Comerica Inc (CMA) 2012 Q1 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 first quarter 2012 earnings conference call.

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

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

(Operator Instructions) Thank you.

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

Darlene Persons, Director of Investor Relations.

Ma'am, you may begin your conference.

Think you, Regina.

Good morning and welcome to Comerica's first-quarter 2012 earnings conference call.

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

You'll hear that Lars has a touch of laryngitis but he is still ready to answer your questions.

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

As we review our first-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 can cause future results to vary from expectations.

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

I refer you to the Safe Harbor statement contained in the release issued today, as well as slide 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.

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

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

Good morning.

Today we reported first-quarter 2012 earnings of $0.66 per share on net income of $130 million, a 36% increase from the fourth quarter of 2011.

Turning to slide number 4 and further highlights, loans continued to grow in the first quarter, with average loans up $815 million or 2%, primarily reflecting an increase of $1.2 billion or 5% in commercial loans.

The increase in commercial loans was broad-based across the majority of business lines and all major markets.

As expected, commercial loan growth was partially offset by the continued decline in commercial real estate loans.

Deposits also continued to grow.

We had record deposits of $49.3 billion at March 31, 2012.

And had an increase in average deposits of $532 million or 1%, primarily reflecting an increase of $461 million in non-interest-bearing deposits.

Net interest income, including accretion, was stable.

Non-interest income increased $24 million, driven by a $10 million or 6% increase in customer-driven fees, offsetting the headwinds of regulatory reform.

We continued to have tight control of expenses.

Non-interest expenses decreased $30 million in the first quarter to $448 million, primarily due to the decrease in restructuring expenses related to our acquisition of Sterling Bancshares.

Credit quality continued to improve in the first quarter.

This was the 11th consecutive quarter of a decline in net charge-offs with a $15 million decrease.

Net charge-offs are at the lowest level since the third quarter of 2007.

The provision for loan losses was relatively stable.

Our expectation is that we will continue to see the provision and net charge-offs at or near these levels for the remainder of the year, assuming the current pace of economic growth is sustained.

We continue to approach capital management from a position of strength.

As we announced on March 14, 2012, the Federal Reserve did not object to our capital plan and the capital distributions contemplated in the plan.

The capital plan, which was approved by our Board of Directors, provides up to $375 million in equity repurchases from the first quarter of 2012 through the first quarter of 2013.

We repurchased $33 million or 1.1 million shares under the share repurchase program in the first quarter of 2012.

Our capital plan further contemplates an increase in our quarterly dividend from $0.10 per share to $0.15 per share, a 50% increase.

The dividend proposal will be considered by our board at our meeting on April 24, 2012.

Turning to slide 5 and our key markets and customer sentiment.

Our customers in Texas are feeling more optimistic as evidenced by the 4% quarter over quarter average loan growth, led by increases in energy, middle market, and global corporate banking.

We continued to leverage the synergies from our Sterling acquisition.

Momentum in the Texas economy increased in early 2012 after cooling at the end of 2011.

Labor market conditions improved, the energy sector remained active, and residential construction activity has increased.

We expect to see ongoing gains in our Texas economic activity index throughout 2012, driven by continued strength in those three areas.

Average loans in our Midwest market, which is primarily Michigan, were up 1% for the [fourth quarter], driven by national dealer services and global corporate banking.

A rebound in US auto industry drove our Michigan economic activity index sharply higher in the start of this year after stalling in late 2011.

Every component of the Michigan index has increased, a sign that the recovery in Michigan is reaching beyond the revitalized auto industry and into the non-manufacturing sectors of the state economy.

This is good news for our customers in the state, where we have a long history of service through numerous economic cycles.

Average loans in our Western market were up 3% compared to the fourth quarter.

Led by national dealer services and technology and life sciences.

Our California economic activity index remains flat.

Some parts of the California economy are vibrant, notably the high-tech industries of Silicon Valley, which includes many of our technology and life sciences customers.

However, the housing sector is still a drag on the California economy.

In addition, the state's large government sector remains challenged by weaker than expected state tax revenues and expected cuts in federal defense spending.

These challenges will likely keep California's economic growth in check through the first half of the year.

In closing, continued loan and deposit growth, increased customer fee income, tight expense management, and solid credit performance reaffirm our focus on improving the bottom line even in this low-rate environment and slow-growing national economy.

Our capital position remains strong, and we continue to be active capital managers.

We are in the right markets with experienced, dedicated colleagues and the products and services our customers desire.

And now I will turn the call over to Karen.

Take you, Ralph, and good morning.

Turning to slide 6.

Ralph talked about total average loan growth up 2%, or $815 million quarter over quarter, as shown on the left-hand side of the slide.

On the right-hand side, you can see commercial loans drove the increase.

Up $1.2 billion or 5%, driven by broad-based increases across national dealer services, energy, global corporate banking, middle market banking, and technology and life sciences.

Our commercial loan growth was partially offset by an average decrease of $352 million, or 3%, in commercial mortgage and real estate construction loans.

Importantly, as you can see by the green bar depicted on the slide, our mortgage banker average loans quarter over quarter were virtually unchanged.

We have talked about variability in that business.

In fact, in the fourth quarter, period end mortgage banker loans grew $500 million.

And then declined [$250 million] in the first quarter.

We believe our balances in this business could continue to be variable as mortgage rates stabilize and refinancing becomes a smaller component of the overall volume.

Turning to slide 7, which shows the period end loan balance picture.

Decreases in commercial real estate, mortgage banker and consumer loans were offset by broad-based increases in all other commercial loans.

Resulting in a $333 million or 1% increase from the end of the fourth quarter 2011 to the end of the first quarter this year.

Period end commercial loans increased 3% quarter over quarter.

We continue to believe the pace of decline in our real estate balances is slowing.

And, as said before, mortgage banker loan balances are difficult to predict.

However, we do expect continued variability.

Importantly, commitments increased for the third quarter in a row, with a $1 billion increase this quarter on the heels of a $1.9 billion increase in the fourth quarter.

In fact, commitments are at the highest level since the third quarter of 2009.

With middle market, commercial real estate, and energy contributing the largest increases.

Because of this growth in commitments, line utilization remains stable at 47.4%.

Also, our pipeline increased significantly in the first quarter across almost all of our business lines, with approximately two-thirds attributed to new business.

As you know, we track our loan growth against the industry.

On slide 8, you can see our average loans have been growing at a more rapid pace than the industry for the past few quarters.

We have benefited from the fact that we have a higher proportion of C&I loans which have been growing at a relatively faster pace.

Also, the Sterling acquisition, which closed at the end of July last year, has helped accelerate our growth.

The former Sterling footprint, which was predominantly Houston, San Antonio, and Kerrville, has seen loan growth of over 10% since the acquisition closed.

Which is in line with the revenue synergy goal we announced last year.

Growth in middle market and energy has more than offset the plan runoff in commercial real estate.

C&I loans are depicted by the chart on the right.

Remember that C&I loans, as defined by H8 data, do not include mortgage banker.

Our average C&I loan growth was impacted by the decline in dealer outstandings in the second and third quarters of last year.

Mainly due to the Japanese supply chain disruption in our auto dealer lending business.

As this started to rebound through the fourth and first quarters, our loan growth outpaced the industry.

In addition, we believe that we benefit from our footprint, which includes the faster growing market of Texas.

As well as our focus on middle market and expertise in several industries that are seeing accelerated growth, such as energy and technology and life sciences.

As shown on slide 9, our deposits continued to grow in the first quarter across all major markets and most lines of business.

In fact, period end deposits grew $1.5 billion to $49.3 billion, topping the record level we set in the fourth quarter.

Our average deposits increased $532 million quarter over quarter.

With over 85% of it coming from non-interest-bearing deposits.

We are pleased not only that a large portion of our deposit growth is non-interest bearing, but also that the interest-bearing deposits grew even as we continued to carefully lower deposit pricing, as shown by the yellow diamonds on the page.

Our cost of deposits today averages 26 basis points.

Turning to slide 10, our net interest income was stable.

Quarter over quarter, loan growth contributed about $7 million to the net interest income change.

And a decrease in our deposit costs added about $2 million.

These increases were partially offset by one less day in the quarter worth about $5 million.

And about a $5 million impact from a decrease in loan yields.

The decrease in loan yields was primarily driven by a mix shift in the loan portfolio, with a decline in commercial real estate loans and an increase in commercial loans.

We remain focused on holding spreads for new and renewed credit facilities.

However, we have seen some spreads tighten, consistent with improving credit risk migration.

Accretion of the purchase discount on the acquired Sterling loan portfolio was $25 million in the first quarter 2012.

Compared to $26 million in the fourth quarter.

Accretion should continue to trend downward as we expect to recognize total accretion of about $35 million to $45 million for the remainder of the year.

Just as a reminder, our target level for the securities portfolio continues to be $9 billion, heavily weighted and highly liquid, highly rated mortgage-backed securities.

Currently, the average yield is 2.73% with a duration of 2.9 years.

As mentioned before, our balance sheet remains well positioned for rising rates.

Approximately 80% of our loans are floating rate.

And 70% of that is LIBOR-based, predominantly 30-day LIBOR.

Therefore, the impact of the low-rate environment has been absorbed.

And rate movement on the long end of the curve should have little impact on us.

We believe a 200 basis point annual increase in rate, equivalent to 100 basis points on average, would result in approximately $165 million increase in net interest income.

Which is an increase from the $150 million number given last quarter.

Primarily due to strong non-interest-bearing deposit growth.

Turning to the credit picture on slide 11.

Credit quality continues to improve.

Net charge-offs in the quarter decreased $15 million to $45 million or 43 basis points of average loan.

Our gross charge-offs decreased $23 million to $62 million.

Recoveries were $17 million compared to the $25 million we had in the fourth quarter.

Over the last eight quarters, recoveries have averaged about $20 million per quarter.

Substantially higher than the $7 million average per quarter for the two years prior to that.

As noted before, the timing and size of recovery is the most difficult credit metric to forecast.

Our provision for loan losses was relatively stable at $23 million.

Reflecting the increase in loan balances, improved overall credit quality, and our prudent, consistent reserving methodology.

We ended the quarter with a reserve ratio of 1.64%.

Our watch list and nonperforming loans also continued to trend downward.

With a slight uptick in the third quarter last year, reflecting the addition of the Sterling loan portfolio.

Watch list loans decreased over $261 million to $4.2 billion at March 31.

Nonperforming loans decreased $31 million.

Foreclosed property remains low and in fact, decreased $27 million or almost 30% to $67 million.

Slide 12 outlines the growth in non-interest income.

Which grew 13% to $206 million in the first quarter 2012.

The $24 million increase included a $10 million or 6% growth in customer-driven fee income.

Resulting from increases in service charges on deposit accounts, investment banking fees, fiduciary income and commercial lending fees.

We were also aided by the cross-sell successes we are having with the legacy Sterling footprint.

We believe we are well on the way to meeting the fee income goal we had set for Sterling as a part of the revenue synergies we had announced.

The growth in non-interest income is partially a result of annual service charges paid in the first quarter, about $3 million, as well as the implementation of our profit improvement revenue initiative.

We are pleased to be offsetting the headwinds which have resulted from regulatory reform, such as reduced interchange fees.

Other changes in non-interest income include an increase of $4 million in gains from the redemption of auction rate securities.

And $5 million in charges incurred in the fourth quarter related to the Visa settlement.

Turning to slide 13, we continue to maintain good expense control.

Expenses this quarter benefited from the fact that we recorded no restructuring costs compared to $37 million in the fourth quarter.

As a reminder, we still expect to incur about $40 million on restructuring expenses for the remainder of 2012.

With about $5 million to $10 million in the second quarter.

Our careful expense management resulted in a decrease in net occupancy expense of $6 million.

And a decline in salaries expense of $4 million.

Reflecting a 2% decrease in our workforce, as shown on the slide.

This was partially offset by increases in litigation and legal expenses of $5 million, and employee benefits expense of $8 million, primarily due to an increase in pension expense.

Litigation and legal expenses increased, primarily due to changes in loss estimates reflecting recent developments on certain litigation contingencies, and are not expected to be repeated.

Turning to capital on slide 14, as Ralph mentioned, the Federal Reserve completed its review of Comerica's 2012 capital plan last month.

The plan provides for up to $375 million in equity repurchases for the first quarter period ending March 13 2013.

Additionally, our board will consider a 50% increase in Comerica's quarterly dividend next week.

The slide shows our payout ratio would have been 81% had we executed on the capital plan in the first quarter.

This is significantly higher than last year, and the peer median.

We used first-quarter estimates for our peers and assumed our capital plans were also in place in the first quarter.

There are only two peers that have active share repurchase programs.

And only two that have announced dividend increases.

We believe our payout relative to peers is a reflection of our strong capital position, with 10.37% tier 1 capital.

Importantly the quality of our capital ranks among the best in our peer group, with common stock comprising over 99% of our tier 1.

It will be 100% common after we redeem the remaining $25 million of trust preferred securities outstanding, which we intend to do in the second quarter.

At some conferences last month, we communicated long-term goals for our efficiency ratio to be below 60%, and return on assets to be above 1.3%.

On slide 15, we have provided a walk forward depicting how we expect to reach the return on asset goal.

Our average ROA over the past 20 years is about 1.2%.

And our goal is to surpass that level by growing revenues and keeping expenses as flat as possible over the longer term.

As you can see on this slide, driving loan and fee growth, while managing expenses are key drivers.

Importantly, while we believe a modest increase in rates will be necessary to reach our goal, we expect to well exceed our goal in a normal rate environment.

Finally, our Outlook.

Our expectation for full-year 2012 compared to full-year 2011 remains unchanged from what we outlined on our call in January.

With one exception.

We now expect the provision to decline from the full-year 2011 level and instead be in line with the run rate from the first quarter.

This is consistent with our view that we should continue to see positive credit migration, partially offset by moderate loan growth.

Which combined is now expected to result in a modest reserve release.

In closing, we are very pleased with our continued loan and deposit growth, increased customer fee income, tight expense management, and solid credit performance.

Even in the current economic and regulatory environment, we feel confident we can continue to deliver strong bottom-line growth to our shareholders.

Now we are happy to answer your questions.

(Operator Instructions) Erika Penala with Bank of America.

This is Connor Fitzgerald for Erika.

Just on your guidance quickly for the outlook for average loans to increase moderately, which, like you said, you didn't change.

Because 1Q '12 was pretty strong.

Was there any pull forward there?

Or do you expect growth to taper off in the second half of 2012?

I think that was Connor.

And I apologize again for my laryngitis to everybody.

Obviously we had a very strong quarter, in particular in commercial loan growth.

Up 5%, $1.2 billion.

The growth was very broad-based across a lot of our major markets and most of our businesses.

So, we feel very good about our momentum as we look forward into the second quarter.

But we are expecting moderate average growth for 2012.

And that's given the backdrop of a continued weak economic environment.

And we also have to keep in mind that we do have some businesses with some variability, Connor.

For example, dealer.

Dealers tend to build their inventories in the spring, and sell them down in the summer.

So there is some seasonality there.

And of course, mortgage banking, as you've seen, there is some variability as mortgage rates continue to change.

That can certainly impact the outstandings of our portfolio as we head through the balance of the year.

But, again, I point out that we do have very nice momentum.

Commercial real estate commitments up, energy commitments up, middle markets.

And it's very broad based.

So we feel good about the balance of the year.

Thanks for taking my question.

Hope you feel better.

Ken Zerbe with Morgan Stanley.

Two quick questions here.

First of all, in terms of mortgage banking, I saw balances were down, but did higher mortgage banking fees contribute to the non-interest income this quarter?

We did see fee increases in commercial lending increase.

And in mortgage banker that obviously contributed a little bit.

Okay.

And then just the other question on, what is your outlook for reducing your excess liquidity going forward?

It looks like you were able to bring that down a bit this quarter.

We did bring it down.

It's now, on ending, under $3 billion on excess liquidity.

Clearly that is a factor of loan growth going forward.

Hard to give an outlook.

Loan and deposit growth, obviously.

Great, thank you.

John Pancari with Evercore Partners.

Sorry to hurt you again here, Lars, but can you give us a little bit more color on the pickup in mid market loan growth?

That's been an area that you hadn't seen a big pickup in that yet.

You'd seen more so at large corporate.

But it's good to see the mid market move here.

And I just wanted to get some added color around what you're seeing there and the sustainability of that.

No problem.

Glad to address it for you, John.

First of all, as I pointed out, I think, on the last conference call, that as we look at our business, middle market business, it really includes our general middle market as we break that out, and a lot of our other middle market industry groups.

We had nice broad-based growth last quarter.

And I would also point out we've had four consecutive quarters now of commercial loan growth.

So we've had a continuation of nice momentum.

If you look specifically at the first quarter, obviously we did have a nice quarter if you look at average balances.

Our general middle market was up about $170 million, which was really positive.

Our dealer business up over $400 million.

Energy up $350 million.

Technology and life sciences was up $125 million.

Our international strategy, which is really middle market-oriented, that was up $80 million.

And, yes, large corporate, that has US banking in that, was up $180 million.

But on a relative basis, that was a smaller component of a very broad-based middle market growth momentum for our Company.

So we feel very good about the momentum across the board, John.

Okay, that is helpful.

Then in terms of pricing, are you seeing the need to give a little bit more here in terms of pricing?

And are you becoming a bit more accommodative to meet that demand?

We are really not willing to trade off volume for pricing.

And the fact of the matter is, we are staying very focused on our relationship banking strategy that has a very disciplined relationship pricing model.

And it has served us very well for a long period of time.

Now with that said, we are seeing the most competitive pricing at the larger end of the market.

But frankly, the whole market overall is competitive today.

What we are trying to really focus on is spending more time in the marketplace.

We have enhanced our sales focus, business development focus, investing in resources.

And I think if you spend more time with customers, more time with prospects, you put yourself in a position to have more opportunities and get paid for it.

And that is the hallmark of Comerica.

And, frankly, we are seeing our new and renewed loan spreads largely holding, even in today's environment.

Okay, thanks.

And then, lastly, on the margin, Karen.

I know you don't really give guidance here but just given your color that you had said about the funding costs and what you're seeing on loan yields here, is it fair to assume that this stability that we see here this quarter is sustainable and this could be the margin floor or at least maybe an inflection in the margin?

On our outlook on margin, as you know we do talk about net interest income So I will talk about it from that perspective We did say from a year-over-year period from 2011 to 2012 that we do expect net interest income to increase moderately.

And when we said that, that was a reflection of assuming moderate loan growth, accretion at a slightly higher level year-over-year, and a full year of Sterling.

We are still focused on that guidance.

Hopefully that's helpful.

That is, thank you.

Steven Alexopoulos of JPMorgan.

On buybacks, the pace seemed a little bit light here in the first quarter.

Just wondering, do you expect to use the entire $375 million authorization through 1Q '13?

And then how should we think about the pace?

Is it now more stock price focused?

Or are you still targeting a percent of net income?

Steven, this is Ralph.

As we were talking about in the comments, we were approved to do up to $375 million in the stock repurchase program.

We started off with $33 million in the first quarter.

And we will move to use that as we move through the five quarters, which first quarter being the first of that quarter, and the first quarter of '13 being the last.

And it will accelerate as we move along.

And as you know, at the current level with our stock price trading right at tangible book value, that is a good investment for the shareholders longer-term to execute our buyback at these levels.

As well as we mentioned that we will be talking at the board meeting here next week about raising the dividend 50%, as well.

Okay.

Just one question on this loan growth guidance.

Last quarter, I think you guys said you expected 2% to 5% average growth.

Which I think Karen defined as moderate.

Do still see that as a reasonable range or are you a bit more optimistic, given how strong the numbers came in this quarter?

Karen can speak to the 2012 expectations.

But we continue to feel good about moderate average loan growth for the year.

With that said, clearly, commitments up $1 billion, four consecutive quarters of commercial loan growth, our pipelines are up very significantly, as are commitments to commit.

And it's very broad based.

You already heard some of the discussion about some of the recovery in Michigan.

And hopefully maybe the beginnings of it in California.

So with all that said, we still continue to look at the year against a pretty weak economic environment with some variable businesses.

And I would add, when we gave that guidance, Steve, we were focused on the fact that mortgage banker was likely to be variable.

Paul Miller with FBR.

It's Jessica Ribner in place of Paul.

We just had a couple questions on what you're seeing in C&I.

And also, if you had said it I'm sorry, but I missed any guidance from merger charges going forward.

Yes.

On restructuring charges, as you know we did not have any restructuring charges this quarter.

We do expect to have about $40 million of structuring charges for the rest of the year, with about $5 million to $10 million in the second quarter.

Jessica, I will pick up the C&I question for you.

As I shared earlier, we are seeing very broad-based lift in activity.

I would say there is no particular business or industry that is carrying the day for us.

Obviously, energy had nice expansion, as you would expect.

We are very well-positioned in that industry.

And it continues to expand and we're working with our customers there.

But technology and life sciences continues to do very well.

Our customers there are expanding.

We continue to see that as a growth business for us.

But if you just look at our general middle market, I think we are seeing our customers more encouraged, and maybe in a position to begin to make more decisions for investment and hiring than they have in the past.

Though still guarded relative to the past.

I would also point out that ex outside of C&I we are beginning to feel a little bit more comfortable with commercial real estate, as the pace of declines decrease.

I referenced earlier that the growth in commitments about commercial real estate, that was one of the key drivers.

And we're definitely seeing a slowing pace of decline on a consolidated basis, hoping that will give us some additional strength in overall commercial loan growth.

I think one of the things, Lars, too, that we are hearing from our people, especially the middle market in the manufacturing side are beginning to run out of capacity, which means they are starting to invest for the future.

Yes.

As I mentioned, they still tend to be guarded.

But in a number of industries you are beginning to see some investment.

That is really what is the key driver in our general middle market that we are seeing.

There is expansion of plant equipment and we are seeing some hiring going on in particular industries.

I think that bodes well for the future for us and for our markets.

Thank you.

And just one follow-up question.

Where do see utilization rates going forward?

As you may have seen in the deck, the utilization rate was stable.

It was a good story, though, because, of course, in that formula, the denominator moved faster than the numerator.

It was one of those issues that we are having growth on both sides of the formula.

I think it's real positive.

It's hard to exactly peg where utilizations will be.

We are just hoping that we continue to see usage levels increase, and that this interest in investing in businesses in middle market continues.

And frankly, that we continue to grow with our customers and continue to move market share, which I am convinced that we are doing today.

Yes, as we mentioned earlier, the commitments were up $1 billion and the utilization was actually consistent at the 47.4%.

Correct, yes.

Great, thank you very much.

Matt O'Connor with Deutsche Bank.

This is Rob Placet in for Matt.

Just a follow-up on the topic of capital and share buybacks.

Given your announced share buyback plan and outlook for continued loan growth, where do you see your capital ratios trending through the year?

And can you remind us if you have a target capital ratio or at least a level where you wouldn't want to go below?

In terms of target capital ratio, that is something that we have done in the past and would like to get back to.

But until the capital rules are clear, very difficult for us to be giving a target capital out there.

Right, okay.

And then just in terms of how we should think about your capital ratios trending through the year, if we assume loan growth continues, and if we assume you execute on your entire share buyback plan, what does that mean for capital ratios?

Yes, obviously for uses of capital we like loan growth.

So, should we see robust loan growth you can see that capital come down slightly.

Very difficult to predict, though, so it's not something that we try to predict.

That would be good to see.

To see loan growth even better than we expected and use the capital for leveraging the loan growth which is profitability over the long term and return over the long term.

And that will always be balanced, as we have in the past.

Right.

So with that said, if loan growth does come in better than expected this year, should we expect maybe reduced buybacks than what you guys announced?

I think at the current level of what we are forecasting, I don't expect that.

It would have to be very robust to put us in that position.

And like Karen said, we have to come to a conclusion on what the capital guidelines are going to be going forward.

And then what cushion we would put into that, as well.

Okay, great.

And if I could just get a follow-up just on your comments on the reserve release from here.

As we look at your reserves to loans, already at 1.6%.

And with an outlook for continued loan growth, is it possible that you draw down reserves too much this year?

And maybe, again, if loan growth comes in better than expected, you could actually see some modest reserve build next year?

As you know, it's not quite as simple as just having a target for reserve levels.

We do have a very rigorous methodology which we have been using for over ten years.

That includes reviewing every sizable problem loan every quarter.

And that methodology has served us well in up and down cycles.

The average carrying value of our nonaccrual loans, for example, is 60%.

If you look at our $704 million reserve on the ALLL at the end of the quarter, it's almost 4 times the annualized first-quarter net charge-off run rate.

So we feel we are pretty well reserved.

And going forward, we are going to follow the methodology.

Reserve levels will vary as charge-offs and problem loans decline.

But increase as the portfolio grows, as well.

Okay, thanks very much.

Craig Siegenthaler with Credit Suisse.

Commercial real estate NPLs ticked up a little in 1Q '12.

I'm wondering if you can provide us some commentary around that trend.

And also how underlying early-stage delinquencies in both classified assets trended within commercial real estate, if you have the data.

A little color on commercial real estate.

Frankly, Craig, I'm feeling pretty good about the trends in the commercial real estate portfolio.

The credit metrics in commercial real estate have improved dramatically over the last ten quarters or so.

And they continue to improve.

It is possible to have a slight variability from quarter to quarter, and that's what we saw in the first quarter.

But the overall momentum is still really improving.

And it improves across the board -- past dues, nonperformers, inflow.

It is all going in the right direction, with a little variability as you saw in the first quarter.

Got it.

And then just on the securities portfolio.

I know you guys use 200 basis points commonly to look at your net interest income on a scenario basis in terms of a parallel shift.

But if you take the same 200 basis point parallel shift and you run it through your securities portfolio, do you know roughly what it does to your duration of 2.9 in terms of duration extension?

Can you repeat the question please?

Yes.

You guys use 200 basis points, you referenced on the call, the K, in terms of an interest rate scenario and what the impact is to net interest income in terms of your earnings power.

And if you take that same 200 basis points and instead you look at the impact to the duration of the securities portfolio, which right now is 2.9, do you know where that extends to?

It would increase it to over 4 likely.

Somewhere between 4 and 5.

Okay.

Got it.

Guys, thanks for taking my questions.

Brian Foran with Nomura.

Just as I think about some of these deal impacts and modeling them out for the rest of the year, you gave enough guidance that we can back into quarterly run rates.

But is the integration expense simply timing of discrete projects you have in place?

Or is there something that is going better than you had planned in the integration?

And really where I'm going is, the back half of the year implied is like $15 million to $20 million, and obviously that is your best estimate right now.

But what is the degree of confidence around that back half of the year integration expense?

And is there a risk that it comes in lower as it did in the first quarter?

Yes, on integration, we do have confidence.

The rest of the integration to be done right now is really around our leases for real estate and our properties.

And so that is why it is timed and back half loaded.

We do feel confident in that estimate.

And then the same question on the accretable yield.

The $25 million, the guidance implies it steps down by about half for the rest of the year.

Was there just one or a handful of discrete recoveries that threw that higher in the first quarter?

The background for the question will be, a lot of the banks that did deals have had a steady stream of non-accretable difference steadily reclassify to accretable.

And so the accretion lasts much longer and higher than expected.

Is there any of that kind of theme developing in the book?

Or is it really just timing of a couple of recoveries in the first quarter?

It is mostly just timing.

We did see a little but more accretion this quarter than expected, mainly due to obviously prepaids on deals that we were refinancing.

We do have a little less than $100 million left in our accretion to go from here.

And we do feel fairly confidence with our guidance of $35 million to $45 million for the rest of the year.

The last one for me, mortgage banker versus dealer floor plan, one normalizing down, one normalizing up.

My dummy math has always been just take them both back to where they were in 2010 and 2011, and that would put dealer floor plan at $3.5 billion to $4 billion range, mortgage in the $500 million to $1 billion range.

And imply the two portfolios combined need to come down a bit.

But at the same time, there's been a lot of disarray in the wholesale mortgage funding channel.

It seems like you guys might have a share story that goes beyond just volumes when we look at these balances.

I know it's impossible to say the normalized level of mortgage banker is exactly X.

But is it too harsh to take it back to 2010 and 2011 levels?

Or is that still where it should trend over time as mortgage activity normalizes?

Yes.

First of all, there are two points there.

I can quickly speak to, first, mortgage banking finance and then dealer.

In mortgage banking finance, two key drivers that we are seeing in terms of the variability in the outstandings of that business.

One is clearly mortgage rates.

That drives volumes and clearly impacts the outstandings in our portfolio.

And we did expect, and do expect, that there would be some moderation if rates pull back this year.

So trying to determine the exact balances in that portfolio would be challenging.

I think you've just got to look at it through that lens.

But one of the things I want to underscore, there has been a lot of change in the industry.

And there is no question about it, that we have been moving market share.

A lot of disruption.

We have been in this industry a long time.

We've got a terrific reputation, a solid source of financing, and the business continues to perform really outstanding for us.

And, frankly, our cross sell to those customers has really been leading in terms of our industry groups.

In terms of our dealer portfolio, very difficult to tell where those balances will be.

Obviously we are very pleased to see sales units up over $14 million.

To the degree that that grows, as we head through the balance of the year, that could certainly positively impact us.

But I'd keep in mind, too, that the industry does have seasonality, as I spoke to earlier.

Great, thanks for taking my questions.

Brett Rabatin with Sterne Agee.

Sorry, Lars, to keep having you talk there, but was curious if there was anything that affected the energy balances at the end of the quarter.

Obviously growth wasn't as strong as the average for the quarter.

And then also was curious, Karen, I didn't quite hear, if I missed it, was there any change to what was defined as moderately increasing on the loan growth of 2% to 5%?

Let me speak first to energy.

None of our portfolios follow exactly the averages and endpoints.

There is variation there.

But something to keep in mind, I think, with energy, obviously we had nice growth on an average basis of $350 million.

The endpoints, clearly up in the $80 million range.

You would also see in our noninterest income that we had a really strong quarter in terms of bond economics where we are working with our customers in bringing debt capital solutions to them.

So there is some variation.

There is windows in the bond markets.

And our customers do recap from time to time.

So you see some variation.

But I think overall, our customers are stable, they are growing.

And I think it's going to be a good business for us with nice noninterest income associated with hedging and accessing the bond market.

So there was no particular event that was driving it?

No particular event.

And then on the question about moderate loan growth.

There was no change in our definition of 2% to 5% on moderate loan growth.

And while we are pleased with our pipeline, that is a full-year 2011 to full-year 2012 forecast.

And we put it out there keeping in mind the economic backdrop and the fact that we do expect variability in our mortgage banker business.

Okay, great, thanks.

Hope you feel better, Lars.

Terry McEvoy with Oppenheimer.

Question for Karen.

The efficiency improvement revenue enhancement program that was announced, I believe after third-quarter earnings, with a goal of $100 million, any status?

Where are we now?

And specifically, is that built into maybe the fee income trends that we saw in the first quarter, reflecting any changes that were made as part of that program?

Yes, just to remind people, on our profit improvement program that we talked about last fall, that was $100 million improvement in profit improvement.

Driven by both expense and revenue focus.

Two-thirds expense and one-third revenue.

That plan is very much on track.

It is something that we monitor and talk about monthly at the executive level.

There are over 350 projects that make up that profit improvement plan.

We are tracking them to completion.

And yes, it is built into our outlook on both fee income and on expenses.

Just one other question.

As I look at your three core markets and loan growth, the Midwest region had the slowest amount of growth.

Which I find a little surprising given what your economic activity index for the state continues to report each month.

Is that a reflection of losing market share?

Are you holding your own?

Or maybe is it just the runoff of commercial real estate is a little bit more pronounced in the Midwest and in Michigan that is maybe hurting the bottom line balances?

Yes, the Midwest, and Michigan in particular, obviously is seeing some recovery.

We are seeing some commercial real estate projects that runoff, so that does impact us in that market.

But we've got a very solid book of business there.

We continue to move some market share.

Pick up some new customers.

But most of all, we are seeing some growth with some existing customers.

But I don't think there is any big story there other than a nice steady increase in activity in that market.

Great, thank you.

Josh Levin with Citigroup.

When you talk to you C&I loan clients about their investment plans, how are they thinking about the trade-off between using the cash on their balance sheets to fund their investing versus borrowing to fund their CapEx?

It's interesting.

We continue to hit record levels of deposits.

In fact, this particular quarter non-interest-bearing demand deposits were the big driver.

Those are relationship deposits, primarily driven by businesses.

It's interesting, we are seeing a pickup in investments -- CapEx, hiring, working capital.

And yet our customers tend to be carrying more liquidity than we have seen in the past.

I'm not sure if it's a paradigm shift, maybe a more cautious position.

But we clearly see this as different than prior cycles.

And it's clearly benefiting us from a deposit growth perspective.

I think that's true both with the consumer as well as the business side.

People are being more cautious, in talking to various of our customers, are holding more liquidity, as Lars was saying.

Yes, we are even seeing that in small business.

It's really across the board.

When you talk about taking market share, do you have a sense of how much market share you're taking from other banks versus non-bank competitors such as the capital markets?

Unfortunately in commercial corporate banking, there's not a good index for that.

So what I'm always looking at is how the overall markets are growing.

And how we are growing relative to them in the spaces that we serve and we know.

And I feel very good.

Like I've mentioned, four consecutive quarters of nice commercial loan growth, the last two have been very robust.

So I feel very confident that we are outpacing the market.

But I would tell you, we are not changing our strategies.

It is not a result of us changing what our markets are, our businesses.

I think that what we are doing is we are reallocating resources, we are creating more accountability, we are spending more time in the market with customers as well as prospects.

And I think that is serving us well.

Thank you very much.

Justin Maurer with Lord Abbett.

Just a quick question on the oft talked-about mortgage.

Does HARP help that business at all?

Or is that largely done through the existing larger banks servicers and such?

Should you guys potentially see any benefit from that?

Justin, the HARP volume has not really impacted our customers in mortgage banking finance.

Our customers are primarily focused on really more the prime mortgage market.

It has not had a significant impact on our volumes.

Market share gains and favorable mortgage rates have been the key drivers.

Got it, okay, thanks a lot.

Matt Burnell with Wells Fargo.

Let me give Lars a rest for at least a couple of second and ask Karen a couple quick questions.

If I calculate your all-in cost of deposits, including non-interest-bearing deposits, it looks like those were down about 2 basis points quarter over quarter to 16 basis points.

You mentioned that it was 26 basis points for the interest-bearing deposits.

How much lower do you think you can drive those from the current levels?

We are monitoring our cost of deposits at a very granular level.

And we focus on it every month.

Because of our keen focus, we will continue to find opportunities.

I'm not sure, though, that those opportunities will continue to add up to something meaningful at the total average deposit cost level.

And I'm presuming your net interest income guidance includes the effect of the TruPS repayment?

It does.

The TruPS repayment is built into our guidance.

And then just one final quick question.

The commercial mortgage loan yields are up about 80 basis points year-over-year.

They're up a little bit less than 20 basis points quarter over quarter.

Can you give a little color as to what is driving that?

Sorry, Lars.

No problem.

I feel a lot better than I sound.

I think a significant impact to that is the fact that the majority of the activity that we are seeing is in footprint urban market oriented, multi-family projects, construction projects.

Very well-capitalized.

Obviously that tends to be a fee-rich kind of opportunity for the Company.

And I think that's having a very positive impact on us.

I think that that will also help us once we begin to see drawdowns on those facilities, Justin, in terms of overall growth in the commercial real estate portfolio.

We are also aided in that portfolio by the accretion from the Sterling loan discount on the commercial real estate loans coming off.

Okay, thank you very much, that is helpful.

Brian Nash with Goldman Sachs.

Just a couple of follow-ups from earlier questions.

You reiterated moderately higher net interest income year-over-year.

Although one half last year excluding Sterling.

I appreciate it will be up moderately but how do we think about the run rate for the rest of the year relative to Q1?

Given your guidance that accretion will be coming down, is the expectation of a decline from here?

Or can we see loan growth actually offset the accretion headwind?

Clearly loan growth will be the key driver going forward.

We do, as you said, and as we guided, expect accretion to be coming down.

So we are focused on loan growth being the driver.

Okay.

And, Lars, I have a sour throat, too, so I will try to make this one quick.

I understand you guys are taking share in the mortgage banking area and HARP isn't really impacting.

But I'm just trying to understand.

We look at industry volumes, we have seen apps up each of the last two quarters.

And I understand there could be differences in terms of timing.

I'm just trying to understand.

Your balances were down quarter over quarter.

Can you just give us a sense of what actually drove the balances down relative to what we see in the rest of the industry?

Some of the headlines, Brian, are being driven by the HARP volumes overall.

But we did expect that we would see some declines in the first quarter.

If you look at the averages, it was only down $50 million.

It was down $250 million in terms of endpoints.

So, it tracked about what we had expected.

Volumes overall for the mortgage companies that we bank., which are very much a prime mortgage-oriented market, did decline some.

I will tell you that the percentage of purchase volumes did increase., which I think was a positive for us in that business.

It's going to be driven, though, largely by mortgage interest rate changes throughout the balance of the year.

I think that will be a big driver for us.

Great, thanks.

Brian Klock with Keefe, Bruyette, Woods.

A question for Karen.

First on the fee income.

You guys have talked about a good solid start to the year.

What I'm trying to figure out is within the other non- interest income there's $29 million.

And I know you talked about certain things within the investment banking and other items.

Maybe the bigger question is, just on that $206 million, what is a more recurring run rate out of that number?

Because if I annualize that number it gets to be significantly higher than the $792 million you had for the full-year of 2011.

So, if you are keeping your guidance the same, should we think that the rest of the year should be a lower level of fee income versus this first quarter?

On our non-interest income, I think it is important, on the 6% increase in customer-related fees that we talked about, that was a $10 million increase, it's important to note that $3 million of that approximately is driven by an annual increase in service charges.

So that would not be repeated for the rest of the year.

Also on non-interest income, we did have securities gains which we don't build into the forecast when we give the outlook.

Those are very difficult to predict.

Okay, I appreciate that.

And then one other question for Karen on the securities portfolio.

You say that the target is a $9 billion target on the MBS portfolio, it's around $9.5 billion right now I guess.

What is the quarterly cash flows coming off of that portfolio?

In case the loan growth does slow down, is that something that would just build back into excess liquidity?

Yes.

Currently right now in our securities portfolio we are reinvesting our prepayments.

Those are averaging around $850 million to $900 million a quarter.

We expect that to continue.

The $9 billion target is still our target.

But included in the balance sheet number is some unrealized gains from our mark-to-market of that portfolio.

That's why you see it at approximately $9.5 billion right now.

While we are not market timers, we do try to, as we reinvest those prepaids, hit the market when we can have some better yields and so that's why you see variability in that target balance number.

Great.

And Lars, sorry, I have one more question for you.

On the syndicated credit book, it looks like that was up about $300 million in the first quarter.

Maybe you can give some guidance.

And is across those key portfolios of national dealer service, energy, and the middle market?

Is that where we saw the growth in the syndicated book?

Yes Brian, that's a pretty good description but I would say it was very much weighted towards general middle markets.

We had a lot of activity in the fourth quarter, coming into the first quarter.

Which is core middle market companies that we had good activity on.

Thanks for taking my questions.

Michael Rose with Raymond James.

Just a quick question on M&.

You're about nine months out from the Sterling deal.

Obviously you have a buyback in place and probably going to increase the dividend there.

Any updated thoughts on M&A activity and what you're seeing and the opportunities going forward?

I think as I said before I feel very comfortable with our footprint today and where we are.

If you remember, when we announced Sterling, that was a very strategic move for us because it put us into Houston and San Antonio as well as Kerrville.

As things come up, we are always looking.

But from the standpoint of expansion today, it would have to fit and be an appropriate price to expand in those markets where we are.

Okay, thanks.

Chris Mutascio from Stifel Nicolaus.

Karen, a couple follow-up questions.

You mentioned confidence in both the M& A costs the rest of the year and also the accretable yield.

In terms of your confidence, is your confidence that those are the numbers that are going to be actual or that you're confident you can beat those numbers going forward in terms of M&A expense and accretable yield?

I think you're talking, when you say M&A expense you're talking about the restructuring charges.

Yes.

We have given a range for that guidance of $5 million to $10 million next quarter.

It's hard to tell you where it's going to be within that range.

We've also said that we expect about $40 million for the rest of the year.

Again, there is a plus or minus there, more likely a minus that a plus.

Okay.

And then when you look at things in a vacuum given some of the comments on the accretable yield and the restructuring costs in the second quarter.

And I look from first quarter to second quarter, is it roughly about a $0.10 headwind given the fact that accretable yield could be down $12 million to $15 million, and the M&A expense could be up $5 million to $10 million versus first quarter?

Clearly there is a headwind from accretion coming down and restructuring charges going up next quarter.

Okay, thank you.

Sean Ryan with and INDABA Global Research.

I just had a question about the securities portfolio, just with the duration creeping out a little bit more this quarter Just wondering how you are thinking about that.

I'm sure you're comfortable with this level but is there some point beyond which you don't want to go?

Should we expect to see it continue to creep out a bit more?

We want in our securities portfolio to obviously be in highly liquid, highly rated securities.

We are in that.

It's mostly invested in mortgage-backed securities which are highly liquid.

Yes, the duration did creep out a little bit, but not much.

It moved from 2.7 last quarter to 2.9 this quarter.

We do have robust prepays on that portfolio, as we talked about, averaging between $850 million and $900 million per quarter.

We are continuing to reinvest those prepaids.

Should we see robust loan growth with our deposit growth, we will obviously not continue to reinvest those prepaids.

So hopefully that answers your question.

We've not changed the strategy.

Yes, strategy remains the same.

Okay, thank you.

[Steve Vinacarellio], UBS

Just a couple quick ones for you.

I just noticed on the strong pipelines, with two-thirds coming from new business, I know that is up from last quarter.

And I just wanted to follow-up.

What are some of the key reasons or the key drivers why you are picking up share from the competition out there.

You are accurate.

Two-thirds of the pipeline today is new business opportunities for Comerica.

I would like to be able to make it easy and point to one particular business, but I can't do that.

It's very broad-based.

It is not broad-based just across our businesses, it's broad-based across our major markets also.

I think it gives us good momentum as we head into the second quarter.

Definitely looks strong.

And then looking on page 28 of the slide deck, focusing on the strong deposit growth, up 6% on the specialty business side.

Just curious to get a little more color there, just given how strong that has been.

We continue to see deposit growth across most of our businesses and our markets.

The specialty business deposit growth has been driven by businesses like our technology and life sciences business.

So basically, is there any reason why we shouldn't see these kind of trends continue as you continue to book these new customers and take market share?

Or, it sounds like as long as the momentum continues, these type of results can continue, as well.

Is that fair?

I think because we drive full relationships with our customers, when we are capturing new customers, we're focused on gaining their transaction account deposit.

So yes, from that perspective of new customer gains, we should expect to see increased deposits.

Excellent, thanks so much guys.

Jon Arfstrom with RBC Capital Markets.

Sorry to prolong this call but I just had one question for you, Ralph.

In terms of Michigan, the legacy Michigan versus today, I'm curious your view as to what's changed and what is possible?

And a little background.

The reason I ask is it's been stable to a drag in that market for a long time.

Really 5 years, maybe even 10 years.

And it's pretty obvious to me that things have changed for the better.

I'm just curious what you think is possible longer-term in that market and whether or not it's possible that it can start to keep pace with the rest of the franchise in terms of growth.

I think as I mentioned earlier, in talking about our activity index there, it has bounced back extremely well.

It's broad-based, and we are seeing expansion not just in the auto industry but now more broad-based.

And as I look at Robert Dye, who is our Chief Economist, and his projections, he is looking for GDP to increase significantly better than the national average going forward.

So I think things are moving in the right direction.

We have a lot of very good customers and clients there.

We are seeing expansion start to happen.

And as was mentioned earlier, capacity is running out, which is the good news.

Meaning, as in the auto industry that Lars was talking about with auto sales at the 14 million unit level, that expansion is accelerating.

So I feel very good about what's happening in Michigan today as do our colleagues there.

It is a very important market for us today, and going forward.

Okay, thank you.

Kevin Reynolds with Wunderlich Securities.

All my questions have been answered by now but I would also like to reiterate excellent quarter.

Gary Tenner with D.A.

Davidson.

I just had one quick question.

On your slide deck, you talked about your long-term ROA goal of 1.3%.

Obviously interest rate is a big piece of that, but you did point out that the loan growth assumption of 5% to 6% is pretty meaningful.

I assume that that's 5% to 6% on annualized basis and not just aggregate from here.

So what does that translate to without knowing the time line you're looking at here on this target in terms of the loan to earning asset mix?

Obviously that mix becomes a big part of achieving that goal.

The loan growth there, this is a long-term goal so that loan growth is a long-term number.

But it is annualized.

When we think about the loan to deposit ratio, which I think is what your question is, it's very difficult to predict deposits and so we didn't build that much into the equation.

But what we did build into the equation is the interest rate that we would earn, as you can see on the chart.

We don't need to get to a normalized rate environment which we would defined as Fed funds and LIBOR which moves in tandem with Fed funds typically to be around 3.5% to reach our goal.

If I can just ask a follow-up to that.

What I was really asking is not so much loan to deposit mix but as you look at your earning asset basket which right now is 75% loans, 25% non- loan earning assets, what does that have to get to, to drive you towards that 1.3% number?

We're focused on loan growth over the long term much more than overall asset growth.

We would expect that our growth and our mix between loans versus the rest of the earning assets would skew more heavily toward loans.

Thank you.

At this time there are no further questions.

I will now turn the conference back over to Mr.

Babb for any closing remarks.

Thank you all for your interest and being on the call today.

We appreciate it.

I hope everyone has a good day.

Thanks.

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

Thank you all for joining and you may now disconnect.