Comerica Inc (CMA) 2006 Q3 法說會逐字稿

Good morning.

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

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

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

After the speakers' remarks, there will be a Question and Answer Session.

[Operator Instructions]

Thank you.

Miss Persons, you may begin your conference.

Thank you, Katherine.

Good morning, and welcome to Comerica's third quarter 2006 earnings conference call.

This is Darlene Persons, Director of Investor Relations.

I am 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 filings with the SEC.

Now I will turn the call over to Ralph.

Good morning.

The third quarter results underscore many positive core operating trends and reflect our emphasis on growth and balance.

Loan growth in our fastest growing markets continued at a double-digit place.

On an annualized basis, comparing third quarter to second quarter, average loans increased 7%, led by 24% growth in Texas, 12% growth in the West, and 1% growth in the Midwest and other markets.

These growth rates exclude financial services division loans.

Credit quality in all markets remained excellent.

Net charge-offs for the quarter were at historically low level while non-performing assets increased slightly from the second quarter but remained at a low level.

Dale will provide some additional color on credit quality, but I believe we are demonstrating our abilities to successfully manage our auto industry and commercial real estate portfolios.

The development and use of our portfolio tools and models is key, but at the heart of our success is our cultural strength as a relationship banker.

By staying close to our customers and understanding their business models, we are in a position to assist them through all phases of an economic cycle.

About two-thirds of our exposure to the auto industry is dealer-related, which historically has had minimal losses.

The portfolio is heavily weighted toward the western market.

The auto manufacturing segment represents only 5% of our total loan portfolio outstandings.

We continue to successfully manage that exposure to a lower level, and added incremental loss reserves related to the industry in the third quarter.

Our commercial real estate portfolio continues to perform well.

We continue to adhere to conservative lending policies.

A large portion of this portfolio is commercial mortgages for owner-occupied properties of our middle-market and small business customer and is three fourths of this portfolio have balances of less than $1 million.

Our commercial real estate line of business includes our relationships with real estate developers.

While this line of business continues to perform well, we have added loss reserves in light of the changing commercial real estate market.

Turning to deposits, the third quarter remained competitive.

As the housing market has weakened, we have seen lower activity within our Financial Services Division; as deposit levels decreased during the quarter, the associated low interest rate loans decreased as well.

Excluding the financial services division we did see increases in average deposits in our Texas and western markets.

Within our business bank, average deposits increased $250 million.

We continue to be confident our investments in new products and services and in new banking centers should result in higher deposits over time.

Our banking center expansion program is well under way and meeting our expectations.

The program's year-to-date results reflect an incremental $10 million in expenses relative to the prior period.

We have obtained $700 million in deposits from our new banking centers since launching the expansion program in late 2004.

The new banking centers are meeting our goal of being accretive within eighteen months of opening.

We have opened 16 banking centers year-to-date, 15 of which are in our high growth markets of California, Texas, Arizona and Florida.

We opened seven banking centers in the third quarter and another two earlier this month.

Of the nine, five are in southern California, one is in northern California and three are in Texas.

We remain on target to open 24 banking centers this year.

By 2010 we expect more than half of all of our banking centers will be located in growth markets outside of Michigan, up from 35% today.

We continued to control expenses in the quarter and our net interest margin was consistent with our full year outlook.

As part of our active capital management, we repurchased 3.7 million shares in the third quarter or 2% of total shares.

On August 4th, we announced the sale of our stake in Munder capital management.

We are on track to complete this by year end and believe this transaction is the right move for our clients and shareholders.

At this time I will turn the call over to Beth.

Thank you, Ralph.

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

Turning to slide 3, we're pleased with our performance this quarter, particularly the loan growth and credit quality; also expenses and margins behaved as we expected.

As you can see on slide 4, we have had similar positive trends in the first nine months of 2006, as we saw in our third quarter including good loan growth and excellent credit quality.

An important difference to note in these two year-to-date periods is the increase in the provision for credit losses from a negative provision of $34 million recorded for the first nine months of 2005 compared to a positive provision of $24 million for the first nine months of 2006.

Turning to slide 5, we outline the major components of our third quarter compared to prior periods.

Today we reported third quarter 2006 net income of $200 million or $1.23 per share compared to 200 million or $1.22 per share in the second quarter and $238 million or $1.41 per share for the third quarter of last year.

Note that the third quarter of 2005 included a $30 million negative provision for loan losses as well as the positive net effect of a $14 million warrant accounting adjustment.

During the third quarter 2006 Comerica announced it had reached a definitive agreement to sell its stake in Comerica Capital Management.

The transaction is expected to close by year end with an initial after-tax gain in the range of $100 million to $110 million.

Effective third quarter 2006, Comerica's accounting for Munder as a discontinued operation, and all periods presented have been restated to reflect this change.

As outlined on slide 6, net interest income of $502 million increased $2 million from the second quarter.

Average loans increased $323 million to $48.1 billion in spite of the seasonal decrease in average loans and national dealer services, $166 million, lower financial services division loans, $464 million, and the success of our efforts to reduce our auto exposure, auto industry exposure.

The net interest margin decreased 3 basis points to 3.79% which is consistent with our full year outlook.

Net interest margin was affected by competitive loan pricing, the decline in non-interest-bearing deposits, and loan growth in excess of deposit growth.

This was partially offset by the positive impact of lower off rack low rate financial services division loans and a higher benefit from non-interest-bearing sources of funds in a rising interest rate environment.

Slide 7 details the major factors affecting non-interest income and non-interest expense.

Non-interest income included two items, a $7 million incremental loss on the sale of Mexico Bank Charter as well as a $9 million decline in the mark-to-market adjustment for warrants in the third quarter compared to the second quarter.

Excluding these two items, non-interest income grew 3% with several fee income categories increasing.

Non-interest expenses were well controlled in the third quarter.

Employee levels remain unchanged over the last five quarters, even as we have added 25 new banking centers.

Moving to the balance sheet and slide 8, compared to the prior year, average loans excluding the Financial Services Division increased $3.7 billion or 9%.

We are steadily making progress toward our goal of achieving for geographic balance, with the West, Texas and Florida markets generating 48% of total loans compared to 43% a year ago.

On an annualized, linked quarter basis, as detailed in the appendix to these slides, average loans increased 7% in the third quarter led by 24% in Texas, 12% in the West, and 1% growth in Midwest and other markets.

These growth rates exclude Financial Services Division loans.

Slide 9 provides detail online of business loan growth excluding Financial Services Division.

As you can see on the slide, nearly all commercial business lines experienced growth in the third quarter compared to the same period last year.

The increases in the middle market, commercial real estate and small business banking portfolios were largely the result of growth in each of our major markets while the increase in national dealer services was primarily in the West and Florida.

Compared to the prior year, the third quarter increase in specialty businesses was primarily due to increases in the energy portfolio, $434 million, and technology and life sciences, $217 million.

On a linked quarter basis, as detailed in the appendix to these slides, annualized loan growth was 7% and was spread amongst nearly all lines of business, with the exception of national dealer services where we experienced a seasonal decline.

Now Dale Greene, our Chief Credit Officer, will discuss recent credit quality trends starting on slide 10.

Good morning.

Credit quality continues to be excellent.

Net credit-related charge-offs remain very low at 6 basis points of average total loans.

The total provision for credit losses exceeded net charge-offs.

Non-performing assets were 42 basis points of total loans and watched loans were 5.1%.

Finally, Comerica's allowance for loan losses which is built credit by credit at the end of each quarter was 1.06% of loans which is up slightly from the second quarter and a solid 251% of non-performing assets.

I would like to take a moment to briefly review our loan loss reserve methodology which is summarized in slide 11.

We are continuously reviewing the components of the reserve, analyzing the migration of risk ratings among the risk rating grades, industries and geographies.

Affecting this quarter's reserves was an increase allocated to our automotive portfolio and certain categories of commercial real estate loans in Michigan, particularly land and construction loans as well as residential real estate loans across all of our markets.

Partially offsetting these effects was a decrease in the reserves related to other industry segments and an improvement in our risk rating accuracy which is assessed by our independent asset quality review team through its ongoing audits of our lending groups.

Overall, the increase in the allocated reserve for loans was partially offset by a decrease in the unallocated reserve with the net effect of a $12 million increase in the loan loss reserve.

In addition, we maintain an off balance sheet reserve for lending-related commitments.

In the third quarter we had a negative provision for credit losses on lending-related commitments due to the sale of an unfunded commitment for an auto-related manufacturer at a price greater than previously reserved.

This is a very robust process that is periodically reviewed by third parties who bring best practices insight to the methodology.

Slide 12 provides detail on the recent performance of the automotive portfolio.

Our dealer business continues to represent over two-thirds of the automotive outstandings.

Overall this portfolio is heavily weighted to the western market with two-thirds to dealerships selling foreign name plates.

As the majority of the portfolio is of a well-secured floor plan nature, we expect it will continue to perform well.

We have not experienced a significant loss in the dealer portfolio in many years.

Looking at our non-dealer automotive exposure as we've indicated before, we are proactively managing it to a lower level, and outstandings have decreased 14% since year end.

This portfolio now represents less than 5% of our total loans.

We continue to closely monitor the performance of the portfolio, and have increased loss reserves in light of the current industry conditions.

On slide 13 we provide a breakdown of our commercial real estate portfolio.

A large portion of the commercial real estate portfolio is commercial mortgages for owner-occupied properties of our middle market and small business customers.

This commercial mortgage portfolio includes over 8900 loans of which 75% have balances of less than $1 million.

Turning to slide 14, we highlight our commercial real estate line of business, which includes both local and national real estate developers, residential development, primarily in California, and mortgage bankers.

We have longstanding relationships with most customers in this segment and often obtain personal recourse.

This line of business includes the $3.3 billion construction portfolio, and the $1.5 billion commercial mortgage portfolio referred to in the prior slide.

In addition, there are $1.9 billion of loans to commercial real estate customers within this line of business that are not secured by real estate.

We've seen good growth in this portfolio, particularly in California and Texas making it geographically diverse, and has performed quite well as demonstrated by the low level of non-accruals and net recoveries year-to-date.

We are well aware of the slowdown in the real estate market and the issues currently surfacing in the industry, and we believe we have adjusted our reserves accordingly.

Looking to slide 15, in our shared national credit or SNC portfolio, this is granular consisting of almost 900 loans, it is also well diversified by line of business and geography with recent growth spread throughout the United States, but less so in the Midwest.

We continue to participate only in transactions that meet our credit standards.

We typically allow up to two years to cross-sell ancillary services such as cash management, foreign exchange, trade finance, bond issuance, et cetera, or we [exit] the credit.

Now I will turn it back to Beth.

Thanks, Dale.

Slide 16 details average deposits by line of business, total deposits were $41.9 billion in the third quarter, largely unchanged from the second quarter.

Excluding the financial services division and institutional CD issuances, line of business deposits were also stable.

We did see increases in our Texas and western markets.

Non-interest-bearing deposits account for 30% of average total deposits and have declined in part as a result of customers moving to interest-bearing instruments as well as employing their cash in their businesses.

In order to grow deposits, we continue to introduce deposit-attracting initiatives such as new products and opening new banking centers which I will discuss in a minute.

First, I will touch on our financial services division which is a major deposit generator.

On slide 17, we provide an update to our financial services division business.

In part reflecting the cooling in California residential real estate activity, non-interest-bearing deposits decreased $700 million in the third quarter.

Interest-bearing deposits which bear interest at competitive rates were down $400 million in the third quarter.

Related average loan balances were down approximately $500 million to $2.1 billion in the third quarter while customer service expense increased slightly over the previous quarter.

The level of non-interest-bearing deposits in our financial services division are impacted by many factors, including interest rates, and the competitive environment.

We have also found that fluctuations in the level of financial services division, non-interest-bearing deposits are associated with 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 29% from one year ago, the seasonally adjusted index is California existing single-family home sales which is down about 30% from one year ago, and the median monthly prices for existing home sales in California which is up about 1.5% through August from one year ago.

Based on current trends, we now expect the following for full-year 2006: Average non-interest-bearing deposits of about $4.3 billion, average loans of about $2.35 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 loan volumes will change commensurately.

Slide 18 provides progress on the banking center expansion.

We have opened 16 banking centers year-to-date and plan to open 8 more banking centers by year end including four in California and three in Texas.

Since our initial three-year banking center expansion began in late 2004, we have opened 51 new banking centers and consolidated 25 banking centers in Michigan; nearly 90% of the new banking centers have been opened in our higher growth markets of California, Arizona, Texas and Florida.

Deposits attributed to our new banking centers now total $700 million with a distribution of deposits among the retail bank, 60%, the business bank, 27%, and wealth and institutional management 13%.

The new banking center expenses were an incremental $10 million for the first nine months of 2006 relative to the first nine months of 2005.

Slide 19 updates our expectations for full-year 2006 compared to full-year 2005.

The outlook we are giving is for continuing operations and therefore has been adjusted to reflect Munder as a discontinued operation.

Our expectations are for an improved outlook for credit quality with all other categories unchanged.

We anticipate average loan growth for the year to be in the high single digit range excluding financial services division loans.

This average full-year net interest margin is expected to be about 3.80%.

Full year credit-related net charge-offs, which encompass both loan losses and credit losses on lending-related commitments, is expected to be about 15 basis points of average loans and for the remainder of 2006 we expect a provision for credit losses in excess of credit-related net charge-offs.

The outlook for net charge-offs reflects an improvement from the 15 to 20 basis points level previously given.

We anticipate stable non-interest income excluding the net gain on sales of businesses.

We expect low single digit growth in non-interest expenses.

We expect to continue to be an active capital manager.

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

[Operator Instructions]

Your first question is from the line of Gary Townsend.

Good morning, Gary.

Good morning.

Hi, Ralph, how are you?

Good.

And Dale, too.

Morning.

Nice quarter first of all.

Dale, I am guessing that credit experiences doing person most in the market have been expecting, and also we've seen in some other financial institutions reporting some beginnings of signs of weakening credit results, and I was wondering from your standpoint as you're looking at your performing loans and I know you're doing your migration analysis, what do you see in that area?

I know you addressed it slightly, but perhaps you can give some more color to that.

Sure.

I would be happy to, Gary.

You know, clearly we're at a point where I know I have said it before, but this is probably without a doubt as good as it will be.

We are clearly seeing some increases in our watch or five rated loans.

Our 5, 6 and 7's are 5.1% which is up slightly from the last quarter.

We clearly are seeing it.

The good news is that it is primarily in the watch category, and it is not isolated in any one segment or any one market.

We do, as you may imagine, quite a bit of work looking at all of those portfolios, and we're seeing the increase in five rated loans pretty much across all of the businesses, clearly middle market is a little more.

Middle market nationwide, not just here in southeast Michigan, but it is pretty much for the moment in the five rated.

Clearly we know some of that will migrate lower.

Even at 5.1%, that's still a very low number by any standard, and while I suspect it will go higher, I am not uncomfortable with where we're seeing it.

It is not lumpy in other words.

Why don't you go market by market, too.

And if you look at it, market by market, what you'll really see is within the western market we've actually seen a reduction in some of our problem loans, particularly in the five rated category.

If you look at Texas, there has been an increase, a slight increase in five rated loans.

It is in the middle market, in a couple of credits.

It is not pervasive.

Within the Michigan or Midwest markets, you will see the largest increase, but even within the Michigan market, it is spread across middle market, some of our real estate businesses, a little bit in our dealer business and so forth.

Again, it is in -- it is not in one particular area, which of course would concern me.

And still historically low levels.

Yeah.

Very, very low.

Right.

Thanks for your additional color there, Dale.

Okay, Gary.

Thanks Gary.

Your next question is from the line of Manuel Ramirez.

Good morning.

Good morning, everyone.

Hope you're doing well.

Got two questions for you.

First, Dale, could you maybe talk about -- thanks for the additional information on the SNC portfolio.

Could you make talk about the growth in that portfolio year-on-year, either commitments or outstandings or both be it available, and secondly, would you be able to characterize your exposure to home builders, either secured or unsecured and also more specifically do you tend to work with smaller regional builders or do you tend to work with large national builders and geographically where is it spread over?

Thanks.

Okay.

If I forget pieces I will go back and ask you to refresh my memory.

In terms of the SNC portfolio, it is now about 18% of total loans.

That's up -- if you go back to the third quarter, a year ago, around 15%.

We clearly have seen a fair amount of growth within the shared national credit portfolio, and as the slides indicated, it is pretty diversified around our business lines, and the types of deals we're doing are all intended to ultimately be relationship-oriented deals.

While it is true we don't lead a large percentage of those, we do lead a fair number of them, and as I have said before, in all cases we usually look to one to two years to start really developing a more full relationship.

If you looked at the credit quality of that portfolio, it has remained pretty stable at very low levels, about 2% in our 5, 6 and 7 rated categories for quite some time.

So it is a key component of how we do business, and it is a key component of how we're able to deal with some large high-quality customers and manage our risk component.

Now, obviously we don't want to be taking large hog shares of those deals.

I am very comfortable with the kinds of things we're doing and really the kinds of relationships we're looking to build within that portfolio.

Turning to the commercial real estate component, first of all, I would talk a little bit about you mention I think a little bit sort of the maybe even the lower end, and we do have a business that's headquartered in California that's primarily focused on, if you will, more of the -- in California it is still a big number -- but the starter home component of real estate development.

That construction portfolio is roughly a billion dollars, and it in fact is one that is in fact always secured and in most cases has recourse to the developer.

As it relates to our national builders and our local builders if you will nationally, those are also secured transactions.

Those also, in many cases, have personal recourse.

The growth year-over-year in that portfolio, about 60% of it has been in the western market which is frankly I would like to see that market still performs very well for us, and if you look at the credit metrics of it, you can clearly see that we're in a net recovery position for the year in terms of any charge-offs, and the charge-offs are very low, and you can also see that the level of non-performers is very low.

So all in, that portfolio non-performers is very low, so all in, that portfolio continues to perform very well although we watch it carefully, and as we indicated in our comments, we added some additional reserves primarily based in the Michigan-based developer portfolio simply because the trends here continue to be worse than they are in some of our other markets.

So, while those loans are also secured, I think we will continue to see softness in the real estate market locally here.

I hope that covers your questions.

That's helpful.

Thank you very much.

Thank you.

[Operator Instructions]

Your next question is from the line of Heather Wolf.

Good morning, Heather.

Quick question for you, Beth.

If I backed into this, the margin guidance correctly, the 380 implies, a 380 for the year implies375 for the fourth quarter.

I am curious when I look at your average balance sheet, it looks like you got about 30-basis point pickup in loan yield and is another 5-basis point pickup from your non-interest-bearing deposits which you're not going to get now that the Fed's done.

What are the offsets to that that are going to keep the margin relatively stable?

Well, first of all, let me say for the first nine months of 2006 the margin was 380.

We are expecting 380 for the full year, so that implies a 380 margin for the fourth quarter as opposed to 375.

I just wanted to clarify that.

We have seen -- let me talk about a couple things one positive impact will be maturing of some swaps we have, $900 million in the fourth quarter at 275 basis points under water, and so that will be a positive effect on the margin.

We are beginning to see also on the deposit pricing side in the last few weeks -- dissipation, if you will of the some of pressures we all saw in the industry in the third quarter because the Fed raised rates the last time on June 29th, and there was still an expectation there might be a Fed increase in August, and the August was a pause.

We have begun to see recently more dissipation in the deposit pricing arena.

Whether that continues we'll have to see.

I think those are good signs.

I think also as we still see competitiveness on the loan spread side, but as we begin to see some of the dynamics on the credit quality begin to change again for across the banking industry, that we should -- our expectation is we should begin to see a little firming there coming, but those are some of the different factors.

That's very helpful.

Thank you.

Thank you.

Your next question is from the line of Jeff Davis.

Good morning.

Good morning, Jeff.

Ralph or Beth, any inclination to do a reworking of the capital structure along the lines of what Suntrust announced where hybrid equity will be -- could be swapped for straight common?

You know, we look as you know regularly at our capital position and we have been targeting for a period of time a tier 1 common ratio between 7 and 8%.

As I have indicated in previous calls, we a year ago if you looked at it, we were closer to the eight.

Now we're below the -- around the midpoint of that range, and so again I would have an expectation as we continue to be an active capital manager that we'll be in that area or a little below that, but we do look regularly at the composition of our capital structure and factor in a lot of things.

We'll also need to factor in implications for adjustments that come to equity at year end related to pension accounting.

We'll get that factored into our planning process, so we're in the midst of that as we speak.

It is a tool that's out there, and we'll always consider all the tools as we look at our capital structure moving forward as well as growth and other potential uses of that capital.

We have capacity in our capital structure for those kinds of things.

Today we have 7% of our capital structure is trust preferred, so it is much beneath some of our peers and certainly way below the regulatory guidelines.

Okay.

Very good.

Thank you.

Thank you.

At this time there are no further questions.

Ms. Persons, are there any closing remarks.

This is Ralph.

I appreciate everybody attending today and thank you very much, and have a good day. .

Ladies and gentlemen, this concludes today's presentation.

You may now disconnect.