference we had in New York.

Okay.

Yeah, the only thing, certainly the strategy we are heading forward and even in light of the fact that we are keeping the reins on expenses, we are continuing to make investments for the future.

We talked about adding branches which we are proceeding on this year.

We are not going to affect expenses that will impact revenue that we see this year, as well as coming into next year.

The only thing that we've indicated differently as we've changed the quarter is a little different outlook in terms of a little less robust loan demand for the full year, because of the way the first quarter turned out and also an update on the margin indicator for you.

Great.

Thank you very much.

Thank you.

Your next question comes from Joe Dubon with Fox-Pitt, Kelton.

Good morning, Joe.

Yes, good morning.

Good morning.

My question was really asked on potential reserve releases but is there anything else to say?

Is it likely to be similar to the same range that we saw in the first quarter, anything more dramatic planned, contemplated?

We don't really know, Joe.

As Dale indicated and as things improve, it depends on loan demand and the combination of those two will determine how much gets released.

And we look at all the dynamics.

We want to see the level of charge-offs, the level of in-flows, the level of nonaccruals.

All of those give us an idea of where we are headed.

Watchlists, which we talked about coming down again, in fact the watchlist is down $1 billion year over year.

So we are seeing good signs and really the pace with which that improves will impact the amount that gets released.

All right.

I appreciate that.

And then on the share repurchases for the rest of the year, again for the next remaining nine months you would expect the 2 to 2.5?

That's correct, for 4.5 to 5 for the full year.

Thank you.

Thank you.

Your next question comes from Matthew Clark of Deutsche Bank.

Good morning, Matthew.

Good morning.

Hello?

Operator, did we lose Matthew?

He withdrew his question.

Your next question comes from John McDonald of Bank of America.

Good morning.

Good morning, John.

Good morning, John.

A couple of Alco [ph] questions.

Can you give us some color on what the interest rate positioning was at the end of the quarter and then can you just comment on the duration of the securities portfolio and any unrealized gains or losses?

In terms of the asset position we continue to be asset sensitive as we were at the end of last year as described in our annual report.

It's not materially different from that today.

In terms of the duration of the portfolio, it's at 2.6 years average life, which is a little shorter than it was at the end of last year.

Largely, when you think about the first quarter, it was a time where rates were declining fairly substantially including in the ten-year sector.

So we did see some shortening up, some little acceleration on prepaids on our mortgage back portfolio.

But, obviously, the dynamics have changed a lot since the quarter ended and the April employment number came out.

So we would expect that in the second quarter we would see a little lengthening a bit in our mortgage back portfolio, three-year kind of range, still with an extension risk around the four-year area.

And in terms of the portfolio, it depends on the date you look at whether we have unrealized gains or losses in a situation where rates are backed up substantially.

We are not in a position of sitting on a lot of gains.

How about losses?

I don't have the number handy, but it's not a significant amount.

Okay.

Beth, then, just a question on the guidance again.

The loan growth, you revised that down a little bit.

Previously you were looking for average earnings assets to be modestly lower.

Mm-hmm.

Does that get a little better now because of the escrow business getting stronger?

It does.

It depends on where loans end up coming, obviously, in that equation, too, but we are running at higher levels within the title and escrow business than we expected.

Now how that leads in the second quarter isn't clear again with the back up of rates.

But, we in fact saw an increase in the title and escrow deposits through the quarter.

The balances came back up during the quarter.

But again rates were lowering during that period.

Now they've backed up again, so we'll see.

Our expectation is that it would be slightly lower but not as low as perhaps thought before.

Okay.

So how does that all net out with the margin and the loans [inaudible] assets?

Net interest income year-on-year is still down a bit, kind of in line with what you thought in March?

I would say, well, two things relative to the outlook we gave in January.

One is that loan growth is not as good, title and escrow deposits is higher, margin is less, though, so I would say relative to the outlook we gave you in January that you take those equations together and you would likely say there would be lower net interest income relative to what we told you in January.

Great.

Thanks.

Your next question comes from Matthew Clark of Deutsche Bank.

Good morning.

Sorry about that, I dropped you all.

That's okay.

No problem, Matthew.

A few questions.

What do you anticipate or what do you believe to be a more normal tax rate going forward?

Is it still around 31.5 or so?

Yes, I would say it's 31 plus some change, in between 31 and 31.5, probably.

Okay.

I guess on the buy back, you mentioned 2 to 2.5 million for the balance of the year.

Why not more aggressive given your authorization?

Well, I think that will be a function, that's our assessment to date.

It will be obviously a function of where our capital levels are, where we think the credit quality improvements are happening, where loan demand is.

It's all those factors together and depending on the situation, if loan demands becomes much more robust, maybe it's less.

If loan demand becomes less than what we've outlined here today, maybe it becomes more.

So those are the dynamics we would look at.

Assuming credit quality continues to improve and loan demand is consistent with what we've indicated to you, we expect it 2 to 2.5.

But it's not cast in stone.

It's a function of all the dynamics that are going on in the business.

Sure.

Lastly, I guess given the number of initiatives that you have underway, I think they've had limited success near term, when do they begin to kick into earnings do you believe?

And is there a desire to diversify the business model, possibly be acquisition given that wealth management, for example, is not supposed to double its contribution for at least five years?

Is there any desire to get out there and, given the tough times you guys have had over the past few years?

You mean on an acquisition basis?

Yes.

As we've said in the past, acquisitions are really a tactic for us and we've outlined our business strategy which we are about executing.

If there were opportunities for us to acquire that fit in that strategy, we would certainly look at it, and it has to fit both from a geography standpoint and a business standpoint and obviously price and all the other things you'd look for.

So that's really depending whether it's available and whether there is an opportunity.

Otherwise, as we outlined in the recent conference, we are about executing the strategy both in the wealth management and personal financial services and I believe we are beginning to see it in wealth management today.

We have a lot more to go to execute that and we are about doing the same thing now on personal financial services and small business.

Sure.

I guess a follow up to that.

Is the Board on board with you all making those goals or getting your ROE back up to what you want it to be by 2006?

Are they okay with waiting?

Our Board is fully aware of our strategy and where we are and we have a very focused Board and they understand their fiduciary responsibilities and that's a constant dialogue and they are very supportive of the strategy.

Great.

Thank you.

Thank you.

Your next question comes from Rodrigo Quintanilla with Merrill Lynch.

Hi.

Good morning.

Good morning, Rodrigo.

Good morning.

Going back a little bit to Alco, my question refers to your level of concern about interest rate volatility, considering where the yields are and where we may be heading, and related to that, what assumptions are you using in your planning process for the rest of the year regarding interest rates?

Our expectation is, well, I have to say, it's difficult to forecast these days, but I would say relative to where we were in January, we were, had expectations of more interest rate increases this year than what we were expecting now.

In January we were expecting an increase in the second quarter and increases again in the fourth quarter.

Now we believe and this could be changed, I guess, if we see payroll employment numbers continue at the pace that they came in April, but now our expectations is that we will not see rates rise until the fourth quarter.

So the rate rising won't have much of an impact on us this year as a result .

Your next question comes from Mike Schiff of Crest Investment.

Good morning, Mike.

Good morning.

A point of clarification, I got on the call late, sorry to make you repeat yourself, what is your revised guidance for loan and earning asset growth?

What we indicated is that we would see on average loans would be slightly lower in '04 versus '03.

That's a change from flat so it's a little more negative in terms of loan growth because first quarter was still relatively slow longer.

And in terms of earning assets, we have again evidence from the first quarter maintained higher level of liquidity in our short-term investment portfolio than we had expected, and so there is some mitigation with loans with higher investment securities.

But on average we are seeing that earning assets in total would be less than last year.

Point-to-point loans.

And point to point.

I talked about averages.

What we had described in January was that period-end to period-end loan growth would be in the low to mid single-digit.

Now we are seeing in the low single-digit.

It's a little weaker in terms of loans.

Whether that's offset by higher liquidity being maintained and thus earning assets being about the same level as the January guidance.

I can't assess that today.

Great.

What would a Fed rate hike of let's say 50 basis points do to your balance sheet -- or do to your margin, I should say.

Well, if we are talking about if it is consistent with our expectation that that won't be until the fourth quarter, it won't have much impact at all.

What about on next year?

Next year, I haven't percolated that through to be able to talk about next year.

Thanks.

In general, it would be a positive, though.

If rates rise earlier than our expectation, it would be a percent of sales, it would be a positive contributor to net interest income.

Thank you.

Your next question comes from Jeff Davis of FTN Securities.

Good morning.

Good morning, Jeff.

Good morning, Jeff.

Beth, spread revenues at $445 million for this quarter, are they not bottoming here?

We may bump along at the bottom for another quarter or two, and regarding the previous question, looking at an inflection here within a quarter or two?

I would think that's probably a fair assessment.

If you take the fact that we are giving an outlook for the full-year margin to be consistent with the first quarter, and we are also indicating that we expect loan growth from here, I would say that, yes, your assessment would be a pretty good one.

Okay.

A couple of other follow-ups.

With regard to the swap book, what decisions did you do and I don't think you had any roll offs, did you?

Not in the first quarter.

We have $500 million rolling off in the second and $3 billion rolling off in the second half.

We did add to our swap book in the first quarter.

We typically, looking out, it's about $1 billion a quarter.

Lastly, just to confirm, the non-recurring or periodic items, security gains at $5 million, and I'm sorry, on the tax is when I was joining, that was $3 million?

In terms of not what's in noninterest expenses, there was a $2.4 million higher interest expense, but there was a lower tax provision by about $4 million after tax, so the net affect was $2.3 million after tax positive to earnings this quarter; last quarter.

Okay.

Then on the expense side, was there offsets or it's sort of what it is?

There's severance that's included in the first quarter that was $3 million which was up from $1 million in the fourth quarter.

So those are two of the unusuals.

Okay.

Very good.

Thank you.

Thanks, Jeff.

There are no further questions.

Ms. Arsenault, are there any closing remarks?

No.

Thank you all very much for joining us on our conference call.

I hope you all have a good day.

Thanks very much.

This concludes today's conference call.

You may now disconnect.