Comerica Inc (CMA) 2006 Q1 法說會逐字稿

Good morning; my name is Heather and I will be your conference operator today.

At this time I would like to welcome everyone to the Comerica Inc. first-quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Burdiss, you may begin your conference.

Thank you, Heather.

Good morning and welcome to Comerica's first-quarter 2006 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 website as well as on our website.

Before we get started I would like to remind you that this conference call contains forward-looking statements and, in that regard, you should be mindful of the risks and uncertainties that can cause future results to vary from expectations.

I refer you to the Safe Harbor statement contained in the earnings release issued today which I incorporate into this call as well as our filings with the SEC.

Now I'll turn the call over to Ralph.

Good morning.

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

The results also underscore our focus on credit quality and prudent growth as we continue to execute the strategy we put in place two years ago.

Average loans increased 10% on an annualized basis with 3% annualized growth in the Midwest market, 11% annualized growth in the Texas market and 20% annualized growth in the Western market excluding the financial services division.

We have made a lot of improvements in our credit process over the past two years and we're seeing the results of those efforts today.

Credit quality continues to be positively affected by our proactive management of the loan portfolio including the auto industry segment.

As a result credit quality was excellent in the first quarter leading to a decline in the allowance for credit losses from the fourth quarter.

Nonperforming assets continued to improve from already low levels and net charge-offs were also down.

In non-interest income fee income associated with wealth and institutional management increased in the first quarter primarily from new business.

While up over last year, commercial lending fees were seasonally down from the fourth quarter.

On the deposit side, it's not unusual for our customers to be drawing down on their deposits to invest in their businesses at this point in the economic cycle.

That combined with the slowdown in real estate activity in our Western market, which affects title and escrow deposits in our financial services division, lead to lower average deposits in the quarter.

Our net interest margin declined due in part to the decline in deposits and the ongoing affects of the competitive environment for lending and deposits.

Non-interest expenses were affected by a number of items which Beth will detail in just a moment.

Notwithstanding those items, the day-to-day expenses associated with running our business were in line with our expectations.

We're within our target of 7 to 8% Tier 1 common equity capital.

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 2006 we acquired 1.5 million shares and we increased our dividend approximately 7%.

We have had 37 consecutive years of dividend increases.

This year we're on target to open 24 new banking centers and we opened three of those in the first quarter.

We remain focused on revenue growth and expense control and our other key strategic drivers to create attractive shareholder returns over time.

And now I'll turn the call over to Beth for a 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 outline the major components of our first quarter compared to prior periods.

Today we reported first-quarter 2006 net income of $194 million or $1.18 per share compared to $207 million or $1.25 per share in the fourth quarter and $199 million or $1.16 per share for the first quarter of last year.

Our first-quarter earnings were reduced by $8 million after-tax or $0.05 per share due to a transition adjustment related to Statement of Financial Accounting Standards number 123R, share based payment, which is reported as a change in accounting principal on the statements of income.

This adjustment was related to our subsidiary, Munder Capital Management.

Slide five highlights a few of the key drivers in the first quarter of 2006 compared to the fourth quarter of 2005.

We saw solid growth in average loans with the Western and Texas markets experiencing double-digit increases.

Credit quality remained solid with nonperforming assets declining 13% from the fourth quarter and 55% from one year ago.

Net loan charge-offs in the first quarter declined to 14 basis points from 20 basis points in the fourth quarter.

The first quarter saw strong growth in wealth and institutional management non-interest income particularly in investment advisory revenue and brokerage fees which increased 16% and 10% respectively.

Non-interest expenses decreased $38 million largely explained by lower incentives, $26 million; credit related costs, $17 million; charitable contributions, $10 million; and customer service expense, $6 million; partially offset by an increase in share based compensation expense, $9 million; and an increase in interest expense on tax liabilities, $23 million, related to the completion of an examination of the Corporation's federal tax returns for the years 1996 through 2000.

Our quarterly cash dividend increased 7% in the first quarter.

As outlined on slide 6, net interest income of $479 million decreased $22 million from the fourth quarter.

This decrease was primarily attributable to a combination of lower non-interest bearing deposits, mostly in the financial services division; lower loan spreads including lower fees; and the impact of two less days which was worth $11 million in the first quarter.

Average earning assets increased $1.2 billion to $51 billion which was largely driven by an increase in average loans in national dealer services 500 million with the remaining increase distributed among the middle market, commercial real estate, financial services division and small-business portfolio.

The net interest margin decreased 20 basis points to 3.80%. 9 basis points of this decline was due to items associated with our financial services division, which I'll describe in a moment, with the remaining net decline attributable to a competitive environment, deposit products and other items.

As I mentioned earlier, financial services division related items contributed 9 basis points to the decline in the net interest margin in the first quarter.

Slide 7 breaks out the impact of these FSD related items into its component parts.

In the first quarter deposits in FSD decreased $1.5 billion of which $1.2 billion were non-interest bearing deposits.

The decrease in non-interest bearing deposits reduced the Corporation's net interest margin by 11 basis points while the change in funding, due to an increase in FSD related loans, reduced the margin by an additional 2 basis points.

These items were partially offset by the increased value of FSD related non-interest bearing deposits in a higher interest rate environment which added 4 basis points to the net interest margin.

I will review additional details on FSD deposits later in the presentation.

Slide 8 details the components of non-interest income which was $215 million for the first quarter, a $66 million decreased from the fourth quarter which included the $55 million net gain on the sale of Framlington Group.

As previously mentioned, revenues associated with wealth and institutional management were up in the first quarter, particularly in investment advisory and brokerage which increased 16% and 10% respectively.

The first quarter included a seasonal decline in commercial lending fees when compared to the fourth quarter; however, on a year-over-year basis these fees increased.

Other non-interest income in the first quarter included $2 million of risk management hedged in effectiveness losses compared to $6 million of gains in the previous quarter.

Other non-interest income was also impacted by a $5 million impairment charge on certain assets held for sale.

Non-interest expenses, as detailed on slide 9, were $449 million for the first quarter, a decrease of $38 million from the prior quarter.

The $19 million decrease in salaries expense in the first quarter was due primarily to be previously mentioned $26 million decrease in incentives partially offset by a $9 million increase in share based compensation resulting from the adoption of the requisite service period provision of the Statement of Financial Accounting Standards 123R.

The provision for credit losses on unfunded lending related commitments in the first quarter of $13 million was for exposure to the auto industry.

Other non-interest expenses included an increase of $23 million of interest expense on tax liabilities related to the completion of an examination of the Corporation's federal tax returns for the years 1996 through 2000.

Partially offsetting this increase when compared to the prior quarter were declines in charitable contributions, $10 million, and other real estate expense, 5 million.

Moving to the balance sheet and slide 10, on an annualized basis average loans in the first quarter increased 10% led by a 20% growth in the Western market, 11% growth in the Texas market, and 3% growth in the Midwest and other markets.

These growth rates exclude financial services division loans.

Compared to prior year, average loans, again excluding the financial services division, increased $2.7 billion or 7%.

Slide 11 details line of business loan growth.

As you can see on this slide, all business lines experienced growth in the first quarter.

National dealer services increased $500 million with the Western market, which is dominated by foreign nameplates, driving the majority of this increase.

The increases in middle market and commercial real estate portfolios was largely the result of growth in the Texas and Western markets respectively.

Compared to the prior period, the first-quarter increase in specialty business was due primarily to growth in the financial services division loans of $140 million.

Average loans in small-business banking increased in all major markets.

Average line utilization in the first quarter increased 1 percentage point from the fourth quarter to 47%.

All of our major markets saw an increase.

Slide 12 highlights the credit quality and reserve trends over the past five quarters.

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

First-quarter net charge-offs on loans and lending related commitments of $22 million were down $6 million from the fourth quarter and included $8 million of recoveries.

Net loan charge-offs were 14 basis points of average total loans.

While continued stability in credit quality resulted in a negative $27 million provision for loan losses, we provided $13 million for credit losses on unfunded lending-related commitments for exposure to the automotive industry.

Nonperforming assets at the end of the first quarter were $141 million, down $21 million from the previous quarter, and consisted of $122 million of nonaccrual loans and $19 million in other real estate.

Loans over $2 million transferred to nonaccrual status were $20 million in the first quarter, down from $28 million in the fourth quarter.

At March 31, our nonaccrual loans have been charged down to 53% of the original contractual value compared to 54% in the fourth quarter.

Our watch list and nonaccrual loans at March 31 were $2.1 billion and represented 4.6% of total loans.

Nonperforming assets have continued to decline and were 32 basis points as a percent of total loans and other real estate in the first quarter compared to 37 basis points in the prior quarter and 75 basis points a year ago.

The allowance for loan losses as a percentage of nonperforming assets has continued to improve and it was 334% at March 31.

Slide 13 provides detail on the recent performance of the automotive portfolio which continues to perform within acceptable credit quality parameters.

We sold unfunded lending-related automotive commitments in the first quarter as we did in the fourth quarter.

We will continue to proactively manage our exposure to this industry to a lower-level this year.

Slight 14 details average deposits by line of business which declined approximately $300 million from the fourth quarter due to two principal factors -- customers were drawing down balances to invest in their businesses, and slower real estate activity in our Western market which affects our financial services division.

Deposits decreased in the financial services division $1.5 billion, middle markets $185 million, and small-business $140 million.

Partially offsetting this decline was an increase in consumer deposits and institutional CDs.

Non-interest bearing deposits account for 33% of our average total deposits.

On slide 15 we provide an update to our financial services division.

FSD deposit balances averaged $7 billion in the first quarter down $1.5 billion from the prior quarter largely due to seasonal factors as well as An overall decline in mortgage financing activity.

Customer service expense was down $6 million from the previous quarter.

Related average loan balances were up approximately $100 million to $2.9 billion in the first quarter.

As you can see on the chart on slide 16, FSD non-interest bearing deposits have a component of seasonality which incurs in the first quarter of each year.

In prior years during mid to late March we began to see a run-up in deposits which resulted in higher balances in the second quarter and for the remainder of the year.

We did not experience the same level of FSD deposit increases in March of this year as we had seen in previous years.

While there was no loss of customers, there was a cooling of the real estate market in the first quarter which has impacted FSD deposit balances.

As a result we are now projecting lower FSD non-interest bearing deposit balances for the remainder of the year when compared to full year 2005.

We are now expecting the following for full year 2006 for FSD -- relatively flat non-interest bearing deposits from first-quarter level; customer service expense to be down compared to full year 2005 levels; and average loans at a level consistent with the first quarter.

Slide 17 updates our expectations for 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 excluding financial services division loans.

This outlook reflects an improvement from the mid single-digit level previously given due to strong first-quarter loan growth.

Based on our outlook for the financial services division and the competitive lending environment, the average full-year net interest margin is expected to be about 3.80% to 3.85%.

Previously this outlook was for a full-year net interest margin of about 4%.

Full-year credit related net charge-offs, which encompasses both loan losses and credit losses on unfunded lending-related commitments is expected to be 20 to 25 basis points of average loans and for the remainder of 2006 we expect to provision for credit losses consistent with credit-related net charge-offs.

The outlook for net charge-offs reflects an improvement from the 25 to 30 basis point level previously given.

We anticipate a low single-digit increase in non-interest income excluding the net gain on sale of businesses, unchanged from our prior outlook.

We expect low single-digit growth in non-interest expenses, an increase over our previous outlook of relatively unchanged driven by a $23 million increase in interest expense on tax liabilities included in the first quarter.

We expect to continue to be an active capital manager.

We believe that the cumulative effect of these changes to our 2006 full-year trends is generally consistent with our prior outlook.

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

(OPERATOR INSTRUCTIONS).

Gary Townsend, Friedman Billings Ramsey.

Good morning, Ralph.

Good morning, Beth.

I've got a couple questions.

The tax rate was quite low compared to what's normal.

Can you discuss what drove the tax rate to those levels and where we should expect it in the remainder of the year?

Yes, during the first quarter we completed an examination of our federal tax years for 1996 through 2000, and out of that exam we settled many items.

There were some that were disallowed by the IRS related to certain types of structured lease transactions and a series of loans to foreign borrowers.

So when you take the combination of all of the items that came out of that exam, we made some adjustments to our tax reserve to reflect the resolution of all of those other matters and we increased the interest expense on tax liabilities to reflect an updated assessment of the couple of items that the IRS disallowed.

So the effect of that exam is what flowed through in the provision for tax line -- part of the effect -- and that drove the effective tax rate to be about 26% in the first quarter.

We would expect that the remaining quarters would have an effective tax rate of 31%.

Also you recently sold Framlington.

I see that Enrique Chang, the President of Munder, has left to go to American Century.

How does that affect -- or have you chosen a successor to him at Munder?

And just how does that affect your views with respect to Munder and any initiatives that you might choose to do there?

Gary, Dennis Mooradian has been out at Munder as well as we have chosen John Adams to take Enrique's spot.

And I think, as you're aware, Munder's performance has been quite good over the last several quarters.

We would expect that to continue.

Investor day in March you were asked a couple of times, as I recall, whether the sale of a piece of Munder to bring some additional visibility let's say from the market standpoint might be desirable.

Do you have any update on your comments since then?

No.

I think as we said then, we really don't comment on speculation of that type; but as I mentioned earlier, we're satisfied and pleased with the performance of Munder.

Thank you.

Jason Goldberg, Lehman Brothers.

Thank you.

Good morning.

I guess with respect to the net interest margin, I guess you pointed out that the drop in FSD deposit is seasonal.

So I guess I'm just trying to reconcile in terms of the margin -- lower guidance versus your prior expectation.

I guess what is different is that seasonal declines expected relative to what you were assuming at your investor day?

Jason, this was more than a seasonal decline, which I think I mentioned a couple of times, but I'd like to reinforce it.

The normal kind of seasonality that we displayed on one of our slides was certainly well beyond that normal seasonality in the first quarter of '06.

And if you look at data underlying metrics that monitor the mortgage activity market, particularly in Western markets where this tends to be focused, we did see a visible reduction in that activity which had an impact and really exacerbated the decline in the first quarter.

So the first-quarter decline in deposits was more than we expected and that really manifested itself very late in the quarter because there's typically slower activity in January and February, but usually a very nice ramp up back in the month of March.

And we saw very limited ramp back up in the month of March.

So that has changed our view on the outlook for deposit levels being -- for the rest of the year being pretty consistent with what the first quarter looks like.

Okay.

And then in terms of you gave I guess loan growth guidance ex FSD.

Some color I guess in terms of expectations with FSD?

Yes, our expectations would be that loan levels for all of '06 will look a lot like the -- on average the average for the first quarter which was $2.9 billion.

Okay.

And then lastly, in terms -- just on the expense guidance.

I guess ex the tax rule this quarter, expenses I guess are still expected to be -- expense guidance is unchanged?

Well, what we've said is including the first-quarter actual that we would expect low single-digit increase in expenses.

But that is largely driven -- that change in outlook by the interest -- the additional $23 million of interest expense in the first quarter.

So we're on track largely with our view in the past.

Thanks for the clarification.

Kevin St. Pierre, Stanford Bernstein.

Good morning.

Just to follow up on Jason's first question, I just want to be sure that the change in the margin guidance is driven strictly by the FSD deposit performance in March?

Or are you seeing, since your investor day, incrementally greater competition in the rest of your business on loans and deposits, etc.?

As we displayed in one of our slides on the first quarter, we saw -- the margin decline in the first quarter was a function of two things.

Largely one is the FSD-related items that we detailed.

The other is we did see lower loan spreads including lower loan fees in the first quarter and we're assuming in our outlook that we're going to remain a very competitive environment in the lending side of our business.

And that was incrementally more competitive after your investor day on March 9th, or is the change in guidance since March 9th strictly related to FSD?

I think there are a myriad of factors and those would be two of the key ones -- the lending competitive environment and FSD.

Understood, thanks.

Then separately on reserve to loans -- and I know we're not supposed to look at it this way.

But you're at 1.06% now, given the guidance for the rest of 2006 provisions will approximate charge-offs, that would imply that reserve to loans will continue to trend down.

I know things look good now, but aren't we setting ourselves up for a fairly dramatic increase in provisioning once nonperformers and charge-offs rise as I expect they most likely will given the current extremely low levels?

Dale Greene.

Frankly, as we look at it and, as you know, we don't -- and you said it correctly at the beginning, we don't really set a target.

We don't have a target for reserve to loans or NPA coverage.

The credit metrics continue to improve; therefore the reserve release and the current levels of reserve are very much reflective of that continued methodology that we've employed for some time.

As nonperformers would climb the watch loan list would climb and so forth.

And as loans would grow certainly we would have to reevaluate and it's certainly likely that the provision would have to increase.

But again, the same methodology would be in place and you would see provisions increase as credit quality would deteriorate and loans would grow.

Okay, thank you very much.

Chris Chouinard, Morgan Stanley.

Good morning.

I had a question just sort of on your guidance.

It sounds like -- it sounds like you said the cumulative effect of the changes in the guidance -- the new guidance versus the old guidance is sort of the same.

Is that accurate?

I think what I said was the cumulative effect of the changes that we mentioned in the '06 outlook is generally consistent with our prior outlook in terms of the net effect.

So we improved our outlook on loans because we had a very good first quarter.

Our credit quality we've improved, we've reduced the level of charge-offs again based on very good credit metrics that we're seeing.

And the noninterest income is a similar outlook.

Expenses was really the change driven by this additional item related to interest on tax liabilities related to this finalization of an exam with the IRS.

And so what we're seeing is there were some pluses, the margin was the change for a decline, but when you add them all together the net effect is pretty comparable with the prior outlook.

Okay.

It looks to me like the credit was just sort of -- to put it in EPS terms about $0.09 a share if you look at 5 basis points improvement.

And the margin is $0.40 to $0.30 a share headwind.

And even a couple percentage points in the loan book only get you another $0.14 to $0.15 a share.

But it still looks like there's a pretty big gap.

I guess I would go back and highlight that these are the key drivers of our business on the loan margin, charge-offs and other expense and income items and this is the update we're giving.

And just sort of to follow up on your margin guidance, how confident are you in this number given I guess the surprise that's happened over the last month and a half or two months or so?

I would say the margin guidance is very important for us to set the FSD outlook that I gave you, which is that deposits would look similar for the balance of the year as they do in the first quarter.

That average loans for financial services will be about the same as they are in the first quarter.

And that customer service expense will be lower this year compared to last year.

So that's an important element of the margin guidance that the FSD metrics turn out to be consistent with what I just mentioned.

So they are an important driver -- as are other things whether it's how the loan competitive environment goes, how other deposit aspects go.

We mentioned that some of our deposits in non FSD declined because our customers were drawing down balances.

We'll have to see how that plays out.

But FSD is an important element of the outlook.

And along a number of other business lines you had, you had declines in deposits as well.

Do you see that as seasonal or is there something else going on?

You had small-business -- a number of other areas had deposits decline outside of FSD.

I guess time will tell in terms of seasonal.

But it feels like looking at a number of the areas that we saw declines that it feels very connected to the very significant improvement we saw in loan growth with customers drawing down balances.

This was not about a rate environment issue.

I think this relates really to the need for our customers to be investing in their business and drawing down balances and drawing down deposit balances and drawing up, if you will, loan balances.

Line usage.

And line usage is up a percentage point in the last quarter.

What was the number?

47% -- it was up a percentage point, 1 percentage point.

Thank you very much.

Heather Wolf, Merrill Lynch.

Good morning.

Can you hear me?

I'm getting some echo on my line.

Yes, we can hear you.

Okay.

Just a question on the loan guidance, and I apologize if you've already mentioned this.

But it seems like your loan volumes were stronger this quarter than what your guidance would indicate for the full year.

Can comment on that?

Well, I think to be fair one quarter does not a year make.

And so I think we're -- I would say the following -- we are very pleased to see that we had good loan growth across all of our business segments and across all of our geographies.

That made us comfortable that at a minimum we needed to revise upward our loan growth.

We'll have to see how that plays out as the quarter goes on, but at this juncture after one quarter of our results that was the perspective we had at this point.

Okay.

And then I'm curious, your forecast for essentially flat title escrow and/or noninterest bearing deposits from this quarter, what gives you confidence in that?

Because it seems to me all the statistics that are coming out of -- all the real estate statistics that are coming out are pointing to a much slower market.

So what makes you think that we won't see further declines from here?

Well, I think this is our assessment at this time based on what we have seen and also there is typically some increase in the summertime also.

So looking at it on averages, our view is at this juncture that it will be relatively unchanged on average, but there will be some little peaks and valleys within that averaging, if you will, for the full year.

Okay, great.

Thank you.

John McDonald, Banc of America Securities.

Good morning.

Just wondering if you'd give a little color on why you think the loan growth has been better.

You mentioned the line utilization increasing.

Are you just seeing folks willing to take their lines down more, a little more confidence in the economy or can you give a little color on that?

We're seeing not only increase in line usage but also increase in commitments.

And I think if you read across a lot of industries there's very good capital spending going on by corporations.

There is capacity utilization numbers are rising.

So I think it's just the underlying economic outlook.

Obviously the growth for us is larger in Texas and our Western division, but we still saw decent growth in the Midwest.

In fact, improved from the fourth quarter where we actually saw a decline.

So I think it's a lot around continued capital investments by corporations as capacity utilization rates rise.

As well as I think our expansion in the markets is beginning to get traction.

Yes, that's a good point.

Market share gains.

Right.

And one clarification, and sorry if this is repetitive.

But just on the guidance about credit law provisioning consistent with credit-related charge-offs, does that mean matching -- or I know you can't really predict whether they're going to match or not given what Dale had said.

I'm just trying to (multiple speakers).

Yes, that's what it means.

It means both provisioning for loan losses and provisioning for off balance sheet unfunded together would be consistent with the charge-offs for both those categories for the balance of the year.

But you can't really say that, right?

And they haven't been the last couple of quarters consistent, right?

We continued to have really good performance metrics, credit metrics in the first quarter that resulted in the provisioning as it was reported.

But our expectation is that this is probably -- the best quarter of the year is going to be this quarter in terms of credit metrics.

And that's just based on what you see in the forward-looking -- the delta of the forward-looking (multiple speakers)?

Well, we keep thinking it can't get any better, but we have been proven wrong.

Well, I think Beth is right.

I think this may be, in fact, the best quarter.

And as we look out, we basically see a matching provisioning that would be equal to the credit-related losses.

Okay, banks.

Casey Ambrich, Millennium.

Good morning, Ralph and Beth.

Thanks for taking the questions.

Just quickly, is Comerica seeing any deposit attrition in the California franchise from that one group leaving?

Any update on that?

I think you're referencing the financial services division.

There were people that left last July.

Yes.

We have seen very little impact from those departures in terms of lost customers.

We had a minor loss of a customer too in the fourth quarter.

We have a very small customer leave in the first quarter, but we also garnered new customers in the first quarter.

So the deposit decline has nothing to do with a customer loss.

It has to do with both seasonality and as I mentioned earlier, the slowdown in mortgage financing activity in the Western market.

Thank you very much.

That is all I wanted to know.

(indiscernible) with Prudential.

Good morning.

Tony Davis, Ryan Beck.

Good morning, Ralph.

Good morning, Beth.

Just wondered if you could give me some color on the current status of the Mexican restructuring, where you are there, when you had hoped to have that sort of wrapped up?

We, as indicated in our annual report, are looking at the sale of our Mexican bank charter, but at this juncture we really don't have an update.

Okay.

Beth, are there other tax years that are being under review at this point that could get resolved with the IRS over the course of '06 that could also affect the expected rate?

That would not be my expectation.

We just completed an extensive review through those years of '96 through 2000, and there will been new reviews on subsequent years that begin at some point, but I don't expect anything else this year.

Okay.

Finally, you have some new applications in the retail bank that are being rolled out.

I just wondered if you could give us any color on how those are going at this point.

I think (technical difficulty) and a couple other things like that.

Yes, we had talked about introducing some enhanced technology tools within the retail bank and those are getting rolled out consistent with what our hope would be.

And I think we're feeling good about moving forward with a lot of things in the retail bank, whether it's a technology platform, the new banking center expansion and new products.

So things are well under way and consistent with what we talked about in early March.

Okay, thank you.

Manuel Ramirez, KBW.

Good morning.

I have a couple of questions for you.

First, I was wondering why you decided to take an additional provision for auto credit given that your charge-offs were I think only $5 million and the provision was $13 million and the credit metrics continue to improve in that line.

And then secondly, I was wondering why your dealer floor plan loans on a period to average basis were up so much.

I know it's probably seasonal, but year-over-year it looked like growth was pretty strong and just hoping you could give us a little bit of an update on that business.

Sure, I'd be happy to.

On the first question we have used the secondary market for debt sales for some time -- actually last quarter and then continuing on to the first quarter of this year.

We continue to be proactive.

We continue to review opportunities to sell unfunded commitments, particularly auto unfunded commitments, to manage our exposures where we think we have some opportunities to reduce exposure.

So we've looked into the portfolio.

We've looked at the market for the sale of those unfunded commitments and, in anticipation of doing some of that this quarter, which we may or may not do, we've set up some additional reserves as has been indicated in our first-quarter results.

And of course every time we would sell a piece of an unfunded commitment in the market we would then charge that reserve and that was the $5 million number you saw in the first quarter.

In the case of the dealer business, we think it's awfully good news.

We've been able -- and Beth showed you some of the increases in loans, particularly dealer loans in the first quarter -- we've been able to acquire a number of new relationships over the last few quarters and what you're really seeing by and large there are the floor plan usages from -- or the usage from those new relationships.

By and large the level of inventory on dealer lots, while it's up somewhat on some models, is fairly consistent with where it's been.

And interestingly, a lot of the Asian dealerships -- Toyota, Nissan and so forth -- have basically built their inventories in anticipation of additional market share.

The vast majority, I'd say two-thirds or so of our dealer exposures tend to be with those foreign nameplated and the rest being the domestic nameplate.

So I think it's good news on the dealer business.

So you would say mostly incremental growth is in (multiple speakers) the floor in May?

Yes.

Just back on the provision issue for a second.

I guess I just am trying to figure out why you had such a large provision in the first quarter and -- or in the fourth quarter and then didn't seem to recognize those losses in the first quarter and took an additional provision in excess of charge-offs.

Obviously you're trying to be somewhat proactive, but I'm trying to square that with trends that we're seeing within that portfolio.

And I guess would you expect to see a lot of potential sales of unfunded commitments in the second quarter?

Is that what you're telling us?

No, I wouldn't --.

Proactive, there's something that you specifically identified that you have a sense of what you're going to be able to sell it for and that's why you recognize the cost?

There are certainly some names in the portfolio that we may be interested in selling if the opportunity is right and if it makes sense to us.

So in anticipation of that, we've looked at those, we've set up the reserves of that if and when we decide to make those sales the reserve will have already been established and really that's why we've done it.

It's not really an indication that we will or we will not make those sales.

It's a very active market.

We're constantly on top of the auto portfolio and, you're right, it's a very proactive approach that we've taken in this regard particularly as it relates to the unfunded commitments.

The underlying portfolio, as you can see, for auto continues to have very good credit metrics for us.

Great, thank you.

You're welcome.

Richard [Lee], Citadel.

Actually it's Darius Braun.

I have a question just to clarify what's going on with the tax rate.

You mentioned that it's going back up to the 31% next quarter.

But it sounded like there was an adjustment that I'm trying to understand whether or not it was one time that was included either in -- I thought it would be a non-interest expense, but maybe I heard interest expense.

Could you just clarify that, please?

Yes.

What happened in the first quarter is a onetime event in the sense of coming to a conclusion of this exam with the IRS for the years '96 through 2000.

So we've completed that exam, we know the outcome of that exam and a couple of things resulted from the outcome of that exam is we increased our interest expense, which is non-interest expense -- it shows up in non-interest expense -- and we adjusted our tax reserves to reflect an updated assessment of reserves we had for a couple items that are in dispute by the IRS, and final resolution of all the other items.

So it is a onetime event that impacts the first quarter.

And when you look at the net effect of the lowering of the provision for taxes and the increase in interest expense in NIX, that the net effect of those two on an after-tax basis is pretty much a wash for the Company in the first quarter.

So it essentially would come to the same effective tax rate as you project going forward?

Exactly.

So the first quarter is, if you will, a onetime event and going forward we see it getting back to where it's been around that 31% area.

So as a follow up, your guidance now for low single-digit growth in non-interest expense, that isn't a change, that is a function of having the higher non-interest expense this quarter as a result of that examination?

That is a key driver for the change in the outlook from relatively unchanged to low single-digit increase.

And it was a $23 million increase in the quarter, so that's a large increase for that particular item related to taxes.

So next quarter that adjustment will go down to zero and your tax rate goes up to 31%?

Correct.

(multiple speakers) of your guidance is consistent except for the NIM being lower?

And the ensuing quarters will not have that -- obviously that $23 million of additional interest expense in the non-interest expense area.

My last question.

If FSD deposits are expected to be down going forward, or flat going forward rather, but down year-over-year, shouldn't that imply a lower level of expenses tied to those deposits?

We have indicated that our expectation would be that customer service expense related to FSD will be down this year versus last year.

One factor that's -- an additional factor is interest rates are higher -- substantially higher this year than last year.

So even those loan levels are higher to help compensate for that, we are -- and balances are slightly lower than last year at this juncture or are lower than last year, we would expect our customer service expense to also be lower this year from last.

Thank you.

There are no further questions at this time.

Thank you very much and everybody have a good day.

This concludes today's Comerica Incorporated first-quarter earnings release conference.

You may now disconnect.