Comerica Inc (CMA) 2009 Q1 法說會逐字稿

Good morning and welcome to the Comerica Incorporated first quarter 2009 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.

Mrs.

Darlene Persons, you may begin your conference.

Thank you, Amber.

Good morning and welcome to Comerica's first quarter 2009 earnings conference call.

This is Darlene Persons, Director of Investor Relations.

I'm 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 exit section of the SEC's Website as well as on our own Website.

Before we get started I would like to remind you that this conference call contains forward-looking statements.

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.

We have remained attentive to our customers during this economic downturn and focused on things we can control, such as expenses, without being distracted by daily news events or the market's continued volatility.

Our efforts have resulted in good deposit growth in the first quarter, controlled expenses, the development of new relationships and the deepening of others.

In addition, our already strong capital levels were further enhanced in the first quarter with a preliminary Tier 1 capital ratio of 11.08% at March 31.

The quality of our capital continues to be solid as evidenced by a Tier 1 common capital ratio of 7.33% and a tangible common equity ratio of 7.27%.

To further preserve and enhance our balance sheet strength in the continuing economic downturn, we announced in January a reduction in the quarterly cash dividend rate to $0.05 per common share in the first quarter from $0.33 per common share in the fourth quarter of 2008.

This action enables the retention of nearly $170 million per year in tangible equity.

We are working hard to deploy our strong capital.

We had $5.6 billion in new and renewed loan commitments in the first quarter as we continued to focus our lending efforts on new and existing relationship customers with the appropriate credit standards and return hurdles in place.

To support the challenged housing market we also funded $2 billion in mortgage-backed Government agency securities in the quarter.

We had $9 million in net income in the first quarter compared to $20 million in the fourth quarter of 2008.

Preferred stock dividends to the US Treasury Department under the capital purchase program were $33 million or $0.22 per share, resulting in a net loss applicable to common stock of $24 million has or $0.16 per share.

We plan to redeem the $2.25 billion in preferred stock at such time as feasible with careful consideration given to the economic environment.

Business and consumer confidence remained low in the first quarter as job losses continued to mount and companies of all sizes looked to conserve cash and reduce expenditures.

The US economy has continued to struggle under the weight of this prolonged recession.

The stark reality is that commercial and industrial loan growth has slowed sharply in all ten previous post World War II recessions with actual loans outstanding falling in eight of those recessions in inflation adjusted terms.

Companies have reduced their borrowings out of appropriate caution during this recession as well.

As a result we have seen reduced loan demand across our geographic markets.

For example, the continued slowdown in auto sales, which are now at their lowest levels in three decades, has led to a paring of dealer inventories.

This in turn has reduced our average national dealer services loans by $461 million in the first quarter when compared to the fourth quarter of 2008.

Overall average loans, excluding the financial services division, were down $1.7 billion from the fourth quarter.

These declines reflected reduced demand we are seeing from customers in this rapidly contracting economic environment.

We have continued to reserve for loan losses substantially in excess of charge-offs to reflect the continued downturn in the economy.

Our loan loss reserves are established using a thorough methodology in which the reserve is built credit-by-credit at the end of each quarter.

We continually review the components of the reserve, analyze risk rating migration within industries and geographies and conduct stress testing.

We are working hard to stay ahead of the credit issues in this environment.

The net interest margin declined 29 basis points from the fourth quarter, primarily reflecting the limited opportunity to reduce deposit rates and the decreased contribution of noninterest bearing funds in a significantly lower rate environment, partially offset by increasing loan spreads.

We believe the core margin bottomed in January and expect it will improve throughout the remainder of the year, largely due to continued loan spread expansion.

We were pleased by the $1 billion increase in average core deposits, the vast majority of which are noninterest bearing.

We are staying close to our customers throughout this economic cycle, delivering the exceptional service that has been a hallmark of our Company for many years.

Our expense controls included a work force reduction of 5% in the first quarter, bringing us to a staffing level that is the lowest in more than ten years, even with our investment in about 100 new banking centers since 2005.

Clearly these are unprecedented times for our nation, the banking industry and Comerica.

We believe our strong focus on credit and expense controls together with our strong capital position, efforts to grow new and existing customer relationships and our dedicated work force will serve us well in this economic environment and in the future.

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

Thank you, Ralph.

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

Turning to Slide 3, we outline the major components of our first quarter results compared to prior periods.

Today we reported first quarter 2009 earnings of $9 million.

After preferred dividends of $33 million, the net loss applicable to common stock was $24 million or $0.16 per diluted share.

Slide 4 provides an overview of the financial results from the quarter.

Average earning assets increased $618 million reflecting a $1.4 billion increase in investment securities, primarily mortgage-backed Government agency securities.

Average loan outstandings excluding financial services division declined about $1.7 billion from the fourth quarter.

The continuing slow down in the economic environment has resulted in lower loan demand in all of our markets.

Deposit generation, excluding financial services division, was very strong in the first quarter with core deposits increasing over $1 billion including an $840 million increase in noninterest bearing deposits.

As expected, the net interest margin in the first quarter declined, primarily reflecting the limited opportunities to reduce deposit rates at the same pace as the decline in loan yields as prime and LIBOR rates were significantly lower in the first quarter.

Net credit related charge-offs were $157 million.

The allowance to total loans increased by $46 million in the first quarter to 1.68% compared to 1.52% in the fourth quarter as we continue to reserve for loan losses substantially in excess of charge-offs.

We continued to successfully control expenses including further reductions in our work force.

Our capital position is strong and was further enhanced in the first quarter.

The Tier 1 capital ratio is expected to be 11.08% at March 31.

In addition, the quality of our capital is solid is evidence by our Tier 1 common capital ratio of 7.33% and a tangible common equity ratio of 7.27%.

Slide 5 outlines the various factors that impacted the net interest margin in the first quarter.

As expected, the full effect of the fourth quarter Fed funds rate cuts were reflected in loan yields as approximately 80% of our loans are floating rate.

In addition, the net interest margin was reduced by approximately 7 basis points from the $1.8 billion of average balances deposited with the Federal Reserve in the first quarter.

This overfunded position resulted from strong deposit growth combined with weak loan demand as we worked to close on the purchase of $2 billion in mortgage-backed Government agency securities.

Partially offsetting these items we continued to successfully expand loan spreads and selectively reduced deposit pricing.

We believe the core margin bottomed in January.

We expect that the margin will improve throughout the remainder of the year, largely due to continued loan spread expansion and the run off of higher cost time deposits and debt.

Slide 6 provides details of our efforts to leverage our strong capital.

We approved about $5.6 billion in new and renewed lending commitments to consumers and businesses.

In addition, we funded $2 billion in mortgage-backed Government agency securities in support of the battered housing market.

We will continue to seek opportunities to grow new and existing relationships as Ralph described in his opening remarks.

Moving to Slide 7.

Average loan outstandings declined in the first quarter compared to the fourth quarter.

Loan dynamics in the first quarter included low demand in all of our markets as customers cautiously managed their businesses in the recessionary environment.

As expected, national dealer services average outstandings were down $461 million or 10% from the fourth quarter in line with falling auto sales which were down 11% quarter-over-quarter.

Larger average decreases in the first quarter were noted in middle-market.

We saw growth in private banking and mortgage banker finance, which falls within our specialty businesses.

Markets outside of the Midwest comprised 63% of average loans.

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

Line utilization was 52.6% in the first quarter, down slightly from the fourth quarter.

The decreases in outstandings were matched with decreases in commitment levels particularly in dealer and middle-market.

Now Dale Greene, our Chief Credit Officer, will discuss recent credit quality trends starting on Slide 8.

Good morning.

In the first quarter, net credit related charge-offs and the provision for loan losses increased as the macroeconomic conditions continued to be challenging, particularly in the Western, Midwest and Florida markets.

Net credit related charge-offs were $157 million in the first quarter.

Net charge-offs included $73 million in the commercial real estate line of business, primarily related to the residential real estate development sector.

The increase in commercial real estate charge-offs reflects the continued deterioration in values we are seeing as we obtain updated appraisals.

Provision for credit related losses of $202 million exceeded charge-offs by $45 million.

Turning to Slide 9, nonperforming assets were 220 basis points of total loans and foreclosed property or 103 basis points excluding the commercial real estate line of business.

Our watch list loans increased to $6.7 billion in the first quarter, reflecting continued negative migration in line with the economic environment, particularly in Michigan.

The increase also reflected our aggressive efforts to recognize and address problem loans.

However, inflows and nonperforming assets declined for the third consecutive quarter.

As expected, foreclosed property increased to $91 million as a result of our efforts to work through the issues in the residential real estate development portfolio.

Loans past due 90 days or more and still accruing increased to $207 million, reflecting the ongoing economic challenges.

These loans are secured and in a process that is expected to result in repayment or restoration to current status.

The allowance for loan losses was 1.68% of total loans, an increase of 16 basis points from the fourth quarter.

The allowance for loan losses was 83% of nonperforming loans.

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

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 nonaccrual loans by 34%.

On Slide 10, we provide information on the makeup of the nonaccrual loans.

The largest portion of the nonaccrual loans continues to be commercial real estate, which consisted primarily of residential real estate development loans.

By geography, 39% of nonaccruals are in the Western market and 38% are in the Midwest market.

The average write down to nonaccrual loans was 34%.

As far as granularity of nonaccrual loans, there are 20 relationships totaling $269 million that aggregate between $10 million and $25 million each and there are (inaudible) relationships over $25 million.

Turning to Slide 11, transfers to nonaccrual slowed again in the first quarter with $241 million in loans greater than $2 million transferred to nonaccrual status.

This is the third quarter in a row that we have seen a decline in the transfers into nonaccrual.

Commercial real estate line of business, primarily residential real estate development, accounted for $112 million or 47% of the transfers to nonaccrual in the first quarter, which is a $51 million decline from the fourth quarter.

As expected, we saw a $28 million increase in transfers to nonaccrual coming from the middle market line of business.

On Slide 12 we provide a breakdown of net charge-- net credit related charge-offs by geography.

Almost half of the net credit related charge-offs in the quarter were in the Western market, of which $47 million can be attributed to the residential real estate developer portfolio.

Net credit related charge-offs for the Midwest, which made up 1/3 of the total, were primarily comprised of $21 million in commercial real estate line of business, $15 million in middle market and $11 million in small business.

The chart also illustrates the fact that provisions have continued to be substantially in excess of charge-offs, reflecting the uncertain economic environment.

On Slide 13, we provide a detailed breakdown by geography and project type of our commercial real estate line of business, which declined slightly from the prior quarter.

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

At March 31st, 32% of this portfolio consisted of loans made to residential real estate developers secured by the underlying real estate.

Total single family construction outstandings were down $500 million or about 1/3 from a year ago.

Geographically the Western market, California primarily, comprised 41% 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 the bulk of these charge-offs in the first quarter.

Charge-offs increased in the Michigan and California residential development portfolio while Texas remained relatively stable.

We have seen some further softening in the Florida market but it has not manifested itself in significant charge-offs.

In the commercial real estate line of business we transferred $112 million in relationships over $2 million to nonaccrual in the first quarter.

All but one of these inflows to nonaccrual in the first quarter were related to residential development.

As far as nonresidential commercial real estate development, we believe that we work with financially strong, well established developers who have the wherewithal to reduce the loan or restructure if collateral values decline.

The issues in California continue to be largely centered in one area, the Western local residential real estate developer portfolio, which is outlined on Slide 15.

This portfolio consists of local, smaller residential developers which build starter and first-time move up homes.

We continue to make progress from reducing the portfolio, which had $453 million outstanding at March 31st, down from over $900 million at December 31st, 2007.

We have not added any new business in this segment in a number of years.

This portfolio accounted for 24% of the bank's total nonaccrual loans and 99% of the western market's commercial real estate line of business net charge-offs of $47 million in the first quarter.

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

Charge-offs plus reserves for the nonaccrual loans in this portfolio were approximately 53% of the contractual value, up from 48% last 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 full service relationship.

As expected, given the rising unemployment rate and falling housing values, we have seen some deterioration in our consumer portfolio, particularly within the home equity loan portfolio.

However, we believe the issues remain manageable and first quarter charge-offs were lower than the previous quarter.

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

Looking at our nondealer automotive manufacturer-related portfolio we have reduced our loan outstanding $1.2 billion or 46% since the end of 2005.

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

The performance of this portfolio continued to be good.

Nonaccrual loans totaled only $12 million at the end of the first quarter and net charge-offs were $4.4 million.

Turning to Slide 18, given the level of attention the auto sector has been receiving, we thought it would be helpful to provide some additional insight into how we are managing the portfolio.

We know the industry and the players very well.

We have worked very hard over the past several years to ensure that we are appropriately positioned within the sector.

This has resulted in the decline in loans that I just mentioned, plus a very tightly underwritten and structured portfolio, as demonstrated by the very low level of nonaccrual loans and charge-offs.

We continue to tighten controls as necessary, as outlined in the slide.

In addition, the US Government has established a backstop for the auto sector under the US Treasury's Automotive Supplier Support Program which should assist suppliers in weathering the challenges they face.

Outstandings to Tier 1 and 2 suppliers whose revenue was 50% or more derived from GM or Chrysler totaled $310 million at the end of February.

Within this group of primary suppliers there were no charge-offs and there was only one customer on nonaccrual with less than $1 million outstanding.

Our auto dealer business is outlined on Slide 19.

Outstandings in this portfolio have declined $1.1 billion or 24% over the past year.

It's important to note that the dealer business model relies more on service and part sales than on new car sales and thus we monitor these metrics very closely.

The dealer portfolio is well diversified with the majority located in the Western market and over 3/4 of the portfolio with dealerships selling foreign name plates.

The bulk of our customers are classified as megafranchises operating multiple dealerships.

We have not had a significant loss in the dealer portfolio in many years as the majority of the portfolio is of a well secured floor plan nature.

We expect it will continue to perform well.

To conclude on credit, early recognition of issues is key.

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

We have increased the staffing of this area over the past year and will continue to do so as warranted.

We apply stress scenarios to the portfolio as we assess the adequacy of our credit reserves and we are comfortable with our current coverage.

We also review our reserves with our regulators and our auditors every quarter.

Our outlook is for full year 2009 net credit related charge-offs of about $650 million to $700 million.

This is an increase from our prior outlook as the recession is now expected to be longer and deeper.

Given the economic environment we expect provision for credit losses will continue to exceed net charge-offs.

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

Thanks, Dale.

As shown on Slide 20, average core deposits, excluding financial services division, increased $1 billion in the first quarter, reflecting an $840 million increase in noninterest bearing deposits.

Growth in the first quarter was experienced across all of our markets and from both commercial and retail customers.

Total average personal banking deposits increased $439 million or 13% on an annualized basis, primarily due to growth in CD and money market account balances.

As far as commercial accounts, noninterest bearing balances increased $728 million and customer CD balances increased over $250 million while money market balances declined.

Deposit pricing conditions remained competitive in the first quarter and believe-- and we believe we have hit rate floors on a number of our products.

However, we were able to selectively decrease rates in certain deposit categories.

On Slide 21 we've highlighted our diverse funding base.

We have multiple funding sources and our access to liquidity has been good.

We funded $2.2 billion in [broker] debt and institutional and brokered CDs maturities in the first quarter.

Through the Federal Home Loan Bank of Dallas, we have $8 billion outstanding at the end of the first quarter.

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

We have been regular participants in the Federal Reserve term auction facility and have tapped into the repo market through Comerica Securities as well as raised several billion dollars in retail brokered CDs.

In addition, in the fourth quarter we elected to participant in the Treasury liquidity guarantee program.

We have not issued any senior debt under this program and have $5 billion in capacity.

Finally, at quarter end we held $9.6 billion of liquid AAA rated mortgage-backed Freddie Mac and Fannie Mae securities which had an accumulated unrealized pretax gain of $298 million.

Slide 22 outlines the results of some of our cost saving initiatives.

We are taking actions to assist us in weathering the current economic environment such as work force reductions and freezing salaries for the top 20% of the Company.

The first quarter results reflect a significant decrease in salaries, incentives and share-based compensation over year ago levels.

Total salary expenses were down $16 million from the fourth quarter and $29 million from the first quarter of last year.

We're also carefully controlling discretionary expenses, which is demonstrated by the fact that travel and entertainment expenses in the first quarter were 50% of what they were in the same period a year ago.

Our cost cutting efforts are somewhat offset by rising FDIC and pension expenses.

The FDIC has imposed higher insurance costs for all banks and our pension costs have increased as a result of a lower discount rate and market returns.

Our qualified pension plan remains well funded.

Slide 23 illustrates our success in reducing our work force while we continue to grow assets.

Our work force has been reduced by almost 1,000 positions or nearly 10% since March 2008.

In addition, we announced severance in the first quarter affecting about 175 positions, which will result in incremental annualized salary savings of about $10 million.

Slide 24 provides additional detail on some of the actions we've been taking to assist in weathering the current economic environment.

We've seen a number of revenue generation opportunities including expanding our success with the social security prepaid debit card, leveraging our position as a trusted advisor in developing new and expanded personal trust clients and maximizing the opportunities to assist new and existing customers in refinancing their mortgages in this low rate environment.

We will continue to carefully control expenses.

By streamlining operations and leveraging technology we have significantly reduced our work force over the past year.

We have slowed the banking center expansion program and are tactically reducing capital expenditure and discretionary expenses.

We will continue to look for additional opportunities to increase our efficiencies.

As far as net interest income we have had great success over the last year in increasing loan spreads, and as relationships come up for renewal, we expect to continue this effort as appropriate.

Also we added $2 billion in mortgage-backed Government agency securities to the investment portfolio to temporarily leverage our strong capital as we work to develop new and expand existing customer relationships.

Finally we will remain vigilant in managing credit.

As Dale commented, early recognition of issues is very important and will result in the best possible outcome in a workout situation.

Also we will continue to pursue loan sales, especially residential development loans.

Slide 25 updates our expectations for 2009.

We will continue to develop new and expand existing relationships with appropriate pricing and credit standards.

The rapidly contracting economy is expected to result in subdued loan demand, as has been a historical experience in every recession.

We believe that the net interest margin will expand other the remainder of 2009 as a result of improving loan pricing and the run off of higher cost time deposits and debt.

The target (Fed funds and short-term LIBOR rates are expected to remain unchanged for the remainder of 2009.

Our outlook for credit quality is for full year 2009 net credit related charge-offs of $650 million to $700 million.

Provisions are expected to continue to exceed net charge-offs.

Cost saving initiative are expected to assist us in achieving a mid single-digit decline in noninterest expenses from 2008 levels despite increasing FDIC and pension costs.

We believe our strong capital position, vigilance in monitoring credit and focus on controlling expenses will assist us in managing through the current environment and position us well as the economy improves.

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

(Operator Instructions).

Your first question comes from Steven Alexopoulos from JP Morgan.

Good morning, everyone.

Good morning, Steven.

Dale could you talk about which portfolio or geography is driving the increased expectation for charge-offs for the full year compared to the guidance that you just gave last quarter?

I don't know that I would necessarily pinpoint it in any one segment.

I think that our sense is that the recession is a little worse than we might have originally thought.

So I would start off from that perspective.

We said that middle market and small business would get softer; we're clearly seeing that in all of our geographies.

And as we've said before, residential real estate -- we're still seeing new appraisals showing lower values.

So that's having an impact on how we look at our assessment going forward.

So I would say it's more around our line of business look than necessarily any one geography.

I mean Texas continues to do pretty well, it is a little softer here but it does well.

Obviously Michigan, California and Florida are struggling a bit.

But I'd sort of characterize it that way.

Looking at the $100 million or so direct exposure to GM and Ford, is that all performing today?

And what happens if GM does declare bankruptcy in terms of loss content there?

Well, I would say a couple of things.

I said first of all in terms of our GM exposure, it's frankly relatively modest compared to where it had been historically.

It's very well secured.

So even if that were to happen, I believe that we're pretty well protected.

And again it's not that large in terms of what we have got.

And in terms of how we handled the, for example, the supplier portfolio, we're obviously-- we have brought that down a lot.

We have in here what our exposure is to suppliers where there's 50% or more revenue coming from GM and Chrysler.

That's, in terms of the size of our portfolio, not all that large.

And so we're kind of paying attention to what happens.

We're obviously paying attention to the supplier program they've put in place; more details are emerging every day on that.

So, we think we've acted as though GM is-- whether it's in a bankruptcy or not, is obviously continuing to struggle and we think we've done all of the right things all things that we can do to protect ourselves.

Thanks, guys.

Thank you.

Your next question comes from Brian Klock with KBW.

Good morning.

Morning, Brian.

Dale, can you update us on the outstanding balances in your shared national credit portfolio?

Well, we don't talk specifically but I mean they have increased a bit.

I think right now our SNC credits are about 23.5% of our loans.

And it-- but it's-- as it has been over the last number of years, it's very well diversified by line of business.

So there isn't just one business that would have the bulk of that.

It has performed very well from a credit perspective compared to some of our other businesses.

We clearly have pushed for more connectivity, more ancillary business and I think that's been a successful strategy.

So-- and clearly we've gone through the SNC exams, and anything that would have been out of that would have been reflected in our numbers.

So we're pleased with that.

So, it's doing fine.

Okay.

So -- Was there any NPLs here in the first quarter or charge-off balances related to that SNC portfolio?

Yeah, there are some.

It's actually down from the fourth quarter and down from the last few quarters.

There's not-- it's not really of a material amount, and there were some inflows in the NPL category in the SNC category.

Okay.

Can you give us a kind of ball park figure of what the NPLs are in that?

Yeah, I-- it's probably, if you look at our overall SNMCNPLs, they're about 20% or so of our overall NPLs.

Okay.

It's consistent with the portfolio size.

The loans were down about $400 million in the quarter, SNC quarter or SNC loans quarter-over-quarter and they're about similar outstanding levels as a year ago.

Right, right.

Okay.

Great, thanks.

And actually, Dale, do you have the updated watch list loan balances first quarter versus fourth quarter?

Yeah, we've shown them in the slide.

It's $6.6 billion of our watch loan lists and that compared to the $5.7 billion that was at the fourth quarter.

And that just reflects the-- again the softness in the economy, the-- a little more middle market and small business that we've been talking about and the fact that we've been very aggressive in getting in front of these, which means we've been aggressive at looking at the ratings.

Okay and then just maybe one last question, Dale for you or for Beth, I guess the comment on when you give the guidance for net charge-offs of $650 million to $700 million for the year, would we expect to see the same sort of provision to charge-offs ratio that we saw in the first quarter?

Well, I don't know what it would ultimately be.

I would tell you that we would expect that we would see provisions certainly well in excess of charge-offs for the next, at least the next few quarters if not the rest of the year.

And my guess is it would probably look a little bit like it's looked over the last few quarters.

Okay, great.

Thanks, guys.

Appreciate it.

Thank you.

Your next question comes from Brian Foran with Goldman Sachs.

Hi, Brian.

Hey, good morning.

Good morning.

I guess just going back to the credit guidance, we've had different guidance from different banks and people like BB&T saying charge-offs are going to fall despite NPAs accelerating.

Now you're saying NPAs inflows are decelerating but charge-offs are going to go up.

Is the guidance predicated on NPA inflows turning for the rest of the year as the economy continues to weaken or is the guidance predicated on an expectation of higher severities despite deceleration in NPA inflows?

Well I think it has a-- it's related to NPL inflows, certainly, but it's related to a number of other factors as well.

And again if you look at peak-to-trough decline in GDP, if you look at unemployment, which we think might be somewhere in the 10% range towards the end of the year, and other macroeconomic variables, all those kind of weigh on our thinking as we tend to look at portfolios deal-by-deal (inaudible) in the quarterly CQR process.

So it's driven by a number of factors.

The NPL flow would be one of those.

And then if I can just follow up on the SNC portfolio, some of the blow ups we've seen at other banks have been focused on construction and commercial real estate exposure within SNC.

I mean is your shared national credit portfolio -- can you give us at least a sense of how much of it is C&I versus how much of it is commercial real estate and construction?

Well the-- it's fairly granular across our business.

I would say that if you look at our CRE book of SNCs it's actually a smaller percentage than the actual SNCs of the total loans.

So if SNCs are 23.5% of total loans, which they are, our CRE book is less than that.

So that should give you some sense of the size of it.

Is there any meaningful construction shared national credit exposure?

Well there's some.

I mean certainly in some of our construction deals where there were large projects we would have participated with good customers in a shared national credit and, i.e., participation in a large project.

So there's, there is certainly some of that in there, yes.

Thank you.

Thank you.

Your next question comes from Heather Wolf with Bank of America.

Hi, good morning.

Good morning, Heather.

Good morning.

Quick question for you on the margin, just curious if, Beth, your comments regarding the ability to pay down borrowings and high cost deposits stems only from the overfunded position or also from an expectation that deposit growth, noninterest bearing deposit growth is going to continue?

No.

The margin outlook, as we've said it earlier, we believe the core margin bottomed in January.

So we saw February and March look better.

And our expectation is that margin will further expand through the rest of the year for really largely two reasons.

One is continuing to work through better pricing on loans, which takes a while to work -- over a two to three year period to work through our portfolio.

And secondly we will see some higher cost CDs and debt mature in the balance of the year.

And our assumption is that those will be replaced either through deposit growth or through other funding alternatives at lower rates than exist today.

Got it.

And then on the loan pricing can you give us a rough feel for what kinds of wider spreads you're seeing and what the duration of your loan portfolio is?

Yeah, we're seeing anywhere from 50 to 125.

It really could be 150, really, basis points.

It just depends on the risk rating in particular for a particular borrower.

So that's a pretty good spread but a pretty big, nice pick up from what we had seen previously.

Our loan portfolio is two to three year kind of duration.

So it'll-- we have been underway on these efforts really for about a year.

And so it will-- that's why we'll see further expansion work its way through the margin this year and frankly into next year as well.

Okay.

And one last question for Dale, can you give us a little bit of color on the makeup of the increase in the 90 day past due category?

Sure.

What types of loans were in there?

Well, there's a mixture but it's-- these are loans -- just to cover that point, I guess, more broadly, these are loans that are for the most part, in fact probably entirely, all secured.

These are loans that are appropriately rated.

I feel comfortable with the rating.

These are loans that are in the process of renegotiation.

A number of them actually are current but the note has matured.

A few of them would be shared national credits that are performing; but when you involve several banks in a renegotiation in this environment, it takes longer to draw up to closure.

A number of these things in fact have been brought current.

So my view is that they are appropriately rated, they are being renegotiated.

In a number of cases they have been brought current already.

So-- but it just takes longer in this environment, quite frankly, to get through renegotiations of deals.

We want to be, frankly our covenants want to be more restrictive.

So it's just a process that's a little different today in this kind of an environment.

But I'm comfortable with what's there.

And what about the product makeup?

Is there any one type of loan that's contributing to it or--?

No.

It's actually -- when you look at it there's some middle market loans, they'll be some small business loans, they'll be some real estate loans, so it's a broad array both in terms of loan type and in terms of the market.

Okay.

Great.

Thanks so much.

Thank you.

(Operator Instructions).

Your next question comes from Jeff Davis with Howe Barnes.

Morning, Jeff.

Good morning.

Hi, Jeff.

Morning.

Good morning.

Questions for Dale and then also Beth.

One, Dale, if you could comment on what sort of financial institution exposure Comerica has and if there's anything material, what might be nonperforming or what are you watching?

Secondly, how is the energy book performing, any emerging issues there?

And then, Beth, any issues with the Federal Home Loan Bank of Dallas as it relates to your preferred stock?

Okay, frankly we don't have that much in terms of our overall financial institution book.

We've been-- canceled a number of exposures, we reduced a number.

And frankly, where we have it is primarily for the use of our money [desk], for counterparty risk; it's all well rated exposures.

We don't do a lot of things that would not be well rated.

It's reviewed through our executive loan committee, which would include me and our Vice Chairman of the business bank and so forth.

So I don't have a specific number for you right this second, how big that is, but it's come down substantially over the last year or two.

In terms of the energy book, it continues to perform well.

It's come down a bit.

The markets actually there, the capital markets there have actually freed up a bit.

So we've seen some of those loans actually go into a, into a capital market type of financing structure which has paid down some of our debt.

We've had fundamentally one problem credit that we've been working on.

But other than that, the book is performing very well.

Okay.

And before going to Beth, just quickly or refresh me how big is the energy book and how big is this one credit?

I won't-- we're $1.7 billion in outstandings in the energy book, which is down slightly, I believe, from the last quarter, when it was about $1.8 billion.

And it was one credit that is just around $10 million or so, so it's relatively small.

Great.

Thank you.

Okay.

On the home loan side, we as -- just to refresh everyone's memory, joined the Federal Home Loan Bank of Dallas about a year ago and have $8 billion that we've accessed through them in outstandings of a variety of maturities.

As part of the joining the Home Loan Bank you make equity investments.

These are common stock investments in the, in the Home Loan Bank.

Actually the Home Loan Bank of Dallas is in very good shape relative to some of its weaker peers.

And we do regular reviews from a credit standpoint of the Home Loan Bank, so we feel comfortable with that investment in that relationship.

Thank you.

Your next question comes from--

Thank you.

Your next question comes from Terry McEvoy with Oppenheimer.

Morning, Terry.

Good morning.

Dale, I was wondering if you could just talk about your commercial real estate portfolio in Texas of $1.2 billion.

Specifically how much of that is residential construction, and then if you could break that out to some degree by market?

Our commercial real estate book in Texas is relatively small.

The bulk of what we've got tends to be in the Western market.

So in the $5.4 billion line of business we have a slide that we've gone through that reflects that for you, so give me a second.

Michigan, and this would be the Slide 13 I referred to before, the Michigan portfolio is 14% or about $700 million.

Texas is $1.2 billion.

Western market, as I said, which is the biggest piece, is $2.2 .

Florida is $700 million and then everything else is under $600 million.

So that's the composition of it.

We also on that slide show you the product type.

The Texas real estate portfolio continues to perform very well for us.

And while there is some softness there, we haven't seen any real significant issues manifest themselves yet.

Texas has been a little bit different in terms of what it's experienced.

It hasn't seen the rapid price escalations that you've seen in some other markets and I think that's actually helped this market do better.

So that would be my

Terry, in the appendix slides, there are detail on the residential piece of Texas.

And of that $1.2 billion that Dale mentioned, $240 million is residential.

Great.

And then were there any noticeable charge-offs in your technology and life science division this past quarter?

Technology and life sciences had four deals that we charged-off amounting to about $10 million or $11 million.

So it was not a big amount and it was spread around four deals.

So that would be-- and frankly, that's pretty good performance I think in this environment.

Thank you.

Thank you.

Thanks.

Your next question comes from Kevin St.

Pierre with Bernstein.

Good morning, Kevin.

Good morning.

As we hear from more banks around the quarter there appears to be a separate set of rules about repaying the TARP capital for those involved in the stress test and those that are not.

Given that you're below the stress test's $100 billion threshold, and you printed a net-- a positive net income but a loss net income available to common and your capital ratios are strong, could you comment on your appetite about-- for repaying the TARP capital?

Well as I mentioned in my comments we are looking at that and certainly looking at the economic environment as well.

And that is key as we look forward.

As you mentioned, our capital is strong.

It was strong at the time we issued the preferred stock.

And if we took the preferred stock out today, it remains strong and well within our historic guidelines and especially strong when you look at the tangible equity side, which would be toward the high end of our peer group, which is at that 7.2% tangible equity.

And as Dale mentioned and Beth mentioned as well, we go through our own stress test of various portfolios as we're building the reserve quarterly and review that not only with our regulators but our auditors.

So we'll be looking at that closely as to when and what the appropriate time is to pay the preferred stock back.

Great.

Thank you.

And just one unrelated, on the deposits as I look at the line of business deposits on Slide 40 it appears this strength was driven by specialty businesses and finance and other.

Could you comment on any special initiatives or any particular drivers of that strength?

I guess I'm not sure on the slide itself.

Specialty businesses are down quarter-over-quarter.

So I'm not sure what you're referring to.

I'm sorry, my quarters, I was looking right to left as opposed to right to left.

Okay.

Just disregard that, my apologies.

All right, no problem.

No problem.

Your last question comes from the line of Joe Stieven with Stieven Capital.

Morning, Joe.

Hi, Ralph, how are you?

Good.

Nearly all of my questions have been answered.

But when you talk about your potential margin improvement, part of it you're talking about getting rid of some of the wholesale funding.

But how much improvement are you just seeing on your traditional core deposit base [with this] just as repricing down, and how much more room do you have for that to help on the improvement side?

Thanks, Ralph.

On the-- I'm sorry; I missed the-- the driver for the--?

Looking at deposit pricing and how much room is there left on lowering deposit pricing.

Yeah I think--

On the core side.

On the core side.

We did see rates lower, obviously on the core deposits in the quarter, which was a positive.

Obviously they weren't as-- they did not come down as much as, obviously, loan yields did.

But I think selectively there are-- have been opportunities, continue to be opportunities as we entered into the quarter, but they're less prevalent than they sure were a couple of quarters ago.

But I think we'll see -- LIBOR funding has become more a rationalized pricing than -- LIBOR was a very elevated rate in the fall and in the fourth quarter.

So, we have seen that more right itself, which I think will be helpful.

And we're very pleased about the, the inflow of deposits and we'll be continuing to work hard to retain those and grow those further.

Joe, I think to emphasize what Beth just said, I think on the core side we're getting pretty close to the bottom.

Okay.

Okay thanks, guys.

Thank you.

I'd now like to turn the call back to Ralph for any closing remarks.

Thank you very much for being with us on the call today and we appreciate your continued interest in Comerica and thanks again and have a good day.

This concludes today's Comerica first quarter 2009 earnings conference call.

Thank you for your participation.

You may now disconnect.