Comerica Inc (CMA) 2007 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to Comerica's first quarter 2007 earnings conference call.

After the speakers' remarks, there will be a question-and-answer session.

[OPERATOR INSTRUCTIONS] .

Thank you.

Ms.

Persons, you may

Thank you, Megan.

Good morning and welcome to Comerica's 2007 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 own Website.

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

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

Now, I'll turn the call over to Ralph.

Good morning.

The financial results announced this morning highlight our positive financial performance in the first quarter.

Our net interest margin increased 7 basis points from the fourth quarter of 2006.

Credit quality was solid across all markets and expenses were well controlled.

Average loans increased 6% on an annualized basis, with 15% growth in the western market, excluding the Financial Services Division.

And 5% growth in the Texas market, with the Midwest market down 1%.

The Texas loan growth was impacted by paydowns in January and rebounded in February and March with low double digit annualized average growth rates.

Net charge-offs were lower and nonperforming assets were virtually unchanged compared to the fourth quarter of 2006.

We continued to manage our credit risk effectively, particularly the automotive and commercial real estate portfolios.

Our people and the enhanced risk management tools they use have helped us to maintain solid credit quality in all markets.

We continued to execute our strategy of exporting our relationship-based model and expertise to high-growth markets.

We opened nine new banking centers in the first quarter, including four in Texas, three in California, and two in Michigan.

We plan to open about 21 more banking centers in 2007, all of them in our high growth markets.

The deposit environment in the first quarter remained competitive.

We were able to maintain deposit levels while carefully managing rates.

We have obtained more than $860 million in deposits from our new banking centers since beginning our banking center expansion program in late 2004.

As expected, we saw decreased activity in our Financial Services Division in the first quarter as a result of the continued cooling of the California housing market.

On March 6, we announced the relocation of our corporate headquarters to Dallas, Texas.

The decision to relocate our headquarters will position our Company in a more central location with greater accessibility to all of our markets.

And the additional resources in these high-growth markets, we believe, will lead to accelerated growth for Comerica.

According to U.S.

Census Bureau projections, 2/3 of all Americans will live in the southern and western United States by 2030, with 30% in just three states, Texas, California, and Florida.

These are all great growth markets for Comerica.

Comerica has had a presence in Texas for almost 20 years.

We currently have 72 banking centers in Dallas, Houston, and Austin, and we expect to significantly increase our growth in the Texas market going forward.

Comerica will maintain a significant presence in Detroit, remaining one of Southeast Michigan's largest employers with more than 7,300 employees in the state.

Tom Ogden, a 36-year veteran of Comerica, was named our Michigan Market President.

We have carefully monitored reaction to our announcement, particularly in Michigan and Texas.

As customers in Michigan realize that nothing has changed in terms of the people they deal with, their accounts, or the local lending and credit decision making; we believe that most are coming to understand our announcement.

Our employees in Michigan have done a terrific job in helping our customers understand the change.

We are already beginning to see the benefits of our announcement in Texas as customers come to appreciate being associated with a banking Company that will become the largest headquartered in the state.

We believe this will be an important competitive advantage for us going forward.

We will be advancing our strategy to further accelerate our growth in the Texas market, including the addition of even more new banking centers and relationship managers than currently planned and look forward to sharing greater details on these initiatives early next year.

We expect the costs associated with the relocation to be about $15 to $20 million over a three-year period.

Beth will provide additional details in her remarks.

Looking at the rest of the year ahead, we will continue our strong focus on growth, balance and relationships.

While we expect to see a continued competitive environment for deposit and loan pricing, we anticipate 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.

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

Thank you, Ralph.

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

Turning to slide three, we present an overview of the financial highlights from the quarter.

As Ralph indicated, we are pleased with the continued loan growth we are achieving in our growth markets.

On an annualized basis, average loans, excluding the Financial Services Division, increased 6%, led by a 15% increase in the West.

Texas loan growth of 5%, impacted by paydowns in January, rebounded in February and March, with low double digit annualized average growth rates.

The Midwest market was down about 1%, due to the slowing loan demand in the commercial real estate sector, the continued managed reduction of our automotive supplier portfolio, and the fact that we continue to be very selective across all industries, given the Midwest economic environment.

Net interest margin increased 7 basis points in the first quarter, reflecting stable loan yields and a decline in deposit rates.

Credit quality continued to be solid.

Nonperforming assets were virtually unchanged from the fourth quarter.

And net credit-related charge-offs as a percentage of average total loans were 16 basis points as a result of our strong credit culture and our sophisticated suite of credit management tools.

Expenses were well-managed.

Employee levels decreased slightly in the first quarter, even as we opened nine new banking centers.

We accelerated our stock repurchase activity in the first quarter and repurchased 3.4 million shares, partly as a result of the successfully $500 million trust preferred securities issuance completed in mid-February.

We expect our share repurchase activity for the remainder of the year will return to historic levels.

Turning to slide four, we outline the major components of our first quarter results compared to prior periods.

Today, we reported first quarter 2007 earnings per share from continuing operations of $1.19, compared to $1.16 in the fourth quarter.

Comerica sold its stake in Munder Capital Management in the fourth quarter of 2006 for an after-tax gain of $108 million or $0.68 per diluted share.

Comerica reports Munder as a discontinued operation in all periods presented.

Also, note that the first quarter of 2006 included a $27 million negative provision for loan losses, as compared to a $23 million positive provision recorded in the first quarter of 2007.

As outlined on slide five, the net interest margin increased 7 basis points to 3.82%, primarily as a result of stable loan yields and a decline in deposit rates.

Maturities of interest rate swaps, which carried a negative spread, provided a 4 basis point lift to the net interest margin.

The positive impact of lower average low rate Financial Services Division loans was offset by a decline in Financial Services Division noninterest-bearing deposits.

Average loans, excluding the Financial Services Division, increased $668 million to $47.3 billion, due to increases in average loans in dealer, $263 million; global corporate banking, $222 million; and private banking, $101 million.

Average earning assets declined slightly due to lower investment portfolio levels.

Deposit levels, excluding the Financial Services Division, held steady.

As far as interest rate sensitivity, we remain slightly asset sensitive.

Slide six shows noninterest income levels over the past several quarters.

First quarter noninterest income reflected positive trends in fee income, with increases noted in fiduciary income, brokerage fees, and card fees.

Noninterest income in the first quarter included $4 million in losses from principal investing and warrants, as compared to $3 million in income in the fourth quarter.

Fourth quarter 2006 noninterest income included the $47 million settlement of a Financial Services Division related lawsuit, as indicated by the gold portion of the bar in the chart.

Our outlook for noninterest income for the full year of 2007 is low single digit growth over a 2006 adjusted base of $820 million, which excludes the Financial Services Division related lawsuit settlement and the loss on the sale of the Mexican bank charter.

Moving to the balance sheet and slide seven.

Compared to the prior year, average loans, excluding the Financial Services Division, increased $3.7 billion or 9%.

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 44% a year ago.

On an annualized linked quarter basis, as detailed in the appendix to these slides, average loans increased 6% in the first quarter, led by 15% growth in the West, excluding Financial Services Division loans.

Texas loan growth slowed to 5% in the first quarter, as outstandings fell in January.

It has since rebounded with low double digit annualized average growth rates reported in February and March.

Slide 8 provides detail on line of business loan growth, excluding Financial Services Division.

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

While we continue to reduce our automotive supplier exposure and commercial real estate, loan growth rates have slowed significantly, particularly in the construction segment.

The increases in the middle markets, 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.

The first quarter of 2007 increase in specialty businesses compared to the prior year was primarily due to increases in the energy portfolio, $313 million, and technology and life sciences, $284 million.

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

Good morning.

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

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

Loan quality in Texas has been outstanding for quite some time and this quarter was no exception.

All key metrics are strong and stable.

We are starting to see some signs of slowdown as the economy shifts from very strong growth rates to merely strong growth.

The western market had net recoveries in the first quarter, as gross charge-offs were at modest levels and recoveries were unusually strong.

We continue to watch the residential real estate portfolio very closely, and while it has definitely seen a softening trend in demand, the issues continued to be very manageable.

In the Midwest, we continue to see a slowdown in both the manufacturing and real estate sectors.

Net credit-related charge-offs remained very low at $19 million or 16 basis points of average total loans.

Recoveries were very strong in the first quarter, totaling $18 million.

Last quarter, I mentioned that we were in the process of selling a $74 million portfolio of loans related to manufactured housing and that these loans were transferred to held-for-sale.

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

The sale was completed in the first quarter at the estimated fair value.

Nonperforming assets were unchanged at 49 basis points of total loans and foreclosed property.

Also, our watch loans were 5.3% of loans, a slight increase from the prior quarter.

Finally, Comerica's allowance for loan losses, which is built credit by credit at the end of each quarter, was 1.04% of loans and 214% of nonperforming assets.

There was virtually no change in these ratios from their fourth quarter levels.

On slide 10, we provide a breakdown of our commercial real estate portfolio.

Almost 2/3 of the commercial real estate portfolio are commercial mortgages for owner-occupied properties of our middle market and small business customers.

On slide 11, we provide a detailed breakdown by geography and project type of our commercial real estate line of business.

There was further detail provided in the appendix to these slides.

This portfolio includes both local and national real estate developers, primarily involved in residential development.

Our customer base consists of top-tier developers, with whom we have had long-standing relationships, some going back three or four generations.

We provided a breakdown by property type.

The portfolio is geographically diverse, with the largest exposure located in our western market, primarily California.

From a project type perspective, the portfolio is reasonably diverse with a concentration in residential projects.

We have held firm to our conservative underwriting standards throughout the cycle, including presale requirements and limits on speculative building.

In particular, we have seen a deterioration in Michigan.

However, overall, the portfolio continues to perform well despite a modest increase in nonperforming loans.

Slide 12 provides an overview of our consumer loan portfolio, which includes the consumer and residential mortgage loan categories on the balance sheet.

This portfolio is relatively small, averaging between 8% and 9% of our total loans.

We've broken the portfolio down into three categories.

The $1.7 billion in residential mortgages we hold on our balance sheet are primarily associated with our private banking customers.

A significant amount of the residential mortgages we originate are sold to a third party.

Home equity lines and loans, which are predominantly secured by second mortgages, comprise 38% of the portfolio.

And finally, the other category at 20% includes automobile, personal watercraft, student and recreational vehicle loans.

The performance of the consumer portfolio has been relatively stable.

The residential mortgage portfolio continues to perform very well.

In fact, we have not had a charge-off in this portfolio in several years.

We have seen a slight deterioration in the home equity portfolio and have established incremental reserves in the third quarter of last year.

I also want to emphasize that we are not in the subprime mortgage business.

Turning to slide 13, we have outlined a few characteristics of our home equity loan portfolio.

Roughly 3/4 of the portfolio consist of revolving home equity lines and the remaining 1/4 are amortizing home equity loans.

These loans were all originated by us as part of a full service customer relationship.

The quality of the portfolio is reflected in the solid FICO and loan-to-value statistics.

Slide 14 provides detail on the recent performance of the automotive portfolio.

Our dealer business represents over 2/3 of the automotive outstandings.

2/3 of this portfolio is located in the western market and 2/3 of the portfolio is with 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 nondealer automotive exposure, we continue to proactively manage it to a lower level and outstandings have decreased another 4% in the first two months of 2007 after declining 19% in 2006.

This portfolio now represents a little over 4% of our total loans.

Nonperforming loans were down, net charge-offs increased slightly in the first quarter in comparison to very low levels in the last few quarters and remain within acceptable ranges.

Of note, half of the net charge-offs in the first quarter were a result of a discretionary decision we made to sell commitments to further reduce our automotive exposure.

We plan to continue to reduce our nondealer automotive exposure.

Now, I'll turn the call back to Beth.

Thanks, Dale.

Slide 15 details average deposits by line of business.

Total average deposits were $42.6 billion in the first quarter, down slightly from the fourth quarter.

Excluding the Financial Services Division and institutional CD issuances, line of business deposits were up $223 million.

Personal banking, $186 million; and global corporate banking, $135 million reported the largest increases.

On a geographic basis, excluding the Financial Services Division, annualized average deposits in the first quarter, when compared to the fourth quarter, were up 7% in the West and 3% in Texas.

Midwest deposits continued to be stable.

Noninterest bearing deposit accounted for almost 30% of our average total deposits.

Excluding Financial Services Division, which I will discuss in the next slide, we maintained the level of noninterest bearing deposits in the first quarter, despite the fact that competition for bank deposits remains spirited.

We were able to selectively reduce rates in the beginning of the quarter, particularly in Michigan.

Overall, we experienced some level of competitor reductions for both time deposits and transactional accounts in all markets we operate.

Relative price differences amongst competitors have narrowed across all of our geographic markets.

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

Due to interest rate curve considerations, the time deposit durations remain very short as customers generally find the best rates at maturities less than 12 months, making these accounts acceptable substitutes for money market accounts.

We continue to see a mix shift between money market accounts to time deposits.

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

In line with our expectations, the continued cooling of the California housing market, as well as seasonal factors, caused balances to climb in the first quarter.

Noninterest bearing deposits decreased $503 million in the first quarter.

Interest bearing deposits, which bear interest at competitive rates, were also down $90 million in the first quarter.

Related average loan balances were down approximately $340 million to $1.6 billion in the first quarter, while customer service expense was unchanged from the previous quarter.

The level of noninterest bearing deposits in our Financial Services Division are impacted by many factors including interest rates, the competitive environment, the volume of mortgage applications, home sales, and home prices.

Using the February data, as compared to one year ago, the National Index of Mortgage Refinance Applications is up about 20%.

The seasonally adjusted index of California Existing Single Family Home Sales is down about 10%, and the median monthly sales price for existing homes in California is up about 6%.

Both the Refinance Index and the California Home Sale Index have been improving, however, we remain cautious.

Our outlook for full year 2007 for the Financial Services Division is the following.

Average noninterest bearing deposits are expected to remain at first quarter 2007 levels.

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

Average loans are expected to fluctuate with the level of noninterest bearing deposits.

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

Our banking center expansion colleagues were very busy this quarter, opening nine new banking centers and we hit a milestone when we opened our 400th banking center in March.

We are well on our way to meeting our target of opening about 30 new banking centers in 2007, up from 25 in 2006.

We plan to open about 21 more banking centers in the remainder of 2007, all of them in our high-growth markets.

Deposits attributed to our new banking centers now total almost $860 million, up from $800 million in December.

These new deposits are well distributed with 61% generated by the retail bank, 31% by the business bank, and 8% by wealth and institutional management.

Our goal is to have our new banking centers accretive within 18 months and we're meeting that target.

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

Slide 18 updates our expectations for the full-year 2007 compared to full-year 2006.

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

Growth in the western and Texas markets is expected to be low double digits and we have lowered our expectation for the Midwest to flat growth in light of the continuing challenging economy.

The average full-year net interest margin is expected to be about $3.75 to $3.80.

We continue to believe that the Federal Reserve will not change rates this is year.

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

Our net interest margin outlook has increased slightly in light of our expectation for slower loan growth.

Our outlook for credit quality remains unchanged.

We anticipate low single digit growth in noninterest income from a 2006 adjusted base of $820 million, which excludes the affects of Financial Services Division related lawsuit settlements and the loss on the sale of the Mexico Bank charter.

We expect flat noninterest expenses, excluding the provision for credit losses on the lending related commitments.

This outlook reflects anticipated 2007 costs associated with moving the headquarters to Dallas and tax-related interest in 2006, which is reclassified in the provision for income taxes in 2007.

We will continue our strategy of active capital management.

As I mentioned at the beginning of this call, we accelerated our stock buyback plan in the first quarter.

As a result of our successful trust preferred securities issuance, we generated $100 million in incremental proceeds in excess of planned preferred trust redemptions.

These excess proceeds were utilized to repurchase approximately 1.7 million shares.

We expect our share repurchase activity for the remainder of the year will return to historical levels.

In sum, we believe we have satisfactory loan demand in our growth markets and expect the solid credit quality we have experienced over the last couple of years will continue.

Further, we will remain diligent in controlling expenses as we ramp up our banking center expansion program and relocate our headquarters.

Turning to slide 19, I'd like to give you an update on the relocation of our headquarters to Dallas.

For our customers, suppliers and employees, it has been largely business as usual.

Our relationship management strengths served us well, as we reached out to customers to assure them they would not be affected by the move, as there would be no change to the Comerica team that serves them or to the products and services we provide.

Also, the reaction in Texas has been very positive.

As the largest bank holding Company headquartered in Texas, with a focus on accelerating growth in this market, we have already been able to open more doors of prospective customers.

We will be stepping up our growth rate through the addition of even more banking centers and relationship managers than currently planned.

I anticipate providing greater detail on these initiatives early next year.

Our cost estimates have not changed.

The relocation expenses will be about $15 to $20 million over the next three years, with about $10 million incurred in 2007.

These figures exclude the incentives we anticipate being provided by the state of Texas and the city of Dallas, which we estimate to be approximately $4 million.

As we have indicated, approximately 200 positions will be relocated to Dallas.

The affected employees have been notified and we expect a smooth transition over the next several quarters.

The senior executives are moving to Dallas by the end of the third quarter.

As Ralph described earlier, the relocation is a logical next step in accelerating our growth and balanced strategy.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Gary Townsend from Friedman, Billings, Ramsey.

Good morning.

All my questions have been answered.

Thank you.

Thank you, Gary.

Your next question comes from Steven Alexopoulos from JPMorgan.

Can you guys hear me okay?

Yes, good morning.

Beth, I was curious, of the $3 billion of the swaps that are maturing in 2007, what percent of those matured here in the first quarter?

There were $700 million that matured in the first quarter.

It was about -- under water, about 260 basis points.

So we have a remaining $2.3 billion maturing for the balance of the year at about 200 basis points negative spread.

Will that be fairly even, the maturities for the rest of the year?

Yes.

Okay.

I was just curious, on the outlook for expenses, which is basically flat, what's the strategy to keep expenses flat with the $60 million of costs related to the banking center expansion?

How's that going to work?

A couple of things.

I mentioned in the outlook for expenses that the '06 expense, of which we're giving the outlook for '07, includes interest on tax liabilities of $38 million.

And so, those interest on tax liabilities will not be included in the '07 expenses.

They instead will be in the provision for income taxes.

So when you're doing your math between the two years, there is a difference in treatment of the interest on tax liabilities, it's in noninterest expense for '06, but not in '07.

And so, that's part of it but we have -- but if you look at it, we are really, apart from the focus on the banking center investments we're making there, we're really -- if you look at a lot of the other line items on the income statement, a lot of good cost control on a lot of those.

So, it's really people related to the new banking centers and occupancy and equipment expense that goes with it.

Apart from that, we're working hard to maintain our employee levels and our costs.

And just a final question, was there any meaningful impact in the quarter from unions withdrawing deposits related to the headquarters move out of Michigan?

The -- in terms of customers' reaction in Michigan, as Ralph mentioned, we reached out a lot of -- to many of our customers and had I think a good communication that nothing is really going to change.

The people that they work with, the processes, the lending authorities, all of that will be the same and I think people are understanding that.

And we have not seen any kind of material impact from any reaction here in the Michigan market.

Great, thank you.

Your next question comes from Manuel Ramirez from KBW.

Good morning, everyone.

I have two quick questions.

One is -- actually, I think they're both for Dale.

One is on the commitments that were sold in the quarter.

Can you give us an indication of what the nature of those was?

What industry it was in?

I assume it's mostly auto still?

And then secondly, if you -- obviously credit quality has been stellar, but if we look at where the increase in NPA's has come from, it's come largely from the commercial real estate area.

If you could talk about, geographically, what you're seeing?

You mentioned the Midwest a little bit.

And whether or not you see any material loss content in those commercial real estate nonaccruals?

Thanks.

Sure, no problem.

In terms of the inflow that we saw to NPA's in the quarter, there's essentially one loan in the owner-occupied piece of commercial real estate in our middle market loan that's secured by the assets of the Company.

It's a loan that we're in the process of liquidating and we would expect that by the end of the year we would have fully liquidated the assets either by sale or however we may approach it.

It's also fully reflected in the quarter in terms of the nonaccrual, the charge-off on the provision.

So if fact, it was one middle market loan that happened to be primarily secured by commercial real estate.

So, that's really the nature of that particular issue.

The first question was --?

I'm sorry.

On the commitments that were sold.

I'm sorry, yes.

Just a continuation of our discretionary of, frankly, our discretionary strategy of selling unfunded commitments, particularly in the auto sector.

We have done that over the last few years to try to manage down our commitment exposures.

They're not utilized commitments.

In this case, they were totally unutilized.

But in order to manage that down to be more proactive, we continue to do that.

Great.

Thank you very much.

Your next question comes from Terry McEvoy with Oppenheimer.

You're now looking for essentially flat loan growth in the Midwest market.

Is that reflecting your decision recently to not grow the portfolio in the Midwest, or is that more a call on the Midwest markets in general?

Well, I think that's both.

The Midwest market has been, for the last couple of quarters, fairly flat to down.

And we've been, as Dale mentioned earlier, very careful in prospecting in the market and adding additional resources to grow loans here.

With the GDP expected to be down about 1% in Michigan, you would not expect to see growth in our loan portfolio typically.

Dale, do you have anything to --?

It's just, the opportunities are not as great, the competitive landscape continues still to be challenging.

So we're cautious, admittedly.

So, yes.

Just one other question.

Within the western market, there was the net recoveries of $5 million that you mentioned, Dale.

You mentioned there was a large recovery within that region.

Could you talk specifically or maybe provide gross charge-offs versus the recoveries?

Well, we can -- it's basically, we've, in the past, had a lot of loans that obviously we've charged off.

In this case they happen to be more entertainment related.

And we have actively worked the charged off loans as we always do.

In this case, we found some opportunities to monetize some of our older charge-off loans, took advantage of what was a good secondary market or a good market for that.

And basically, were successful in selling off the assets related to those charge-off loans.

Thank you.

Your next question comes from Heather Wolf from Merrill Lynch.

Good morning.

This question is for Dale.

On the nonperforming assets, it looks like you had a little bit of lumpiness with commercial improving and commercial real estate deteriorating.

Can you talk a little bit about the drivers behind that?

Well again, the one big change in the quarter was the one middle market loan happened to have a lot of different pieces to it and the gasoline distribution of gas stations and petroleum distribution.

So it was in the middle market, secured primarily by the real estate of the Company, so it was really an owner-occupied piece of real estate.

And we're in the process, as I indicated earlier, of liquidating those assets.

And we believe that this quarter properly reflects whatever charge-offs, provisions that we need to take on that.

So, I think, from time to time, you'll have things like that and we'll work our way on out of it as we have many times in the past.

That comes from the entertainment, credit -- no, that would have already been charged off.

Where did the improvement in C&I come from?

In terms of the rest of the nonaccrual numbers?

In nonperforming.

Well, it came across the board, primarily in our middle market related businesses nationally.

We had a number of opportunities to successfully exit through either refinancing or sale of companies a number of the names that were on the list in the fourth quarter of last year.

So we worked very hard to get those done in the quarter.

So we were able to reduce three or four of our larger nonperforming names without taking much of any hit.

So, it was a successful execution.

It really continues to demonstrate our strategy to be very active and proactive related to our credit management.

And I think that's what you saw in our quarter.

Great.

And then, on the margin, you increased your margin guidance but it still shows some compression from current levels.

I'm just curious what the primary driver of that is?

Is that just the loan growth outpacing deposit growth or is there something else going on there?

The outlook we gave earlier was $3.75, now we're saying $3.75 to $3.80, having seen the first quarter.

We would anticipate a relatively -- within that range, certainly for the rest of the year.

The key drivers for the margin this year versus last, if I look at full year, is really we see the benefits from the swap maturities that we spoke about earlier and offset though, largely by the loan growth outpacing deposit growth.

So, it's still pretty much the same scenario we had presented in January.

The difference is now in why we raised the outlook is because we see loan growth a little more tempered than we saw in January.

And so, that's the key driver for the outlook change.

Got it.

Thank you very much.

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

Good morning, guys.

I just had a quick follow-up question on the expense guidance.

Just so I'm clear, if we exclude the tax liability adjustment that you're talking about, is that -- would that equate to about what you were saying last quarter in terms of, I think it was, low single digit?

Yes.

In fact, last quarter we had anticipated that we would be not only reclassifying interest on tax liabilities in '07, but that we would be reclassifying the prior periods.

But based on some SEC guidance on this, that's been given generally, we will not be restating history.

And so, when we're giving our guidance, it's off the '06 actual, which includes the interest on tax liabilities.

So when you do the apples and oranges on that treatment, the guidance is very similar to what we gave before.

Okay, thank you.

And then perhaps related, what should one expect in terms of an effective tax rate going forward?

Yes.

We're saying for the full year, 32%.

We were a little below that in the first quarter but fairly similar.

Okay, thank you.

Your next question comes from Jeff Davis from FTN Midwest Securities.

Good morning, Jeff.

Jeff, your line is open.

Jeff?

Good morning.

Can you hear me now?

Yes, we can hear you.

Good morning.

A question in minutia.

Dale, how big is the energy book for Comerica and how has it grown over the last year and what does it look like over the next few years?

Well, the energy book is about $1.3 billion and we've done a lot of energy credits over the last few years where we got a full relationship.

I would say our opportunities continue to be pretty good in that sector.

The companies we look at are performing very, very well.

Clearly, we have a group devoted to that activity.

And so, I would anticipate that we would continue to see pretty reasonable growth there.

And is it evenly split between E&P and service companies?

It's probably more E&P than service but clearly, there's a piece of the business that we look at, which is really the service side as well.

Thanks.

That's all I had.

There are no further questions at this time.

Okay.

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

Thank you very much.

This concludes today's conference call.

You may now disconnect.