Comerica Inc (CMA) 2006 Q2 法說會逐字稿

Good morning.

My name is Dennis and I will be your conference operator today.

At this time, I would like to welcome everyone to the Comerica Incorporated second quarter earnings release conference call.

[OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Burdiss.

Please go ahead sir.

Thank you, Dennis.

Good morning and welcome to Comerica's second 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.

Thank you, Paul.

Good morning.

The second quarter was a solid one for Comerica with financial results that reflect the successful execution of our strategy.

Revenue increased primarily as a result of accelerated loan growth in our fastest growing markets, Texas and the West, which includes California and Arizona.

We continue to invest in banking centers and people in those markets to bring greater geographic balance to our operations.

In the second quarter, we continued to control expenses and our net interest margin was stable.

On an annualized basis, average loans in the second quarter increased 15% led by 34% growth in Texas, 21% growth in the West, and 5% growth in the Midwest and other markets.

These growth rates exclude Financial Services Division loans.

Credit quality is excellent as a result of our ongoing proactive management of our credit risk.

We continue to carefully monitor our exposure to the automobile industry and take appropriate action as necessary.

Net charge offs are stable and while nonperforming assets are up, both credit measures remain at historically low levels.

On the deposit side, we continue to be challenged by the competitive pressures in the marketplace.

However, we are confident that our investing in new products, services, and banking centers should increase relationships and deposits.

Revenue in the second quarter increased 33 million or 5% over the first quarter driven primarily by loan growth.

The net interest margin improved slightly to 3.83% up from 3.8% in the first quarter.

Non-interest expenses were down and consistent with our expectations.

They decreased 44 million from the first quarter of 2006 which included a tax related item.

We are on target to open 24 new banking centers this year in growing metropolitan areas with the right mix of small business, middle market, and a fluent customers who value our commitment to relationship banking.

In the second quarter, we opened four new banking centers in Scottsdale, San Diego, South Palm Beach County, and Los Angeles.

We plan to open six more banking centers in California and three in Texas in the third quarter of 2006.

We also plan to relocate six banking centers in California, Texas, Arizona, and Florida in the third quarter into more visible and convenient locations.

The financial performance of our new banking centers is consistent with the targets we shared earlier this year.

As we expand our banking centers, we closely manage our headcount and expenses corporate-wide by optimizing efficiencies in slower growth businesses and markets.

In the second quarter, we also introduced a number of new products for our business and retail customers including an expanded fraud protection and information management tool for commercial customers, expanded checking account packages and new credit cards for small business and retail customers, and two new cash management solutions for small business to minimize risk and increase payments efficiencies.

During the second quarter, we began exploring a possible sale of Munder Capital Management.

In connection with this, we temporarily suspended our share repurchase program during the quarter which will resume.

There is no assurance that a transaction will occur.

However, we are considering a sale of Munder and would invest the proceeds into our fastest growing markets and businesses and repurchasing shares.

Our open architecture platform will allow us to continue offering our customers Munder's top performing products as well as many other options.

Because we are in the process of exploring a sale, we're not at liberty to discuss any additional details about this matter now.

As we execute our strategy throughout 2006, we will continue to focus on prudent growth, business and market balance, building customer relationships, enhancing risk-management techniques, and holding ourselves accountable.

Now I will turn the call over to Beth for a review of the second quarter.

Good morning.

As Ralph just conveyed, we're excited about our performance this quarter particular the loan growth.

Also credit quality, expenses, and margins behaved as we expected.

As I review our second 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 second quarter compared to prior periods.

Today we reported second quarter 2006 net income of 200 million, or $1.22 per share compared to 194 million or $1.18 per share in the first quarter and 217 million or $1.28 per share for the second quarter of last year.

Slide five highlights the few of the key drivers in the second quarter compared to the first quarter.

Total revenue of 727 million increased 33 million, or 5% over the first quarter.

We continue to see terrific growth in average loans with 21% annualized growth in the West and 34% annualized growth in Texas.

The net interest margin of 3.83% was up 3 basis points from the first quarter.

Credit quality remains strong with net loan charge-offs for the second quarter of 15 basis points virtually unchanged from the first quarter.

Non-interest expense declined 44 million from a more elevated level in the first quarter.

You'll recall that the first quarter included a tax related item of $26 million, in addition to a 13 million provision for credit losses on lending related commitments.

Slide 6 highlights a few of the key drivers for the first six months of 2006 compared to the first six months of 2005.

Total revenue increased 4% over the comparable period last year.

Average loans, excluding the Financial Services Division, grew 7% in the Western and Texas markets, experiencing 14% and 15%, respectively.

Credit quality improved from net loan charge-offs of 15 basis points compared to 31 basis point in the prior period.

Nonperforming assets declined 29% to 174 million at June 30, 2006.

Non-interest expenses increased 97 million, or 13% in the first six months of 2006, when compared to the same period last year, with more than half of the increase related to interest on tax liabilities, 15 million, share-based compensation, 15 million and credit related costs, 24 million.

Slide 7 provides a non-GAAP comparison of earnings per share on an adjusted basis.

Specifically, we have adjusted reported GAAP earnings per share for certain items, such as the previously reported interest expense on tax liabilities and provision for income taxes.

In addition, this analysis assumes the quarterly provision for credit losses equal to the greater of the reported provision for net credit related charge-offs.

In sum, our assessment is that the positive trend in the adjusted EPS demonstrates an improvement in Comerica's underlying operating performance.

As outlined on slide 8, net interest income of 502 million increased 23 million from the first quarter.

Average earning assets increased 1.4 billion to 52.4 billion which was primary the result of increases in average loans in the middle market 535 million, commercial real estate 435 and national dealer services 408 million.

The net interest margin increased 3 basis points to 3.83%.

Higher non-interest bearing deposits and lower low rate loans in the Financial Services Division, which I will discuss later, added to the margin this quarter, partially offsetting this increase with the impact of the change in funding mix, primarily due to strong loan growth.

Slide 9 details the components of non-interest income, which was 225 million for the second quarter, a $10 million increase from the first quarter.

Most categories of non-interest income were stable in the second quarter with increases in investment advisory revenue and currencies of 9% and 11%, respectively.

Other non-interest income in the first quarter included a 5 million impairment charge of certain assets held for sale.

Non-interest expenses, as detailed on slide 10, were 405 million for the second quarter, a decrease of 44 million from the prior quarter.

The second quarter benefited from a 6 million reduction of interest on tax liabilities due to settlement of various refund claims with the internal revenues service.

These are shown in other non-interest expenses.

I should also note that expenses in the first quarter were elevated by 26 million due to a tax-related item.

Overall expenses remained well controlled.

In the second quarter, employee levels were virtually flat, compared to the first quarter and were down approximately 1% from a year ago levels.

We believe we're on track to contain full year 2006 expense growth to a low single-digit rate compared to 2005.

Moving to the balance sheet on slide 11, on an annualized basis, average loans in the second quarter increased 15% led by 34% in Texas, 21% growth in the West, and 5% growth in Midwest and other markets.

These growth rates exclude Financial Services Division loans.

Compared to the prior year, average loans, again excluding Financial Services Division, increased 3.2 billion or 7%.

Slide 12 provides detail on line of business loan growth.

As you can see on the slide, nearly all commercial business lines experienced growth in the second quarter.

The increases in the middle market and commercial real estate portfolios were largely the result of growth in each of our major markets.

National dealer services increased 408 million, with the Western market, which is dominated by foreign name plates and Florida, driving the majority of this increase.

Compared to the prior period, the second quarter decreased in specialty businesses, which is primarily due to lower Financial Services Division loans, 352 million, partially offset by an increase in the energy portfolio, 133 million.

Average loans in small-business banking increased in each of our three major markets.

Average line utilization in the second quarter of 47% was up slightly from the first quarter as we continued to add new commitment to customers.

Slide 13 highlights the solid credit quality and reserve trends over the past five quarters.

A few key points I'd like to make on this topic.

Net charge-offs remained low on 15 basis points of average loans.

The total provisions for credit losses exceeded net charge-offs, reflecting strong loan growth and stable credit quality trends.

Nonperforming assets remained at a historically low level of 37 basis points of total loans.

And the total dollar value of large loans, including nonperforming loans, was flat.

And finally, Comerica's allowance for loan losses, which is filled credit by credit at the end of each quarter, is a solid 278% of nonperforming assets.

Slide 14 provides details on the recent performance of the automotive portfolio, which continues to perform within acceptable credit quality parameters.

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

Slide 15 details average deposits by line of business.

Total deposits were 42 billion in the second quarter, up 2% from the first quarter.

Non-interest bearing deposits account for 32% of our average total deposits.

On slide 16, we provide an update to our Financial Services Division's business.

As we expected, non-interest bearing deposits increased only 110 million in the traditionally strong second quarter, reflecting weakness in California residential real estate activity.

Interest-bearing deposits, which bear interest at competitive rates, were down 522 million in the second quarter.

Related average loan balances were down 352 million to 2.6 billion in the second quarter, while customer services expenses were down 4 million from the previous quarter.

The declines reflect the lower non-interest bearing deposit volumes over the past two quarters.

The level of non-interest bearing deposits in our Financial Services Division are impacted by many items, including the level of interest rates and the competitive environment.

We've also found that fluctuations in the level of Financial Services Division's non-interest bearing deposits are largely explained by a limited set of publicly available data points -- the most relevant of which are the national index of mortgage applications for refinance, which is down about 32% from one year ago; the seasonally adjusted index of California's existing single-family homes sales, which is down about 21% from a year ago; and the median monthly prices for existing home sales in California, which is up about 8% from one year ago.

Based upon current trends, we now expect the following for the full year 2006.

Average non-interest bearings deposits of about 4.5 billion, average loans of about 2.6 billion, and customer service expense to be down compared to full year 2005.

To the extent that the level of non-interest bearing deposits varies from this outlook, we expect that loan volumes will change commensurately.

Slide 17 provides an update on the progress of our banking center expansion.

As Ralph mentioned previously, we plan to open nine banking centers in the third quarter -- six in California, three in Texas.

Since our initial three-year banking center expansion began in 2004, we've opened 42 new banking centers.

Our goal is to add 24 new banking centers in 2006, increasing our three-year total to 59, up from our original target of 50.

Nearly, 90% of the new banking centers will be opened in our higher growth markets of California, Arizona, Texas and Florida.

Among our new banking centers, we have a nice distribution of deposits with the retail bank contributing 56% of new deposits, the business bank 31%, and wealth and institution management 13%.

Slide 18 updates our expectations for full year 2006 compared to full year 2005.

We anticipate average loan growth for the year to be in the high single-digit range, excluding Financial Services Division loans.

This outlook reflects an improvement from the mid to high single-digit loans, previously given, due to strong loan growth in the first half of the year.

The average full-year net interest margins is expected to be about 3.80%, which reflects the refinement of our outlook based on first half results.

The refined margin outlook is driven primarily by the change in funding mix related to higher than expected commercial loan growth.

This outlook assumes a flat yield curve in August and one more tightening by the Federal Reserve in August.

Full-year credit related net charge offs, which encompasses both loan losses and credit losses on unfunded lending commitment is expected to be 15 to 20 basis points of average loan.

And for the remainder of 2006, we predict the provision for credit losses slightly in excess of credit related net charge-offs.

The outlook for net charge-offs reflects an improvement from the 20 to 25 basis points level previously given.

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

We expect low single-digit growth in non-interest expenses also unchanged from our previous outlook.

As Ralph mentioned earlier, we are considering selling our interest in Munder.

While we're not at liberty to discuss any additional details of a potential sale at this time, we have included a recent financial history of Munder in the appendix.

Due to these recent events, we did not repurchase any shares in the second quarter.

However, we will be resuming our share repurchase program.

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

[OPERATOR INSTRUCTIONS]

We will pause for a moment to compile the Q&A roster.

Your first question is from the line of the Gary Townsend with FBR.

Morning, Gary.

Gary, your line is open.

I'm sorry.

Can you hear me?

Yes.

Yes.

Morning, Gary.

I beg your pardon.

Dale, perhaps, you could talk about the provision that you had in the quarter for loan losses, last quarter -- the first.

You released provision again this time.

You are adding to it.

Can you talk about the factors that are driving the addition this time?

Sure.

I'd be happy to.

There are really a couple of factors.

One, obviously, you saw a fairly robust loan growth.

Certainly, that is an element that goes into our thinking.

And frankly, we've seen some stabilization in terms of our overall credit quality metrics, particularly in the Midwest.

You can see that the credit quality indicators are such there that back to the rate of improvement there is basically leveling off.

The other markets continue to show good improvement.

But because of those two factors and based on the same methodology we have used for quite some time, now, we've come up with a provision that is in excess of net charge-offs.

And there's been great concern with respect to automotive and your exposure to that industry group.

Could you characterize developments from the past quarter there, positively or negatively?

Sure.

And Beth, I think, showed you the slide on automotive.

Fundamentally, the inflows to automotive non-performers were relatively modest.

I think, about -- of the 51 million of inflow, about slightly less than half were related to automotive.

And that was a fairly modest number made up of four or five different credits.

The overall level of non-performers related to automotive is still pretty low, at around 27%.

Our exposures there continue to be reducing overall.

We continue, as Beth indicated, to manage that.

So we're relatively pleased, to say the least, in terms of the overall auto performance in our portfolio.

But as you know, it continues to be a challenge.

Thank you.

Ralph, perhaps, or Beth, you're adding new branches.

Could you -- and we have a more slender margin than we had a year ago -- could you talk about the economics of branch banking in a flat yield curve environment and how that affects your thinking?

Beth, why don't you give the new numbers on the branches that we've opened up through the end of the second quarter?

Yes.

I think I'd make a couple of comments on that.

One is that we continue to be meeting the objectives of that we have laid out earlier this year of getting to an 18-month breakeven point on new branches.

And really, the heart of what is important to us is, as we have said before, it is not about a mass market retail strategy.

It is about a branching strategy that involves all of our business segments.

So when we look at deposit levels, we're in excess of $600 million of deposits for those new branches, which is up about over 30% from a year ago level.

And it has that nice mix that I mentioned earlier between retail and wealth management and the business banks.

So we're still on target with the financial goals.

Yes.

Those are very big things for us, Gary, is that the reason we call them banking centers is we locate them as if you were looking to open a new small bank and that we want to have the right mix of both middle-market but also small business, retail, and wealth and institutional management.

And that ability to look for those locations and the models we use appeared to be working and working well compared to the analytics that we had given out at investor day as an example of a returns that we expected.

So far, we are exceeding those returns.

Thank you.

Your next question comes from the line of John McDonald with the Bank of America Securities.

Hi.

Good morning.

Morning, John.

Morning, John.

I wonder if I can get a little color on the loan growth in terms of what you saw from customers in terms of demand and geographic diversity there.

I think, overall, what you saw is and you saw the strength of the numbers both in Texas and California and also here in Michigan at a more subdued rate.

But as you look at the economy here, it was a good rate.

When you look at the diversity of the loan production, you saw the dealer, you saw commercial real estate, you saw middle market, and as Beth's slide shows, it really covered most of our business lines.

Overall, global as an example, I think, was down for the quarter, but when you look at its growth, [inaudible] was up in the quarter.

But when you look at California, as an example, it had an excellent growth.

Yes.

I think that is the key is that across all of the business banks --

Yes.

-- all of those segments were up and small business was also up in all the markets.

Right.

Dale, do you have anything to --

No.

That covers it.

Okay.

I guess, what I was wondering is that it feels like your loan growth is accelerating a little bit.

Are you seeing more line utilization or are you doing a better job getting to relationships?

As Beth mentioned earlier, line utilization was actually up slightly.

It is new relationships and really gaining traction in those California and Texas markets.

And the last thing.

How about the pricing environment?

We hear a lot about competitive pricing in the Midwest.

How would you characterize it across your franchise?

It is competitive, and it is not unusual in this part of the cycle.

In the slower growth markets, I would characterize it as probably more competitive, and in some of the faster growing markets a little more realistic.

But I would not shade that a whole lot.

It is very competitive.

That is a true statement.

Okay.

One quick follow-up for Beth.

What is the impact of maturing swaps this year on the margin?

Is that helpful to your margin?

I assume that's baked into your guidance.

And did that help at all this quarter?

It did in a minor way.

We had 700 million of swaps that matured this quarter.

We have 1.8 billion that's maturing in the balance of the year, and so that will be a positive contributor toward the margin.

Are those currently in a negative spread, Beth, the 1.8 billion.

They are.

There are a couple of hundred basis points below -- in a negative position.

Right.

Okay.

Thanks.

Thank you.

Your next question comes from the line of Mike Mayo from Prudential Equity.

Good morning.

Good morning.

Good morning.

Can you talk a little bit more about risk oversight.

On the one hand, you had a very good commercial loan growth, lower loan losses, you're getting the revenue.

On the other hand, we look at the one-fourth increase in problem loans.

So how do you view the trade off if the economy were to be slowing somewhat now?

Well, let me try that one.

The risk management oversight continues to be, I think, very solid.

We have certain key credit policies that are filed in all of our markets.

We have credit officers in all of our markets that report up to me independently.

So I think that the oversight is still there.

The growth is in the right places and the right kinds of -- whether it is real estate, middle market, or dealer businesses, which have all performed very well.

The increase in non-performers, you know -- on a relative basis, if you look at how low our non-performers were, frankly, that increase to me is relatively modest.

It's still -- we're still at very low levels at 37 basis points.

The other thing that I'd point out in the non-performers is that they are very granular.

They are on the non-performer list.

We take them to that list with whatever appropriate level of charge-off is required with appropriate levels of reserves.

And virtually, all of them are secured.

So I think the value in those non-performers and our success rate in terms of recoveries has been pretty good.

It still is there.

So I'm feeling pretty good about the level of non-performers and what is in there today.

And you had a little more -- a little less than half of the increase was due to auto?

Yes, about 48%.

Of the --

Of the inflows.

Of the inflows.

Of the inflows.

Right. 27% of all NPAs are auto-related.

And by region, where did the increase in NPAs come from -- the Midwest or California or Texas?

It's primarily in the Midwest.

And are you seeing anything different in the Midwest if you were to characterize the relative growth rates, are they similar, or getting worse, or better in each of your regions?

As we saw the growth -- the growth rates in loans are outstanding.

Its clearly are coming from the markets where we have the investments, the western market in Texas.

The growth rate in the Midwest has been fairly subdued.

So it's kind of what you might expect in terms of the opportunities.

And we see greater opportunities, obviously, in our other markets, although there are still some opportunities here that we continue to pursue.

And I think the point is in the Midwest, because it is a slower environment, we are not reaching for growth.

And therefore, you'll see more [inaudible] growth there.

Exactly.

And you're not seeing any trends here that are alarming.

No.

Not at all.

You gave more attention or do you put more people on this or are you not even at that point?

No.

I mean, we're clearly not at that point.

I mean we clearly have the same level of attention.

We've been through these cycles before, in the Midwest in particular.

We have what we call our credit quality review process that goes on every quarter.

We pay a lot of attention to the portfolio, particularly the auto portfolio as we've indicated.

And I think we're -- I think everything, from my perspective, is well-controlled and I think I'm feeling very confident about our level of oversight.

All right.

Good.

I think as Dale has discussed in the past, we've done a lot of focus and have a lot of focus on our whole credit mechanism over the last several years.

And I believe that's beginning to pay dividends at this point.

Is that not fair?

Right.

And I think all of that said, I think we have clearly developed a lot of -- and we talked about this before -- a lot of analytical tools which are, I think, helping us greatly in terms of our oversight of the portfolio.

It allows us to be more proactive.

And we have them.

All right.

Thank you.

Thank you.

Thanks.

Your next question comes from the line of Manuel Ramirez with KBW.

Morning.

Hi.

Good morning.

Good morning.

I have two quick questions for you -- or actually three questions.

One is on the repurchases.

You'd mentioned that you're out of the market in anticipation of the Munder transaction.

I know you'd be back in the market.

I apologize, it's a little early here, but I have a hard time figuring out the link between the two since, in the whole scheme of things, it's probably not a huge transaction.

And then the second question is with everything that's going on with the GM these days, including a potential relationship with Nissan and Renault, I was kind of curious as to what you thought the implications would be of that sort of alliance with a foreign automaker, and whether or not it will be positive or negative for the auto industry in Michigan, the Midwest overall, just helping us to think about these applications?

Beth, do you want to take the repurchase and I'll take the...

Yes, I'll take the repurchase.

It's really -- it was an abundance of caution that given we were considering a possible sale of Munder that we felt it was appropriate from a cautious standpoint to seize our repurchase program in the second quarter.

But as we have indicated, we are resuming that and we'll get back on a pace of looking very similar to repurchase levels that we did in the first quarter.

So we hope to make up the second quarter a lack of repurchase in the balance of the year on a kind of the run rate what we saw in the first quarter on a quarterly basis.

So we shouldn't interpret it as you're going to use the proceeds to do -- turnaround and do an acquisition of a particular peer bank did within the last couple of weeks?

Our intention is to continue to be an active capital manager and we will be back repurchasing shares.

Okay.

Great.

Just to add to that statement, as we've said in the past, we're always looking for potential acquisitions.

But I agree with that statement moving forward.

Your question on GM, what you've seen here locally in the newspapers and I think nationally as well, is Rick Wagner's response to those questions of saying that they're looking at it and they will see if it makes sense for them from a business standpoint.

And that's really all that I would reiterate to you.

Overall, do you think it would be good or bad for the economy?

I don't have an opinion on that because its like Rick said you really don't know what it may or may not turn out to be.

So speculation, I don't think would be appropriate.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Jeff Davis with FTN Midwest Securities.

Hi.

Good morning.

Good morning.

Good morning.

Question for Dale.

Dale, it looks like the loan sales were lower this quarter than in past quarters, is there any particular reason?

And then, secondly, as it relates to auto pricing for auto credits in the market specifically, what happened during the quarter, and then, maybe a little perspective over the last six to nine months for those types of credit?

In terms of the sales in the secondary market, we're always looking at our list of troubled accounts to see which of those it might make sense to sell and so forth.

The list of troubled accounts has fallen dramatically.

So the opportunities that we have to sell into that market are more limited, not that we from time to time don't make some sales and we obviously did a little in the quarter.

And so, as opportunities continue to present themselves to us, we try to stay ahead, as we've done in the past.

We're proactive managers of credit obviously.

You may, in fact, see some additional sales in the upcoming quarters simply because there will be those opportunities that make sense to us.

So it's just a matter of what the market is saying to us and what opportunities we have to sell.

And the list, as I said, is getting smaller in terms of those opportunities, which is a good thing.

In terms of -- if you're talking about the pricing of the auto credits, the loan pricing in particular, there is still a very active, competitive market for a good auto credits.

And, you know what, we do have a number of very, very good long time auto credits that a lot of our competitors would like to have.

We obviously are very vigilant in that arena.

We sell a lot of other services to those clients to try to get full relationship pricing and we do that successfully.

But we have to be on our toes constantly.

Pricing in auto credits is as -- is probably as aggressive as I've seen in sometime and as aggressive as it is in most of our other markets.

So it's very competitive there, too.

Okay.

Dale, actually I meant as far as if you've got a loan outstanding [inaudible] or whatever, what are other desks that you shop these credit [period] that make a market and these credit -- is pricing firmed over the last six months or is it still looking downhill?

No.

The pricing for those credits, by and large -- and we've seen it from large credits to smaller tier two type supplier credits -- has remained relatively stable, and in some cases has actually increased.

But it's a deal by deal transaction.

Sure.

The market isn't particularly deep or broad.

It's every deal -- there are a handful of institutions that you probably know that will look at those and those are the institutions that we go to when we are interested in pursuing a sale.

But by and large, the market has remained stable.

Okay.

And then, final question, it's not in the slides here, but you all had it in last quarter, and that is the outstandings for the auto book and the commitments.

Has there been much change since March 31?

We typically update that on an annual basis in full detail, but there has been a trend downward this year and we will -- we put all the details of that in our annual report.

But consistent with what we've indicated, we are down 200 million to 300 million.

Okay.

Thanks.

I maybe confusing quarters.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS]

Your next question is from the line of Heather Wolf with Merrill Lynch.

Good morning.

Just a couple questions for you.

One on the reserve, I noticed that you still threw down the percentage of loans this quarter.

I'm wondering if you can talk about what the catalyst would be for rebuilding those reserves?

Well, clearly again -- and we do have a very distinct, well developed methodology for analyzing our reserve position as we go through every quarter.

As Beth has already indicated, it's a credit by credit review.

And so, frankly, as loans continue to grow and as the portfolio continues to change overtime, that will -- those will be inputs into our methodology.

And to the extent that suggests we need to make some changes or adjustments to our reserve, we'll do so.

But it's driven by loan growth and the quality within the portfolio.

Those are kind of broad overview since those are the key determinants to our overall level of reserves.

And Heather, the absolute level of reserves are up and we did provision more than charge off this quarter and we indicated in our outlook that we would be having a similar trend in the third and fourth.

The key is really staying with the methodology, and that -- it takes the level of reserves versus a set percentage of the loans outstanding.

Right.

There is no target.

Right.

Okay.

Great.

And then second question, Beth, can you refresh us on what your capital targets are and has that changed in light of the fact that your reserves have been coming down in distributed sales under the credit cycle?

The capital ratio that we most follow is a tier one common, which is tier one left for preferred.

So that's really a shareholder -- common shareholder equivalent.

And we are targeted between 7% and 8% one that ratio.

We were at 769 at the end of June, and we've indicated we would be somewhere in kind of -- we'd like to be around the middle of that range.

And we would -- our share repurchase and other capital planning is consistent with kind of being in that target range.

There hasn't been any change in that as a result of any change in the economic backdrop?

That's a wide range, 7% to 8%.

It's a question of where we are in that range.

And as I said, we're comfortable in being about in the middle of the range at this point.

Okay.

Great.

And then just last question, you gave a lot of good detail on Munder in the press release.

I'm wondering if you would be willing to provide us with the revenue number.

And if not, can you give us some indication of where margins stand relative to the tier group?

I would turn you, I guess, to the appendix slide.

You can take a look at which does show a five-year history of revenue expenses and pre-tax income for Munder.

Got it.

Sorry about that.

That's okay.

Okay.

Thanks very much.

Appreciate it.

Thanks.

Your next question comes from line of Ross Demmerle with Hilliard Lyon.

Good morning.

Good morning.

I'm trying to reconcile service charges on deposit accounts with all the new branch openings.

I guess I would expect to see that level increase with the new branches and probably new deposit accounts.

Am I looking at that incorrectly?

Well, I think you have to look at service charges in the context of the interest-rate environment, because those interest rates have gone up and to the extent customers are getting earnings credit for deposit balances that they have.

We in fact feel pretty pleased about the stability that we've had in our service charge income, which has been pretty stable quarter-over-quarter and year-over-year.

Having said that, as you can appreciate, I mentioned earlier that of our new branches, we had 600 million of deposits in those branches.

That's out of a total $42 billion.

So we are still -- it's still very small, but that's what we're continuing to accelerate our program, to continue to accelerate the deposit growth in those.

So we're not at this juncture on our large base, seeing that in a significant way.

But over time it will come.

Okay.

And as you look down the line of business of deposit growth, where would you expect to see most of those deposits, that in personal banking or small business banking?

In terms of -- we would expect in the new branches a very nice mix that we mentioned on our slide between retail wealth management and the business bank.

As I mentioned earlier, about half of the deposits are from the retail bank customers, which includes small business.

Wealth management was about 13%, and the business bank 31%.

So that would be our expectation and would be a nice blend of that mix going forward.

Okay.

Thanks.

Thank you.

Your next question comes from the line of Casey Ambrich with Millennium.

Hi good morning Ralph and Dale.

Thank you for taking my question.

Good morning.

Excellent quarter.

I was just wondering if you could -- I wanted to make sure you and understand it correctly, on the NIM going forward, so you had some negative carried swaps going off.

Does that kind of continue to benefit going forward?

And should we continue to expect the positive operating leverage you've reported this quarter on a going forward?

On the NIM outlook we have factored in a lot of things, obviously in the outlook and there are lots of dynamics building -- manage a balance sheet.

Obviously the maturing of underwater swaps will be helpful to the margin.

We have also factored in the outlook for FFD that we had given you into the outlook as well as obviously our loan growth.

So at this juncture that we refined our outlook and are calling for 380-level.

So that's -- we look at all factors.

Okay.

And your other question, I lost.

I mean positive operating leverage you've reported this quarter?

Okay.

What we have indicated is our expectation on the expense side of the equation, is that this year we would be up in the low single-digit growth from last year.

And I think that's a pretty good level, especially in light of the fact it will be spending an extra $20 million on a branches this year versus last year.

So we are holding our expenses, I think are well controlled.

We're -- with the expectation of loan growth and non-interest income growth we would have expect positive operating leverage.

Okay.

Great.

Thank you very much.

Nice quarter.

Thank you.

Your next question comes from the line of Lori Appelbaum with Goldman Sachs.

Good morning.

Good morning, Ralph.

Ralph you mentioned about -- any potential sales of Munder, the proceeds could be used not just for buybacks, but also to reinvestment in fast growing market.

Could you be more specific on some of the reinvestment opportunities that you're considering in your faster growing markets?

Well, I think it's a -- the branch build out, and I used branch, I mean, banking centers as I mentioned earlier.

Also the repurchase Beth spoke to as well as we're always looking for opportunistic acquisitions that might help us move that strategy quicker.

And what sort of acquisitions are appealing to you?

Well, it would be an acquisition that would put locations where our model shows that we want to be.

And if it does that and it's at the right price in the right return, we would be interested in looking at that.

The key is, we will not slowdown our internal or organic growth.

This would be an opportunity to add on.

And, maybe what size of deals would be interesting?

What cities?

Well, I think, the locations where we pretty much said, we're committed to California, we're committed to Texas, and that's the urban areas.

We obviously are building out Arizona in the Phoenix /Scottsdale area and we have locations in Florida.

So given our internal plans, anything that would help leverage that would be appropriate to look at.

And size?

Size, historically it needs to be something that is handleable, like I said earlier, I do not want to disrupt our organic growth profile.

So it needs to fit in.

The exact size, I didn't really have a target for, but looking back at history, you'd see that that ranges from smaller to medium-sized banks for us.

All right.

Thank you.

Thank you.

Your next question comes from the line of Chris Chouinard with Morgan Stanley.

Hell, good morning.

Good morning.

I had a quick question on loan growth in the Midwest, in the sequentially it seems to picked up a bit.

I was wondering if that was something you think can be sustained for the foreseeable future of that kind of blip and you expect this sort of outside bit here?

Let me take a shot at it, Dale.

I think that the growth in the Midwest, the Midwest itself -- we have seen reasonable growth, reasonable opportunities as we've said before, most of the opportunities tend to be in western markets and obviously Texas.

I think as the economy improves here in the Midwest, I think, we will continue to see opportunities as we have.

I think the growth rates will be more muted, obviously, than other markets.

And we're seeing pretty reasonable backlogs of good opportunities within our Midwest portfolio.

So I guess my bottom-line answer is there, as we call in the Midwest market we will continue to see opportunities, but it will be at a slower rate of growth.

And what drove the acceleration in the Midwest this quarter?

Was there any one particular thing?

Really across-the-board, middle market was up, commercial real-estate was up, national dealers were up to minor.

So small business was up, so really as similar trends as we saw in the other geographies

This isn't some things [inaudible] it's seasonality?

No.

No.

Okay.

Then ...

The real seasonality for us is in the third quarter.

Right.

But the dealer [multiple speakers].

We would expect that the dealers' outstandings would come down and the third quarter compared to the second.

All right.

Thank you.

Thank you.

Your next question comes from a line of Andrew Marquardt with Fox-Pitt Kelton.

Good morning, guys.

Good morning.

Good morning.

Can you just step back and give us a backdrop as to why you're considering sale of Munder at this point?

Well, I think if you look at what we've been developing in our wealth and institutional management, which is an open architecture and the ability to continue, as I mentioned earlier to utilize the good products of Munder, at the same time, expanding the various product offerings that we can have through an open architecture and in developing our wealth and institutional management business, which I think you're seeing an expansion overall in the competition as well.

And to meet that competition, we need to have a wide array of products.

And that's the reason we're taking a look at it.

And what we're doing frankly is not really different from a lot of industry trends that are happening, too.

Right.

Okay.

Thanks.

And then, maybe I missed it -- can you just review what the outlook was on FSD interest deposits and loan.

Is that the second half or is that for the full year that you're saying?

It was full year averaged '06 versus '05.

I'm sorry, that's not what I meant.

What we gave you is average for the year, $4.5 billion.

So that factors in the fact that there was $4.7 billion of average DDA in the first half.

So that implies a lower level in the second half, which would be the normal seasonality we would see to average has been for the year of 4.5 billion.

Great.

Thank you.

Thank you.

Your next question comes from the line of the Tony Davis with Ryan Beck.

Good morning.

Great quarter.

Thank you

Thank you.

You mentioned in the energy portfolio, and I was just wondering if you give us little more color on what you're seeing in loan demand and trends in the specialty businesses outside of the state?

Well, I -- let me take a shot of that as well.

The energy business and our specialty business in general are doing well.

Energy is headquartered really in Texas for us.

We've seen good growth in that business, as you might expect.

We're seeing a lot of larger deals that are participations with other institutions.

Pricing in those names tends to be a little better overall.

So that business continues to perform very, very well, our technology and life sciences businesses and other large business that has had some decent growth.

And that's also a very -- have been a very successful business.

So across the board, I'd say, our specialty businesses primarily led by energy and certainly technology and life science have done very, very well.

That total portfolio, Dale, is about --

Yes.

Energy is about 1 billion.

Very well

About 1 billion for energy.

Right.

Right.

And in terms of growth, this year versus last, what would that annual portfolio look like you think this year?

Both of those are up about 30% versus the year ago.

Right.

Thanks, guys.

Beth, one other question on the interests here on these tax liabilities.

Just whatever you can say about the resolution of prior year returns that we might expect to see before yearend?

I don't expect anything of any significance.

Okay.

Thank you much.

Thank you.

Your next question is a follow-up question from the line of Manuel Ramirez with KBW.

Hi, Manny.

Hi, just a follow-up question on the Munder.

Can you specify a little bit -- in a little bit greater detail what if for [patience] the Munder -- a potential Munder transaction have for your branch strategy.

In particular, your Analyst Day you were talking a fair amount about how wealth management was an integral part of the branch build out.

You did mention that you've been shifting the business model anyway but does it -- do you think it changes the economics of your branching strategy in the near-term, let's say, the next one year or two years?

Assuming that you didn't participate in Munder sales two years ago when you planned this when you laid the strategy?

No.

And I go back to the comments I was making earlier about open architecture and the way we supply the needed products and services to our customers, which as today is very important in competing in that market.

So I don't view that to be a negative from that perspective at all.

So what you're saying is you're not -- Munder does not really drive any business through the branches and what you called your growth areas in California and Texas is really finished in operation?

Munder has very good products and services and we will continue -- we will be able to continue to utilize those products and services in the open architecture.

So from that standpoint, it fits into the model that we were really describing.

Okay.

And one other question on that part that it, you know, would you consider buying another money management business which, perhaps, fit in -- fits in a little bit better either geographically or in terms of the business model with your current strategy?

I think the way we had just talked about it is looking at the open architecture, is really the way we're headed in looking for products to bring in that we don't manufacture.

So at least at this point in time, that's our focus.

Okay.

Thanks.

And at this time there are no further questions.

Thank you very much for your time this morning.

And everyone have a good day.

Ladies and gentlemen, this does conclude the Comerica Incorporated second quarter earnings release conference call.

You may now disconnect.