Comerica Inc (CMA) 2012 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Comerica second-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).

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

Please go ahead, ma'am.

Thank you, Carmen.

Good morning and welcome to Comerica's second-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.

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 second-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 this 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'll turn the call over to Ralph who will begin on slide 3.

Good morning.

Today, we reported second-quarter 2012 earnings per share of $0.73, or $144 million, and 11% increase from the first quarter.

Our results reflect our focus on the bottom line in this slow-growing national economy.

Turning to slide number 4 and further highlights, loans continued to grow with average loans up $959 million, or 2% compared to the first quarter, primarily reflecting an increase of $1.2 billion, or 5% in commercial loans.

This was the eighth consecutive quarter of average commercial loan growth resulting in a 20% year-over-year increase, including our acquisition of Sterling Bancshares last July.

The increase in average commercial loans in the second quarter was broad-based with increases across nearly all of our businesses.

Deposits continued to grow in the second quarter.

We had record deposits of $49.4 billion at June 30, 2012 with an increase in average deposits of $368 million, primarily driven by an increase in non-interest-bearing deposits.

Excluding the decline in accretion, net interest income was stable.

Non-interest income increased $5 million to $211 million, including a $3 million increase in customer-driven fee income.

We maintained our tight control of expenses with decreases in several categories.

Credit quality continued to be strong.

Provision for credit losses decreased $3 million to $19 million.

Our capital position remains a source of strength to support our future growth.

We repurchased 2.9 million shares under our share repurchase program in the second quarter.

In April, our Board of Directors increased the quarterly cash dividend 50% to $0.15 per share.

The combined share buyback and dividend returned 81% of second-quarter net income to shareholders.

In addition, we have reviewed the Basel III regulatory capital framework and believe that on a fully phased-in pro forma basis, we are well above the proposed capital levels.

Turning to slide 5 and our corporate news, Comerica Bank ranked highly in the 2012 American Banker Reputation Institute survey of the reputations of 30 large banks.

Comerica ranks fourth overall and number one in the categories of citizenship and governance.

According to the consumer survey, Comerica had the second-largest positive gain in reputation from a year ago and was one of only two banks that placed in the top five of nearly every survey category.

And on slide 6, a new Census Bureau report shows the cities with the largest growth.

Comerica has a presence in nine of the top 15 -- Houston, San Antonio, Austin, Los Angeles, Dallas, Phoenix, San Diego, Fort Worth and San Jose.

We believe population growth drives economic growth and that we are well-positioned in these growing cities.

Turning to our key markets, we had 38% average loan growth year over year in Texas, including our acquisition of Sterling.

Our growth has been broad-based with increases in almost every business line.

We are also investing resources in Texas in technology and life sciences, environmental services and mortgage banker finance.

In his most recent Texas economic activity index, our Chief Economist, Robert Dye, stated that Texas drilling activity remains strong with the state's energy sector driving job gains.

The energy and manufacturing sectors are boosting the demand for services providing a broad basis for ongoing economic growth.

Average loans were relatively stable year over year in our Midwest market, which is primarily Michigan.

The rate of growth in the Michigan economy has slowed into mid-2012 after being lifted by the rebounding auto industry in 2011.

A softer US economy through midyear 2012 will likely dampen further gains in auto sales and production for the second half of 2012.

However, with ample pent-up demand and high affordability, auto sales are expected to hold up near a 14 million unit pace this summer and that will support ongoing moderate growth in the Michigan economy.

We had average loan growth of 7% year over year in our western market, which is primarily California, with increases in National Dealer Services, Global Corporate Banking, Technology and Life Sciences and Entertainment (sic-see press release), as well as notable growth in middle-market the last two quarters.

Our most recent California economic activity index showed an expansion in that state's economy driven by gains in the high-tech sector, which includes many of our technology and life sciences customers.

However, California job growth is below the national average and state and municipal fiscal conditions remain challenging.

In summary, our loan and deposit growth, solid credit performance and tight expense management reflect our focus on the bottom line.

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

Our consistent, conservative, relationship-focused approach to banking is making a positive difference for us and our customers.

And now, I will turn the call over to Karen.

Thank you, Ralph and good morning, everyone.

Turning to slide 7, as Ralph mentioned, total average loan growth was 2% or $959 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 5% or $1.2 billion, as a result of growth in many lines of business, including National Dealer Services, Global Corporate Banking, Middle-Market Banking and Energy.

The green part of the bar shows that on average mortgage banker loans were essentially unchanged.

However, as in the past, there was significant variability in the balances in the quarter.

In fact, in the last week of the quarter, mortgage banker loans grew approximately $500 million.

Importantly, our commercial loan growth was partially offset by a decrease of $252 million, or 2%, in average commercial mortgage and real estate construction loans.

Turning to slide 8, total commitments increased for the fourth quarter in a row with a $636 million increase in the second quarter.

Energy, Mortgage Banker Finance, Technology and Life Sciences and National Dealer Services contributed the largest increases.

With the growth in outstandings outpacing the increasing commitments in the second quarter, our line utilization increased to 48.8%.

Also, our pipeline remained strong in the second quarter with increases in many business lines and approximately 60% attributed to new business.

As shown on slide 9, our deposits continued to grow and were at an all-time high.

Our average deposits increased $368 million quarter over quarter with $491 million coming from noninterest bearing deposits.

The western market drove the increase with the largest contribution from Technology and Life Sciences and the Financial Services division.

Additionally, we were pleased that we were able to lower deposit pricing by another basis point as shown by the yellow diamonds on the slide.

However, as stated before, we believe we are at or very near the floor for deposit rates.

Our loan to deposit ratio stood at 89% on June 30.

Turning to slide 10, our net interest income was stable, excluding the $7 million decline in accretion of the purchase discount on the acquired Sterling loan portfolio.

Accretion should continue to trend downward as we expect to recognize total accretion of about $20 million to $25 million for the remainder of the year.

As you know, there are many moving pieces in net interest income.

Quarter over quarter, our increase in average loans provided an $8 million benefit, but was partially offset by a $4 million negative impact from lower loan yields, excluding accretion.

While we remain focused on holding spreads for new and renewed credit facilities, a continued shift in our loan portfolio mix drove the yield decrease.

This was largely due to the decrease in commercial real estate loans and the increase in lower-yielding, higher credit quality commercial loans.

In addition to loan volumes and yields, the mortgage-backed investment securities portfolio had a $5 million negative impact on net interest income.

I will discuss that further when we get to the next slide.

It is important to reiterate the fact that a continuation of the low rate environment is not a further negative for us as the impact from falling rates has mostly already been absorbed.

We continually update our interest rate sensitivity and our current update reflects the fact that approximately 85% of our loans are floating rate, up from our previously reported level of 80%.

Of our loans that are floating rate, 75% are LIBOR-based, predominately 30-day LIBOR.

Therefore, rate movement on both the short and long end of the curve should have little impact on us given the floating-rate predominance in our loan book and the relatively small size of our securities portfolio.

Importantly, our asset-sensitive balance sheet remains well-positioned for rising rates.

We believe a 200 basis point annual increase in rates equivalent to 100 basis points on average would result in approximately a $160 million increase in net interest income.

Loans with rate floors consist of less than 10% of our portfolio and therefore will not be a major drag on revenue expansion as rates rise.

Slide 11 provides details on our securities portfolio, which primarily consists of highly liquid, highly rated, mortgage-backed securities.

Interest earned on this portfolio decreased $5 million, primarily a result of accelerated premium amortization of $3 million, due to faster forecasted prepay speeds on the portfolio.

In addition, lower reinvestment yields and a small decrease in the size of the portfolio had a $2 million impact on the interest earned in the second quarter.

At June 30, the remaining net unamortized premium was about $115 million, or just over 1% of the portfolio balance.

The average duration on the portfolio remains low at 2.7 years.

The average yield is 2.66%, excluding the impact from the accelerated premium amortization, which equates to about 11 basis points.

Our target level for the securities portfolio continues to be $9 billion, so we continue to reinvest the prepayments, which were about $750 million in the second quarter.

While current reinvestment rates for 15-year MBS are in the 1.7% to 1.8% range, we do try to invest as opportunistically as possible within our parameters to maximize yield, minimize premium and maintain a short duration.

We expect that the prepayments will continue to be about $750 million to $900 million per quarter for the remainder of the year.

Turning to the credit picture on slide 12, credit quality was strong.

Net charge-offs remained relatively low at $45 million, or 42 basis points of average loans.

Our provision for credit losses of $19 million was a $3 million decline from the first quarter.

While overall credit quality continues to improve, charge-offs are approaching normalized levels.

Our watchlist and nonperforming loans continue to trend downward after a slight uptick in the third quarter last year reflecting the addition of the Sterling loan portfolio.

Watchlist loans decreased $371 million to $3.8 billion or less than 9% of total loans.

Nonperforming loans decreased $109 million and we are now at the lowest level seen since 2008.

Foreclosed property remains stable and very low at $67 million.

Finally, we received the annual Shared National Credit or SNC exam results at the end of June.

They are reflected in our results and were in line with our expectations.

Slide 13 outlines the growth in noninterest income, which was $211 million, up $5 million over the first quarter.

Continued growth in customer-driven fee income of $3 million resulted primarily from increased customer derivative income, which was partially offset by a decrease in service charges on deposit accounts.

We are seeing the success of our profit improvement revenue initiatives, which are assisting us in offsetting the headwinds that resulted from regulatory reform.

Other changes in noninterest income include $5 million for an annual incentive payment from our third-party credit card provider and a $3 million increase in net income from principal investing and warrants.

Finally, deferred compensation asset returns decreased $7 million in the second quarter and are completely offset by a decrease in deferred compensation plan expense in noninterest expenses.

Turning to slide 14, we continued to maintain good expense control.

Expenses declined $16 million to $433 million.

Salaries expense declined $12 million reflecting stock grants of $5 million booked in the first quarter and $7 million in lower deferred compensation expense as mentioned previously.

In addition, annual merit increases were offset by a 2% decrease in our workforce as shown on the bottom left section of the slide.

We had $8 million in restructuring costs in the second quarter related to the acquisition of Sterling, which closed last July.

We now expect to incur about $25 million to $30 million in merger and restructuring expenses for the remainder of 2012 primarily related to real estate optimization, which will occur in the third quarter.

Our careful expense management resulted in reductions in several other categories, including a decrease of $4 million in foreclosed property expenses, as well as smaller decreases in occupancy, software and equipment.

Litigation and legal expenses decreased $3 million, but remained somewhat elevated due to the changes in loss estimates reflecting recent developments on certain litigation contingencies.

Moving to slide 15 and capital, as you can see on the left side of this slide, our capital is strong and we had robust capital generation in the quarter.

Therefore, we have excess capital available, which we are returning to shareholders through dividends and share repurchase.

On the right-hand side of the slide, we have outlined the primary effects from the Basel III capital framework.

Last month, the Federal Reserve Bank issued a notice of proposed rulemaking related to Basel III capital standards for the United States.

These rules have been public published for comments and are not yet final.

The proposals narrowed the definition of capital, increased the minimum levels of required capital, introduced capital buffers and increased the risk weights for various asset classes.

We have reviewed the proposal and even under the new stricter definition, on a fully phased-in pro forma basis, Comerica is currently estimated to exceed the standards for well-capitalized banks.

If calculated according to the proposed rules today, our Tier 1 capital ratio is estimated to be between 9.3% and 9.4%, comfortably above the new 8.5% regulatory standard, which will be phased in over the next seven years.

We continue to monitor the regulatory environment and assess its implication on capital as the rules are finalized.

Turning to shareholder payout on slide 16, as Ralph mentioned, we repurchased 2.9 million shares under our share repurchase program in the second quarter.

And when combined with the shares repurchased in the first quarter, we have completed $121 million of our $375 million capital plan.

As a reminder, the Federal Reserve concluded its review of Comerica's 2012 capital plan in March.

The plan provides for up to $375 million in equity repurchases for the five-quarter period ending March 31, 2013.

In April, our Board of Directors increased our quarterly cash dividend by 50% to $0.15 per share.

The share buyback plus the dividend resulted in a shareholder payout of 81% of second-quarter net income, above our 10-year historical average of 77% prior to the downturn.

Finally, our outlook.

We have obviously benefited from good loan growth in the first half of the year.

As a result, based on average loans for full-year 2011 compared to full-year 2012, we now expect growth of 5% to 6%, which is slightly more than we had previously guided.

While our loan growth so far this year has been strong and broad-based, we have also continued to benefit from our expertise in a couple of industries, which could see some variability going forward.

For example, our Mortgage Banker business has grown along with the robust mortgage refinance volume.

We still expect those balances to moderate over the next couple of quarters as mortgage origination volumes are forecasted to slow.

For example, the Mortgage Bankers Association is forecasting mortgage originations to fall almost 25% in the second half of the year.

Also, we anticipate National Dealer Services loans will experience the normal seasonal decline as dealers reduce inventories in anticipation of the new model year.

In addition, we expect commercial real estate loans to continue to decline, but at a slower pace.

Finally, the current economic outlook does bear on demand for new loans and we intend to continue to exercise relationship pricing discipline.

On net interest income, we are narrowing our outlook at the higher end of the previous range for growth of 3% to 5%.

We expect that higher loan volume will continue to be offset by a decline in yields.

As I mentioned earlier, securities yields have been declining and loan yields have been impacted by a mix shift in the portfolio and improved asset quality.

We expect our credit expenses to decline from last year's levels, albeit at a slower pace as we approach normal historical levels.

And we expect credit quality trends in our portfolio to remain positive, which will be partially offset by loan growth and result in a continued reserve release.

Therefore, we expect to see the provision and net charge-off at or near the second-quarter levels for the remainder of the year.

On net interest income, we are revising our relatively stable outlook to 1% to 2% growth over last year's levels as we are more than offsetting the significant regulatory headwind.

The noninterest expense outlook is unchanged with the expectation for it to be relatively stable, plus or minus 1%, compared to last year as we continue to maintain tight control of expenses.

As far as the tax rate, we expect a rate of about 26% for the full year.

With regard to our synergy expectations for the Sterling acquisition, we continue to be on course to deliver the loan and noninterest income growth we previously announced.

The former Sterling footprint, which was predominately Houston, San Antonio and Kerrville, has already seen loan growth of over 10% and we believe we are well on our way to meeting the 15% fee increase goal since the acquisition closed.

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

In the current interest rate, economic and regulatory environment, we remain keenly focused on the bottom line.

Now we are happy to answer your questions.

(Operator Instructions).

Jon Arfstrom.

Hey, good morning.

A question for you on commercial real estate.

Karen, you talked a little bit about declining, but at a slower pace.

Can you give us a little more color as to what you are seeing there?

It is obviously the one area of your balance sheet that continues to be a bit of a drag.

Why don't we ask Lars to comment on that?

Lars?

Right, hey, Don, yes, let me talk about that just for a second.

As we have previously shared, we do see continued moderation in those balances over the next quarter or two throughout the balance of the year.

We are continuing to see our customer base access the long-term kind of permanent market and move some of their assets there and that clearly is putting some downward pressure on that portfolio.

But on the flip side, I would tell you I am very encouraged, as we have shared in previous calls.

We have had some very nice activity volumes that is consistent with our existing strategy, which we have not changed.

It is very much done on a footprint urban market-oriented portfolio strategy.

We're working with experienced developers, many that we have gone through the crisis with and they are in very good condition.

We are seeing a lot of multifamily opportunities, very well-capitalized in California and in Texas.

So I think that we are going to begin to see the benefits of those construction loans that are very well-capitalized as we head into next year, but we would expect some moderation in those balances throughout the balance of the year.

Okay.

And then, Karen, then just a question for you.

What are you expecting on the pace on the buyback?

It looks like you still have about $250 million left.

I am just curious this is something you expect to spread over the next three quarters or accelerate it a bit.

You should expect it spread over the quarters.

We don't claim to be market timers on anything, including share repurchase and so we are in the market every day that we can be repurchasing shares.

Okay, thank you.

Brett Rabatin.

Hi, good morning.

Good morning, Ralph.

I wanted to ask, just given the strong loan growth that you did have in a couple key businesses this quarter, I guess I thought the growth that you were implying would be a little stronger going forward.

And I realize you are concerned somewhat about the mortgage warehouse possibly having some decline.

Are you seeing -- I guess the number that you gave last quarter on commitments to commit, can you give us that?

I missed it if you gave it.

And then just can you talk maybe more about the pipeline in terms of the middle-market, large corporate, etc.?

Sure.

Lars, do you want to --?

Yes, I would be glad to take that, Ralph.

Hey, Brett, first of all, I don't believe in the prior quarter we shared the commitments to commit.

We did give a little bit of guidance into our overall commitments, which, through this past quarter, it was the fourth consecutive quarter of commitment increases, up $636 million.

So I think that that is really good.

That was building on about a $1 billion of expansion to our overall commitments in the first quarter.

For this quarter, it was really driven by Dealer, Energy, TLS, MBF, a number of other businesses.

The overall though as we look at the balance of year, the loan growth opportunities for us -- yes, we were up in commercial loans $1.2 billion roughly or 5%, as Ralph pointed out, about a 20% annualized growth rate, which has been nice.

Our Dealer business has obviously benefited.

That was up 13% quarter over quarter, Global Corporate Banking.

Middle-Market which was great to see, California really impacted that, in particular Northern California, having a positive impact and Energy.

So all of those were some nice tailwinds that we had expected and we are doing well I think in those segments.

I would say though as we look to the balance of the year, it is important to keep in mind, as I have shared just a minute ago, we do expect some moderation in commercial real estate balances, at least for the balance of this year.

Also, two of our businesses with unique variability characteristics -- first, Mortgage Banking Finance, which at least the Mortgage Banking Association's forecast would lead us to expect that balances in that portfolio would moderate here over the next two quarters.

And then I think the other key component of that would be Dealer, which we had previously shared Brett.

It's a seasonal business.

We do see inventories clear during the summer getting ready for new models to come in.

So nothing unusual there.

One last footnote, I have been spending a lot of time in the markets with customers, prospects and it is pretty clear to me there is a rising sense of kind of uncertainty given the fiscal cliff, political environment.

There is a lot going on.

I think there is people that are becoming more reticent about making investment.

So all of those would factor into I think our thinking for the balance of the year.

Okay.

And then the follow-up I wanted to ask was the guidance with the loan guidance that you have for average balances implies slightly lower end-of-period balances and the spread revenue guidance essentially -- I know you don't want to give margin guidance explicitly, but it assumes that the margin would be under some additional pressure.

The question there is just on is it going to be on the securities portfolio or do you also continue to see any pressure on loan portfolio yields going forward?

Are you seeing -- do you expect more pressure on the loan portfolio yields I guess is the easiest way to ask it?

Yes, first of all, I think it is good news in terms of loan spreads.

We have gone through a period of crisis.

Been a lot of competitive pressures on pricing on loans obviously as banks have become much more active in the marketplace.

You may have seen the first -- excuse me -- the second-quarter Fed survey that outlined that loan spreads had compressed kind of at record levels since 1986, so it is a competitive market.

For us, we have largely held our loan spreads and I think that is good news and frankly, I would expect that to continue.

Our value proposition, our relationship-focused approach I think is being well-received in the marketplace.

And I would just add to that on loan yields that, in our overall portfolio, we are obviously seeing higher-yielding commercial real estate assets come off the books while higher credit quality, but lower yielding middle-market type loans coming on the books, which has impacted our loan yield so far this year and we think will continue.

And finally, the benefit of accretion, as we mentioned before, will be slowing as we approach the end of the year.

Right.

Thank you very much.

Really a change of mix.

Steve Scinicariello.

Good morning, everyone.

I just want to follow up a little bit on the mix shift going on in that portfolio and just kind of obviously know that trends on the middle-market have been strong and you want to deemphasize the commercial real estate.

But just to kind of try to gauge kind of the extent to which you see that continuing going forward and how much pressure that could mean for loan yields.

Do you think the mix shift at the similar pace that we saw this quarter could continue or maybe starts to slow down as we start to see some of the pipeline and the CREs start to materialize?

Just before Lars, I would just say that the biggest impact is the accretion on the loan yields, so you should make sure you focus on that.

We had $25 million approximately of accretion the prior three quarters.

We had $18 million this quarter and we expect $20 million to $25 million for the rest of the year.

And I think just to underline what Lars was saying earlier that we expect that commercial real estate will start to what I will call plateau toward the end of the year and that then mix shift will slow from a higher rate environment to what we would focus on being our commercial C&I lending, which is, at this point, higher credit and also lower yield from that standpoint.

Lars, do you want to add anything to that?

No, I think that is well said.

Our expectation is that commercial real estate, hopefully as we head into '13, will begin to show some different growth kind of characteristics.

But clearly, we are continuing to stay very focused on our middle-market businesses that I think are very well-positioned and stable.

Our Dealer business, our Energy business, well-positioned Technology and Life Sciences, general Middle-Market.

And I would underscore too, it has been awhile since we have really seen the good core middle-market banking lift in California and that is very substantial for us.

We continue to see nice lift in Texas and so I would say our portfolio trends should continue with hopefully a moderation in the decline in the commercial real estate component.

Got you.

And the net interest income guidance certainly implies a similar, even slightly better loan growth run rate.

And I think you said you felt pretty good that even to the extent you see some modest kind of yield pressure as the shift continues and whatnot, you still feel very confident that you should be able to kind of grow through it I guess is the question.

Yes, I think we have shared that there is a couple businesses in the short term with some variability, but we are not changing our strategy.

It is being very well received.

We are paid a premium at Comerica for our value proposition and frankly, I think in the marketplace today, what I am seeing is that business owners, partners, executives are looking more and more for the relationship-focused banking model that Comerica can successfully deliver and get paid for.

Great, great.

And then just last, any reason why we shouldn't expect to see the full amount of the buyback executed?

We don't predict the future on buybacks.

Got you.

Got you.

Thanks very much, guys.

Matthew O'Connor.

Good morning.

There has been a couple of banks, including yourself, that have said the impact of the low rate environment is mostly reflected in your balance sheet.

And obviously you are a little bit different in that most of your loans are priced off the shorter-term part of the curve.

But I guess when I look at the securities book, including for you, you are adding new securities at yields that are 75 to 100 basis points lower and I just got to think there is still some more drive from that.

So I do want to follow up on the comment that you think the bulk of the impact of the low rate environment is already in the NIM.

Yes, I think what I said was the bulk.

Clearly, we do continue to have a securities portfolio, which is relatively small as a percentage of our assets that does have prepays that we are reinvesting at current market rates as they prepay.

So we do expect, and that is part of our net interest income outlook, that the reinvestment rate will remain at about current yields, which are very low and so we do expect some impact from that.

Okay.

And then on the premium amortization, I know you guys tend to be pretty conservative in how you account for that.

It seems like you tried to do a little forward-looking view on the writedown that you took this quarter.

That's correct.

On the securities portfolio, the premium amortization is a full forward-looking view.

Okay.

So if rates stayed at these levels, you wouldn't expect any additional hits in the third quarter?

That is correct, if rates stayed at this level.

Okay.

And then just separately if I may, the Basel III, 90 to 100 basis point hit, how much of that do you think you can mitigate over time?

The rules are not yet final, as we said, so difficult for us to say how much we expect to be able to change.

I think the important thing is that we are well above the standardized levels at 8.5%, which we don't need to be above until 2019.

So we are well ahead of the game and obviously once the rules are final, we will be focused on not only adhering to the rules, but also making sure we operate well within them.

And is it right that the increase in the RWAs is mostly from the unfunded commercial commitments that are I guess less than a year?

Yes.

Yes.

So the RWA increase is mostly from unfunded commitments less than a year.

We also have some impact on low loan-to-value commercial real estate development loans, as well as deferred tax asset change in risk-weighted assets and the change in non-accrual loans and those kind of loans.

And then just lastly as a follow-up on this, do you have any thoughts -- is there any hope that the unfunded commitments of less than a year, that the guidance might change there because obviously that could have implications for credit availability for a number of corporates out there I would think?

I think we just have to wait and see what is going to happen, but I think there will be changes in the rules, as Karen was talking about, in the future.

And as they evolve, the good news is that we are ahead of it even today and that puts us in a very good position to adjust accordingly as the rules evolve.

Right.

And as the rules become final, I think there might be changes in the overall industry and an overall customer appetite for things like unfunded commitments.

Okay.

Thanks for taking all my questions.

Matt Burnell.

Good morning.

Just a question on the reserve release.

You are currently running reserves at about 1.5% of loans.

That is down about 10 basis points quarter over quarter.

Karen, I think you mentioned that you are expecting continued reserve releases through the end of the year.

I guess I am just trying to get a sense as to the size of those reserve releases over the next couple of quarters.

The reserve release this quarter was visibly higher than last quarter, so I guess I am just trying to get a sense of the pace of the reserve releases and where you might be comfortable reducing the reserves relative to outstanding loans.

John, why don't you comment on that?

Sure, I would be glad to.

There is really no target for where we want reserves to be, so we will continue to review every sizable problem loan every quarter.

We will continue using our existing reserve methodology and right now, our total reserve of 703 is almost four times our annualized charge-offs.

As you know, going forward, reserve levels will vary as charge-offs and problem loans decline, but increase as we have growth in the portfolio.

In the near term, as you mentioned, we did say that charge-offs and provisions would be very close in the third and fourth quarter to what they were in the second quarter.

And I would expect the reserve release, which overall was 26 in the second quarter, 23 in the first quarter, to be very much in that range as we go forward for the next couple of quarters.

Okay.

And then just bigger picture question perhaps for Ralph.

Now that we have the MPR for Basel III out in the public domain as it were, are you sensing that there may be better opportunities for M&A within your markets now that the banks that you compete with and some of the smaller banks have a better sense of what those rules are going to be?

I think everybody is, at this point, doing what we are.

They are watching and waiting for the rules to evolve before decisions are made on those types of items.

As always, we are focused on the communities we serve and opportunities that may or may not arise in those communities.

And then one last quick question.

Was there any affect in this quarter from the recently announced interchange settlement?

We don't comment specifically on specific cases, but what I would say is we do believe that we are adequately reserved for all litigation-related matters.

Okay.

Thanks for taking my questions.

Mike Turner, Compass Point.

Hi, good morning.

I realize it is almost insignificant, but I noticed the NPLs for the home equity portfolio almost doubled from $9 million to $16 million.

There is usually some seasonality in that, but I don't know if you could add any color around that.

Sure.

John?

Yes, I'd be glad to.

We have about a $1.6 billion portfolio in home equity loans.

That is 3% of the total portfolio to your point.

About $900 million of that is from Michigan.

It is all self-originated.

We have never used brokers, nor have we done subprime and our average home equity line of credit balance by the way is about $45,000.

Our delinquency rates and charge-off rates have consistently been better than industry statistics and the relatively modest increase in NPLs that you saw this quarter were the result of some changes in our policies where we got a little more conservative on when we move things to non-accrual.

We basically moved to a 90-day standard as opposed to 120 to 180, which I think the whole industry is moving toward a 90-day standard.

That is why you saw the increase.

Okay, thanks.

That makes a lot of sense.

And then also not to sort of beat the dead horse on the NIM or NII guidance, just when I look at it from a high level, your loan growth is coming in strong.

You raised your loan growth guidance.

Your NII change is essentially similar to where it was.

Your guidance is basically unchanged.

Your accretion income is really -- expectations for accretion is unchanged.

So given the higher loan growth, that assumes the NIM is down and I understand that is some of a mix shift.

I guess my question is embedded in your thoughts or your guidance, are you assuming that you will continue to maintain the loan spreads that you are having now or is there some conservatism in there that further rate pressure would ensue?

Yes, we are very focused on full relationship pricing with our customers and maintaining pricing and spreads on new and renewed loans as much as we can.

So that is built into our thought process.

But I think what you would see is you will see that continual shift in the mix.

That is correct.

Which is built in.

Okay, so if there was additional competitive pressures, that could be a little bit of downside and if you maintain it, that is basically where guidance is right now?

Right.

Okay, all right.

Thank you.

Craig Siegenthaler, Credit Suisse.

Thanks guys, good morning.

Just wanted to clarify an accretion number you threw out there.

There was $25 million I believe in the second-quarter run rate and you expect this to fall to $20 million to $25 million for the entire second half, so kind of $10 million to $13 million per quarter.

Is that right?

That is correct and you should expect it to be decreasing each quarter.

Got it.

And then if you think about the $25 million in the second quarter, where was the contribution of that?

Was it mostly from commercial real estate and maybe a little bit from C&I?

Yes, it is mostly from commercial real estate and you are right, it is a little bit from C&I.

Okay.

Well, then, if you look at your C&I yield, because I was wondering if there is anything in that number, it only fell by about four basis points quarter on quarter, down to about 352.

When you think about the inflow of kind of the new money yield there, how quickly do you anticipate this should really decline over the next few quarters and what is that new money yield?

Yes, I don't think we comment specifically on spreads for loans because they vary by risk rating and by structure on the loans.

But what I would say on C&I in general is we are working again to maintain pricing on all new and renewed business as much as we can and I think that is one of the reasons why you are seeing less of a decrease on the C&I yield.

And that is true in the commercial real estate sector as well.

Yes, I was going to say, Ralph, that in commercial real estate in particular, we have got some great relationships and some terrific projects that, over the last year, that we have been originating that I think are at very fair kind of spreads for the kind of value proposition.

We have been very reliable through the cycle.

Our developers know that and we are getting paid for it.

Whether it is commercial real estate or it is our C&I and middle-market-focused businesses, we have a very disciplined approach to relationship pricing and we are okay to take a pass on deals and we do it every day.

But it just means we have to spend more time in the market looking for the right kinds of opportunities with customers and prospects to get paid fairly and I think we are doing that.

Got it.

And then just one last question on the Mortgage Banker balance.

A year ago, it was sitting at $600 million.

Now it is at $1.5 billion.

I heard your commentary around kind of pressure.

Even if there is second-half pressure, what is the normal run rate there, the normal balance?

And I know it moves around a lot, but over the course of the cycle, where is kind of an average balance for this that we should think about?

I'm sorry.

I didn't hear --.

Average balance on Mortgage Banker Finance.

Yes, gosh, that is really hard to peg because, if you go back over the last few quarters, you will see that there were some very wide swings if you go back into the fourth quarter of last year and into the first quarter.

It would be hard to peg a number for you.

But I would just tell you that as we do look out over the balance of the year that we would expect that there would be some moderation in those balances.

I mean we have seen balances between quarters decline $0.5 billion or more, but it can surprise you because I think we have all been surprised and we continue to have record low rates kind of quarter after quarter.

That is a key driver of the growth in that business.

But I also want to underscore one other very important point.

There have been a lot of changes in the mortgage industry over the last couple years.

Comerica has been very stable, very focused on this warehouse lending approach to really prime mortgage companies and that reputation has served us well.

We are clearly serving a lot more mortgage companies today than we were one year ago and we are cross-selling them and I think that that gives us a much broader base to work from as we move forward.

That increase in market share I think, as I have watched kind of the ups and downs here recently, it is about $0.5 billion or so that will go up and down, but that doesn't mean the mortgage market can't change and dry up for a longer period of time.

It really depends on where that is going, as Lars mentioned about what was going on with the Mortgage Bankers Association and their prediction.

And then I just heard a commercial on rates are at a new all-time low and many brokers are out there selling those rates again for refinance.

So a lot depends on what is happening in the market there.

All right, great.

Guys, thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Great, thanks.

Actually -- good morning -- just a little bit further on Mortgage Banking very briefly.

Karen, did you say Mortgage Banker balances at the very end of second quarter were down $500 million or they were $500 million?

They were up $500 million.

Oh, they were up $500 million.

Okay, so from the 2. -- okay, so it was up $500 million versus last quarter.

Got it.

Okay.

So then the growth -- I know you guys don't want to comment specifically on like C&I loan growth guidance, but when we think about that, Mortgage Banking is still very strong.

Should we view the rest of C&I -- I am looking at page 7 here -- as also being up in the quarter or in next quarter?

Thanks.

Yes, we do expect to continue to see growth in our C&I portfolio and that is built into our overall loan expectation.

And that is excluding any impact from Mortgage Banking?

Correct.

We actually expect Mortgage Banker to decline in the second half consistent with the Mortgage Banker Association survey.

As well as our Dealer business, which has seasonal moderation.

Right.

Got it.

Okay, great.

All right, thank you.

Chris Mutascio, Stifel Nicolaus.

Good morning, Ralph and Karen.

How are you?

Good.

Karen, I just want to go over my math in terms of net interest income.

Let's forget about the margin and accretable yields and get to the dollars.

If I look at the midpoint of your guidance of roughly 4% year over year net interest income growth and apply that to last year, you get this year about $1.725 billion in net interest income.

Then I back out the roughly $880 million of net interest income you have earned so far in the first half of this year, that leaves you with roughly $845 million in net interest income for the second half of this year or roughly $420 million to $425 million per quarter versus a $440 million run rate in the first half.

Is that an accurate assessment?

Yes, but what you need to make sure you take into account is the impact of lower accretion in each quarter.

Again, we expect $20 million to $25 million in accretion for the rest of the year and that is going to come at a declining pace each quarter.

Right.

And remember, we had $26 million in the first quarter, $18 million in the second quarter.

Right.

I think we are taking that into effect with your guidance.

So my point is, in the second half of this year, we are looking at roughly a $420 million, $425 million net interest income line versus the $440 million in the first half.

Yes, and then I think you need to make sure you take into account the fact that our loan yields should continue to be impacted by the mix shift in the portfolio as commercial real estate loans come down and lower yielding middle-market loans come on the books.

And then we also do have the slight impact from our securities portfolio on the reinvestment rate on those yields.

Okay, great.

Thank you for the clarification.

Gary Tenner, D.A. Davidson.

Thanks.

Good morning.

Just a couple questions.

You talked about some of the variability you expect in the mortgage business.

Just in terms of the Dealer floorplan business, $2.5 billion or $2.4 billion at the end of the second quarter, what is the magnitude of that seasonality that you might expect over the second half of the year?

Lars?

Okay, yes, I believe the overall Dealer Finance business was $4.3 billion.

That was the average for the quarter for the whole business.

But it is a little bit difficult to tell and I would be hard-pressed to kind of give you a range there.

But given a stable environment of continuation of say 14 million units, which is what we are hopeful for, I would just say that you typically would end up with some moderation in the maybe $0.5 billion or more.

But I will tell you that can really vary depending upon a lot of circumstances.

I think that we saw that you can have a supply chain interruption, you can have a lot of things that go on in there that can significantly impact that.

Okay, and then, Lars, I was wondering if you can just give some commentary on the small business piece.

It was down a couple hundred million dollars this quarter.

Maybe just give us some thoughts on that.

Yes, it's a good question and obviously small business took the brunt of I think this economic storm that we have seen.

I think our small-business clients are probably feeling as guarded as any segment that we have got.

So they are reflecting a slow growth economy.

We are continuing to see the runoff of some term credits that may not exactly fit into our longer-term kind of strategy of growth of just kind of core C&I and small business.

Our small-business customers though -- our sense of it is they are continuing to delever and become more liquid, so we are seeing that.

On the flip side, I would tell you that our pipelines have continued to grow.

I think I shared that in the last quarter.

They continue to be very strong and in fact, this past quarter was our best quarter of new loan production that we have had in at least a couple years and I think that that bodes very well for us.

Okay, thanks for taking my questions.

Terry McEvoy, Oppenheimer.

Good morning.

Thanks.

A year ago this month, you closed the Sterling deal.

Earlier in the call, you talked about loan growth tracking expectations.

I guess my questions would be is it coming in the areas you expected it to be when you first announced that deal and how do you see that transaction being additive to Comerica going forward?

The transaction is going very well and very much as we expected.

The team has come together well in the market, especially in the Houston, San Antonio, Kerrville markets.

And I believe the latest numbers showed about a 10% increase in loans outstanding since the acquisition.

And we are very excited about that combination and the other synergies are on target as we expected.

Okay.

And the real estate optimization later this year, are the cost saves of those events, is that built into the 2012 outlook or will any cost saves be more visible next year in 2013?

All of the cost saves are built into the outlook.

And then just one last question, on the Wealth Management, there was virtually no provision, if I remember and it said something about decreasing in private banking in the Midwest markets.

Is that a conscious decision of Comerica or is that simply a function of the market itself decreasing?

John?

Yes, it is not the intent of any strategy at all.

That is just the way the numbers came out this quarter.

We intend to execute that business strongly across the country.

It's a very important business for us.

Great, that's it.

I appreciate it.

John Pancari.

Look, you have been giving the balance sheet growth and the spread income and sorry to beat you up again here on the margin, but that implies about 5 to 10 basis points of margin compression by my math through the back half of this year.

Is that a fair level at least to think about?

I know you don't give guidance, but I just wanted to see in terms of magnitude if that is a fair range.

Yes, obviously we don't give guidance on our rate NIM because they can move around quite a bit and it also is dependent on the level of our excess deposits.

So I won't give guidance on that.

But I would focus on the guidance that we have given for net interest income and the impacts around that of lower accretion, of the lower loan yields due to the mix shift of the impacts on the mortgage banking-backed securities, which we talked about and of loan growth.

I would focus on that.

Okay.

All right.

And then separately, the second-quarter level for comp and benefit expense, about $250 million in total, I wanted to see if that is a pretty good run rate to stick with going forward or if you expect some incremental volatility in that number outside of the sterling impact?

That is a pretty good number to look at going forward.

Okay, all right.

That's it for me.

Thanks.

Michael Rose, Raymond James.

Good morning, everyone.

I just wanted to get a little bit of color on the increase in utilization rates.

I understand why it was up in part due to the growth -- outstripping the growth in commitments.

But as we sit here and look at kind of maybe a slowdown in technology spending, energy is under pressure.

How should we think about utilization rates and commitments going forward?

Thanks.

Lars, do you want to take that?

Yes, be really glad to.

Obviously, yes, utilization rates were just math driven by overall loan growth of $950 million.

Commercial loans up $1.2 billion and yet commitments [Y] up a healthy $636 million.

The math around that pushed our total utilization rates against commitments, up 140 basis points to 48.8.

The biggest contributors that drove that were Dealer, Energy, Technology Life Sciences, Mortgage Banking Finance and such.

And so I am not sure I would jump to any conclusions there around utilization rates and where that would be going in the future.

We were obviously glad to -- we were glad to see that, but I couldn't point to one particular business that I think would particularly influence that going forward.

We are just going to continue to stay very focused on our middle-market businesses, which are the biggest part of our commitments and commitment growth and we feel very good about our long-term growth prospects of all of our middle-market businesses and general middle-market, as I mentioned, picking up in California.

I think Texas continuing will have impacts on that.

So I hope that is somewhat helpful to you; though it is hard to guide you exactly where I think that will be.

Yes, that is helpful.

And then as a follow-up, when I kind of look at the net interest income in Texas, even excluding the impact of the accretion, I guess it implies that competitor pressures continue to take shape in Texas.

Can you kind of comment on what you are seeing out of maybe some of your larger competitors?

Are they still being very competitive on rate and structure?

Thanks.

Yes, we are seeing a very competitive marketplace.

There is no question about it.

I would say, from a geographic perspective, the West Coast the most competitive, maybe Michigan, Texas.

But really we are seeing good competition.

It is very competitive across all of our segments.

The good news of it is I think that our strategy is playing out very well.

It is being very, very well received and in spite of that, we are continuing to hold on our loan spreads.

We have done that for two quarters in a row and I feel very bullish.

I think we've got the rights businesses kind of in the right markets with very talented bankers.

I think we have got some of the best bankers in the marketplace and you have got to have them to execute kind of this relationship banking model that I think is being well received in driving some nice growth in the market.

Great.

Thanks for taking my questions.

Paul Miller, FBR.

Hello?

I'm sorry; I got disconnected.

Hey, guys.

How you doing?

A couple of real quick questions.

On your guidance for noninterest expense up 1%, does that include the $20 million to $25 million of merger expenses in the second half of the year?

Yes, it does.

It includes restructuring expenses.

So then next year, you should have noninterest expense go down even farther factoring out any type of growth metrics?

That is correct.

And on the MBS portfolio, I think you said your duration is around 2.5 to 3 years.

Is the new stuff you're adding on is in that same duration mix?

Yes, it is.

When we focus on adding securities, we are focused on keeping duration as low as possible while maximizing yield and keeping premium as low as possible.

So we have --.

And what type --?

Our 2.7% duration has been on the portfolio for a few quarters now.

And then just -- and then so when you're reinvesting from the runoff, what type of yields are you getting for those securities today?

Today, we are getting yields between 1.7% and 1.8%.

And then I don't know if you disclosed it, but have you disclosed what type of CPR rates you have on those securities currently?

We don't disclose that.

Okay.

Okay, thank you very much.

Brian Klock, Keefe, Bruyette & Woods.

Hey, good morning, everybody.

And really quick, and I am sorry if maybe this was answered already, but I have been bouncing on a couple of different things this morning.

And maybe this is a question for Lars.

The loan growth -- does seem like syndicated national credits, those balances increased about $0.5 billion or about half the total growth in C&I this quarter if you take out the Mortgage Banker Finance.

So I guess maybe you can talk about that.

Is there opportunities that you are seeing because of what is going on in Europe, the bigger European banks that have US operations, that maybe you are seeing some better looks at deals because of that or maybe you can talk about the growth in that SNC portfolio.

Okay, I'd be glad to.

Two kind of issues there.

I will try to cover first the European banks so they are linked.

We are seeing some opportunities there, though it is somewhat limited.

Some of the changes in the marketplace have been bulk purchases, portfolios.

We are really spending our time building relationships rather than focused on buying credits.

That is kind of where we are at our best, so I would say that that is somewhat limited.

We have seen some opportunities with existing customers where we have been able to expand our relationships, but we have pretty conservative hold limits.

And so we are going to stay in the box there and stick with a conservative strategy there.

As that relates to the Shared National Credit, portfolio was up actually $478 million.

I think it is on slide 23.

I think the important thing to point out is the commercial loan growth for period end which is what you would measure that against, because the SNC number is period end, was up $1.4 billion.

So you are talking about roughly $900 million in production that was non-Shared National Credit.

So it is by far the majority of our production.

But a couple of things I want to point out is we use Shared National Credit is simply a tool, a very conservative tool to manage our risk exposure in industries and segments that we have been in a very long time, we are very comfortable with, and that we have very good asset quality profitability kind of metrics from.

In fact, if you look at the Shared National Credit portfolio at our bank today, the returns, the asset quality of those credits really is consistent with the overall portfolio.

The last point I would make for you is we underwrite our Shared National Credits like we do any other credit.

There is no difference in standard there, and we hold them to the same relationship banking pricing standards and frankly execution that we have of any other credit in our portfolio.

So we are very comfortable with it.

We are very comfortable with our lines of business.

But it simply complements some long-term businesses that we have been in.

I would underline that relationship approach to Shared National Credits.

Some of our biggest relationships, and meaning total banking relationships, not just credit, would fall into that category.

Yes.

Okay, thanks for that color.

And maybe just one follow-up for John Killian.

John, did you say earlier when you were talking about the provisions, the guidance, the overall guidance is that the provisions in charge-offs should be down year over year and trending down.

But did I hear you say that the third and fourth-quarter provisions and charge-offs should be similar to the second-quarter level?

Yes, you did, Brian.

Okay.

And I think at what point -- I guess maybe that is the thing is that if loan growth, there is some expectation, Karen, that loan growth should be moderating in the second half of the year.

There is probably less pressure on needing to provision for the loan growth in the second half of the year.

Is that maybe the way to think about why that -- with the good loan growth you had in the first half of this year, I would expect provisions to go up from that $19 million run rate in the second quarter, but is that why we are kind of --?

Yes, I mean that is correct.

Obviously, the key drivers of our overall reserve are loan growth in credit quality.

So yes, your statement is correct.

All right.

Thanks for taking my questions.

Jennifer Demba, SunTrust Robinson.

Regarding the energy portfolio, you have had a lot of growth in that over the last year.

I know much of it probably related to Sterling.

Can you just talk about the composition of the portfolio, whether most of it is Shared National Credit in nature, and what kind of concentration you are comfortable with in terms of energy loans to total loans over time?

Lars?

Yes, Jennifer, it has been obviously a business that we have been in a very long time, Texas-based company, and we are very comfortable with it.

And frankly, we developed I think a really nice reputation in the industry.

Today, it represents somewhere around 5.5% or so of our overall loan portfolio.

So it is very manageable.

It was up 6% quarter over quarter, the growth in it.

So it didn't have quite the growth in it over the last quarter.

It is very clearly consistent with our relationship banking model.

We work very closely with management teams and sponsors that we work with for a long period of time and frankly, we get excellent ancillary business out of working with these management teams and companies because they value our long-term commitment to the industry.

If you look at a portfolio overall, it is very much of a liquids kind of oriented portfolio towards natural gas liquids and oil, which is really where you want to be.

That is not a mistake.

The portfolio continues to have excellent performance characteristics and growth asset quality and profitability.

So we are very comfortable with where we are today.

We have got a proven track record, a robust credit policy that served us very, very well and I would just remind you that, back in the '90s, this portfolio went through $10 a barrel gas, $1.70 natural gas.

It also made it through 2009 at $40 a barrel -- yes, at $40 a barrel -- did I say --?

You said gas.

Yes, at $10 in the '90s, $40 a barrel in 2009 and frankly, our performance has been excellent.

So we are very comfortable with where we are and with our strategy and we are going to continue to grow with our customers and we are going to stay very focused on our existing strategy, no changes there.

So Jennifer, you had mentioned in your question that you thought that much of the energy growth was related to Sterling and I just want to let you know that Sterling did not have the robust industry expertise in energy that Comerica has had for a long time.

So we wouldn't necessarily attribute that to Sterling.

What I would also say is you asked about the composition of SNC.

Most of our energy loans are SNC loans.

Yes, and that is really a reflection of a very conservative approach to our hold limits in an industry that is very asset-intensive.

Thank you.

Erika Penala, Bank of America.

Good morning.

I just had one high-level question for you, Ralph.

So if I take a step back, if the Fed is on hold for the next two years or through 2014, I guess that implies to me that the outlook for your bank is that loan growth is getting better and that is balanced with the provision -- the credit leverage from improving credit moderating, but that also implies that the margin will continue to grind down and we don't know what is going to happen in terms of the CCAR process each year in terms of your ability to continue to increase capital return.

And I guess in that scenario, as you look out over the next two years, what do you think the other levers are that are available to you in terms of improving EPS in an environment that is difficult for that long?

Is it to Matt's question, M&A?

Would it be a special dividend or are there more expense leverage outside of -- it sounds like the base for next year on a core basis is $1.73 billion.

Is there something -- what else -- I mean or are you really saying, look, this rate issue is cyclical, so we are not going to do something outside our comfort zone just because rates are low for another two years?

That is a good way to summarize in total.

We will stay with our philosophy and our strategy of growing in the markets where we are.

We think we are very well-placed and building relationships for the longer term.

Now there are levers that we continue to look at all the time and that is expenses and I think we have set a record of doing that.

We look at expenses every year and making sure those are at the right places for the right leverage.

We have been an active capital manager and we will continue to be that within the rules and guidelines that are out there.

And as you know, those aren't and as we have talked about aren't set yet at this point in time.

So the strategy I believe and especially the strategy of the geographic expansion that we undertook several years ago and is now paying off in Texas and California and balancing out that geographic distribution is working very well.

And the growth is going to be, as we talked about in the comments, in the states where we are, especially Texas and California.

And so I think we are very well-positioned to weather through the storm that may be there or may not be there from that standpoint based on rates and whether they continue to be at a low level.

Okay, thank you for taking my question.

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

First question was for Lars.

Several quarters before we saw the positive turn in C&I loan growth, you were able to telegraph this because you looked at the increase in commitments to commit.

I'm curious here with the economy softening, when you look at this leading indicator, are you starting to see a downturn or any softening in the C&I coming?

Right, Steven.

Yes, we have had I guess now eight consecutive quarters of commercial loan growth, which has really been terrific and the last few has been very strong.

Our pipeline continues to look good.

I would just say though that, at least from what I am hearing in the marketplace and I have been spending a lot of time out there with customers and prospects, is there is this growing sense of uncertainty and maybe a cooling of the economy that could impact I think business activity in the second half of the year.

But you mentioned the word telegraphing.

I would say this though.

I think that we are as well-positioned in the marketplace today in our markets and our businesses as any franchise.

I mean going out into the marketplace today and talking about Comerica's story of reliability, our size, our products, our strength, our capital position, talking about our customer service commitment and our relationship banking model.

And then thirdly, and I think most importantly, being able to take bankers out there that on the average -- our group managers have an average tenure at Comerica of about 20 years, our average relationship manager, almost 10 years.

Those are the folks that execute our relationship banking model.

So I am very encouraged about our businesses, about our markets, about our products and our growth prospects longer term for sure, Steven.

Lars, maybe I can follow up on that because I hear that you are very encouraged, you are well-positioned, you expect moderation in Mortgage Banker [accrete], but I guess we all struggle because when we look at the average loan growth guidance, it implies $42 million, $42.5 million for the full year.

Your period-end loans I think were $44 million, so it implies a pretty steep decline coming in the second half of the year.

Period-end might be down $2 billion looking at your guidance.

So I guess I am trying to reconcile is my math wrong or is your term moderation really implying a pretty steep decline in loans coming in the second half?

I would say, on our outlook, it is based on what we said, a decline in Mortgage Banker Finance, seasonality in Dealer, overall decline in commercial real estate, continuing decline in commercial real estate.

So it is against that backdrop, as well as the backdrop of a not so robust economy out there and the fact that we intend to continue what we have been doing on maintaining our relationship pricing discipline.

Got you.

Okay.

And maybe just -- a few quarters ago, you talked about $100 million in annual profit improvement from revenue and expense initiatives.

How much of that $100 million has now been realized and are you still on track for the full $100 million?

Thanks.

Yes, Steve, we are on track to receive the profit improvement that we had planned for earlier in the year.

We do monitor and measure that at a very granular level every month and so we are comfortable with it.

In terms of timing, we expected it to be spread fairly evenly across the quarters this year and that is still proving to be the case.

Karen, could you share how much of that you have realized already?

You know what?

It is very difficult to track at that kind of level on how much we have realized already.

But it is spread evenly and so you can deduce it from there.

Okay, thanks for taking my questions.

Ken Usdin, Jefferies.

Thanks.

Hey, good morning, Ralph and Karen.

Just two really quick ones on fee income.

I am just wondering can you just talk about what the drivers of fee income growth will be from here.

What areas do you expect to lead that forward?

Sure.

On fee income, we do expect to see continued customer-driven fee income increases as we put in place as part of our profit improvement revenue initiatives this year, a big focus on fees, doing things like higher penetration on cross-sell, ensuring that we actually collect fees and don't waive much in fees, things like that.

So we do expect customer-driven fee increases to continue.

The other part of the noninterest income revenue are things that are variable and we don't necessarily expect to continue for the rest of the year, things like gains on principal and investments and warrants, gains on our auction-rate securities portfolio and the $5 million annual incentive that we received this quarter on our credit card portfolio.

So if I bring that all in together and I wanted to ask you about the other income line, because there is always a lot of the volatility stuff in other.

So what was outside of the bonus gain in there this quarter?

What else was strong in there and kind of how do you expect that line to trend over the course of the year?

We also had strong customer derivative income too, which is part of the customer derivatives that I hadn't mentioned or customer income that I hadn't mentioned.

But in other, what else is in that?

It is really the gain on our principal and investing more in our auction-rate securities.

Okay.

And so when you think about it kind of like the same way people have been asking about NII, do you expect fees to be able to grow from here or is it just that they will be able to grow off of a decent comp from year over year?

We do expect to be able to continue to increase customer-driven fees year over year.

No, I meant from the current quarter.

I mean from the run rate.

And from the current quarter run rate.

Okay, got it.

And then the volatility is just the pluses or minuses underneath that.

Okay, great.

Thanks very much.

Joe Stieven, Stieven Capital.

Good morning, everyone.

This is Steve Covington actually for Joe.

All my questions have been answered.

Congrats on a great quarter.

Thanks.

Okay, thank you.

Josh Levin, Citi.

Good morning.

So you have obviously had very strong C&I loan growth.

When you think about the return on capital, what is the all-in return on capital you're getting on these C&I loans that you are making in the current environment?

We don't disclose the returns that we are getting on each individual loan, but what I will say is that we are very focused on overall relationship returns for each of our customers every time we price any product to them and those overall relationship return hurdles are fairly strong.

Both an economic return on equity, as well as a regulatory return on equity spreads, among other things that are looked at on every credit.

Okay.

And second question is sort of related.

Given how challenging this environment is for all banks, is there a point at which you sort of consider shrinking the bank, returning some capital to shareholders and then you can raise capital at some later point when the cycle ultimately turns?

Is that even on the table at all or not even close to being on the table?

No, I think the focus is, as we see things evolve, we will continue to be an active capital manager in returning the appropriate amount that we believe to our shareholders during any given year.

And as the rules get more finalized, we will be, as we have in the past, more open with what we think the current target for capital is in the market.

Thank you very much.

Mike Mayo, CLSA.

Good morning.

Questions, so on the one hand, you are raising guidance.

You are at the high end of spread revenues, loans are better than you thought.

And on the other hand, you are sounding a note of caution with slowing Mortgage Banking business, National Dealer seasonally slower, continued decline in commercial real estate.

Midwest is slowing into the middle of the year, uncertainty with your clients with the macro situation.

So my question is are you raising guidance really solely due to what you have seen in the first half of the year?

Yes, I would say that our guidance for the rest of the year is driven in large part to the strong performance that we have seen in the first half of this year.

Yes, the issue, as you know very well, is when you look out for the rest of the year, we have the election, we have what is going on in the European sector, as well as the slowing in the Asian sector and the fiscal cliff that is in the paper every day.

And that has caused us to be cautious while, I think Lars said a while ago, we have not really seen an effect at this point and we will still be out there and looking for new business and new relationships as aggressively as we have in the past and making sure that we are leveraging our abilities to the best point for our shareholders.

Are you cautious partly because of what you are seeing from your customers, however?

Are you hearing or seeing this with their behavior?

We are hearing from our customers, but I would say also, and I think we talked about it in the last call, that capacity has gotten to be part of a factual situation where customers are beginning to borrow and having to invest in what I would call the short term in order to meet the demands that they have.

Our customers, as Lars was talking about earlier, are doing very well and have seen a very good turnaround in the last couple of years.

And so at this point, as I mentioned earlier, we have not seen that slowdown, but there is a lot of caution that is being discussed and they are not going to reach to the what I would call more historical investing until they get certainty in what the rules are going to be going forward in the economy.

And the answer to the other question, so are you forecasting loans to be down from period-end second-quarter levels?

We are not going to comment specifically other than what we have said in our guidance, Mike, that we do expect loans to moderate in certain areas like we have talked about.

We do expect continued growth in C&I.

And then lastly, you said you are asset-sensitive; you have always been asset-sensitive.

I look at the decline in yield on the loans down 13 basis points this quarter, the decline in yield on securities down 16 basis points this quarter and decline on deposits by only 1 basis point.

But then I hear your statement saying low rates should not be a further negative for you guys and it is just a little surprising given the decline in the loan securities yields.

You said deposit rates are at a floor.

You almost have a built-in excuse, right?

You can say it to anybody.

Who expected rates to be this low for this long?

And you have always been asset-sensitive so you should be getting hurt by that, but instead you say, well, it shouldn't really be a further negative for us.

It just seems like you are putting your neck out on the line when you really don't need to.

What gives you this kind of surprising confidence?

Yes, I think what you need to take into account is that our overall relative exposure to the rate environment is low and when we say that comment that is what we are referring to.

I just -- I really want to understand this, I want to understand this not only for you, but for the industry.

The pain is already done.

When you say the exposure to the rate environment -- I mean forever Comerica -- for decades, Comerica has been a core deposit filer for commercial loans and it is natural that you are asset-sensitive.

So if rates are low, you can't reprice those core deposits down forever and it sounds like you're at that point now and those loans and securities get repriced lower.

So unless you are hedging or doing something else, and I thought you said that the new yield on securities is 1.8% versus the second quarter was 2.6%.

So right there that is another 80 basis points on the securities portfolio.

So can you give me any other color as to how you get to that conclusion?

So first of all, the securities portfolio, the rate prior quarter was about 2% where we were reinvesting.

So it has come down, but not 80 basis points, closer to 20 to 30 basis points.

What I meant -- the overall yield on securities is 2.6% in the second quarter.

That is correct.

I thought you were talking about the reinvestment rate.

Right.

So that would just drag down your overall yield.

I am just looking -- forecasting -- I know you are not giving guidance on that, but go ahead.

So on our securities portfolio, yes, we do have prepays every quarter.

We do expect those to be $750 million to $900 million per quarter and we are reinvesting those at low rates.

We currently do not have any hedges on our portfolio.

At some point in time, in a better rate environment, we do intend to put hedges back on the portfolio.

We had them in the past.

They have run out at this stage.

So that is the securities portfolio and our hedging strategy.

On the loan side, 85% of our loans are floating-rate and of that, 75% are LIBOR-based and most of that is 30-day LIBOR.

So when we talk about the asset sensitivity on our business, we are talking about the fact that we are mostly floating-rate-exposed, mostly 30-day LIBOR exposed and the fact that the securities portfolio, yes, is reinvesting at lower rates, but we have given you the amounts of those prepaids that we expect going forward.

Last follow-up.

Sorry.

The loan yields keep coming down though.

I mean they are down 13 basis points this last quarter.

Don't you expect that to go down also?

Yes, and we have talked about on loan yields the fact that there is a mix shift in our overall portfolio.

And that mix shift is the higher-yielding commercial real estate loans coming off the books and being replaced by lower-yielding, but better quality loans coming on the books.

And so that is a phenomenon in our overall loan portfolio yield.

At the same time, you have got accretion impacting that yield, which needs to be taken into account and then on loan yields for new and renewed business, we are focused on maintaining spreads everywhere that we can.

And because we are focused on that, the yield in our portfolio will come down less than it would have if we hadn't been very focused on the new and renewed pricing.

All right, thank you.

Ryan Nash, Goldman Sachs.

Yes, all my questions have been asked.

Thank you.

Good.

There are no further questions at this time.

Mr. Babb, do you have any closing remarks?

Well, I would like to thank everyone for being on today and your interest in Comerica.

Thank you very much.

This concludes today's conference call.

You may now disconnect.