Comerica Inc (CMA) 2006 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Comerica Incorporated fourth quarter and full-year 2006 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.

Ms. Persons, you may begin your conference.

Thank you, Janice.

Good morning and welcome to Comerica's fourth quarter and full-year 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 Web site as well as on our own Web site.

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

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

Now I'll turn the call over to Ralph.

Good morning.

2006 was a good year.

We made significant progress in executing our strategy of exporting our relationship-based model and expertise to our high growth markets.

Each of our business units made a number of important contributions this year as we opened 25 new banking centers, most of which are located in California and Texas.

Average loans increased at a strong pace, particularly in Texas and the West, and credit quality remained solid.

On an annualized basis, and excluding the Financial Services Division, average loans increased 5% compared to the third quarter led by 15% in the Texas market, 10% in the Western market, and 16% in the Florida market with the Midwest and other markets down 1%.

As the fourth quarter results demonstrate, we continue to manage our credit risk effectively paying particular attention to our automotive and commercial real estate portfolios which continue to perform well.

We believe our relationship banking model and the improvements in our credit risk management tools have been key contributors to our effective credit risk management and financial performance.

The deposit environment in the fourth quarter remained competitive, however, Business Bank deposits, excluding the Financial Services Division, increased $180 million compared to the third quarter.

Average deposits were up 3% in the Texas market and 5% in the Western market excluding the Financial Services Division.

These increases can be partially attributed to our banking center expansion program.

We have obtained almost $800 million in deposits from our new banking centers since beginning the expansion program in late 2004.

As expected, we saw decreased activity in our Financial Services Division in the fourth quarter as a result of declining residential mortgage loan volumes in the current housing market.

In the fourth quarter we sold Munder Capital Management and in line with our strategy the proceeds in the sale will be invested in our growth markets and to repurchase shares.

The sale of our stake in Munder Capital Management resulted in an after-tax gain of $108 million.

We continue to have a strong relationship with Munder, and we will continue to drive growth in our investment management businesses through our open architecture platform.

Now I'd like to review some of our 2006 achievements in more detail and then talk about our plans for the coming year.

Our banking center expansion program is on track.

In 2006 we opened 25 banking centers, 24 of which were in our high growth markets of California, Texas, Arizona, and Florida.

Eleven of those 24 banking centers were opened in the fourth quarter.

We also refurbished 19 banking centers and relocated 7 others to sites with improved visibility and accessibility for all our customer segments.

In our Retail Bank in 2006 we introduced credit cards for consumers and small businesses with features that include reward options.

We also added six new small business loan products and successfully launched a small business suite of cash management products.

We also introduced the Comerica Northwest Airlines WorldPerks Check Card and simplified and enhanced various checking account offerings.

In the Business Bank we launched a series of new treasury management products and services in 2006 including remote deposit capture, easy pay and ACH positive pay.

We expanded certain businesses such as financial institutions and municipalities into the Texas and Western markets.

We also announced the opening of our representative office in Shanghai to provide networking services for U.S. customers seeking to expand or explore business opportunities in China.

Wealth & Institutional Management continued to grow and contributed nicely to non-interest income in 2006.

In addition to the sale of our stake in Munder, Wealth & Institutional Management enhanced the delivery of advisory services through Comerica securities and introduced Executive Asset Management Suite, a product package specially designed for owners and officers of companies that are Comerica business clients.

During 2006 we continued to actively manage our capital and to return excess capital to our shareholders through our share repurchase and dividend programs. 2006 marked our 38th consecutive year of annual dividend increases.

Additionally, over the course of the year we repurchased 6.6 million shares for a total of $383 million.

Our total payout to shareholders in 2006, including dividends and share repurchases, was 97%, which excludes the gain on the sale of Munder.

Looking at the year ahead in 2007, our strategy for success is to continue our strong focus on growth, balance, and relationships.

While we expect to see a competitive environment for deposits and loan pricing, we anticipate strong loan growth, particularly in our fastest growing markets, solid credit quality and controlled expenses.

We see a continued opportunity to expand our business in our high growth markets.

In 2007 we expect to open approximately 30 new banking centers at sites that provide a mix of small business, middle market companies and affluent households and where there are wealth management opportunities.

Nearly all of these new banking centers will be in our high growth markets.

The economic outlook for both California and Texas is positive, and we intend to capitalize on the growth opportunities in these markets in the year ahead.

We also will continue to leverage our leadership position in Michigan.

At this time, I'll turn the call over to Beth.

Thank you, Ralph.

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

Turning to Slide 3, as Ralph indicated, we are pleased with the loan growth and credit quality we achieved in the fourth quarter.

On an annualized basis average loans, excluding the Financial Services Division, increased 5% led by a 16% increase in Florida, 15% in Texas, and 10% in the West.

The Midwest and other markets were down 1% as we continue to be very selective given the Midwest economic environment.

Credit quality continued to be solid reflecting the improvements we have made in our risk management tools over the last several years.

As you can see on Slide 4, we have had similar positive trends for the full-year as we saw in the fourth quarter including continued good loan growth and excellent credit quality.

Revenue from continuing operations increased 2% after adjusting for several items which I will discuss in more detail in a moment.

Also an important difference to note in the full-year analysis is the increase in the provision for credit losses from a negative provision of $29 million for 2005 compared to a positive provision of $42 million for 2006.

Turning to Slide 5, we outline the major components of our fourth quarter and full-year results compared to prior periods.

Today we reported fourth quarter 2006 earnings per share from continuing operations of $1.16 compared to $1.20 in the third quarter.

These include a number -- these results include a number of items which I will review in a moment.

Total earnings per share for the fourth quarter were $1.87 and included an after-tax gain of $108 million, or $0.68 per share from the sale of Munder, as well as Munder's earnings from operations of $0.03.

Munder was reported as a discontinued operation in all periods presented.

Details of the Munder transaction can be found in the appendix to these slides.

I would like to point out that in the fourth quarter non-interest income reflected positive trends in fee income with increases noted in investment banking, fiduciary and commercial lending fees.

Also, non-interest expenses, excluding the certain items which I will discuss in the next slide, were up due to an increase in contract labor costs associated with technology related projects and increased severance.

This was partially offset by a decrease in employee benefit expense and net gains on the disposal of other real estate.

Employee levels, excluding Munder, increased less than 1% year-end over year-end and only 1% quarter-end over quarter-end even as we have added new banking centers.

Slide 6 lists the diluted earnings per share impact of certain items that were included in continuing operations.

Details of the impact on the income statement are included in the appendix.

Specifically included in the fourth quarter was the previously announced settlement of a Financial Services Division related lawsuit of $0.19 per share.

Also, a charge to tax and tax related interest reserves totaling $0.19 per share was recorded in the fourth quarter.

As previously disclosed in SEC filings, we are having ongoing discussions with the IRS regarding the disallowance of benefits related to a series of loans to foreign borrowers.

The gain on the sale of Munder was included in our performance-based compensation calculations and resulted in an incremental compensation of $0.04 per share.

In previous years, negative Munder related items decreased compensation.

As shown in the last slide in the appendix, the Munder related special charges during the 2001 to 2006 period fully offset the gains recognized in 2005 and 2006.

I'd also like to point out that overall incentive expenses for the full-year, including this item, were down from 2005 levels.

Finally, Comerica made a $0.04 per share contribution to the Comerica Charitable Foundation in the fourth quarter.

In sum, our assessment is that there is a positive trend in Comerica's operating performance excluding the items I just described.

As outlined on Slide 7, net interest income of $502 million was relatively unchanged.

The net interest margin decreased 4 basis points to 3.75% primarily as a result of competitive deposit pricing, a change in deposit mix to higher cost deposits, and loan growth in excess of deposit growth.

This was partially offset by the positive impact of lower average low rate Financial Services Division loans and maturities of interest rate swaps which carried a negative spread.

Average loans increased $443 million to $48.6 billion due to increases in average loans in technology and life science, $140 million, middle market, $171 million, and dealer, $123 million.

Related to deposits, while rates remained very competitive, we were able to lower deposit rates selectively toward the end of the fourth quarter.

Some of you have been wondering if we are planning to restructure our securities portfolio.

We do not have plans to take such an action largely because of the small size of our portfolio at 6% of total assets at year-end, we do not have a need to reduce this portfolio.

Moving to the balance sheet and Slide 8, compared to the prior year, average loans, excluding the Financial Services Division, increased $4.2 billion, or 10%.

We are continuing to make progress toward our goal of achieving more geographic balance with Texas, Florida, and the Western markets accounting for 48% of total loans compared to 45% a year ago.

On an annualized linked quarter basis as detailed in the appendix to these slides, average loans increased 5% in the fourth quarter led by 15% in Texas and 10% growth in the West.

These growth rates exclude Financial Services Division loans.

Slide 9 provides detail on line of business loan growth excluding the Financial Services Division.

All commercial business lines experienced growth in the fourth quarter compared to the same period last year.

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

Compared to the prior year, the fourth quarter increase in specialty businesses was primarily due to increases in the energy portfolio, $360 million, and technology and life sciences, $254 million.

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

Good morning.

Credit quality continued to be very good in the fourth quarter.

I'd like to start by addressing each of our major markets.

Loan quality in the West has been very good.

We experienced a net recovery of $2 million in the quarter.

We continue to watch the real estate portfolio closely, and while there are some signs of softening, the issues are manageable.

Loan quality in the Texas market continues to be outstanding with all key credit metrics strong and stable.

In the Midwest we are seeing a continued slowdown in both the manufacturing and real estate sectors.

As a result, credit quality has deteriorated slightly, however, our overall metrics remain solid.

We continue to take a proactive approach in dealing with the current economic climate.

I'll touch briefly on the consumer segment which is relatively small, representing only about 8.5% of our total average loans.

While it continues to perform within acceptable credit parameters, we have seen some stress in our Michigan portfolio, particularly in home equity.

This was addressed in the third quarter when we provided additional reserves in light of industry conditions.

Net credit related charge-offs remained very low at $23 million, or 19 basis points of average total loans.

We have a $74 million portfolio of loans related to manufactured housing located primarily in Michigan and Ohio.

In the fourth quarter we made a decision to sell these loans and they were transferred to held for sale.

This portfolio required a $9 million charge-off to adjust the loans to estimated fair value.

Excluding this item, net credit related charge-offs would have been only $14 million, or 12 basis points of average loans.

Non-performing assets were 49 basis points of total loans and other real estate, and our watch loans remained unchanged from last quarter at 5.1%.

Finally, Comerica's allowance for loan losses, which is billed credit by credit at the end of each quarter, was 1.04% of loans and 213% of non-performing assets.

While both ratios are down from the third quarter, we are comfortable with these levels given our detailed analysis of the loan loss reserve which I'll discuss on the next slide.

Slide 11 outlines the changes we made in our loan loss reserves in the fourth quarter.

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

The increase in the standard reserve was a result of a slight deterioration of commercial loans particularly in the automotive supplier and real estate sectors in Michigan.

This was offset by the reduction of our reserves required for our manufactured housing portfolio which, as I just mentioned, has been transferred to held for sale.

Turning to the standard incremental reserve, again this quarter we increased the reserve allocated to our automotive supplier portfolio due to our stress testing analysis of this segment.

And this was partially offset by a reduction in other industry segments due to better metrics demonstrated for those specific industries.

The unallocated reserve was unchanged.

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

In the fourth quarter we had a negative provision for credit losses on lending related commitments of $4 million as compared to a negative provision of $5 million in the third quarter.

The negative provision was primarily due to improvements in trading price of unfunded commitments for certain credits in our auto related manufacturer portfolio.

I'd like to point out again that 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 nameplates.

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, we continue to proactively manage it to a lower level, and outstandings have decreased 19% since the end of 2005.

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

In addition, non-performing loans and net charge-offs were lower in the fourth quarter in comparison to the third quarter.

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

In 2007 we plan to further reduce our non-dealer automotive exposure.

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

Almost two-thirds of the commercial real estate portfolio are 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 less than $1 million.

The non-owner occupied portion of the portfolio includes both local and national real estate developers, residential development, and mortgage bankers.

This portfolio is geographically diverse and continues to perform well despite a modest increase in non-performing loans.

In particular, a few of our longstanding customers have encountered project specific issues that they are working through.

As you may recall, we took additional reserves in the third quarter to address the difficult industry conditions.

Now I'll turn the call back to Beth.

Thanks, Dale.

Slide 14 details average deposits by line of business.

Total deposits were $43.2 billion in the fourth quarter, up slightly from the third quarter.

Excluding the Financial Services Division and institutional CD issuance, line of business deposits were up approximately $450 million, or 1% which is in part seasonal.

Personal banking, $130 million, middle market, $101 million, and small business banking, $97 million, accounted for the bulk of the increase.

On a geographic basis average deposits on a quarter-over-quarter basis were up 3% in the Texas market and 5% in the Western market excluding the Financial Services Division.

Non-interest-bearing deposits account for almost 30% of our average total deposits.

Excluding Financial Services Division, which I will discuss on the next slide, we saw a slight increase in non-interest-bearing deposits in the fourth quarter.

Spirited competition for bank deposits continued in the fourth quarter.

Toward the end of the quarter we experienced some level of competitor reductions in all markets we operate, and we were able to selectively reduce rates, particularly in Michigan.

From a time deposit perspective, the Midwest is generally the most competitive across products and balanced tiers.

Concerning other interest-bearing instruments, price differences continue to exist across our geographic markets, however, their relative differences have narrowed.

On Slide 15 we provided an update to our Financial Services Division business.

While the continued cooling of the California housing market caused balances to decline, the decline was less than we expected.

Non-interest-bearing deposits decreased $100 million in the fourth quarter.

Interest-bearing deposits, which bear interest at competitive rates, were also down $100 million in the fourth quarter.

Related average loan balances were down approximately $200 million to $1.9 billion in the fourth quarter while customer services 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.

Using the November data as compared to one year ago, the national index for mortgage applications for refinance is up about 16%.

The seasonally adjusted index of California existing single-family home sales is down about 22% and the median monthly prices for existing home sales in California is up about 1%.

Both the refinance index and the California home sales index has seen some improvement lately, however, we remain cautious.

Our outlook for full-year 2007 for the Financial Services Division is the following: average non-interest-bearing deposits are expected to decline about 10 to 15% from the fourth quarter 2006 level of $4 billion.

This is in line with the expectations that the housing market will remain relatively depressed.

Average loans are expected to continue to fluctuate with the level of non-interest-bearing deposits.

Slide 16 provides an update on the progress of our banking center expansion.

Since our initial three-year banking center expansion began in 2004 we've opened 60 banking centers, up from our original target of 50.

We opened 25 banking centers in 2006, and are targeting to open about 30 new banking centers in 2007.

More than 90% of our new banking centers will continue to be opened in our high growth markets of California, Arizona, Texas and Florida.

Deposits attributed to our new banking centers now total almost $800 million, up from the $700 million that we reported in the third quarter.

These new deposits are well distributed with 52% generated by the Retail Bank, 40% by the Business Bank, and 8% by Wealth & Institutional Management.

The new banking center expenses for the full-year 2006 were $30 million, up from $15 million in 2005, and we expect about $60 million in new banking center expenses in 2007.

Slide 17 provides our expectations for the full-year 2007 compared to full-year 2006.

Consistent with our 2006 performance we anticipate average total loan growth for the year to be in the high single-digit range excluding Financial Services Division loans.

Growth in the Western and Texas markets is expected to be low double-digit with Midwest and other low single-digit.

The average full-year net interest margin is expected to be about 3.75%, consistent with the fourth quarter level.

It is our belief that the Federal Reserve will not change rates this year.

Also, we believe that the positive impact of maturing swaps will be offset by the expectation that loan growth will exceed deposit growth.

Full-year credit related net charge-offs, which encompass both loan losses and credit losses on lending related commitments, is expected to be about 20 basis points of average loans, and we expect provision for credit losses to be modestly in excess of credit related net charge-offs.

We anticipate low single-digit growth in non-interest income excluding the 2006 effects of the Financial Services Division related lawsuit settlement and the loss on the sale of the Mexican bank charter.

We expect low single-digit growth in non-interest expenses, excluding the provision for credit losses on lending related commitments.

Also in the first quarter of 2007, we plan to reclassify interest on tax liabilities from non-interest expenses to the provision for income taxes and thus have excluded it from our outlook for non-interest expenses.

In sum, we believe we have good momentum particularly in our high growth markets and expect that the solid credit quality we have experienced over the last couple of years will continue.

Furthermore, we remain diligent in controlling expenses as we ramp up our banking center expansion program.

On the final slide, Slide 18, we provide a little more color behind the term "active capital management", which is a term you have heard us use in the past.

But before I review our capital strategy, I would like to discuss three new accounting standards that have an impact on capital.

First, shareholders equity was reduced on December 31, 2006 by a $209 million after-tax charge associated with the adoption of the new accounting standard on pension and post retirement plan accounting, otherwise known as FAS 158.

This is down from the $290 million estimate that we included in our third quarter 10-Q due to an increase in the discount rate used to value the pension obligations.

The banking regulators recently issued an interim decision indicating that the effects of this new standard should be excluded from the calculation of regulatory capital ratios.

We are mindful that this might not provide permanent regulatory capital relief.

If the regulatory decision is reversed and the adjustment to equity was included in the calculation of the regulatory ratios, our Tier 1 capital ratio would be reduced by about 25 basis points.

Second, on January 1, 2007 we adopted FAS 13-2, which relates to accounting for income from leverage leases, and FASB Interpretation No. 48, which relates to accounting for uncertain tax positions.

In the first quarter of 2007 we estimate we will record a non-cash charge to equity of approximately $49 million which has the effect of reducing our Tier 1 capital ratios by 7 basis points.

Now, turning to our capital strategy, I'd like to point out that our stock has a very attractive dividend yield targeting about a 45 to 50% payout supplemented by an active share buyback program.

The average payout ratio for the past five years, including dividends and share buyback, was 90% excluding the gain on the sale of Munder in 2006 and Framlington in 2005.

We have continued to enhance our tools to manage and measure risk which includes our assessment of capital adequacy.

As a result, we've refined our capital guidelines.

We are reducing our Tier 1 common ratio guideline range by 50 basis points to 6.5 to 7.5.

We are also adding a Tier 1 capital guideline of 7.25% to 8.25%.

Additionally, with the development in the capital markets of equity-like securities we would envision this type of security playing a larger role in our capital base over time.

As a result, we believe our approach to capital management and our new capital guidelines will lead to a more cost effective capital base and therefore, improve shareholder returns.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Gary Townsend of Friedman and Billings.

Good morning, Ralph, Beth and Dale.

How are you?

Good morning.

Good.

Congratulations on a good quarter.

Do you have any -- it was a noisy quarter, though, and of course the gap of $1.87.

Do you have a view as to operating EPS was?

You know, I think, Gary, a good assessment would be to take the items that we detailed in the quarter in the press release specifically related to the Financial Services Division.

So I think really looking at the quarter in taking those items $0.19 related to FSD settlement, the negative $0.19 related to the tax adjustments, and then there's another $0.08 that relates to the performance based compensation related to Munder and the Charitable Foundation.

Yes, I understand that.

Using those we come up with $1.24.

Does that seem right to you?

That would be what it would seem to be.

Let me ask with regard to just credit.

That seems to be a continuing concern of investors.

Dale, you mentioned your migration analysis and that that generally shows a favorable picture.

Could you talk about the auto floorplan loans and do you see any changes in the dealerships with respect to credit quality as you look at the migration analysis and other data that you have?

No.

I see that business as continuing to be, to reflect stellar credit performance.

It's been a great growth business for us as you know, and as I indicated, a couple of things, one, two-thirds, 70% of what we've got tends to be out of the Midwest and the West and so forth, and it tends to be two-thirds to 70% to foreign nameplates, but even those businesses we have here, the dealer business we have here continues to perform very well, so the migration data, the credit metrics around that business are strong.

Thank you for your comments.

Thank you.

Your next question comes from the line of John McDonald of Banc of America.

Hi, John.

Good morning, John.

Beth, could you give us a little color on the factors that are likely to affect the margin in '07?

You've given the outlook pretty flat with the fourth quarter.

Maybe just talk a little about the swaps and loan growth versus deposit growth and what factors are positive and negative on the margin next year.

Yes.

I think in my comments really referenced the key drivers on that, really taking the fourth quarter level of 3.75 and looking out and saying that a positive contribution to the margin this year will be obviously the swap maturities.

We have $3 billion of swaps maturing that are, have carried a negative spread a little in excess of 200 basis points.

So that's a primary positive driver.

The offset is the loan growth that we mentioned, high single-digit average loan growth excluding FSD will be in excess of deposit growth.

And so it's really those factors that kind of combine and offset each other to produce kind of the same level we saw in the fourth quarter.

Okay.

And just a piggyback question.

There was a lot of issues around taxes this year.

Any help on just what would be a normal tax rate for you guys going forward?

Yes, for '07 we're saying 32%.

Okay.

And then just a question for Ralph.

Does the additional thoughts today on capital, does that affect the way you think about acquisitions at all?

No.

You know, we've said all along that we continue to look for opportunities as long as those opportunities align with our internal strategy.

And what I mean by that is in the markets that we're currently in or an adjacent market, and that it doesn't take away from the momentum that we've built in that internal strategy, so in other words, it would be an add-to, and then of course all of the returns would have to be in line.

Okay.

Thank you.

Thank you.

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

Good morning, everyone.

Good morning, Manny.

Just a point of clarification on your capital targets.

The way that you present Tier 1 common on Slide 18 of the presentation, does that exclude the FAS 158 adjustment that you had discussed?

You know, the -- when we think about this as it relates to core equity, and we have to be mindful as we're going forward and dealing within these guidelines about the fact that the regulator's decision related to the treatment of FAS 158 is an interim decision, so is does factor into our thinking, but having said that, the reality is we are at the very high-end of the new range that we have put out.

We're at 7.5% estimated at the at the end of the year, and that's at the high-end of the new range we have, so I think we've continued to still have a lot of flexibility to repurchase shares.

Okay.

So the 7.51 excludes that mark or includes that mark?

Sorry, I'm a little bit dense.

I'm sorry.

It includes because we, the whole industry, was granted regulatory relief.

It includes -- it excludes an adjustment related to the $209 million.

Okay.

So worst case scenario you're at 7.26.

Yes, exactly.

It's a 25 basis point change.

And so even with that change we are at the higher end of the range that we put out there.

Okay.

And it seems -- I am sorry, go ahead.

No, I was done.

Sorry.

Okay.

It would seem to be safe to assume that since you mentioned the non-equity forms of capital available in the market, that you're looking fairly actively at them now, and we might expect something in the relative near future, can we assume if that happens that you would plow most of that back into a buyback?

You know, I think in looking at this we would be over time having these be a more active part of our capital structure and so it's hard to predict when that might be.

I would make a couple of comments, though.

We do actually have given notice at the end of last year to call a small trust preferred of $55 million that was, we got as part of the acquisition of Imperial.

So that is, we are going to call that in June of this year.

Also, we had $350 million of preferred last year become callable, and it will likely be attractive to do that sometime, so between those two, we are thinking about those things.

Okay.

I appreciate it.

Thank you.

Thank you.

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

Hi.

Good morning.

Good morning.

Just a quick question back on the swaps.

Will you be sort of reinvesting any of that into new swaps or should we just assume the full benefit of the 200 basis points on $3 billion additional?

At least under present our present outlook for interest rates and our balance sheet dynamics would, at least at this juncture, say that we would not be putting on new ones.

Okay.

And then what kind of protection do you still have on the balance sheet again Fed easing and how would you sort of be protecting your loan book?

Well, I think as we every month simulate our outlook of the dynamics of our balance sheet and an interest rate outlook, that, depending on our outlook can change, and therefore would cause us to be putting in appropriate, whether it is additional swaps or other kinds of tools that we would use to protect for that.

Right now, as I indicated previously, our expectation is there will be no change in the Fed rates this year.

Actually, we've been on that path of that assumption for a long time, and actually I think the market is coming around to that.

Okay.

And I think the change in mix, Beth, in our balance sheet has made it less asset sensitive that it was in the past, so that has given that rate scenario, if I am not mistaken, doesn't show the need for additional swaps.

And.

Sorry, go ahead.

No, that's right.

And as I said, we factor all that in and look at it on a monthly basis as part of our out go process.

It's not a position of taking higher risk.

Okay.

And the, after the $3 billion expires in '06, what do you have remaining, anything or is that --

Oh, yes, we have swaps out into '08, another $3 billion, and then really nothing after that.

Okay.

And then Ralph, I think last time I talked to you, you gave some good color on the Michigan economy.

You had mentioned that the economy had actually started contracting, and I'm wondering if you're seeing any relief or if trends sort of continuing the same direction?

The Michigan economy is still in that kind of flat to down scenario, and I think we're looking basically for it to be in that range.

Our economist, Dana Johnson, is up slightly to down slightly through the next year.

Okay.

That's helpful.

Thanks so much.

Your next question comes from the line of Terry McEvoy of Oppenheimer.

Hi, Terry.

Good morning, Mark and Beth.

When you talked about fee income you mentioned was it higher investment banking fees or investment services fees, and if it was investment banking can you maybe just expand on that, please?

Yes, we have a small group that does investment banking kinds of work for, related primarily to middle market kinds of customers, dispositions, acquisitions, those kinds of work, and they just had a terrific quarter.

And that's the real driver for that.

[Inaudible] side since there wasn't similar actions taken in Q4 should we read into that that you're seeing some stability on the land in residential construction business?

Terry, you cut out in the beginning of your question.

Could you repeat it?

Oh, sure.

Sorry.

In the third quarter there was a higher reserve component taken for the Michigan land and commercial residential, commercial real estate portfolio.

Since that did not happen in the fourth quarter, should we assume that then you see some stability in the Michigan real estate market?

Well, I think a couple of points there.

I would say that we took a hard look particularly at the western Michigan market in particular, and that market has, at least to date, continued to perform satisfactorily on the real estate side.

Still soft but performed a little more satisfactorily.

On the southeast Michigan side, we were able to enter into some arrangements, as I indicated, with some of our developers in terms of forbearance arrangements and that strengthened some of the portfolio that was there so on deal specific kinds of issues there was some improvement.

But I still think we're seeing softness in the real estate market here locally and likely will continue to see that, so there was really not that much change in terms of the reserve on the stressed real estate portfolio.

$74 million of manufactured housing loans in Michigan and Ohio.

Is that the total portfolio?

That is.

Okay.

Thank you.

Thank you.

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

Good morning, folks.

Just to circle back on the swap book confirm that in '08, Beth, isn't it $3.2 billion with a negative carry of 125 points?

Is that still where you are?

That's exactly it.

On the FSD deposit base can you give me any color there on how much of those deposits are outside of California, how that's changed over the last year or so as you are attempting to better diversify that business?

I would say almost all of it is in California because it's only in recent times that we have hired people actually in Texas and also in Michigan to pursue opportunities with the title and escrow customers there.

So it's almost exclusively predominantly in California.

Okay.

And on the, Dale, on the $3.4 billion construction portfolio, how much of that is in Michigan, how much of it is in California and can you give us any color, I guess, on developer stamina in the markets in California?

Well, a couple of things.

One, a little over 40% of it would be located in our Western market.

Texas would have maybe 20% or so of that, and then spread out between Florida and Michigan, so not that big a component actually as in Michigan and, in fact, it's come down a bit as you might expect.

In terms of stamina or strength, we're still seeing a lot of support in the Western market and Texas market in terms of absorption.

I think that's stabilized.

I think we're seeing some good projects there, and what we've got there tends to be very strong.

Within this market we still have developers who support their projects and support our loans, and we've come to terms, as I indicated, with a number of them, but it will continue to be a challenge for us particularly here in southeast Michigan.

Okay.

Thanks for the color.

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

My question is for Dale.

Dale, in terms of the charge-off outlook, which is fairly stable with charge-off rates in the fourth quarter, if you could give a little more color on your expectations for stability.

I mean it appears across the bank that there's a little bit of deterioration across portfolios in the fourth quarter and why you feel that [if] loans continue to deteriorate, why you think it will be stable from here?

Sure.

A couple of things.

In terms of what we're doing in managing our portfolio, we talk a lot about our credit tools and other sorts of things.

If you look at where our current watch list stands, we indicated it's stable with the third quarter at 5.1% of loans, so that gives me some reason for optimism.

As we look at the various portfolios and we have a very active process of looking at those portfolios frequently, we don't see any significant issues within those portfolios.

As you know, we have a quarterly credit quality review process that we look at all of our problem deals through that process, and again, everything I see there for the moment seems to be at least stable if not improving, and while there would be some selected portfolios as auto and commercial real estate in this market that will challenge us, I think we've demonstrated that we can manage those very effectively.

So I feel pretty good about where we are today and what we've been able to accomplish on what I think are the most troubling of the portfolios, that being auto and commercial real estate.

And I would add to that that of the 19 basis points in the fourth quarter that 7 relates to the manufactured housing decision.

Right.

So it really, that's kind of a one-time kind of look at that, so that's, I think, a factor to be considered.

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

Good morning, guys.

Good morning.

Can you give us a little more detail in terms of your deposit growth expectations?

I understand your underlying assumptions for '07 is that loan growth will exceed deposit growth but any other additional color would be helpful.

I think a key element, obviously, is the outlook we gave for Financial Services Division, so in total the total deposit levels are obviously impacted by our assessment that those DDA levels of $4 billion in the fourth quarter could decline 10 to 15% this year.

So we do expect underlying growth elsewhere, particularly as our new banking center expansion continues to increase, and as we talked about earlier, we're up $800 million in deposits from when we started with those and up just $100 million in the last quarter.

So we still see through our other customer initiatives that we, our expectations we will be growing other deposits.

The question is whether that will be able to offset the decline we're expecting in FSD.

And do you currently expect that?

I would say it's going to be a challenge, but we're working on hard on it with all the initiatives we have underway.

Okay.

Thanks.

Next question was, you mentioned in your comments, Beth, that in terms of the deposit funding costs in different regions narrowing a bit, I was curious if you could elaborate a little bit on that?

Yes.

I just think there has become more competitive activity I think in the California market than there had been.

Texas and Michigan were really pretty active, Michigan being the most, so some narrowing of that gap, particularly related to California relative to the other markets, so that was primarily the thinking.

Okay.

Thanks.

And then the last question I had was in terms of the branch openings that you mentioned, are there any branch closings that you targeted?

You know, we regularly look at consolidating banking centers, optimizing our footprint and as I think you're aware, both last year and the prior year we closed about 25 banking centers in Michigan, so we will continue to on a regular basis to look at that.

Okay.

Thank you.

Your next question comes from the line of Chris Mutascio of Credit Suisse.

Hey, Beth.

How are you?

Good morning, Chris.

A quick question and forgive me because I'm going through some of the stuff here and also three or four other banks reporting.

On the operating expense side $457 million in the quarter, if I back out Munder, some excess expenses at Munder at $9 million, $10 million in charitable contributions and roughly $14 million in tax related interest costs, I get to about a run rate of 424 which still seems a bit high.

Am I missing something in there, especially in the salary expense that was a bit an anomaly during the quarter?

Well there were a couple of other items I would add to your list.

Okay.

One would be there was increased severance in the quarter of about $4 million.

Okay.

The other is we did, I mentioned previously, that we have given an indication that we're going to be calling a trust preferred $55 million issue in June.

We've already given notice of that last year in that we incurred a penalty related -- a premium related to that, that was $3 million.

So those are, I think you captured the rest between the foundation, the interest on tax liabilities, the Munder incentive, severance and the preferred charge.

Great.

Thank you.

And again, I apologize if you went over that beforehand.

No, that's fine.

Take care.

Your next question comes from the line of Paul Delaney of Morgan Stanley.

Good morning, Paul.

Good morning.

Paul, your line's open.

My apologies.

Two quick questions.

One, I realize you manage your line book from quarter-to-quarter, but are there any other sort of portfolios like the manufactured housing that are on the cusp of perhaps being sold perhaps in the next quarter or two that might have deteriorating credit fundamentals?

That portfolio, the manufactured housing we basically stopped making those loans back in 2004, so that's been a liquidating portfolio that we just decided to sell.

Other than that, at this point we don't really have anything in terms of a portfolio.

Okay.

Great.

And then just for Beth.

Beth, I noticed that there was strong growth in foreign office time deposits and institutional CDs.

Was there anything driving that in particular?

The institutional CD issuance is a function of where we stand on asset growth relative to underlying core deposit growth, so it was an indication of continuing to fund the balance sheet.

We did take down, as you see in the data, our overnight short-term borrowings were down a little, also, which we think is a good thing, and so part of that would be termed out via the institutional CD issuance.

Okay.

And foreign office time deposit?

Nothing big going on there.

There are things that fluctuate quarter-to-quarter.

Great.

Thank you.

I think that was our last question.

I would like to thank all of you for joining us on the call today and for your continued interest in Comerica.

Please feel free to call if you have any additional questions, and I hope everyone has a good day.

Thank you.

This concludes today's conference.

You may now disconnect.