Comerica Inc (CMA) 2010 Q2 法說會逐字稿

Good morning, my name is Janeka, and I will be your conference operator.

At this time, I would like to welcome everyone to the Comerica second quarter 2010 earnings call.

All lines have been placed on mute to prevent any background noise.

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

(Operator Instructions) Thank you.

I would now like to turn the call over to Ms.

Darlene Persons, Director of Investor Relations.

You may begin.

Thank you, Janeka.

Good morning, and welcome to Comerica's second quarter 2010 earnings conference call.

Participating on this call will be our Chairman, Ralph Babb, our Chief Financial Officer, Beth Acton, our Chief Credit Officer, John Killian, and Dale Greene, Executive Vice President of the Business Bank.

A copy of our press release and presentation slides are available on the SEC's web site, as well as in the Investor Relations section of 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.

Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements.

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

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

In that regard, I would direct you to the reconciliation of these measures within this presentation.

Now I'll turn the call over to Ralph.

Good morning.

Today we reported second quarter net income of $70 million or $0.39 per share.

Second quarter total revenue increased over the first quarter and was up almost 5% compared to the second quarter last year, excluding securities gains.

Our financial results reflect the positive trends we have seen over several quarters.

This includes three consecutive quarters of broad-based improvement in credit quality with leading indicators of future credit quality also pointing positive.

Our net interest margin continued to expand, and our expenses remained well controlled.

We have strong capital and liquidity to support future growth with the flexibility to grow organically, as well as by acquisition.

We continue to reach out to our customers, taking their pulse on the economy, their current financial needs, and future plans.

As a relationship focused main street bank, this type of proactive outreach is how we differentiate ourselves.

Since the onset of the economic downturn, we stepped up our calling efforts to be sure we were ideally positioned to assist our customers in navigating the economic environment and to meet their needs as the economy improves.

While the pace of the economic recovery remains uncertain and our customers remain cautious, they are preparing for future growth.

This is reflected in our loan pipeline which is at its highest level in more than two years.

Also, economic factors which support loan growth such as business fixed investment and inventories continue to rise.

We view these as encouraging and hopeful signs for the future.

Middle market banking teams in all of our markets report they are seeing more opportunities, again due to the consistent calling efforts of our relationship managers and executive teams.

The resulting new business gains include customers and prospects with an eye on acquisitions or expansions.

These are full-service relationships with good companies that look to us as their trusted financial advisor.

We continue to see good opportunities in Texas and are adding a new small business health care profession group to capitalize on this growing segment.

In California, our technology and life sciences division has seen an increase in opportunities, too, including the recent addition of more than 35 customers in the alternative energy sector.

As the economy continues to improve, technology and life sciences firms are turning to Comerica because of our experience and expertise in serving this segment.

In Michigan, backlogs are continuing to grow, and we are getting more interest from prospects as the economy continues to improve in that state.

New and renewed loan commitments for our bank as a whole totaled $10.5 billion in the second quarter, reflecting an uptick in new commitments and the seasonality of renewals.

The pace of decline in loan outstandings continued to slow in the second quarter.

We are pleased to see that line utilization has remained relatively stable since the middle of the first quarter.

Second quarter, our average core deposits increased $1.7 billion from the first quarter.

The continued broad-based improvement in credit quality reflects our early recognition of issues and our ability to quickly and proactively work through problem loans.

Overall, charge-offs declined in the second quarter with a notable decrease in commercial real estate charge-offs.

The pace of improvement in credit quality is significant and faster than we had expected.

A key indicator of future credit quality is our watch list loans, which are down $851 million from the first quarter.

As a result of the positive trends we have seen, we have reduced our charge-off outlook for full year 2010.

The net interest margin increased 10 basis points to 3.28% in the second quarter, primarily from maturing higher cost wholesale funding and a less costly blend of core deposits.

We continue to focus on expense controls.

Non-interest expenses decreased $7 million from the first quarter.

Our capital position remains strong, and together with our strong liquidity will help support our growth.

As far as acquisition opportunities, we continue to look for those that would fit from a financial, geographic, and cultural perspective.

It is our sense that industry merger and acquisition activity will pick up much sooner than many may expect.

We are focused on opportunities in the urban markets of Texas and California, where we continue to grow organically through our banking center expansion program.

With respect to financial reform, we have made a preliminary assessment of the impacts to Comerica.

Beth will go into more detail, but the bottom line is we expect to compare quite favorably to our peers and larger banks.

While it will take some time for regulators to implement any new rules, both the industry and Comerica are expected to respond with new products and services to generate revenue opportunities and offset costs.

Our implementation efforts to support the regulation E amendment continue on schedule, and our banking center personnel relationship managers and customer contact staff have the tools they need to assist our customers with their participation decisions with respect to overdraft services.

The fed is now expecting slower economic growth.

Regardless of the pace of recovery, we are focused on generating improving returns.

We plan to do this a number of ways.

Through targeted investments and increasing market share in our higher growth market.

By the proactive management of credit issues, just as we have done throughout this cycle.

By maximizing relationship returns through the cross selling of products and services, and by our effective management of expenses.

We will continue to grow new relationships and expand existing ones with confidence we are in the right markets with the right people, and a full array of products and services to make a positive difference for our customers, shareholders, and the communities we serve.

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

Thank you, Ralph.

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

Turning to slide three, we outlined the major components of our second quarter results compared to the prior period, and to the same period a year ago.

Today we reported second quarter 2010 net income from continuing operations of $70 million, compared to $35 million for the first quarter.

The diluted earnings per share were $0.39 for the second quarter.

The second quarter results reflected a lower provision for credit losses, and the benefit of the full redemption of the preferred stock held by the US Treasury in the first quarter.

Second quarter total revenue increased over the first quarter and was up almost 5% in comparison to the second quarter last year, excluding net securities gains.

Slide four provides highlights of the financial results for the second quarter, compared to the first quarter.

Credit quality metrics continued to improve, net credit-related charge-offs decreased by $27 million from the first quarter to $146 million.

The provision for credit losses was $126 million, or $56 million less than the first quarter.

Non-performing assets declined $37 million, and the in-flow to non-accruals slowed by $46 million to $199 million.

The watch list declined by $851 million.

The net interest margin in the second quarter increased 10 basis points to 3.28% with little change from the impact of excess liquidity.

The increase in the margin was primarily due to the maturities of higher cost wholesale funding and a less costly blend of core deposits.

We continue to carefully control expenses, non-interest expenses decreased 2%, primarily the result of a decrease in credit-related expenses.

Our capital position remains strong, as evidenced by our tangible common equity ratio of 10.11%.

The pace at which average loans declined continued to slow as shown on slide five.

Average loans declined $641 million in the second quarter, compared to the $1.4 billion decline in the first quarter.

On a period-end basis, total loans increased $62 million from March 31 to June 30, excluding commercial real estate line of business which declined $305 million.

We expect to see commercial loan growth as working capital needs increase, and this will be muted by declines in commercial real estate loan outstandings.

Over half of the decline in average outstandings in the second quarter was in commercial real estate.

Loan outstandings increased in mortgage banker, national dealer services, private banking, and technology and life sciences.

Decreased average outstandings in the second quarter were noted in a number of areas, with the largest declines in commercial real estate, global corporate banking, energy, and middle markets.

Turning to slide six, our loan portfolio is well diversified among many lines of business and geographies.

Line utilization for the portfolio as a whole has remained stable at about 45% since the middle of the first quarter.

Our customers are feeling cautiously optimistic, and we are seeing our loan pipelines grow.

This includes commitments issued, but not yet closed which increased $151 million in the second quarter to $588 million.

Also we expect middle market and small businesses will start borrowing as their working capital needs increase.

As shown on slide seven, strong core deposit growth continued in the second quarter as core deposits increased $1.7 billion, including a $1.3 billion increase in money market and now deposits, and a $594 million increase in non-interest-bearing deposits.

This was partially offset by $246 million decline in customer CDs.

We had growth in all geographic markets, and all business segments.

The largest increase was in the financial services division, which primarily specializes in working with title and escrow companies, and has expanded to include other deposit-rich segments.

We also saw robust growth in global corporate banking, technology and life sciences, mortgage banker finance, small business, personal banking, and wealth management.

Declines were noted in commercial real estate, as well as middle market.

As outlined on slide eight, the net interest margin increased 10 basis points in the second quarter to 3.28%.

Without the 23 basis points negative impact from excess liquidity, the net interest margin would have been 3.51% in the second quarter.

The increase in the margin was driven primarily by maturities of higher cost wholesale funding and a less costly blend of core deposits.

Excess liquidity was represented by an average of $3.7 billion deposited with the Federal Reserve bank in the second quarter.

A $373 million decline in the first quarter.

The excess liquidity position at June 30 was $3.3 billion.

We expect that excess liquidity will remain at these levels for the rest of the year due to sluggish loan demand and strong deposit levels.

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

Turning to slide nine, non-interest expenses decreased $7 million, or 2%, in the second quarter.

Credit-related costs declined $14 million with ORE expense declining by $7 million, and the provision for lending-related commitments down $7 million.

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.

Our work force decreased by approximately 4% from year-ago levels, and is 20% lower than it was at the end of 2001.

Salaries expense was higher in the quarter, as a result of annual merit increases, higher stock-based compensation, and one more day in the quarter.

Now John Killian, our Chief Credit Officer, will discuss credit quality starting on slide 10.

Good morning.

For the third consecutive quarter, we saw broad-based improvement in our credit metrics, and the improvement occurred at a faster pace than we expected.

Net charge-offs and provision for credit losses improved considerably from first quarter levels.

The second quarter marked the fourth consecutive quarter of decline in net charge-offs.

Net credit-related charge-offs decreased $27 million to $146 million in the second quarter.

Provision for credit losses of $126 million was $56 million less than the first quarter.

The provision was less than charge-offs for the first time this cycle, reflecting our overall credit performance, including improving migration trends.

The allowance for loan losses was 2.38% of total loans and 86% of total non-performing loans.

Slide 11 provides detail on net loan charge-offs.

Net credit-related charge-offs declined to $146 million, led by a $50 million decline in commercial real estate net charge-offs.

Middle market net charge-offs were $71 million, with $26 million attributed to a middle market national specialty group, which manages a $500 million portfolio of higher leveraged transactions.

We are exiting this business and have established incremental reserves.

Excluding this group, middle market charge-offs were $45 million, up slightly from $39 million recorded in the first quarter and well below quarterly charge-off levels last year.

By market, charge-offs declined $17 million in western, $17 million in Texas, $4 million in midwest, and increased $19 million in other geographic markets, primarily due to the middle market specialty group I just discussed.

Turning to slide 12.

Total non-performing assets declined $37 million to $1.2 billion.

Importantly, the in-flow to non-performing assets decreased by $46 million in the second quarter.

This marks the fourth consecutive quarter of decline.

We review workout strategies, reserves, and the carrying values for each individual non-performing loan at least quarterly.

This proactive strategy has contributed to the decline in non-performing assets, as well as an average carrying value of our non-performing assets of 55% compared to contractual values.

On slide 13, we provide information on the make-up of the non-accrual loans.

The largest portion of the non-accrual loans continues to be the commercial real estate line of business, which decreased $103 million in the quarter.

Non-accruals increased modestly from low levels in middle market by $31 million, private banking by $24 million, and global corporate banking by $13 million.

During the second quarter, $199 million of loan relationships greater than $2 million were transferred to non-accrual status, a reduction of $46 million from the first quarter.

Of these in-flows, $118 million were in middle market, primarily midwest and other markets.

$33 million were in the commercial real estate business line, which is a $95 million decrease from last quarter, and $30 million were in private banking.

TDRs increased from $48 million to $99 million in the second quarter.

We sold $47 million of non-performing loans in the quarter, as well as $15 million in performing loans and $18 million in short sales.

Whereby we settle a note with the borrower at less than par.

In total, prices approximated our carrying value plus reserves.

This continues to support our analysis of valuations.

On slide 14, we have our watch list loans, which decreased by $851 million to $6.7 billion at the end of the second quarter.

The watch list is primarily comprised of special mention, substandard and non-accrual loans.

The watch list is the best early indicator we have of future credit quality.

This is the third consecutive quarter of decline and reflects improvements in our portfolio in all geographic markets and across virtually all lines of business.

Loans past due 90 days or more and still accruing total $115 million.

While this is a $32 million increase from last quarter's low level, it was almost half of the cyclical peak of $210 million a year ago.

Loans past due, 30 to 89 days, decreased $118 million to $338 million.

Foreclosed property remained relatively stable at $93 million.

On slide 15, we provide a detailed breakdown by geography and project type of our commercial real estate line of business, which declined $305 million on a period-end basis from the end of the first quarter.

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

Total outstandings of $4.3 billion were down $912 million from a year ago.

This included a $584 million decrease in the western market, $159 million decrease in Florida, and $149 million decline in Michigan.

Slide 16 provides net charge-offs for our commercial real estate line of business by project type and geography.

Net charge-offs for commercial real estate decreased $50 million in the second quarter.

Charge-offs declined as values continued to stabilize and even improve in certain locations.

Charge-offs fell in every project type and in all markets except Michigan, where we had a slight uptick from a relatively low level.

In-flows to non-accrual greater than $2 million decreased substantially and non-accrual and watch list loans also declined in the second quarter.

We continue to believe that we will see some variability in charge-offs with a general downward trend.

I'd like to take a moment to address a couple of current areas of interest.

As far as European exposure, we have no direct sovereign risk, and our exposure to the European banking sector is predominantly within the higher rated countries and primarily relates to facilitating trade and corporate banking activities for our customers.

As far as Gulf of Mexico drilling exposure, within our $1.1 billion energy portfolio, we have only a handful of customers that service the Gulf, and no customers that have substantial revenues derived from deep water drilling.

Finally, our municipalities exposure is less than $100 million, and has been performing well.

There are additional slides in the appendix which provide further detail on certain segments.

The consumer portfolio, representing approximately 10% of our total loans, continues to perform relatively well.

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

We continue to have excellent credit quality in both of these portfolios.

To conclude on credit, we are pleased that the continued improvement in credit metrics we have seen over the past several quarters, including improving migration trends.

These results support our updated outlook for net credit-related charge-offs of $600 million to $650 million for full year 2010, which is a $75 million decrease from our previous outlook.

We expect the provision for credit losses will be less than net charge-offs for the full year.

Now I'll turn the call back to Beth.

Thanks, John.

Turning to slide 17 and our capital ratios.

Our capital position is strong, and historically we have had some of the highest capital ratios in our peer group.

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

Turning to slide 18, we have provided an overview of the key pieces of financial reform that are relevant to Comerica.

You can see that our assessment, based on currently available information, is that the expected direct impacts of financial reform are manageable.

With rule making and a possible correction bill still to come, it will be some time before we can provide more precise estimates.

Importantly, we also see opportunities in financial reform, and we will be working to develop product and pricing strategies that will enable Comerica to continue to grow profitably in this quickly evolving environment.

Overall, we believe that the direct adverse impacts of financial reform will be felt less by Comerica than by many other major banks due to the nature of our business.

Regarding Reg E, our implementation remains on schedule, and opt-in rates are similar to our expectations.

Based on the trends we have been seeing, we anticipate a reduction in fee income of approximately $5 million for the second half of the year.

Slide 19 provides an update on our outlook for 2010, which is based on an uncertain pace of economic recovery.

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

We expect that C&I borrowings will grow as working capital needs increase, and will be partially offset by declining commercial real estate outstandings.

As a result, we believe loan outstandings will remain stable from June 30 period end to December 31 period end.

We expect the securities portfolio, excluding auction rate securities, to remain at the current level of about $6.5 billion.

Excess liquidity has not dissipated as quickly as we had expected.

As strong deposit growth and continued subdued loan demand have differed from our assumptions.

Therefore, we have lowered the net interest margin forecast by five basis points, which solely reflects our updated expectations regarding excess liquidity continuing, resulting in higher earning asset levels.

Our outlook is for net credit-related charge-offs of $600 million to $650 million.

The full-year provision is expected to be less than net charge-offs.

As John mentioned, this is a $75 million decline from our outlook -- from our prior outlook as a result of the continued positive trends we are seeing in our credit metrics.

Non-interest income excluding 2009 securities gains is expected to decline low to mid-single digits.

This is a reduction from our prior outlook, primarily as a result of the lackluster performance of the stock market in the second quarter.

We believe retail service charges on deposit accounts and market-related fees, such as brokerage and fiduciary, will continue to be impacted by the cautious behavior of our customers.

Our expense outlook is unchanged.

The continued careful control of costs is expected to result in a low single-digit decrease in expenses.

Overall, we saw many positive trends continue in the second quarter, such as improved credit metrics, a slower pace of decline in loan demand, terrific deposit growth, and a significant increase in the net interest margin.

We believe that our relationship approach has served us well throughout this economic cycle and will assist us in attracting new business and grow existing relationships as the recovery continues.

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

(Operator Instructions) Your first question comes from the line of Ken Zerbe of Morgan Stanley.

Good morning.

Good morning.

Good morning.

I was hoping you could elaborate just a little bit on the balance sheet growth.

It seems that your guidance, yes, is -- is slightly negative -- or I guess is slightly negative revision from what you had in the first quarter.

Yet at the same time, the pipeline's stronger, you're seeing stable line utilizations.

Was hoping you could help reconcile those two points.

This is Beth.

Let me speak to that.

We are -- the guidance for loan that we had given today is a little weaker than what we had said in April.

Having said that, we see a lot of positive indicators in the quarter.

And when we -- you mentioned pipeline, it takes time for the pipeline to actually turn into business or, in some cases, we are making proposals to prospects that we may or may not get the business.

So there's a mixture of deals in the pipeline that come at different paces.

But if you look at the fact that line utilization has stabilized, that our decline in commitment, not just loans, but in commitments in the second quarter was substantially less than the decline in commitments in the first quarter.

We also saw an increase in new commitments, the best we've seen in the last five quarters.

And we did see growth at period end in commercial side of things, including real estate.

So there are a lot of things that feel like there are loan outstandings coming, they will come.

It's just a little slower than I think we had expected.

And the economy was a little weaker in the second quarter than I think many of us expected.

In terms of the rest of the guidance, the securities portfolio is the same at $6.5 billion as we gave in April, and lastly, though, we are expecting a little higher earning assets than we had previously expected because we are not assuming that the excess liquidity, which is on deposit with the fed, we had earlier said that that would dissipate through the balance this year.

Now we're saying it will remain through the balance of this year.

That impacts margin because earning assets are higher, but it doesn't necessarily impact net interest income.

This is Ralph.

I think we're seeing a slowing in the economy in general.

A lot will depend when that begins to pick up, both on the employment side.

Right now, all of our customers, both individual as well as commercial customers are preparing for growth, but they're being very cautious.

I would say that confidence is low at the moment, and our economist is looking for a pretty slow third quarter from an economic standpoint.

Okay.

The other question, just on the MPA reduction, obviously down just a little bit.

But seems that the more positive data point was the sharp slowdown in the MPA in-flows.

Could you talk about the outlook for MPA balances.

If in-flows are slowing pretty sharply, how long is it going to take to start seeing that impact in terms of getting a reduction in the MPA's?

Yes, this is John.

I can address that.

You are correct, the MPA's in this cycle are a little stickier than in prior cycles.

I think that's because we haven't seen as much ability to get companies refinanced with other institutions in this cycle than we have in the past.

The good news, as you said, in-flow is coming down.

Our watch list is $851 million down.

We proactively get in front of these credits and deal with them.

As a result, we've written down the MPA's to 55% of contractual value.

So while all those things are positive, MPA's on an absolute basis are going to be a little bit stickier this cycle than last, and until that bid ask, and narrows, and until refinancing becomes more available, they'll be stubbornly sticky, but still coming down on a gradual basis as we've seen now for three quarters in a row.

Okay, great.

Thank you very much.

Thank you.

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Good morning, everyone.

Just to follow up first on the provision outlook.

How should we be thinking about the magnitude of reserve reductions in the seconds half?

Is $20 million a quarter good, should it widen out?

Any color here would be actually helpful.

Certainly the guidance -- this is John again.

The guidance is for, as you know, the provision to be less than charge-offs.

We have a very rigorous process for determining reserves and, therefore, the provision.

So it really is impossible at this point to predict the magnitude.

Given the trends and the overall metrics, we're certainly very comfortable with our guidance that it will be less.

But it's important to remember that there's still a lot of work to do here.

On an absolute basis, these numbers are still high.

So while we're pleased about the general credit metrics, we are somewhat concerned about the economic trends in the environment.

So bottom line, it's just very difficult to predict that.

I'm curious on capital with the TC ratios at 10%, earnings are at $0.39, the dividend still a penny, what's holding you back at this point in terms of starting to rebuild the dividend?

This is Ralph.

We're monitoring as we talked about the economic, and the economic outlook.

We'd like to see more stability there, as well as stability in job growth going forward.

As well as the continued increase in our core profitability.

And we will monitor that as it moves along before we make a recommendation either on dividend or buy back.

Steve, you mentioned the dividend is a penny.

It's actually a nickel.

A nickel, yes.

Ralph, what is it that you're seeing that you say you could see a pickup in M&A sooner than later?

I think in general just given what we've been through and the opportunities out there will pick up a little quicker than they have in past terms.

And, two, the fact that it's turning a little bit slower, I think there will be opportunities.

That's an editorial comment.

I can't list you five reasons specifically why, but that's typically in comparing to past terms and given the current environment.

I think we will see opportunities out there.

Are you actually seeing more banks coming to you to sell today?

Is that driving this?

I wouldn't really comment on specifics.

It's just a feeling I get as I'm watching and being a part of the industry.

Thanks.

Thank you.

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

Good morning.

Just looking at the compensation expense trends and given the pretty significant headcount reduction we've seen over the last year, I'm just wondering why the comp run rate isn't lower.

Not really looking at the sequential comp, but more the year-over-year comp, which is pretty much flat.

If you look at -- I'm not sure where you're getting the comps.

We showed salary and benefits together.

Salaries were up in the quarter, $10 million.

We had several factors driving that despite having lower headcount in the second quarter compared to the first.

One is the annual merit increases.

A year ago for many of our people we weren't granting merit increases, as an example.

We had one more day in the quarter, which also impacts things.

We had higher stock compensation expense in the quarter, really resulting from -- we updated the models that we use in the first quarter.

So the first quarter ended up being lower than what it normally would have been.

So the variance quarter over quarter is an increase in the second quarter.

So when you add all those things together, the salaries were up -- salary and benefits up $10 million compared to the prior quarter.

But if you look at certainly levels a year over year were still very stable in terms of the expense phase, despite a lot of different moving parts, whether it's health care expense, whether it's pension expense, et cetera.

Got it.

Just real quickly on the C&I book and the share national credits in specific, with the exam results coming out in the next half from the share national credit exam, I'm just wondering how you think those results could fare year over year, when you looked at how your share national credit book was stressed last year by regulators, your prospects for this year.

Well, again, I think we have to take a look at that in the context of general improvement in the economy since the last year, and the improvement in the credit metrics that we've had.

As you know, we reach out in the second quarter as is allowed by the regulators to try and get a verbal read on as many of these [snik] credits as we can.

And we continue to do that this year, and reflected those items in the second quarter where it was appropriate.

And as a result, our outlook for the third quarter on the snik portfolio is that we'll probably again continue to fare consistent with the way our portfolio goes overall.

For example, snik outstandings have been down the last couple of quarters as following our portfolio trends.

Our snik charge-offs in the second quarter were $21 million versus $40 million in the first quarter.

Our NPL's that are sniks were $229 million at the end of the second quarter, versus $283 million at the end of the first quarter.

The watch list was down $400 million in the second quarter.

So the snik portfolio continues to mirror our overall portfolio and our relationship approach, and we would expect those trends to continue in the third quarter.

Great.

Thanks for taking my questions.

Thank you.

Your next question comes from the line of David Rochester of FBR Capital Markets.

Good morning.

Hi, good morning.

Ralph, I'm going to take Steve's prior question from another angle here.

Given the comments on M&A and your commentary that things have maybe slowed down a little bit or the outlook is slow, are you emphasizing more M&A going forward, or are you looking more closely at M&A as a growth driver right now, versus maybe a quarter or two ago?

Our focus on M&A has always been the same.

We've always been looking for the right potential acquisitions that would increase or expand our presence in the urban markets of especially Texas and California.

My comment really was I think there will be some opportunity there.

Having said that, we're beginning to ramp up our investment in our banking centers as we had slowed that during the significant downturn in the economy.

We're not going back quite yet to where it was.

But it is time with, especially a lead time of approximately 18 months or so after you find property to start ramping that back up.

And so we're being cautious, we think the turn is going to be slower than many of us expected.

But I think there are going to be opportunities, both for organic as well as potentially acquisition.

You never know until that happens.

Okay.

Thanks for that color there.

One quick followup on the C&I side.

You talked about a lot of the segments where you're seeing an increase in demand.

Are you seeing that across the size of the -- I guess the different customer segments in terms of size, are you seeing that in small business, large corporate, as well as middle market?

Sure.

This is Dale.

We're seeing it pretty much across the board.

I would tell you that clearly our TLS business off California technology and life sciences has seen a lot of activity, Ralph referenced some of that earlier in his comments.

The middle market and small business across our market, but particularly in our growth markets are seeing a nice increase in the pipeline.

But across the board we're seeing good activity.

And whether it's the dealer business that we've referenced or the mortgage banking business, again, it's just a lot of that activity we're beginning to see.

And as Beth indicated, we've seen our pipeline grow to a level we haven't seen in some time.

And a lot of that now is new activity, not just expansion of existing relationships.

That pipeline takes some time to development.

Not all of it turns into new business, obviously.

But we're continuing to see customers become a little bit more optimistic about particularly supporting working capital needs.

And hopefully that continues.

Okay.

Thanks for that.

Lastly, given your comments that customers are cautiously optimistic, but the confidence is still low.

Has there been any difference or change in psychology from last quarter to this quarter just given all the macro concerns that we've seen crop up in May and June?

It sounds like things are maybe getting a little more positive on the pipeline side, but yet confidence may be lower.

Is that a fair statement?

I think confidence has always been little bit muted until -- no one's quite certain of the economic environment.

I think in terms of working capital types of requests, replenishment of inventory, supportive increase of receivable levels, we're seeing that.

As it relates to fixed assets, fixed investment-type opportunities, they're a little less prevalent simply because I think people are more reluctant at this point to make any of those capital investment activities.

There's some of that, but I think that's where you'll see more of the caution.

Okay, great, thanks.

Thank you.

Your next question comes from the line of Brian Foran of Goldman Sachs.

Good morning.

Good morning.

I missed the beginning of the call, so stop me if you've covered this.

But the debit interchange impact was bigger than I was anticipating.

Can you talk through, especially on the signature debit line item of potentially $31 million of lost fees, what is the base you're currently running at, and what kind of reduction are you assuming in terms of an interchange rate?

And how would you characterize the degrees of confidence around that estimate?

Is it kind of a preliminary guess based on what, or is it something you feel pretty tight on in terms of accuracy?

Yes, Brian.

Actually, if you read carefully the slide, it's not a -- our actual total universe of fees, whether it's pin or signature based is 38 in total.

That's not the risk we're putting forward.

That's just the universe of fees that could be impacted.

At this juncture, we don't have an estimate to give you on the impact of those, but we did want to disclose to investors what the universe of interchange fees are in total.

There will clearly be an impact on this $38 million in total fees that we earned today.

But at this juncture, we have not quantified it.

There's a lot to be done with rule making and a possible correction bill that could impact all of these, as well as we're looking at other alternatives in terms of the whole revenue arena, particularly in the retail side of things.

Understood.

So there's $38 million --

In total --

2010 fees --

Correct.

And it's too early to tell how much that will be reduced by.

Yes.

And this is going to be promulgated, at least according to the bill, nine months from now.

There will be rule making that the fed will be involved in, and it's not clear at this juncture how that will turn out.

So -- but we did want to size for investors the total universe of those fees.

That is not the risk of the fees.

Thank you.

I appreciate that.

Thank you.

Your next question comes from the line of Brian Klock of KBW.

Good morning.

Good morning, everybody.

Good morning.

And I know you did go through some of this, so, again, I was trying to keep up.

If you didn't cover this, I was between John and Dale I guess with the C&I portfolio, the growth that you did see and end of period loan balances, there is both the floor plan, seems like it's grown to levels of -- that we haven't seen in over a year.

But then the other C&I portfolio was also up.

Maybe you can comment on two things.

One, is that floor plan build kind of over, are dealers still building inventories?

Do you feel that that will level off?

And I guess from a geography perspective within the other $19.6 billion of C&I loans, is that coming out of Texas and California?

Some color on that.

Sure, Brian.

Dale here.

The dealer floor plan, piece, number one, it's certainly always seasonal.

But I would also tell you that we've picked up a number of new dealer relationships simply by pursuing the strategy we've always pursued of dealing with top tier dealers and getting good referrals from our customer base.

So growth that you've seen in the dealer book is at least partially due to the fact that we've got some new relationships.

And when I talk about pipeline, dealer pipeline is also quite nice for us.

And obviously for us, that's been a very successful business.

So it's as much customer acquisition as it is any increases in flooring.

And depending on auto sales, obviously, that will have a direct impact on the level of inventories, et cetera, et cetera.

So-- but it is seasonal.

We're in kind of a seasonal low or we will be in the July-August timeframe.

Coming back out of that in the Fall is the new models.

As it relates to the rest of the C&I book, clearly we're seeing a lot of good growth opportunity as we've indicated earlier in the western market and in Texas.

Particularly in the middle market side in both California and Texas.

And we've seen some opportunities in the Michigan or midwest market, as well.

And there's some nice pipeline there, as well, for good middle market small business type of customers.

So growth has been across the board, but typically where we like to see it in our growth markets.

Great.

Thanks.

Thanks for that.

I guess one question for Beth.

Remind me, I think within the margin guidance you have for the rest of the year and the excess liquidity balances that are on the balance sheet, remind me of how much of the high cost time deposits, I think there was a 3% or higher cost of funding that.

I think those are maturing here in the third quarter.

And maybe remind us of how much that is and are you going to use that excess of liquidity to pay that down?

Yes.

Actually, Brian, we've kind of run through the higher cost CDs.

We had $650 million of retail brokered CDs mature in the second quarter.

Those carried a rate in excess of 4%.

So the -- we have $800 million of debt maturing between now and the end of the year.

And all of that is very -- at very normal kind of cost competitive funding.

So the pick-up from the maturity of the higher cost CDs has really happened.

Okay.

All right.

Thanks for taking my questions.

Thank you.

Your next question comes from the line of Jed Gore with Diamondback.

Good morning, Jed.

Good morning, great quarter.

I have a question, I'm not sure if you can answer.

One of the things we looked at with the values that they shrunk their balance sheet in commercial by $63 billion year over year, which is larger than your entire loan book.

Are you seeing any portion of that in terms of -- I understand the economy is soft.

But you're saying you're seeing some pickup in terms of utilization or interest levels.

Is that a bit of a market share shift?

Can you differentiate that at all?

Dale, again.

Yes, I think part of that for us is, again, we have continually through all of us, we've called on customers, we're seeing the results of that activity now, particularly as you look, as we keep talking about the backlog reports that we're seeing, pipeline reports.

We're seeing good increases in activity because of what we're doing.

You will continue to see, as we referenced earlier, the commercial real estate book continue to decline as an offset or at least a partial offset to that.

But we are picking up some good new relationships.

Again, we referenced in technology and life science, a number of new relationships, particularly in the alternative fuel segment.

But really been across the board in technology and life science, mortgage banking, we picked up some nice, good clients in our core markets throughout this cycle.

Very strong, profitable relationships, et cetera.

So we are seeing some market share gains for us in our key markets, in our key businesses.

The offset, of course, is we're continuing to work through the real estate portfolio, and that will continue to be a drag on growth.

Thank you.

Thank you.

Your next question comes from the line of Ken Usdin of Banc of America.

Good morning, Ken.

Hi.

It's actually Ian Foley for Ken.

Okay.

Good morning.

Quick question on the C&I side.

Saw that the loan yields were kind of flattening out.

Wondering if you could talk it pricing in general and whether you're giving up any to kind of get new relationships.

This is Dale.

We have a pretty disciplined approach to pricing that we've had now for a while.

There's still a little bit of repricing left to be done on the book, but most of it's been done.

In terms of existing and new relationships, we've been pretty -- and the troops will tell you this, we've been pretty disciplined in our pricing approach.

We've also, obviously, continued to be very disciplined in our credit underwriting.

But I think what we bring to the table is we're a known commodity, particularly in the middle market and small business side.

And a middle market broadly defined, and I think that we're able to get some better pricing typically there.

We're not chasing deals for price, or structure, or size.

We try to keep it very much in our -- in the kind of core competencies we have, which is primarily on the middle market side.

Obviously technology, dealer, and so forth.

So while the pricing pressure is clearly there and the competitive aggressiveness is clearly there, and clearly we will make exceptions for the right deal, they tend to be exactly that, exceptions.

So we've held pretty firm to our pricing discipline.

And there is a very rigorous process in place to make sure that that continues.

Okay.

And to touch on commercial real estate business real quick.

Obviously, that continues to wind down a little bit.

I was wondering if you could talk to the potential sizing of the business a couple years from now and how much of the current business you would consider run-off per se.

Well, again, a couple of things I would say on commercial real estate.

One is, we're going to continue to work through our credit issues as we've been doing.

That's going to take priority, I think, more than anything else.

When we do come back to the real estate lending side of the equation, it will be in our growth markets.

It will be with developers who we've got a good relationship with, or who have referred us into a new relationship.

It will be done differently than we've done it historically.

We've learned a lot.

Some-- some of it has been somewhat painful.

So we'll come back to that.

And there will be some size limits put on it in terms of individual deals and the overall level of the portfolio.

So-- but we're not there yet.

We've got work to do on the portfolio, and frankly, the real estate market is still suffering.

And we're not anxious in the near term to jump back into the commercial real estate segment in any meaningful way.

There will be the occasional opportunity that we'll pursue and we are pursuing, but it will be a while, and it will be a different kind of approach that we take.

Got you, thanks.

There are currently no more questions in queue.

I would like to turn the call back over to Mr Babb for any additional closing remarks.

Thank you, and I would like to thank all for joining us on the call today.

And for your continued interest in Comerica.

Thank you very much.

This concludes today's Comerica second quarter 2010 conference call.

You may now disconnect.