Comerica Inc (CMA) 2007 Q3 法說會逐字稿

Good morning.

My name is Tiara and I will be the conference Operator today.

At this time I'd like to welcome everyone to the Comerica Inc.

third quarter 2007 earnings 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.

I would now like to turn the call over to your host, Ms.

Darlene Persons.

You may begin your conference.

Thank you, Tiara.

Good morning and welcome to Comerica's third quarter 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 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.

This is our first earnings conference call from our new headquarters in Dallas, Texas.

Our executive management team is now in place at Comerica Bank Tower which is on Main Street in downtown Dallas.

We are very grateful for the warm Texas welcome we continue to receive.

Our third quarter earnings per share of $1.17 from continuing operations was down from $1.25 in the second quarter and $1.20 in the third quarter 2006.

Third quarter results reflected strong loan growth in our high growth markets.

The net interest margin of 3.66% declined 10 basis points from the second quarter, reflecting a more competitive deposit environment, an increase in borrowings and a larger investment securities portfolio.

We increased the provision for loan losses by $9 million from the second quarter due to the continued commercial real estate challenges in Michigan and California.

We had good fee income growth in the third quart ever and our expenses were controlled, even as we continued our banking center expansion program and relocated our Corporate headquarters to Texas.

We saw strong loan growth in Texas of 20% on an annualized basis, Western market loan growth also was solid at 13% on an annualized basis excluding Financial Services Division loans and the seasonal decline in the National Dealer Services business.

Our Michigan market leadership team continued to do a good job of maintaining our leadership position in that state as evidenced in part by the increased deposits in the third quarter.

As you know from recent news announcements, the third quarter was a challenging one for many companies in the financial services sector.

This sector was hit hard across-the-board due to the challenging credit market conditions, higher borrowing costs, volatility in the mortgage backed securities market, and the continued deterioration of consumer credit and the housing and subprime residential mortgage markets.

The changes in market conditions were more severe and more sudden than many expected.

While it is not an ideal environment, we are navigating our way through these swift currents.

Fortunately the issues that have caused the greatest volatility fall largely outside of the parameters of Comerica's business.

We do not sponsor or participate in the asset backed commercial paper market or in structured investment vehicles.

We do provide back up lines for securitization vehicles, however, these commitments are nominal and none are related to mortgage activity.

Comerica's loans to highly leveraged companies account for only about 3% of our total loans.

With regard to Shared National Credits, Comerica is the agent on about 14% of these facilities, a very small percentage would be considered highly leveraged transactions, and we do not typically underwrite large or covenant life transactions.

We do not compromise our credit standards, return expectations, or our exposure guidelines in order to participate in a syndicated facility.

Our risk management is another important differentiator.

In recent years, we have invested significant resources into enhancing our credit process.

This process was put to the test in the third quarter as a result of the increased stress on our commercial real estate portfolios.

While we saw some continued deterioration in credit quality, we have taken additional specific reserves and realigned internal resources to continue our active management of these credits in light of the tough commercial real estate environment particularly in Michigan and California.

We believe our enhanced credit process is assisting us in staying ahead of problems and has positioned us well to manage credit throughout cycles including this current one.

With regard to the consumer segment, less than 8% of our loan portfolio is in residential and consumer loans and we have no subprime programs.

The destabilization of the mortgage market has had an impact on the non-interest bearing deposits in our Financial Services Division.

This has been partially offset by the deposits we are generating in our new banking centers.

We have obtained more than $1.5 billion in new deposits from the 73 banking centers we have opened since beginning our expansion program in late 2004.

We are still on pace to open about 30 banking centers in 2007.

The banking centers that have opened are achieving the desired results.

For example, the new Century City Banking Center in California is experiencing strong deposit growth and became accretive to earnings in just three months, well ahead of the 18 month average.

While we are advancing our strategy to diversify our customer base and extend our reach in our high growth markets, we continued to do what we do best, provide exceptional customer service.

Recent surveys from [Greenwich Convenient SAC] underscore our proven ability to meet the needs of small and middle market businesses respectively.

As a banking Company with a strong focus on relationships, we have brought solutions to our customers that helped them be successful in the marketplace.

Our strategy is working.

We're making the investment to move the needle in a meaningful way on the geographic balance of our earnings mix and we expect those results to accelerate.

We believe a balanced growth strategy will produce more stable and consistent earnings over time.

And now I'll turn the call over to Beth and Dale who will discuss our third quarter results in more detail.

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 three, we outlined the major components of our third quarter results compared to prior periods.

Today we reported third quarter 2007 earnings per share from continuing operations of $1.17 compared to $1.25 in the second quarter.

Turning to slide four and an overview of the financial highlights from the quarter.

We continue to have strong loan growth in our high growth markets.

On an annualized basis average loans excluding the Financial Services Division increased 4% lead by a 20% increase in Texas, 10% in Florida, and 6% in the Western market.

Excluding the seasonal decline in our National Dealer Services loans, average annualized loan growth would be 7% in total, 29% in Florida, 22% in Texas, and 13% in the Western market.

The net interest margin decreased 10 basis points to 3.66% in the third quarter primarily reflecting a more competitive deposit environment, an increase in borrowings, and a larger investment securities portfolio.

Credit quality remains sound.

Both non-performing assets and net credit related charge-offs showed modest increases from low levels.

Provision for loan losses for the third quarter at $45 million was slightly more than charge-offs and compared to $36 million in the second quarter.

We continue to carefully control expenses.

Non-interest expenses increased $12 million largely reflecting an $8 million litigation related insurance settlement received in the second quarter.

Total employee headcount again remained virtually unchanged.

We repurchased 2 million shares in the third quarter as we work to bring our capital ratios to the middle of our target ranges.

The third quarter pay out was 114% of earnings.

As outlined on slide five, in spite of good loan growth, net interest income decreased modestly in the third quarter, primarily as a result of higher funding costs due to the volatility in the capital markets and a decline in the non- interest bearing deposits in our Financial Services Division.

The decline in the margin from the second quarter reflected a change in funding mix including customer movement toward higher cost deposits as the O-curve steepened and an increase in borrowings.

Maturities of interest rate swaps which carried a negative spread provided a 3 basis point lift to the net interest margin but was offset by the impact of a $320 million increase in our securities portfolio.

Finally, higher non-accrual interest recoveries in the second quarter and higher average non-accrual loans in the third quarter had a negative impact on the margin between quarters.

Slide six shows the growth of our securities portfolio over the past few quarters.

We have opportunistically increased our investment securities portfolio as spreads widened.

While increasing the portfolio had a 3 basis point negative impact on the net interest margin in the third quarter, it is assisting us in managing our interest rate risk.

Within our securities portfolio, we have invested almost exclusively in AAA rated mortgage backed government sponsored agency securities, specifically Freddie Mac and Fannie Mae.

Slide seven shows non-interest income levels over the past several quarters.

Third quarter non-interest income reflected positive trends in fee income with increases in a number of categories as detailed on the slide.

In addition, net income from principal investing and warrants increased $5 million.

Net securities gains of $4 million were recorded and primarily consisted of a $3 million gain on the sale of put rights obtained in a non-accrual loan work out several years ago, similar to a loan recovery.

These increases were partially offset by an $8 million decrease in deferred compensation plan asset returns.

Note that this last item was completely offset by a decrease in salaries expense.

Moving to the balance sheet in slide eight, compared to the prior period, average loans excluding the Financial Services Division increased $2.7 billion or 6%.

We are steadily making progress toward our goal of achieving more geographic balance with markets outside of the Midwest now comprising 55% of average loans compared to 52% a year ago.

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

All commercial business lines experienced growth in the third quarter compared to the same period last year, even as we continued to reduce our automotive supplier exposure.

The middle market, global corporate banking, and national dealer services portfolios showed growth in each of our major markets.

The third quarter increase in specialty businesses compared to the prior year was centered in the technology and life science portfolio which grew $357 million and the energy portfolio which grew $201 million.

On a linked quarter basis, average loans excluding the Financial Services Division increased $470 million to $48.7 billion due to increases in commercial real estate, $155 million, global corporate banking, $138 million, middle market, $135 million, and energy, $132 million.

Loans in the national dealer services experienced a seasonal decline of $291 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 sound in the third quarter.

While there was modest deterioration in credit quality this quarter, our metrics still remain at historically low levels.

Our metrics in the Texas market were once again very strong.

And while there are signs of some slowing in the Texas economy, on a relative basis it is still showing good growth.

All of our business lines in Texas are displaying very strong credit quality.

Overall, credit quality in the Western market continues to be quite good with historically strong metrics.

That being said, the residential real estate development portfolio as we have noted before has seen a softening in select markets and sub markets and that trend continues.

We are monitoring that portfolio very closely.

The issues are manageable but we do expect to see some deterioration in the residential housing markets before our recovery begins.

The economic environment in Michigan continues to be difficult which is having a particularly significant negative impact on the residential real estate development.

The provision for loan losses was $45 million, a $9 million increase from the second quarter due to the ongoing challenges in commercial real estate, specifically in Michigan and California.

Our watch loans were 6.5% of total loans, an increase from the prior quarter, and non-performing assets remained at a historically low level of 59 basis points of total loans and foreclosed property.

We had a $13 million decline in the dollar amount of loans greater than $2 million that were transferred to non-accrual status in the third quarter as compared to the second quarter.

Of these $94 million in transfers to non-accrual, all were in the Midwest, and by industry, real estate accounted for $77 million of these transfers to non-accrual.

There were no new non-accrual transfers over $2 million from the automotive supplier segment.

There were two new loans over $10 million transferred to non-accrual.

Both are real estate projects in Michigan.

Gross charge-offs increased $4 million and recoveries declined $6 million from second quarter levels resulting in a $10 million increase to net credit related charge-offs to $40 million or 32 basis points of average total loans in the third quarter.

Additional reserves for Michigan as well as California real estate were established this quarter.

We have not seen any material deterioration in any other sectors.

As far as the decline in recoveries, while we continue to work our files, there are fewer opportunities for recovery due to the very low charge-offs we have experienced for many quarters.

Comerica's allowance for loan losses which I'll discuss further in a moment was 1.03% of total loans and 176% of non-performing assets.

Net credit related charge-offs for the first nine months of 2007 were 24 basis points.

We believe that net charge-offs for the fourth quarter will be consistent with what we experienced in the third quarter.

Slide 11 outlines the changes we made in our loan loss reserve in the third quarter.

Comerica's loan loss reserve is based on an in depth credit quality review which is performed at the end of each quarter.

In addition we are continuously reviewing the components of the reserve analyzing risk creating migration within industries and geographies and conducting stress testing of various segments.

This quarter we increased the reserves allocated to our commercial real estate portfolio in Michigan and also added reserves for our California residential real estate development exposure due to negative migration and the results of our stress testing analysis.

This was partially offset by a reduction in other industry segments primarily the automotive industry where we saw evidence of improved results as we reduced exposure over the last several quarters.

In addition we reduced the reserve for the gasoline delivery industry where our refined analysis indicated less risk.

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

In the third quarter we had no change to the provision for credit losses on lending related commitments compared to a negative provision of $2 million in the second quarter.

On slide 12 we provide a break down of our commercial real estate portfolio.

A little less than two-thirds of the commercial real estate portfolio are primarily commercial mortgages for owner occupied properties of our middle market and small business customers.

The remainder consists of our commercial real estate line of business.

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

On slide 13 we provide a detailed break down by geography and project type of our commercial real estate line of business.

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

As I mentioned earlier in this segment we transferred $77 million in relationships over $2 million to non-performing loans.

This encompasses seven relationships, all located in the Midwest.

One of these relationships is with a long time Michigan based developer which has several projects in Florida.

The largest exposure we have geographically is in the Western market, California specifically.

The Sacramento market in general has been significantly affected by overbuilding and the decline in demand.

Like any real estate market there are some markets that are doing fine but overall, it will be some time before Sacramento is back to full health.

We do have exposure in this market but we believe the issues are manageable.

Similarly, the San Diego market has been affected as well primarily by the decline in demand.

While the market is still soft, we are seeing some signs of firming in demand.

Again, we believe the problems have been identified and are manageable.

We are monitoring the performance of our customers very closely including their liquidity positions, inventory levels, and analyzing trends such as absorption rates and sales prices.

In cases where there are issues, we are proactively restructuring facilities.

For example, reducing exposure, taking additional security, and guarantees, and increasing the controls.

Our large customer base in this segment assists us in evaluating market conditions and assessing the current performance of a project.

In addition, we have extensive expertise and experience in this segment and many of our managers and relationship officers have been through cycles.

We have added additional reserves to our work out, excuse me, additional resources to our work-out area to assist in working through the issues and we are accessing the secondary loan sale market as appropriate.

As you know, conditions in this segment have been deteriorating for over a year with issues recently compounded by the subprime mortgage problems.

As a result of ongoing softness, we have increased our reserves for this segment.

Turning to slide 14, I'd like to make a few comments on our Shared National Credit or SNC relationships.

More than half of our SNC exposure is in areas where we maintain large corporate relationships primarily in commercial real estate and global corporate banking.

In other areas, particularly middle market, we have worked to manage our exposure to customers by arranging club facilities, inviting other banks into a facility.

You'll recall that SNC loans are facilities that are greater than $20 million and shared by three or more financial institutions.

We (inaudible) about 14% of these loans and have not experienced any significant issues in the syndication process.

We have a policy that we must have direct contact with the management of the company and have identified potential products and services that we can provide in addition to our participation in the SNC facility.

Our philosophy is that ancillary business not only provides supplemental income but increases customer loyalty and provides opportunities for regular contact with the customer increasing our knowledge and understanding of their business.

We do not compromise our credit standards, return expectations, or exposure guidelines in order to participate in a syndicated facility.

Finally, this category is very granular, consisting of over 1,000 borrowers.

There's also well diversified by both line of business and geography.

The category has better credit metrics than that of our total loan portfolio.

There are currently no non-performing SNC loans and there have been no net loan charge-offs in 2007.

Slide 15 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 representing just 8% of our total loans.

These loans are self-originated and part of a full service relationship.

We've broken the portfolio down into three categories.

The $1.9 billion in residential mortgages we hold on our balance sheet are primarily associated with our private banking customers.

The residential mortgages we originate through our banking centers are typically 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 18% includes automobile, personal watercraft, student, and recreational vehicle loans.

We are not in the subprime mortgage business and the performance of our consumer portfolio has been 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 increase in delinquencies in the revolving home equity lines, and have increased reserves in the third quarter.

Turning to slide 16 we have outlined a few characteristics of our home equity portfolio.

Roughly three-quarters of the portfolio consist of revolving home equity lines and the remaining one-quarter are amortizing home equity loans.

These loans were 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 17 provides detail on the recent performance of the automotive portfolio.

Our dealer business represents over 70% of the automotive outstandings.

Two-thirds of this portfolio was located in the western market and two-thirds of the portfolio is with 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 which we continue to proactively manage to a lower level, outstandings have decreased 13% in the first eight months of 2007 after declining 19% in 2006.

This portfolio now represents about 4% of our total loans.

Non-performing loans were down with no in-flows to non-accrual for the third consecutive quarter and we had no net credit related charge-offs in this portfolio in the third quarter.

Performance of this portfolio has stabilized but we remain cautious.

Now I'll turn the call back to Beth.

Thanks, Dale.

Slide 18 details average deposits by line of business.

Total average core deposits excluding Financial Services Division of $31.1 billion increased 4% on an annualized basis in the third quarter.

Average retail bank deposits declined slightly, due primarily to a decrease in retail deposits in Michigan as we experienced a decrease in the average balance per consumer account.

This was partially offset by an increase in small business banking deposits in the Texas and Western markets.

Within the business bank, technology and life science reported the largest increase with a $101 million increase in average deposits.

On a geographic basis excluding the Financial Services Division, annualized average deposits in the third quarter when compared to the second quarter were up 9% in the Texas market, 5% in the West, and 3% in the Midwest.

Competition for bank deposits remains strong and while standard pricing rates remain stable, promotional rate offerings intensified as the cost of alternative funding for banks increased.

As yield curve improved customers shifted into higher yielding, longer maturity, time deposits.

Non-interest bearing deposits account for about 26% of our average total deposits.

These deposits declined in the third quarter due to a decrease in Financial Services Division deposits.

On slide 19, we provide an update to our Financial Services Division business.

In line with the continued cooling of the California housing market, combined with the destabilization of the mortgage market, non-interest bearing deposits decreased $702 million in the third quarter.

Interest bearing deposits, which bear interest at competitive rates were unchanged.

Related average loan balances decreased approximately $389 million while customer service expense was flat relative to the previous quarter.

Our outlook for the Financial Services Division is that deposits will continue to trend lower for the remainder of the year, therefore we expect fourth quarter average non-interest bearing deposits of about $1.8 billion.

This is a reduction from our previous outlook and is in line with the expectation that the housing market will remain depressed.

We also expect that average loans will continue to fluctuate at the level of non-interest bearing deposits.

As you can see on slide 20, our banking center expansion is producing the desired results.

Deposits attributed to our new banking centers total over $1.5 billion as of September 2007 up from $1.1 billion in June.

These new deposits are well distributed with 48% generated by the retail bank, 39% by the business bank, and 13% by wealth and institutional management.

We continue to meet our goal of having our new banking centers accretive within 18 months.

We have opened 13 new banking centers year-to-date and plan to open about 17 more banking centers in the remainder of 2007, all of them in our high growth markets.

We expect about $55 million in new banking center expense for full year 2007 up from $30 million for full year 2006.

Turning to slide 21, you see here a picture of our new corporate headquarters.

As Ralph indicated earlier, our executive management team has relocated to the Comerica Bank Tower in downtown Dallas.

Early next year we expect to have a banking center on the ground floor and occupy the first five floors that we are leasing.

I am pleased to report that we are meeting our timeline and expenses are tracking below our initial budget.

Executive management is becoming engaged in the community and we are already starting to see new opportunities that will assist in accelerating our growth in this market.

Our colleagues in Michigan continue to work to maintain our leadership position in the Michigan market and we have not lost any significant business as a result of the relocation of our headquarters.

Slide 22 updates our expectations for the full year 2007 compared to full year 2006.

We continue to 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 with the Midwest remaining flat in light of the continuing challenging economy.

The average full year net interest margin is expected to be in the high 3.60% range reflecting a net interest margin in the low 3.50% range for the fourth quarter.

We have adjusted our margin outlook primarily in response to changes in the capital markets.

Specifically our outlook has decreased in light of our expected continued loan growth in the context of a more challenging funding and deposit environment.

The deposit environment remains highly competitive as banks are only selectively lowering rates in conjunction with the Fed easing as the cost of alternative funding sources remains relatively expensive.

Also, the competitive landscape of our Financial Services Division has become even more intense as volumes have declined.

On the positive side, the changes in the financial markets provided an opportunity to add to our securities portfolio in the third quarter and we expect to continue adding to the portfolio in the fourth quarter as opportunities arise.

These security portfolio additions will be positive to earnings but will have a negative impact on the margin in the fourth quarter.

We believe the Federal Reserve will reduce rates one more time this year, specifically by 25 basis points at the end of October.

Our outlook for credit qualities for average net credit related charge-offs were about 25 basis points for the full year.

We believe that net charge-offs for the fourth quarter will be consistent with what we experienced in the third quarter.

We are revising our non-interest income expectation upward to high single digit growth for the full year.

Our outlook for flat non-interest expenses remains unchanged.

We will continue our strategy of active capital management.

We expect our share repurchase for the year to be about 10 million shares up from 9 million communicated previously.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Gary Townsend.

Hi, Gary.

Good morning Ralph, Beth, Darlene, and Dale too there.

Maybe the first question for Dale.

If you could discuss the residential construction book again, and particularly, the Michigan developer with projects in Florida.

Is the problem with that credit the Florida exposure or what else can you add?

Okay, I'll do my best.

The Michigan line of business commercial real estate portfolio is roughly $800 million or $900 million, so it's a relatively small piece of the overall commercial real estate line of business portfolio.

Within that portfolio, we will have developers who will do projects not only in Michigan but elsewhere, and in this particular case that I referenced, this is a long time customer, a long time developer who we know very well which is an important ingredient particularly in a work-out situation who did a couple of projects actually in Florida that has generally performed well but has recently come into some tough times so we're working through that project with them as we would with anyone else who would get into trouble.

The good news is that it's in a location where there continues to be good growth and we're hopeful that we can restructure this and successfully exit it over time but that's not an unusual situation for a number of our Michigan residential developers.

So you would be providing him finance that he would be using for construction in Florida?

Correct.

Okay.

And Beth, very impressive slide 20, the new banking center deposits, but if you could discuss, you've got great growth here and if you project this into the future, it's certainly going to be helpful, but it seems to be masked, currently at least by other things and the overall deposit growth has not been that impressive, so could you also just speak to how you see this developing from here?

Yes.

Well, I guess what I'd say generally speaking is a couple things.

One is if you look at excluding Financial Services business, our deposit growth was good in the quarter, and part of that was obviously bolstered by the new banking center additions, particularly saw higher growth in Texas and Western but still growth in Michigan too.

What's countervailing a lot of that good growth out of the new banking centers obviously is the Financial Services Division.

Our deposits are down $1.8 billion year-over-year in total in FSD and so in that 12 month period, that's a big decline that is hard to totally offset, but as I said, other than FSD, we are getting growth in our core deposits and we feel positive about that as the new banking centers are contributing to that obviously.

I see that loans are down at the FSD in the quarter, and so the margin impact of the low-yielding loans ought to be somewhat reduced.

Do I have that right or not?

Yes.

You have it exactly right.

The deposits declined about $700 million.

The loans were down about $400 million so the impact on the margin was negligible.

But we did say our expectation is in the fourth quarter that as this business has been shrinking that the competitive dynamics are getting more intense and therefore we may not be able to maintain that offsetting totally in the fourth quarter.

Any thought to any strategic choice with respect to the FSD operation?

I think we continued to realign it in terms of resources.

We are down about 16, 17% from a couple of years ago and we will be working to make sure that business is aligned from a resource standpoint with the lower deposits as we go forward.

Thank you for your comments.

Thanks, Gary.

Your next question comes from the line of Terry McEvoy.

Good morning, Terry.

Good morning.

The 20% loan growth in Texas is a pretty impressive number given I think Dale had mentioned some softness in the market and I think it was 6% last quarter and then the deposit growth I think was 9% this quarter in Texas.

Anything special going on in terms of aggressive marketing, maybe being aggressive on the pricing of products given the relocation or is it just the strategy is working?

I think the last point is the right one, the strategy is working.

We've seen new opportunities, I think part of that is because we're now here and that does mean something in the market and certainly part of it is the growth of the energy sector itself which we're an active participant in, but I think what I'd say overall is all of the businesses, particularly in the middle market segment, are experiencing good quality growth.

We're not seeing any stretch in terms of the metrics, if you will, or the structures, or the pricing.

It's pretty much right down the middle.

And I think to reinforce what Dale said, we, actually if you look at all of our lines of business saw improvement in the quarter so it's not just isolated in one sector, like energy it's across all of our business lines.

I would emphasize one thing you said, Terry, in that as our management group has gotten here, we have all been very active in the community and making calls and opening doors that support Chuck Gumer and his Texas team who has been here about 20 years so we're seeing that accelerate opportunities.

Just one last question on the relocation expenses, I know the City of Dallas and the State of Texas offered some incentives and will that come through the tax line or will those incentives be netted against the expenses that we saw last quarter as well as in the most recent quarter?

Yes.

Those are being netted against the expense so that the net result in the third quarter was a $2 million net increase in expense related to the relocation.

Thank you very much.

Thank you.

Your next question comes from the line of Mike Mayo.

Good morning, Mike.

Good morning.

Can you give a little more color on the margin outlook?

I guess you said it's going to be down in the fourth quarter, so spread revenues also down and I guess related questions, does that include the benefit of the maturing swaps and what's your overall interest rate position?

I know you were modestly hurt by lower rates when the quarter started.

Now, looking at the fourth quarter outlook we gave versus the third, we will have a positive impact from maturing swaps.

We have $800 million maturing in the quarter so that will provide several basis points of positive lift, but there are a couple of, there really is a continuation we see, expect in the fourth quarter that the deposit environment will remain still very competitive that deposit rates just are not coming down and even if there is a Fed decline, we think the opportunities for much of a decline in deposits is less so that will impact the fourth quarter.

Wholesale funding costs to the extent again we're projecting lower deposits from FSD will be increasing our need for wholesale borrowings and obviously the cost of that for all participants is higher and so that's reflected in our outlook.

And the addition of securities, I mentioned that we increased our securities portfolio in the third quarter.

We anticipate, assuming the attractiveness remains, doing more of that in the fourth and there will be a higher impact, negative impact on the margin in the fourth quarter versus the third in terms of what we added in the third and what we anticipate adding in the fourth.

And finally I mentioned just a minute ago that we have an expectation that there will be more -- some margin pressure from the FSD business.

So it's really all of those factors, deposits, wholesale funding, FSD, and securities purchases that have an impact on the margin in the fourth quarter.

I would add to that, Mike, that we have not really seen an upward pressure on pricing on the asset side at this point.

It has still been a very competitive market.

I would expect to see that in time but at this point, can't project it.

Which markets in particular, because traditionally, you have capital markets disruption, more firms want to go to banks, and you would think you'd have a little more pricing power, so what's causing this ongoing heightened level of competition?

I think you see based on what you just said, just to carry on with that a little bit, at the higher end you've seen some, at the lower end, you've seen a little bit but at the middle market, we have not seen that yet because they are used to working with banks day-to-day as it is.

And when you are talking about this competition, can you kind of rank your markets?

Is it worse in Michigan, Texas, California?

I would say it's strong in all of the markets.

Yes, it is, Mike.

I mean and even in Michigan, we keep saying it's surprisingly very competitive, so we really haven't really seen the opportunity there to do much on the margin side.

Michigan would probably be at the top on the deposit side, and then California and Texas would be -- would follow that, probably Texas next and then California.

On the loan side, I would say that we see that competition really kind of across-the-board.

And then unrelated, you're saying charge-offs should be kind of flat which I guess would be good for the fourth quarter.

What's your expectation for next year and why do you expect losses to stay so low given the environment that we're in?

Well, I think that there's -- it's sort of a complex answer.

The fundamental thing is that we believe that we have added additional resources in our work out area that can help us, particularly real estate experienced work out resources.

We're working with developers who we've known for years.

We think we've taken all of the appropriate steps to structure these appropriately, reserve for them appropriately, and take charge-offs as necessary.

We are from time to time accessing the secondary market which does exist for real estate transactions and so that's a helpful strategy, and what we learned on the auto side, i.e.

quick actions, staying in front, gearing up resources and work out, accessing the secondary market, et cetera, there are a lot of things that are transferable to the real estate side which I think is helping us but it's a little longer work-out process on the real estate side.

So we're hopeful that the market stabilizes a bit but even if it doesn't, I think we've identified and drawn some fences around our issues.

And last question, just your feel for the environment?

It's obviously getting worse or is it getting worse at an increasing rate or are things just the same as they've been?

How do you characterize that?

Well, I think it depends on the market to a certain extent.

I think in Michigan, that market has softened for some time.

It probably will get softer but I think we really haven't added anything in Michigan for some time so we're working through what's already out there and we're already I think well in front of that problem and hopefully we've done the right things there and I think we have.

California is probably still the market that's still showing some deterioration, depending on the particular submarkets you want to talk about but even there, there's still positive job growth.

There's still growth in the economy that you don't really see in Michigan and that will help us work out of the issues we've got there I think more quickly and more successfully to a certain extent than you would see in Michigan.

And Texas continues, knock on wood, to do pretty well.

We don't see really any issues there at all.

All right, thank you.

Thank you, Mike.

Your next question comes from the line of Steven Alexopoulos.

Good morning, Steven.

Hi, good morning, everyone.

Just to follow-up on the margin commentary you just gave, now do you see a longer term benefit from the Fed cut, steepening of the curve or is a 350 margin what you would expect going beyond the fourth quarter?

We haven't finished actually our budget for next year and we would give you an outlook in January for the full year of '08, but for us, the key item right now is really how the market is reacting on the deposit side, that as the Fed has cut rates and if there are further cuts to come, we are seeing banks being pretty sticky in lowering rates because the alternative is to go out and raise other funding which potentially could be more expensive, and so I think that's the dynamic that we, not just we but many banks or all banks will be dealing with and so in some sense regardless of what the Fed does in this quarter, that will be a dynamic that we'll all have to be dealing with.

That's helpful.

Dale, can you help me reconcile the increase in non-performers?

They're up I guess it's $32 million sequentially and in the release you're saying you moved $94 million of loans into non-accruals.

Did you sell non-performers in the quarter?

Well, we sold some, obviously took charge-offs against some others so when you take a look at what we added over 2 million and basically, there's payments, there's charge-offs, and so forth, it all ties out, so it all reconciles and it does relate directly to the amount of writedowns and charge-offs we've taken.

Do you have the amount of non-performers that were sold in the quarter?

It was $11 million.

It was all real estate.

Yes, all real estate.

And then just a final question.

Beth, are you able to provide the annualized loan growth metrics in the four major markets without the impact of the Shared National Credit?

Do you have that available?

Well, I don't off the top of my head, but I can say that the Shared National Credit growth really can vary from quarter to quarter.

This quarter, it was about 57% of our growth was related to Shared National Credits.

In prior quarters we've had a much lower and other quarters we've had higher, so it really is something that isn't a managed number.

It's just a function of what opportunities there are in the market, so that was, as I said, about 57% of our loan growth was in SNC's this quarter.

Is it safe to say if we look at the Texas growth which you talked had a 20% annualized, it looks like a lot of that is in the increase in Shared National Credit than energy lending so that would be significantly lower ex that item?

Well and I guess I'm a little -- how I would address that is I don't think of it that way because the SNC strategy is not a SNC strategy.

It's not we go out and say this is how much we want this business to be and to the extent loan growth isn't being achieved in non-SNC related things that we do something to manage the SNC target so that's not how we think of it.

The reality is for a lot of the businesses we're in whether it's Texas or elsewhere, commercial real estate transactions tend to be often in SNC, energy transactions often are in syndicated credits, middle market tends to be less, so it's really, it's the full complement of accessing those various customer bases that we're going after.

And truly based on relationships, and either existing relationships or building relationships, or we're not interested.

It is not just putting assets on the balance sheet and that's a very important difference because it allows us to properly balance our credit and our risk in any given transaction as we were talking about earlier.

It's across all of our businesses and we look very carefully and many times we invite other institutions in in order to balance that risk.

Just a follow-up on that, Ralph.

We ended the quarter at $10 billion in that portfolio.

To follow-up on that, could you give what the deposits might be for those borrowers?

I don't have that off the top of my head.

Okay.

Thanks.

Those were my questions.

I mean, it's in the mix, and that's one of the things we look at.

We not only look at the deposit, cash management, but we look at other areas where we can provide services and we have the products and services to do that so we look at the overall returns on those particular clients and if it is one we're trying to develop over time, and I think we've said this in the past, we'll look one to two years and if we can't develop it then we will move on to other customers.

Many of our biggest customers, we have considerable other business with them because a bank our size can provide what I would call kind of extra business because we're quick and we can move quickly, but we have the products and services as well to compete with the largest customers.

I would also add as you referenced Texas and SNC, and the energy business in particular, but I would say that number one, we do participate in larger high quality energy credits where we don't certainly want all of the exposure.

And virtually every one of those we have a full relationship including deposits and treasury management so it's a heavily emphasized piece of our strategy.

Okay.

Thanks, those are my questions.

Thank you.

Your next question comes from the line of Manuel Ramirez.

Good morning, Manny.

Hi, good morning, how are you?

Good.

Want to start off on the margin just to follow-up on one of the earlier questions, Beth.

Maybe to crystallize the margin issue a little bit more if you could talk about the margin in the low 350s in the fourth quarter versus I think it was at 377 in the second quarter.

If you had to guess at the moving parts on that, how much of that is the Fed, how much of that is deposits, how much of that is FSD, and all of the factors that you cited as well as the hedges?

I don't know if you can get into that level of detail but just trying to square it in my own head.

Yes, well, actually in terms of thinking about it from the third, it's the second to third, so down 10 basis points in the quarter.

If you look at it, we mentioned that -- so first of all, the dynamics in that quarter were impacted by our decision to do additional securities, and so that had a 3 basis point impact on the third quarter.

So as we think about what happened in the third and then our outlook for the fourth, we're saying we see a continuation of pressure on the margin related to the deposit climate that I described earlier, that wholesale, given the decline in FSD deposits we are now projecting in the fourth quarter that we'll be doing more wholesale funding which is more expensive because of the credit turmoil in the third quarter.

So those are factors that really kind of continue from the back end of the third quarter.

So deposit pricing, the wholesale funding, the securities purchases will be an incremental negative impact, incremental to the third quarter in the fourth quarter, at least that's our expectation.

And lastly, there is -- we have been or were able in the third quarter to successfully navigate lower FSD deposits and lower low rate loans, but as this business has been shrinking, it's becoming even more competitive and therefore, we think there will be an incremental -- there will be a net negative impact on the margin in the fourth quarter from that.

So it's really, it's all of those pieces that I just described, securities, deposits, wholesale funding, and FSD.

Okay.

If I focus on the two pieces that are easiest to probably dissect from 3Q to 4Q, focusing in on that, the addition of securities and then I think the Fed actions at least as it relates to the asset side of your balance sheet, can you give me a ballpark estimate of the impact from the 366 to the, let's say it's 351, 352?

Well, and the Fed action itself is an interesting one to think about but it's more, I put it into the buckets of thinking about deposit pricing and into the buckets of in turn, what I need to raise on the wholesale funding side so it's really those together that are not an insignificant part of the decline quarter to quarter.

Okay.

Great, and then two other questions.

One is obviously on the venture capital gains.

They were elevated this quarter.

What should we think about as a normal four quarter average run rate on that aside from just taking the four quarter average?

No, that's a tricky number.

Year-to-date, our income was $13 million.

If you look at the last three full years prior to that, we ranged between $10 million and $20 million, so the $13 million year-to-date is kind of in the space where it's been frankly over the last several years, but it's very difficult to project.

Okay, so a few million a quarter, and what's built into your full year guidance then?

What would the implicit assumption be for the fourth quarter?

I think your thought of the -- kind of the several million is a good assumption.

Okay.

Great.

And then the last thing, and this is for Dale.

If you look at your comments on the increase in non-accruals all coming from the Midwest, or for the most part, but then I look at your provisions in your Western business line increasing pretty dramatically.

Should I infer from that that we should start to see some NPA's coming through probably on the construction side perhaps in California over the next couple of quarters?

We know NPA's are going up for the industry but it seems like there might actually be some baked into the cake here for you going forward.

I think that's a reasonable assumption.

I mean, clearly, there's still as we've said before, there's still stress out there and we are seeing negative migration and we have seen it for the last few quarters, so I think in the for sale housing side, the construction lending side, you're likely to see some inflow there without question.

Okay.

And sorry, to hog the time, one last question.

If we looked at you historically, if we looked at reserves to NPA's, and you can argue whether or not that's a meaningful metric, most of your NPA's in the past were C&I loans, right?

But if I look at where your NPA's are today, a lot of them are real estate loans and it seems like might increasingly be real estate loans so I think about reserve adequacy relative to collateral you might have versus on a credit.

Any rule of thumb that we should consider or just how do you think about it on the credit side?

I don't think of it in terms of a rule of thumb.

We obviously, and we talk about it a lot every quarter, go through a very elaborate process with credits to assess, charge-offs, reserves, action plans, and so fourth and we look at the value of the underlying assets that secure our loans.

We look at the value of guarantees from individuals who guarantee our loans, and we look at a number of other factors.

We have a very active back office of construction monitoring, we monitor budgets carefully, so it's quite the process to make sure we're adequately addressing the issues.

And so we're comfortable obviously with where we are in that regard, but every quarter, you go back through it again and see what's changed and to the extent values would decline further, obviously that would have an impact on what we do.

And do you think you fully take into account the decline in home prices that's likely happened here in the last couple months?

Oh, definitely.

I think we have.

I think we've appropriately reserved and charged off.

I think we're taking the appropriate actions.

We do look at sale prices all the time no matter what the market is.

Every market is different.

Absorption rates are different and so forth.

Currently, Dale, the percentage writedown that's in the non-performing is about 70%.

Yes, I think the value of what's there is about $65 million or so, $65 million to $70 million.

Right.

So a 30 to 35% writedown you mean?

Yes, it was 70% in the third quarter.

Okay, got you.

So a 30% writedown.

Thank you very much.

Yes.

Thank you.

Your next question comes from the line of Chris Mutascio.

Good morning, Chris.

Beth, a quick question more from a macro perspective.

You had mentioned that the average deposit balances for the consumer fell during the quarter.

In your view is that seasonal or could that be more ominous of things to come for the consumer maybe they're drawing down cash reserves?

Then kind of curious to get your thought on that.

Yes, the comment I made actually was specifically related to Michigan.

We are seeing, because of the economic climate there, we're going on to now the fourth year of a recession in Michigan that we have consumers being -- drawing down liquidity reserves, if you will, and dealing with the economic situation there.

You see that manifested in our home equity drawdowns, they're down 5% year-over-year, so we are not seeing activity there so consumers are being cautious about doing anymore borrowing and in addition we're seeing them drawing down balances but again, it's Michigan related.

Okay.

I appreciate your color.

Your next question comes from the line of Heather Wolf.

Hi, good morning.

Good morning.

Dale, a quick question for you.

You had talked about building reserves in the different categories so I'm just wondering why that didn't come through if we're just looking at those for a consolidated reserve to loan ratio?

Yes.

And as I indicated, the reserves that we have built have been primarily real estate related.

If you look at the reserves we had for our automotive exposure, our automotive supplier exposure where we've had great results over the last few quarters no one closed, no charge-offs and where we reduced the absolute level down to $1.9 billion, the level of reserves required there has reduced rather substantially.

We also looked at some of the other segments where we had bigger reserves and did some in depth analysis of certain industry segments, I mentioned gasoline delivery and because of that analysis determined that the level of reserves we had there wasn't necessary where we had it.

So on a net basis, it's come down because of the way we look at our reserves.

Real estate clearly has gone up a fair amount for obvious reasons and that's how you sort of reconcile the numbers.

Okay so it was almost a full offset, okay.

Right.

And then also, forgive me if you've mentioned this already, but on the increase in the delinquencies, that was primarily real estate driven as well?

Well, delinquency would be there's been some home equity delinquency increases that hasn't been material but nonetheless have been delinquency increases there which have caused us to increase some reserves on the home equity portfolio.

Are you talking about the past dues, Heather?

Yes.

(multiple speakers).

Excuse me, there's a component of it that's real estate, there's a component that is in middle market.

Almost all of it is related to timing issues, in most cases putting forbearance agreements together and/or getting payouts.

In some cases that's already occurred after the end of the month, so all of those are generally well secured in the process of a workout or being refinanced in some way.

So I don't see any -- there's no real issues there and as I said, it's a mix between real estate and sort of middle market type credits.

Okay, and then Beth just one last question for you on margin, I'm sorry to beat a dead horse here, but you talk a lot about the deposit environment and I'm just curious, have you hedged out a lot of the floating rate aspect of your loan portfolio or should we expect some of that repricing to start flowing through in the fourth quarter in '08?

Part of the opportunity in the marketplace provided itself for looking at the attractiveness of increasing our securities portfolio, and obviously an element of that is in helping us better manage looking forward the interest rate environment.

And so those are similar to just as if we were putting on interest rate swaps where we received a fixed interest rate and pay a floating.

So part of what we have been doing over the last couple of quarters is increasing that portfolio and have intentions to increase it further in the fourth quarter to protect ourselves against further downside in interest rates.

So do you happen to know kind of including, I don't know, including your swaps, et cetera what percentage of your earning assets are floating rate, once you include all of the off balance sheet?

Yes.

About -- well, 85% of our loans are floating rate.

And that includes any off balance sheet hedges?

No.

That's just the explicit loan dynamics.

And the rest of our earning assets really are either cash or investment securities.

The investment securities are largely fixed rate portfolio.

Okay.

So it sounds like what we see is kind of what we get as we're looking at the on balance sheet earning assets and the off balance sheet may not alter that number all that much?

Yes.

The off balance sheet is, we have $3.2 billion of swaps that mature next year, another $800 million this quarter, and you see that in the net interest income reconciliation, the impact of that.

Okay.

All right thanks very much.

Okay.

Thank you.

There are no further questions in queue.

Do you have any closing remarks?

Okay, I would like to thank all of you for joining us today and for your continued interest in Comerica.

Thanks very much.

This concludes today's Comerica Inc.

third quarter 2007 earnings call.

You may now disconnect.