Comerica Inc (CMA) 2004 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Comercia Incorporated second quarter earnings release.

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. [Caller Instructions].

Thank you.

Ms. Arsenal, you may begin your conference.

Thank you.

Good morning and welcome to Comercia's second quarter earnings conference call.

This is Helen Arsenal, Director of Investor Relations.

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

The 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 that this conference call contains forward-looking statements and in that regard 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 will turn the call over to Ralph.

Good morning.

The second quarter results reflect improved credit quality and controlled expenses and position the Company to compete effectively in a recovering economy.

As you saw in the press release revenue was stable. we experienced the first uptick in net interest income since the fourth quarter of 2002.

Average loans are up slightly, the first quarterly increase since the first quarter of 2003, and we saw a growing pipeline of additional business.

Our total staff is down 3% year-over-year.

Credit quality continued to show solid improvement with strong recoveries contributing to lower net charge-offs and a continued decline in problem loans.

Consistent with that improvement we reduced the allowance for loan losses which contributed to higher earnings per share this quarter.

The Fed's recent decision to increase interest rates reflects confidence in an improving economy that should translate into a more robust business climate.

Comercia's decline in loans due in part to our repositioning of large corporate and international loan portfolios appears to have leveled off and businesses are beginning to use their lines of credit more frequently.

As part of the improvement in credit our watch list is down substantially from a year ago.

In addition we are being very selective about the credits we add, focusing on our relationship model by delivering the products and services of a larger bank with a personal touch of a community bank.

We are making progress on our strategy to extend our core competencies into our higher growth markets especially California and Texas.

One major component of this strategy is our plan to add 50 new branches over the next three years, two-thirds of which will be in California and Texas.

In the second quarter we opened a new branch in California as well as one in our core market in Michigan and we broke ground for one in Texas.

We've announced locations for seven of the nine branches we intend to open in California this year and last month we announced that we will consolidate our three San Francisco branch offices in 2005 into a new location in the Embarcadero Center which will provide excellent visibility.

All of these branches are being built to fit our relationship model and serve our target markets, the middle market customer, the small business owner and the individual customer.

At our March investor day we shared our long-term objectives for revenue growth, noninterest expenses, net charge-offs, tier-one common equity ratio and return on equity and I believe we are on track to meet these goals.

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

Good morning.

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

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

Today we reported second quarter, 2004, net income, of 192 million or $1.10 per share, compared to 162 million or 92 cents per share in the first quarter of 2004.

As outlined on slide five net interest income of 448 million increased 3 million from the first quarter as average earning assets increased approximately 800 million or 2% to 47.6 billion.

The net interest margin decreased 6 basis points to 3.77% due to higher short term liquidity caused by an increase in average title and escrow deposits which increased 1.6 billion during the quarter to 7.8 billion.

Slide six details the components of noninterest income which was 228 million for the second quarter, an $8 million increase.

Activity related fees which are service charges, commercial lending fees and letter of credit fees, decreased 2 million on a combined basis from the first quarter.

This is largely explained by reduced service charges on deposit accounts following the assessment of annual service fees on commercial accounts in the first quarter.

On a combined basis market related fees, which are fiduciary income, foreign exchange income, brokerage fees and investment advisory fees, decreased 2 million over the first quarter, reflecting lower activity levels and a lack of clear, positive movement in the securities markets.

During the second quarter we sold a portion of our merchant card processing business and recognized a $7 million gain.

Other noninterest income increased 4 million to 43 million, primarily explained by income distributions from venture capital and private equity investment.

Noninterest expenses as detailed on slide seven were 372 million for the second quarter, an increase of 3 million from the first quarter.

Salaries and employee benefits were up 9 million which included higher severance expenses and annual merit increases and stock compensation grants awarded in the second quarter.

Customer service fees increased 5 million, primarily a result of higher activity levels in our Financial Services Group which serves our title and escrow customers.

Other non-interest expenses decreased 10 million to 58 million the second quarter, due in part to a $4 million reduction in the allowance for credit losses on lending related commitments.

The remainder represent decreases in a variety of categories.

Moving to the balance sheet on slide eight.

Average loans at 40.7 billion for the first quarter were up 1%t, or 300 million from the first quarter, largely due to increases in the western region.

Slide nine provides detail on line of business loan growth.

In the second quarter is a 200 million decline in global corporate banking was offset by similar increase in our specialty businesses.

On balance the loan book appears to have stabilized during the second quarter with continuing improvement in line utilization which stands at 45.7%, up 1% since year end.

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

Nonperforming assets were down 92 million from the last quarter, to 430 million and include 404 million in non-accrual loans and 26 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 international and other 64%, western region 31%, 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 concentrate of non-accrual loans, at 21% and 15% respectively.

Shared national credits represent about 13% of total non-accrual loans, down from 16% last quarter.

As of June 30, our non-accrual loans have been charged down to 52% of he original contractual value compared to 56% in the first quarter.

Slide eleven walks you through the changes affecting the balance of non-accrual loans and reflects continued improvement in credit quality.

During the quarter 63 million of loans were transferred to non-accrual, compared to 92 million in the first quarter.

The new non-accrual loans include one credit over 10 million, totaling 20 million to a company servicing the shipping industry.

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

Our watch list is down approximately 500 million to 2.6 billion and now represents less than 7% of total loans.

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

Net charge-offs for the quarter were 56 million including 20 million of recoveries.

By geography 59% of net charge-offs were in the western region, 37% in midwest, international and other, and 4% in Texas.

Credit quality improvement in the midwest has continued at a healthy pace.

The economic recovery in the western region has lagged that of the midwest.

In absolute dollars net charge-offs in the western region were 33 million in the second quarter, a $6 million increase over the first quarter.

Virtually all of the net charge-offs in the western region were in the middle market lending line of business.

By industry classification, contractors represent the largest concentration of total net charge-offs at 26%, two credits in the western region represent the majority of this amount.

These loans are classified as commercial loans on the balance sheet and not as real estate loans.

Shared national credits represent about 3 million of the total net charge-offs.

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

With the continued improvement in credit quality the reserve decreased 36 million to 762 million during the second quarter.

The allowance for loan losses at June 30 stands at 1.90% of loans down from 1.99% at March 31.

Moving to the funding side of the balance sheet, slide fourteen details average deposits by line of business which increased 1.3 billion, or 3% from last quarter.

This increase was driven by a 1.6 billion increase in average deposits for our Financial Services Group, a specialty business that serves our title and escrow customers.

These deposits average 7.8 billion for the second quarter compared to 6.2 billion in the first quarter.

Slide fifteen outlines our capital position.

At June 30 the preliminary tier-one common capital ratio was 7.99%, down from 8.00% at March 31.

During the quarter we repurchased 2.1 million shares, bringing total shares repurchased year-to-date to 4.5 million.

At this time we anticipate repurchasing a minimum of 1 million shares during the remainder of 2004 based on our present assessment of earning asset growth and our desired levels of liquidity at the holding company.

Many factors play a role in Capital Management and we monitor it very closely.

Slide sixteen outlines some trends for the full year 2004.

In total we expect average loans to be slightly lower than 2003, with low single-digit growth between the end of 2003 and 2004.

We anticipate low single-digit non-interest income growth in 2004 excluding securities gains.

On average the net interest margin will be about 3.80% for the full ear.

We have previously outlined our commitment to at least hold total expenses in 2004 even with 2003 levels.

Within that commitment we are targeting a 5 to $10 million reduction in year-over-year non-interest expenses excluding severance expense.

Year-to-date severance expense was 7 million compared to 100,000 for the same period last year and 2 million for the full year 2003.

Finally, we expect improvement in credit quality to continue throughout the remainder of the year with full year average net charge-offs of approximately 50 to 55 basis points.

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

[Caller Instructions].

Our first question is from Jeff Davis of FTN Securities.

Hey, good morning.

Hi, Jeff.

The slow down in the repurchase activity that you all are planning for the second half of the year, is that related to expectations that the balance sheet growth for next year is going to accelerate substantially from the loan side or are there things that may be of interest on the acquisition side, maybe in California or elsewhere?

The -- our present assessment of the 1 million, and we indicated it's a minimum of 1 million and it's something that we carefully monitor on a regular basis, but it's driven by looking at asset growth in at least the foreseeable future, as well as making sure we have appropriate liquidity at the holding company level.

So, really those are the two drivers.

Very good, thank you.

Your next question is from John McDonald of Banc of America Securities.

Hi, good morning.

Hi, John.

Hi, John.

Could you give us a little color on what the competitive conditions are like in your lending markets?

Dale.

Yeh, I'd be happy to answer that, John.

This is Dale Greene We are continuing to see in really in most of our markets a high level of competition both in structure and price.

There's a lot of liquidity, as I'm sure you know, in the marketplace and so it's -- there is a lot -- a lot of activity.

The good news is that we are seeing a number of opportunities, a lot of which have come to our committee recently that have been approved and hopefully will be closing in the next few quarters.

So, our activity levels are up quite a bit from the last, actually, several quarters but it's a tough competitive landscape.

You know, we've got a lot of bank's locally that have -- really new to our market in southeast Michigan, for example, a large marketing capacity and are really being very aggressive and it's really true in most of our markets so that's what we see.

Do you expect that to impact your spreads going forward, Dale?

Well, you know, we -- we're seeing again competition on both price and structure so, yes, I think it will be a challenge on the spread side.

And we'll just, you know, we'll continue, I think, to fight that battle.

Okay, thanks.

And just a question for Beth on the margin outlook which seems relatively flat.

Could you comment on the impact of swaps maturing in the second half of this year and how that's influencing your margin outlook?

If you -- really there are two factors impacting the margin outlook.

One, just the first half of this year, obviously, the margin on average as at 380 which is in fact what we are seeing for the full year.

The negatives related to the second half on margin relate to swap maturities.

The positive relate to really a -- an increase in loan activity such that the Fed Funds sold position, either through a combination of loan growth as well as a reduced level of deposits from the title and escrow customers, both combine to kind of offset each other and therefore maintain a pretty stable margin.

Did your asset sensitivity change much this quarter, Beth.

No, consistent -- pretty consistent with the first -- the 10(Q) disclosures.

Okay, thanks.

Thank you.

Your next question is from Gary Townsend of Friedman, Billings, Ramsey.

Hi, Gary.

Good morning, how are you?

Good.

Hi, Gary.

Good.

Could -- you had an enormous reduction in your credit expense in the quarter and as we look forward, particularly given the proportion of your loans in the upper midwest and Beth's discussion that that seems to be where the improvement is occurring most quickly, can you give some guidance with respect to or philosophy with regard to how you will be taking credit charges in the coming quarters?

Yeah, I -- Gary, Dale Greene.

I -- the way I view it right now is, as Beth indicated, we continue to see steady improvement.

Actually this quarter was a very strong, obviously, quarter in terms of improvement in credit quality, virtually in all categories, non-performers or watch loan lists and so forth.

And as we look at the next few quarters we continue to see the economy getting better and our loan credit quality metrics improving.

So I would anticipate, assuming loan growth is moderate, that we would be in a position where we would have to look at lowering the provisions some more.

It's tough to forecast that.

As you know we look at every -- we build it from the bottom up.

We look at the individual credits and look at the migration and a number of other factors in order to assess what the number is.

But it's -- from where I sit I think it's quite likely we will see additional reductions in the provision but it's tough to say what that might be.

Of course.

Thank you.

Uh huh.

Thanks, Gary.

Your next question is from Lori Appelbaum of Goldman Sachs.

My question relates to the -- the change between growth in commercial loans in the quarter and -- at 2%, and then average trends were a little bit more flat.

I was wondering if you could comment on what's happening with commercial activity given that, you know, whatever, that average balances were positive but appeared in level for not?

You're -- go ahead, Dale.

No, I'll followup.

You're looking at the average versus period end.

There was a little bit of decline at period end.

I don't really view that as significant or a trend.

As I mentioned earlier and I think Dale highlighted as well, activity begins to pick up -- has begun to pick up and I would envision that overall demand will continue to increase.

I think we may have had the title escrow loans, as well, came down toward the end of the quarter and that's probably the bulk of that, is that not right?

Right.

That's what I was going to say.

That's really what's impacted us on that at the end of the quarter.

Which is really, as you know and for those that aren't familiar with that, relate to the balances in the title escrow businesses and the flows based on mortgage demand for them.

So, what is a more indicative trend of the underlying commercial lending business in terms of growth, as the averages were trending in a 8.5%, I know, interest rate and carried on levels where more flat, I guess, you're saying something in between?

Yeah.

What we've said for the full year is that from the end of '03 to the end of '04 low single-digit growth, period end growth.

But we've also indicated, based on the actions we took last year to reduced large corporate and international, that the year-over-year change on the average will, in fact, be lower in '04 versus '03 from an average standpoint but up low single-digit from period end to period end.

So, we see growth, you know, as Ralph mentioned, we see things, and Dale, in the hopper, in the pipeline working to have better growth, obviously, the in he second half.

In other words, maybe to ask it more specifically, to exclude the impact of the escrow related loans what would growth of -- commercial loan growth have been in the quarter on average?

It would have been fairly less, less, it would have still been growth.

Of low single digits?

Yes.

Okay.

Annualized?

Yes.

Okay.

The other complicating factor, Lori, that's in there is, and as we mentioned earlier, you know, the -- our loans, especially our classified loans, have come down almost 1.2 billion from last year including the continuation of the repositioning of international and global which is about 1.6 billion.

So, that tends to offset some of the growth that would be inherent in that portfolio as well.

So, it's complicated in looking at.

That's why I still believe that given the activity levels that we are beginning to see and the fact that we are now pretty well done with the repositioning and credit quality seems to be very stable here to improving that we will begin to see a pickup as long as the economy continues to pick up.

And we did see growth in middle market and commercial real estate and private banking in the second quarter.

So, those were positive signs.

Your next question is from Mike Mayo of Prudential Equity Group.

Hi, Mike

Hi, Mike.

How are you doing?

Good, how are you?

Good.

You mentioned a $4 million reduction in lending related commitments and, I guess, that depressed expenses a little bit, should we think of that as one time.

It's only 4 million.

The parallel is -- it's a parallel event consistent with improvement in credit quality overall.

For -- credit equal for on balance sheet items those go through the allowance.

For items that are -- are unused commitments and letters of credit, those are -- flow through the income statement through non-interest expense.

So, that's -- to the extent credit quality continues to improve it will affect not only the allowance for loan losses but will affect the off balance sheet items, too.

And separately, unrealized securities gains or losses where they stand right now?

About 80 million in a negative sense, deficit, which is basically an 80 million deterioration from basically a zero position at the end of the second -- first quarter.

And lastly, the guidance that you gave on the last slide, I'm trying to see where that's different from before.

It looks like credit quality, you are lowering your guidance from 60 basis points to 50 to 55.

That's correct.

Expenses, I think before you said flat to down 20 million, so you're just kind of taking the midpoint there, is that right?

Well, what we've said is we will -- we are still targeting to be at least flat, perhaps a little lower than that.

But within that, excluding severance because severance is a much bigger factor this year versus last, that will be 5 to $10 million lower in expenses excluding severance.

We had 7 million of severance this year which is -- will be the predominant piece of severance versus 2 last year.

But not a big change there.

Well, for us it's a big change.

Okay.

And then the margin, before you said the low 380s, now you are saying about 380.

I don't want to read too much in the word about.

No, it's just that we had given the earlier guidance connected to the first quarter and we thought, given we are a quarter away from the first quarter, we connected to a -- just a number.

So that's all it is.

So your guidance to the margin is the same.

Is the same.

Okay, thank you.

Thank you.

Your next question is from Ross Demmerle from Hilliard Lyons.

You touched a little bit on loan growth.

I was hoping you could talk a little bit more about Texas in that your loans declined slightly from a year ago.

And, you know, I recently had a major acquisition announced where Texas is the place to be now and I'm wondering what you are seeing there and why loans would have declined a little bit?

Actually our Texas market, as we've talked about the activity levels, is one of our higher markets at the moment.

We are seeing a lot of activity and I would expect that growth to be one of the leaders going forward.

Where you see the change in Texas, really, is in large corporate and real estate.

Actually in our core, middle market business in Texas we were up about 8 percent, in fact, in the quarter.

Okay, thanks.

Thank you.

Your next question is from Charlie Ernst of Sandler O'Neill Assets.

Good morning.

Good morning.

Two questions for you.

One, you mentioned that credit costs could have down from this quarter.

Is that the actual provision level you were talking about or were you referring to the net charge-off number?

Both.

Two are obviously related.

We -- we -- we would envision charge-offs continuing again, assuming economic activity continues to improve, to be down.

We also, as we look at the overall portfolio, as we look at the improvement in the overall portfolio, that -- and its loan growth again is somewhat muted, that we would be in a position to look at releasing some additional provision.

So that's really what I was talking about.

Okay.

And then on the -- in looking at your bond yield you guys are obviously way below the industry right now, are there any thoughts as to why it was down this quarter and kind of what your expectations are going forward?

In terms of our -- I'm sorry.

The overall bond yield on the portfolio.

In the portfolio what we saw is the change from quarter to quarter is really a function of paydowns that we saw with the accelerated -- with the -- in early part of the quarter where the interest rates were declining and there was more refinancing going on.

So, we saw paydowns in our investment portfolio.

But it's, that's really the major activity that happened in the second quarter, no real structural differences.

We have a duration of an average life of about three years which is pretty similar to what it looked like in the first quarter.

You would also note that our securities portfolio as a percentage of total assets is probably one of the smaller portfolios in the industry.

I appreciate it.

Thank you.

Your next question is from Glen Shapiro of Sigma Capital.

Hi, guys.

Good morning.

just had a quick question.

I've heard a couple people ask how your guidance changed.

Would you mind just walk through, I remember you guys said everything at the investor day.

We talked about end of period loan growth, average loan growth, the margin and then credit.

Can you just compare your new guidance to what it was at the investor day?

Yeah.

I have to remember what investor day versus April.

But let me -- let me --.

I'm sorry, if April is easier.

Okay.

The first on average loans in non-interest income growth is the same outlook that we've given, really, all year, well, since April, I should say.

So, low single-digit, end of period growth is the same as we gave you at the end of the first quarter.

Same with low single-digit non-interest income growth is the same as we ave you at the first -- after the first quarter.

The average net interest margin is just -- is-- it's similar.

It's basically around 380 level.

Okay.

The expense item, we indicated that expenses would be at least flat with last year.

What we've done in addition to saying that, we are targeting that those expenses, excluding severance, would be 5 to 10 million below last year.

But in total expenses, including severance, would be at least no worse than - no higher than last year.

Okay.

And so that's -- that's pretty similar to what we've indicated in the past and charge-offs, in fact, we've brought down from 60 basis points to 50 to 55 for the full year.

So it's mostly the charge off number that moved.

I -- I remember -- I think you guys changed your loan growth guidance, I guess, at the investor day from the fourth quarter.

So, that's -- that stuff's the same and then now it's the charge off guidance.

Yes.

In January at the end of the -- we had given an outlook that we could see low to mid single-digit growth.

Okay.

And now it's just low based on our first quarter performance we updated that guidance in April.

Okay, that's great.

Thank you very much.

Thank you.

Appreciate it.

Your next question is from Casey Imbrecht of Millenium Partners.

Good morning.

Good morning, Casey.

Thanks for taking the question.

Just two quick things.

Beth, especially with your background, I was just wondering if we should be concerned at all about the auto portfolio.

Not necessarily for Comercia but for the fall backs?

It seems like there's a slow down and -- .

I think we should ask the Chief Credit Officer that.

I might have a biased view.

Okay.

Well, I'll be happy to answer that.

You know, we -- we've been through a number of economic cycles, obviously, a lot of us around this table, in terms of -- Joe Buttigieg, who runs the business bank for us and certainly Beth, Ralph and I and I'll you that's a key piece of what we do in this market and a lot of what we've done in the last year or so has been really to exam the portfolio.

We've obviously exited a number of credits, some of which were auto related.

The auto industry right now, I think, and particularly if you look at domestic OEM and we just went through an analysis internally, I think is in good shape.

They've got strong liquidity.

They really don't have big issues now.

A lot of the -- the post requirement benefit issues and a lot of it -- you, know, the pension issues and healthcare issues, I think, have been addressed.

There's a lot of new product launchings and their -- the forecast for improved profitability is there.

So, we are feeling pretty good about it.

We always watch it carefully.

It's a key piece of what we do here.

And so, quite frankly, I feel pretty good about it today.

And I think just to add on to that, Casey, I think it's notable that in the charge off where we categorize it by industry, that automotive is not one of the ones we highlighted there as being a concentration.

Right.

Okay.

And then just, Ralph, maybe you could comment but when do -- when -- when does the industry begin to see some real revenue growth?

Is it more a function of loan growth or?

Well, I think it's a combination, certainly, of loan growth which we'vetalked about a fair amount this morning.

And I believe that's beginning to pick up and I hope that we are going to see a steady come out in the economy here.

But the other is the market.

You know, as the market increases that increases revenue for us especially in the market related segments.

So, it's a combination of a positive economic environment.

Okay, great.

Thank you.

Thank you.

Thanks.

Your next question is from Kevin St Pierre of Sanford C Bernstein.

Good morning.

Morning, Kevin

Morning, Kevin

If we could shift over, just for a second, to the right side of the balance sheet and if I look at period end balances and deposits, you showed pretty nice growth in non-interest bearing deposits pretty -- and just about flat in interest bearing deposits and then if I look at the average balance sheet, you know, it seems like most of -- on the interest bearing side, the average balances of CDs went down fairly significantly. an you comment on wether that's intensional, what you are seeing in pricing and what your strategy is there?

I think there're two -- from a CD standpoint a couple of comments.

One is on the individual, the personal side, we see consumers less interested in CDs and more putting money into money market accounts.

The other is we have purposely let run off the large institutional CD portfolio because of the surplus of liquidity that we have.

So, it's really a function of those two elements.

Okay, thank you.

Thank you.

Your next question is from Matthew Clark of Deutsche Bank.

Good morning, Matthew.

Good morning, all.

Morning.

Just a few quick questions.

I know you had spoke about a potential 20 million of expense saves annually that you could get if revenues were tougher to come by.

And it looks like you did a good job this quarter.

I'm wondering, you know, how much of that is related to your new expense guidance, how much of that was, I guess, baked into this quarter?

Well, if you look at the first half expenses and you look at it from a standpoint of in the first half we had a higher run rate, we had 7 million of severance in that -- in that standpoint as well as merits and incremental stock option expense, et cetera, stock compensation expense.

You know, I think the run rate we have in the first half we are targeting, as I said, at least being no higher than last year and perhaps a little lower than that in total.

So, I think we've made good progress.

We've certainly set up a good basis for running into next year with having been diligent around the people front over the last year or so in terms of taking headcount down and watching that carefully.

Having said that, the people we have, obviously, we are making sure we are rewarding with merits and other things like that and, literally, you saw a lot of our expense activity in the category called other non-interest expenses, those were down 10 million in the quarter.

And those are literally in every category whether it's consulting, whether it's insurance, whether it's stationery supplies, whether it's travel and entertainment.

So,there's a lot of focus on really every line item.

And we've made good progress there.

Okay.

I apologize because I hopped on late.

But -- so that's part of your expense target of being down 5 to 10 million.

I mean, you are still planning on that 20 million?

You haven't raised that?

You haven't --?

No, what we've said is in total that -- in total expenses including severance would be no higher than last year and might possibly be a little lower than last year.

Excluding severance from that, because severance is so much higher this year than last, we'll be 5 to 10 million down from last year.

Okay.

Where does your unallocated reserve stand?

It's about 5%, 6% of the total reserves, so 5762.

Okay.

And I apologize if you talked about this as well, the SNC(ph) -- the SNC growth during the quarter and how does that stand as a percent of total.

It's about 14% of total loans and that's down from 15 last quarter.

Okay, thank you.

Thank you.

Your next question is from Lori Appelbaum of Goldman Sachs.

Hi, I just have a followup question on the question on the tepid buyback -- buyback activity in the second half.

You mentioned that commercial loans, I'm sorry, that loan growth would be up low single digits and that's just not going to absorb that much capital and my understanding is that you manage to tier-one capital, which is currently 8%, and your target is 7.

So, I -- I'm wondering if you are raising your capital target for -- or if you're being a little conservative on how much stock you are actually going to buyback in the second half?

Yeah, I would make a couple comments -- .

Or if you are being cautious on loan growth expectations, I mean, something is just not putting(ph).

I would make a couple comments.

One is that our -- our target ratio for tier-one common is between 7 and 8%.

That's the number that we articulated at the investor day in March.

So, it's somewhere in that band of 7 to 8%.

Obviously at the levels we've come from, which is around 8%, you can't get there in one quarter or even two.

And so -- so, one, I wanted to clarify that our goal is 7 to 8% and -- so, we are right around the top ends of that.

The other is we did indicate two other things.

One is that it would be a minimum of 1 million shares in the remainder of the year and that it's something we look closely on as we monitor each months performance.

But, Beth, given where we are in the cycle wouldn't your targeted capital ratio be at the lower end of your range, not the higher end?

Well -- but from where we've come from, you can't just get there overnight in a quarter and I think we will -- we -- our expectations are, and we haven't put together the outlook for next year, is that we will see much more robust loan growth next year than we do this year.

And so, those are factors that are -- but, as I said literally, we look at this on a monthly basis as the results come in for asset growth and monitor it closely and - and -- and we will make decisions from there.

But, one of the assumptions factoring into it is being -- is conservative?

I think that would be a fair assessment .

Okay.

Your next question is from Norman Jaffray of Sonoma Capital.

Hi, actually this is Jed Gore from Sonoma Capital.

My question was exactly the same as Lori Applebaum's.

Thank you for answering it.

I just wanted to say thanks.

Congratulations and thank you, I guess, for returning to a 15 ROE, it's the best I recall since 2001.

Thank you.

Thank you.

Your next question is from Fred Cummings of KeyBanc Capital Markets.

Morning, Fred.

Yes, good morning, Ralph.

Ralph, can you talk about how you expect the World Bank of Scotland Citizens Bank to compete, you guys probably have done some diligence on them.

How do you think they are going to compete vis-a-vis, you know, Charter One?

Charter One was a much stronger retail bank but my understanding is that World Bank is pretty good middle market lender.

How do you see that changing the competitive landscape up there in Michigan?

You know, Fred, to go back to what Dale was saying earlier, the market here has been very competitive for years.

A number of names have changed over that period of time and it continues to be very competitive and they are very good competitors and I think that's -- competition is good, without specifically going in to any one competitor.

And than another kind of tactical or strategic question, Ralph, given the fact that credit is improving so quickly, might this cause you to somewhat accelerate your retail branch expansion plans?

You know, as we've indicated with the 50 branches, keeping in mind that that's not just a retail expansion strategy, that -- that really focuses in on our middle market and wealth and institutional management as well.

We found that middle market customers visit those branches a considerable number of times during a week and a month and it's very important that we be near them in order to continue to develop that business.

So, given the amount and we are ramping up now, I wouldn't see that substantially increasing in the short term but certainly as profitability increases the options to invest increase and we will invest as to where we think the maximum return is.

Then lastly, Ralph, with respect to any significant additions to your senior staff, I think John Haggerty plans on retiring at -- maybe by the end of the year.

Where do you stand in looking for potential replacement for him?

Is it likely to come from someone inside the bank or how actively are you looking at outside candidates for his replacement?

We currently have a nationwide search going on and candidates internally as well externally are being looked at.

Okay, thanks, Ralph.

Thank you.

Your next question is from Joe Duwan of Fox-Pitt.

Yes, good morning.

You probably covered this earlier but I was connected late.

The allowance on loan commitment is a $4 million reduction that did flow through other expenses.

Yes, that's a reduction of expense.

Okay.

In the other category?

Correct.

All right, thank you.

Thank you.

At this time there are no further questions.

Do you have any closing remarks?

We appreciate everybody joining us this morning.

Thanks for taking time and I hope you all have a good day.

Thank you for participating in today's Comercia Incorporated second quarter earnings release.

This concludes today's teleconference.

You may now disconnect.