Comerica Inc (CMA) 2005 Q4 法說會逐字稿

Good morning, my name is Heather and I will be your conference facilitator today.

At this time I would like to welcome everyone to the fourth quarter and full-year 2005 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 session. [ OPERATOR INSTRUCTIONS ] Thank you.

Mr. Burdiss, you may begin your conference.

Thank you, Heather.

Good morning and welcome to Comerica's fourth quarter and full-year 2005 earnings conference call.

This is Paul Burdiss, 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 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'll turn the call over to Ralph.

Good morning.

The financial performance for 2005 is the result of the successful execution of our strategy.

Our fourth quarter results underscore many of the positive trends we have seen all year, including consistently solid credit quality and good loan growth, particularly in our Texas market and our Western market, which includes California and Arizona.

Average loans in the fourth quarter increased 2% on an annualized basis with 14% annualized growth in the Texas market and 10% annualized growth in the Western market, excluding the Financial Services Division.

This loan growth was partially offset by a 5% annualized decline in the Midwest and other markets.

The core net interest margin remains stable despite the unusual interest rate environment.

Continued stability and credit quality metrics in the fourth quarter resulted in a $23 million decline in the allowance for credit losses from the third quarter.

As a result of the 27% decline in nonperforming assets, reserves as a percentage of nonperforming assets have continued to increase.

Noninterest expenses were up, reflecting investments in banking centers, higher incentives from increased profitability, increased credit-related costs and several other items which Beth will discuss in detail.

In 2005, revenue was up 7% compared to 2004, excluding the net gain on the sale of businesses.

Average loans grew by 5% excluding the Financial Services Division.

Average loans increased 11% in Texas, 7% in the Western market and 3% in the Midwest and other markets.

Noninterest expenses in 2005 were up 12%, reflecting in part our investments in people, products, technology and new banking centers, with approximately half of the increase related to the Financial Services Division customer service expense and credit-related costs.

Overall, credit quality continued to be solid by any metric.

During 2005, we returned excess capital to our shareholders through our share repurchase and dividend programs with a total payout of approximately 100% of earnings.

It was a 36th consecutive year we increased our annual dividend.

We remain focused on revenue growth in our key strategic drivers to create attractive shareholder returns over time.

As we enter 2006, we expect to deliver good loan growth with solid credit quality while generating positive operating leverage.

This year, we will complete our three-year plan to open 50 new banking centers in strong growth markets to capture more small business, middle market and retail customers.

To date, we have opened 35 new banking centers, including 10 in Texas and 19 in the Western market.

We'll continue to apply technology to expand our capabilities to meet our customer's financial needs quickly and efficiently.

We'll focus on developing new products and services to enable our customers to be more effective and to help them grow.

And to help us achieve consistent growth through all phases of a business cycle, we continue to make the investments to further diversify our earnings mix by business segment and geography.

The strategy we've put in place two years ago is working and we will continue to execute it.

Now I'll turn the call over to Beth for a more detailed review of the fourth quarter and full-year of 2005.

Good morning.

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

Turning to Slide 4, we outlined the major components of our fourth quarter and full-year earnings compared to prior periods.

Today, we reported fourth quarter 2005 net income of 207 million, or $1.25 per share compared to 238 million, or $1.41 per share in the third quarter.

For the full-year 2005 we reported net income of 861 million, or $5.11 per share compared to 757 million, or $4.36 per share in 2004.

Our return on equity was 16.9% compared to 15.03% in 2004.

Slide 5 highlights a few of the key drivers in the fourth quarter and full-year 2005.

There were several common themes that impacted both the fourth quarter and full-year 2005.

We saw continued growth in average loans driven largely by our Texas and Western markets.

Credit quality remained solid with nonperforming assets declining 27% from the third quarter and 52% from one year ago.

Net loan charge-offs in 2005 declined to 25 basis points from 48 basis points for full-year 2004.

Compared to 2004 total revenue in 2005, grew 9%, or 7% excluding the net gain on sales of businesses.

The net interest margin improved 20 basis points in 2005 to 4.06% when compared to the prior year.

Noninterest income, excluding the net gain on sales of businesses was up 4% over 2004.

Noninterest expenses rose 12% with approximately half of the increase related to customer service expense in the Financial Services Division, 46 million, and credit-related costs, 39 million, including the provision for credit losses on unfunding lending-related commitments and other real estate expense.

Other factors contributing to the increase in noninterest expenses will be detailed in a later slide.

As outlined on Slide 6, net interest income of 501 million increased 9 million from the third quarter, excluding the previously reported $20 million benefit in the third quarter from the change in warrant accounting.

Average earning assets increased nearly 700 million to 49.8 billion, primarily due to an increase of 435 million in Financial Services Division-related average loans, in addition to increases in the commercial real estate and national dealer portfolios.

Excluding the previously reported 16 basis point benefit from the change in warrant accounting in the third quarter, the net interest margin increased 1 basis point to 4%.

Higher FSD low rate loans negatively impacted the net interest margin by 4 basis points during the fourth quarter 2005, while several other factors combined to more than offset this decline.

Slide 7 details the components of noninterest income which was 281 million for the fourth quarter, a 49 million increase from the third quarter.

Included in these results is the previously announced 55 million gain from the sale of Framlington Group.

Other noninterest income in the fourth quarter included 6 million of risk management hedged in effectiveness gains compared to 3 million of losses in the previous quarter.

Other noninterest income was also impacted by a $13 million decline in income, net of write-downs, recognized on unconsolidated venture capital and private equity investments.

For the year, strength in market and activity-related fees helped drive the 4% increase in noninterest income, excluding the net gain on sales of businesses.

In particular, increases in investment advisory revenue, fiduciary income, commercial lending and card fees were partially offset by a decline in service charges on deposit accounts.

Noninterest expenses, as detailed on Slide 8, were 487 million for the fourth quarter, an increase of 65 million from the prior quarter.

Salaries expense was up 16 million in the fourth quarter, due primarily to an increase in profitability-related business unit incentives and severance.

Customer services declined 10 million from the previous quarter due to the net result of changes in the competitive environment, the levels of noninterest bearing deposits in the Financial Services Division and the earnings credit allowances provided on these deposits.

The fourth quarter $26 million increase in the provision for credit losses on unfunded lending-related commitments was due to exposure to the automotive industry.

Included in fourth quarter other noninterest expenses was a $10 million contribution to the Comerica Charitable Foundation and an increase of 7 million in other real estate expense.

Compared to the prior year, noninterest expenses in 2005 increased 6%, excluding increases in interest rate sensitive FSD customer service expense, 46 million, and credit-related costs, 39 million.

Credit-related costs include the provision for credit losses on unfunding lending-related commitments and other real estate expense.

Other factors impacting the full-year were increases in profitability-related incentives, 41 million, pension and staff insurance, 20 million, and new banking centers, 12 million.

Moving to the balance sheet and Slide 9, on an annualized basis, average loans in the fourth quarter increased 2%, led by 14% growth in the Texas market and 10% growth in the Western market, partially offset by a 5% decline in the Midwest and other markets.

These growth rates exclude the Financial Services Division loans.

For the full-year average loans, excluding Financial Services Division loans, increased 5% over the prior year driven by growth in the Texas market, 11%, and Western markets, 7%.

Slide 10 provides detail on line of business loan growth.

As you can see on the slide, many business lines experienced growth in the fourth quarter and for the full-year.

The commercial real estate portfolio increased approximately 100 million during the fourth quarter, driven by our Western market.

National dealer services rebounded as expected, from the seasonal decline in the third quarter with a 200 million average increase in the fourth quarter, with each of our major geographic markets posting gains.

Compared to the third quarter, the fourth quarter increase in specialty businesses was due to growth in the Financial Services Division, 435 million, energy-related lending, 105 million and technology and life sciences, 103 million.

Slide 11 provides an update to our annual automotive lending disclosure.

Our exposure to the automotive industry includes both the dealer and nondealer component.

The dealer portfolio continues to be a profitable high credit quality business with good geographic and nameplate distribution.

The nondealer exposure, which is down 700 million when compared to the end of 2004, focuses on those customers directly affected by automotive production.

Loan outstandings for this component are down slightly when compared to the prior year.

Loans to North American affiliates of foreign-owned auto makers and suppliers represented 32% of the nondealer component exposure at year-end 2005, unchanged from year-end 2004.

Slide 12 provides details on the recent performance of the automotive portfolio, which continues to perform within acceptable credit quality parameters.

Slide 13 highlights recent credit quality and reserve trends.

Net charge-offs continue to remain at historically low levels.

Fourth quarter net charge-offs on loans and lending-related commitments of 28 million were up 7 million from the third quarter and included 16 million of recoveries.

Net loan charge-offs remained low at 20 basis points.

While continued stability and credit quality resulted in a negative 20 million provision for loan losses, we provided 25 million for credit losses on unfunded lending-related commitments, which resulted in a 5 million positive provision for credit losses in the fourth quarter.

Nonperforming assets at the end of the fourth quarter were 162 million, down 58 million from the previous quarter and consisted of 138 million of nonaccrual loans and 24 million in other real estate.

Loans over 2 million transferred to nonaccrual status were 28 million in the fourth quarter 2005, down from 81 million in the third quarter.

At December 31, our nonaccrual loans have been charged down to 54% of the original contractual value, compared to 51% in the third quarter.

Our watch list in nonaccrual loans at December 31 were 1.9 billion and represented 4.4% of total loans.

Nonperforming assets have declined in each of the past five quarters and were 37 basis points as a percent of total loans and other real estate in the fourth quarter, compared to 52 basis points in the prior quarter and 83 basis points a year ago.

The allowance for loan losses as a percent of nonperforming assets has increased in each of the past five quarters and was 319% at December 31.

Slide 14 details average deposits by line of business, which increased approximately 200 million from the third quarter due to growth in middle market and institutional CDs, partially offset by a decline in Financial Services Division deposits.

Noninterest bearing deposits account for 37% of our average total deposits.

On Slide 15, we provide an update on our Financial Services Division business.

FSD deposit balances averaged 8.5 billion in the fourth quarter, down 500 million from the prior quarter due largely to seasonality.

Customer services expense was down 10 million from the previous quarter.

Related average loan balances were up 500 million to 2.8 billion in the fourth quarter.

On a full-year basis FSD noninterest bearing deposits averaged 5.9 billion in 2005 compared to 5.3 billion in 2004.

Compared to full-year 2005, we expect the following metrics in the Financial Services Division for full-year 2006.

Average noninterest bearing deposits be flat to down, customer service expense to be down and average loans at a level consistent with the fourth quarter of 2005.

Deposits from our Financial Services Division customers continued to provide attractive funding for Comerica.

Slide 16 updates our expectations for the full-year 2006 compared to full-year 2005.

We anticipate average loan growth for the year to be in the mid to high single-digit range, or excluding FSD, in the mid single-digit range.

On average the full-year net interest margin is expected to be around 4%.

Full-year provision for credit losses, which encompasses both loan losses and credit losses on unfunded lending-related commitments, is expected to be consistent with credit-related charge-offs, which we expect to be between 25 and 30 basis points of full-year average loans.

We anticipate a low single-digit increase in noninterest income, excluding net gain on sales of businesses.

Noninterest expenses are expected to be unchanged from 2005 levels.

Inherent in this outlook are incremental expenses of approximately 35 million for employee benefits expense, including both stock-based compensation and pension costs, and 20 million for new banking center expense compared to 2005.

Customer services expense and incentive compensation are expected to be lower than 2005.

We expect to continue to be an active capital manager.

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

[ OPERATOR INSTRUCTIONS ] Your first question comes from Jeff Davis.

Thanks.

Good morning.

Good morning, Jeff.

Good morning, Jeff.

Good quarter.

Ralph, strategically, can you give us your thoughts on Comerica's relationship with the auto industry and I know you're managing your exposure down.

How should that evolve over the next three to five years?

Is it something, I know you can't get completely out of it, but is it you're working like hell to get it as low as possible or you're comfortable with what you've got or do you just dilute it through growth elsewhere over time?

Well let me start with your last point.

Over time, just as we talked about earlier, that the growth we're seeing in Texas and California and other parts of the geography will continue to lessen the percentage of overall automotive exposure.

Obviously, the automotive industry is going through a lot of change at the moment and we've been in that business for a very long time and through many cycles in the past and I think we understand the business very well.

We will continue to support the automotive business, as Beth said earlier.

We have an excellent dealer operation that is very geographically diverse as well as nameplate diverse and history has shown there is very little losses there, it's a very liquid collateral position.

So, there will be a lot of change and we will be watching that and acting accordingly as we move along.

Oh, okay.

But, and this may not be the venue, really, for specifics, but it's not where, it's not a situation necessarily, then, Ralph, where you can look at your portfolio and say, we've got 100 meaningful relationships, mostly in Michigan and there are 35 of them over the next two to three years we'd really like to see migrate elsewhere?

No, it's not, you're not able to do that.

Things change along the way.

There are some very strong customers there.

There are others that from time to time will show weakness and have issues and we will deal with that accordingly as we've always dealt with it, very much from a relationship-based position.

Oh, okay.

And if I could ask you just also to comment on your views of acquisitions.

You returned all capital that you generated to shareholders and if you could just comment on acquisition outlook?

Thanks.

Okay.

Acquisition outlook, I think, has not changed.

As I've said in the past, it, to us, is a tactic.

If there was an opportunity in one of the markets that we're interested in and growing in that would give us an opportunity to accelerate the opening of our banking centers and positioning ourselves in those various markets, we would look at it.

Having said that, it has to fit from a culture, it has to fit from a product and it has to fit from a return basis.

Otherwise, I think it is very important that we have the model in place that continues to build the organization and grow over time, which is the strategy we put forth in the past and we will stay with.

Thank you.

Your next question comes from Scott Siefers.

Good morning, guys.

Good morning.

I was just hoping to kind of reconcile the noninterest expense guidance that you've given for '06.

I think in '05, you're somewhere around 1.65 billion or so in total expenses, implying a run rate of about, or, you know, quarterly average of 415 million.

And then on this quarter, obviously there was some noise, but even if you exclude, you know, the unfunded commitments, the charitable contributions, the OREO and the severance switch still at a number of about 440 million on kind of a run rate basis, I guess, so, I'm just trying to reconcile the delta, how we get down to that average of 415 million or so on a quarterly basis?

Scott, one of the things we did say that there were a number of drivers, both pushing expense up next year but also pushing it down to, we had indicated in our outlook for FSD that we expect customer service expense to be down in '06 compared with '05 and that we also expect incentive competition levels to be lower this year versus last year.

And they're just other things that we work on on a regular basis to insure that we have a kind of continued discipline we need to have around the expense side.

So, I think they all come together.

They're countervailing some, we're pushing expenses higher, I talked about stock compensation and pension costs, but there are some other things either that we're holding flat or will be reducing.

So, the outlook we gave for you does present a kind of run rate that is the quarter that you reference and I think we're comfortable with that, that we can achieve that.

Okay.

Thank you.

Thank you.

Your next question comes from Brent Erensel.

Good morning.

Good morning.

I've got two questions.

One, the credit, or the provision for unfunded commitments, was that on a newly-extended line of credit or is that an existing one that's looking to sour that you felt that you had to put a provision into?

Hi, this is Dale Greene.

Let me try to answer that one.

Basically what we have done from time to time is gone to the debt sale market for existing loans outstanding.

That's been a great tactic for us to try to manage our portfolios from a creditor's perspective.

We saw some opportunities for unfunded commitments to go to the market and reduce some of our auto-related commitments that was entirely discretionary.

It's just, I think, further evidence of our proactive approach to managing our auto-related or our credit portfolio in general and so there wasn't any, it wasn't because we had a new deal on the books that we decided we wanted to sell down or bid up in the secondary market.

We will, on an ongoing basis, continue to pursue tactics such as that.

So you went and bought some unfunded commitments in the marketplace and you [inaudible] put a reserve into that?

No, no, no, no.

We took existing unfunded commitments that we have, i.e., commitments to certain companies in the auto sector that were not currently utilized and because of some opportunities in the secondary market to reduce the size of some unfunded commitments.

Right.

We basically took those to the market and sold some of those.

So why do you have to put a provision into --

We because don't sell it at par, we have to, these are commitments in the auto sector where their secondary market is trading at a discount to par.

Got it.

Got it.

Okay.

I understand, I understand.

Yes, there are two pieces.

One that the action that we took in the fourth quarter is reflected in our charge-offs.

Right.

And that's explicitly shown against the allowance for lending commitments, separate from the allowance for loans.

So we actually took the loss that Dale mentioned.

We also may look for opportunities in the future to sell additional unfunded commitments in this regard and the provision provides really some estimate of the loss content in those potential sales.

Thank you.

Just to follow-up, you mentioned a watch list and I'm not sure weather I heard whether that was going up, going down and what the amount was.

It was down about 100 million in the quarter.

A little more than 100 million to 4.4% of loans, total loans.

And if you look at it versus a year ago, it's down several hundred million and down a full percentage point at 4.4.

Thanks very much.

It's historically, very low level.

Thank you.

Your next question comes from Mike Mayo.

Good morning.

Good morning, Mike.

Hey, how you doing?

Good.

Good.

Can you comment more on loan growth?

Seems like the pace of loans has decelerated some and is that seasonal, is it your geography or is that a statement on the economy overall?

Well, if you look at the economy in our various markets, obviously Dana Johnson, our economist, would tell you that in California and Texas, the expectations are, and it has been, right at or slightly above the national average in economic growth.

In Michigan we are flat to up slightly in economic growth and that's where we saw the slowdown in the second half that you're talking about.

And we continued to see good growth in both the Texas and California markets.

I guess I'm partly asking what's line utilization?

Is that up, down, flat?

It's up just slightly.

Okay.

And when I mean slightly it's less, I don't remember the exact number, but it's less than 1%.

Okay.

And then separately, what is your outlook for net interest income or earning asset growth?

It would be pretty consistent with looking at loan growth.

Okay.

So earning assets should grow as fast as loans?

In other words, in the mid to high single-digits, too?

Well, probably a little lower than that because we wouldn't be growing, obviously, our investment portfolio as quickly as loans.

Right.

And therefore it would be less, it would be a little less than loan growth.

Okay.

Thank you.

Uh-huh.

Thank you.

Your next question comes from Charles Ernst.

Good morning.

Good morning.

You all didn't talk about the tax rate in your guidance.

Is there anything that you can offer there?

About 32% for '06.

And that's an effective tax rate?

Yes.

And in terms of the fee line, the only thing you're backing out is the $55 million gain?

In terms of the growth?

Yes.

Yes, you're using the reported number of fees for '05, you're backing out the $55 million gain and then you're assuming the growth rate?

Yes, exactly.

And there's, the gain, the 55 million is backed out.

We're saying excluding that we would see low single-digit noninterest income growth.

Exactly.

And on the expense side, you're basing that off of reported expenses?

That's correct.

Okay, great.

Thanks a lot.

Thank you.

Again, if have a question, please press star then the number one on your telephone keypad.

Your next question comes from Chris Mutascio.

Good morning, Ralph and Beth.

Good morning, Chris.

My question on expenses was asked and answered.

Thank you.

Thank you.

Your next question comes from Heather Wolf.

Hi, good morning.

Good morning.

Can you explain a little bit more of what's driving the expense in the, or the benefit expense and why it kicked up so much in the fourth quarter?

The benefit expense, in fact, was pretty flat quarter-over-quarter.

I'm sorry, salaries --

Oh, salaries.

Salaries were up 16.

About 11 of that relates to business unit incentives because of continuing better performance relative to plans on loan growth, fee income growth, credit quality.

So all of those brought together a higher final accrual in the fourth quarter for business unit incentives.

That was about 11.

And there's an additional 2 millions of severance in the fourth quarter compared with the third.

So those are the main explanatory factors.

I guess my question is if I look at your overall performance for each of the different quarters in the year, it looks to me like this is probably the weaker quarter of the four.

So I'm just wondering why those accruals weren't made throughout the year, why they were done right at year-end?

Well, as you can see as we've gone through the year, actually, there have been increases in business unit incentive accruals as we've gone through the year, particularly in the second half there was also increases business unit incentives in the third quarter as well as the fourth.

But they tend to be more second half loaded depending on how you're doing relative to plan.

So, this is just the way the calendarization works.

So I assume then in that line we'll see a big drop off in the first quarter with building throughout 2006?

Well, the guidance we gave for is for expenses overall and we typically don't talk about it by quarter.

Okay.

Just a couple of more questions.

Can you give us the after-tax gain on the sale of Framlington?

It's about $0.22 in noninterest income effect in the noninterest income line.

Got it.

And then I think if I'm not mistaken, in your 10-Q from last quarter, you guided to a margin of around $3.90 and you came in obviously a lot better than that.

I'm wondering what changed versus your expectations?

There are always a lot of variables that go in and out of predicting margin.

Certainly one factor would be the level of low rate loans in the Financial Services Division.

Those ended up being a little lower than what we expected.

As I said, there are a number of different factors, but that was part of it.

Okay.

Thanks very much.

Your next question comes from Gary Townsend.

Good morning.

How are you, Ralph and Beth?

Good morning, Gary.

Did you change your incentive structure at all or with respect to your FSD loans during the quarter?

No.

There have been no changes of any significance in incentive plans in the fourth quarter.

And could, I'm sorry, Ralph, did you have something to add?

No.

Good.

And could you discuss deposit initiatives?

And particularly you've been doing some de novo expansion.

Can you describe how that is going and relative success?

If you look at the banking centers that I talked about earlier that we've put in, they are currently exceeding our expectations.

Keeping in mind that it's not just a, what I refer to as a mass market retail.

It is strategically placing those centers where we capitalize on both wealth and institutional management as well as the business bank, small business, middle market and retail.

And in all cases today, we are getting a good distribution out of those centers and I would say we're a little ahead of where we thought we'd be in our projections on the growth out of those centers.

And after a couple of years, typically what size do they grow to on an average basis, let's say?

I don't know that I have an average amount but what I would say is that we breakeven at a minimum of 18 months and we target about a 20% return and we're well ahead of that at the moment.

Thank you.

In most cases.

Thank you.

Your next question comes from Casey Ambrich.

Good morning, Ralph and Beth.

Thanks for taking my question.

Good morning.

Two quick questions for you.

The reserve ratio, where should that bottom?

Now standing at 1.19.

This is Dale Greene.

You know, we don't target it that way.

This is going to be a little repetitive of what we've said in the past.

We have a very, a disciplined methodology that we've used now for quite some time.

We'll look at that.

It's largely driven by the credit quality metrics, which continue to be stable to somewhat improving.

So every quarter we go through that and we basically take a look at what the provision needs to be.

Obviously we look at our charge-offs and other factors and that's the number we come up with.

But it's not a number we would target.

It's not a number that we point --

Well is there a level, you know, if you were a residential lender, you know, you could see it going a lot lower, but a commercial lender, I just wonder at a trough in the credit cycle.

I just wonder where, what a good kind of, you know, is it 1%?

No, we don't, I mean again, I, we don't necessarily have a number that we would point to to say this is the target for our provision.

It's really very much driven by the quality of the portfolio and the loss content and it's a very disciplined approach and it is what it is every quarter.

Okay.

And then just one other question on the credit.

Can you just explain again what this $25 million expense for provision in the credit losses on the lending related commitments is -- what, like?

Yes, let me take at shot at that.

Okay.

Basically, we have, obviously, a number of unfunded commitments, in this case it's specifically related to the automotive industry.

And as we -- and we in the fourth quarter took the opportunity to sell a part of an unfunded commitment in the secondary market, at a discount as I indicated, and that's part of the credit-related loss in the quarter on unfunded commitments.

Because we will -- we may seek to do more of that this year, obviously at a discount, we established a reserve based on what we view the loss content to be on those commitments we may choose to sell.

Okay.

And do you sell that like on $0.98 on the dollar?

Well, no, you know, it's at a discount. $0.98 in the secondary market would be closer to par, actually.

We would sell them at discounts that would be lower than that.

Okay.

But again, the market, it's not -- it's a very thin market and we continue to look at it and when opportunities present themselves we act.

And then just one more question on the California deposit franchise.

Is there any update to kind of the events surrounding the [Daly] team?

And deposit trends in his kind of footprint?

If you look at FSD deposits did decline in the quarter, but looking at past kind of years, that appears to be seasonal-related.

We have lost very few customers, just a handful of customers in the last quarter and with very nominal balances.

So, we still continue to have a very strong franchise there.

The preliminary injunction, which was granted in November is still in effect and so we are continuing to manage that business, we think, in a manner that makes sense going forward and we feel pleased about how it's doing.

Okay.

Great.

Thank you very much.

Thank you.

Your next question comes from Chris Chouinard.

Thank you, good morning.

Good morning.

A couple of quick questions.

Was wondering, first, if you could provide some details on the property where you had some incremental OREO expense this quarter?

We don't typically get into any detail at all on that.

We typically have a modest OREO book and from time to time, obviously, you know, we're always actively marketing those properties.

This happened to be one where the market was extremely distressed for us and it was just, it was necessary given the values of the underlying collateral to write it down by the amount indicated.

If I could put other real estate expense in context, we had last year 12 million of other real estate expense and that was up from 3 the prior year, which would have been, at least looking at recent history, more typical than certainly the 9.

And it's related to the single property that Dale referenced.

Right.

Is that, can you tell us, you know, where it is?

Is it in Michigan?

Is it in California, Texas?

Yes.

I mean in this case it was in Michigan, and clearly, you know, we would, the bulk of our OREO properties would be in Michigan.

Again, there's not very much there as you can tell by the number.

And as a follow-up, just looking at your guidance next year for net interest margins at 4% and it looks like your loan growth assumptions for next year, or your expectations for next year, incorporate some continued growth in these FSD loans.

You know, when you look at the variability, or the potential for variability in long-term rates and, you know, what that can do to, you know, volumes in that business, what are your concerns about, you know, how predictable margin is next year?

I think it's certainly an important factor for around the guidance we gave you on margins.

Certainly FSD is part of that factor.

And that's why we also wanted to give you all of that guidance around FSD.

We do believe that balances could be modestly down this year but not in a significant way.

We also have indicated that we do expect loans to be, year-over-year loans to be up similar to the fourth quarter levels, but the total equation on that, too, is that we'd expect the customer service expense to be down, also.

So, those are all interconnected with each other and have different impact on the margin and obviously as we've guided that loan levels for FSD will be higher this year than last year on average, that has a negative impact on the margin, but there are other positive things going on in the margin and for the makeup in mix of our balance sheet and also anticipating an interest rate rise in January and also a couple of rises in the fourth quarter, and looking at all of our deposit elasticity and all the different things we look at, that's the guidance we came up with, recognizing that there is a negative impact from FSD higher loans, but other positive elements going on in the business.

Thank you very much.

Thank you.

Your next question comes from Dori Cohen.

Hi, it's Barry.

Can you hear me?

Yes.

Hi, Gary.

Good morning.

Thank you for taking the question.

It's a very quick housekeeping.

What's your expectation for dividend growth?

Well I think as I mentioned earlier that we've had 36 years of increasing dividends and that will be taken up in the normal course of business by our board.

Okay.

And you mentioned as expectations for 2006, you know, provisions kind of normalizing in the 25 to 30 basis points.

Is that, will we see the average for the year but it be more of a back-end loaded phenomenon?

I think given where the credit metrics have been recently that we would anticipate things to look -- that we could have continuation of these positive things going on in the credit world in the first half and perhaps looking more back-end loaded to the second half.

Great.

And when you think about consensus estimates out there for the year, they incorporated an expectation of share repurchase.

When thinking about the dividend and your net income expectations, how much of your total income do you anticipate giving back to shareholders over 2006?

You know, we haven't specifically indicated how many shares we would be repurchasing this year.

We have had, over the last several years, very active, actually, if you look over the last decade, we've distributed close to 75 to 80% of our earnings via dividends and share repurchase.

What it will be for this year, I can't say, but I think I would reinforce that we have been an active capital manager in that range for a long time.

Thank you for your help.

I appreciate it.

Thank you.

Your next question comes from Manuel Ramirez.

Hi, Manny.

Hi, good morning.

Good morning.

A couple of questions to revisit.

The auto, the charge for your auto exposure.

If you, I look at the total commitment, or total reserves on the commitments at the end of the quarter, it looks like the actual credit costs, or the actual write-down that you incurred in the quarter was something like 6 or $7 million.

Is that an accurate reading?

In terms of the ongoing--

So from what you actually, so from the commitments that you actually sold your credit costs, your charge-offs are really about $6 million?

That's correct.

So, the additional 19 of the 25 was really in anticipation of additional opportunistic sales?

That's correct.

Okay.

Secondly, Beth, can you talk a little bit, just to follow-up on the question on the margin and how you're thinking about the margin and FSD deposits, can you sort of bound for us what the upside/downside on the margin is given the uncertainty of the FSD deposits?

In other words, let's say that they're realistically lower than your current projections, is it 5 basis points on the margin, is it 3 basis points on the margin?

Is it 10 basis points on the margin?

And conversely what it is on the upside?

Well, it's hard to isolate that by itself, but, you know, I think we feel comfortable with the 4% as being consistent with the outlook we gave you for FSD.

Those are obviously intricately linked with so we have some expectation.

There could be some modest decline in the DDA that we will see loans on average be higher for the year than last year and that customer service expense would come down.

So I think that's our best assessment of it and we'll see how it plays out.

We'll obviously update all of you after the first quarter and have a better sense of how the year is trending, but I think we feel comfortable within the context of the FSD outlook that we gave you that 4%, around 4% is where we can, we hope to deliver.

Okay.

And then one other quick question on, could you give us what your economic outlook is in developing your guidance for loan growth specifically for the year?

Yes, we, for the nation as a whole, we're talking about GDP growth of about 3%.

And for Texas, Florida, Arizona, California, we're really talking about at or better than the national average.

For Michigan, we're talking about 0 to 1% and probably more like 0 than it is 1%.

So, that has an impact on how we think about things from a geographic standpoint.

The second is expectations in terms of interest rates, we view that there will be a fed increase at the end of January and there will be, of 25 basis points.

There will be a pause, then is our view and then back into with some inflation building by the fourth quarter that would be two more rate rises in the fourth quarter, such that the fed funds would be 5% at the end of the year.

And we see a pretty flat curve.

I think toward the end of this year, we think that the 10-year could look very similar to where funds are, but becoming more of a positively sloped curve in '07.

Thank you very much.

Thank you.

Your next question comes from John McDonald.

Hi, good morning.

Good morning, John.

Good morning, John.

Sorry if this is a little repetitive.

Just on the expense outlook for flat expenses in '06, you know, I understand that you're investing to build up the franchise in Texas and California and I know Connie Beck's doing some work in the Midwest, as well, to kind of, you know, retool the Michigan bank.

So that, I assume, involves some investment spending.

What are the offsets to that level of investment spending to keep expenses flattish in '06 versus '05?

Two of the ones we cited in the outlook that will be, our expectation is that they will be down in '06 versus '05, relate to customer service expense for Financial Services and incentive comp are two important ones that we cited in our outlook.

Then the rest are just careful manager around occupancy, which, you know, will have some pressure up because we're investing in branches, equipment expense, software development.

All of those things, we work on literally every month as results come in to see how we're trending.

And so it's just a diligent daily process of making sure we can meet the outlook that we set out here.

It's important for us in that context because we want to see positive operating leverage in '06 and we think we have put forward an outlook that can deliver that.

Okay.

I'm sorry if I missed that, what was the incentive comp that would be, why would incentive comp be down, Beth?

Because of a number of the items this year, of credit reserve release and we indicated in our outlook that we would be providing in '06 charge-off levels versus we actually released reserves beyond charge-off levels in '05.

So that's an important variance from year-to-year and obviously lack of a gain on a sale, Framlington.

So, there are a number of items in last year that will not recur this year.

The provisioning is a key one and the Framlington gain is another.

And the provisioning effects what people get paid?

Yes, and the credit quality, the trends in the credit quality, which we saw a significant improvement this year, we're saying for -- last year.

For this year, we're saying we see stable but not improvement from here.

Okay.

Thanks.

Thank you.

Your next question comes from Andrew Marquardt.

Hi, guys.

Good morning.

I had a follow-up question regarding the provision to the unfunded commitments.

I just wanted to be clear.

So, do you feel that you're now adequately reserved for potential additional sales at a discount or could we see additional provisioning if you chose to sell more?

Well, I think based on what we saw at the end of the fourth quarter and what our assessment was of the commitments, I think that we're, we feel like we're fine.

But, you know, I always reserve the fact to say that as we move through the year, if we have opportunities to do some more discretionary or proactive management of that, we will.

But I think from where we are today, I think we're fine.

Thanks.

And then separately, how would you just generalize, or characterize the credit quality environment?

Has it been, in the Midwest, as well as some of your other markets.

Has it been improving?

Stable?

Worsening?

Well, we have, we can see our numbers, obviously for us it's been a significant improvement over the last few years and in particular the last year.

We continue to use the term "stable" because I think that's what it is for us and so I think that's the term I would continue to use.

We have moved our credit quality metrics in a very positive way and I think they're about as positive as they can be.

So, "stable" is the right term I would use.

Separately, you mentioned how much the low rate loans in FSD impacted the margin this quarter.

Do you have the comparable number for last quarter's impact to margin?

It was 22 basis points in the fourth quarter, negative impact, and 18 basis points the prior quarter.

And we also show that, it's disclosed in our financial statements, the analysis of net interest income, both the quarter as well as the full-year impacts are disclosed there as well as the warrant impacts from the third quarter.

So you can see those.

There are no further questions at this time.

Okay.

Well, let me tell everyone thanks for joining us this morning and we appreciate it.

Thank you very much.

This does conclude today's Comerica fourth quarter and full-year 2005 earnings release conference call.

You may now disconnect.