Comerica Inc (CMA) 2010 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to Comerica's third quarter 2010 earnings conference call.

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

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

(Operator Instructions) I would now like to turn today's call over to Ms Darlene Persons.

Please go ahead, ma'am.

Thank you, Alisha.

Good morning and welcome to Comerica's third 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 website as well as in the investor relations section of our website.

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

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 will turn the call over to Ralph.

Good morning.

Today we reported third quarter net income of $59 million or $0.33 per share.

Third quarter total revenue was down 4% from the second quarter, primarily driven by a decrease in average loans and lower fee income from customer activities.

In this sluggish and still uncertain economic environment our customers have remained understandably cautious.

This is reflected in the weak loan demand and continued strong core deposit levels.

Our solid capital and liquidity position enabled us to fully redeem our trust preferred securities on October 1st, which will reduce interest expense.

This uniquely positions us as the only bank in our peer group to have redeemed TARP and eliminated trust preferred securities.

Our third quarter financial results reflected the continued improvement in credit quality and careful control of expenses.

Our skill based relationship driven strategy and our prudent conservative approach to banking continued to serve us well.

We believe we have a business model that cannot be replicated overnight.

It takes years of experience and expertise to understand the credit cycle, small businesses, middle market companies and their owners, managers and employees for whom we provide personal financial services.

Relationships mean more than ever in this type of environment.

While unemployment remains stubbornly high, there are some signals the economy is improving, albeit slowly.

Economic factors which support loan growth, such as business, fixed investment and inventories, continue to improve.

The Commerce Department recently indicated that investments in computers, communications equipment, and machinery for example, helped spur capital goods orders in August, which is a good sign.

Here in Texas, which continues to outperform the national economy, we are establishing good full service relationships with solid companies, as long-term calling by relationship managers and executive management is paying off.

In California, a state whose economy is holding study according to our chief economists' latest economic activity index, we're seeing more opportunities in middle market and small business banking, in addition to technology and life sciences.

In Michigan a rebound in manufacturing is helping that state and the national economy emerge from the recession.

US light vehicle sales are headed in the right direction this year.

We are seeing more encouraging and hopeful signs throughout our footprint.

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

Commercial loans increased modestly in the third quarter and total loans increased in the month of September.

Our loan pipeline continued its strong growth, as evidenced by the commitments issued but not yet closed, which increased nearly 50% from the second quarter.

Line utilization increased almost 1% to about 46% at September 30th after remaining at about 45% since the middle of the first quarter.

We had loan growth in the third quarter in mortgage banker finance, national dealer services and energy lending business lines.

Commercial real estate accounted for about half of the decline in average loan outstandings in the third quarter as expected.

After six straight quarters of growth, average deposit levels were relatively stable compared to the second quarter.

The continued improvement in credit quality is reflected by the decline in net charge-offs for the fifth consecutive quarter, as well as the $10 million decline in the provision for credit losses compared to the second quarter.

The increase in inflows to non-accrual loans was primarily related to commercial real estate, which we believe will continue to exhibit variability with a downward trend.

Overall, credit migration has improved, as evidenced by the $480 million decline in the watch list, which is our best early indicator of future credit quality.

Our early recognition of credit issues and our ability to quickly and proactively work through them remains one of our key strengths.

In light of the struggle and uncertain economic environment, we expect fourth quarter net charge-offs to be similar to the third quarter.

Based on year-to-date positive trends, as well as our expectations for the fourth quarter, our full year net charge-offs are expected to be lower than our prior outlook.

The net interest margin decreased five basis points to 3.23%, resulting from a variety of factors which Beth will discuss shortly.

We do expect our net interest margin to improve in the fourth quarter from third quarter levels.

Our expenses remained well controlled.

Noninterest expenses were relatively stable compared to the second quarter.

Our capital ratios remain strong.

The tangible common equity ratio increased 28 basis points to 10.39% at September 30th and the estimated Tier 1 common ratio increased 16 basis points to 9.97% at September 30th from June 30th.

We will be closely following the development of the new Basel standards.

Comerica has maintained a very strong capital base for a long time and we expect we will comfortably be able to meet the proposed capital requirements.

With respect to financial reform, our analysis hasn't changed.

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.

In closing, we have remained focused on executing our relationship banking strategy and delivering outstanding customer service throughout this economic cycle.

Positive trends in credit quality have continued and we have strong capital and liquidity to grow organically or by acquisition.

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

Thank you, Ralph.

As I review our third quarter results, I'll be referring to slides we've prepared that provide additional details on our earnings.

Turning to slide three, we outlined the major components of our third quarter 2010 results compared to the prior period and as the same period a year-ago.

Today we reported third quarter 2010 net income of $59 million and diluted earnings per share of $0.33.

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

Credit quality continued to improve, net credit related charge-offs decreased by $14 million from the second quarter to $132 million.

The provision for credit losses was $116 million, $10 million less than the second quarter.

Also the watch list declined by $480 million.

The pace of decline in loans continued to slow in the third quarter.

Average loans declined $470 million compared to declines of $641 million in the second quarter and $1.4 billion in the first quarter.

Average deposit levels remained strong, decreasing only 1% from the second quarter.

Growth in business deposits was offset by reduced personal and private banking deposits.

The net interest margin in the third quarter was 3.23%.

Excluding the impact of excess liquidity, the net interest margin would have been 3.42%.

We continue to carefully control expenses, with noninterest expenses relatively stable.

And our capital position remains strong, as evidenced by our tangible common equity ratio of 10.39%.

As I just mentioned, the pace at which average loans declined continued to slow, as shown on slide five.

Average loans declined $570 million in the third quarter and in the last month of the quarter average loans increased $145 million.

We're hoping that we've started to turn the corner on loan outstandings.

Average commercial loans were up $57 million over last quarter.

On a period end basis, commercial loans increased $281 million from June 30 to September 30.

As commercial loan growth returns, we expect it'll be muted by declines in commercial real estate loans.

In fact, about half of the decline in average outstandings in the third quarter was in commercial real estate.

Turning to slide six, our loan portfolio's well diversified among many lines of business and geography.

In the third quarter average loan outstandings increased in mortgage banker, national dealer services and energy.

Decreased average outstandings in the third quarter were noted in a number of areas, with the largest decline in [capital] market, commercial real estate and global corporate banking.

Line utilization for the portfolio as a whole increased almost 1% to about 46% after remaining about 45% since the beginning, since the middle of the first quarter.

While loan demand remains weak as our customers are understandably cautious given the sluggish and uncertain economy, we're hopeful as our loan pipelines continue to grow.

This includes commitments issued but not yet closed, which increased almost 50% in the third quarter to $871 million.

As shown on slide seven, core deposits remain strong in the third quarter.

Average core deposits decreased a modest $142 million after six consecutive quarters of growth.

A $327 million increase in money market and NOW deposits was offset by a $290 million, $298 million decrease in noninterest bearing deposits and a $119 million decline in customer CDs.

Overall, deposit growth in commercial segments was offset by reduced personal and private banking deposits.

We had growth in several business segments led by middle markets, energy and small business, partially offset by a decrease in global corporate banking.

Deposits declined in private banking, as customers generally shifted into money market accounts at Comerica Securities.

A smaller decrease was noted in personal banking where in the midwest over half the decrease related to maturities of higher priced CDs.

As outlined on slide eight, the net interest margin of 3.23% decreased 5 basis points compared to the second quarter for several reasons.

First of all, we had lower loan yields in the quarter.

This was primarily a result of the lower fees in the margin.

When a loan is prepaid, there's accelerated recognition of deferred loan fees.

Due to the slower pace of loan prepayments in the third quarter relative to the first half of the year loan fees declined.

The reduction in LIBOR rates in the quarter also had a minor impact on loan yields.

As a reminder, about 70% of our loans are floating rate with about 70% LIBOR-based.

Additionally the increase in the impact from non-accrual loans and maturing interest rate swaps had a small negative impact on loan yields.

Of note, we haven't seen any major loan spread compression, only selectively for larger, better-rated corporations.

Second, the yield on the securities portfolio was lower in the quarter.

Mortgage rates fell significantly in the third quarter, resulting in accelerating prepayments of mortgage-backed securities throughout the quarter, particularly in September.

In fact, prepayments were more than twice as high in September as they were in June.

When prepayments occur, there's acceleration of the original purchase premium, which was being amortized over the securities expected life.

Finally, the impact from the reduction in excess liquidity partially offset the decline in the yields on loans and securities.

Excess liquidity was represented by an average of $3 billion deposited with the Federal Reserve in the third quarter.

This was a $736 million decline from the second quarter and declined less than we had anticipated due to continued weak loan demand and strong deposit levels.

The excess liquidity position at September 30 was $3 billion.

We are proactively managing excess liquidity, as evidenced by the prepayment without penalty of $2 billion in Federal Home Loan Bank advances in late August, as well as fully redeeming $500 million in trust preferred securities at par on October 1st.

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

Turning to slide nine, noninterest expenses remained well controlled in the third quarter.

Credit related cost decline with a $6 million decrease in the provision for lending related commitments, partially offset by a $2 million increase in ORE expense.

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

We have consistently reduced our workforce over the past several years.

Our workforce decreased by approximately 3% from year-ago levels.

Compared to 2001, we have 20% fewer people today, while our assets are 10% larger.

Salaries expense was higher in the quarter as a result of the impact of one additional day in the third quarter and included an increase in share-based compensation expense of $6 million related to stock brands in the quarter.

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

Good morning.

In the third quarter we saw continued improvement in our credit quality.

Net charge-offs, the provision for credit losses and the watch list improved from second quarter levels.

The third quarter marked the fifth consecutive quarter of decline in net charge-offs.

Net credit related charge-offs decreased $14 million to $132 million.

Provision for credit losses, which includes loans as well as off-balance sheet commitments, was $116 million.

This was $10 million less than the second quarter, primarily due to declines in the middle market, energy and entertainment business lines, partially offset by an increase in the private banking and commercial real estate business lines.

The provision was less than charge-offs for the second consecutive quarter, reflecting our overall credit performance, including improving migration trends for both loans as well as off-balance sheet commitments.

The allowance for loan losses was 2.38% of total loans and 80% of total non-performing loans.

Slide 11 provides detail on net charge-offs, which decreased $14 million to $132 million in the third quarter.

The decrease in net credit related charge-offs resulted primarily from a $39 million decrease in the middle market, partially offset by a $24 million increase in the commercial real estate business line, primarily in the western and midwest markets.

On slide 12, we provide information on the inflow to non-accrual loans.

During the third quarter $294 million of loan relationships greater than $2 million were transferred to non-accrual status.

Of these inflows $132 million were from the commercial real estate business line, with almost three-quarters coming from the western market, $91 million were from the middle market business line, primarily in the midwest market, and $28 million were from energy lending in the Texas market.

Based on our analysis of default rates, risk rating migration patterns and watch list results, the increase in the inflow to non-accruals is caused by previously identified problem credits moving along the normal route of the collection process.

We believe we will continue to see a downward trend in the inflows to non-accrual, with some variability quarter-to-quarter, particularly in commercial real estate.

Turning to slide 13, total non-accrual loans increased $65 million to $1.2 billion.

The largest portion of the non-accrual loans continues to be the commercial real estate line of business, which remains stable at $528 million in the quarter.

Non-accruals increased in middle market by $41 million.

Private banking and global corporate banking non-accruals declined.

By geography, the decrease in non-accrual loans in the midwest was offset by increases in western and Texas.

Total TDRs increased from $99 million to $147 million in the third quarter.

Of the total TDRs, $50 million were accruing, $28 million were reduced rate and $69 million were non-accrual.

We sold $12 million of non-performing loans in the quarter, as well as $7 million in performing loans, excuse me.

Additionally, we completed $42 million in short sales, of which $13 million were non-performing loans, whereby we settle a note with the borrower at less than par.

In total, prices approximated are carrying value plus reserves.

This continued to support our analysis of valuations.

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

This proactive strategy has contributed to the decline in net charge-offs, as well as an average carrying value of our non-accrual loans of 55% compared to contractual values.

On slide 14 we have our watch list loans, which decreased by $480 million to $6.2 billion at the end of the third 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 fourth consecutive quarter of decline and reflects a significant decline in special mention loans.

Declines in the watch list were evidenced in all geographic markets and across virtually all lines of business, particularly in middle market and commercial real estate.

Loans past due 90 days or more and still accruing totaled $104 million, an $11 million decrease from last quarter.

Foreclosed property increased $27 million to $120 million, yet remains relatively small.

Shared national credit, or SNC, exam results were released in August.

The results were consistent with the credit outlook we had given in July and overall weren't a factor in our third quarter results.

On slide 15 we provide a detailed breakdown by geography and project type of our commercial real estate line of business, which declined $202 million on a period end basis from the end of the second quarter.

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

Total outstandings of $4.1 billion were down $892 million from a year-ago.

This included a $513 million decrease in western market and $137 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 were $60 million in the third quarter and were consistent with our expectation for continued improvement with some variability from quarter-to-quarter.

Values have stabilized and even improved in certain locations.

The largest portion of charge-offs were noted in residential properties and in the western market.

Inflows to non-accruals greater than $2 million increased from a very low level in the second quarter.

Total non-accruals were stable and watch list loans decreased in the third quarter.

We believe these trends are consistent with what we'd expect in the normal course of working through problem loans.

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.

Included in our consumer portfolio is only $1.6 billion in residential mortgages and $1.7 billion in home equity loans.

Given the size and makeup of the portfolio, we would expect any impact from the current industry foreclosure issues to be minimal.

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 those portfolios.

To conclude on credit, we are pleased with the continued improvement in credit quality, including improving migration trends.

In light of the sluggish and uncertain economic environment, we expect fourth quarter net credit related charge-offs to be similar to the third quarter.

We expect a provision for credit losses in the fourth quarter will continue to be less than net charge-offs.

Based on our year-to-date positive trends and our expectations for the fourth quarter, full year net charge-offs are expected to be lower than our prior outlook.

Now I'll turn the call back to Beth.

Thanks, John.

Turning to slide 17, our capital position is strong and historically we've had some of the highest capital ratios in our peer group.

We fully redeemed our trust preferred securities at par on October 1st.

This uniquely positions us as the only bank in our peer group to have redeemed TARP, as well as eliminated trust preferreds from its capital structure.

The elimination of these higher cost securities will result in significant interest savings for us.

Slide 18 outlines our summary analysis of the latest Basel proposal if it's applied to Comerica.

On the capital side our assessment, based on currently available information, is that the expected impacts from changes in the components of capital in the calculation of risk-weighted assets wouldn't be material.

In fact, we believe we already meet the proposed capital ratio requirements.

On a liquidity side, there's a high degree of uncertainty regarding implementation and interpretation of the rules.

We'll be closely following the development of these new standards.

We believe that the potential changes are manageable given our proven ability to administer our balance sheet.

Included in the appendix is a slide detailing the impact of the Dodd Frank Act.

Essentially our analysis hasn't changed.

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

Slide 19 provides our outlook for the fourth quarter.

We expect average earning assets of approximately $48 billion, largely reflecting a decline in average excess liquidity from $3 billion in the third quarter to about $1 billion in the fourth quarter.

We expect that average excess liquidity will decline in the fourth quarter, primarily due to debt maturities, the redemption of the trust preferred and the full quarter effect of the $2 billion prepayment of the Federal Home Loan Bank advances in late August.

We expect a net interest margin between 3.30% and 3.35%, primarily based on a decline in excess liquidity to $1 billion and assuming prepayments in the investment securities portfolio remaining at the same high level we experienced in September.

Our outlook for fourth quarter net credit related charge-offs is that they will be similar to the third quarter.

The provision for credit losses is expected to be below net credit related charge-offs.

We expect a low single-digit decline in noninterest income compared to the third quarter.

This includes the impact of Reg E and based on the current trends we continue anticipate a reduction in fee income of approximately $3 million in the fourth quarter.

As far as noninterest expenses, we expect a low single-digit increase compared to the third quarter.

As previously announced, the fourth quarter will include a $5 million negative impact from the accelerated accretion of the remaining original issuance discount related to the redemption of the trust-preferred securities.

Overall we saw positive trends continue in the third quarter, such as improved credit quality, a slower pace of decline in loan demand, as well as strong deposit and capital levels.

We believe that our relationship approach has served us well throughout this cycle, economic cycle and will assist us in attracting new business and growing existing relationships as the economy improves.

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

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

Good morning, Ken.

Good morning, guys.

Good morning.

First question, just in terms of the nonperformers or more specifically the increase in commercial real estate non-performing assets.

It almost sounds like from your comments that you anticipated this increase given the trends that you saw in the underlying and the credits going into the quarter.

Probably, I think, my suspicion is that a lot of the street wasn't necessarily anticipating that.

When you look at your portfolio going forward, do you anticipate any other items or material changes one way or the other, either whether it is in commercial real estate or other-wise?

John.

Ken, I didn't actually anticipate that going into the third quarter.

We still had had four or five quarters in a row of improving credit metrics.

And as you saw in the third quarter again, net charge-offs, provisions, past dues and most importantly the watch list improved.

We did see the increase in commercial real estate NPA inflow and therefore the increase in total NPAs and we've consistently said over the past several quarters, there could be some variability in any one of these numbers or two of these numbers as we go forward in this kind of economic uncertainty.

The story on the CRE inflow was really a very familiar story for us.

The main part of the increase in NPA inflow was due to single family, resi and retail again showing some distress, as we've frankly had for a couple quarters in a row.

But everything we've analyzed came from migration patterns, to the watch list itself, leads us to believe that these are all previously identified problem credits moving through the normal collection route and not a new wave of problems.

Overall, we still expect credit metrics to continue to improve with some variability from quarter-to-quarter, as we've seen in this quarter, particularly in the commercial real estate sector, which as you know is still struggling in this economic environment.

So there's still a lot of work to do.

Okay, it was probably the comment that they were previously identified and then they go in at NPA, that kind of threw me there.

The other thing I had a question on was just in terms of the noninterest bearing deposits, it looks like this was the first quarter where we saw a decline.

What was the driver for the roughly $300 million decline in noninterest bearing?

Are you seeing a change in corporate behavior?

Is this -- was there some unusual items in there that led to the drop?

Ken, this is Beth.

I think we were not surprised that we saw some decline in noninterest bearing because it's been so high and grown so much, six consecutive quarters, and actually in DDA today in the third quarter we are 13% higher than we were a year-ago.

So noninterest bearing levels continue to be high, but there are some opportunities for companies to use it in their businesses, use the cash in their businesses, hopefully as investment picks up.

And as we mentioned, related to private banking, we did have some deposits move over into Comerica Securities, our brokerage unit, into some money market accounts.

So it's a variety of reasons, but not unexpected.

Okay, thank you.

Thank you.

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

Good morning, Steve.

Good morning, everyone.

Maybe I could start with the net interest margin.

It seemed like the positive guidance for the margin in the fourth quarter is related to the reduction in excess liquidity, but do you actually expect any net interest income growth in the fourth quarter?

When -- if you look at the guidance we gave, what we said was earning assets.

So you think about net interest income as two pieces, right?

One is our earning assets, the other is the margin.

We did indicate in our outlook that the margin would be up between 3.30% and 3.35%, up from 3.23%, but that earning assets would be down $2 billion from the average in the third quarter, largely because, as you mentioned, the decline in excess liquidity from $3 billion to $1 billion.

So that is, those are the pieces of the outlook that we gave and our perspective on kind of what the quarter would shape up to be.

And then if we look at the reduction this quarter in the yield in the interest income on the available for sale securities, which was down I guess $5 million of interest income and 14 basis points, based on your commentary that prepay speed should stay very high.

Should that fall by another 14 basis points in the fourth quarter?

What I'd say there is when you look at the fourth quarter outlook we gave we indicated, as I mentioned earlier, that excess liquidity would decline by $2 billion.

That's a, that's anywhere from 12, about 12 basis point improvement in the margin.

There are some, based on the numbers we've given you on the impact of excess liquidity on the margin, there'll be some -- our outlook for the margin isn't quite as high as that in terms of an increase in the fourth quarter.

So we will continue to see two things as partial offsets to the excess liquidity going away.

One is the impact you just mentioned, high prepayments we're assuming will continue and we'll be reinvesting at lower yields and that will have a minor, but probably a little larger impact in the third quarter and second, we have maturing interest rate swaps which are providing, which are maturing at positive spreads.

So those will be going away, another $200 million and the $700 million matured in the third quarter, $200 million in the fourth.

So the positive, very positive impact from excess liquidity will be diminished a little by those two aspects as well.

Maybe I could shift to loan growth for a second.

It seems like the C&I balances benefited to a degree from mortgage-related lending.

Can you talk about what you saw from your more traditional commercial borrowers during the quarter?

Any signs of lines being drawn down or any increased optimism?

Yes, Steve, this is Dale.

Number one, as we indicated, the usage was up a bit from about 45% to 46%.

It's good to see that.

We haven't seen that in a while.

If you look at the backlogs and you look at the growth from new customers and increases to existing customers, that's kind of spread across most of our businesses.

Clearly the dealer business has shown growth.

The energy business, as indicated, has shown growth.

Those backlogs continue to look good And what we call the commitments to commit or the approved deals that we're waiting to close are up rather substantially this quarter over last quarter and, again, that's generally across the, most of the segments, middle market, technology and life sciences and so forth.

So the quality of the backlog, if you will, is good in the sense that there are more deals that have been approved, that are waiting to close and the level of activity is generally a little better than it's been.

So I would say that we're cautiously optimistic.

But this is an uncertain time.

So while we're seeing some improvements and we're happy to see it, we're happy to see better usage, there's still an economy here that most business people will tell you is concerning, troubling, uncertain.

Okay, thanks, Dale.

Maybe just finally on capital.

Are you guys permitted to buyback stock and maybe you could share your thoughts on buyback versus dividend increase, particularly with the payout ratio at only 15%.

Well, as we've talked about before, this is Ralph, we continue to watch the economic environment that Dale just described and we've talked about earlier, as well as our core profitability trends and we are generating capital in excess of our balance sheet growth, but there is still a fair amount of uncertainty out there.

We will continue to monitor that and, as you mentioned, both the dividend and stock buybacks are important tools in making sure that we are where we want to be from a capital standpoint and the appropriate time to return to our shareholder.

Ralph, given that you've repaid TARP, could you buyback stock if you wanted to here?

Well, I think we evaluate that accordingly and would have discussions with the appropriate -- obviously the board and appropriate regulators before we undertook to do anything like that.

But again the uncertainty that is out there is the thing that we have to watch at the moment.

We feel very comfortable with our capital, as you mentioned.

We are very strong, as Beth was talking about earlier, and I think positioned very well and on a cautious things are moving in the right direction.

But the key is will it continue to accelerate in the economy?

And on the buyback, Steve, we're still, we'll be waiting for how Basel III will get promulgated into US rules so that we have more clarity related to us.

We are not a Basel II bank, so it will be very important to see the US regulators turn Basel III into some proposed rulemaking that we can evaluate in the context of a share repurchase program.

Okay, thanks.

Thank you

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

Good morning.

Good morning, everyone.

And I guess maybe expanding on the capital management, you do have a significant amount of capital, the Tier 1 common ratio is significantly higher than a lot of your peers, so thinking that if there's not a significant impact or change to your risk-weighted assets, because already they're largely commercial focused, (inaudible), Basel III has been put in place.

So it seems to me you guys could be in a situation where, again, you have a low payout ratio, that probably enough, I guess, is there something you need to wait until after the G-20 meeting here in November to get more clarity on deciding what to do as far as capital deployment?

I guess maybe second, since you already talked about dividend and buyback, I guess, maybe Ralph you can talk about the acquisition opportunities that you could see to deploy all that excess capital.

Well, I think to your first point, that certainly is watching to see what happens in the Basel and capital is requirements that Beth was talking about earlier is important.

one of the important aspects of looking to see where we are and where we go in the future.

Acquisitions, as I mentioned earlier, we certainly have the capital for internal growth, as well as acquisitions and, as we've said in the past, we're always looking for opportunities especially in Texas and California to increase our presence here.

We're looking for acquisitions from the standpoint of really to join us, to pick up not only an institution, but also the people in that institution so we can grow in those markets.

Given all the change and things that are going on today in the current environment in the financial institutions area, it's my personal belief that there'll be some opportunities there, whether they'll fit us from a price and culture standpoint and location standpoint you never know until it presents itself.

Okay, okay, and I guess, maybe from John or Dale, maybe you guys can comment on, and I apologize if you did go into this in a little bit detail if I missed it, but the inflows into non-performing, you mentioned that a good portion of that was related to western commercial real estate.

Is there any sort of particular market within California that you're seeing the weakness in that commercial real estate line of business in your western footprint?

No, there's no concentration, Brian, in the western market, it really has spread throughout the state and as you know, location is everything on real estate, so it really is quite dependent.

But again, it was mostly resi and mostly some weakness in retail.

Oddly enough, multifamily, which some institutions seem to be having some difficulty with, we had very little difficulty.

In fact, in many locations multifamily is, dare I say, hot these days in the marketplace.

So no concentration to answer your question.

Okay, so again, some more -- the residential, still the same softness in residential?

Very familiar, very familiar story, primarily residential, but some distress in retail as well.

Although we believe even in the western market that that market is overall stable and has bottomed in terms of vacancies and lease rates.

It's unfortunately both of those are at levels that are lower than we'd like them to be.

Okay.

And I guess you see is there any impact of all the foreclosure moratoriums, et cetera, just taking longer to get to a bottom with the residential real estate?

Is that a contributing factor?

No, not really.

Our consumer portfolio is about 10% of our portfolio.

We have got about 1.6 in residential mortgages.

And just to remind you, most of those are mortgages to our private lending clients.

So that portfolio has performed extremely well with charge-offs and non-accrual and past due rates that are well below the marketplace.

Now we do outsource the servicing of that portfolio and to the extent that that outsourcing could be caught up in a temporary moratorium, we could be wrapped up in that.

But that could cause a small increase in NPAs is how we'd look at that, but it's really minimal overall in the scope of the bank.

Yes, it seems like that's a lower risk and maybe it's just the residential construction and development, those properties maybe just taking a little longer to clear because of all this mess, I guess, is what I'm thinking.

Yes, we're not seeing any problems with moving ahead with whether it be foreclosure or whatever needs to be done in the collection process on the commercial side.

Okay.

All right, thanks for taking my questions.

Thank you

Thanks, Brian.

Your next question comes from the line of Brett Rabatin of Sterne, Agee.

Good morning, Brett.

Good morning.

Wanted to ask-- first off I think Beth mentioned that you haven't really seen much in the way of spread compression on the loan portfolio, so I was curious if you expect any as competition continues to heat up in this low rate environment?

This is Dale.

The environment clearly has become more competitive.

We, as we've indicated, haven't seen any significant spread compression at this point.

Clearly for some of the larger corporate, high quality deals, there is certainly more compression there, but frankly in our core sweet spot of middle market and small business, while I wouldn't want you to believe it's not competitive, we're not seeing any significant spread compression there at all.

And clearly the competition in terms of the structural elements continues to be challenging, but so far we've been able to achieve our returns and the level of credit quality that we want, but it is clearly more competitive.

Okay.

And then secondly, wanted to ask you've essentially been able to manage expenses flat this year and I know you don't give guidance on 2011, yet, but was curious if you might have initiatives next year that might continue to be favorable towards your relative efficiency ratio.

If you look at -- we manage expenses literally on a monthly basis as part of our monthly forecast process and working into next year as well, clearly.

And a key element is obviously controlling people and, as we mentioned earlier, we have done, I think, a really good job over a long period of time of managing people.

As I mentioned in the script, if you, just to repeat it, that we're operating today with 20% fewer people and our bank is 10% bigger in terms of assets.

So the productivity, if you look at assets per employee, average assets per employer, almost 40% improvement.

And so we'll continue to be focused on finding ways, not protecting the revenue base, the revenue producers, but finding ways to continue to do things more efficiently than we have in the past.

And those jobs that we've taken out as part of that efficiency won't come back.

So the management of people is a big part of our expense-base.

We're always looking at ways to do things more effectively.

And so it's not something that we do as part of a big program that we announce, it's a two-year program with a fancy name, this is literally a part of a monthly process.

And even the management of people, to the extent they're different from what has been approved at budget levels, it has to come to the management policy committee to get approval.

That's meant to be bureaucratic and it is, because it really means that people are serious about needing to add headcount, they're going to come and ask the very senior people.

So I think we have a very good process, we'll give more color on kind of the dynamics for next year in January, but be assured, it's a big focus for the management team.

Okay, thanks for the color.

Thank you.

Your next question comes from the line of John Pancari of Evercore Partners

Good morning, John.

Morning.

Beth, on that same lines around expenses, can you talk a little bit about how you manage the control around employee comp expense and headcount with the opportunities to hire and take advantage of some of the disruption, particularly in some of your growth markets, like Texas?

Yes, actually, we have -- when I talked about the headcount levels, that doesn't mean we aren't hiring people and we are hiring people whether it's in California, whether it is in Texas, whether it's as part of the new wealth management retail combination.

All of those things continue to go on.

And we continue to find attractive opportunities to hire people, senior people, as well as more day-to-day revenue producers.

So we are finding -- given our, that we are through our issues, that Comerica has weathered the storm very well in the last two years, that we're out of TARP, that we're in a capital position that allows us to support growth going forward, I think we have a very good story in recruiting people.

And so we continue to do that selectively, but managing in the overall headcount in the context of it.

We are not passing up the opportunities that you referred to.

In fact we've attracted some very talented and good new people.

Okay.

And then barring the TruPS redemption costs and just looking forward here over the next several quarters, can you give us an idea of where you'd expect the, your operating efficiency to fall out at?

Obviously it's elevated right now, but just trying to get an idea in terms of where your efficiency could run and if we can expect some positive operating leverage here in coming quarters.

For us we don't target an efficiency ratio, particularly over the last few years.

We've added banking centers over the last few years, which kind of changed the historical business bank more exclusive focus.

And so the efficiency ratio is one we're not, we certainly evaluate and measure, but we're really focused on how we look at the relationship between expense growth and revenue growth.

And that's why over the last couple years, given revenue's been quite challenging, that we've been very focused on controlling expenses even more so.

So I think it's the relative relationship between how we look at revenue trends related to expense trends and making sure those are properly balanced.

So that's how we'd look at it.

Okay, all right.

And then quickly on credit, do you have the amount of the 30 to 89-day past dues and how that trended?

Yes, John, they were actually up a little bit in the third quarter from the second quarter.

The second quarter they were about $350 million, in the third quarter they were about $400 million.

So a very modest increase in light of the whole portfolio.

Okay.

And I'm sorry if you already commented on this, but in terms of how you're thinking about the reserve, given the decline in the watch list and your expectations for a general downward trend in non-performers, I know you indicated that you expect to under-provide for charge-offs in coming quarters, but does that imply just keeping the reserve stable for the time being or when can you predict some of the release?

John, it's a very rigorous process that we use for determining the reserve and therefore the provisions, so it really is difficult if not impossible to predict on an absolute basis.

Given the trends, as you mentioned, and the overall metrics, we're comfortable with our guidance, but there's still an awful lot of work to do, frankly in a low growth economy.

So in the final analysis we are going to need to see continued improvement in the credit metrics and hopefully some more expansive GDP growth and job creation as we go forward along those lines.

But we have, just to remind you, in the second quarter we did provide $20 million less than charge-offs and in the third quarter we provided $16 million less than charge-offs.

So how that trend continues or expands, we'll have to see, to John's point, but we have been modestly reducing reserves the last couple of quarters.

And we think cautiously so and prudently so in light of the kind of still uncertainty that exists in the economic environment.

Okay and my last question and I'm sorry if you may have already touched on this in one of the first two questions, but in terms, I know you talked about utilization rate and everything in terms of demand firming up on commercial lending, but just trying to get an idea of how soon we can actually see the growth in commercial offset the CRE roll-off in terms of absolute loan growth.

I hope soon, but the reality is that number one, in terms of new CRE types of opportunities, there are very few good new opportunities, so we'll continue to see the runoff of the commercial real estate book.

It's part of a design, if you will, and so clearly that's, as we have talked about before, is a headwind against growth.

W while we are seeing some positive trends in the non-CRE, the rest of the C&I book, it's still very difficult to predict because there's just that uncertainty.

So I wouldn't sit here and tell you exactly when you might see it.

May be a while.

John talked about unemployment rates and the growth in the economy as being still at fairly muted levels.

I don't know that that's going to change any time in the near-term, therefore what we're doing is the things we've done for years.

We're calling on customers, we are calling on prospects, we are looking for the core middle market opportunities, particularly in Texas and California.

We have those good opportunities, we have a better quality backlog, but it will take some time, I think, to see any significant growth, if you will, in the C&I book.

It's just going to be sort of an ongoing, quarter-to-quarter, blocking and tackling kind of an effort.

As Dale was mentioning, we're staying very close to our customers and what we're hearing from our customers, and we have a lot of customers who are doing very well, they are not, because of the uncertainty in the economy and other things that affect their particular business, investing for the future.

They're really taking care of what's happening today.

And until there's a confidence factor build out there along with the economy showing a steady improvement, I don't think you are going to see loans consistently pick up in the industry.

And you monitor the numbers, I am sure, just like we do, as to how the industry in total is working.

We saw a little bit of that in the first quarter to the second quarter when things began to pick up and then all of a sudden the economy slowed back down again and the estimates that I've heard and look at over the next couple of quarters and into next year are not significant in pick-up.

I hope that that's not correct .

Okay, thank you.

Thanks for taking all my questions.

Sure.

Thank you.

Your next question comes from the line of Terry McEvoy of Oppenheimer.

Good morning, Terry.

Good morning, Terry.

Good morning, thanks.

On the call, last call in July you said that the NPA levels would be sticky, but heading lower on a gradual basis and I think we saw the stickiness in Q3.

Would that continue to be your feel looking out into the fourth quarter into next year, where that stickiness could result in non-performing assets remaining relatively unchanged and possibly up a little bit?

The way we look at it is given the overall improvement in our credit metrics of recent quarters and continuing into the third quarter, continuing with a low growth economy, but a growth economy nonetheless, we think that the credit metrics will generally trend downward, i.e., improve over the next several quarters, but there's always the chance that there'll be some variability in any quarter, in any particular credit metric.

So we're still pretty optimistic that the downward trend on a more expansive, six or seven, eight quarter linked quarter basis will hold, but from any quarter-to-quarter there could be some variability.

It's just that uncertain an economy.

And then just one other question for Beth, the margin guidance for Q4 does that take into consideration the continued runoff of noninterest bearing deposits?

And any comments at all, and I'm sure you'll talk about this in January, about maybe where you see the margin directionally headed in the first couple quarters of next year.

Yes, we have and I -- our noninterest bearing deposits actually are at levels higher than we expected them to be, even though they were down modestly in the quarter.

That's after, as I mentioned, six consecutive quarters of growth.

And so they're still much higher than year-ago levels.

And so while we have some, seen some decline, I would expect that we could see a little modest decline in the fourth quarter in noninterest bearing.

So that's certainly all the dynamics of thinking about the different aspects of the balance sheet are factored into the outlook we gave of the 3.30% to 3.35% in the fourth quarter.

Related to next year, when I think about the margin, and we're not assuming an increase in the Fed Funds rate next year, so we think that the margin looks pretty stable next year relative to where it's going to end up in the fourth quarter.

And while there'll still be further dissipation of the excess liquidity, which will be a positive for the margin next year versus 2010, we'll still will be working through, particularly in the first half of the year some offsets to that through the maturing of swaps.

We have $800 million of swaps maturing that have positive spreads in the first quarter and also just working through these lower yield levels on the securities portfolio.

So, but if you -- so there'll be some positives from excess liquidity dissipating, particularly in the first half, offset by these other couple of factors I mentioned.

But we see the margins stable from fourth quarter levels into next year.

Appreciate that, thank you.

Thank you.

Your next question comes from the line of Gary Tenner of DA Davidson.

Good morning, Gary.

Had a question.

Dale, you'd made a comment a moment ago regarding CRE opportunities, didn't sound very constructive on those.

We heard from some other banks that they think there is some opportunity there in terms of structure and equity in these deals.

Is it more a factor, would you say, of your appetite for the deals or are you simply not seeing the kind of transactions that you would feel comfortable underwriting at this point in the cycle?

Well, I'd say a couple things.

One is nothing's really changed materially for us in terms of how we view it.

We still have, as indicated, a fair amount of work to do on our existing CRE book and we frankly don't want to divert too much attention from that.

The other piece for me is we're just not seeing a great level of opportunities, certainly quality opportunities in our footprint that we think makes sense.

We're seeing some, but they're being hotly contested and frankly some of the structures in pricing just really don't meet our parameters.

So we're holding firm to the kind of deal we want, the kind of covenants, the kind of structure, including equity and certainly the pricing.

So that hasn't changed and frankly we're just not seeing those kinds of opportunities at this point.

Okay, thanks for the color.

Thank you.

Thanks.

There are no further questions at this time.

I'd like to thank everybody for joining us today and for your continued interest in Comerica.

Thank you very much.

This concludes today 's conference call, you may now disconnect.