Comerica Inc (CMA) 2005 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Comerica, Inc. first-quarter earnings 2005 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. Arsenault, you may begin your conference.

Thank you.

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

This is Helen Arsenault, 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 Web site as well as on our Web site.

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.

Our first-quarter financial results reflect solid loan growth across our businesses and geographic markets.

The results also underscore our focus on credit equality, ability to effectively manage interest rate risk and expense discipline.

Total revenue was up slightly when compared to the fourth quarter, and expenses were down, even as we continued to invest by opening new branches.

In the fourth quarter of 2004, we opened 14 branches, including seven in the month of December.

As the financing needs of corporations expand, we think the rebound in commercial lending is taking hold.

We're building new relationships and deepening the ones with our existing customers.

Average loan outstandings increased $1 billion, or 10%, on an annualized basis, compared to the fourth quarter, and commitment usage was up slightly.

Credit quality continues to improve as the result of our focus on this key aspect of our strategy.

For the first quarter, our watchlist loans, charge-offs and nonperforming assets continued to decline from year-ago levels, accentuating the improvement that began in 2004.

In fact, our nonperforming assets are at the lowest level since the third quarter of 2000.

Consistent with that positive trend, the allowance for loan losses declined, which contributed to earnings per share.

As we fund loan growth and make investments for the future, we also return excess capital to our shareholders through our share repurchase program and dividends.

In the first quarter of 2005, we acquired 2.1 million shares and we increased our dividend 6%.

This is our 36th consecutive year of dividend increases.

We are slightly above our current target of 7 to 8% of Tier 1 common equity capital.

We're now reporting financial information by business segment and geographic segment in our press release.

Currently, our business bank represents 72% of net income, and it will remain a significant component.

The emphasis we placed on strengthening our wealth and institutional management and small-business and personal financial services businesses is beginning to yield results, as you can see from the increased contribution to net income from the wealth business.

Markets outside the Midwest now provide 42% of net income, up from 37% one year ago.

The Midwest remains an important contributor to net income.

Now, I'll turn the call over to Beth for a more detailed review of the first quarter.

Good morning.

As I review our first-quarter results, I will be referring to slides we have 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 first-quarter 2005 net income of 199 million, or $1.16 per share, compared to 207 million, or $1.21 per share, in the fourth quarter of 2004 and 162 million, or $0.92 per share, for the first quarter of last year.

You will note that we are providing, today, business and market segment data.

Previously, we provided this data at the time of the 10-Q filings.

Slide 5 provides a breakdown of first-quarter net income by business segment.

Net income was up across all business segments over the fourth quarter with improved credit quality as the main contributor.

Also helping to increase first-quarter results from the previous quarter was growth in average loans in the business bank and small-business and personal financial services, with wealth and institutional management experiencing positive trends in several fee (ph) categories.

Expenses were well-controlled in all three major business segments.

Included in the finance segment is the securities portfolio and asset liability management activity.

Slide 6 highlights contribution to net income by geographic market segment.

Midwest and other markets continued to be an important contributor to our earnings and represented 58% of first-quarter net income.

Growth in loans and improved credit quality resulted in a 20 million increase in net income.

Markets outside the Midwest provided 42% of net income in the first quarter, up from 37% one year ago.

The Western market reported 80 million of net income for the first quarter, a 13 million increase over the fourth quarter.

This resulted primarily from a 14 million improvement in provision due to improved credit quality.

Average loans increased 18% on an annualized basis from the fourth quarter.

We opened 9 new branches in the fourth quarter in the Western market.

The Texas market reported 20 million net income for the first quarter.

Average loans grew 10% on an annualized basis, when compared to the fourth quarter.

Three new branches were opened in this market in the fourth quarter.

Florida reported 3 million in net income for the first quarter.

As outlined on slide 7, net interest income of 460 million decreased 6 million from the fourth quarter.

This decline was impacted by two less days in the first quarter when compared to the fourth quarter.

Average earning assets decreased 373 million or 1% to 46.6 billion, due to a 1.1 billion decrease in short-term investments and a 262 million decline in the available-for-sale securities portfolio, offset by growth in average loans of 1 billion.

Average deposits of 39.8 billion decreased 545 million or 1% during the quarter as a result of lower non-interest-bearing deposits.

The net interest margin increased 4 basis points to 4%, primarily due to greater contribution from noninterest-bearing deposits and the shift in earning asset mix from short-term investments to loans.

Noninterest-bearing deposits, which have an increased value to Comerica in a rising-rate environment, account for about 35% of our average total deposits.

Slide 8 details the components of non-interest income, which was 210 million for the first quarter, a 7 million increase from the fourth quarter.

While there was variability in several line items during the quarter, overall trends for non-interest income remain relatively flat when compared to the fourth quarter.

Noninterest expenses, as detailed on slide 9, were 374 million for the first quarter, a $6 million decrease from the fourth quarter.

Salaries and employee benefits were up 3 million in the first quarter due to increases in pension expense and other employee benefits.

Severance expense was 1 million for the first quarter, compared to 3 million for the fourth quarter.

The number of employees at March 31 decreased about 1% from December 31.

Customer services of 11 million increased 5 million from the fourth quarter.

This line items will fluctuate quarter-to-quarter due to the level of noninterest-bearing deposits from customers in our Financial Services Group and the earnings credit allowance given on these deposits.

Other noninterest expenses decreased 19 million to 49 million for the first quarter, due in part to 7 million in contribution expense recorded in the fourth quarter.

Also included in other noninterest expenses were 2 million in interest expense on tax liabilities, compared to 8 million in the fourth quarter.

Finally, the provision for credit losses on lending-related commitments decreased 3 million during the first quarter.

Moving to the balance sheet and slide 10, compared to the fourth quarter, average loans for the first quarter increased $1 billion or 10% on an annualized basis.

All of our markets experienced growth during the quarter.

Loans were also up 1.8 billion or 4% from year-ago levels.

Slide 11 provides detail on line of business loan growth.

The first quarter showed increases in all of our lines of business except commercial real estate, where construction loan activity has slowed in the Western and Midwest and other markets.

Average middle market loans of 14.2 billion showed the largest increase, rising 400 million from the fourth quarter, or nearly 12% on an annualized basis, and up 500 million from a year ago.

Turning to slide 12, we have provided additional detail to our 2004 annual report disclosures regarding our exposure to the automotive industry.

At year-end 2004, loans outstanding to the automotive industry totaled 6.6 billion, a decrease of 400 million or about 6% in the two-year period since year-end 2002.

Loans to dealers have increased as a percentage of automotive outstandings since 2002.

Dealers represented 64% of our automotive outstandings at year-end 2004, up from 58% at year-end 2002.

By contrast, all other automotive outstandings were down 600 million from year-end 2002 to 2.4 billion at year-end 2004.

This represents less than 6% of Comerica's total loans.

Total commitments to the automotive industry decreased 500 million from year-end 2002 to year-end 2004 with the same shift in mix toward dealers.

At year-end 2004, dealers represented 51% of automotive commitments, up from 42% at year-end 2002.

We carefully monitor our overall automotive exposure, as well as the specific segments of the exposure.

As we continue to focus our strategy on growing and balancing our overall business, both by market and by business segment, automotive will naturally decline as a percentage of the total business.

Slide 13 highlights the geographic and franchise distribution of our national dealer business in 2004.

Our dealer business is well diversified, both by geography and by manufacturer, and has historically experienced very small credit losses.

Slide 14 takes us into the credit quality portion of our results.

Nonperforming assets were down 28 million from the previous quarter to 311 million and include 269 million in nonaccrual loans and 42 million in other real estate.

The geographic concentration of nonaccrual loans was relatively unchanged with the previous quarter, with Midwest and Other and Western markets showing declines of 20 million and 26 million respectively.

The Texas and Florida markets had minor increases of 4 million and 1 million respectively.

By line of business, middle market, small-business and commercial real estate account for 77% of nonaccrual loans.

Automotive-related and real estate represents the largest industry concentrations of nonaccrual loans at 30% and 14% respectively.

We will provide additional detail on automotive credit quality in a moment.

The commercial real estate nonaccruals are granular and consist of nine loans over $1 million, with the largest having a balance of 7 million.

As of March 31, our nonaccrual loans have been charged out to 48% of the original contractual value, compared to 54% in the fourth quarter.

Slide 15 walks you through the changes affecting the balance of nonaccrual loans and reflects continued improvement in credit quality.

During the quarter, 66 million of loans were transfers to nonaccrual, compared to 71 million in the fourth quarter.

There was one new, nonaccrual loan over 10 million, which totaled 19 million, in the consumer nondurable (ph) industry in Midwest and other markets.

During the quarter, we sold four credits, two of which were unperforming status.

Our watchlist and nonaccrual loans were stable at 2.2 billion and represented about 5.3% of total loans.

Slide 16 depicts net charge-offs by geography, line of business and industry.

Net charge-offs for the quarter were 38 million, including 8 million of recoveries.

By geography, 45% of net charge-offs were in the Midwest and other markets, 24% in Western, 21% in Texas, and 10% in Florida.

Middle market represented the largest concentration of net charge-offs by line of business at 32%.

Three loans in our leasing and our technology and life science groups comprised a majority of the net charge-offs for our specialty business.

Two of these loans were in the transportation industry.

As the automotive industry is the largest concentration of our loan portfolio, slide 17 provides additional detail regarding credit quality trends over the last five quarters.

Automotive nonaccrual loans totaled 81 million at March 31, a 34 million decline from one year ago.

New automotive nonaccruals and net charge-offs are also down from March 31, 2004.

Slide 18 shows the trend in our allowance for loan losses, which decreased 37 million to 636 million during the first quarter.

The allowance for loan losses at March 31 stood at 1.52% of loans, down from 1.65% at December 31, reflecting improved credit quality metrics.

Moving to the funding side of the balance sheet, slide 19 details average deposits by line of business, which decreased about 500 million or 1% from the fourth quarter, more than explained by the decline in noninterest-bearing deposits.

This decline in deposits correlates to the loan growth we've experienced in the first quarter, as nearly two-thirds of our average deposits and 90% of demand deposits are from our commercial customers.

Deposits for our Financial Services Group averaged 7.8 billion for the first quarter, compared to 8 billion in the fourth quarter.

These deposits totaled 10.6 billion at March 31.

Slide 20 updates trends for the full year of 2005.

With the loan growth we've experienced in the first quarter, we have updated our outlook for average loan growth to the mid single digit range for 2005, when compared to 2004, with average earning assets virtually unchanged.

On average, the net interest margin is expected to be about 4% for 2005.

There are a number of factors we consider in providing this outlook.

We now see the Fed funds rate ending the year at 3.75%, up from our prior expectation of 3.50%.

Moderating this increased interest rate outlook is a competitive pricing environment for both loans and deposits, as well as an anticipated change in funding mix, as loan growth is expected to outpace deposit growth.

We continue to expect low single digit increases in both noninterest income and noninterest expenses.

We have updated full-year average net charge-offs to be about 35 basis points.

During the quarter, we repurchased 2.1 million shares for $118 million.

We expect to continue to be an active capital manager this year.

We have made progress toward our long-term objective of 5 to 7% revenue growth, 2 to 3% noninterest expense growth, net charge-offs of 40 to 60 basis points, a 7 to 8% Tier one common equity ratio, and return on equity of 15 to 18%.

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

Do we have questions?

(OPERATOR INSTRUCTIONS).

Gary Townsend.

Good morning, Ralph.

Good morning, Beth.

First question -- in your understated way, this is -- you sound the most optimistic as I've heard you.

Would you care to comment?

Well, I think, overall, as we said, Gary, we're starting to see pickup in loan volume in all of the markets and all of the businesses except for commercial real estate, which we talked a little bit about, or Beth did as she was going through the slides.

So overall, I think we do feel that things are beginning to pickup and beginning to move forward.

We are pleased with our strategy of two things.

One is that we are beginning to see wealth in institutional management and expect personal financial services and small-business to be a larger share of income going forward.

Also, we are seeing good growth in the markets of California, Texas, Florida.

That is beginning to be a larger share of our income, which is, as we have said in the past, gives us the kind of geographic balance we're looking for, going forward.

So I would say, yes, we're cautiously optimistic.

Hen I talk my clients about your stock, oftentimes I am hearing concern expressed with regard to your exposure to auto.

You and Beth addressed, I think, that also in your remarks.

What's the best way to think about this exposure that you have?

In a sense, it seems to me that, if the auto sector has some struggles in front of it, perhaps they need their banker more.

Is that maybe the way to think about it, as long as you control your credit quality in this space?

Well, I think a couple of things, as Beth went through the numbers, to focus on.

One is the heavy portfolio that we have in the dealer network, which is not only -- there is geographic balance but there is also balance by type of car, which is very important as well.

Historically, obviously, those are secured by cars.

About 30% is real estate, and the dealers have done very well through both up and down periods.

The remaining balance is to suppliers and OEMs, and there is where the issues that you read about are.

We have been in the business for a long time.

There are many things you have to look at for each supplier and each OEM as you go through, and I think we have done a good job of doing that.

Having said that, it is a downturn in the U.S. and Michigan, our economist would say, is going to be fairly flat for the next year or so -- there again, back to the geographic diversity of having markets like California and Texas, which we expect to grow at a minimum equal to the U.S. as a whole.

Dale, did you have anything to add to that on the supplier side?

You know, Gary, you make a good point; we always have to balance the needs of our customers, or our auto suppliers, auto customers, with our obviously need to balance our credit quality.

I think we do and have done for years a good job in that regard.

But it's always going to -- this environment is going to be a challenge.

One final question -- is it line utilization improvement that is spurring some of the loan growth in the commercial sector, or is it still -- are you still -- is it the marketshare take or what do you see that's changed in the last quarter?

It's actually increase in business, which would imply increase in marketshare as well.

While I mentioned that the line utilization is up, it is up only slightly, and certainly the overall commitments are up.

But it's both with expanding existing customers as well as new relationships.

Jed Gore (ph).

Congratulations on another very good quarter.

I was wondering if you could update us.

I can't find any evidence in your 10-K whether you use credit default swaps.

No.

We don't.

Any thoughts on their use in the future? (multiple speakers) -- applies to the auto book?

For many of our customers, that market is really not available because many of our customers are privately held or smaller customers.

That market is still what I would characterize in an involving state, and the cost of laying off that credit risk through the credit default market is still, I would characterize as relatively expensive, relative to what our assessment is of the risk.

I think we've used it in one instance in the past, but that -- (multiple speakers) -- was very minor.

That highlights your point that the book is reasonably diversified into smaller companies.

The second question -- I was wondering if you could update us on the interest rate swaps book and where it stands at the end of the quarter.

Yes, we -- as we indicated in our 10-K, we have $3.8 billion of swaps maturing this year; 1 billion of those matured in the first quarter.

Obviously, as rate rose about 50 basis points in the first quarter, the spread at which those swaps are on has declined.

It was, as we showed in the 10-K, about 93 basis points of spread on that 3.8 billion.

That obviously has deteriorated by about 50 basis points, but we continue each quarter to replace the maturing -- the maturities of the swaps at about $1 billion a clip in terms of adding swaps to the balance sheets -- or off-balance sheet.

So that's really kind of been our pattern.

There's no big changes from that since we've updated you in the past.

Are you putting the new swaps on at similar spreads to what's rolling off or --?

If you look at -- it really depends on the quarter.

Today, the spreads are about 100 basis points, and depending on what quarter you look at, swaps can be rolling off at, as I mentioned earlier, that on average the book was 93 basis points of spread at the end of December and more like 36 or 37 basis points at the end of March.

So it really depends on the quarter, what's coming off, but new ones are going on around 100 today.

Thank you for the update.

Heather Wolf.

Good morning.

A quick question or two questions on the funding side of the balance sheet.

First, there's a pretty divergent trend on your end-of-period versus average non-interest-bearing deposits.

Can you give us an update on that?

Yes, that's very typical for us that the average would be less than that period end.

The reason is driven largely by the title and escrow business we do within our Financial Services Group.

Those deposits tend to peak at quarter end as part of the nature of the mortgage or financing business that our title and escrow customers do.

So very typically, the period end will be in excess of the average.

In fact, we mentioned that the period end for the title and escrow business, the Financial Services Group deposits was 10.6 billion versus an average of 7.8 billion for the quarter, so that's the key driver.

I got it.

It just seems like a bigger number this quarter but it sounds like the same trend.

We saw, actually during the quarter, an acceleration of deposits within the Financial Services Group.

Even though the average declined 200 million in the first quarter compared with the fourth, that average was really a function of lower balances in January but came on very strongly in March -- by March.

So that business still is very strong for us.

Okay.

Then just from a bigger-picture perspective, you mentioned, in your commentary, that your loan growth is likely to exceed your deposit growth.

Can you talk about some of the funding options that you'll be using as you go through the rest of the year?

We have -- obviously, our first focus is on the deposit-gathering side, and we are making investments that will help facilitate that from a small-business and retail standpoint.

Ralph mentioned a number of the branches that we've added last year, and we plan to add a similar amount of branches.

We added 17 last year -- a similar number this year.

A majority of those will frankly be in California and Texas, where we see -- at Western division and Texas, where we see larger growth opportunities.

So that's one.

The second is certainly through the institutional CD market, as well as other wholesale funding.

We have very large medium-term note programs in both the U.S. and Europe, so we have plenty of capacity.

How low are you willing to take your securities portfolio as a percentage of earning assets (ph)?

When we look at the securities portfolio, we look at it -- we really look at what our options are to manage our liquidity and to manage our interest rate risk.

We use swaps and we use securities to manage liquidity and interest rate risk.

We have allowed the securities portfolio really to amortize, normal amortization over the last year, because we felt we were at a cyclical point in terms of rates turning into a rising interest rate environment.

We've seen rates rise a fair amount in the last six months, although they have been fairly volatile, and but it would be our plan that we would be adding securities during the balance of the year.

Okay, great.

That's helpful.

Thank you.

That addition, though, is factored into our average earning asset outlook.

(OPERATOR INSTRUCTIONS).

Chris Mutascio.

Good morning, Ralph and Beth.

Ralph, you mentioned that nonperforming assets I think were the lowest level since third quarter of '00.

When I go back and I look at the reserve to nonperforming assets in OREO, today's coverage ratio is identical, if I did my math right, to third quarter '00.

Does that imply that the reserve releases are coming to an end?

You know, I wouldn't have known the coverage back in the year 2000, if you hadn't have bought it up there, but no, I think we look at the reserves very carefully from a bottoms-up, and Dale can comment more fully on that.

What that number then comes to, based on the current portfolio, is the number that's in the reserve.

There, we then adjust the provision accordingly with charge-offs for the quarter.

So, it is very much a methodology that we have developed and refined over current years in order to produce that reserve on a current basis.

Dale, have I summarized that?

You have.

You know, the methodology has been the consistent methodology we've used for awhile now, and it's very much based on our quarterly review of all credits that are a certain size and a certain risk-rating cut off.

From that, there's a fair amount of work and discipline that goes into it, and review.

At the end of the day, that's the number that we build to from the bottoms-up in terms of the level of reserve that we need.

Frankly, the result of that is obviously the calculations you've just mentioned.

So we will do that every quarter.

Every quarter, we will assess the loan growth; every quarter, we will assess the credit metrics as we do now, and come up with what we recommend as the appropriate level of provisioning.

I think, relating it to past or future would not be a good relationship, because it depends what's in the portfolio today.

Absolutely!

It's very mix-driven and therefore very hard to calibrate.

Fair enough.

Thank you for the color.

Chris Chouinard.

Good morning.

I was wondering if you could give us a little bit of color on some of the loans and loan growth in the different segment, specifically if you could talk about the increase in the global corporate as well as if you could talk about if there's been any increase in loans in the FSG group yet.

If you look at specifically global, what you would find, especially in the large corporate side, is the mix very much mirrors the mix that we have in our overall portfolio.

So in other words, you would have middle market corporate real estate and about a third would be what I would call the large corporate, from a syndicated standpoint, if that's really what your question is.

As we've mentioned in the past, it is very important to us that we have the ability to develop relationships with these individual credits over time, realizing that we need to be able to syndicate credits as well, so we do take credits that we do not have a relationship in order to be a part of that market.

So, we watch that very carefully, as to how it mixes into our overall portfolio.

I think the key message is that we did see growth across our lines of business, except for commercial real estate, which we mentioned.

There's a lot of paydowns that have been happening in that marketplace as refinancing opportunities happen in the capital markets.

Apart from that, we've really seen good growth in middle market and large corporate, international, in national dealer, some of our specialty businesses, on energy and technology.

It's across our geography, so I think that's what we feel the most positive about.

It really does reflect an overall pick-up.

On the Financial Services, the escrow loans, have those been picking up or are they --?

Those are up a couple hundred million in the quarter.

And how long --?

That's on average,

On average.

Thinking about the escrow balances still fairly high at 7.8 billion, you know, what's your expectation for those?

Are you surprised at the strength recently?

I think the answer is yes, because I think if you asked us 6 or 9 months ago, we would have assumed that those would come down more like a 5 billion kind of level.

I think the fact that the interest rate environment, particularly on the long end, has been very well-behaved in spite of the rising (LAUGHTER) short end of the curve, I think that's been very instrumental.

And the underlying level of economic activity in the economy is good across the nation generally.

So I think those are positive -- and certainly in California is a key driver of this business and it's been very strong from a real estate standpoint, even as rates have risen, although long-term rates have not risen as much as we had expected.

So I think that's the key factor for why the deposits are higher.

Charlie Ernst.

I just wanted to ask a little bit about the average earning, the asset guidance.

It seems like you all are incrementally a little bit more positive on loan growth, and you're also talking about maybe adding to the bond portfolio over the year.

So how do you reconcile those two items, that you're not expecting much growth?

I think the key difference from the outlook we had given you in January was that we've improved the outlook on loan growth.

We had low to make single digit; now we are seeing mid single digit.

But inherent in the outlook we gave in January as well as today, we had made some assumptions that we would be replacing some of our securities as the year went on, so that assumption is not different.

It is not enough to make the virtually unchanged different from the guidance we gave you before -- the change in loan growth.

Just for clarification, is that a year-over-year or is that with current quarter?

It's a year-over-year, average '04 to average '05.

Is it fair to say that loans would become a little bit greater mix of the overall earning asset mix?

Yes, and we've seen that already in the first quarter; we saw our short-term investments, really our excess liquidity I referred to it, gone from 1.8 billion in the fourth quarter to 700 million in the first quarter, driven by -- and that's a positive contributor to the margin, too.

Why wouldn't that make you a little bit more optimistic on the margin, given that you are at 4% this quarter and loans continue to go up in terms of the overall assets -- (multiple speakers) -- mix?

Yes, I guess I would add a couple of things.

One, we have increased our interest rate outlook, which should be a positive in thinking about margin, but we've temper that by also saying -- and you can see, as you look into our net interest income analysis that we do -- there continues to be a lot of pressure on the loan side, very competitive in the lending arena, so we have seen some spread compression there.

Up till now, we have seen pretty conservative deposit pricing, but we began to see more activity in a competitive way and as we got into later in the first quarter.

Lastly, with our revised look at loan growth, it will be -- probably at some point, we will not be able to fund that with deposit growth and therefore we will be on the margin with more expensive funding on a relative basis versus the core deposits.

So all of those kind of worked ourselves together to say, when we did the analysis of it, that it made sense that we would continue with the outlook that we had.

Beth, can you give one comment or just an overall view, given your background, about the status, the financial status of the large auto manufacturers?

You know, I'm not -- I'm not in those companies any more, so it would be difficult for me to comment on the inner workings of what's going on.

I think the key message, from our vantage point, is the automotive exposure that we do have has come down over the last couple of years.

The mix of the exposure has increased, related to dealers, where the credit quality history has been a long, long track record of very good credit quality.

So, we're managing carefully our supplier exposure and making sure we are managing that in a way that makes sense.

Thanks a lot.

Denis Laplante.

I had a few things.

Tangible capital still remains strong, 9%.

You stepped up the buyback a little bit but it looks like share options reassurance is kind negating that effect.

Can you talk about what you expect on options reissuance for the rest of the year?

Given that you are feeling better about credit, given your trends, notwithstanding where the auto stuff is, and things are getting better in general, that you might start to leverage that capital a little more than you have?

Well, I think if you -- as we've talked about the increased loan demand and at the present time, we have, as Beth just went through, a flat earning-asset growth, at some point, your earning-asset growth will begin to pick up, whether it's next year or whether it's late in this year, so that begins to focus on leverage.

We expect, as Beth said earlier in her remarks, to continue to be an active capital manager and return excess capital to the shareholders through buyback, and I think we demonstrated that certainly in the first quarter.

If I remember right, last year, we bought back about 96% of earnings, and typically we've averaged about 75%.

So we are very mindful of the excess capital position, which is one of the reasons I mentioned that we're still slightly above our target.

We would certainly longer-term prefer to be within that target.

Those numbers that Ralph mentioned include dividends, buyback and dividends, in terms of payout.

How about the options reissuance, is that going to continue to offset any buyback you do?

That's a tough one to predict, in terms of exercising of options.

So, we obviously grant options on an annual basis, in our second quarter, to our senior team, but predicting how that plays out is difficult.

Yes, that becomes personal decisions by the individuals, as well as the market.

I don't know how to predict that one.

The second question I have -- end-of-period loan balances were down below average and that seems to be a pattern, but anything there that would suggest that you had some more payoffs around the end of the quarter, or could you just kind of talk about how that relates to the averages?

Yes, Denis, it's the same phenomenon related to deposits, only the converse, and it's relates to the Financial Services Group.

They tend to pay off their loans at period-end, so in that case, the averages tend to be higher than the period-end, just the converse of the deposit phenomenon.

It's the same group though.

Right.

Is it fair to say that the difference between the period-end numbers and the averages reflect all just that?

Yes, that's largely the effect.

Watchlist trends in the automotive -- I know, for the last year or so, that you've been suggesting -- in fact, I've been asking this question for the last couple of years -- you've been suggesting all along that watchlist trends either were stable or improving.

Have we've seen any deterioration in the watchlist trends in the most recent quarter?

No, no, we continue to see improvement in the watch trends, probably not as a faster rate as we have, of course, because they're down quite a bit, but those trends continue to be positive, so there's nothing there, Denis, that would cause us any concern.

(indiscernible) question was auto-related?

Auto-specific, yes.

And they have been relatively flat over the last several quarters; they are down a fair amount from a year-ago levels.

Right.

But to your point, they have been fairly static over the last several quarters.

Dale's comment --.

No deterioration but no big improvement, either.

Now, is that influenced a little bit because the sizable dealer part of the business -- if you kind isolate it into the supplier, would that still be the case -- relatively flat?

Yes, because most of this would relate to the supplier, not to the dealers.

I mean, last year, we had 0 credit losses for dealers.

Great.

Thank you very much.

Fred Cummings.

Good morning.

Just a couple of quick questions on kind of the small-business area -- the outstandings seem to be flattish here and I'm a little surprised by that.

Can you give us an update what's going on in small-business lending?

Well, let me answer that.

It's Dale Greene.

I think, from the standpoint of small-business lending, a couple of things have happened.

First, Connie Beck has come on and has really pushed hard in terms of branches, deposit gathering, reorganizing her structure and really doing a number of things on the small-business end.

So, I think we've really got now a lot of strong leadership and a more -- a reintegrated, if you will, sales culture.

We're really focusing the small-business areas to generate more loans.

We're starting to see those backlogs grow.

We're doing a number of things at the low-end of small business to make it a lot more efficient and a lot faster turnaround, a lot more productive.

So, all of those things are well underway and I think we will begin to see a lot of improvement in terms of the revenue and growth in the small-business sector.

So, I think you'll begin to see that occurring through the rest of the year.

I think, in Michigan, it's tempered by that things aren't growing as quickly.

We did see some modest amount of small-business growth in California.

You can't see those in the detail but -- so we did see some improvement in the Western division.

Then an unrelated question -- are you guys seeing -- I know there's some tough competition for talent, particularly on the commercial lending side.

Are you seeing competitive pressures in terms of wages and salaries that you have to pay to your lenders, based on so many people wanting to grow the number of relationship officers?

Even here in the Midwest, there's a number of banks who want to expand the number of lenders they have on the front lines.

Do you have any anecdotal evidence of is that putting pressure on your compensation expenses?

I think, Fred, it's not unusual at this part of the cycle, the kind of competitive environment that you're seeing.

It's expected, and it's nothing that I haven't seen in previous cycles, to be honest with you.

It's not a dramatic thing.

I mean, there are anecdotal of people being wooed away, but in fact, we've also had people who have come back (LAUGHTER) because we've an environment here that's very much focused on the relationship approach to the customer and long-standing relationships, and those are important.

Frankly, we get some of our people back, which is terrific.

Plus, we've an incentive plan that I think is very well focused on growth and profitability and it's a great program that we've had for awhile.

People know that and it's -- we don't know of anybody in the market who has anything that's quite as attractive.

Clearly, if they are interested in targeting a specific individual, that will always happen, but we have been pretty successful in retaining and even having a few return to us.

Then lastly, Dale, going back to the syndicated lending issue, and I think within the last couple of years, you all have talked about wanting to lower your hold levels in terms of when you are involved with syndicated lending.

To the extent that you're getting growth right now, can you just give us some sense for the loans sizes, relative to what you may have done in the past?

Sure.

First of all, our share national credit book is around 15 or 16%.

It came down to that level and it's relatively around that number, maybe slightly higher but about 15 or 16%.

Secondly, our hold levels -- we have much more focused, as you indicated, on that.

By and large, we're within our house limit requirements for the shared national credit that we see.

Occasionally, we will make an exception, but that's usually an exception that is made at our executive committee level, so Joe Buttigieg and myself and others get involved with those decisions.

The credit quality of what we're seeing I think is good, and by and large, most of those credits come on board with either a fuller relationship in hand or one committed to in the next year, which is clearly what we want more of and we are successful in doing that.

Okay, thank you.

Jeff Davis.

Good morning.

My questions were covered.

Good quarter.

Mike Mayo.

My question really is, what happens if interest rates go up a lot more than you expect?

What would be the dynamics?

Would that be good to your earnings?

Bad?

And also, the margin?

Well, I guess my first answer -- a question back to you would be that there is an underlying reason for rates rising more than we expected.

If it's growth-driven, then it has different implications than if it is related to some other crisis or something.

But in general, you know, we've talked about, to the extent that rates are rising and to the extent that there is rationality in the loan as well as deposit-pricing side, that should be a positive for us.

We don't expect that.

You know, I indicated expectation is to get fed funds to 375 by the end of the year, so that's factored into our outlook.

I just don't see something that would cause us to be in that situation.

It depends on a lot of dynamics, on the movements in the balance sheet and the different assumptions, so it's a very hard question to answer.

Like Beth has said in the past, though, our bias is to an asset-sensitivity, so just a pure interest rate perspective, that would be a positive.

I think the bigger one is, as Beth said, with rates rising means typically the economic environment is picking up, and that would be a plus as well.

But that also might mean that loan growth is certainly outstripping deposit growth, which on the margin can depress the margin.

I guess when we rank all the banks and based on what is in the 10-Q, you always come out towards the top as far as being a beneficiary to higher interest rates, and the 4 basis point improvement this quarter is good, but now I was kind of looking for kind of a flat margin the rest of the year, despite you being at the top of that list and rates going higher.

Well, yes.

To remind you, though, what we disclosed in the annual report is a sensitivity analysis around a core base assumption for interest rates.

So our shocks (ph) that we do are on top of a core interest rate environment that we've assumed in our scenario are most likely are our base forecasts that we call it in the SEC filings.

So, these are rate shocks over and above an assumption, underlying assumption that rates are going to rise.

So the fact that rates are going to rise isn't necessarily additional good news; it's that, if there's a rate rise that is in addition to what we've already assumed in our basic forecast, that's the key difference.

Okay, so if I -- I think I saw it correctly.

The core CPI this morning is higher than expected.

Just if we get that for the next couple of months, all else equal, let's say that's already reflected in the underlying growth, is that good, or is it only good because it should come with better commercial loan growth?

Yes, I think we have factored into our interest rate forecast outlook of 3.75 at year-end that in fact core underlying CPI is rising, so it will be up more than a percentage point year-over-year and we are assuming 3.5 to 4% GDP growth this year.

All of that bodes well for underlying loan growth.

That's why we changed the outlook.

A related question -- I guess deposits aren't growing a whole lot.

Is there potentially a spillover effect from the auto industry on the consumers, since you're still a good part Midwestern bank?

Is there a spillover effect on just very sluggish deposit growth and that might lead you to have more wholesale funding than you might have planned on?

Well, as we talked about, almost two-thirds of our deposits are commercial-related and given the nature of the lending business we do, but we certainly have a desire to be more effective, even in our Michigan market, where we are a dominant force in terms of the retail deposit side, but also focused on growing the retail and small-business and wealth management in Western division and Texas.

Those are very important initiatives.

We hired Connie Beck to lead that charge on a nationwide basis and we're making investments in branches last year, this year and will be next year, as we've indicated.

So all of that says we want to continue to try to improve our capabilities related to deposit gathering.

Just last question, you said one-third of your loan growth was from syndicated loans?

I might have read that incorrectly.

No, no.

If you look at our loan growth, we were up 300 million in what we call in our line of business slide global corporate banking, but we were up 400 million in middle market, we were up 200 million in the dealer business, and we were lower by 300 million in the commercial real estate.

So --.

How much of the growth was through syndicated loans?

400 million.

That was my one-third comment was, of the syndicated loans, one-third was in large corporate.

Okay, great.

Well, thanks a lot.

Lori Appelbaum.

My question relates to your commercial loan yields on your portfolio.

They've been rising at roughly twice that of the industry over the past year (indiscernible) been tightening.

I was wondering what you would attribute it to.

Have you considered it a result of mix shift issues away from large corporate lending towards small-business and middle market, or are you trying to avoid more competitive pricing situations in some of your competitors?

I think, from the yield standpoint, we have -- one difference that could characterize us from other banks in general is our fixed-rate book.

Our fixed-rate book is only 15% of our portfolio, so that has an impact.

Some of it is in the commercial loan category you see on the balance sheet; some is the real estate construction lending tends to be all floating rate, and you saw that resulting in the higher yields there.

Commercial mortgage loans have some fixed-rate elements, as does residential and consumer.

So -- but lease financing and international loans tend to be floating rate.

So as I said, 85% of our loans are floating, and so that has an impact as you see it in yields for us.

I think the focus on small-business and middle market would have an effect on what I would say is better spreads and pricing.

What about your overall view toward pricing commercial loans, relative to your competitors?

It's extremely competitive and really all of our markets are very competitive.

I mean, are you trying to set pricing for the market, or are you in the middle of the pack or trying to -- (multiple speakers)?

I think we've always said we will compete on pricing, and we have a pricing model that we use, and we stick to that within our boundaries.

I think also, in the middle market where we've had long-term relationships, they tend to be very sticky, which means they tend to stay with us; we tend to have a full relationship.

I think, because of what we have been able to do to support them over time, we can, from time to time although not always, have a little better return on some of those relationships than maybe some competitors might offer.

But nonetheless, it is a very aggressive market today and we are defending constantly, obviously.

So --.

My next question relates to your (indiscernible) acquisitions and that capital sitting well over your targets, and you are feeling a lot more optimistic about business conditions.

What's your current view toward doing deals?

I think our view really hasn't changed.

If we were to do a deal, it would have to fit in the markets that we've outlined, it would have to fit the strategy, and it would have to have a makeup that would fit culturally.

I think it's very important that we do not teeter from the momentum that we've established, so we would look very carefully at acquisitions.

Could you maybe be more specific than that? (multiple speakers).

No, really each one, Lori, is different, and I'm saying we would look for it to fit and I think we would have very strict guidelines as we look at an acquisition today, given we have, in effect, a model now that I think is beginning to produce results.

We are growing in markets that are very fast-growing markets, and I do not want to delay that.

Now, if an acquisition were available at the right price, with the right mix and it would project us further along our strategy, we would consider it, but it would have to fit in a lot of different ways in order for us to take it on.

The key thing that I mentioned earlier about our long-term objectives that we indicated again that we're making good progress towards, those long-term objectives are organic.

They don't assume in it that there are acquisitions.

Ralph, when you say if there were an acquisition with the right fit and at the right price, when you say the right price, what do you mean specifically, in terms of the amount of dilution you'd be willing to present?

Well, that will depend on what it is and where it is; that would be one piece.

Typically, we've looked at accretion in the first full year, but that's only one indicator.

And others?

Well, as I mentioned earlier, it's fit; it's people.

No, I mean the financial part of it.

Return on capital.

It's, as you know, when you look at acquisitions, it is the whole list of considerations.

Jon Balkind.

Thanks.

Good morning, everyone.

Two quick questions -- one, in terms of the percentage of your commercial deposits coming from the auto industry, could you tell us what that is?

Then two, just getting back to the acquisition question but more specifically, will funding considerations drive that potentially, given that it looks like your loan growth is going to far outstrip your deposit growth in the near term?

On the first question, I don't think we have those numbers handy, on the deposits, for the auto industry, but it probably would be small; it would be in comparison to the ratio of our loans from and auto industry perspective to total.

That is an intuitive answer, not an effectual answer.

We would have to look to see where that is.

When you look at the funding question and would that drive an acquisition, certainly that would be one question you would look at.

But keep in mind that we are beginning to come back into an environment where, as wholesale funding picks up, we are a long ways from where it was even several years ago.

There is a lot of capacity there in the banking system, in my opinion.

Michael Shep (ph).

I just wanted to follow up on the reserve.

I realize it's a (indiscernible) process and metrics are great, but I mean, being a predominately business bank, at some point, is there a floor on reserve as you start providing for loan growth and charge-offs?

How are you looking at that?

No, there isn't a floor per se.

There clearly -- and I probably sound like a broken record, but there's a clear set of methodology that we've employed, we continue to employ.

We will fine-tuned it from time to time as we gain more behavioral experience in the portfolio.

We will obviously take a look at loan growth and how that impacts it.

But there is not a floor.

We basically look at each credit at above certain thresholds, go through a very in-depth analysis, subject that to a lot of scrutiny.

There's a lot of other components to it as well, and that methodology is the methodology that we stick to and are true to, and as I said, it's reviewed by a lot of folks each quarter.

So, no, there is not a bottom.

Are you providing or planning on providing for new loans?

The concern is just, when the cycle turns, you are behind the curve, so to speak.

We do provide -- part of the methodology of course is to provide for whatever the loan growth is.

We provide, again, on a deal-specific basis, depending on the rating of that credit and obviously the amount of the loan and so forth, so it takes into account all of the factors.

Okay, great.

A follow-up question from Denis Laplante.

Of the 85% of your portfolio that's floating, do you have a sense of how much is prime versus LIBOR?

A second question related to kind of pricing is if you kind of focus on your sweet spot, where I'm not sure how you would characterize it but probably your double-B equivalent, which is noninvestment-grade stuff, how much compression in pricing have you seen, say, over the last six months or twelve months or whatever kind of time period you'd like to characterize?

Thank you.

Denis, on the prime, the floating rate, it's about 50-50 between prime-based and LIBOR-based on the floating-rate book.

Your question is a very difficult one to answer on loan compression because we've seen it varies by business line, it varies by geography, etc., but clearly, there has been compression in the last quarter, in the last year.

Whether we have seen the bottom, you know, I think it would be nice to think now that we are seeing much more loan activity as opposed to banks chasing just a few small, good deals, now there is more activity and as I mentioned, across all of our business lines except for commercial real estate and across our geographies, that's a good thing.

So, I'm crossing my fingers that we haven't -- we've seen the worst is over.

But it is a very competitive environment.

But if you characterized in kind of that sub-investment-grade, your sweet spot typically with Comerica's companies is they've lent to (ph) over time.

Has that gone from, say, 250 basis points over LIBOR to 175, or can you give us some sense?

No, I think it's fairly small on a relative scheme, of the group you're talking about.

We are seeing -- you know, for the more highly rated and for ones that have more access to opportunities, I think there's been more competition around those, but in our sweet spot as you call it, not too much.

Okay, great.

Thank you.

At this time, there are no further questions.

Ms. Arsenault, do you have any closing remarks?

No, thank you for listening to our call, and have a great day.

Thanks, everyone.

We appreciate you being with us this morning.

Have a good day.

This concludes today's conference call.

You may now disconnect.