Comerica Inc (CMA) 2004 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Comerica Inc. third-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. (Operator Instructions).

Thank you.

Ms. Arsenal, you may begin your conference.

Thank you.

Good morning, and welcome to Comerica's third-quarter earnings conference call.

This is Helen Arsenal, Director of Investor Relations.

I'm 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 website as well as on our website.

Before we get started, I'd 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'll turn the call over to Ralph.

Good morning.

Today we reported third-quarter earnings per share of $1.13, up from last year's third quarter, when we earned 89 cents per share, and also up from the $1.10 for the second quarter of this year.

Compared to second quarter, net interest income rose slightly.

Non-interest income was down for a number of reasons, including less revenue from warrant income and private equity investments, security losses versus gains, and the absence of a gain from the sale of a business as we reported in the second quarter.

Our improved results reflect our continued progress against the goals we laid out earlier this year, especially in the areas of credit quality and expense control.

And I am pleased with the momentum of our initiatives to better position Comerica to resume growth to enhance geographic balance and our business mix, and to capitalize on our relationship banking model.

Loan volumes remained stable during the quarter even though we saw the typical seasonal decline in our auto dealer floor plan loans.

Momentum continues to build in the development of new business, both in commitments to new customers and expanded commitments to existing customers.

Usage of credit lines remains at low levels as customers continue to maintain liquidity and are cautious about investment activity.

What we're seeing at this stage of the economic expansion is that many middle market business owners made solid productivity gains over the past several years.

As a result, there still appears to be unused capacity, and those companies frequently have large amounts of cash on their balance sheets.

I think we are well positioned to capture growth opportunities as the borrowing needs of these companies change.

But we currently are not seeing a significant expansion in commercial borrowing.

Our large corporate and international lending portfolios, which we've intentionally repositioned, were stable during the period.

The improvement in credit quality metrics for the quarter includes the lowest level of net charge-offs in more than three years, and a continued decline in problem loans.

On the expense front, we're delivering on our commitment to hold expenses flat.

We're focused on striking the right balance between investing and growth, containing expenses and improving productivity, as evidenced by a 3 percent reduction in employees year-over-year.

We'll open 16 branches this year, primarily in Texas and California, and we'll continue to make investments in the technology and systems we need to compete effectively.

The third quarter was solid in light of the economic conditions with which we are working.

Now let me turn the call over to Beth for a more detailed review of the quarter.

Good morning.

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

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

Today, we reported third-quarter 2004 net income of 196 million, or $1.13 per share compared to 192 million or $1.10 per share in the second quarter of 2004.

As outlined on Slide 5, net interest income of 451 million increased 3 million from the second quarter.

Average earning assets decreased approximately 1.2 billion, or 3 percent to 46.4 billion, due primarily to declines in average short-term investments, 894 million, and average investment securities available for sale, 235 million.

Average deposits of 39.7 billion decreased 1.2 billion during the quarter, driven largely by declines in average title and escrow deposits.

The net interest margin increased 9 basis points to 3.86 percent, primarily resulting from two factors -- an increasing rate environment contributed to a 19 basis point improvement in yields on earning assets, partially offset by a 14 basis point increase in funding costs; and lower short-term liquidity caused in part by the decrease in average title and escrow deposits.

Slide 6 details the components of non-interest income, which was 206 million for the third quarter, a $22 million decrease from the second quarter.

Activity-related and market-related fees were largely unchanged between the second and third quarters.

The change in non-interest income for the quarter is primarily explained by several items -- a $7 million decrease in net securities gains.

During the quarter we recognized 6 million of net securities losses related a write-down of an investment in a private equity fund that is consolidated on our balance sheet.

Second, the absence of a 7 million onetime gain on sale of a business recorded in the second quarter.

And a $4 million decrease in other non-interest income, which is largely attributed to reduced income distributions net of write-downs from unconsolidated venture capital and private equity investments -- 3 million in the third quarter versus 5 million in the second quarter.

Noninterest expenses is detailed on Slide 7, for 372 million for the third quarter, unchanged from the second quarter.

Salaries and employee benefits were down 10 million, largely due to forfeiture of stock-based compensation of employees who have left the organization.

You will note that we've added a new line item, Litigation and Operational Losses, which were previously included in other non-interest expenses.

These losses include traditionally defined operating losses, such as fraud or processing problems, as well as uninsured losses and losses triggered by litigation.

The expenses in this line item will fluctuate quarter to quarter due to the timing of insurance receipts and litigation settlements.

Other non-interest expenses decreased 5 million to 50 million for the third quarter, largely due to a $4 million reduction in the allowance for credit losses on lending-related commitments.

Moving to the balance sheet and Slide 8, average loans for the quarter were stable at 40.6 billion.

Line utilization decreased about 1 percentage point to 44.4 percent as a result of increased commitments offset by lower outstandings.

Slide 9 provides detail on line of business loan growth.

National dealer services decreased 300 million, primarily due to the seasonal decline in floor plan lines.

Floor plan loans decreased approximately 500 million from the end of the second quarter to 2.3 billion.

Loans to our specialty businesses increased 500 million from the second quarter, largely due to loans to our title and escrow customers in the Financial Services Group and our Energy Group in Texas.

There is continued softness in the Western market for middle market and small-business loans, which offset gains in our Midwest, Texas and Florida markets for these lines of business.

Additional line of business and geographic detail is provided in the appendix to these slides.

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

Non-performing assets were down 42 million from the last quarter to 388 million, and includes 361 million in non-accrual loans and 27 million in other real estate.

The geographic concentration of non-accrual loans is probably consistent with the mix of our overall loan portfolio and is as follows -- Midwest and other, 67 percent;

Western region, 29 percent; and Texas, 4 percent.

By line of business, middle market, global corporate banking, and small-business account for 76 percent of non-accrual loans.

Automotive-related and real estate represent the largest industry concentrations of non-accrual loans at 26 percent and 14 percent, respectively.

Shared national credits represent about 17 percent of total non-accrual loans, up from 13 percent last quarter.

As of September 30, our non-accrual loans have been charged onto 53 percent of the original contractural (ph) value, compared to 52 percent in the second quarter.

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

During the quarter, 106 million of loans were transferred to non-accrual compared to 63 million in the second quarter.

There were two new non-accrual loans over 10 million, totaling 30 million, to the automotive industry, one of which was an international customer.

During the quarter, we took the opportunity to exit 8 credits, 4 of which were on performing status.

Our watch list is down approximately 160 million to 2.5 billion and that represents about 6.2 percent of total loans.

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

Net charge-offs for the quarter were 33 million, including 20 million of recoveries.

By geography, 56 percent of net charge-offs were in the Midwest and other region; 42 percent in Western; and 2 percent in Texas.

Middle market represented the largest concentration of net charge-offs by line of business at 92 percent.

By industry classification, automotive-related represents the largest concentration of total net charge-offs at 32 percent.

One credit in the Midwest region represents the majority of this amount.

Shared national credits represent about 1 million of the total net charge-offs.

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

With the continued improvement in credit quality, the reserve decreased 33 million to 729 million during the third quarter.

The allowance for loan losses at September 30 stands at 1.83 percent of loans, down from 1.90 at June 30.

Moving to the funding side of the balance sheet, Slide 14 details average deposits by line of business, which decreased 1.2 billion or 3 percent from last quarter.

Specialty deposits declined 800 million during the quarter, driven primarily by a 600 million decrease in average deposits for our Financial Services Group, a specialty businesses that serves our title and escrow customers.

These deposits averaged 7.2 billion for the third quarter compared to 7.8 billion in the second quarter.

Technology and life science deposits averaged 3.2 billion for the third quarter, and account for the remaining 200 million decline in specialty deposits.

Slide 15 outlines our capital position.

And at September 30, the preliminary tier one common capital ratio of 8.16 percent was up from 8.0 percent at June 30.

During the quarter, we repurchased 1.5 million shares, bringing total shares repurchased year-to-date to 6 million.

We continue to be an active capital manager for the balance of the year.

Slide 16 outlines some trends for the full year 2004.

Based on the first three quarters of the year, we now expect average loans for 2004 will decrease in the mid-single digit range when compared to last year.

Total loans at year-end 2004 should be flat when compared to year-end 2003.

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

On average, the net interest margin will be about 3.85 percent for the full year.

We are on track to hold expenses in 2004 even with 2003 levels.

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

Year-to-date severance expense was 8 million compared to 2 million for the full year 2003.

Finally, we expect steady improvement in credit quality with full year average net charge-offs of approximately 50 basis points.

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

(Operator Instructions).

The first question comes from Jeff Davis from FTN Securities.

Good morning.

Two-part question -- unrelated.

First part, capital continues to build.

Beth, you said you continue to be active managing capital.

Ralph, could you comment on your M&A appetite?

Well, as I have said in the past, we're very comfortable with our model.

And our model is put in place to accommodate the targets that we have for growth and returns.

And acquisitions are really a tactic, and we'll look at acquisitions if they will put us ahead in that model.

And they have to fit; they have to be in the right location.

They have to have the right culture and business, and obviously, the right price.

So we view acquisitions very much as a tactic.

Otherwise, we're really focused on the model.

They are not a strategy for us.

Ralph, as I know, packages are periodically being shown to you.

Are there things of more interest on the market today than if I were asking you this question six months ago?

Pricing may not be more attractive, but --

You know, it -- without getting into specifics, they kind of, as you say, you never know when they're going to arise.

And I don't know on a comparative basis, quite frankly, whether they're more today versus six months ago or not.

Okay.

And if I may ask a follow-up question.

Beth, the swap income was a little bit higher than expected.

You've got one last tranche of high-margin blocks, swaps, that roll off this second half of this year at 3 billion, I want to say it is.

Was that on for the quarter?

And had it rolled off?

And then what, if anything, did you put on to replace, so that what was the ending book?

Yes, we had a billion of swaps mature in the third quarter, and those carried about 350 basis point spreads on them.

We did put on about 600 million of swaps during the quarter at about 150 basis points in spreads.

So there has been replacement of swaps, but obviously, not a 350 basis point spread.

Okay.

And did you have the 1 billion for most of the quarter, or half the quarter?

Did it roll off at the beginning?

It's about mid-quarter.

Okay, great.

Thank you, much.

The next question comes from John McDonald from Banc of America Securities.

Could you comment on how you're thinking about reserve release going forward if loan demand remains sluggish and credit remains good?

Sure, John.

Dale Greene.

Well, as you know, we look at our reserves every quarter.

We look at the portfolio and the various components.

And I can tell you that if the credit metrics continue to be favorable and if loan growth remains soft or muted, that we'll probably be in a position to have additional reductions in our allowance.

But sitting here at the end of the third quarter, it's a little tough to forecast what that might be.

So we'll just take a look at it then.

Okay, thanks.

And Beth, are you able to look out a little further on the margin and tell us broadly if you expect to see some margin improvement in 2005 and what will be the key factors affecting that?

I think if you look at just some fundamental underlying things, there could be opportunities for improvement in the margin, dependent on a number of things.

One is obviously, interest rates continue to rise; that will benefit us in terms of the value ascribed to the pre-funds (ph), the DDA portion of our balance sheet, which is pretty significant, particularly relative to peers.

So that's a positive.

I think as we see loan growth come and a good mix of loan growth, particularly middle market kinds of loan growth, we'll see margins improve.

Right now, we've seen more growth in the dealer business, which, as you know, is lower-margin business, very high ROE, because it has very limited losses.

But there will be a better loan mix.

And I think the third variable is what is a competitive environment, vis-a-vis deposits and deposit pricing as rates rise.

And the other factor is, assuming rates continue to rise, that we should see some moderation in our excess liquidity that exists on the balance sheet.

Therefore, that should be good for margin.

Thanks.

The next question comes from Matthew Clark from Deutsche Bank.

Good morning.

Can you talk a little bit in more detail, I guess, the makeup of your operational losses in the quarter and, I guess, kind of going forward, your expectations?

We had referenced that both -- there are a number categories in that new line item.

One would be just whether it be processing issues, business practice issues, and pulling that practice -- those kinds of traditional operating losses.

In addition to that, there is claims experience, either from self-insured items or insurance recoveries we had.

And the other would be in the category of litigation and the expense related to that.

So it's really those factors.

We've broken it out to give more clarity around those numbers.

And, as I mentioned in my prepared remarks, these can vary from quarter to quarter depending on timing of a number of these things.

So I don't have a forecast that I could give you.

But there was nothing unusual in the quarter that occurred?

I mean I'm just trying to get a sense is a trend going back?

I think -- (multiple speakers)

Actually I can see it here.

Yes, we provided you the trend.

And I think that's what you could look at.

There was a little higher litigation expense in the quarter compared with the prior quarter, which we highlighted in the press release.

Okay, great.

And then second question -- I know you guys are committed to keeping expenses relatively flat, but any commitment or desire to achieve positive operating leverage?

I think for us, we have some longer-term goals in terms of efficiency for us.

I think by virtue of the fact that revenue has been remuted (ph) this year, we felt it was appropriate to be holding expenses flat.

As we see revenue rise, as the C&I, if you will, recovery takes hold at some point, we will get positive leverage out of the fact that we've been containing expenses and improving productivity within the organization.

So that will naturally happen as revenue begins to climb.

Great.

Thank you.

The next question comes from Ross Demmerle from Hilliard Lyons.

I've got two questions.

One, you talked about the forfeitures this quarter.

And you suggested that most of that was from reduction in employees.

It sounds like that expense is not going to come back, and I just want to know, I guess, can I assume that it won't?

And then secondly, there's a pretty big difference between total assets at period-end and average assets for the quarter.

And that's sort of happened in the last couple of quarters.

And I'm trying to look at the fourth quarter here and get a better feel for what average assets might actually be.

On the forfeiture side, there were two things that we highlighted in the press release.

One was an actual forfeiture related to employees who left -- chose to either leave the Company or were severed as part of our severance activity that we've had this year.

Because of that, we have revised the assumptions that we had used for forfeiture.

It's at higher rates than we have had because of the higher severance that we've had over the last year.

So largely the benefit of that is reflected in this quarter -- a change in assumption.

Okay.

And I guess going forward, this isn't just a onetime benefit as far as reducing non-interest expense in this particular area, is it?

I think to the extent that -- obviously it will be dependent on a bit of what comes to pass compared to the assumptions we've made.

And it also depends on ongoing severance activity.

We've just focused on -- we've had a higher level of severance this year.

I can't really speak to what that might look like next year that could impact that expense, and those assumptions.

Okay.

On the average assets versus period-end assets, a lot of it is driven by the excess liquidity, particularly related to our title and escrow business.

That tends to be higher in the average and less at the period-end.

So there's fluctuation around those title and escrow deposits.

That's the main variability.

Well -- I guess you might mean that it's higher at period-end versus the averages?

Because --

Yes.

Sorry.

So, alright.

So is it safe to assume possibly, that average assets for the quarter are probably going to be less than what you have here at period-end then?

Yes.

In fact, if you look at just from a short-term investment, which is the big variability on the balance sheet, at the end of the third quarter, we had 5 billion on short-term investments.

And the average for the third quarter was 1.6.

And that, again, is largely driven by the variability of the title and escrow deposits, which peak at the quarter end and then average out during the quarter.

Thank you.

Your next question comes from Kevin St. Pierre from Sanford Bernstein.

Good morning.

Just in terms of the guidance for period-end loan growth, it would appear that if you have -- if we're looking at 2004 to be flat somewhat with 2003, it would appear that fourth-quarter loan growth would have to be the strongest it's been in about two years.

Just wondering if you could comment on, maybe a little more color, on what you're seeing with respect to loan demand, first.

And I'll have a second question after.

I'd make a couple of comments there.

One, we will likely have a seasonal rebound of the dealer business.

And that has varied by it over the last couple of years, but it's not atypical that it would be several 100 million increase.

As we talked about earlier, that business was down about a half $1 billion period end to period end in the third quarter.

So we will see some recovery of that.

And I think also, we saw an increase in commitments in the third quarter that we had not seen much of prior to that.

And I think that gives us encouragement.

And we saw it in middle markets in Michigan.

We saw it in Texas, California in the north, in particular is still more challenging.

But we're beginning to see signs, certainly with increased commitment.

But we haven't seen that translated in the drawdowns.

But the fact that we're seeing this activity compared with the prior quarters is encouraging.

How that translates into borrowings will be -- it's more difficult to forecast.

As I mentioned earlier, I think the activity continues to be pretty strong.

And that tends to lead when you begin to see outstandings begin to come back.

But I agree with what Beth said, that until it begins, you're really not going to know.

It's difficult to measure that excess capacity.

Right.

Okay.

And then shifting ever to the other side of the balance sheet on deposits, if I look at period-end balances and if I assume we had, similar to the average balances, about a 600 million decline in the title and escrow-related deposits, it still looks like deposits shrank by about a billion.

Maybe you could comment on the macro-environment for the deposit gathering as well as your positioning versus competitors.

I'd make a couple comments.

On the business side, if you will, on deposits, we did, as we talked about, see declines in the title and escrow deposits, which is a function of long-term interest rate.

And the second was in the technology and life science areas, where we saw our deposits decline a couple hundred million.

And I think part of that is we're seeing more activity coming in the technology side of the business of investments being made, and therefore, cash being drawn down.

And so we're seeing, in fact, increased loan demand within the technology and life science.

So there's a correlation there with the cash side of the business.

If you look at, on the more the retail deposit kinds of things, it's really a function of what the activity might be with competitors on, as the interest rates had risen.

And we have for the initial periods of interest rates going up is June and also in August, we did not see that much competitive response in the marketplace on deposit pricing.

I would say that that has become more active in terms of pricing competition.

So I think that's something we will be obviously watching on a weekly basis, daily basis, to see what's going on in that realm.

Okay, thank you.

Your next question comes from Art Shapiro from (indiscernible) Access Management.

Hi, it's Howard Shapiro.

Could you characterize the environment on pricing in terms for commercial loans in the Midwest right now?

I think I would -- let me split those apart.

I would say it's very aggressive, especially on the price side.

And their meeting competition is something that we very readily compete with.

But also on the terms, and I would say that as well, are very competitive at this point in time.

And from our standpoint, it is a point to be judicious about terms, and that's what we're about doing.

Dale, you --?

Well, I think that normally you have usually one or the other, price or structure.

It tends to be a little liberal.

Right now, there's a tremendous amount of liquidity.

There's a lot of institutional money.

So you're seeing structures with longer maturities, a little more aggressive, and obviously, pricing is tight.

So it's -- but given all that, we still see a lot of great opportunities, and we are booking a lot of business, and that's the positive to me.

Has this more aggressive environment -- can you quantify at all what that might have done so far to your commercial loan growth?

Are you able to do that?

I don't know I could sit here today and tell you exactly what the impact has been.

It's just -- we're -- it really has been -- the competitive landscape today is such that you want them -- as Ralph says, be cautious.

We're not going to reach to any great extent.

We will be competitive for good deals and we have been.

But I couldn't really quantify what the impact has been.

Okay.

Thank you very much.

(Operator Instructions).

Your next question comes from Gary Townsend from Friedman Billings Ramsey.

I'd like to tie -- just the credit quality metrics appear to have continued to improve with perhaps one exception.

During the quarter, there was a pickup in the inflows of new non-performing assets.

And Beth described, I think, a good portion of that.

But could you describe the trend?

Was this unusual to see the pickup and what additional color might you provide?

Sure.

Gary, I -- a couple of things.

One, I would tell you that I thought the second quarter was particularly good in terms of the inflows.

I think it's not unusual from time to time, certainly, from where I sit, to see inflows at about the kind of number we saw in the third quarter.

It is not particularly disturbing.

But to me, it was rather broad-based in terms of industry and business units.

We would expect from time to time if this economy continues, at least in the Midwest, to be a little bit more strained -- to see some inflows that might be in the range of the last couple of quarters, the second and third quarter.

But quite frankly, for me, it's not particularly disturbing.

And so the underlying trend would be continued improvement?

Yes, that's correct.

And just generally in terms of the systems for evaluating credit and such, can you -- I know you've been working hard to bring in new systems.

But could you just provide an update as to their status?

Yes.

All the risk-rating tools are in use and in production.

We'll be using both the old and the new system beginning in January of '05, and gradually phase out the old system; and they're working quite well.

We need to go through a period of validation.

And we are doing that and will continue to do that.

In terms of our stress testing models, our migration models, our loss forecasting models and therefore, those are up and running.

The stress testing is in its infancy, but its well along the way in terms of its development.

Migration -- we've had for a while now, and we are using that quite actively.

And our forecasting models are new within the last few quarters, and they tend to support what our other tools in the past have told us.

So I'm very, very pleased with where we are.

Obviously, there's a lot more work to be done, but they're in full use.

And I think they're producing results, Gary.

It already gives us the ability to be more of an active manager of risk.

And we're beginning to foresee things before they are at that stage where you really don't have many alternatives.

That's a good thing.

Yes.

Thanks very much.

The next question comes from Jed Gore (ph) from Sonoma Capital.

Thanks for taking my question, but actually all of my questions have been answered.

Thank you.

The next question comes from Joe Duwan from Fox-Pitt Kelton.

My question was mostly answered on the competitive environment in loans.

But are you seeing any geographic differences in competition, either price or structure?

I would say, Joe, that the competitive environment is pretty well even.

Certainly here in the Midwest, Texas is very competitive.

Southern California and Northern California.

So I would say really across the board that those comments hold.

Right.

I mean when I look at what we see, and especially to our executive-level committees' transactions, they're from all over.

And I would tell you that right now, it's across the board, just given the level of liquidity that's out in the market today.

Okay, thank you.

And any elaboration on share repurchase plans going forward?

Only what we had indicated in my remarks, and that's, we'll continue to be an active capital manager, as we have historically.

Okay, thanks.

The next question comes from Dennis Laplante from Keefe Bruyette & Woods.

Good morning.

Thank you.

Two, three things.

Related to the floor plan dealer business, you indicated that end of period, down 500 million.

Would that have impacted the average balances in the same amount?

The average balances were down about 300.

Okay, thanks.

In terms of -- was there any benefit to spreading come from interest income recovery and accrual on past charge-offs?

Or was that a significant item this quarter?

No.

And the last question I have on criticized classified trends, you indicated overall, they're getting better.

But Dale, if you'd just kind of looked at a microcosm of your portfolio within the auto supplier sector, could you talk about the trends in there, given that you had a couple of nonaccrual loans come on?

Well, I think the issues there tend to be focused in the manufacturing segment of middle market in the Midwest.

I think that the tier 1's are in pretty good shape.

They're able -- they've got a lot more leverage with the OEM's, I think the tier 2's and so forth, and we've got a fair number of those in our middle market portfolio -- tend to be more challenged.

Certainly, steel prices have affected them to a great degree.

A lot of them have been able to negotiate resale agreements with the autos, which has helped them.

But as steel prices, and really other commodity prices stay high, I think it will impact them.

Most of our middle market loans in the manufacturing segment are secured.

So we felt pretty good relative to our position in the loan, but the operating fundamentals of some of these companies, I think, will continue to be challenged.

Have the criticized classified trends actually got worse in that line?

The trends in that line are not worse at all.

Actually, they're somewhat better because we've gone through a period of rationalization and moving out of a lot of the problem credits.

So what we really have tends to be -- they tend to have done what needs to be done to strengthen themselves.

So we're really seeing improvement in that segment, because the overall trends were so much better.

The next question comes from Chris Chenard (ph) from Morgan Stanley.

I was just wondering if you could give a little color on the $6 million securities loss.

What securities were you selling?

And why the decision to take the loss?

Yes, it actually related to a venture capital fund that we -- private equity -- that we own an interest in, that we consolidated for purposes of the balance sheet.

And it was a loss related to the investment activity of that fund.

And so it was a private equity investment.

It was not regular available for sale kinds of securities losses.

Got it.

And if I could follow up -- credit, obviously, is improving a lot.

Commercial real estate nonperformers, if you look at sort of commercial mortgage and real estate construction have been relatively flat.

I was wondering if you could talk about trends there, and why you're not seeing as much improvement there.

Well, commercial real estate, the segment for us has been a very strong segment.

Obviously, we have not seen any particular problems on the credit side in the commercial real estate segment.

The issue around growing the segment tends to be the challenge with the runoff as these projects are developed and taken into the end market, there's a lot of that we have to replace, and that becomes a difficult challenge for us, so --.

But the segment in terms of the credit quality metrics continues to be, quite frankly, very good.

Thanks.

The next question comes from Heather Wolf from Merrill Lynch.

Wondering if you can talk about your outlook for financial services volumes for the fourth quarter and into 2005?

And specifically, what drove the strength this quarter?

The title and escrow deposits, are you referring to?

I was talking about the -- no, no, no -- the financial services lending volumes in the specialty business line.

Ah, okay.

Actually those are -- there were two things that drove increases in that line item.

One was our energy business in Texas continues to be developing and growing stronger in terms of loan demand.

The other is, we do have, through our title and escrow customers, we do make them loans periodically, and those were higher for the quarter than the prior quarter.

Those are a function of a lot of different dynamics that go on relative to the mortgage refinancing business.

So those can fluctuate fairly dramatically as you've seen deposits also fluctuate.

Okay.

And your outlook into the fourth quarter and '05?

In terms of the balance of the year, we've indicated generally that related to the title and escrow business, that we would see generally deposits and interest rates rise.

We would expect to see those deposits continue to come down.

And we've kind of -- we've indicated on a kind of a steady-state basis, that those could be in the 4 to $5 billion area, as a kind of a steady-state interest rate environment.

Those are, today, in excess of 7.

So that we do expect still some decline in those deposits over the next year or two.

How those actually calendarize is tough to forecast!

Actually, sorry.

I think we may have just mis-communicated.

I was actually talking about the loan volumes.

The loan volumes for that business?

Well, the specialty business loan volumes are up 14 percent quarter over quarter.

Are we on the same page, or no?

Yes, I understand.

Your question is related to loans related to the title and escrow business?

Right.

Those, as I said, can fluctuate fairly dramatically.

Those were up several hundred million in the quarter.

And those -- there is an ongoing kind of run rate.

But it, again, is a function of where the deposit business is going, where the loan needs are, and the overall, driven by absolute level of interest rates.

So that's a very difficult one.

Okay.

Great.

Thanks.

I just wanted to make sure we were on the same page.

At this time, there are no further questions.

Okay.

Thank you very much for attending the conference call this morning, and I hope everyone has a great day.

Thank you.

Thank you for participation in today's conference call.

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