Comerica Inc (CMA) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Comerica's third quarter 2008 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 conference over Ms.

Darlene Persons, Director of Investor Relations.

Ms.

Persons, you may begin your conference.

Thank you, Carrie.

Good morning and welcome to Comerica's third quarter 2008 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 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 could 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.

We are pleased by the announcements from the Treasury Department, the Federal reserve and the FDIC which are aimed at restoring liquidity to the marketplace and boosting consumer confidence.

Subject to review of the final details, we intend to remain in the FDIC temporary liquidity guarantee program beyond the 30 day initial period.

We are also reviewing and evaluating the Treasury Department's capital purchase program.

In an economic environment that is as challenging and volatile as any we have ever seen, Comerica's core operating earnings remain stable compared to the two prior quarters.

As expected, net credit related charge-offs and the provision for loan losses were unchanged.

Maintaining a solid capital position in this uncertain environment is prudent.

It provides us the flexibility to navigate these swift economic currents and continue to invest in our growth markets.

We are therefore taking actions to improve our capital ratios and enhance our balance sheet strength including a previously-announced intention to reduce our dividend and the execution of a loan optimization program.

As part of the loan optimization program, we are focused on the appropriate loan pricing and return hurdles with the aim to optimize the revenue per relationship.

The program is working and producing the desired results, and our process ensures we take care of our relationship customers.

Our third quarter earnings per share of $0.18 were impacted by a $0.40 after tax charge related to a previously announced offer to repurchase at par auction rate securities from our retail and institutional clients.

We know our clients holding auction rate securities have been facing unprecedented market conditions, so we sought relief for them in a prompt and appropriate manner.

Our net interest margin of 3.11% or 3.17%, excluding the charge to interest income on certain structured lease transactions, reflects improved loan spreads and lower deposit rates.

As expected, net credit related charge-offs were similar to the first and second quarters at $116 million or 90 basis points of average total loans.

Net charge-offs related to Western market residential real estate development were lower, reflecting our aggressive management of this portfolio.

As expected, we are seeing softness in small business and middle market, which is consistent with our outlook.

We continue to provide for loan losses in excess of charge-offs.

Our core expenses remain well-controlled.

We have reduced our personnel by about 3% from a year ago, and by almost 2% from the second quarter, even as we continued our banking center expansion program.

In response to our loan optimization program, average loans decreased 7% on an annualized basis, compared to the second quarter.

On an annualized basis, non-interest bearing deposits, excluding the Financial Services Division, increased 13% compared to the second quarter.

We gained momentum in our deposit gathering toward the end of the quarter, as evidenced by the increase in period-end core balances.

We are encouraged by this trend as the last four weeks have been the best of the year with respect to net new retail customers.

We opened eight new banking centers in the third quarter and plan to open 15 more by year-end.

All of the 28 banking centers we expect to open in 2008 will be in our higher growth markets.

We plan to open about 17 new banking centers in 2009.

Looking ahead, we will remain vigilant in managing our problem loans and our capital, while working our way through this particular cycle of the economy.

Our core operating performance has been stable this year.

Our strong focus on customer service will continue to serve us well in this environment, as it has over many years and through various cycles of the economy.

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 details on our earnings.

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

Today, we reported third quarter 2008 earnings per share from continuing operations of $0.18.

This included a $0.40 per share charge related to our previously announced offer to repurchase at par auction rate securities from our customers.

Core operating results were consistent with the last two quarters.

Net charge-offs and provision, net interest margin and our capital ratios, excluding the impact of the auction rate securities we purchased all were in line with our expectations.

Slide four provides the after tax impact of certain items on income from continuing operations.

The third quarter was impacted by the private sale of our remaining Visa shares, $0.11, and the second quarter was impacted by the sale of MasterCard shares, $0.06.

Third quarter earnings were also impacted by a $61 million after tax charge, $0.40 related to the repurchase of auction rate securities which I'll provide further detail in a moment.

Third quarter and second quarter earnings were impacted by tax-related leasing charges, $0.04, and $0.21 respectively, excluding the net interest income component of the leasing charges, the net interest margin would have been 3.17% for the third quarter, and 3.10% for the second quarter.

Slide five provides an overview of the financial results from the quarter.

In line with our loan optimization strategy, average loan outstanding declined 7% on an annualized basis.

We are making headway in our efforts to increase loan spreads and relationship returns as well as remain selective in terms of new business as is prudent in an increasingly challenging economic environment.

Non-interest bearing deposit generation excluding the financial services division was excellent, and gained momentum toward the end of the quarter.

Net interest margin in the third quarter was 3.17%, excluding the effect of a 6 basis point tax related leasing charge.

The higher margin reflected better loan spreads as well as lower deposit rates.

Net credit related charge-offs and provisions were stable, with continued weakness evident in residential real estate development.

Provision for loan losses for the third quarter was $165 million, compared to $170 million in the second quarter.

The allowance to total loans increased in the third quarter to 1.38%, compared to 1.28% last quarter as we continue to provide for loan losses in excess of charge-offs.

We continue to carefully control expenses and excluding the effect of the auction rate securities repurchase, expenses declined.

Salary expenses remained flat as headcount decreased by almost 2% in the quarter.

Our Tier 1 capital ratio of 7.35% was within our targeted range.

Turning to slide six and the details behind our recently announced repurchase of auction rate securities held by our customers, we estimate that the par value of auction rate securities held by customers at September 30th totaled $1.5 billion.

Based on the current market conditions and an assessment by third party valuation experts, we incurred a $61 million after tax charge in the third quarter, primarily reflecting the difference between par and fair value.

The final estimate of the charge was reduced to $0.40 per share from $0.50 per share at the time of the announcement, as a result of completing a detailed review of the securities.

The repurchase of these securities will occur between October 1st and December 19th.

We will hold these assets in the available for sale account on our balance sheet.

The current yield is in excess of our funding costs.

Therefore, we expect they will be accretive to net income going forward.

The underlying assets consist of preferred stock closed in mutual funds, municipal bonds and a small portion of student loans.

All are generally of good credit quality but lack a liquid market to sell them.

Turning to slide seven, net interest income in the second and third quarters were impacted by a non-cash charge to lease income.

In the third quarter, we accepted a global settlement offer by the IRS on certain structured leasing transactions.

Excluding the impact from the lease income charge, the net interest margin was 3.17% in the third quarter, up 7 basis points from the second quarter, reflecting higher loan spreads and lower deposit rates.

As part of our interest rate risk management strategy, we added $900 million of two-year interest rate swaps in the third quarter, plus an additional $200 million since the beginning of October.

This is in addition to the $8 billion securities portfolio, which assists us in mitigating our asset sensitivity.

Moving to the balance sheet and slide eight.

Compared to the prior year, average loans increased $1.6 billion, or 3%, paced by a 12% increase in our Texas market.

We continue to make steady progress toward our goal of achieving more geographic balance with markets outside of the Midwest now comprising 63% of average loans.

In addition, our loan portfolio is well-diversified among many business lines.

As I mentioned a moment ago, average loan outstandings declined $859 million or 7% on an annualized basis in the third quarter, compared to the second quarter, as we worked to optimize our loan portfolio.

On a linked quarter basis, the largest decreases were noted in national dealer services, $568 million, middle market, $404 million, and energy, $134 million.

Loan commitments declined $2.6 billion in the quarter.

This exceeded the decline in draws under the commitments, with the net effect of an increase in line utilization to slightly over 51%, at the end of the third quarter.

Increased line utilization was focused in the areas where we maintain large corporate relationships and we believe the increased utilization can be partly attributed to the dysfunctional credit markets.

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

Good morning.

Net credit related charge-offs and provisions in the third quarter remained stable.

Our biggest challenge continues to be the ongoing issues in the residential real estate development portfolio, which is part of our commercial real estate line of business.

In addition, as expected, given the challenges in the economy, we have started to see some softness in middle market and small business but the issues remain within our expected ranges.

Net credit related charge-offs were $116 million in the third quarter.

Net charge-offs included $57 million in the commercial real estate line of business, primarily related to the California residential real estate development sector.

This is a decrease from the $73 million in net charge-offs for this line of business in the second quarter.

Provision for credit losses of $174 million exceeded credit related charge-offs of $116 million.

Turning to slide 10, non-performing assets were 171 basis points of total loans on foreclosed property, or 76 basis points excluding the commercial real estate line of business.

Our watched loans were $5.5 billion, or 10.6% of total loans up from 9.3% in the second quarter.

Loans past due 90 days or more and still accruing of $97 million at September 30 decreased from $112 million at June 30.

These loans are in the process of being restructured, continue to pay interest, and are expected to continue to pay interest on a restructured basis.

The allowance for loan losses was 1.38% of total loans, an increase of 10 basis points from the second quarter.

The allowance for loan losses was 82% of non-performing loans.

Comerica's portfolio is more heavily composed of commercial loans, which in the event of default are typically carried on the books as non-performing assets for a longer period of time than our consumer loans, which are typically charged off when they become non-performing.

Therefore, banks with a heavier commercial loan mix in their portfolios tend to have lower NPA coverage ratios than do retail-focused banks.

In addition, we have written down our non accrual loans by almost one-third.

Excluding Western residential real estate, NPA coverage for the remainder of the portfolio is in excess of 100%.

With regard to Western residential real estate, we have obtained independent appraisals and taken the appropriate charge-offs and provided additional reserves.

As we apply stress scenarios to this portfolio, we are comfortable with our reserve coverage.

On slide 11 we provide information on the makeup of the non-accrual loans.

Commercial real estate, which consists primarily of residential real estate development loans, comprised the largest portion of the non-accrual loans.

By geography, almost half of the non-accruals are in the Western market.

As far as granularity of non-accrual loans, there are 22 relationships totaling $295 million that aggregate to between 10 and $25 million each and there are only two relationships over $25 million each.

The average write-down to non accrual loans was 32%.

Transfers to non-accruals slowed in the third quarter, $280 million in loans greater than $2 million transferred to non-accrual status.

This is a reduction from the $304 million transferred into non-accrual in the second quarter.

Commercial real estate line of business accounted for $145 million, or 52% of the transfers to non-accrual, down $43 million from the second quarter.

On slide 12, we provide a breakdown of net charge-offs by geography.

Net charge-offs in the Western market, which comprise 44% of net charge-offs in the quarter, can be largely attributed to the residential real estate developer portfolio.

Net charge-offs for the Midwest, which made up 38% of the total, was primarily comprised of $20 million in middle market and $11 million in commercial real estate line of business.

Midwest charge-offs were relatively stable, as we have been dealing with the challenges of the Midwest economy for the past several years.

On slide 13 we provide a detailed breakdown by geography and project type of our commercial real estate line of business, which was relatively unchanged from the prior quarter.

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

At September 30th, 45% of this portfolio consisted of loans made to residential real estate developers, secured by the underlying real estate.

Geographically, the Western market, California primarily, comprised 44% of the total portfolio.

On slide 14, we provided the geographic breakdown of the commercial real estate line of business net loan charge-offs over the last two quarters.

Residential real estate development loans accounted for 97% of these charge-offs in the third quarter.

The rate of deterioration in the California residential development portfolio has slowed as is apparent in reduced level of net charge-offs in the quarter, as well as fewer inflows of non-accrual loans.

As far as the Midwest, the net charge-offs declined slightly this quarter, as we have been working through the issues of falling home prices and slower absorption rates on this portfolio for several years.

In the commercial real estate line of business, we transferred $145 million in relationships over $2 million to non-accrual loans in the third quarter, down from $188 million in the second quarter, and $233 million in the first quarter.

100% of these inflows to non-accrual in the third quarter were related to residential development.

We have not seen any significant deterioration in non-residential real estate development.

The issues in call important California are centered in one area, the portfolio which is outlined on slide 15.

This portfolio was focused on local smaller residential developers which built starter and first time move-up homes.

We continue to make progress in reducing the portfolio, which had had about $625 million outstandings as of September 30, down from $932 million at December 31st, 2007.

This portfolio accounted for 34% of the bank's total non-accrual loans and 94% of the Western market's commercial real estate line of business net charge-offs, up $39 million in the third quarter.

We continue to obtain updated independent appraisals and take the appropriate charge-offs and reserves to reflect current market values.

Average charge-off plus reserves for the loans that would be generally defined as substandard and doubtful loans is approximately 42% of the contractual value which is an increase of 40% from the second quarter.

Loan sales and foreclosures involving real estate involve a lengthy process.

However, we expect to complete the sale of some of these assets in the fourth quarter.

Slide 16 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 9% of our total loans.

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

The performance of our consumer portfolio has been stable.

Slide 17 provides detail on the recent performance of the automotive portfolio.

Our dealer business is well-diversified with nearly two-thirds of the portfolio located in the Western market and over two-thirds of the portfolio with dealerships selling foreign name plates.

These are long-term relationships.

Many of our customers have diversified and operate multiple dealerships.

We have not experienced a significant loss in the dealer portfolio in many years, as the majority of the portfolio is of a well-secured floorplan nature.

We expect it will continue to perform well.

Looking at our non-dealer automotive exposure, we have reduced our loan outstandings $188 million in the first eight months of 2008 and over one-third or $1.1 billion since the end of 2005.

This portfolio now represents about 3% of our total loans, and we plan to continue to reduce our exposure to the automotive sector.

Non-accrual loans were only $9 million, down $4 million from the previous quarter and we had a small recovery in this portfolio in the third quarter.

The performance of this portfolio continues to be excellent.

However, given the challenges the sector faces, we added to our stressed portfolio reserves in the third quarter.

To conclude, our outlook is for continued stability in net charge-offs in the fourth quarter.

We are clearly focused on the credit issues in the residential real estate development portfolio.

We expect that the stress on the residential real estate sector will continue.

However, the issues will start to fade as we continue to work through that portfolio.

Based on recent appraisals and market conditions, we believe that we have taken the necessary charge-offs and reserves.

Outside of residential real estate development, we are seeing some modest softening in middle market and small business.

However, the issues remain manageable.

Early recognition of issues is key.

Therefore, we have stepped up the frequency of our credit reviews in certain segments and we are moving credits to our workout group at the first sign of significant stress.

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

Thanks, Dale.

Turning to slide 18, average core non-interest bearing deposits excluding Financial Services Division grew $279 million, or 13% on an annualized basis.

Core deposits exclude institutional CDs and foreign office timed deposits.

Non-interest bearing deposits account for about 27% of our average total deposits.

Deposit competition became more intense in the third quarter.

Mid- to late in the quarter, we increased rates moderately to remain in line with competition.

As a result, we saw excellent deposit growth toward the end of the quarter, as evidenced by the increase in period-end core balances.

Specifically on a period-end basis we saw an $836 million increase in core non-interest bearing deposits and a $401 million increase in customer CDs.

We are encouraged by this trend, as the last four weeks have been the best of the year with respect to net new retail customers.

On slide 19, we've highlighted our diverse funding base.

Liquidity and access to funds has become a hot topic as financial market conditions have changed significantly over the past few months and weeks.

Overall, our access to funding has been good, particularly for shorter term funds, as evidenced by the fact that we funded $3.5 billion in senior debt and institutional CD maturities in the third quarter.

We have been regular participants in the Federal Reserve's term auction facility and have tapped into the repo market through Comerica Securities as well as raised over $3.5 billion in retail brokered CDs since the beginning of October.

Also, we joined the Federal Home Loan Bank in Dallas in February, and as of the end of the third quarter, we had $7.5 billion outstanding with a further $500 million drawn since the beginning of October.

These advances are at very attractive rates with maturities of one year to six years, and we had significant undrawn capacity available.

On slide 20, we provided an update on our capital optimization plan which we introduced last quarter.

We are making headway in our efforts to optimize our loan portfolio.

Loan commitments and outstandings declined in the third quarter, while charge-offs and the provision remains stable in a very challenging economic environment.

The increased governance on loan pricing is also working and we are starting to see the effects in spread improvement.

As far as expense control, we have consistently reduced personnel over the past several years, and expect this to continue in conjunction with the loan portfolio optimization.

In addition, we are slowing our banking center expansion, and expect to open 17 new banking centers in 2009.

Turning to slide 21, we believe we have a solid capital position as evidenced by the fact that we remain within our targeted ranges and well in excess of the regulatory minimum guidelines.

We previously announced that it is the intention of our Board of Directors to reduce the quarterly dividend by 50% commencing with the fourth quarter payment.

The resulting capital retention will help us further enhance our balance sheet strength in this uncertain economic environment.

Also, through our loan optimization plan, we expect to further strengthen our capital ratios through the balance of 2008 and into 2009.

Finally, the quality of our capital is strong.

With preferred stock accounting for only a relatively small percentage of our capital base.

As Ralph mentioned, we are in the process of reviewing and evaluating the Treasury Department's capital purchase program.

Slide 22 updates our expectations for the full year 2008, compared to full year 2007.

In conjunction with our loan optimization plan, we expect loan outstanding will decline over the remainder of 2008.

Our net interest margin outlook for the full year is about 3.10%.

Excluding the second and third quarter tax related lease income charges.

This decrease from our previous outlook of 3.15% largely reflects the 50 basis point reduction in the Fed fund's rate announced last week.

Our full year outlook for credit quality is for net credit related chargeoffs of $450 million.

We expect the stress in the residential real estate development market to fade, as we continue to work through the issues.

Our outlook incorporates softening in the middle market and small business portfolios.

Also, our outlook is to maintain our tier 1 capital ratio within our targeted range.

Now I'll be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment to compile the Q&A roster.

And your first question comes from Dave Rochester with FBR.

Good morning, Dave.

Hi, good morning, guys.

On your NIM guidance, we appreciate that color there.

What does another 50 basis point rate cut get you to on top of the one that we just had?

Do you have a sense for that?

It would -- there would be further pressure on the margin but it's hard to estimate that in a vacuum, in the sense that there are so many moving parts related to it, including the reaction by financial institutions related to deposit pricing.

We have a pretty conservative assumption in the outlook we gave you in terms of the ability to significantly impact deposit rates.

So I think that's the key element that would be at play in connection, if there were a further decline.

But obviously, given our -- the nature of our balance sheet, there would be a modest negative effect.

Okay.

And Dale, you mentioned loan sales potentially in the fourth quarter.

What kind of magnitude are you expecting or shooting for at this point?

Well, we haven't gone out and said exactly what that will be but it will be primarily in the residential real estate portfolio where that portfolio is now about $625 million and we've broken that portfolio into different segments for potential sale so we would hope that a piece of that, and we're working on actually the details and amounts, would be able to be concluded in the fourth quarter.

So -- but because we don't have it -- because there's a lot of things in play, I can't exactly quantify for you.

But it would probably, in terms of the number of loans, it would probably be somewhere around 10 to 15 loans in that portfolio.

Okay.

That's great color.

And Beth, on the strong deposit growth you mentioned, what's your sense of where these deposits are coming from?

Are they coming from larger banks?

Smaller banks?

Failed banks?

It's -- at times, it's hard to tell.

It comes, frankly, from a variety of places and our goal here, regardless of the competition, is to make sure we're attracting customers to develop long-term relationships with them and that's our focus.

Okay.

And Dale, you mentioned stepping up credit reviews.

Can you tell us exactly what that means and what which areas you're doing this.

Is this in certain industries or within the shared national credit portfolio?

Anything specifically you can point to?

Well, I would say that given the stress in Michigan, we're looking obviously all the time at real estate but we're doing a little more frequent reviews in small business and middle market in terms of the types of things we're looking at.

Obviously, trying to stay ahead of the issues and moving as I said before deals to special assets, our workout area earlier and the whole intent is to make sure we're doing the right thing as quickly as we see the deterioration.

Got you.

And Dale, I still have you -- the increase in the provision in the Midwest, you talked about that a little bit.

And in the text you're saying you cited FRE in the global corporate.

Could you potentially provide some color there to which the industries you're seeing that weakness in the global corporate side.

We don't really get into a lot of that.

I think it's fair to say that given the stress in the market that you know, whether it's small business or middle market, we're going to continue to see some softness.

We're not really seeing any big, significant issues in global corporate but obviously those companies have been stressed a bit by what's going on.

Most of what you're seeing tends to be as we said, small business and middle market.

Okay.

In Texas you talked about a provision build, loans have declined there but you cited energy lending.

Are you seeing any impacts from the drop in oil?

Is that what that's linked to or are there other things going on there.

No, that's not really linked to the drop in oil prices, given the way that we manage our price for oil and natural gas.

It's just there's some softness in middle market in Texas.

Texas is not unaffected by what's going on in the economy but again, we're not seeing anything of any significance.

We are certainly seeing that softness occur and therefore we're providing additional reserves.

Okay.

And do you have any updated credit metrics on the shared national credit portfolio or shared national portfolio?

Yeah, everything that -- anything that would have come out of that review, frankly, would have been reflected primarily in the second quarter and as I've indicated in the past, clearly we're of the age where we get the results, if not we call to get those results and most of the time we do get them from the agent banks.

So anything that has occurred in the shared national credit for us has been reflected certainly fully through the third quarter.

Okay.

Thanks a lot, guys.

Thanks, Dave.

Your next question comes from Ken Zerbe with Morgan Stanley.

I was hoping could you comment on the outlook for C and I given what's happening in the overall economy.

There's two slides actually stuck out at me.

One was on the non-accrual loans.

Just look at middle market and small business, looks like non-accruals were up over 30% in that bucket on a sequential basis.

And you also made another comment about CRE and COs being down sequentially.

Overall sales were actually up.

Is it fair to assume that that I guess exaggerated increase was driven by C&I charge-offs rather than construction?

Well, I think if you look at the overall level of charge-offs of $116 million, fairly similar to first and second quarter, you could see that real estate line of business charge-offs were down.

Therefore, you could see that the charge-offs in some of the other business lines were up.

Again, as we've said, you're seeing some softness in small business, particularly in the Midwest and the same would be true of middle market in the Midwest.

So we are obviously aggressively managing the real estate but also aggressively managing the middle market and small business portfolios which is why we've gone to more frequent reviews that I talked about earlier.

You have seen in fact a bit of a shift in where the charge-offs are occurring.

And second question I had was just on the home builder portfolio.

If I heard you correctly, I think you said that you expect to sell some of those loans in fourth quarter.

Whereas I believe your prior statements were more that you expect to sell all of the loans in fourth quarter.

I was hoping you could tell me what's changed on the margin to get you a little less confident that those can be sold quickly.

I don't believe that I ever said that we were going to sell them all in the fourth quarter.

Simply because that would be a lot to get accomplished and the market I don't think would absorb it in the way we would want.

We always talk about tiering the portfolio in terms of three different tiers in terms of how we would group these.

In the last year we have been working to sell a chunk of those loans which we have in fact worked on in the last couple of quarters.

We would hope that that piece, as I said earlier, 10 to 15 loans, approximately, would be able to be concluded in the fourth quarter.

Okay.

Understood.

All right, thank you very much.

Thanks,.

Your next question comes from Steven Alexopoulos with JPMorgan.

When you stress the Michigan portfolio, in a recession scenario, is there any merit that loans there will actually hold up better because that market's been weak for several years or should we expect losses there to be just as much as the rest of the portfolio or possibly even more?

In commercial real estate in the Midwest?

Specifically to your Michigan credit.

Oh, Michigan portfolio.

Right.

Not really.

I think what we're seeing, it's not as though the issues there have suddenly emerged in the last year or two.

As we indicated, the recession there has been ongoing for six or seven years.

We've been working those portfolios down.

You know, we had a larger auto book.

As you can see, we worked that down substantially and the credit metrics there are outstanding.

We have a dealer book there.

Those credit metrics there are outstanding.

The real issue tends to be more in the real estate space and we've worked out in those portfolios.

We get appraisals there like we do in other markets for real estate.

We write them down to the as-is appraised values, provide reserves and so forth and then we stress it based on certain scenarios that we employ and so that's I think what you're seeing is fundamentally what we have been seeing there.

It's a little -- it's softer in small business and middle market real estate tends to be the way it has be.

But no reason to think that that would hold up better than the rest of the portfolio, given that it's been stressed.

I think it's going to be -- we are seeing some improvements.

We're seeing data that suggests that although at lower prices, residential real estate sales are actually increasing in Michigan.

I wouldn't expect it to be significantly worse, be roughly the same as we're seeing elsewhere.

I was curious, are you becoming more sensitive with the loan optimization plan, just curious why the move to a further reduce asset sensitivity, given where we are at the Fed funds rate.

We, as you know, earlier this year, significantly increased our investment portfolio to ensure as we go through cycles that we have less impact from lower rates and in addition, I mentioned that we had added actually a pill I a billion one in swaps since the end of June and that includes $200 million we did in the month of October.

So we're continuing to make sure we can continue to contain within our policy limits the asset sensitivity.

We have seen growth in the last couple of months in our CD portfolio, particularly in kind of the one-year area.

And so those are fixed terms so that is -- that's good for liquidity but it has -- we have to manage around the interest rate risk related to fixed term CDs.

So we're seeing good growth there and that's one reason we're continuing to make sure we're doing additional hedging as we go forward.

Perfect.

Thank you.

Your next question comes from Matthew O'Connor with UBS.

Good morning.

Good morning.

You mentioned that you raised about $3.5 billion of brokered CDs in October.

I was just wondering what funding does this replace?

Well, it goes into the general pool, if you will.

So we -- and that's how we manage it, is the general pool.

I think we feel very good about the variety of sources we have, be it Fed funds, be it repo, be it the new -- the retail brokered CDs the home loan bank advances and we've actually done a good job I think of using the home loan advances to really help our kind of one to six year put maturities out and spread them out nicely over the next few years.

And if you look at the -- in the third quarter obviously we have seen institutional CDs lower on average in the third versus the second.

So that would -- all of those sources of funds that I just described would have certainly replaced those, as well as we will be bringing onto the balance sheet the auction rate securities in the fourth quarter which is $1.4 billion.

Okay.

And then separately, it sounds like the core deposit inflows improved so far in September and so far this quarter.

If we look the last couple of quarters they were down about 7, 8% on an average basis.

As you look to fourth quarter on an average basis do you expect those levels to be up?

Well, I guess prognosticating on deposits is always a slippery slope.

What I would say is we are encouraged at the traction we've seen in the last six weeks or so.

We have maintained our rational pricing throughout that period as well, and as you may have seen and I'm sure everybody's aware, there has been in various markets pricing that has kind of what I would say gone from the top to the bottom of the spectrum.

I can appreciate the tough balancing act between the net interest margin and the actual deposit volumes, that just seems like with a branch expansion there might be a more upward trajectory to the deposits, ex all the noise.

I think longer term, that is certainly the strategy and will be the case as the markets begin to come back to more traditional -- what's the right word -- traditional relationships with institutional and wholesale funding.

And you have to remember that when you look at our deposit numbers in total, which includes Financial Services Division, the DDA for Financial Services Division is down $1.1 billion on a year-over-year basis and so we've done a good job on the rest of the business in improving particularly DDA in the slides, we particularly highlight nice growth over the last number of quarters in DDA, excluding SSD.

And as we get to the bottom of this real estate cycle, we'll see FSD bottoming out at some point here and then have stability there and then moving forward.

So that kind of blurs some of the detail in our financial statements on deposits, what's going on with FSD.

Okay.

All right.

Thank you.

Thank you.

Your next question comes from Scott Siefers with Sandler O'Neill.

Good morning, everybody.

Beth, I was hoping you might be able to just talk a little bit about the sale of the Visa shares.

And I guess how you guys were able to do that.

Was that a transfer to another former member bank?

I only ask because I thought they were locked up and I know there are various ways you can sort of jettison them, so-to-speak.

The shares that we sold and it's our remaining interest so we have no further shares after this sale, were Class B shares which are not able to be sold into the public market until they convert to Class A shares which probably isn't until 2011.

But we chose through a private sale route to another member bank and that's the only way you can do it.

We affected that in the third quarter and completed the sale.

So that -- it's something that we have a position in.

It was a significant position that taking market risk for the next three or four years was not something that is typical.

Our pattern is when things are able to be sold on these kind of things that we do affect the sale so we went ahead and did that.

Okay.

Perfect.

Thank you very much.

Thank you.

Your next question comes from Mike Mayo with Deutsche Bank.

Good morning, Mike.

Good morning.

Can you comment on the new treasury plan, I guess in three parts.

Number one, the preferred stock.

You said you're evaluating that but a 5% coupon seems pretty good, doesn't it?

And then second part of it would be the insurance on new unsecured bank lending, how might you use that.

And then the third part would be the unlimited deposit insurance for non-interest bearing deposits, I guess mostly small business accounts.

I imagine you have more of that than the average bank.

Let me start with your last point, that is true.

Because we are heavily commercial so we do have a larger deposit base in the DDA side and certainly the FDIC temporary liquidity guarantee program as it's called, which as the terms are today starts out at 30 days and then you opt, you must opt out or remain in and as I said earlier, it is our feeling that we will remain in both for the deposit side as well as for the debt side.

While we're still getting some of the details and understanding all of the requirements of the program, that is our initial feeling, that we will participate in that program.

You mentioned that the 5% yield on the preferred stock and the treasury department's capital purchase program appears to an attractive yield and I don't disagree with that.

But we are, as I said earlier, looking and evaluating all of the facts as they come out.

And when they come out, we will come to an appropriate decision there.

As far as the guarantee on new bank debt, I mean, how much debt do you have maturing over the next several months and as that matures, is that a real possibility to use the new government program?

Mike, this is Beth.

We are still obviously -- there isn't total clarity from the FDIC yet on what is and isn't covered.

We believe it's unsecured.

We believe that said funds is included in that as well as maturities of senior notes, not subordinated notes.

We also think that institutional CD maturities and we have used that distribution channel for raising debt also, is not covered but it isn't totally clear, but assuming it's just senior notes maturing as well as Fed funds we would have under the rules about $5 $5 billion of capacity under the guaranteed program.

Might that change your strategy away from institutional CDs to other forms of wholesale borrowings.

Well and in fact the institutional CD market has not been really very attractive in recent quarters, so absolutely.

And then last question, you're not alone in not having a lot of the details, and I just wonder what's the information dissemination process to the extent the Fed, the treasury, the government put so much fire power into resolving the crisis but there seems to be a disconnect between you and others getting that information.

So when do you think you'll get all the information you need to help decide with these decisions?

I don't know when that will be, Mike.

But I would underline that the communications between the regulators and certainly in our case are very good.

And as soon as they come out, I would fully expect that we will have all of the detail that we need.

But I have not heard anything as to when everything will be fully disseminated.

And there are further conference calls with the FDIC is having to help answer questions, so that dialogue is going on practically daily.

So there's progress being made.

All right.

Thank you.

Thank you.

Your next question comes from Jason Goldberg with Barclays Capital.

Good morning, Jason.

Good morning.

I guess all my questions have been addressed.

But thanks.

Okay.

Thank you.

Your next question comes from Brian Foran with Goldman Sachs.

Hi, good morning.

I guess just following up on the government preferreds, if you did take it, would it change your lending appetite at all or would you just use it to strengthen capital ratios and also as part of that, are you interested in doing failed bank deals and if so, what geographies would you be most likely to target?

Well, starting with the first part of your question, clearly what we've been doing in our optimization program is focusing on our customers.

And taking care of those customers and a customer who wants to be a full relationship.

When there's excess capital financial institutions tend to take advantage of what I would call more product versus relationship as well.

So we've refocused that to make sure that we're there for our customers and certainly in the future we'll be looking for further new relationships as well.

Certainly preferred stock adds to the capital base, as Beth said earlier.

We're comfortable and within our ranges on the capital but we certainly will look at this program to see if it will work favorably for us.

As far as failed institutions, you know, we're always interested in opportunities if they're in our markets and provide us the locations and the type of business that is key to our strategies moving forward.

And I guess just if I could make sure I understand, because --

Sure.

Part of the reason I'm asking is, you know, a lot of this program seems designed to get banks lending again and the consistent message from a lot of banks is this program doesn't really change their appetite for extending credit.

It sounds like you're kind of saying the same thing.

I'm saying from our standpoint, we have refocused and made sure that we are using our resources for our relationship customers and that can mean growth as well, because new relationships and I underline meaning a total type of relationship, is very important to our strategy going forward.

Great.

Thank you guys.

Thank you.

Your next question comes from Jed Gore with Diamondback Capital.

Good morning, Jed.

Hey, good morning, Ralph.

Thanks for taking my question.

I'm just looking at on an average basis your loans were down as you're managing optimization process but on a period end basis loans were more flattish.

I assume the difference is line utilization picking up towards the end of the quarter.

I was wondering if that's accurate and do you have an outlook on line utilization

That is the case.

We have did have line utilization pick up a bit toward the end of the quarter.

As Beth mentioned earlier, I attribute that in all likelihood to our larger customer base that was seeing the disruption in the capital markets that you're familiar with.

You know, we were at about 50 -- a little over 51% in it had been running in the 49 point -- I don't remember exactly.

49.5

49.5% range so it wasn't an overly significant increase but I attribute it to basically the dislocation in the capital markets and I would expect we'll begin to see that decline as those markets free up in the future.

Great.

Hopefully that will be the case.

All right, thank you so much.

Thank you.

Your next question comes from Brian Klock with KBW.

Good morning, Brian.

Good morning, Ralph.

I guess most of my questions have been answered already.

I guess maybe just for Dale, and Beth, the guidance for charge-offs for the full year would sort of imply about, what, 110, $111 million of charge-offs for the fourth quarter?

Right.

And I guess not sure if you can give us any sort of guidance compared to the third quarter, like you said you've seen the geographic contribution decline from the Western, seems like the Texas charge-offs were up a little bit in the third quarter, Midwest up a little bit.

So I guess is there any sort of expectation in that charge-off guidance of -- is it coming more out of Midwest commercial?

Texas?

Or other markets?

And Western would be continuing to sort of decline or maybe some color just on where we might see that charge-offs coming from in the fourth quarter.

I would say that it will be much like we have seen particularly in the third quarter.

I don't know that I would at this point say that the contribution to charge-offs would be significantly different.

I would certainly hope and expect that real estate will continue to be performing as it has.

I would hope that we could complete of the real estate sales as we've discussed.

Clearly, the Midwest will continue to be soft and struggle and we know that so -- but I think it's going to be consistent with what we've seen, particularly in the third quarter.

I know you mentioned this earlier, but can you give us the watch list or classified loan balances again for the third quarter?

It's $5.5 billion, 10.3% on loans.

Okay.

And I guess within that,, I guess you've talked before about the SNC portfolio and obviously the -- is there any material move in that watch list category out of your SNC portfolio and/or the Midwest commercial book?

Well, no, as I said, I think all of the results of the shared national credit exam were clearly fully reflected and certainly fully reflected through the third quarter our numbers and beyond that wouldn't make any additional comments.

I think it is fair to say as we've said that with softness in the middle market and small business in the Midwest that you would see more of those loans showing up on the watch list this quarter.

Those are loans that are already in our special assets group, our workout group and are being actively worked and collected.

Great.

One last question, just I guess would we expect to see the same sort of relationship of provision and net charge-offs in the fourth quarter?

Well, as we said, we'll continue to see provisions well above charge-offs as we have and you can look back through the first three quarters and see what it's been and it's probably likely to be something like that but certainly charge-offs.

Thanks.

Appreciate you taking the call.

Thanks.

Your next question comes from Heather Walsh with Merrill Lynch.

Good morning, Heather.

Hi, good morning.

Dale, quick question for you on the C&I non-performers.

Can you talk about any partial charge-offs you've taken for the new non-perform ers and kind of give us a loss severity experience has been on C&I?

As I think I mentioned, we written our non-accruals down by 32% and that's fairly consistent.

We are pretty aggressive in the way we look at things.

When we move something to non-accrual, we look at the collateral position, the cash flow, a whole range of things and make the assessment based on that.

We've written that down 32%.

The substandard non-accrual piece of residential real estate is down to 42% based on appraisals, very current independent appraisals and so forth.

So I think we've been doing what we need to do in terms of recognizing losses on those portfolios.

The point Dale mentioned, the non-accruals are charged down 32%, that's not a typical looking at long series of years.

We update our loss given default studies on a quarterly basis and these are very consistent with long-term and recent trends, so --

Right.

Just a point of clarification.

Construction has been written down to 42%, the 32%, is that the total book or just C&I.

It's total non accrual.

Do you have the numbers for C&I portfolio.

I don't.

We know it's 42% of residential real estate.

You can sort of back into it.

The 42% includes substandard and doubtful which the 32% that we mentioned on non-accrual is just non-accrual.

So the resi is higher, not only non-accruals but the substandard and doubtful.

Okay.

Thanks very much.

Thank you.

Your last question comes from Chris Mutascio with Stifel Nicolaus.

Good morning, Chris.

All my questions have been asked and answered, but I wanted to get your view on the macro.

Looking at the numbers, looks like maybe we're seeing some stability or the signs of stability on the real estate construction portfolio.

Could we see a lull here in economic activity or in credit quality deterioration where construction portfolios do see some signs of stabilization but could it be a false positive to some degree as we see the C&I portfolios run off, whether it's you specifically or just in general the banking sector as the economy starts taking a broader toll?

Well, it's hard to predict of course, but clearly the message we have, we've seen a fair amount of stability.

You can see in terms of the inflows of non-accruals, obviously they're down.

You can see the real estate component of that, charge-offs down from the last quarter as well.

So in terms of that segment, is it a lull, is it a bottom, all we can say is what we have seen through the third quarter and that's the stability that we have mentioned.

We also talked about some softness in middle market and small business.

That's what you would expect in this kind of economy.

Right.

I've certainly seen enough of those in my tenure here.

So I don't know.

There's so much uncertainty right now that we're just blocking and tackling every day and whether it's a lull or not, I don't know.

But it is at least stable for now.

Thank you very much.

Thanks, Chris.

Thank you.

At this time, there are no further questions.

Mr.

Babb, do you have any closing remarks?

I want to thank everyone for joining us today and your continued interest in Comerica.

Thank you very much.

This concludes today's conference.

You may now disconnect.