Comerica Inc (CMA) 2009 Q4 法說會逐字稿

Goods morning.

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

At this time I would like to welcome everyone to the Comerica fourth quarter 2009 earnings conference call.

All line versus been placed on mute to prevent any background noise.

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

(Operator Instructions).

Thank you.

Ms.

Darlene Persons, you may begin the conference.

Thank you, Regina.

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

This is Darlene Persons, Director of Investor Relations.

I am here with our Chairman, Ralph Babb, our Chief Financial Officer, Beth Acton and Dale Greene our Chief Credit Officer.

A copy of our earnings release, financial statements, and supplemental information is available on the SEC web site as well as on our web site.

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

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

Also this conference call will reference non-GAAP financial measures.

In that regard I would direct you to the calculation of these measures within the earnings release and presentation.

Now I will turn call over to Ralph.

Good morning.

We saw many encouraging signs in the fourth quarter including improved credit metrics, continued strong deposit growth, a slower pace of decline in loan demand, and a notable increase in the net interest margin.

These positive developments lead us to believe our core fundamentals will continue to show improvement in 2010.

We are pleased to see broad based improvement in credit quality.

Net credit related charge offs decreased $14 million in the fourth quarter, nonperforming assets decreased $13 million, and the provision for loan losses decreased $54 million.

Nonaccrual loans were charged down to 44%, as of December 31 versus 41% at September 30.

Our watch list loans were down $520 million.

We believe these improved credit metrics are the result of our diligent management of credit throughout this economic cycle.

With unemployment at 10%, business owners and managers as well as consumers remain cautious.

This is reflected in the subdued loan demand and in our core deposits, which increased $935 million from the third quarter; however, our customers are conveying a more confident tone, and we are seeing more loans in the pipeline.

New, and renewed loan commitments totaled $9.8 billion in the fourth quarter, combined with our strong capital levels and dedicated colleagues, we believe we are ideally positioned to develop new relationships, and expand existing ones as the economy continues its recovery.

Our net interest margin increased 26 basis points to 2.94% in the fourth quarter.

Excluding excess liquidity, represented by average balances deposited with the Federal Reserve Bank, the net interest margin would have been 3.07%.

We continue to focus on expense controls, our work force has been reduced by 8% from 2008 even as we added 10 new banking centers in 2009.

Our capital position remains strong.

Our Tier 1 capital ratio is estimated to be 12.46% at December 31.

In addition, the quality of our capital remains solid.

As evidenced by a tangible common equity ratio of 7.99%.

With regard to the $2.25 billion in preferred stock we still plan to redeem it at such time as feasible with careful consideration given to the economic environment.

It remains a top corporate priority.

In summary, we believe the future is brighter and that current opportunities are ahead of us, because of the many positive signs we have seen in the fourth quarter.

These positive signs are reflected in the breadth of improvement we have seen in credit quality, as well as in our strong deposit growth.

The less subdued loan demand and in our increasing net interest margin.

Our customers are expressing more optimism and we share that optimism with them as the economy continues its recovery.

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

Thank you, Ralph.

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

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

Today we reported a fourth quarter 2009 net loss of $29 million.

After preferred dividends of $33 million, the net loss applicable to common stock was $62 million or $0.41 per diluted share.

Slide four, provides an overview of the financial results for the fourth quarter compared to the third quarter.

Credit quality metrics improved consistent with our outlook.

Nonperforming assets declined $13 million and the inflow to nonaccrual slowed by $95 million to $266 million.

Net credit related charge offs decreased to $225 million, and the provision declined to $257 million, compared to $311 million in the third quarter.

The net interest margin in the fourth quarter increased 26 basis points to 2.94%.

Reduced deposit rates, maturing of higher cost time deposits, and improved loan spreads all contributed to the increase.

The low return on excess liquidity had a 13 basis point impact which I will describe in more detail in a minute.

We had very strong deposit generation again, in the fourth quarter, with core deposits increasing $935 million, including a $1.2 billion increase in noninterest bearing deposits.

Average earning assets decreased $3.6 billion, including a $2 billion decline in loan outstandings.

Our customers continue to be cautious, in the current economic environment.

Average other earnings assets primarily Federal Reserve Bank deposits and investment securities, declined $1.6 billion as average excess liquidity was reduced.

Noninterest income decreased due to a $97 million decline, in securities gains, consistent with our outlook.

We continued to carefully control expenses.

The fourth quarter results reflected a decrease in regular salaries, and incentives, which were more than offset by an increase in severance expense relating to a planned reduction of 300 full time equivalent positions.

Our work force has been reduced by 850 positions or 8% since December 2008.

Full-year 2009 noninterest expenses decreased 6% from 2008.

Our capital position is strong, and was further enhanced in the fourth quarter, the Tier 1 capital ratio increased to an estimated 12.46%, at December 31.

In addition, the quality of our capital is solid as evidenced by our tangible common equity ratio of 7.99%.

Turning to Slide five, average loan outstandings declined at a slower pace in the fourth quarter compared to the third quarter.

Consistent with post recessionary environments we had low loan demand in all of our geographic markets as customers continue to deleverage as they cautiously manage their businesses.

Decreased average outstandings in the fourth quarter were noted in virtually every area with the largest declines in middle-market, global corporate banking and commercial real estate.

Line utilization was 46.8%, in the fourth quarter, down slightly from the third quarter.

As shown on Slide six, we had very strong core deposit growth again in the fourth quarter, we had growth in Texas, western and Florida markets, and all commercial lines of business.

Average core deposits increased $935 million, including a $1.2 billion increase in noninterest bearing deposits.

While deposit rates are significantly lower today, I am pleased to say that to date we have retained the vast majority of the balances of maturing customer CDs, many of which were put out in late 2008 at rates over 3%.

Deposit pricing conditions remained competitive in the fourth quarter, and we believe we have hit rate floors on a number of products; however, we were able to selectively decrease rates at certain deposit categories.

As outlined on Slide seven, the net interest margin increased 26 basis points in the fourth quarter to 2.94%.

Excluding the impact of excess liquidity the net interest margin would have been 3.07%, in the fourth quarter, an increase of 23 basis points from the third quarter.

The increase was primarily a result of lower core deposit rates, maturing higher cost customer CDs and other time deposits, and a decrease in excess liquidity.

In the fourth quarter, excess liquidity had an approximately 13 basis point negative effect on the margin compared to a 16 basis point impact in the third quarter.

Excess liquidity was represented by an average of $2.5 billion deposited with the Federal Reserve in the fourth quarter, down from an average $3.5 billion in the third quarter.

With the maturities of wholesale funding and expected loan growth, we expect excess liquidity will dissipate in the first half of the year.

This excess liquidity is above and beyond the investment securities portfolio which will continue to provide a reservoir of liquidity.

Turning to Slide eight, we focus on expense management on a daily basis.

Our largest expense item is salaries and therefore management of staff levels is key.

As you can see on the slide we have consistently reduced personnel over the past several years even while we were opening new banking centers.

In 2009, in response to the recession and as part of our ongoing efforts to leverage technology, and maximize productivity to support growth, full-time equivalent staff decreased by approximately 850 employees, or 8%.

In 2010 we expect to achieve the further reduction of about 300 positions or about 3% of the total work force, which will largely be completed by mid year.

These positions are across all lines of business, and geographies.

In conjunction with this action we incurred a severance charge of $11 million in the fourth quarter.

Annualized salary savings of about $16 million related to this action are expected going forward.

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

Good morning.

We saw broad based improvement in our credit metrics in the fourth quarter.

As expected, fourth quarter net credit related charge offs and the provision for credit losses improved from third quarter levels.

Economic conditions continue to be challenging, but we are seeing more encouraging signs that things are improving.

Net credit related charge offs were $225 million in the fourth quarter, a $14 million reduction from the third quarter.

Net charge offs included $62 million in the commercial real estate line of business, primarily related to residential real estate development down from $91 million in the third quarter.

The decline in commercial real estate charge offs reflects the wind down of the California local residential real estate portfolio, and the fact that we believe we have been taking the necessary charges to reflect declining values over the past two years.

We also continue to see values stabilize in select markets.

Provision for credit related losses of $259 million, was $54 million less than the third quarter.

The provision exceeded net charge offs by $34 million, compared to $74 million in the third quarter reflecting the improvement in overall credit performance.

The allowance for loan losses was 2.34% of total loans, an increase of 15 basis points from the third quarter.

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

Turning to Slide 10, total nonperforming assets declined $13 million, to $1.3 billion.

Importantly, the inflow to nonperforming assets decreased by $95 million in the fourth quarter, loans past due 90 days or more and still accruing declined $60 million to $101 million.

Foreclosed property held relatively stable.

Other real estate expenses in the fourth quarter increased to $22 million from $10 million in the third quarter.

This reflects write downs related to updated appraisals.

The average carrying value of these properties is now well below 40% of the original contractual loan amount.

Also, we believe the -- that the market is starting to stabilize.

Therefore, we expect quarterly ORE expenses going forward to be less than the fourth quarter level.

Our watch list loans decreased by $520 million to $7.7 billion at the end of the fourth quarter.

This reflects improvements in our portfolio in all geographic markets and across virtually all lines of business.

On Slide 11 we provide information on the make up of the nonaccrual loans.

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

Commercial real estate nonaccrual loans decreased by $47 million in the quarter.

Nonaccruals also decreased in middle-market by $17 million.

Personal banking which falls within other business lines saw a $25 million increase in nonaccruals as the weak economy has taken a toll on some of our residential mortgage customers.

Because these are primarily seasoned mortgages, the loss content remains low.

During the fourth quarter, 2009, $266 million of loan relationships greater than $2 million were transferred to nonaccrual status, a reduction of $95 million from the third quarter.

Of these inflows, commercial real estate and line of business contributed $64 million down from $211 million in the third quarter.

Middle-market at $85 million a small decrease from the third quarter.

Inflows increased modestly in several lines of business such as small business, global corporate banking, and technology and life science from low levels.

Slide 12 provides further detail on our nonaccrual loans.

Collateral values on nonaccrual loans are reviewed every quarter as part of our credit quality review process.

We have written down nonperforming loans by 44%, compared to 34% a year ago.

The carrying value plus the reserve reflected current market conditions.

We had $34 million in total troubled debt restructurings or TDRs.

This included $18 million in reduced rates loans, primarily residential mortgages, $5 million in other nonperforming TDRs and $11 million in performing TDRs.

In the fourth quarter, we sold $11 million in loans, four loans totaling $10 million were nonperforming.

The average price was close to carrying values plus reserves.

We have seen a firming of prices particularly for distressed syndicated debt and we continue to pursue loan sales on off basis.

On Slide 13 we provide a break down of net credit related charge offs by office of loan origination.

Net charge offs in all four major geographic markets declined in the fourth quarter.

Within the Midwest, which made up 43% of the total, middle-market charge offs declined.

Small business charge offs were relatively stable, and we saw small increases in private banking and global banking.

Western market charge offs made up 38% of the total.

The decrease from the third quarter was driven by a decline in residential development related charge offs as well as global corporate banking.

Middle-market posted an increase from the third quarter.

Texas net charge offs returned to a relatively low level with no particular area of concentration.

As far as Florida, net charge offs declined again in the fourth quarter as there were no additional significant write downs on the condo portfolio.

Other markets net charge offs increased with no particular geographic or industry focus.

Slide 14 provides detail on net loan charge offs by line of business.

The commercial real estate line of business charge offs declined while middle-market increased as expected.

Charge offs for wealth and institutional management, small business and personal banking were relatively stable.

On Slide 15, we provide a detailed break down by geography and project type of our commercial real estate line of business which declined $194 million from the prior quarter.

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

At December 31, 22% of this portfolio consisted of loans made to residential real estate developers, secured by the underlying real estate.

Michigan outstandings of $620 million represented 13% of the portfolio and were down $142 million from a year ago.

Florida outstandings of $553 million represents (technical difficulty) [1%] of the portfolio owe and were down $160 million from a year ago.

As shown on Slide 16, as of the fourth quarter, as of the end of the fourth quarter, we reduced residential real estate development exposure by $1.2 billion or 54% since June of 2008.

Total single family construction outstandings were down $785 million or 59% from June 2008.

Turning to Slide 17 we display project type and geographic break down of net charge offs for the commercial real estate line of business.

Consistent with the decline in total commercial real estate nonaccrual loans and decline at inflows to nonaccrual loans, we had a $29 million or a 33% decrease in net charge offs in the fourth quarter, for a total of $62 million.

Residential real estate development loan charge offs decreased by over 50% in the fourth quarter.

We have seen prices for single family homes stabilize and even increase in select markets; however, land prices remain soft and in some locations continue to decline.

Charge offs in nonresidential real estate construction segment increased in the fourth quarter.

The majority can be attributed to a single transaction secured by entitled land in California.

While we continue to see softness, we believe that nonresidential real estate will see far fewer defaults and much lower loss content than the residential construction segment.

In fact, we had only one nonresidential commercial real estate loan over $2 million transferred to nonaccrual in the fourth quarter.

Total commercial real estate related charge offs decreased in western, Texas and other markets, Midwest was stable.

As far as Florida, charge off have trended downward for the last two quarters.

We have limited land exposure in Florida, and single family exposure has been managed down for some time.

The issues in Florida are primarily related to condo exposure, which total about $100 million at December 31, down from about $125 million at the end of September.

Condo closings are occurring but at a very modest level.

Slide 18 provides an overview of our consumer loan portfolio.

This portfolio is relatively small, representing less than 10% of our total loans.

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

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

Net charge offs for residential mortgages decreased again in the fourth quarter.

The home equity loan portfolio has held up relatively well with a slight increase in charge offs in the fourth quarter and 30 and 90 day delinquency rates improved.

Slides detailing our auto dealer and automotive supplier portfolio can be found in the appendix.

Both portfolios continue to perform well.

As far as the auto supplier portfolio, we continue to reduce our loan outstandings and it now represents only 2% of our total loans.

Nonaccrual loans and net charge offs declined significantly in the fourth quarter.

The auto dealer average outstandings have declined $1.4 billion or 32% over the past year in line with falling sales volumes of new cars and we continue to have excellent credit quality in this portfolio.

To conclude on credit, we conduct in depth reviews of all of our watch list credits at least quarterly to insure that we have an appropriate work out strategy as well as reserves and carrying values that reflect our collateral assessment.

This proactive action has resulted in a current carrying value of nonperforming loans of 56%.

We are pleased with the improvement in credit metrics in the fourth quarter; these results as well as [our] improving macro economic statistics support our outlook for net credit related charge offs of $775 million to $825 million for 2010.

We expect the provision for credit losses to slightly exceed net charge offs for the year.

And now I will turn the call back to Beth.

Thanks, Dale.

Turning to Slide 19, our Tier 1 capital ratio is well in excess of the well capitalized threshold as defined by the regulators and it has increased in each of the past five quarters.

Turning to Slide 20, and the tangible common equity ratio.

We have maintained a solid capital structure with a large component of common equity for many years.

Our tangible common equity ratio which was 7.99% at the end of the fourth quarter increased from the third quarter, and historically has been well above the average ratio of our peer group.

Slide 21 provides our expectations for 2010, which is based on a modestly improving economic environment.

We expect subdued loan demand for a while longer, as loan growth typically lags other positive economic indicators.

We believe we will achieve single-digit period-end to period-end loan growth.

We expect the securities portfolio will remain at the current level.

Based on the assumption that there will not -- there will not be an increase in the Fed Funds rate in 2010, we expect that the net interest margin will increase to 3.15% to 3.25% as a result of maturities of higher cost CDs and wholesale funding and a reduction in excess liquidity.

In addition, we expect the margin will continue to benefit from the improved loan pricing.

Our outlook is for net credit related charge offs of $775 million to $825 million, provision is expected to be slightly in excess of net charge offs.

Noninterest income excluding 2009 securities gains is expected to be flat, as increases in core fee income are offset by 2009 nonrecurring items such as gains on the repurchase of debt.

The expected reduction of pension, FDIC in ORE expense as well as the continued careful control of discretionary costs is expected to result in low single-digit decrease in expenses.

Overall, the many positive signs we saw in the fourth quarter such as improved credit metrics, continued strong deposit growth, a slower pace of decline in loan demand and a significant increase in the net interest margin lead us to believe we will continue to see improvement in our core operating fundamentals in 2010.

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

(Operator Instructions).

Your first question comes from the line of Steven Alexopoulos with JPMorgan.

Good morning.

Just a start, maybe to drill down into the provision guidance a bit.

I believe it is full year provision exceeding net charge offs but Dale do you expect in the later quarters of 2010 to actually start providing below net charge offs.

My sense of it is that with the very broad based improvement in the metrics [we] saw in the fourth quarter and a number of them we have talked about, that we should continue to see that delta, I mean you saw the reduction actually between the charge offs and provision fall rather substantially from quarter to quarter last quarter.

So my guess is if we continue to see the economy show steady improvement that we would probably be at that point.

Then just to follow up on that given what we saw with the watch list this quarter, how should we think about the trend in inflows into nonaccrual, should that gap down here or do you expect it to be more gradual through the year?

I don't suspect that it will be like falling off a cliff but I think we will see gradual improvement as the economy continues to improve.

And clearly everything we are seeing kind of points to that.

So hopefully that is in fact the case.

Just one technical one for Beth.

The guidance for the single-digit decrease in noninterest expense is that off the base of the $1.649 billion.

That's correct.

Okay.

Thanks, guys.

Thank you.

Our next question comes from the line of Craig Siegenthaler with Credit Suisse.

Good morning.

Thanks and good morning everyone.

Morning.

First we just want to give a little push back on the guidance for loan growth of mid single-digit point to point in 2010.

We know there's a historical correlation between the inflection point and economic growth which happened this year and loan growth recovery next year.

But, given that your loans are still shrinking at a pretty rapid pace, and this recession was deeper and longer than most, how can you make us feel a little more comfortable about positive loan growth next year or actually this year, 2010.

The guidance was for low single-digit growth from the period end, so 12/31/09 to 12/31/10.

When you look at how we are thinking of it.

It will be muted if you think about loans in the first half of this year, and we will see more rise toward the end of this year.

So we are not expecting, we are expecting a fairly typical pattern which is probably two to three quarters after GDP turns positive we start as an industry seeing (inaudible) [growth].

So we believe that could start toward the second, toward the end of the second quarter, in the second quarter, and then perhaps pick up pace is our expectation in the second half.

So this we are talking low single-digit period end to period end growth.

So it really muted in the first half, with more growth in the second.

I think -- the other point is we were -- we were pleased while loans were down in the fourth quarter, that they were down at a slower pace than they were in the third.

So that's at least progress toward what I just described.

Is there anything you can point to quantitatively or fundamentally that you are seeing a turn with your clients or demand for C&I loans, anything you can point to that makes us see that a turn is coming?

I think what we are seeing is we are starting to see some good activity; we are starting to see some backlogs grow.

Clients are starting to talk a little bit more optimistically, so we are starting to hear the things, and starting to see the things that would suggest that our loan volume should start to improve.

I don't suspect that you will necessarily as Beth indicated see that as much early in the year as later in the year.

The other issue is as you know we've got a reasonably sized dealer book that has come down quite a bit because of sales volumes.

Sales volumes are rebounding nicely.

Dealer inventories are at very low levels.

So I think we are going to start to see that business grow a bit as well not only with existing clients but obviously with new clients

Clearly in the lines you are seeing new lines as well as renewed lines that are supporting what Dale and Beth said in that the customers are getting prepared and feeling a little more positive about what's going on and they want to be in a position to seize the opportunity as it moves forward.

Great.

Thanks for taking my questions.

Thank you.

Our next question comes from David Rochester with FBR.

Morning, David.

Morning, guys.

Can you qualify a little bit more where the pipeline is building, which products and the geographies.

Clearly middle-market and particularly in Texas and California.

We are seeing good activities.

We are seeing some opportunities certainly in the large corporate space, particularly in Texas, where, obviously, we have been now head quarters for the last couple of years.

But I would say it is fairly broad based.

As I said, the dealer book, I think we are going to start seeing some activity there as dealers build inventory.

As you know that's been a very good business for us through the years.

And clearly with the banking centers we have got with a more, more of a focus on the small business side we would hope to see more small business growth.

So at this point not really seeing it on the small business side, more in the middle-market side.

Well, more middle-market but I think we're also starting to see it in some other areas as well.

Clearly, you know our focus, as we said for a long time, we are kind of really more in the middle-market space.

We like that space; we have great opportunities given our market share in Texas and California.

I think there's tremendous upside with the kind of banking we do and with the model we bring to the table.

Okay.

Thanks for that.

One last one, if you happen to know what percentage of loans are sitting on floors at this point and what percentage of the book has been renewed at those higher spreads?

Yes.

So, two questions.

One is about floors.

It is only about $3 billion of our $42 billion loan book that has floors.

It is not a significant impact.

Okay.

The second is on the repricing.

I think as we get through the balance of this year, that we will have effectively repriced the entire loan portfolio, and we saw a good improvement in loan spreads in '09, and part of our margin guidance -- improvement in 2010 entails further working through the portfolio -- repricing.

So that we will see further loan spread expansion this year as well.

Okay.

Thank you very much.

Thank you.

Thanks.

Our next question comes from the line of Matthew O'Connor with Deutsche Bank.

Good morning.

Hi, Matt.

I guess I'll take the other side of the loan growth argument and I think when it comes back it will probably come back both sooner and a little bit more than expected.

But the tricky thing to figure out is who is in a position to get this growth.

We can see you have the mix that would suggest that you should get it, but are there any metrics you can provide that suggest you have maintained or gained market share in terms of sales staff or increasing credit commitments?

We have focused on the current environment and as you know in moving our head quarters a couple of years ago down to Texas the focus has been the fast growing markets for us, which are both Texas and California, today we believe we have capacity in California and we are continuing to look at where we are here and how we want to move forward with the resources necessary to be prepared for the turn.

That is part of the overall strategy, and was when we moved here, even before the downturn in the economy.

Any metrics on the credit commitment, you gave us the line utilization, but you can often measure some market share gains just by looking at the total commitments.

We don't have any of those numbers --.

We did this in one of our slides, slide 25 that talks about new and renewed commitments, so clearly we are still doing a lot of business with not only existing customers but with new customers as well so that is one measure that we certainly provide on a quarterly basis.

Okay.

Just a totally different topic, we are getting more and more estimates on what the overdraft and NSF regulatory changes might be at the banks.

I think it is much more modest impact for you than for some but do you have a rough estimate on what that might be.

We are still evaluating what's going on in the competitive landscape there and have not formulated specific plans at this juncture, but as you said it is a significantly smaller part of our revenue than for many others.

So it is something we will manage through and make sure we are competitive.

Okay.

Have you disclosed what NSF fees are relative to your total service charges?

It is less than 1% of revenue relate to retail.

Okay.

All right.

Thank you very much.

Thank you.

Your next question comes from the line of Gary Townsend with Hill Townsend Capital.

Hi, Gary.

Morning.

How are you?

Good.

Your capital ratios look awful strong.

What about repaying the TARP at this point?

Well as I mentioned earlier we are focused on that, it is one of our top priorities and we are watching the economy, and we are watching the positive signs that we are seeing to evaluate where we are, and when we will be able to do that.

2010?

We haven't set a date for it.

We continue to monitor it, and then like I said it is one of our top priorities.

Okay.

Dale, good job.

Thanks very much.

Thanks, Gary.

Our next question comes from the line of Heather Wolf with UBS.

Good morning.

Morning, Heather .

Dale, quick question on C&I.

I know that migration in this product is notoriously lumpy.

What are you thinking in terms of your peak losses and NPLs?

Have we seen it, is it this quarter or do you expect some further deterioration as we move through 2010.

I think, again, if you look, Heather, at any metric you want and put them all together I think we -- not only have we said we would think, we thought the fourth quarter would show improvements and certainly we said we would see improvements in charge offs but across the board we have seen steady improvements and when I looked at the watch category and [down] $520 million quarter-over-quarter and I look at the components of it , I feel pretty good that in the C&I book that -- that not only are we on top of it but we should see steady improvements.

I'm very confident in that.

That book has held up well for

To amplify what Dale said, the really good thing about the watch list decline, it is broad based.

It is across all of our geographic markets including Michigan, and it is across virtually all of our business lines.

So I think that gives us -- that is a very important factor.

Right.

Which I think is very reflective of the markets we are in.

Right.

Which is one of [the]key strategies for us, and the businesses we are in.

Right.

Okay.

Great.

Thank you very much.

Thank you.

Our next question comes from Jeff Davis with FTN Equity Capital Markets.

Good morning.

Hi, Jeff.

Question for you, Dale, maybe it is obvious, but maybe not.

In terms of the low rate environment, how much is -- since credit for your company and many others looks like it has peaked or is on the verge of peaking, how important was the zero rate interest policy for -- from the Fed, in terms of borrowers getting over the hump, and then secondly, consensus is for limited rate hikes late this year and into 2011, but if rates go up say 300 BIPS does that matter for credit in 2011?

I don't think there is any doubt that particularly in real estate side, single family in particular, that a lot of the programs and the rates --(inaudible) piece of it certainly helped.

I don't think there's any question.

What about C&I.

In C&I I think In general that has been probably less of an issue than it has been for real estate.

I wouldn't discount it as not being important but I think it is a little less significant in the C&I book than for the real estate book for us.

As to a rate hike and its impact, it is hard to evaluate.

I think people probably at some point would anticipate that.

That their plans would incorporate that.

I think as the economy gets better, most of our customers have rationalized the devil out of their expense structure.

They have lived with an environment, whether it be in Michigan or anywhere else, for two or more years of difficulty.

So I think they are poised to take advantage of revenue growth.

I think we will see revenue growth and I think that will help accommodate whatever happens on the rate side.

I think if rates are going up as much as you are just describing there, hopefully that means there's a good strong growth underlying it which will be helpful to what Dale just described.

In addition, obviously a rate rise helps us from an interest rate (inaudible) standpoint.

Right.

But I think rising rates probably means a better economy, which is good news for Comerica.

Sure.

And our customers.

And our customers.

That's exactly right.

Then just follow-up.

Is -- Ralph, in terms of FDIC deals, what are your thoughts on 2010?

Well, we continue to monitor what's available and as we have said many times in the past, the key for us is it has to fit our model in our markets, and we are very careful as we have -- evaluate that.

We are looking at them to fit into our longer-term strategy not as a transaction in the short-term.

Would it be fair to say that since most that are failing, or if not all of them, have a very heavy real estate dent?

They, all else equal, probably wouldn't be of interest?

Certainly, that would be an issue for us, as we look at it, and we would not want to take on severe risk in any kind of acquisition like that

Our next question comes from Ken Usdin, Banc of America/Merrill Lynch.

Thanks.

Good morning, everyone.

Morning.

First question is -- I noticed you sold a little bit of loans this quarter, $10 million or so, I am just wondering if you are seeing any incremental opportunities for loan sales, how that market is acting and whether or not that would fit your strategy to continue to manage the loss content.

Yes, yes and it looks good.

I would have to say that -- and particularly as we indicated on more of the syndicated side, clearly the secondary market is looking better.

We always are evaluating opportunities, but across the board, I would say there's more interest in distressed asset sales, whether it is packages of deals or one off deals.

In a lot of cases, let's say it is real estate, the prices of real estate and the write downs have been so significant that people are now starting to say maybe the bottom has been reached or maybe we are on the upside of that depending on the market.

So very, very good activity.

We continue to look at that as one of our strategies, to shed assets, certainly problem assets and we will continue to do that.

Great.

Could you give us a little color on two more items.

First of all I noticed there was no provision for Florida this quarter.

I'm just wondering how confident are you maybe that you are really past the peak in Florida, and then secondly, if you could just drill down into income producing CRE and give a little bit more color about why you are continuing to feel so confident about that part of the book.

Well, Florida, in terms of the real estate side, is only $500 million.

For us condos were the issue, that's down to 100; we have taken the marks there that I think we need to take.

Condos are selling although at lower prices and lower absorptions but they're selling.

That market is actually starting -- depending on which part of Florida you are talking about -- and I think we are not -- we are in the market, because we want to be and that I think they are coming back nicely.

We feel pretty good about what we are seeing there; [seeing] very good about the marks we have already taken.

That's why Florida -- we are feeling very good about at this point.

Across the board, income producing properties for us, again a lot of our construction loans have reached completion or are nearing completion.

Again the construction piece is behind us.

We are seeing in many cases, the discounted cash flows are sufficient to structure deals into a mini perm.

We have numerous examples of deals that we have done that with and not only are we able to structure into mini perms, we are able to get, in many cases, more collateral, cross collateralize.

We are also usually able to get better rates and other structure enhancements, so it is a good opportunity right now for us as these loans are completed to really strengthen our position and that's what we have done.

To reinforce, Dale in his script has indicated that we only had one nonresidential commercial real estate loan over $2 million transferred to nonaccrual in fourth quarter.

So there's not a big pile that's waiting to come in or has come in.

That's a good indicator as well.

Great.

Great.

Thanks very much.

Thank you.

You're welcome.

Our next question comes from the line of [Brian Corwin] with Goldman Sachs.

Morning, Brian.

If I think about your deposits and how this loan growth issue is going to play out should we expect a quarter at some point down the road where DDAs shrink, loans are not growing yet, but that's actually a somewhat bullish sign because that's the first source of corporate to actually invest.

They may draw down on their own cash.

Exactly.

I think that will be exactly what you will see because people are keeping their liquidity, and they have got it in deposits.

They're waiting for the turn; they will spend that before they begin to draw down on their lines.

So the follow up would be if I look at your Slide six, I know it is -- people don't raise their hand and define their deposits as excess liquidity versus market share but do you have a sense of how much of your deposit growth over the past year especially has been market share gains versus excess liquidity?

From your customers.

It has been a blend, again back to the mix of our business, being in -- even though we have been in the downturn, being in a couple of the high growth markets has been a plus there, and as I mentioned earlier, people are being very cautious so including picking up new customers, but I don't have a number on the exact mix of that.

But on the slide you referred to, Slide six, you can see we have been growing DDA, actually for -- our chart goes back to the fourth quarter of '07 but as you can see through this recession and the liquidity you talked about an acceleration of that growth.

So we have been growing DDA.

It has just been growing faster with the environment we just described.

If I could sneak one more in.

When we think about your capital ratio, TC's best- in-class, risk-weighted assets work against you.

So the Tier 1 common, Tier 1 ex-TARP, they are all good but not at the top of the stack.

Do you feel like you get credit for that when you speak with the constituents you are dealing with, especially around the TARP issue.

I guess, you know, your risk weightings are high but your charge off and NPA trends wouldn't suggest it necessarily is a riskier balance sheet.

I think it is well understood and everybody understands where we are.

That's the reason our [bent] is to a -- as Beth indicated in her comments -- to a solid and a strong capital base, and being at the 7.99% on the equity side.

Thank you.

Our next question comes from the line of Brian Klock with KBW.

Good morning, all.

Hi, Brian.

By now just about every one of my questions has been answered but just a quick question.

I'm not sure if you covered it early in some of your comments, the commercial real estate portfolio, the income producing piece, how much of that comes up for renewal in 2010 that maybe you can be concerned with, about the collateral values on those properties that come up for renewal this year?

Well, I can't -- off the top of my head I can't tell you exactly what would come up for renewal this year, but again since we haven't really made a new construction loan in the couple, 2.5, maybe 3 years, and we typically make them for two to three years, a lot of them have already come up for renewal and we've dealt with them.

As it relates to valuations, we are doing valuations all the time.

I am not particularly concerned about valuations having necessarily a big impact on us, because we are very current on those as you know.

So, but for the most part, we are seeing generally just improvements in commercial real estate space particularly income producing.

We are seeing projects that are leasing up nicely, obviously in those cases where they are not we are dealing with them.

So I am not really overly concerned about that, Brian, because I think because of the way -- the fact we haven't made a new one in some time a lot of them we have already dealt with.

There's not that many more that I think we have to face this year.

Okay.

Fair enough.

Beth, in the fourth quarter, the tax rate -- the credit -- the effective tax rate was a little bit higher than I thought but was there anything one time in there that drove or that or is it still related to the BOLI and the other low income housing credits as the adjustments there.

There are no unusual tax items in the fourth quarter.

In the second and third we did have some settlements and some anticipation of tax refunds.

But there's nothing unusual in the fourth quarter.

And I think the guidance we gave is certainly for 2010 is the -- on how the tax is calculated, it is consistent with what we have been saying.

Okay.

Great.

Thanks for taking my question.

Thank you.

Our next question comes from Michael Rose with Raymond James.

Good morning.

Morning.

I saw the shared national credit portfolio continues to come down.

Can you talk about any noticeable credit trends in that book?

That portfolio has performed nicely for us.

As you know, we are moving more and more to relationships and less transactions.

In terms of the credit metrics , they're slightly improved from where they were in the last quarter, and you saw all the results of our [snick] portfolio as it relates to the [snick] exam pretty much all reflected in the third quarter.

So that, and it is granular, it is across a number of lines of business, and so forth.

So I don't -- my comments on the [snick] portfolio is it is just a piece of our business, that where we want to develop further, the relationships.

And I think all in it is performing very

Okay.

Secondarily can you talk about your energy portfolio in general, and any demand improvement that you might see over the coming year?

Again the energy book is, I think performed very well for us.

We are very active in terms of how we manage the price stack, we meet monthly on that and reset it as appropriate.

We are more focused on gas than we would be on oil.

Energy prices have come back nicely.

We have opportunities there to do more business, I think as the Capital Markets continue to improve, a lot of the credits that we provided financing for will find opportunities to go to the Capital Markets which was always their intent.

It has been a very good book.

We are not at the low end, we are not at the high end.

We are focused on the mid-cap types of companies that are very strong with very solid properties behind them.

Great.

That's helpful.

Thank you.

Thank you.

Our last question will come from the line of Gary Tenner with Soleil Securities.

Morning Gary.

Morning everybody.

Dale just had a question for you regarding the outlook, in terms of the charge off and provision trends for 2010.

Given the trends we saw in the fourth quarter, which seem to be pretty, pretty universally positive for you, the way that the current NPAs are marked, I still find it a little surprising that you would expect to end 2010 with a flat to higher loan loss reserve as compared to this year.

So I wonder if you can give a little more of an outlook in terms of why you'd expect to be heading into 2011, let's say, given the trends you have right now with the reserves.

Well, I think if you look at the fourth quarter, you can see that the provision, as compared to the charge offs, was about $34 million or so over the charge offs, down substantially from where it has been.

If you look at each quarter throughout 2009, you would have seen charge offs a little lighter in the first half of year, heavier in the second half which is clearly reflective of how we be built the provision.

We have -- I believe that given our outlook for charge offs, and I think we had the question earlier that we should probably continue to see first half provision continue to be in excess of charge offs, but at a declining rate, and I believe that we are very likely to see a provision in the second half of the year be below charge offs simply because I think we will continue to see improving credit metrics.

I believe the broad based improvement we saw in the fourth quarter, will largely continue throughout all of this year, and so, and, obviously, we will look at it each quarter, as we always do to see where we are, and if we have seen the kind of improvements we have seen in the fourth quarter, we will adjust.

As you know, the economic recovery is -- is not robust, and so obviously that will be a factor that we will be keeping in mind as well.

Okay.

Thank you.

Thank you.

There are no further questions at this time.

I will turn the conference back over to management for any further remarks.

I want to thank everybody for being with us today and thank you for your continued interest in Comerica.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

Thank you for participating.

You may now disconnect.