Comerica Inc (CMA) 2011 Q3 法說會逐字稿

Good morning.

My name is Brandy and I will be a conference operator today.

At this time I would like to welcome everyone to the Comerica third quarter 2011 earnings call.

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

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

(Operator Instructions).

Thank you.

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

Darlene Persons, Director of Investor Relations.

You may begin you conference.

Thank you, Brandy.

Good morning and welcome to Comerica's third-quarter 2011 conference call.

Participating on this call will be our Chairman, Ralph Babb; CFO, Beth Acton; Chief Credit Officer, John Killian; Vice Chairman of the Business Bank, Lars Anderson; and Karen Parkhill, Vice Chairman.

A copy of the press release and presentation slides are available on the SEC's website as well as the investor relations section of our website, Comerica.com.

As we review our third-quarter results, we will be referring to the slides which provide additional details on our earnings.

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 could 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 2 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 and in that regard I would direct you to the reconciliation of these measures within the presentation.

Now I will turn the call over to Ralph who will begin on slide 3.

Good morning.

Today we reported third-quarter net income of $98 million or $0.51 per share.

Impacting the quarter were merger and restructuring charges of $33 million which is $21 million after-tax, or $0.11 per share related to our acquisition of Sterling Bancshares which we completed on July 28.

Third quarter revenue was up 5% when compared to the second quarter reflecting our Sterling acquisition.

Turning to slide 4 and highlights from the quarter, the Sterling acquisition primarily drove our $2 billion increase in period end loans in the third quarter.

Comerica legacy loans reflected increases in Texas as well as in commercial loans primarily specialty businesses including mortgage banker, energy, and technology and life sciences offset by decreases in national dealer services, global corporate banking and small business banking.

Specialty businesses along with Sterling were the primary contributors to the $1.1 billion increase in period end commercial loans in the third quarter.

Comerica legacy commercial loans increased $668 million, or 3%.

In our Texas market, Comerica legacy period end total loans increased $113 million, or 2%.

Our average core deposits were up $3.5 billion with increases in all major markets led by Texas which reflected average Sterling core deposits of $2.5 billion.

The net interest margin increased 4 basis points to 3.18% primarily from the acquisition of the Sterling loan portfolio partially offset by the impact from higher excess liquidity.

Non-interest income was stable with core operating fees up modestly including the contribution from two months of Sterling.

Non-interest expense increased $51 million to $460 million including $18 million from Sterling operations and the previously mentioned $33 million of merger and restructuring charges related to the Sterling acquisition.

We continue to be pleased with our broad-based steady improvement in credit quality.

This was the ninth consecutive quarter of decline in net charge-offs with a $13 million decrease.

Internal watchlist loans and nonperforming loans continued to trend downward for both Comerica legacy loans and the Sterling loan portfolio.

We continued to see reductions in inflows to non-accrual loans and positive migration in other credit metrics.

Our customers generally are in a stronger position today with higher liquidity, lower leverage and increased efficiency.

These positive attributes will assist them in whatever economic scenario emerges in the coming months.

As a result of the overall improvements in credit quality we have seen, the provision for loan losses declined to $38 million (sic -- see slide presentation).

Our post acquisition capital remained strong as evidenced by our Tier 1 capital common capital ratio of 10.57%.

We repurchase 2.1 million shares in the third quarter and expect to continue to be an active repurchaser of shares for the balance of 2011.

Turning to slide 5 and our acquisition of Sterling, systems integrations are on track and expected to be completed by year-end.

We have been in ongoing communication with Sterling customers throughout this transition process and look forward to officially welcoming them to the Comerica customer platform.

Sterling's size, geographic footprint and customer focus uniquely fits our strategy and expands our growth in Texas.

As we have mentioned previously, Sterling's solid deposit base and well located branch network virtually triples our Houston market share, provides us entry into the attractive San Antonio region, and complements our existing footprint in the Dallas-Fort Worth area.

We are dedicated to ensuring we deliver the revenue synergies that we anticipate from the Sterling acquisition.

These include treasury management, wealth management, trade services and derivative products.

For 2012 excluding the impact of regulatory reform and the completed sale of Sterling's investment advisory business, we expect about of 15% lift in Sterling's non-interest income.

This equates to about $4 million.

We believe these synergies will accelerate in 2013 and beyond.

In addition, we believe there are opportunities to accelerate loan growth with our specialty businesses and at the lower end of the middle market.

This could add about 10% or $200 million to their loan portfolio and accelerate in future years.

In summary, the Sterling acquisition provides an exceptional growth opportunity in one of the most attractive markets in the US.

Texas is a growth leader for the US economy with strong high-tech and energy sectors and strong demographic growth.

Our Texas Economic Activity Index indicates the state economy is holding steady although lower energy prices could impact the energy sector in the months ahead.

Texas is expected to outperform the national economy again this year.

The Michigan economy received a boost from increased automobile production in July as supply chain constraints eased.

Sales for the three Detroit automakers held up in August and September despite the severe drop in consumer confidence that we saw at the end of the summer.

Lower gasoline prices and ample pent-up demand are also positives for the auto sector and Michigan.

The California economy continues to struggle for traction.

Consumer spending remains fundamentally constrained by a weak housing market.

Silicon Valley remains a bright spot for the state economy but some high-tech industries are vulnerable to cooler markets.

With the uncertain national and global economies we have heightened our focus on revenue-generating initiatives and expense controls.

Beth will go into more detail but in addition to delivering the revenue and expense synergies from the Sterling acquisition, we plan to reallocate resources to faster growing businesses, leverage opportunities to lower deposit pricing and continue to utilize technology to produce efficiencies among many other action items.

By continuing to strengthen our franchise, we believe we will be able to drive growth in this challenging economic environment.

Before turning the call over to Beth, I want to remind you that Karen Parkhill is here as well.

As you may know, Karen joined us on August 8 as a Vice Chairman.

Initially she has assumed administrative responsibilities for the service company, corporate planning and development, and corporate compliance and financial intelligence.

Following the filing of our form 10-Q for the third quarter 2011 and as previously announced, it is anticipated that Karen will assume the additional role of Chief Financial Officer succeeding Beth who plans to retire in April 2012.

As CFO, Karen will assume reporting for fourth quarter 2011 results and for all financial reporting thereafter.

A special thanks to Beth for all her contributions over the years.

And now I will turn the call over to Beth.

Thanks, Ralph.

Good morning everyone.

Turning to slide 6, total period end loans at September 30 of $41.2 billion increased $2 billion from June 30 primarily due to the addition of Sterling.

Loan growth in Texas accelerated in the third quarter with the acquisition of Sterling.

Legacy Comerica Texas loans increased for the fourth consecutive quarter by $113 million, or 2%.

Commercial loans increased $1.1 billion at period end with $393 million due to the addition of Sterling and Comerica legacy loan growth of 3% or $668 million.

This primarily reflected a $1 billion increase in the specialty businesses including mortgage banker, energy, technology and life sciences and entertainment.

As we anticipated, average outstandings in National Dealer Services were down $488 million and down $290 million at period end.

This was a result of supply-chain disruptions related to the Japanese earthquakes.

We expect dealer inventories and loan outstandings will grow in the fourth quarter.

As we predicted, the pace of decline in Comerica legacy commercial real estate slowed in the third quarter.

Total average loans increased $924 million to $40.1 billion in the third quarter reflecting two months of Sterling.

Line utilization for the Comerica legacy portfolio was up almost 1 percentage point to 45.5% as the increase in outstandings was greater than the increase in commitments.

In line with the growth in outstandings, increased commitments were noted in the specialty businesses.

Our loan pipelines increased in the third quarter.

Commitments to commit which is the last stage in the pipeline before the deal is booked increased nicely for the third quarter in a row across almost all business lines.

Slide 7 shows average loan growth in selected portfolios.

Mortgage banker outstanding increased 50% in the third quarter.

Lower mortgage rates and industrywide volume constraints as well as recent market share gains have been the drivers behind mortgage banker outstandings.

We believe outstandings will moderate somewhat as mortgage rates stabilize.

Average loans increased again in the third quarter in global corporate banking in all major markets.

Energy increased $179 million in the third quarter.

The pace of loan growth picked up in technology and life sciences with $129 million increase in average loans recorded in the third quarter.

As shown on slide 8, core deposit growth continued to be strong in the third quarter.

Average core deposits increased $3.5 billion compared to second quarter reflecting a $1.7 billion increase in non-interest-bearing and $1.8 billion increase in interest-bearing deposits.

Sterling provided $2.5 billion of the total increase in average core deposits.

Increased average core deposits were noted in all major geographic markets.

By line of business, strong growth was reported in almost all lines of business particularly global corporate banking, financial services division, small business and wealth management.

The FDIC recently released their annual deposit market share report which showed Comerica's market share in Texas and Michigan increase as of June 30.

We believe this increase reflects our relationship banking focus backed by the prudent yet competitive rates we offer.

Slide 9 provides an update on our investment securities portfolio.

Excluding auction-rate securities, the investment portfolio consists primarily of mortgage backed securities, or MBS, and totaled $9.3 billion at September 30, a $2.4 billion increase from the prior period.

The acquisition of Sterling added $1.5 billion and this portfolio has been repositioned to look more similar to Comerica's portfolio.

This resulted in securities gains of $11 million in the quarter.

In addition, in order to reduce excess liquidity and enhance revenue, we purchased an incremental $1 billion in mortgage backed securities which settled September 30.

These securities have a controlled duration and have a higher yield than we were earning on deposits at the Federal Reserve.

Our target is to maintain an MBS portfolio of approximately $9 billion, thus we will continue to reinvest the proceeds from prepayments.

As outlined on slide 10, the net interest margin of 3.18% increased 4 basis points compared to the second quarter.

Accretion of the purchase discount on the acquired Sterling loan portfolio increased the net interest margin by 20 basis points.

This was partially offset by an increase in excess liquidity which had an 8 basis point impact as well as the 6 basis point impact from the accelerated premium amortization due to increased prepayment activity on the MBS portfolio.

Average excess liquidity which was represented by deposits held at the Federal Reserve increased $1.4 billion to $4.8 billion.

The increase was due primarily to very strong deposit growth.

Loan yields were modestly higher reflecting the purchase accounting accretion from the Sterling portfolio.

We have not seen any material loan spread compression.

However, we are seeing increased competition for customers as liquidity in the banking system continues to increase.

Our balance sheet remains well-positioned for rising rates as 80% of our loans are floating rate of which 70% are LIBOR-based, predominately 30-day LIBOR.

As loans represent 75% of our earning assets, our interest rate sensitivity is primarily at the short end of the curve.

Our net interest margin in the third quarter was lower than we had forecasted in July due to much higher excess liquidity.

In addition, Operation Twist announced by the Federal Reserve to lower longer-term rates, affected our securities portfolio which is a relatively smaller portion of our earning assets.

Slide 11 provides our expectations for the net interest margin for the fourth quarter and an early sense for next year.

Overall we expect the net interest margin to remain relatively stable for the near term.

For the fourth quarter, we expect the net interest margin to be about 3.15%.

This reflects the benefit from a larger MBS portfolio, lower excess liquidity as a result of the September 30 settlement of a $1 billion in MBS, and one additional month of higher-yielding Sterling loans.

This is expected to be offset by a reduction in the accretion of the purchase discount on the acquired Sterling loan portfolio and lower reinvestment rates on the MBS portfolio.

Our outlook assumes LIBOR remaining at the current level which is a few basis points higher than the average for the third quarter.

Based on an early look at next year, we expect the full-year 2012 margin to be relatively stable compared to the fourth quarter of 2011 assuming modest loan growth.

Remember we have already largely absorbed the impact of lower rates due to our predominance of floating-rate assets.

We believe we are being conservative in our other assumptions including MBS reinvestment rates at today's levels, no material change in the amount of excess liquidity, and loan pricing in a competitive environment.

Turning to slide 12, non-interest expenses totaled $460 million in the third quarter, an increase of $51 million.

The increase primarily reflected an increase in merger and restructuring charges of $28 million which was in line with our expectations and $18 million of non-interest expense from Sterling operations.

Merger and restructuring charges including costs related to the terminations of certain existing Sterling leases and other contracts, systems integration and related charges, as well is estimated severance and other employee related charges.

As the chart on this slide illustrates, we have consistently reduced our workforce excluding Sterling legacy employees over the past several years.

At the same time we believe preserving customer facing positions to maintain consistency in the customer experience is highly valued.

Comerica legacy full-time equivalent staff has decreased by approximately 17% since 2007 as we responded to the economic environment and as part of our continued efforts to leverage technology and maximize productivity.

We have recently heightened our focus on expense management which I will discuss further in a moment.

Our credit metrics are outlined on slide 13.

We continued to see steady improvement in credit trends in the third quarter.

Net credit related charge-offs decreased $13 million to $77 million and reflected an $18 million decrease in middle-market partially offset by an $8 million increase in commercial real estate.

Watchlist loans and nonperforming loans continue to trend downward for both Comerica legacy loans and the acquired Sterling loan portfolio.

Comerica legacy watchlist loans decreased $263 million to $4.6 billion at September 30.

Nonperforming assets increased modestly reflecting the addition of $24 million in foreclosed property from Sterling.

During the third quarter, $130 million of borrower relationships greater than $2 million were transferred to non-accrual status, a decrease of $20 million from the second quarter.

Of these transfers to non-accrual, $63 million were from middle-market primarily in the Western and Midwest markets, and $48 million were from the commercial real estate business line primarily in the Western market.

The allowance for loan losses to total loans was 1.86%.

The decrease in the ratio from the prior quarter primarily reflected the impact of the Sterling loans recorded at fair value at acquisition without a corresponding allowance for loan losses.

The remaining fair value discounts on Sterling acquired loans was $236 million at September 30.

As a result of the overall continued improvement in credit quality, the provision for loan losses declined to $38 million.

Turning to capital and slide 14, our capital position continues to be strong and the quality of our capital is among the best in our peer group.

The acquisition of Sterling had only a minor impact on our Tier 1 common ratio.

Earlier this year, we commenced our share repurchase program buying back 400,000 shares in the first quarter.

We did not repurchase any shares in the second quarter due to the pending acquisition of Sterling.

We significantly increased our repurchases in the third quarter and repurchased 2.1 million shares.

We continue to target an annual earnings payout ratio including dividends and share repurchases of up to 50% of full-year 2011 earnings.

The Federal Reserve published in June a proposal requiring banks with assets of $50 billion or more to submit annual capital plans.

The comment period has ended and we would expect some direction on this proposal in the fourth quarter.

We will be prepared if this proposal moves forward and believe we are approaching capital management from a position of strength.

With the uncertain economic environment, we have heightened our focus on revenue-generating initiatives and controlling expenses.

Slide 15 outlines some of the challenges we are working to more than offset.

These include the impact of regulatory changes such as new FDIC overdraft guidelines at lower interchange fees as well is rising employee health-care and pension expenses.

We are in the process of implementing about 250 revenue enhancement and expense reduction projects.

About two-thirds of these projects are related to expense initiatives and one-third revenue opportunities.

Our current estimate is this will result in at least $100 million in annual profit improvement in 2012.

On the revenue front, opportunities include reallocating resources to faster growing businesses as well as closely reviewing pricing of all fee-based products and rates on deposits.

Also a renewed emphasis has been placed on cross-sell referral opportunities and of course, we are dedicated to ensuring we deliver the revenue synergies that we anticipate from the Sterling acquisition.

Turning to the expense management side of the equation, over the past several years and particularly since the beginning of the past recession, we have undertaken a variety of measures to control our costs and promote efficiencies.

The efforts have ranged from the consolidation and renegotiation of certain vendor relationships to the streamlining of our various operational processes to the selective outsourcing of non-core operational and technological functions.

Using these same techniques and others, we believe that we can further reduce expenses while still providing ample opportunities to invest in growth businesses that will power our future.

We have already taken action on a couple of balance sheet items.

As I mentioned earlier, we have invested $1 billion of excess liquidity in higher-yielding MBS.

Also in order to reduce interest expense and excess liquidity, we proactively repaid about $80 million of Sterling senior debt.

Additionally, we have announced the future redemption of about $31 million in Sterling TruPS and expect to redeem an additional $24 million in Sterling TruPS in the near future.

Slide 16 provides our outlook for the fourth quarter compared to the third quarter.

Recall that Sterling results were included for only two months in the third quarter.

Average total loans are expected to increase by low single digits largely reflecting the impact of one additional month of Sterling.

Period end loans are expected to be relatively stable.

As I mentioned earlier, loans in the National Dealer Services business line are expected to grow.

Mortgage banker loan growth is expected to moderate and loans in the commercial real estate business line are expected to continue to decrease.

Average earning assets are expected to be approximately $54.5 billion reflecting increases primarily related to Sterling in average loans and MBS.

I already covered our outlook for the margin.

We expect credit related charge-offs of $65 million to $75 million and a provision for credit losses is expected to trend modestly lower from the third quarter.

We expect a mid single-digit decline in noninterest income primarily due to the regulatory impact on interchange fees and no further significant securities gains.

This will be partially offset by one additional month of Sterling.

Excluding merger and restructuring charges of approximately $25 million after-tax, or $40 million pretax, we expect a low to mid single-digit increase in noninterest expenses primarily due to one additional month of Sterling expenses in the fourth quarter.

In closing, we believe our geographic footprint is well situated.

With the acquisition of Sterling Bank, we are accelerating our growth in Texas.

We are confident we are well-positioned for future growth with a strong relationship focus and with the right people, products, and services in place.

This is my last earnings conference call.

As Ralph mentioned, Karen will be assuming the role of CFO after we file this quarter's 10-Q.

It has been a pleasure working with you over the past 10 years and I wish you all the best.

Now we are happy to answer questions.

(Operator Instructions).

Brett Rabatin, Sterne Agee.

Hi, good morning, everyone.

I wanted to first maybe get a little clarification on just the loans in the third quarter in terms of Sterling and Comerica legacy.

I know that Sterling ended 2Q with about $2.3 billion and you added $2 billion of loans during the quarter.

Can you talk about maybe the Sterling portfolio during 3Q and then the outlook for that going forward in terms of the guidance for loans to be flat in 4Q?

I can speak to part of it.

Lars may have some additional things.

When you think about it, you mentioned the number $2.3 billion.

Remember we had a mark.

These loans were marked 12% before they came onto our balance sheet.

So at that time, we were estimating about $2.1 billion.

We have seen a little runoff not surprising particularly on real estate and so the $2 billion number that we show on slide 6, $2.009 billion, was what was added at September 30 or what was existing for our Sterling at September 30 so the $2.3 billion you mentioned is pre the mark.

They came on the balance sheet at the end of July at $2.1 billion.

And then in terms of future opportunities, I will let Lars speak to that.

Obviously there is a little bit over $1 billion of commercial real estate that is in that portfolio.

We have already integrated kind of the leadership and management of the commercial real estate customers in our line of business and that has really gone well.

There is actually some good developers, some good customers in there that we are looking forward to working with.

But the commercial real estate portfolio overall as we look forward will probably have some runoff in it as we kind of integrate it into our portfolio and our underwriting but there are some really good customers in there.

The balance of it is -- looks like some good C&I opportunity for us, both small business and a little bit of middle-market.

And it is really kind of gratifying to see already that as we look at where the majority of those loans are centered is in the Houston kind of Metro area.

We are really seeing a lot of lift; in fact, the market today, Houston is our number one growth market for both middle-market and small business for our Company.

I think part of that is the legacy franchise we have there.

But part of it clearly is the result of the Sterling merger and some of the resources that we picked up.

We just have really a broader franchise there.

We are more broadly seeing kind of viewed in the community a better distribution so I think that really bodes well for us.

But the driver -- part of that driver will be the commercial real estate portfolio and the runoff in that.

So we will just have to see how that kind of plays out but it looks good at this point.

And as Ralph mentioned, we also are expecting as we look into next year about a 10% lift from that portfolio into sectors that really Sterling had not been so much whether some of our specialty businesses or certainly in the lower end middle market.

Yes, I mean you can talk about all the other things we are bringing to the market.

There is all of our lines of business that we are bringing to Houston and we are expanding and to San Antonio that I think are pretty attractive but also our products and services, much broader array there.

So I could spend a lot of time talking about those but I am very encouraged about our opportunities there.

Okay.

I guess thinking of the 4Q guidance, I am a little surprised to hear kind of the flattish guidance with all that said and the dealer book being up.

Can you give some clarity maybe around commercial real estate and how much more shrinkage to go do we have there?

Has the construction book completely run off or can you provide a little more guidance around the flattish comment?

We do see dealer growing but it will take some time to get that certainly at higher levels.

Mortgage banker, given how quickly it grows in the third quarter and given kind of where we have seen recently mortgage rates rise somewhat that we will see some moderation in the growth of mortgage banker in the fourth quarter.

And commercial real estate, I think the run off should be in the fourth quarter should look fairly similar to the third quarter but that is difficult to make assessments.

Those come in chunkier pieces and so at least that is our estimate at the moment.

Okay, great.

Thanks for all the color.

Steven Alexopoulos, JPMorgan.

Good morning.

Beth, since I know how much you are going to miss margin questions in your retirement, let me start there.

Oh, you are so sweet.

Thank you.

In terms of the guidance for the stable margin in 2012 versus the 4Q level, do you see the securities yield as holding relatively stable through the year or are there offsets here?

Do you plan on investing more cash?

Just wondering what the offsets are in this guidance for stable NIM in '12.

Yes, one of the things we have talked about is assuming modest loan growth.

It doesn't have to be a lot but any loan growth that replaces excess liquidity is powerful in terms of the NIM.

We do expect and have modeled in our outlook for next year that there will be a negative related to securities.

Because we have a $9 billion portfolio, we will have significant cash flows every quarter that we will be -- we are assuming will be reinvesting at rates below 2%.

And so we will see -- again, we think that is a conservative assumption but that will cause over time the average yield on the portfolio next year to decline.

But we have incorporated that into our margin outlook.

And there are some minor changes on excess liquidity and so in the end, it is a pretty flattish looking situation to us.

We think we still have deposit -- a little more to go on the deposit cost side, more down and we are also assuming it is a pretty competitive pricing situation.

So I think those are pretty conservative assumptions and at this stage as I mentioned earlier, it is an early look at next year.

And that is really with a stable economy out there too as well.

So if the economy picks up, then too we would pick up along with that which Beth has built into her numbers.

And then on the buyback, would you say you are targeting 50% of earnings with the dividend buyback?

Are you looking at reported earnings which would include merger costs?

And then how are you thinking about this target for 2012 similar 50%?

The 2011 earnings includes everything.

It is reported earnings in terms of our 50% payout.

As related to 2012, as I mentioned on the call, it could be that banks our size based on the proposal the Fed has put out there that $50 billion plus banks will be part of the really the CCARs process and therefore would be submitting capital plans as per this proposal in early January with an acknowledgment of the plan by mid-March.

So we are into a little new ballgame it appears.

I believe we will know more in the fourth quarter because if we are going to participate in the similar processes this top 19 banks, then we will have to know something soon.

So it is really difficult to comment on looking forward until we put that plan forward.

Fair enough.

Thanks for taking my questions.

Erica Penala, Bank of America Merrill Lynch.

Good morning.

My first question is on the $100 million in annual profit improvement that you are targeting?

Could you give us a sense of how much either your efficiency efforts will contribute to that $100 million swing?

Yes, what we have said is about two-thirds of the $100 million is expense related and one-third is revenue related.

I'm sorry if I missed that.

No, that's okay.

Okay.

And I guess importantly given that you are not part of the CCAR, the formal CCAR process, and given what seems to be a suboptimal interest rate environment over the next 12 months, I guess what do you have to see or what do you think you have to see in the underlying economic environment to perhaps target more than 50% payout?

Erika, you had mentioned that -- I just commented that it appears based on the proposals that the Fed has put forward that $50 billion plus banks will be part of a CCAR's process.

Whether it is the same process that the 19 go through is not clear.

But the timing at least based on the proposal appears to be similar to the top 19 banks.

So a submission of an annual capital plan in early January with a comeback to give us their views by formally by mid-March.

So at this juncture, I really can't amplify on our plans for '12.

We will be going -- if we have to go through that process, we will be doing that.

Obviously we are coming from capital from a position of strength and understand interest of shareholders and take all -- and looking at balance sheets growth etc.

as we move forward with that capital plan that we would potentially need to submit in early January.

Okay.

I'm sorry if you had to repeat things to me.

We are sort of dealing with multiple things.

That's no problem.

Not a problem.

And just one more and I promise Beth for your retirement present it won't be about -- well actually it won't be about margin.

But in terms of extracting revenue synergies from cross-sell with regards to Sterling, I guess perhaps Lars could comment on this, how much more training do you think the legacy sterling commercial bankers need in order to do that or do you think they have sort of the right culture in place to be able to be set up to meet that goal in 2012?

Erika, a good point.

I will tell you just to start at the end of your question and that is, are they kind of prepared -- the franchisers today?

If you think about Sterling, it really was kind of a business bank.

That was their orientation.

That is kind of what they did.

So a lot of the bankers there are really kind of already culturally focused on relationships, relationship building looking for broader opportunities to deliver more products and services which we bring obviously to the table for them in spades.

Whether it is in trade finance or it is in wealth management, private banking which I think is a tremendous opportunity for us, we have obviously a nice array of products and services in our risk management area whether it is FX, whether it is energy which for Houston obviously is right across the plate, interest rate risk management.

There is a number of products and services -- our commercial card, merchant services like I mentioned earlier, I could kind of go on and on and honestly the bankers there are very excited about us bringing those products and services to the market.

We have already gone very far down the road in terms of training the bankers.

So we are talking about the conversion here at the end of the year but we are really not waiting for the end of the year to push the accelerator here and to look for opportunities.

As I mentioned before, the Houston Metro area is now our leading middle-market and small business area and part of that is because of the products and services we are bringing to some really good bankers that understand what we do.

It is a relationship banking model.

So, Erika, it really looks promising for us as we look forward.

I would underline what Lars has said.

The integration process is going extremely well and the excitement on both sides and having [Downy] there in the Houston market today is really already showing the kind of things that we wanted from the integration.

It is moving along quite well.

Okay, thanks for taking my questions and Beth, good luck and have so much fun.

Thank you much.

I appreciate it.

Mike Turner, Compass Point.

Hi, good morning.

Just curious what were kind of the average gross yields of new funded originations this quarter?

I know it is kind of a meatball.

I know you have got a lot of different types of products but can you give us kind of a ballpark -- you know is it 3%, is it 4.5%.

And just where is that relative to the current loan book yield?

You know we haven't, as we indicated in the comments, we haven't seen material loan spread compression.

We do see things -- we are seeing for instance just as an example, we had a $1 million of fixed rate loans mature over the course of the quarter which has obviously an impact on margin in terms of loan yields.

But we really haven't seen a material change.

We still have much nicer loan spreads today than we had three years ago.

And while business is getting renewed and there is more competition, particularly at the high-end, large corporate, very creditworthy, high creditworthy, we are still holding spreads pretty well in middle-market and small business and some of the other sectors.

But having said that, there is a lot of liquidity out there in the banking system and frankly inherent in our outlook for next year is that we are going to see more competition and potentially an impact on spreads.

But we haven't seen a material impact at this point.

And then I guess I have to do the back of the envelope math, but implied in your NIM guidance, I mean should you be able to grow net interest income dollars from say the fourth quarter annualized rate in 2012?

I mean is that what is embedded in your assumption?

One of the important things -- a point I made earlier is that the relatively stable margin in '12 assumes modest loan growth.

So that is an important element because as I mentioned, replacing 25 basis point deposits with the Fed with loans is a very powerful thing for NIM.

So to the extent loan growth is better, as Ralph had mentioned than we expect which is very modest at this point, that would be a positive for the margin.

Okay, great.

Sorry, one last question.

Just on capital management to beat the dead horse.

If your stock is still trading at call it 80% of tangible book, you have got a 10.5% capital [level], even if you sat here and said maybe 9.5% who knows what the final number target number is -- I mean, would it be your intention to potentially try and return more than the 50%?

I mean is that something you should contemplate in your capital plan that you will submit in January to buy back more shares?

You know, I think we have approached capital from a cautious vantage point up till now because there has not been clarity on the final capital rules.

While I believe the process for us will be clarified in the fourth quarter, I don't -- my expectation is we will not see the Basel rules translated into US regulations until the first quarter of next year.

So that is an unknown that we feel like as I mentioned earlier, we are approaching this from a position of strength but we also would like to kind of know what the level is and what the consequences of thinking about being in the buffer, not in the buffer, is the buffer really a buffer and what the consequences of all those things are.

So I think before we become you know much more aggressive, we would want to feel comfortable with those capital rules.

Great, thank you.

John Pancari, Evercore Partners.

Beth, in that stable margin outlook that you provided, can you talk a little bit about what your assumptions are for the growth in the commercial lending segment and the large corporate segment?

I know you talked about the floorplan and mortgage banker segment, but can you talk more specifically about the commercial lines?

Are you talking about in the fourth quarter?

Yes and then also going into 2012 particularly based on your stable margin assumptions.

We do highlight the ones, mortgage banker, dealer, commercial real estate because those are ones that have had some variability to them.

Right now if you look at the third quarter, middle-market was kind of flat; small business is still struggling a bit.

In fact, actually we are seeing more production in small business than we did a year ago, more originations have happened this year than last year.

But we are seeing as term loans mature, they are paying them off because they are not investing in additional plant capacity or whatever machinery and equipment, those kinds of things.

They are being cautious.

So those are things that are not providing as much lift in a weaker environment which is not surprising.

But we are very pleased at the growth we have seen in our specialty business at TLS, energy, certainly mortgage banker has its ups and downs.

Dealer is coming back.

I mentioned entertainment, I think.

So we are very pleased at those and then adding Sterling to it will be helpful as we move forward.

Okay, but I guess I was just getting more so to your outlook for the commercial specific segments.

I know you mentioned in that stable margin outlook for 2012 you expect modest loan growth.

Do you expect a lot of that growth to come from specialty and energy and others or do you expect a good lift coming from the commercial specific segments?

I think it would be a combination of not just the specialty business but core middle-market is a third of our loan portfolio so if we can get through kind of the soft patch we are going through now, I think we will begin to see middle-market certainly propel itself probably sooner than small business.

Okay.

And then my last question is just around the securities portfolio.

Can you give us what is the monthly cash flows you have coming off that -- the securities book?

And in terms of your reinvestment opportunities, what duration are you looking at in terms of new investments?

The cash flows, we are expecting about $900 million of cash flows in the fourth quarter and about $700 million to $800 million a quarter next year.

And remember that is on a bigger portfolio, so that is on a $9 billion portfolio.

If you look at the kind of duration of things we have bought, which is close to 3 years, the overall duration of the portfolio was 2.7 years at September 30.

So that is kind of the duration we would probably keep looking into next year.

And opportunities there, depending on whether you are into CMOs or into pass-throughs, can be anywhere from today from the 180s to the 240s.

We are being cautious in the outlook we are giving and saying it is below 2%, is where we are going to be reinvesting all those cash flows over the next year.

Okay, great.

Best of luck, Beth.

Thank you.

Brian Foran, Nomura.

Hi, good morning.

I guess on a year-to-date basis, I think a lot of investors feel like your loan growth has underperformed peers, even especially adjusted for business mix.

I know you have kind of addressed each of the moving parts, but I am sure you get the question a lot.

So when people say to you, hey, it seems like you're losing market share and your loan growth is underperforming others, how should we think about that because I know there are a lot of puts and takes?

Lars, do you want to talk about that?

You know, I can't really speak to the overall -- what the market is saying about it.

I can tell you from where we sit, you know, when you see it looking back over this year, we have had really nice middle-market growth.

In particular here in Texas, it has been a really good growth market for us, and we expect to it to continue to be a nice growth market for us.

Our global corporate banking business has grown very nicely this year.

Obviously, commercial real estate, you know, as we have shared with everybody, would continue to have some runoff in that portfolio.

But that runoff has slowed, clearly, as we shared in the past.

It is lumpy in terms of the runoff, but it has slowed which we think is a good sign.

We have had a lot more new originations in there.

We think at some point the lines will cross and that will begin to grow, once we have fundings under some of our new construction facilities that are really focused mostly on multifamily kind of in footprint.

So that will be good.

But think back to the first quarter and the second quarter where you did have both the impact of mortgage and dealer, which are large businesses for us and had a significant impact on our outstandings.

Now you look back at mortgage banker finance, that is up 50% and one quarter, so we are getting some lift out of that.

We expect dealer to grow here in the fourth quarter.

And as we look across the rest of our specialty businesses as we mentioned earlier, Brian, frankly they are very well-positioned.

Just take energy for example; that business has been growing throughout the year.

I feel very comfortable with our market share in energy.

I feel like we are working with just the right kinds of customers that have the right risk profile and are well-positioned.

And I think that is an industry that is going to continue to be expanding.

It is going to be a long cycle, I think, and one that we are going to be a player in.

But if you look at technology and life sciences, we have very large market shares there.

We expect that that is going to continue to grow and that has done very well.

If you look at our environmental services, entertainment, very well-positioned.

And remember, these are not businesses that you get into overnight.

These are businesses that you have to build over many, many years.

So I can't speak to the market share issue but I will tell you that we have had in a number of these businesses some very nice growth.

We expect to have nice growth in the future and we see ourselves as very well positioned.

So anyway, hopefully that helps you a little bit, Brian.

Lars, you might want to comment that as far as existing customers, continue and pick up of new customers as well as we are very focused on making sure that we institute lending under our terms moving forward and that has paid off very well for us through the downturn and it is very important to us to build relationships over time.

I think that is a good point, Ralph.

It is a very, very competitive market, Brian, and there is a lot of growth available to banks out there today if you are willing to price it and structure it properly.

But you have to remember who we are and how we have positioned ourselves from a credit perspective and from a client perspective.

We have performed better throughout the cycle and we have positioned ourselves for the long haul.

Our customers view us as a very reliable stable source of financial advice and capital and that is the way that we want to position ourselves for the future.

Got it.

And one follow-up on the mortgage and auto dealer floorplan because there has been big swinging parts.

It seems like over the past few years mortgage has been anywhere from 500 million to 1.3 billion.

It seems like auto dealer floorplan has been anywhere from 3 billion now to as high as 5 billion back in '08.

Do you have a sense just of a best guess of a normalized level?

Obviously mortgage is going to come down, auto is going to go up.

But I am just trying to figure out, are the two of them basically a wash or is one going to go down more than the other goes up or vice versa?

Hard to know.

It is very difficult to predict particularly on the mortgage banker business but -- and industry volumes on the auto side are going to take some time to get back to the levels when it was a $5 billion business.

We are talking about 13 million SAARs instead of what were 16 million SAARs.

I guess maybe another way to think about it is, is there anything that you have done to either structurally grow or shrink either business geographically or customer wise or is it just the outlook for refi volume and the outlook for dealer inventories that is going to move the balances?

In fact, we are garnering market share in the mortgage banker business.

We have picked up new customers.

There has been a change in kind of the mortgage market and I think our reliability through the cycle has been -- is well viewed by that market and we have part of the growth that we have had clearly is from market share growth.

But we do expect the dealer business to come back.

Exactly pegging where that is going to be is hard to tell but there will be growth there.

The economy is the big unknown there.

Yes, that's right.

Thanks for taking my questions.

Paul Miller, FBR Capital Markets.

Yes, thank you very much.

Talking a little bit about the accretable yield that you guys gave guidance to go from $27 million to $15 million to $20 million in the fourth quarter.

How long should we model as accretable yield and in how much decay should we go?

Is it going to be relevant through 2012 also?

Oh, yes.

It will be and we will -- we gave you the outlook for the fourth quarter of $15 million to $20 million, down from $27 million.

We will be giving an outlook on that in January when we give our outlook for 2012.

So we will be giving you more details.

But it will still be an important contributor certainly in '12.

And how long is the -- I guess the amortization schedule supposed to take place.

Is it a three- to four-year issue or a five- to seven-year (multiple speakers)?

It could be up to five years.

The bulk of the accretion will come in the first one to three years.

Okay.

And so and it is a pretty big decay from this quarter to next quarter.

But I don't expect that decay to be that much I guess going into the first quarter next year.

I am just trying to model out next year.

Yes, we haven't really given an outlook for next year but when things come on the books and we have seen some pay downs as we mentioned earlier, that tends to accelerate it.

So part of the art in this forecasting is thinking about how the loans come off the books there or mature or prepaid sooner than the contractual and that is the tricky part in modeling this.

But anyway, there will still be a significant amount of money next year which as I said we will give more details on in January.

Thanks.

And the other issue going back following up I think on Brian's question about the mortgage business, we have seen a lot of capacity especially out of Bank of America getting out of the correspondent business leave the mortgage business.

Is that an area that you guys are looking into to try to fill some of those voids from those bigger guys leaving the correspondent business?

No, if you think about it, correspondent banking and of course mortgage banking finance is two different products.

We are very focused on the high quality mortgage companies and really providing warehouse facilities as well as other products and services.

In fact some of our best cross-sell as I look at the business bank is in our mortgage banking finance.

So these are real relationships and that is really what we do for a living and so it is very consistent with our strategy.

I definitely would think that there is some probably good companies out there looking for a new home at this point.

Well it has I think played nicely into our hands and we are going to continue to be there in the market and it is part of -- as we have mentioned before, we have really kind of enhanced the sales culture and the focus and part of that is in our specialty businesses including mortgage banking finance and being out making the calls.

And it has played nicely for us and we continue to hope to grow that business.

Hey, guys, thank you very much.

Matt O'Connor, Deutsche Bank.

Good morning.

Sorry for another NIM question but obviously it has been coming in less than expected.

The macro environment has proved to be a lot different.

I don't know if you can answer this question now or maybe give us some color at a future date but I think having some sensitivities out there would be helpful.

For example, if long rates pop up another 50 bps and loan growth is a little bit better than expected, do you get back to 20 basis points of NIM that kind of went away this quarter?

Conversely if the 10-year goes back below 2 and there is no loan growth and liquidity builds, do we see kind of meaningful NIM pressure?

And I appreciate that the swings in the market have been huge but having some sensitivities out there might be helpful as well as kind of base case guidance.

Yes, Matt, you made a reference to NIM being down 20 basis points.

It is not down 20 basis points.

Even if you take accretion out of the third quarter and you equalize the excess liquidity position between the second and the third, we are down about 8 basis points (multiple speakers)

I just meant the guidance was for 335 to 340 in the back half.

(multiple speakers)

Yes, and there are two reasons for that.

One is that the excess liquidity is much higher than what we had assumed for that.

That is a big part of the explanation.

And the other piece is what I view as kind of a one-time remark if you will of accelerated amortization on the securities portfolio because rates did change so dramatically.

You saw it in our yield.

Our yield on our portfolio went from 340 to 287.

And because of that, we had to take this acceleration of amortization which because we have shorter lives now, we have to amortize it over a shorter period.

And so that one-time adjustment happened in the third quarter.

So again, I don't view that as an ongoing drag.

There will be an ongoing drag from lower yields in the securities portfolio which is not unique to Comerica but we have other things that I talked about that will provide offsets both in the fourth quarter and next year that we feel pretty good about the stable outlook we gave.

Okay.

And then I mean just going forward anything on sensitivities would be helpful.

I mean it seems like some of the -- well what I call NIM give up versus expectations you could get back if rates rise and you deploy liquidity if loan growth is better and then conversely I think some people worry that if rates go back to down and loan growth is not there, liquidity continues to build because you are viewed as safer than some -- that there could be some NIM risk.

So any sensitivities that you could provide now or at a future date would be helpful to many.

Okay.

And the impact when you just think about it in the macro sense, the impact on earning assets, the securities portfolio is a much smaller percentage of earning assets and loans.

And so the relative impact is a handful of basis points on these kinds of things versus something more dramatic.

But I am happy to address that as we move forward.

And then just a separate question, I mean I think the expense initiatives are a good theme for the industry to be focused on and that you guys have been focused on expenses for a long time now.

So it is impressive that there is more savings still to come.

As we think about that $100 million for next year, is that on a run rate basis or should we just sort of $100 million of basically pre-prevision earnings increase into kind of whatever we had thought for next year?

Do you get the full 100 -- I guess the first question is do you get the full $100 million next year or is it more on a run rate basis so that the entire $100 million would be realized in 2013?

No, we would have -- we are talking about having $100 million improvement in 2012.

Okay.

And that would be -- I mean there is no offsets to that so if pre-prevision earnings are running call it $700 million-ish, it would be $100 million on top of that?

Well, I mean you have to factor in some of the things we talked about as some of the challenges whether you have those in your models, I am not sure.

We had not previously disclosed what the impact of regulatory impacts we had disclosed those for this year but had not talked about them for next year.

That is a $26 million negative employee pensions because interest rates are so low, we are going to have higher pension expense next year.

And healthcare continues -- actually we have managed pretty well and the general marketplace is low double digits; we have been handling kind of high single digit increases but those combined are $30 million to $40 million.

So I don't know if you have those in your model.

Those are some of the things we are trying to more than offset with these efficiencies and revenue improvements.

Okay, that's helpful color.

Thank you very much.

Kevin St.

Pierre, Sanford Bernstein.

Good morning.

I guess most of my questions have been addressed.

I guess it is a good sign that there has been relatively few credit related questions but maybe I will just throw one at you.

Reserve to loan ratio now below 2%.

Do you see any floor in that metric or will that just be dictated by the improvement in underlying credit quality?

You know I think it will be dictated by the underlying improvement in credit quality and as we said, we have seen our major metrics improve for nine quarters.

As long as the economy continues to improve, we expect that steady improvement to continue as well but it would be very difficult to predict a floor on that.

You might mention the event effect of Sterling bringing in the portfolio on that ratio.

Yes, it dropped from quarter to quarter to the 1.86 simply because of the math.

As you add the loans from Sterling into the Comerica legacy loans, the denominator grows but you are bringing those loans over consistent with purchase accounting these days without a reserve.

So that does affect the trend line there.

If you just look at Comerica legacy, it would be at a 195.

Yes, it is 195 without that.

Right, got you.

Beth, congratulations and best of luck.

Thank you.

I appreciate it.

Bob Patten, Morgan, Keegan.

Yes, good morning everybody.

Kevin hit my question right on the head.

I know we can't pick a floor but can you give us like a little idea of what the accountants are saying right now in terms of how they are addressing the FASB issues?

We know credit is getting better.

We can look at what is going on in the ratios and so forth.

Are we going to run it down like we did in the last cycle in the late '90s or are we going to keep some kind of economic cushion in this?

Again, it is very difficult to predict the absolute path here.

Will the ratio continue to decline?

Yes, I honestly think that it will as the economy continues to improve and our overall level of non-accrual loans continues to decline.

You might recall that we took an approach early on in the recession that we had a very strong capital position, a very strong balance sheet.

We were not going to engage in fire (technical difficulty) loans.

We are going to continue to work those through our very experienced workout group.

So we will continue to do that and as the non-accrual loans come down the ratio will adjust appropriately.

But again, it is very difficult to predict how far down it will go.

And the reason I ask the question is we are sitting with 300, 400 basis points of Tier 1 common coming out of this cycle than we did last time.

And we ended up with the SEC pushing the banks to 1% or below.

So are you guys sensing any of that sort of recurrence in discussions?

I am not sensing any of that at this point.

But you might reiterate how you build the reserves every quarter.

Yes, we have a methodology that has served us well we have been using for about 10 years now.

It is block by block every quarter based on individual reserves for non-accrual loans, a pool approach based on statistical models for all other loans.

And then some special reserves as needed for those sectors of the portfolio that might be incurring charge-offs that aren't fully reflected in our standard loss back.

So it is a very methodical approach and the days of the old general reserve are really gone.

Okay, thanks everybody.

Brian Klock, KBW.

Good morning, everybody.

Just one real quick question on Sterling.

Beth, do you actually have the net interest income impact from Sterling?

I know you gave us the accretable yield impact.

But and we know as far as just trying to get to the total impact out of Sterling, we know we have the fee income piece, the accretable yield.

Just wonder if you have the rest of the NII impact from Sterling?

Excluding accretion, is $21 million in the quarter.

Great.

Okay.

And really just apologize again if you already went through this but it is still pretty early out here on the West Coast so I apologize for that.

Yes, we know.

But the $100 million in annual profit improvement from the revenue and efficiency opportunities, that is an after-tax number or that is a pretax -- that's a pretax?

That is pretax.

Got you.

Got you.

And then maybe the last thing too, the commitments to commit you said those were up nicely in the third quarter.

I mean can you give us an idea of where they are now versus second quarter?

And any of that commitments to commit related to the mortgage banker finance book and auto floorplan, how much of that is from just good old-fashioned good old middle-market and small business versus those other business lines?

Commitments to commit are up $400 million in the quarter to $1.9 billion and keep that in context, that number in the fourth quarter of last year was $900 million.

So commitments to commit have been rising literally just about every quarter first quarter from fourth to first, first to second, second to third.

What we aren't seeing yet is the draw down on some of those facilities but the fact that they are being put in place is very positive and I think Lars, it is really across a lot of the business.

I think it is.

It is really across all of our lines of business.

You know part of it would be in commercial real estate in some of the new multifamily commitments that we have put out there and you know those commercial real estate products that we are underwriting today I mean they have 35%, 40% cash in them.

So you are looking out at a 12-month oftentimes horizon before you even begin to get any outstandings against some of those closings.

But we are seeing it across the board and -- but we need utilization rates to go up too.

(multiple speakers)

And so we were encouraged by that.

Really help us.

It is up one tick as we look over the last quarter, almost 1% and I think that bodes well for us.

That is two quarters in a row.

Yes.

That is correct.

Two quarters in a row right of increasing line utilization.

Right, that is a good point.

Thanks for taking my questions and again, Beth, thank you.

It has been a pleasure working with you and best of luck.

Thank you much.

Terry McEvoy, Oppenheimer.

Hi, good morning.

Last November I believe you did increase the dividend and paid it out I think early in the first quarter.

Just listening to some of the commentary earlier in the call, is that not something -- is that something we should not expect this November until we get into the new year?

You know, I think we have to go back to what Beth was talking about earlier.

We have got to see if there is any of the rules and where they are and we will make our determinations accordingly there.

And as I mentioned and I would underline, we have a very strong capital base and historically we have been -- we have appropriately managed that capital base through the ups and downs whether it be dividend and/or buybacks.

And then just one last question.

If I look at the pieces of your loan portfolio and look at your commentary for the fourth quarter, it seems like for the most part it is flat to higher in the fourth quarter and then looking at the runoff of commercial real estate, it has slowed and has continued to slow down.

But yet your guidance has called for flat loans.

And I am wondering is it maybe, Ralph, your comments earlier in the call where you talked about energy and maybe being a little bit soft just given what prices have done.

Is it the energy portfolio maybe potentially trending lower?

What I am simply trying to match up your commentary for the fourth quarter for all the lending categories relative to total loans.

I think it really focuses on the fact that middle-market is still kind of going sideways right now for us and small business continues to be a drag.

So I think until we begin to see some percolation in those two, the specialty business we are very pleased about.

There are some ins and outs that we talked about earlier but core middle-market particularly outside of Texas and small business really pretty much everywhere we just -- there isn't momentum at this point.

As Lars was mentioning earlier and as Beth mentioned too, when you talk to customers today, many of our customers are doing quite well.

But what they are not doing is investing as they would have in past and what do I mean by that?

As things begin to grow, confidence is going to have to build before the customers are going to reach out and begin to -- and I will use an example of one I talked to the other day -- begin to build additional factory capacity.

So a lot of this depends on and I think we are being cautious but depends on where confidence and the economy begins to move going forward.

Right now our economist, Robert Dye, is projecting GDP for the year to be under 2% while certain states will do better than that like a Texas as an example and Michigan will do better than his current -- well he is forecasting it to be ahead of the national side, there is still a great deal of lack of confidence there.

And we are going to have to have -- we are going to see that from a national standpoint before you start to see the kind of especially our customers begin to move forward.

Thanks, appreciate the added color.

Thank you.

Gary Tenner, D.A.

Davidson.

Good morning.

Just a couple of questions.

I missed what the actual line utilization number increased to.

Was it 45, what was the number?

45.5, up 1 percentage point.

45.5.

Okay, great.

And just this question about your -- about the technology and life sciences division.

Obviously there was some great growth this quarter.

Is that growth coming from the kind of startups?

Is it coming from more established companies?

Is it what you consider new market growth or kind of market share shift?

You know, if you think about our technology and life science business, it is not so much about the Company as it is kind of the sponsors, the equity sponsors.

And those are the folks that we work with and have worked with over many, many years.

And frankly, you know that has been a rich space.

There has been a lot of startup.

We are primarily focused on the early-stage -- it has been a great business for us.

As we have shared before, we have three to one in terms of deposits to loans and outstandings.

So not so much about the companies as it is the sponsors.

The sponsors continue to be very active.

There is a lot going on and frankly the market up until recently has been very receptive to IPOs also for these companies.

And that has kind of played into our hands in terms of our warrant strategy.

But we see that as a continued growth business for us.

Could there be a little bit of cooling?

Could be.

There has been a little bit of that in the IPO market but overall a long-term good growth business for us.

Okay, great.

And then just one question on National Dealer.

I guess I would have expected it to have been a little more stable this fiscal quarter.

Was the decline this quarter more a function of the domestic auto dealers as opposed to any more hangover from Japanese supply issues?

You know, actually if you look at the period end balance you will see that that is not down as much as the averages.

In other words, it is beginning to turn.

And so when we talk about growth in the fourth quarter, we believe at this point that we will see a growth in outstandings as we look forward.

The Japanese name plates have been showing up as we had shared before on the lots.

The production is back but those vehicles are moving very quickly which I think is contributing to the increase in light vehicle sales nationally up to 13.1 nationally.

So I think what we are going to do is we really need kind of a combination of a couple of things.

What can help us is actually a slowdown in sales a little bit because it does increase inventories on the lots.

But as the Japanese name plates, which for us represents about 40% of our portfolio, you know as they are able to build inventories on the lots that will certainly help the outstandings as we turn the corner.

All right great.

Thanks for taking my question.

Jim Agah, Millennium Partners.

Hi guys.

That was a long queue but worth the wait I hope.

I just want to ask you a couple of questions about sort of the forward look like what basis we should using because in noninterest expense, you have about (technical difficulty) in this quarter but that I guess includes two months of Sterling, not three, right?

So it should be going up sort of 9 million-ish next quarter?

Well that certainly looking at the Sterling piece of it, yes.

It was $18 million in the third quarter, adding an additional month if it is a similar run rate would be the 9 that you mentioned.

Right and then in merger and acquisition, merger and restructuring expenses go up a little bit, right?

They were $33 million and they are going to $40 million?

(multiple speakers) Yes.

Go ahead, Beth.

No, that's okay.

Well when you strip that out and then you look forward to these $100 million of synergies, or $100 million of pretax profit improvement, you are not double counting the Sterling synergies as well, right?

The Sterling synergy should be on top of that $100 million, right?

That is absolutely correct.

So it is the $56 million, the 35% that is incremental to the $100 million.

Right.

So all other things being equal, Sterling synergies plus the $100 million profit improvement next year should result in $156 million of pretax profit improvement before those things you talked to (multiple speakers)

In terms of some of the challenges.

Right, the pension and healthcare costs you said?

30 to 40 and regulatory impacts of interchange is 26.

And I do want to make a comment.

What we said about the expense synergies in Sterling that the run rate --the 35% reduction or the $56 million reduction will be fully realized by the end of next year.

That is what our guidance has been.

So it is not a day one obviously.

Right, right.

Okay, that is a good clarification.

And then what about for -- well that is very positive.

So I look forward to that improvement.

Now on the noninterest expense, on the noninterest revenue side, the fee revenue side, you are backing out -- we should back out securities gains, right, of $12 million when we look at sort of a core run rate or a base?

What we have in the third quarter from the Sterling repositioning of the portfolio was $11 million.

Those will not recur in the fourth quarter.

$11 million.

But that is $11 million of the $12 million, right?

Well, we had actually $8 million of securities gains in the quarter over quarter sorry -- yes, now I am confused.

Anyway you should back out (multiple speakers)

$12 million reported, $12 million reported, $8 million was the increase.

Yes, exactly.

$11 million of the $12 million was related to Sterling.

That will not recur.

Okay.

But when I look forward, when I sort of like forecast growth or shrinkage I should be using the number X securities gains, right?

That is correct.

Well no, no, no.

No, no, no.

We are giving our outlook based on total NII and total NII included the securities gains in the third quarter.

So when we are saying the fourth compared to third, you absolutely have to include everything at -- that $201 million of net noninterest income is what we had in the third quarter.

Okay, good.

That is a good clarification.

And then when you were speaking earlier with Erika about the CCAR and the buyback and how you have to present your capital plan to the Fed in January, it is most likely then that that share repurchase activity will be -- it will be weighted towards the final three quarters of 2012 one would expect.

(multiple speakers) at this juncture --

Is that right to assume?

Yes, at this juncture I am not prepared really to talk about color there.

One, we don't know that that is going to be the case.

We believe it is that we will have to submit a capital plan but at this juncture, I'm not going to go into the details of what our thinking is because we are still working on it.

Okay.

And then when you said the portfolio yield went from -- did you say 340 to 287 -- that was year over year I take it?

No, that was in the quarter.

If you look at our slides related to -- I mean our investment portfolio, it was a 340 yield in the quarter second quarter and a 287 in the third.

Wow, okay.

Yes, yields on mortgage-backeds have really declined.

Okay.

And the drag from prepayment amortization on the NIM was I think six basis points this quarter?

Yes, because of the shortening of the lives, we had to accelerate the amortization of the premium which is 6 basis points or $8 million.

Okay.

That is not really expected to occur going forward, right?

That is correct, it is not expected to recur.

And then lastly on the margin, the excess liquidity cost in basis points, that should go down towards next year, right?

That would be our expectation with modest growth but the thing -- with modest loan growth.

The thing that has been very difficult to predict is deposits.

I would not have conjectured this past quarter that we would have had -- forgetting the Sterling piece -- that we would have had the growth we have had.

So that is the big unknown.

Where did that deposit growth come from?

Were you running programs or was it just --?

No, if you looked at our deposit costs, we have very low deposit costs and so it relates to our relationship focus and as excess liquidity, our customers are generating cash flow, they are putting their cash on deposit with us until they need to use it.

So it really is a reflection of kind of the cautiousness that is out in corporate America and we have very good relationships.

It was across virtually all of our lines of business and virtually all of our major -- well certainly across all of our major markets deposits were up.

So it is a good story.

It just happens to create a little excess liquidity for a period and we will have to deal with that and we did.

We took action to put $1 billion of it to use in a more productive way.

Okay.

Well these are really solid numbers with very conservative outlook.

Just keep your heads down.

Beth, congratulations and good luck.

You have been great.

Thank you.

Thank you.

Bye, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you.

I think all the questions have really been asked but Beth, what are the expectations for merger charges in 2012?

We had said originally that there were 80 after-tax in total.

We have now taken 24 and have indicated that another 25 would be in the fourth quarter.

I think that is 49.

So the balance of 41 after-tax would be in next year.

And would that be kind of between first and second quarter most likely?

Or all in the first quarter?

Probably more in the first half.

Okay, all right, thank you very much.

Congratulations Beth.

(multiple speakers)

Thank you.

Justin Maurer, Lord Abbett.

Good morning, guys.

An hour and a half, wow, that's a record.

You guys are just doing this because it is my last call.

Exactly.

Drag it out.

The liquidity, you just mentioned deposit rates being low.

There is no way to really pin it down but is that in a negative spread?

I presume it probably is once it is a fully big number with costs associated.

But just on an NII basis, is it negative or close to negative spread on that?

In terms of are you talking about incremental deposits?

Yes.

Okay, going into incremental investments with the Fed, I would say generally it is pretty much of a wash.

Because everybody is obviously fixated as you outlined -- you know the 8 basis point impact on NIM but what really matters is NII, that is where I was going with that.

Yes, well, and obviously earning assets are bigger as a result.

We in fact in the outlook we provided in the fourth quarter is $54.5 billion which is up significantly from the third and certainly from the second half outlook we gave back in July, it is up significantly from there.

Thanks.

Ken Usdin, Jefferies.

Thanks, good morning.

I just wanted to come back to slide 15 again and just ask one summarizing question.

Which is just -- when you talk about the implementation of these projects, revenue enhancement and efficiency improvements, it is that alone that can get $100 million.

But I just wanted to make sure, are you trying to signal in a totality what could happen with pretax pre-prevision or is what happens actually in the business plus or minus that as well?

Like it doesn't mention just loan growth which you mention could be slightly positive or you haven't really talked about what your forward margin could be also.

So I just want to make sure if we are either reading too much or too little into the absolute numbers that we are seeing on the slide in terms of the overall business performance expected for next year?

Yes, we have not given guidance on loan growth other than to say -- or margin -- we have given an early read that next year we think it will be fairly stable assuming modest loan growth.

But these things described -- the revenue enhancement efficiency improvements described on page 15 are not related to other things loan growth, provisions, any of those things.

This is just about primarily focused on fee income as well as efficiency on the expense side.

In addition, we have already taken action as I mentioned of putting $1 billion into securities yielding a 183 versus previously 25 basis points.

So that is part of the enhancements as well.

Right, right.

So it is tough to tease out basically right but we are going to get some improvement based on these things and then there is just also what happens in the core performance of the business itself which is not all necessarily captured in $100 million?

If there is loan growth, I would presume that that is additive as opposed to detractive versus $100 million?

Well, what I would say is again to remind you that there are challenges that we are facing and whether you have those in your models, I don't know.

One is regulatory impacts next year are negative 26 and higher employee pension and healthcare expenses of $30 million to $40 million higher in '12 versus '11.

So those are some of the things we are working on offsetting but in addition, contributing additional profit improvements on top of offsetting those challenges.

Right.

Okay.

And your comments about flat margin with a little loan growth so you are not commenting explicitly on loans next year but do you have just a general backdrop for what you expect to pan out without giving necessarily explicit guidance on numbers for next year?

What I would say is obviously a lot depends on what the economic outlook is.

We are -- a lot of economists are saying we are teetering on a recession.

I think our view is that we are hopeful that we won't get into that again and if it is, it is going to be a modest kind of thing like in the early 2000s where one quarter might be positive, one quarter might be a little negative.

We have already been through the worst of the real estate restructuring, all of those bubbles that happen.

We have been through that.

So if anything slows down in my view, and our collective view, it is not going to be a material thing.

So assuming though we get back onto a 2%, 2% to 3% kind of trajectory on growth GDP growth next year, we would see modest loan growth, yes would be our expectation.

Okay, got it.

Great.

Thanks for that color and best of luck, Beth.

Thank you.

[Peter Ganneteau], Carlson Capital.

Hey guys.

I just heard the word growth and I am getting all excited here.

I'm talking about next year, Peter.

Yes, yes.

Well next year is what people care about so I know we are talking about Q4 and I go through the pieces.

And it is like I listen to Lars and I get all excited and then I listen to the outlook and I am like blah.

Dealers are going to grow in Q4.

(inaudible) runoff is slower.

The mortgage warehouse is going to normalize but it is not going to fall off a cliff in Q4.

I mean right -- we have -- we have got the funding of all these mortgages.

Michigan is doing okay.

Look, I guess I just ask you on a one to 10 scale, how aggressive do you think you are being on loan growth guidance in Q4?

You know, Peter, you know us well.

We tend to be conservative in how we approach things.

But you highlighted some of the positive things but small business is still a drag, wealth management actually -- wealthy people have kind of pulled back and so we are not seeing -- we are seeing declines in loans in wealth management as well.

And middle-market as I said, has been kind of flattish.

So those are important sectors those three to our business that don't have a clear direction at this point.

So that is why we can talk about the ones we are more confident about whether it is dealer we believe will come back some how much that is to Lars point, I am not sure.

Mortgage banker, yes, you are probably your points are well taken.

And real estate but that is only a portion of the business and so that is why we kind of put it together the way we did.

I would underline too that the mortgage banker and the dealer that can move very quickly depending on where the economy and where confidence is and positive signals there can be a significant increase there where negative signals as we have seen like we saw in mortgage finance a couple of quarters ago can go the opposite way when things slow down.

So it gets back to what Beth was talking about earlier as we see steady growth in the economy and if confidence builds at the same time, then things could be -- there would really be an additional I think to our forecast there.

Okay so some hope.

And then are we getting hit with any other big pre-pays like the $1 billion in this quarter -- sorry in the large payoffs?

Yes, well we expect actually a pretty large prepayments in the -- just cash flows in the fourth quarter.

Our portfolio is bigger but also given the interest rate environment but we do not see or expect like we had in the third an acceleration of the amortization of the premium.

So that was kind of a one-time thing that when there is a big sea change in the securities things, we have to do a catch-up.

So that catch-up really happened in the third quarter.

It is not my expectation we would see that moving forward unless -- those yields are hard to go much lower.

I mean those are yielding anywhere in the high 1s, 1.80, to 2.30 to 2.40 depending on the structure.

So unless there is some very significant step down in rates again, I wouldn't expect that.

And we are not expecting that.

Right.

And that is when I look at the NIM outlook you know, all the desk analysts have tattooed you guys as the most sensitive to falling rates which of course is not true because 80% of your loan book is variable.

I mean you have the most upside if short rates go up but you don't have much downside to your core NIM.

Given that, the 3.15 you know again on a scale of one to 10, are you being -- how aggressive is that?

I am not going to ask you how conservative it is because you are so conservative you probably wouldn't score yourself high on being conservative.

It is our best guess at this point and that is all I can say, it is our best guess.

All right, all right.

So if I laid out a scenario where the world isn't melting down and the economy does kind of get a little better, we get different guidance from different crews, right, on the management side.

You are not losing massive market share to Wells Fargo in Houston.

Is that fair?

No.

Okay.

All right.

Okay that is it for me -- yes sir?

One thing I would say is that you can get in today's market about as much growth as you want if you are willing to price and if you're willing to structure certain ways.

We have a very deliberate kind of pricing strategy that has served us very, very well.

We are going to stick with that and over a long period of time, we believe it will provide superior returns.

As well as underwriting.

Consistent underwriting.

That proved well in the past.

Yes, so I appreciate that.

Thanks very much.

Thank you.

There are no further questions at this time.

Well, thanks everyone and I appreciate you all joining us for the call today and have a good day.

This does conclude today's conference call.

You may now disconnect.