Comerica Inc (CMA) 2010 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Comerica conference call.

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

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

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Darlene Persons, Director of Investor Relations.

Ms.

Persons, you may begin the conference.

Thank you, Regina.

Good morning and thank you for joining us.

Today we issued two press relations releases and two presentation slide decks, one announcing our fourth-quarter financial results and one announcing our acquisition of Sterling Bancshares.

Copies of both releases and presentation decks are available on the SEC's website as well as in the investor relations section of our website.

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

First, Ralph will provide comments regarding our fourth-quarter results and then review the Sterling transaction.

Beth and John will then provide the regular quarterly review of our financial results which will be followed by a question-and-answer period.

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 releases issued today, as well as slide 2 of each presentation slide deck 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 each presentation slide deck.

Now I'll turn the call over to Ralph.

Good morning, everyone.

Today we reported fourth-quarter net income of $96 million or $0.53 per share.

Fourth quarter revenue grew 5% over the third quarter driven by stronger fee income.

Our results also reflected the broad-based improvement in credit quality which led to a significant decline in the provision for loan losses to $57 million from $122 million in the third quarter.

Quarter-over-quarter, period end loans outstanding were stable with commercial loans increasing $713 million or 3%.

Excluding the commercial real estate line of business which continued to run off as expected, average loans increased $229 million.

Deposit growth was very strong with core deposits increasing $1.1 billion.

Overall we are pleased with the quarter and the many positive trends we continue to see.

Beth and John will provide further detail on our earnings results later in the call.

First, I would like to discuss our acquisition of Sterling Bancshares.

My remarks will follow the acquisition presentation starting on slide 3.

We are very excited about this opportunity.

Our approach to acquisitions has been a strategic one.

We focus on opportunities to accelerate our growth, particularly in the urban markets of California and Texas.

Sterling, with its presence in the Houston, San Antonio, and Dallas-Ft.

Worth markets fits our strategy perfectly.

There have not been, nor are there expected to be, many banks in Texas that have the size, fit and focus of a bank like Sterling.

In fact, there have only been two unassisted acquisitions of banks with over $5 billion in assets in Texas in the past seven years.

Also, there are only four other US public banks headquartered in Texas with assets in excess of $5 billion remaining, exemplifying the scarcity value of the franchise.

Sterling has a very appealing branch network which almost doubles our presence in Houston, provides an entry into the San Antonio market, which is one of the fastest-growing metropolitan areas in the country, and complements our banking center network in Dallas-Fort Worth.

Sterling also has a very attractive deposit base with a relatively large component of non-interest-bearing deposits.

We believe this gives us the ability to leverage additional marketing capacity to offer a wide array of products through a larger distribution network, particularly to middle market and small-business companies.

Also the timing is right.

The economic environment is improving and the industry is getting more clarity on regulatory topics.

With this acquisition, we expect to maintain our strong capital position which will support growth.

We are confident that we can manage the integration given the size and our in-depth knowledge of the Texas market.

Slide 4 provides an overview of the terms of the transaction.

This is a 100% stock deal for the purchase price of $1.027 billion.

The transaction is expected to be breakeven to Comerica's earnings the first full fiscal year, excluding merger and integration costs of approximately $80 million after tax, and be increasingly accretive thereafter.

Estimated synergies include expense savings of $56 million to be fully realized on a run rate basis by year-end 2012.

Because the transaction is expected to be closed midyear 2011, the savings will be predominantly -- be achieved in 2012.

We have completed comprehensive due diligence, including a thorough review of the loan portfolio.

The terms of the transaction reflect our assessment of the required loan marks.

In summary, our conservative assessment resulted in gross loan marks of 12% or about $330 million.

We expect to receive Sterling shareholder approval as well as the customary regulatory approvals and close by midyear 2011.

We believe that the terms of the acquisition are attractive and it is a compelling combination for all constituencies, shareholders, employees and customers.

Additional information on this transaction can be found in the appendix to this presentation.

Slide 5 provides a snapshot of Sterling as of December 31, 2010.

Of the US banks with headquarters in Texas, Sterling is the sixth largest by deposit size based on June 30 FDIC data.

Sterling has been operating in Texas for over 35 years with 57 branches in the Houston, Dallas-Fort Worth and San Antonio markets.

Sterling's headquarters and over half of their branches are in Houston.

Houston is the fourth largest city in the US and the largest city in Texas.

Houston accounts for over 30% of the state's GDP.

Expanding our presence in Houston is important to our strategic goal of accelerating our growth in Texas.

Sterling has assets of roughly $5 billion including loans of $2.8 billion, deposits totaled $4.3 billion of which $1.3 billion are non-interest-bearing.

That's a loan to deposit ratio of about 65%.

Also I should mention that Sterling exited TARP in early 2009.

Additional financial information on Sterling can be found in the appendix.

Slide 6 provides an overview of the loan mix for Comerica, Comerica's Texas market and Sterling.

Sterling's total loans of $2.8 billion at December 31, 2010, included non-owner occupied investor-owned commercial real estate of about $1 billion with the majority located in Texas and construction loans totaled $220 million or 8%.

Consumer and residential real estate represented 15%, C&I and owner-occupied real estate accounted for almost $1.2 billion or 45% of total loans.

Our expectation is that over time the loan mix would evolve to look more like the Comerica loan mix.

We believe the investor/commercial real estate component will decrease and the C&I portion will grow as we focus on leveraging the distribution channels to grow the middle market and small-business segments.

Deposit mix detail is provided on slide 7.

The mix between Comerica, Comerica's Texas market and Sterling is similar.

At December 31, 2010, Sterling's non-interest-bearing deposits accounted for 31% or $1.3 billion of total deposits.

This component of deposits was slightly higher at Comerica.

The average cost of Sterling's interest-bearing deposits in the fourth quarter was 76 basis points compared to 40 basis points for Comerica and 54 basis points for our Texas market.

We expect Sterling's deposit pricing will convert to Comerica's standards over time, thus reducing deposit costs.

This will be carefully managed to maximize customer deposit retention.

Slide eight outlines why Texas is so attractive as it provides excellent growth opportunities.

Texas had a shorter and shallower downturn and is recovering at a faster pace than the US as a whole.

Over the past decade, population in Texas grew 2.5 times faster than the rest of the nation and population growth provides a building block for job creation.

Texas created 941,000 jobs in the 10-year Census interval which is more than any other state.

Texas job growth rate for 2010 was 2.3%, greatly exceeding the national average of 0.9%.

There are more Fortune 1000 companies headquartered in Texas than any other state.

Our expectation is population and job growth in Texas will be sustained and should result in continued economic outperformance relative to the national economy which bodes well for Comerica's growth prospects.

Turning to slide 9 and a view of the combined branch network of Comerica and Sterling, this is arguably the most desirable footprint in Texas providing access to small business, middle market and mass affluent customers and prospects.

On a pro forma basis on June 30 FDIC data, our Texas deposit market share rank moves from tenth to sixth with total deposits of $9.4 billion which has increased to over $10 billion as of December 31.

In Houston, Sterling has the largest deposit market share of a Texas-based bank.

When combined with Comerica's Houston market share, we move up in rank from twelfth to sixth with a $4.7 billion in deposits.

Sterling provides an entry into the fast-growing San Antonio market with over $600 million in deposits.

Slide 10 is a pro forma view of the combined entity.

We are confident that the integration of Sterling will be manageable.

Its total assets are about 10% of Comerica's total assets.

However, it is meaningful as it significantly enhances the size of our Texas franchise.

This assists in fulfilling our strategy of attaining more geographic balance in order to provide more consistent earnings growth throughout the economic cycles.

Slide 11 provides an overview of the due diligence process.

Comerica's credit performance throughout the cycle has been among the best in our peer group.

The loan due diligence was completed by 25 senior officers from loan review, workout and credit administration.

The same methodology was used to review our own -- as was used to review our own portfolio was used to review Sterling's portfolio.

Furthermore, in our review, we had the benefit of knowing the Texas market.

We reviewed 96% of nonperforming loans outstanding, 92% of special mention and substandard loans and 43% of past credits.

As of December 31, 2010, the cumulative losses since December 31, 2007 were $120 million.

Our assessment process resulted in further gross loan mark of $330 million which brings the total estimated loss content through the cycle to be 15.7%.

This loan mark reflects our estimate of the future lifetime losses in this portfolio.

We are confident that we have conservatively provided for the credit risk in this portfolio.

This excludes the $77 million allowance for loan losses on Sterling's balance sheet which equates to about 3% of loans.

As a result of recording a mark for the future estimated lifetime losses, we won't be recording a provision in the future as these estimated expected losses are realized.

We also reviewed the ORE focused on recent appraisals and carrying values.

Outside the loan portfolio, we completed due diligence on the investment securities portfolio and found book value to be in line with fair market value.

Our analysis of the balance sheet marks was validated by third-party experts.

Turning to slide 12 and our capital position, on a pro forma basis, our capital is strong and we remain among the best capitalized in our peer group.

The quality of our pro forma capital continues to be solid with 99% of Tier 1 capital consisting of common equity.

Our pro forma tangible common equity ratio at 12/31/'10 would have remained about 10% -- above 10%.

Our strong capital base positions us well for growth.

On slide 13, we provide the highlights of our integration plan.

As I mentioned, we are very familiar with Sterling's markets as we have been operating in Texas for over 20 years.

As a relationship bank, we understand the importance of preserving the customer contact capabilities.

Comerica and Sterling share the same vision and values, the same strong commitment to relationship banking, and the same passion for doing business in the great state of Texas.

We look forward to working with Sterling employees in the weeks and months ahead as together we began a new and exciting chapter in our Texas banking history.

Downey Bridgwater, Sterling's CEO, is expected to become our Houston market president following the completion of the transaction.

As far as the nonperforming loans, we have a very experienced workout group which along with Sterling's workout professionals will manage that portfolio.

We will employ a focused integration plan that will leverage the talent and expertise that exists in both banks to ensure a smooth transition.

In conclusion, this acquisition is consistent with our strategy of growth and balance.

It bolsters our presence in the metropolitan areas of Texas, one of the most attractive markets in the country.

The transaction is expected to be breakeven in the first full fiscal year and be increasingly accretive thereafter.

We believe the value is fair at about 2.3 times tangible book and a deposit premium of about 17%, particularly given Sterling's high attractive footprint in one of the fastest growing markets in the US.

We are committed to ensuring a smooth transition and will draw upon the expertise of our colleagues throughout the bank and leverage our strong relationship banking culture to welcome the customers and employees of Sterling.

By maintaining our strong capital position we are well positioned to grow as the Texas and the national economy continue to improve.

Now I will turn the call over to Beth and John to discuss the fourth-quarter earnings.

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

Turning to slide 3, we outline the major components of our fourth-quarter and full-year results compared to prior periods.

Today we reported fourth-quarter 2010 net income of $96 million and diluted earnings per share of $0.53.

Slide 4 provides highlights of the financial results for the fourth quarter compared to the third quarter.

Broad-based improvement in credit quality continued.

Net credit related charge-offs decreased by $19 million from the third quarter to $113 million.

Inflow to nonperforming loans, total nonperforming loans and watch list loans all declined.

These continued positive trends led to a significant decline in the provision for loan losses to $57 million from $122 million in the third quarter.

Period end loan outstandings were stable with commercial loans increasing $713 million or 3%.

Excluding the commercial real estate line of business, which continued to run off as expected, average loans increased $229 million.

Average deposit levels increased $1.1 billion from the third quarter including a $687 million increase in non-interest-bearing deposits.

Revenue increased 5% driven by an increase in non-interest income of $29 million reflecting increases in numerous categories.

The net interest margin increased six basis points in the fourth quarter to 3.29%.

Our capital position remains strong as evidenced by our tangible common equity ratio of 10.54%.

Turning to slide 5, average total loans declined $103 million in the fourth quarter.

As categorized on the balance sheet, average commercial loans were up $497 million over the third quarter.

On a period end basis, commercial loans increased $713 million from September 30 to December 31.

Average commercial real estate loans, including owner occupied, declined $546 million in the fourth quarter and are expected to continue to decline for the foreseeable future.

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

In terms of lines of business, average loan outstandings in the fourth quarter increased in national dealer services, mortgage banker and energy.

Decreased average outstandings in the fourth quarter were noted in a number of areas with the largest declines in commercial real estate, middle market and small business.

Total average loans in Texas were up $78 million driven by an 8% increase in middle market and 6% increase in energy, partially offset by a decline in commercial real estate.

Line utilization for the portfolio as a whole was down slightly as the increase in commitments was greater than the change in outstandings.

Commitments increased for the first time in almost three years and, excluding commercial real estate, commitments in December were up over $600 million from September driven by an increase in Texas.

Our loan pipelines remain strong.

As shown on slide 6, core deposit growth was strong in the fourth quarter.

Average core deposits increased $1.1 billion as non-interest-bearing deposits increased $687 million.

Money market and NOW deposits increased $621 million.

This was partially offset by a $206 million decline in customer CDs.

We had increases in all markets and almost all business lines.

The growth was led by middle markets, small business and technology and life sciences.

As outlined on slide 7, the net interest margin of 3.29% increased 6 basis points compared to the third quarter.

A reduction in excess liquidity contributed to an increase in the margin.

Excess liquidity was represented by an average of $1.8 billion deposited with the Federal Reserve Bank in the fourth quarter.

This was a $1.2 billion decline from the third quarter.

The decline was less than we had anticipated due to strong deposit growth.

If excess liquidity had averaged $1 billion as we had expected, the margin would have been within the outlook we provided in October.

The excess liquidity position at December 31 was $1.3 billion.

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

Also having a positive impact on the margin was the redemption of a higher cost trust preferred securities or TruPS on October 1.

The benefits of the reduction in excess liquidity and the TruPS redemption were partially offset by a lower yield on the securities portfolio as mortgage rates have fallen significantly over the past several months.

Loan yields were modestly lower reflecting lower contribution from maturing interest rate swaps.

We have not seen any major loan spread compression, only selectively for larger better rated companies.

As far as non-interest income, we generated a $29 million increase in the fourth quarter to $215 million.

The increase resulted largely from a $7 million increase in commercial lending fees; a $6 million increase in deferred compensation asset returns, which is offset in non-interest expense; a $5 million increase in bank-owned life insurance; a $4 million increase in customer derivative income; and a $4 million insurance recovery.

As expected, service charges on deposit accounts declined $2 million, largely the result of the impact of Regulation E on overdraft fees.

Turning to slide eight and non-interest expenses.

Salaries expense was higher in the quarter as a result of a $10 million increase in business unit and executive incentives due to our improved financial performance and the final ranking of our financial performance relative to our peer group.

In addition, deferred compensation, which is offset by an increase in deferred compensation asset returns and non-interest income increased $6 million and severance expenses were up $3 million.

These increases were partially offset by a decrease in share-based compensation expense of $5 million related to stock grants given in the third quarter.

Our largest expense item is salaries and therefore we carefully manage the size of our workforce.

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

Our workforce decreased by approximately 4% from year ago levels.

We are operating with 17% fewer people today than we were in 2007 when the recession began.

Non-interest expense were also impacted by the $5 million charge related to the redemption of the trust preferred securities.

Now John Killian, our Chief Credit Officer, will discuss credit quality starting on slide 9.

Good morning.

In the fourth quarter, we saw continued broad-based improvement in credit quality.

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

Net credit related charge-offs decreased $19 million to $113 million.

Nonperforming assets declined $76 million.

Foreclosed properties declined $8 million.

Loans past due 90 days or more and still accruing declined $42 million.

And the watch list, which is the best early indicator we have for future credit quality, declined $629 million.

The watch list is primarily comprised of special mention, substandard and nonaccrual loans.

About half of the decline was in the special mention category, reflecting the positive migration patterns we have been seeing across the portfolio.

The watch list has declined $2.7 billion since the peak in the third quarter of 2009.

The improvement in all of these metrics led to a significant decrease in the provision for loan losses to $57 million.

The provision for loan losses decreased $65 million, primarily due to reductions in the middle market, private banking, commercial real estate and leasing business lines, partially offset by increases in the global corporate banking and personal banking business lines.

Turning to slide 10, the provision was less than charge-offs for the third consecutive quarter, reflecting our overall credit performance including improving migration trends.

The allowance for loan losses decreased $59 million and was 2.24% of total loans and 80% of total nonperforming loans.

Recoveries increased in the fourth quarter to $27 million, which is $14 million greater than the third quarter.

We believe this is a somewhat elevated amount of recoveries and they were comprised of a large number of relatively small loans.

We sold $41 million of nonperforming loans in the quarter, as well as $29 million in performing loans.

In total, prices approximated our carrying value plus reserves.

The recoveries, as well as the loan sales, reflect the fact that we have remained prudent in the marks we have taken throughout the cycle.

Turning to slide 11, total nonaccrual loans decreased $83 million to $1.1 billion.

The largest portion of the nonaccrual loans continues to be the commercial real estate line of business which declined $80 million in the quarter.

Non-accruals also decreased in the specialty businesses.

By geography, nonaccrual loans decreased in Western by $66 million and Texas by $13 million.

Midwest nonaccrual loans were stable.

Total TDRs increased from $147 million to $165 million in the fourth quarter.

Of the total TDRs, $44 million were accruing, $43 million were reduced rate, and $78 million were nonaccrual.

We review workout strategies, reserves and carrying values for each individual nonperforming 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 nonaccrual loans of 54% compared to contractual values.

Slide 12 provides detail on our commercial real estate line of business.

The planned runoff in commercial real estate continuous.

Total outstandings of $3.8 billion were down over $1 billion from a year ago.

Net charge-offs for commercial real estate were $40 million in the fourth quarter, a decrease of $19 million from the third quarter.

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

Inflows to non-accruals greater than $2 million, total non-accruals and watch list loans decreased in the fourth quarter.

Values have stabilized and even improved in certain locations.

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

In light of the continued moderate economic recovery under way, we expect full year 2011 net credit related charge-offs to be $350 million to $400 million.

We expect the provision for credit losses will be $150 million to $200 million.

Now I'll turn the call back to Beth.

Thanks, John.

Turning to slide 13, our capital position continues to be strong and historically we have had some of the highest capital ratios in our peer group.

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

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 has resulted in significant interest savings for us.

In November, we announced that we doubled our quarterly dividend to $0.10 per share.

The Board also authorized the purchase of 12.6 million common shares as well as the purchase of all of the outstanding warrants.

We expect to remain cautious in managing our capital.

Slide 14 provides our outlook for full year 2011.

As has been our practice, we expect to update our outlook each quarter when we announce our financial results.

Please note that this outlook does not include any impact from the acquisition of Sterling Bancshares.

We expect a low single-digit decline in average loans as growth in commercial loans will be muted by continued runoff of commercial real estate loans.

Excluding the commercial real estate line of business, we expect a low single-digit increase in average loans.

We expect that commercial loan growth momentum will build as the year progresses and the economy improves.

This will result in average earning assets of approximately $48 billion.

Excess liquidity is expected to dissipate throughout the year due to debt maturities combined with the slowing of deposit growth.

We expect to maintain the securities portfolio at about $6.5 billion.

We expect the net interest margin similar to 2010.

We expect the margin in the second half of the year to be stronger than in the first half due to lower excess liquidity as well as the expectation that the first half will be more affected by swap maturities and the impact from lower yielding securities.

Our outlook for net credit related charge-offs is $350 million to $400 million with a provision for credit losses of $150 million to $200 million.

We expect a low single-digit decline in non-interest income with increased customer activity more than offset by the impact of regulatory changes.

As far as non-interest expenses, we expect a low single-digit increase primarily due to an increase in employee benefits expense primarily healthcare and pension costs.

We expect income tax expense to approximate 36% of income before income taxes less approximately $60 million of permanent differences related to low income housing and bank-owned life insurance.

We plan to commence the share buyback program, targeting an earnings payout ratio, including dividends, of less than 50% of earnings.

Looking ahead, shareholder distributions, including dividends and share repurchases, will be a function of earnings strength.

Now I'll turn the call back to Ralph.

Thank you, Beth and John.

We are pleased with the many positive trends we saw in the quarter, including commercial loan growth, broad-based improvement in credit quality and strong deposit levels.

Therefore, we expect to see continued improvement in our earnings power going forward.

We are very excited about the announcement today of the acquisition of Sterling.

We believe it is a strategically compelling and unique opportunity that brings together two organizations that share a strong commitment to relationship banking and to Texas.

The combination with Sterling accelerates our growth in Texas and builds upon the momentum we are generating in Texas, one of the strongest economies in the US.

This momentum can be seen in our fourth-quarter results with our Texas loan outstandings and core deposits both increasing.

This is the right acquisition that comes at the right time and with the right organization that shares our vision, values and commitment to customer service.

In short, it is a strong strategic fit.

And now we'd be happy to answer any questions you may have.

(Operator Instructions).

John Pancari, Evercore Partners.

Good morning.

Can you talk about how your -- on your loss estimates on your mark for the Sterling deal, can you talk about how that splits between the Texas portfolio and the non-Texas book?

Is that CRE wholesale line, is that reflective of what is in the non-Texas piece?

Yes, John, the CRE wholesale line is primarily the outside of the state of Texas portfolio.

That was a portfolio of purchased loans.

They stopped adding to that in October of 2008, so it has been running off under Sterling management and we'll continue that effort as well.

It includes some hospitality, but it's largely owner-occupied mortgages, first mortgages, many SBA 504 loans to businesses located outside of Texas.

So it's a relatively small part of the overall portfolio and of course, when you combine with Comerica, a relatively small part of the overall portfolio.

Okay.

And then the total marks -- actually the lifetime losses that you are assuming here for the other CRE books for Sterling appear relatively high for a Texas bank.

So if you can just discuss some of your assumptions as you work through that portfolio.

Well, I can tell you that we had a 25 person team doing the due diligence.

We had collection people, we had senior credit officers, we had senior loan review officers and we analyzed the portfolio the same way we analyzed the Comerica portfolio.

The C&I mark, as you can see, is lower than others, reflecting the fact that it is a strong core Texas portfolio and of course C&I content is generally lower than commercial real estate content in the industry.

The CRE marks are certainly higher but not as high as in other parts of the country.

We did have our marks validated by outside third-party experts and based on all of that, we're pretty comfortable with them.

Don't forget also that the marks cover the reserve under fair value accounting, so it's really closer to 12% all in.

Okay, all right.

Then lastly, can you just talk about the 35% cost save that you're assuming?

Does that assume some branch consolidation or headcount reduction?

Yes, this is Beth.

When you look at the expense synergies that we're assuming of $56 million or about 35% of their expense base, it's a combination of things.

Obviously the largest expense for any bank is people, so people is one aspect.

But we see savings across virtually every line item on the income statement in terms of expenses.

So it's really across the whole expense base.

We do see, as we said in the script, that more of those expense saves will be -- the predominant portion of them will be in 2012.

Okay, great.

Thank you.

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

Maybe could I start -- could you just remind us of your financial acquisition criteria and how this deal fits into that, looking at IRR, earnings accretion, tangible book value, dilution, earn back, and stuff like that?

I think when you look at this as we've consistently said, we want a couple of things, not just the financial side, and that is it needs to fit from a cultural standpoint.

It needs to fit from a location standpoint and product and services and especially the lines of business that it is in.

And when you look at this and how it lines up with us, what we've been looking for is not consolidation, it is more we want to grow with an acquisition.

And this provides the people and the products and the services and expands us in the market.

As Beth was mentioning earlier, there is always synergies in two organizations when you combine them which come from both sides, but when you look at the locations that we have, we're really pleased with the fact of its an expanding situation, not a consolidating situation.

And in looking at the prices of previous acquisitions, especially here in Texas, a 2.3 times tangible book and a 17% deposit premium is certainly not out of line and especially on a historical basis.

And we have seen multiples much higher than that moving forward.

So when we went down through the list of things that were important to us, including the culture and the people, this one stands out and especially, as I mentioned earlier, with the scarcity of potential opportunities in the market and the way this one fits with us was top of the list.

And, Steve, I would -- this is Beth -- I would add one other item and that is certainly we have said we expected to be breakeven to our earnings in the first year.

That's very similar with what we have said in the past.

And then we would expect to be increasingly accretive beyond that.

Ralph, to follow up on that, does that imply that you would do a strategic deal at any price?

That there is not at least a minimum IRR that's acceptable to you?

Maybe even if you could just provide the IRR, that would be helpful.

You know, I think the answer to your question is no, we would not do it at any price.

Clearly we want -- and the IRR, depending on the assumptions you make, can vary quite a bit.

But we want to make sure that we are at our cost of capital or above.

Okay.

And this an auction process or did you have a relationship with Sterling?

We have known Sterling for some time since we have been down here and I won't comment on the process that was out there.

Okay, fair enough.

Thanks.

Ken Zerbe, Morgan Stanley.

Okay, thanks.

A couple of things I guess.

First question is maybe just address the thought process behind using stock instead of cash to buy Sterling given your excess capital position.

Well, as we've continued through the last several years, we value having a very strong capital position.

And until we get better, as we've talked about on calls before, a better sense of where the market is going to be from a capital position, the market being not only from an investor standpoint but also from a regulatory standpoint, it's our opinion that erring to the high side is the appropriate place to be.

And that's the reason, as you heard in Beth's comments and my comments, that being above 10% at this point in time is comfortable for us.

And I think I would add, Ken, on that -- this transaction via the use of common stock is not going to preclude us from moving forward as we indicated on the earnings slide, from beginning our share repurchase program.

So we will be moving forward with that in connection with the parameters that we described on the call.

Okay.

And just to follow up on the buyback program, it seems that the amount that you're indicating, so 50% of earnings all in between buybacks and dividends, a little bit lower than probably I was expecting and maybe some other people.

Just on that, I guess what level of tangible common are you willing to go down to eventually?

If you're sticking with basically trying to keep your capital ratios flat after the Sterling deal -- and I understand the conservatism -- a year down the road or if the economy gets better, where does that end up, where is your target ratio?

You know, Ken, until we get the Basel III rules translated into a notice of proposed rulemaking in the US, it's very difficult to answer your question.

We will want to get back to once we have more clarity through the notice of proposed rulemaking, to what we've done in the past which is to provide investors with a range of capital within which we want to operate.

Today it's very difficult to know what that range is.

And so for now, as Ralph indicated, we are being cautious.

But having said that, we are undertaking -- beginning a process of at least share repurchase which will start the process.

But again, until we have more clarity, it's difficult to answer your question.

But we will have more clarity.

I'm hoping it's this year that we will have more clarity and be able then to speak to investors about the range within which we want to operate going forward.

All right, thank you.

Craig Siegenthaler, Credit Suisse.

Thanks, good morning, everyone.

Just a follow-up to Ken's question on the debate between the mix of cash and stock, was the driver here also a desire to keep excess liquidity high in the event of negative deposit growth at some point this year, especially among your commercial customers?

So really just not regulatory capital, but also maybe keeping excess liquidity high?

Well, from a liquidity standpoint, we need to see total loan growth.

And as Beth was going through the numbers right now, the loan growth is flat.

One of the real pluses with combining with Sterling is they have a low loan to deposit ratio which gives us even more liquidity for the future.

As you know, when loan growth picks up it will be as you described, liquidity will go down at the same time as loans go back up.

And we are certainly focused on the liquidity that will be necessary to fuel the loan growth that we have in the future, which especially looking to where banks were in the past on loan to deposit ratios, I don't see those ratios getting to the heights that they did in that network.

So I think that all fits together from what you're asking.

Hi.

This is Mike Zaremski.

I work with Craig, I cover Sterling.

Just to refine on the earlier question on the $56 million of expense synergies, is that coming purely from operating expenses?

Because Sterling has already been cutting expenses for over a year now.

Or do you expect to recognize some benefits from net interest income, maybe runoff of CDs, or what are you guys thinking there?

The synergies that we mentioned, the $56 million, are just operating expenses, non-interest expense that we have not -- we do see benefits coming, as we talked about in the presentation, from lower deposit pricing for instance.

But that's a process that would be managed slowly to ensure that we retain deposits.

So the synergies that we mentioned of $56 million is just in noninterest expense.

That doesn't include revenues either.

Yes, and there's no revenue synergies assumed either.

Okay great, thanks for taking our questions.

Paul Miller, FBR Capital Markets.

Just real quick, one housekeeping question.

When you talk about buy backs and dividends on retained earnings, are you assuming dividend -- not dividend releases -- are you assuming provision releases in that calculation?

Well, we gave an outlook for credit quality in our 2011 outlook, as you saw, that we are assuming a provision of $150 million to $200 million, which is less than the $350 million to $400 million of charge-offs that we've also given the outlook.

So yes, there is reserve release in 2011 compared to charge-offs.

I guess -- and you're going to return that back through buybacks is my question.

That's part of your retained earning calculation, that's my question.

Yes.

Well, all of that obviously contributes to profitability and the payout is a function of profitability.

So yes.

And then the other question -- you guy's had a lot of one-time stuff in the NII.

Can we -- I mean, what type of numbers should be modeling out in the noninterest income line item?

Also related to the outlook we gave on 2011, we expect noninterest income to be down low single digits compared to 2010.

We do expect customer activity to be improving as we saw in the fourth quarter, but more than impacted by -- negatively by regulatory changes, particularly interchange coming in the second half of the year.

If you look in our financial regulatory slide, you will see that we're expecting a $13 million to $15 million negative impact from interchange starting in July assuming the federal reserve proposal goes through as proposed.

So that's part of the drag.

We do see -- you mentioned one timers in the fourth quarter on NII.

Actually there was a lot of stripping out, whether it's the insurance recovery or the BOLI insurance being up.

We did see fundamentally -- except for service charges -- fundamentally saw an increase in every category on the income statement in NII.

So we felt good about the traction there.

Is that from just raising your fees across the board?

No, it's through volume.

Volume?

Okay, thanks a lot, guys.

I appreciate it.

Ken Usdin, Jefferies.

It's actually [Ian Foley] for Ken.

Real quick wanted to touch on the NIM.

The guidance looked a little less than we would have expected given excess liquidity in the loan build up.

I was just wondering if you could give some of the gives and takes and why the NIM could actually go down a bit from current levels.

Yes, what we've said for full year 2011, it will be similar to full year 2010.

And when you think about the drivers in 2011, we do see a positive impact to the margin from a reduction in excess liquidity, which we anticipate given a slowing of deposit growth as well as about $1.4 billion of debt maturities we have this year.

But there are some offsets.

One is we have swaps that have been maturing starting in the third quarter and the fourth quarter and also in the first quarter which have been providing a contribution to net interest income.

Those are maturing.

And so that contribution goes away so that's a negative compared to last year.

And also with lower mortgage-backed securities levels, we also see a negative impact from lower yields on our securities portfolio.

Again, swaps and the mortgage-backed securities portfolio impacts are really more first half.

So it's really excess liquidity positive offset with these other two factors that I mentioned.

So those kind of equate to a similar impact or to have a similar margin this year compared to last year.

Got you.

Thank you for the color.

Chris Mutascio, Stifel Nicolaus.

Good morning, Ralph and Beth.

How are you?

Beth, I don't know -- I could certainly do this calculation myself, haven't gotten to it though.

But do have the pro forma tangible book value per share for Comerica with the inclusion of Sterling?

Yes, if you look at it fundamentally, think about it in these two pieces.

One is we are issuing incremental shares related to this transaction, about 24 million which is about a 13% dilution.

But we are getting obviously tangible assets from Sterling, and therefore when you work the math through, it equates to about an 8% decrease in terms of the tangible book value on a pro forma basis.

Great, thank you.

Ralph, can you go over -- you had a comment in there talking about acquisitions going forward are going to get more expensive.

I'm kind of shocked how we've gone -- in roughly what a six to nine month period of time from FDIC transactions to out and out M&A that was below the previous day's book to now you have Comerica trading at 1.3 times tangible book buying a franchise for 2.3.

And you think that's going to go higher?

Are we in the very early stages of this?

Are we going to get back to the type of tangible book multiples we saw in the late 1990s?

I don't know whether we will or not.

I think that what I was really implying to was when you look at our acquisition of Sterling and the scarcity value of an appropriate acquisition that fit all of the other metrics that I was talking to, its value in my opinion for anyone wanting to build the kind of market share that we do here in Texas and that is adding to our overall ability to grow with the markets, made it a very attractive and very strategic fit for us.

I do think prices will continue to move up as the economy improves.

Whether we will get back to what I call exuberance of the past, I don't know.

I don't really have an outlook on that one.

It will be a while.

Okay.

Thank you, Ralph, appreciate it.

Heather Wolfe, UBS.

Hi, good morning.

Two quick questions on Sterling.

Can you guys talk a little bit about the balance sheet growth that you're expecting over the next couple of years?

We haven't gone into a lot of details in the presentation on our assumptions on a lot of different factors.

What we do see is a shifting mix over the next few two years in their loan book to be less CRE and to be more C&I.

If you looked at the pie charts on the slide that compared Comerica, Comerica Texas and Sterling, we see that mix shifting.

It will take some time but we are very excited about the opportunities to grow C&I, particularly off that platform.

So we're very excited.

Yes, the other big plus is the ability to have the additional products and services and the revenue that Beth mentioned earlier that we really haven't put into the equation at this point.

With the addition of their colleagues and their locations and our products and services, our ability to grow is significantly improved in the Texas market.

Okay, great.

And then, Beth, just one quick question on the securities portfolio.

The drop in the yield quarter-over-quarter, looked like fairly large actually just for one quarter impact, particularly given the rise in the long end of the curve this quarter.

Was there some kind of a shift in strategy or a shortening of duration going on, or is that just pure reinvestment risk?

Yes, if you look at it, and we talked about it on the last call, that we saw a spike in prepayment for the mortgage-backed securities in September.

Those high pre-pay levels remained throughout the quarter.

So we were replacing those prepayments at much lower yields, particularly early in the quarter.

In October at our call in fact, we mentioned that those yields were in the 265 kind of area.

Now they're at 330, but we were purchasing securities obviously throughout the fourth quarter.

So that is the drop in the yield.

If you look at expectations for pre-pays starting to moderate in 2011 and also assuming current yields at least are maintained around the 330s, I think we've seen the bottom of the yields on the securities portfolio in the fourth quarter.

And we could actually see that go up a little bit?

Yes, I believe so.

I think when you -- again, assuming rates remain kind of at today's levels, we would see the yield begin to improve.

That the fourth quarter in fact it had bottomed.

But still, depending on what your assumptions are, it could be that on average the yield could be lower full-year this year versus last year.

But we do see that it has bottomed and I think we'll see some improvement as we go through the quarters this year.

Okay, that's very helpful.

Thanks.

Brian Foran, Nomura.

Can you tell us how much of the marks is likely to be coming back as a part of -- as accretable yield?

And does the accretion dilution you gave include accretable yield for 2012 and 2013?

It's really impossible to know that at this point.

You'll have to continue to work through time and see how the marks come out.

We're very comfortable with them for all the reasons that I gave before, but it's really impossible to know how much might accrete back as we go forward.

And we have nothing in the accretion outlook that we gave you related to credit.

Okay.

A lot of it depends on where the economy goes --

Absolutely.

-- going forward and how quickly the rebound is.

But we are not counting on being in our projections that we gave you in being better than those credit marks.

Right.

Write.

So we are not making an assumption there.

And then on the C&I yields, do you have what the yields would be exploiting swaps and how that compares to the weighted average on new originations you are doing?

Yes, loan yields in the fourth quarter were down a few basis points, almost entirely explained by the swap maturities.

Right but the 3.8% C&I yields right now, is there still a benefit of swaps in that?

And if so, how big is the total benefit?

Well, the last part of the swaps are maturing in the first quarter.

We have 800 million of swaps maturing in the first quarter at about 150 basis point increment positive contribution to earnings.

So that will be in -- but obviously our net interest margin forecast for 2011 factors that in.

And then are new originations coming on consistent with the existing book or lower or higher in terms of typical interest rates?

What I would say is from a spread standpoint that we are not seeing much compression related to lending.

I did make a reference that we are seeing more competition in larger highly rated credits where there is some competitive pricing going on.

But we are not seeing widespread competitive issues related to loan spreads.

Okay.

Thank you.

Sachin Shah, Capstone Global Markets.

Hi, good morning.

Thanks for taking my question.

I just wanted to follow up on some of the approvals that are needed to complete the deal.

Improvements?

Approvals.

(multiple speakers)

Okay, I'm sorry, I didn't hear you at first.

The approvals are the normal approvals from a regulatory standpoint and from the shareholders of Sterling.

Okay, can you be a little bit more specific on what approvals may be needed?

Well, it's the normal application for consolidation through the regulatory process which there's nothing different about that than any other transaction.

And in Texas, there is a two-thirds approval by the shareholders of Sterling to approve the merger.

Okay, and you mentioned that you're expecting the deal to be completed mid year.

That seems kind of, relative to some of the other deals -- banking deals, it seems fairly short.

I just wanted to see if you maybe could explain that and also any kind of narrowing of timeframe of that deal completion?

That's really our estimate based on getting the applications together and filing those applications in combination with our colleagues at Sterling.

Okay, is there a narrowing of the timeframe of sometime this year?

That will just depend on how quickly it goes through the system.

There's no way for me to estimate that.

That was our kind of best estimation (multiple speakers) end of the second quarter.

Okay, just one last question about the exchange ratio.

I know you mentioned how the process worked.

But can you just maybe talk about how you arrived at specifically the exchange ratio on a valuation standpoint?

Well, the exchange ratio was based on looking at where our stock was at the time and the price that we were to pay and that becomes a situation of basically dividing the numbers.

And that's how we came to the exchange rate of 0.2365.

Okay.

Thank you very much.

Have a good day.

Brian Klock, KBW.

A lot of my questions have already been answer, but maybe, Beth, you can maybe follow up on a little bit of the questions earlier.

In thinking about your targets for IRR and tangible book value dilution, I'm getting about $2.00, $2.50 tangible book value dilution which is about in line with where your 8% dilution all in comes in.

Maybe you can kind of give us some feeling for how soon can you earn back that dilution.

I know you're saying it's going to start to begin to be incrementally accretive after the first full year.

Maybe you can kind of give us an idea of how large could that accretion be in 2012 and into 2013 as far as a run rate of the tangible book value earn back?

When you think about the earn back, Brian, I think about it not just by Sterling, and we do see, as we indicated that we would see increasing accretion in 2014 and 2015, certainly significantly higher than in 2012 or 2013.

But fundamentally, so that's a piece of it, but fundamentally it's the core earning power of Comerica that also will be working back to, if you will in your words, earn back the dilution.

And I think we feel very positive about where we're headed.

We've started to see the indicators of loan growth.

We've -- net interest margin will be rising as rates rise at some point, we are not expecting that this year.

And fee income that grows with loan growth.

So all the -- and credit quality continues to be a very good story for us.

All of those dynamics come together not just for Sterling but also for Comerica to say our earning power is on the right trajectory and therefore the pace at which we earn it back I can't define today because I don't have a crystal ball.

But I think we feel very positive about the trajectory we are on.

Okay, and I guess -- I know Heather asked this too.

I was going to ask you -- with that basic assumption you have of being neutral to 2011 and then the accretion to start, do you assume any balance sheet growth at Sterling?

I know you said it would be a mix change from less CRE to more C&I, but are you assuming a static balance sheet at Sterling?

You know, for us again it is some of the same dynamics that we Comerica have been working with and that is CRE runoff, commercial coming back, and I think we can really help through this larger platform now to begin to start that mix shift at Sterling that I mentioned earlier between CRE and C&I.

But frankly the pace of economic growth, we're pleased obviously Texas is growing better than the national average, so we think we have a good shot.

But Sterling will have very similar I think dynamics that we will which is there is commercial real estate runoff which mutes high growth.

So we're going to work hard to do the best we can to leverage that platform.

We will have the revenue synergies that we talked about that we haven't included yet.

And with the new people joining us as well as the new locations and being able to leverage our products and services, that should be a real plus especially, as Beth mentioned, given the Texas economy and the locations of where Sterling is.

And the core deposit franchise at Sterling is very strong and is a very nice additive for us to support overall Comerica growth as well.

Okay.

And just one last question.

I know you mentioned it earlier on the utilization rates, you saw some very strong floor plan loan growth again.

The C&I portfolio outside of that grew about 8% linked quarter annualized.

Can you review the utilization rates again?

I guess where are they in your C&I book today?

Yes, I mentioned that they're a little lower than they were in the third quarter because in fact we've added commitments more -- in more amounts than we've added loan outstandings.

We are down about 7/10 of a percentage point to 45 -- I have to remember my -- for some reason I don't have that in my head -- it's 45.6% which was down 7/10 from the third quarter.

But the terrific thing, as I mentioned in the script, is that we saw commitments increase for the first time in three years.

Excluding commercial real estate, they were up $600 million.

If you include commercial real estate, they are a little less than $200 million up and it is driven by increases in Texas, which again, we're seeing, as we mentioned, also in loan growth, we're seeing very good activity in Texas overall.

Okay.

And I'm sorry, one last question, a follow-up on the floor plan loan growth.

Maybe John, you can comment on it, or Dale, if you are still on the call.

Do you think that -- we saw some strong auto loan sales here in the fourth quarter, we had -- the SAAR was over $12 million for the quarter.

It looks like you're seeing some of that already being pulled through.

Do you think that'll continue into the first half of year as well?

Yes, I do think that the -- we have added, Brian, a number of new relationships.

These are obviously well tested.

Volumes are coming back, inventories have been tightly managed.

There's been great opportunities for some of our customers to acquire dealerships that maybe were a little weaker and bring them into their system.

So all in all, as long as the economy continues to improve, as long as the autos continue to do what they're doing which is improve, I think you'll continue to see good progress in that business.

Brian, our economists is looking at a $13 million kind of unit level up from about $11.5 million last year.

Okay great.

Thank you.

Judy Delgado, Alpine Associates.

Good morning, thank you for taking the questions.

Most of our questions have been answered.

I'm wondering if the companies can just detail the consideration for shareholders.

Is there any mechanism there to protect Sterling if the stock price of Comerica does fall on certain levels?

It is a fixed exchange rate.

Okay, so no collar on the stock so to speak.

No.

Okay, wonderful.

Thank you very much.

Brian Foran, Nomura.

Hi, just one follow-up.

On a commercial real estate runoff you mentioned a couple times, can you remind us the total size of what we should consider a runoff book so we can try to gauge how long that headwind will persist?

Yes, I think if you look at in 2010, we had about a $1 billion decline, a little over if you look on the balance sheet period end to period end.

It would be our expectation it would not be as large this year.

It's hard to quantify that but it's not as much as last year.

Is there a total bucket of loans that you've deemed runoff in your mind though?

Like X billion of the company is in runoff over the next few years?

Well, I wouldn't categorize it as billions.

I think we just mentioned that last year, it was a little over $1 billion, this year our expectation is CRE runoff would be less than that.

And not only because of ones that we might want to work out of, but also because frankly there's liquidity that's coming into the marketplace.

We are not a long-term mortgage lender, so these things will get refinanced in the public market or through other sectors.

Many of our real estate projects, the construction is behind us and they're ready to go to the permit market, the permit market is coming back.

The portfolio has come down, as you know, substantially so the base is lower.

So it will run off certainly to some extent.

But as Beth said, not nearly as much in our opinion as we saw this past year.

Okay, and then would it be fair to say in 2012 we don't know what the commercial real estate environment will look like and it is economic dependent, I get that.

But the runoff, the mechanical rundown issue will be mostly behind us at that point?

Yes, I would think so.

I would think, assuming the economy continues to improve, that we will have seen the bulk of the runoff and we will be seeing some opportunities.

Thank you.

At this time, you have no further questions.

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

Well, we appreciate very much you all being with us today.

It's an exciting time.

We're looking forward to our acquisition of Sterling and their colleagues joining us and ramping up the growth in the Texas market because of that combination.

So thanks very much, we appreciate it.

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

We thank you all for participating and you may now disconnect.