Comerica Inc (CMA) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, my name is Monserrat and I will be your conference operator today.

At this time I would like to welcome everyone to the Comerica 2013 earnings conference call.

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

Following the presentation there will be a question-and-answer session.

(Operator Instructions).

I would now like to turn the call over to your host, Ms. Darlene Persons.

Ma'am, you may begin your conference.

Thank you, Monserrat.

Good morning, and welcome to Comerica's second-quarter 2013 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 detail 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 this presentation.

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

Good morning.

Today we reported second-quarter 2013 earnings of $0.76 per share or $143 million compared to $0.70 per share or $134 million for the first quarter of 2013.

Average loan growth, fee income growth, expense control and continued solid credit quality contributed to our 9% increase in earnings per share in the second quarter.

Turning to slide 4 and other highlights, average total loans grew $276 million compared to the first quarter and reflected an increase of $337 million or 1% in commercial loans.

Our middle-market business lines across all three of our major geographies were the key contributor to our loan growth in the second quarter.

Overall customers remain cautious, but relatively more positive in this slow-growing economy.

Average total deposits increased $756 million or 1% in the second quarter, primarily reflecting an increase of $570 million or 3% in non-interest-bearing deposits.

Net interest income remained relatively stable in the second quarter; declining $2 million as the contribution from an additional day in the quarter and loan growth were offset by the decline in accretion on the acquired portfolio and the impact from continued shifting loan portfolio dynamics.

The net interest margin decreased 5 basis points primarily due to lower accretion on the acquired loan portfolio and lower loan yields due to the continued mix shift in the portfolio.

Credit quality was solid in the second quarter with net charge-offs of 15 basis points, which is the lowest level since the first quarter of 2007.

Nonaccrual loans also decreased as did watch list loans.

These positive metrics are indicative of our strong credit culture and have resulted in a $3 million decrease in the provision for credit losses.

Noninterest income increased $8 million in the second quarter to $208 million reflecting broad-based growth in several categories as well as an annual incentive received from our third-party credit card provider.

Noninterest expenses of $416 million in the second quarter were unchanged from the first quarter, reflecting our continued tight expense controls.

Our capital position continues to be a source of strength to support our growth.

We repurchased 1.9 million shares in the second quarter under our share repurchase program and, combined with dividends, returned 72% of second-quarter net income to shareholders.

On July 2 the Federal Reserve approved its final version of the Basel III capital rules.

We estimate that our June 30, 2013 Basel III Tier 1 common ratio is 10.1% on a fully phased-in basis.

This is well in excess of the minimum requirement to be considered well-capitalized and assumes we elect to exclude most elements of accumulated other comprehensive income.

Turning to slide 5 and a look at our footprint, we are well-positioned in our primary markets where our relationship-based approach and experience combine to make a positive difference for our customers.

Our strategy is to have balance between our markets and we are making meaningful progress.

Texas continues to be a growth leader for the US economy with strong high-tech and energy sectors.

Job growth is well above the US average on a percent change year-over-year basis.

We continue to leverage our standing in Texas as the largest US commercial bank headquartered in the state.

Average loans in Texas were up 7% year over year.

California residential real estate markets are quickly improving and home prices are increasing in all major metropolitan areas.

Many homeowners are experiencing increased wealth providing broad-based support to the state's economy.

Job growth in California is above the US average on a percent change year-over-year basis.

Average loans in California were up 10% year over year and average deposits were up 4%.

Increased auto production and sales have strengthened the Michigan economy.

June auto sales reached a 15.9 million unit rate, the highest level in over five years.

Residential real estate markets in Michigan are stabilizing statewide and home prices are increasing.

And according to the National Association of Manufacturers, Michigan is the top state for manufacturing job creation from December 2009 to March 2013.

Texas ranked second.

Average loans in Michigan were relatively stable year over year while deposits grew 5%.

In closing, we remain focused on growing revenue in the slowly expanding economy.

Our relationship strategy is working well in this low rate environment as evidenced by growth of loans, deposits and fee income.

Also contributing to our strong shareholder payout were our tight expense management and solid credit performance.

And now we'll turn the call over to Karen.

Thank you, Ralph, and good morning.

Turning to slide 6, as Ralph mentioned, total average loan growth was $276 million or 1% quarter over quarter, reflecting a continued increase in commercial loans and a slowing of the decline in commercial real estate loans.

As you can see, positive trends continued with period end loans greater than the average in the second quarter.

Period end loans increased $392 million from the end of the first quarter to $45.5 billion.

By line of business middle-market loans across all three major geographies were a key contributor to our loan growth in the second quarter.

In fact, average loans grew $250 million in our national dealer business and $213 million in our general middle-market business.

In looking at trends, loans in our general middle-market business have increased five of the past six quarters with the largest increases in the last two quarters.

Somewhat offsetting that growth, we did have a $270 million decline in corporate banking, which is one of the most competitive segments and reflects our desire to maintain our pricing discipline.

Loan yields, shown in the yellow diamonds, declined 7 basis points in the quarter reflecting the expected decline in purchased loan accretion as well as the continued mix shift of our portfolio.

Total loan commitments increased almost $1 billion as of June 30, with commitments increasing in all major markets and nearly all business lines.

Also line utilization increased to 48.2% from 47.7% at the end of the first quarter.

Finally, our loan pipeline increased to the highest level since the first quarter of 2012.

In fact, it is more than 10% higher than last quarter with increases noted in most business lines.

Continuing with loans on slide 7, by type as opposed to line of business, average commercial loans were up $337 million and were the main driver of our loan growth.

On the top portion of the bar mortgage banker finance, which provides mortgage warehouse lines, saw average loans increase almost $100 million this past quarter.

As we have noted before, mortgage banker outstandings can be variable and we expect that they will moderate as mortgage refinance volumes slow in line with the Mortgage Bankers Association forecast.

The pace of decline in commercial real estate loans continues to slow.

In fact, as depicted in the chart on the right, the combined commercial mortgage and real estate construction average loans decreased $67 million, down from a decrease of $106 million in the first quarter and $241 million in the fourth quarter of last year.

Breaking the bar into pieces, developer commercial real estate has stabilized at $3 billion and is showing signs that it is starting to grow.

In fact, commitments to developers have increased for the past six quarters and construction loans grew for the third consecutive quarter, up $102 million in the second quarter with demand improving.

Offsetting that growth, projects are moving quickly to the permanent long-term financing market upon completion before the construction loan can be converted to a mini perm mortgage on our books.

On the other hand, owner occupied real estate, which makes up 72% of our commercial real estate exposure, declined $131 million in the quarter.

These real estate loans for the factories, warehouses and offices of our commercial customers, continue to be impacted by amortization and refinancings to the long-term market.

Our customers are growing and performing well but remain cautious about expanding their facilities in the current economic environment.

As shown on slide 8, our total average deposits increased $756 million or 1% to $51.4 billion.

Non-interest-bearing deposits grew $570 million while interest-bearing deposits increased $186 million.

Deposit pricing declined 2 basis points to 19 basis points, depicted in the yellow diamonds on the slide, as higher rate CDs matured and we have lowered rates on select products.

Average deposits in our financial services division, which provides services to title and escrow companies, increased $228 million after contracting about $700 million in the first quarter.

And deposits in our corporate banking business increased almost $400 million due to tax-related seasonality.

The same seasonality also impacted period end deposits which decreased $862 million.

Slide 9 provides details on our securities portfolio, which primarily consists of highly liquid, highly rated mortgage-backed securities.

The MBS portfolio averaged $9.4 billion in the second quarter, down $235 million from the first quarter as we purposefully slowed the reinvestment of prepayments in April and May due to the unattractive low yields that were available.

At period end the balance of the MBS portfolio was $9.3 billion.

The decline was mainly due to the slowing of reinvestments as well as a decline in the fair value of the portfolio as a result of rising rates.

The net unrealized gain on the portfolio was $10 million, a decrease of $219 million pre-tax or $139 million after-tax and was recorded through accumulated other comprehensive income, or AOCI.

With the rise in long rates and current rate expectations we believe the pace of prepaids will slow, with $500 million to $600 million in prepaids expected in the third quarter.

Consequently, at 4.1 years, the estimated duration of the portfolio increased from 3.4 years at the end of the first quarter.

However, the expected duration under a 200 basis point rate shock remained relatively constant at about five years as a result of the composition of our portfolio and the fact that pre-paid speeds should stabilize.

We will continue to manage a portfolio dynamically taking into account many factors, including not only our loan and deposit expectations and the overall yields available, but also the duration and mark-to-market impact on our portfolio in a rising rate environment.

Turning to slide 10, our net interest income was relatively stable declining $2 million in the second quarter.

We've summarized in the table on the right the major moving pieces.

One additional day in the quarter added $4 million to net interest income.

Loan growth contributed $2 million and helped offset the effects of the low rate environment.

Lower funding costs, including debt maturities in the second quarter, as well as lower deposit costs, added $1 million and provided a 1 basis point increase to the margin.

Offsetting these positive contributions was a $4 million decline in accretion of the purchase discount on the acquired loan portfolio, which had a 3 basis point impact on the margin.

We have about $38 million of total accretion remaining to be realized on the acquired portfolio.

Accretion should continue to trend downward each quarter and we expect to recognize about $25 million to $30 million in 2013.

While we remain focused on holding loan spreads for new and renewed credit facilities, there are still mix shift dynamics impacting the portfolio.

These include higher-yielding commercial mortgage loans shrinking while lower yielding C&I loans are growing and older fixed-rate loans are maturing.

In addition, 30-day LIBOR declined over half a basis point in the quarter.

As a reminder, approximately 85% of our loans are floating rate of which 75% are LIBOR based, predominately 30-day LIBOR.

All of these factors combined had a $4 million or 2 basis point impact on the net interest margin.

Dynamics in the securities portfolio, including prepayments that were reinvested at lower yields as well as a lower average balance, had a $1 million or less than 1 basis point negative impact.

And finally, average excess liquidity increased almost $300 million, decreasing the net interest margin by 1 basis point.

We believe our assets sensitive balance sheet remains well-positioned for rising rates.

Based on our historical experience and asset liability model, we believe a 200 basis point increase in rates over a one-year period equivalent to 100 basis points on average would result in more than a 10% increase in net interest income of approximately $185 million.

Turning to the credit picture on slide 11, credit quality continued to be strong in the second quarter.

Net charge-offs decreased to $17 million or 15 basis points of average loans.

The charts on the right show our watch list loans declined $224 million and our nonperforming loans declined $44 million.

With the decline in nonperforming loans the allowance to NPL's increased to 130% and the $613 million allowance covers our trailing 12-month net charge-offs over five times, as you can see on the lower left chart.

As a result of the continued positive trends in our credit metrics our provision for credit losses declined $3 million from the first quarter to $13 million.

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

They are reflected in our second-quarter results and were not significant.

Slide 12 outlines the $8 million increase in noninterest income.

Second-quarter customer driven fees increased $4 million due to broad-based increases across most customer driven fee income categories, including a $3 million increase in customer derivative income.

This was partially offset by a $2 million decrease in service charges on deposit accounts from the seasonally high first-quarter levels.

Noncustomer-related categories increased $4 million to $20 million primarily due to a $6 million annual incentive received from our third-party credit card provider.

This was partially offset by a securities loss of $2 million.

Turning to slide 13, we continue to maintain tight expense control which resulted in stable expenses in the second quarter.

Salaries expense decreased $6 million reflecting a slightly smaller workforce, seasonally higher stock compensation in the first quarter, and decreases in incentive compensation.

This was partially offset by the impact of merit increases and one additional day in the quarter.

Offsetting the decline in salary expense in the second quarter, we had a $4 million write-down on other foreclosed assets and a $2 million increase in outside processing fees, primarily due to increased activity tied to revenue growth and the outsourcing of certain functions.

Going forward there are three extra days in the second half of the year which will impact our salary expense.

In addition, we expect to incur additional salary, software and consulting expenses related to regulatory compliance, predominately stress testing, particularly as we migrate to becoming a full CCAR bank this year.

In addition, occupancy expenses are typically seasonally higher in the second half of the year.

Moving to slide 14 and shareholder payout, in the second quarter we repurchased 1.9 million shares under our share repurchase program.

Combined with the dividends paid we returned 72% of net income to our shareholders in the second quarter.

We believe our shareholder payout is a reflection of our strong capital position.

Shares repurchased were mostly offset by the impact of share dilution from warrants and employee options resulting from the increase in our stock price during the quarter.

We are pleased that the Basel III capital rules have been finalized.

We believe we are already well above the required minimum to be considered well-capitalized with an estimated Basel III Tier 1 common capital ratio of 10.1% at June 30 on a fully phased-in basis, assuming we elect to exclude the impact of AOCI.

Finally, turning to slide 15 and our outlook, our expectations for full-year 2013 compared to full-year 2012 remain unchanged from what we outlined on our call in April, with the exception of provision.

We are now expecting the provision and net charge-offs to decline from last year's levels, with both these levels in the second half of the year similar to the first half.

Based on current trends we believe we should see continued improvement in credit quality partially offset by loan growth.

In this slow-growing economy we will continue to focus on the things we can control -- allocating resources to our faster growing markets and industry segments; driving cross sell opportunities; and carefully managing expenses.

In closing, we are pleased with our loan deposit and fee income growth, tight expense management, solid credit performance and strong shareholder payouts.

We remain keenly focused on delivering a growing bottom line.

Now we are happy to answer your questions.

(Operator Instructions).

John Pancari, Evercore Partners.

I want to see if you can give us some color on loan pricing -- what you are seeing in your markets that you are seeing any ability to price better given the steepness in the curve (inaudible).

Okay, Lars?

Yes, John, so as you know, we typically price with the shorter end of the yield curve, as Karen mentioned earlier.

So as you have seen a steepening in the yield curve, that hasn't had as much kind of impact on us.

Obviously the hiccup in the leveraged loan market did move I think some activity to the shorter end of the yield curve which helps senior bank debt.

But overall I don't think the interest rate shifts have really had any significant impact on us.

And as you know, LIBOR really hasn't significantly changed.

So we are staying very focused on our existing strategy.

We haven't changed our pricing strategy at all, John.

Okay.

Are you seeing any change in the competitiveness of some of your competing banks on that front at all or any room to improve pricing just given any changes in the competitive landscape?

Well, I would say that we have continued to see a very aggressive marketplace in terms of pricing.

And if I look back a couple quarters ago to today I would say that it has gotten relatively more aggressive.

We do see durations getting stretched on a number of facilities and that's pretty active across a number of our businesses.

So, we are continuing to just focus on our discipline and our product and what we do and feel very comfortable.

We are getting the kinds of returns that are attractive to our shareholders and we're going to stick to our guns with that, John.

But I don't see it as an opportunity for us to significantly increase spreads or yields, but I do think that we are very well positioned with the businesses we have, the expertise we have, the markets that we have to continue to deliver.

And as you know, our loan spreads have largely held here over the last year.

Okay.

And then lastly, Karen, you are probably going to shoot me down on this, but on the margin I want to see if we can get some just additional color on your thoughts there on the margin.

Could we see a bottoming in the margin over the next couple quarters here?

And can you talk about the magnitude of compression that we might see?

I laugh, John, because you are right.

In terms of the margin, as you know, it is extremely difficult to predict.

And the key variable there is excess liquidity, which can bounce the margin up and down and just very difficult for us to predict.

I would say on net interest income, which does drive the margin, that you will continue to see a decline in the accretion benefit.

We've mentioned that we expect to see $25 million to $30 million this year; we've seen $18 million so far.

That means we will continue to see a decline the next two quarters and that will impact the margin.

We do expect loan growth to offset the decline that we've seen on our portfolio loan yields.

We do expect that to continue but eventually wane.

And it is just difficult to predict eventually when that will turn around.

Okay, thank you.

Steven Alexopoulos, JPMorgan.

I wanted to start -- regarding the slowdown of the reinvestment of securities in 2Q, where are you able to reinvest today and have you started reinvesting that cash?

Yes, Steve, we have started to reinvest.

When rates did rise last month we did move back in the market to purchase securities.

Today we are seeing yields in the [220 to 250] range.

And what duration would that be, Karen?

Similar duration to what we have got on the portfolio.

Okay.

And I'm curious, what impact has the stock market -- [it's done so well] and the yield curve is steepening.

What impact has that had on confidence, if any, of your business customers?

Have you seen anything?

Lars, do you want to comment on that?

Sure, yes.

Steven, frankly we haven't really seen a significant change in terms of I would say the wealth effect in terms of business owners.

Where I think we've seen more activity there would probably be in our wealth business.

You may have noticed that our wealth loan portfolio had nice growth of almost $80 million; fiduciary fees, asset management fees continue to grow.

Part of that is frankly we have a -- continue to enhance our collaboration, cross sell across our platform and continue to work with those customers.

Because if you think about it, many of our middle-market companies that are privately owned, they are feeling better.

Their companies are deleveraging, they are creating liquidity and they are thinking about exit plans and that is where we bring expertise to the table.

So I think that that's one of the areas where we have been able to really benefit and I think that has shown up in our numbers.

But to answer your question specifically for business customers that we would see say in middle-market banking, no, I haven't seen that.

I think you are still seeing a lot of uncertainty out there, just to add what Lars was saying, and people are waiting and watching to see what is going to happen.

And they are doing quite well, [plus we're] under current operations, but they just don't want to invest until they know what the outlook is going to be including the many uncertainties that are there on particular items that will affect their earnings.

Yes, I would say cautious optimism is probably a pretty good description of the way they are feeling, but still dampened investment at this point.

Okay, thanks, that's helpful.

Karen, just a final one for you.

Can help us think about the dollars of incremental expense related to the stress test now that you will be a CCAR bank?

Yes, we will have dollars related to consulting expenses, additional headcount and some software expenses.

I'm not giving out the exact dollar, but I will say that related to increased regulatory expenses we will be spending about $15 million annually a year just related to regulatory expenses.

Some of that is already in our run rate but not all of it.

Okay, thanks for the color.

Ken Zerbe, Morgan Stanley.

First question, just in terms of loan growth, obviously we see your guidance that it's going to be slower, that's fine.

My question though is how should we think about the interplay between mortgage banker, which has actually held up pretty well this quarter.

And I guess my suspicion is, just given the rise in rates, given the slowdown in refis, that actually could fall pretty materially in the back half of the year versus growth in the rest of the portfolio.

Lars?

Yes, absolutely, Ken.

Yes, obviously with a rising interest rate environment on mortgage rates -- I think 30-year is up now 4.5%.

So that is clearly going to have, we believe, an impact.

The Mortgage Banking Association is -- they are projecting a 39% decline in mortgage apps in the second half of the year.

And clearly we think that could help -- would moderate some of our outstandings.

I would underscore a couple things though, ken, that I think are important.

Our business continues to become more granular.

We continue to add more mortgage companies, which I think with those expanded facilities and commitments that we're seeing that gives us a little bit more kind of insulation on the downside.

Also, if you look at of the volumes that we are doing today, if you go back a couple quarters, our purchase volumes were 30%.

Last quarter, and I'm talking about the first quarter, they were 50%; in the second quarter they were 60%.

That general migration towards a purchase volume concentration I think helps us, positions us well.

We have very strong relationships with some large national builders that are giving us some good volume.

And in addition to it, we are in some good growth markets like Texas where the housing market continues to expand and we expect to gain more of the purchase volume.

So, yes, could we see some moderation?

I think that's a good observation.

But I think we're going to manage the business to position ourselves for the long haul.

We've got great customers, some of the best cross sell we have in the bank, certainly in the Business Bank, in that particular business.

Understood.

And then when we think about the timing of the potential decline, I mean is there enough carryover business from second quarter that locked in at the lower rates?

Or should we actually see a pretty steep decline starting fairly soon, meaning third quarter and then maybe stable in forth?

Yes, I would say that that would be very difficult to tell.

There are a number of dynamics that actually impact the outstandings on these facilities including the investor and the investor market.

So I really couldn't give you a number there that would be helpful.

No, understood.

But even with that decline in mind, you guys still believe that slow but positive total loan growth is achievable in third and fourth quarter, correct?

We have not changed our loan growth outlook, that is correct.

Great.

Thank you very much.

Erika Penala, Bank of America-Merrill Lynch.

I just wanted to follow-up on some of John's questions.

I think -- or actually my first follow-up question is on the liquidity side, Karen, I appreciate that you have started to reinvest into this higher loan rate environment.

How should we think about the proper level of liquidity for the Bank going forward?

We are positioned well with liquidity for the rising loan growth environment.

We like that position because we do want to ultimately reinvest in loans.

From an overall liquidity perspective we are feeling very comfortable.

We currently have a little bit less than $3 billion on deposit with the Fed and that moves up and down depending on our overall balance sheet position.

I don't know if you need more color, Erika?

I guess I'm just wondering -- if I look at average balances your cash with the Fed is about 7% of earning assets.

If loan growth is normalizing and there are more reinvestment opportunities, can that level go down (multiple speakers) margin?

It certainly could go down.

One of the things that we need to be mindful of, though, is the potential new rules coming out or new rules coming out on liquidity.

Those have been proposed by the Basel committee but have not yet been written in the United States.

So we will begin paying close attention to those and making sure that we are ultimately compliant with them.

I think the thing I would add to that as well, as things pick up and people get more positive you will see that excess liquidity go down because people will begin to use it again to invest for the future, not only the consumer but also our business customers.

I see.

And just switching topics a little bit, it seems like given your reinvestment rate on the securities book we should expect that we've perhaps hit a bottom on your bond yield.

But could you remind us exactly where you are originating new loans in both corporate banking and middle market in terms of your spread to LIBOR?

No, we don't give the origination yields out.

But you should know that we are very focused on holding or increasing spreads everywhere that we can on new and renewed loans.

It is something that we track every month and we have been successful.

Erika, I would just reinforce that -- I know you know this, but we take very much of a relationship approach.

We are not just looking at the individual credit; we are looking at the entire relationship and what they are really bringing to Comerica and the ability for that customer relationship to generate shareholder value.

So that is -- obviously credit is a key component of it, but we really take a relationship type approach when evaluating our customers.

Understood.

And just one more question before I step out of the queue.

Karen, have you given us an update on under the Basel III proposed rules what your liquidity coverage ratio would be?

We have not given that because the rules are really just proposed at the Basel level and still have a long way to go, they have yet to be written in the United States.

We and many other banks, if the rules are passed as drafted under Basel, would need to add liquidity.

And it is something that we are very focused on, but we are waiting for rules to come in the United States.

Got it.

Thank you.

Matt O'Connor, Deutsche Bank.

Good morning, this is (multiple speakers) [Rob Placid] on Matt's team.

First question, as it relates to the decline in period end DDA balances this quarter, you pointed to some seasonality.

I guess what specifically caused the seasonal drop this quarter?

Lars?

They were mainly tax-related seasonality due to companies building up liquidity in order to pay certain tax bills.

And that is why you saw a decline at period end too.

Okay.

And then looking at expenses as it relates to your comments for personnel and occupancy expenses in the second half of the year.

I was wondering if you could talk to the magnitude of the increase in those categories?

And then is it safe to say that the level of expenses should drift higher versus the $416 million level this quarter?

Yes, we do expect expenses to be slightly higher and that is due to three additional days in the second half than we've had in the first half, as well as increased headcount mostly related to stress tests.

And the fact that our occupancy expenses are seasonally higher in the second half than they are in the first half.

Okay, thanks.

Craig Siegenthaler, Credit Suisse.

Just a quick question on the $80 million premium amortization balance.

What was the quarterly run rate that impacted net interest income in the second quarter?

Can you repeat your question, please?

Yes, on the premium amortization, I was wondering what the second-quarter impact to that was, just thinking about that on a go-forward basis as durations could potentially extend.

Yes, so, about $9 million.

Got it.

And does the duration of the premium amortization sort of match the available-for-sale securities portfolio?

Well, we look at premium amortization every quarter.

It is something that, as interest rates have increased and the duration on our portfolio extends, we expect could increase a little bit -- if that answers your question.

No, it does.

And just one follow-up.

What was the period ending mortgage banker balance?

And if you don't have that, maybe you can help us think about what was the quarterly change in the mortgage banker balance on a period end basis, not an average basis?

Okay, yes, so, mortgage banking finance on a period end basis was up $374 million, that was against an average of $78 million.

One of the things that I would remind you is that oftentimes the ending period balances do spike.

Typically mortgage companies build up their inventory throughout the month and at the end of the quarter would then sell off to investors.

So the change was $374 million and the ending balance for mortgage banker finance was $2.4 billion.

Great.

Guys, thanks for taking my questions.

Jennifer Demba, SunTrust Robinson.

A question on the decline in corporate banking loan balances in the second quarter.

You indicated it was largely competitively driven.

I was wondering if could give us some more color on that and is it a trend that you expect to continue in that bucket?

Lars?

Okay.

Well, as I have shared on previous conference calls, as we look at the competitive landscape from a pricing structure including duration of credit, that as you go to the upper segments, clearly corporate banking, that is where we have seen most competition, frankly.

And as we look back over the past quarter, it's been a tough market; it's been very, very aggressive.

There is clearly excess liquidity.

If you look at some of the syndicated credit market there is a significant oversubscription in those facilities.

And frankly we are a Company that is just not going to overreach.

We are not going to trade off credit quality nor relationship pricing for volume.

And so, at times you've got to make a difficult short-term decision on some credits.

But I think for the long term we are very well-positioned.

We've got some great customers in both US banking and in international.

And I think from a long-term perspective it's a great growth business for us.

But in the short run, it is challenging, we aren't not going to overreach; this is not the time to do that.

What do you think will offset that largely, Lars?

Is it middle-market and dealer?

Yes, well, we are very fortunate that we have a diversified geography between Michigan, Texas, California with unique businesses even embedded in those markets, whether it is automotive, energy, environmental services, technology and life sciences.

If you think about some of those businesses from a long-term perspective, they look very attractive.

I think energy, technology and life sciences, you saw growth in environmental services this quarter, our small business had its fourth consecutive quarter of growth, Wealth Management grew.

And we continue to have a very stable growth in just kind of our general middle-market, what I would say is non-industry-specific.

And you put on top of all of that what we are beginning to see is this turn in kind of our commercial real estate line of business.

The story looks pretty attractive for the long haul I think for us.

Thank you very much.

Ken Usdin, Jeffries.

A couple more questions on loans.

Can you just remind us of the typical seasonal pattern of dealer floor plan and just how underlying trends are going in that business?

Lars?

Sure.

Well, typically what you would see -- if you look at a calendar over the years you would see that inventories would build as you headed earlier in the year in the spring and then you would see a very active sales season as you headed through the summer.

That is both that frankly the consumers are very active in buying, and also you have an interest in our dealers in clearing the past year's model and making room for the new year model.

So that is the typical seasonality that you would see in the business.

But we didn't see that last year.

So you got to keep that in mind.

Now the second part of your question was about utilization rates.

Utilization rates today are at near record levels for us.

And I think for the industry, which is a reflection of the strength of the auto industry.

You saw June's numbers come out and annualized sales were at 15.9 million units, which I think is very positive.

One of the things that I keep a very close eye on as those inventories build is how rapidly they are turning.

And what we are seeing is inventories turn in that high 50- to a low 60-day kind of range, which over a long period of time is a very healthy number.

So I like our business, I like the way that we're positioned and our inventory is turning.

In our business our dealers are doing very, very well.

One note I would point out is our margins on new models and used are getting compressed though.

It is a very competitive marketplace out there.

Yes.

And my second question is regarding -- on the commercial real estate business I'm just wondering how much more run off you foresee.

I know you point out in the deck that the rate of decline continues to slow, but we are still down another $300 million when I look at that total commercial loan number at $9 billion.

So at what point do we get to stabilization there?

Yes, so, I think it's important to break apart the total commercial loan portfolio because you both have owner occupied real estate, which frankly if you think about a big part of our portfolio, middle-market banking, these are companies that are delivering, they are credit facilities owner occupied or amortizing; maybe they're even paying them off.

And the financing to those same companies is showing up in the expansion of other financing in middle-market banking like revolving credit facilities, import/export facilities.

So that could continue to decline, we just really don't know.

I think as owner occupied, as middle-market companies begin to reinvest in their facilities and expand we will see that grow.

The other half of that commercial real estate portfolio is really the professional developer.

And this is what we oftentimes talk about that is very focused on oftentimes multi-family, it's urban market oriented, it's the construction portfolio that Karen referenced earlier as well as our national developer business that does business with some of the best and biggest homebuilders in the country as well as REITs.

And that part of our business we're actually seeing grow.

So I think that that is very positive for us.

And I would expect our commercial real estate professional developer business to continue to grow as we go down the road.

We have very good pipelines in that business.

Okay, great.

And last quick one, just on, Ralph, your earlier comment about companies hopefully using their deposit at some point to invest.

Karen mentioned that a lot of this quarter's deposit outflows were more seasonal but I'm just wondering, underneath the surface are you seeing any suggestion that companies are in fact either drawing down deposits to invest or contemplating drawing down deposits to invest versus taking out the incremental loan?

I think we have seen it in some businesses.

I wouldn't call it a trend, but it has at least shown a glimmer of hope that investment is starting.

Whether it is a trend or not we just don't know.

I think that's right.

Where you primarily have seen a reduction in deposit balances has been in general middle-market banking.

And frankly that is when we are where we are seeing good stable loan growth.

So I think a number of those companies are putting that liquidity to work.

Thanks very much, everyone.

Brett Rabatin, Stern Agee.

Was just hoping to follow up on capital and the provision.

From a capital perspective was wondering now that we are getting closer to having full clarity on ratios, what do you think about capital and sort of where things might normalize over the next few years?

And then secondly, just wanted to ask about the provision and thinking about the guidance for a lower provision for the year and the back half of the year assuming loan growth is moderate or slow, as you indicated, that the provision level might be similar than it was -- relative to 2Q anyway?

Karen, do you want to talk about capital?

Yes, sure.

On capital we are feeling good that now that the final rules are out that our capital clearly complies with the rules if they were fully phased in and they don't fully phase in until 2019.

So we remain very well capitalized.

In terms of where things should normalize, we expect to continue to be well capitalized and as our capital does grow we expect to hopefully continue to pay back to shareholders.

Does that answer your --?

John, do you want to talk about provision?

Sure, I would be glad to.

I think it is helpful to look at the major components of the provision to get a more full understanding of this.

So at 15 basis points net charge-offs are well within the normal ranges and we expect them to be similar for the rest of the year.

We have made great progress in reducing NPLs, but they should still trend a little lower at $471 million at the end of the second quarter versus $515 million at the end of the first.

We do expect loan growth to partially offset some of this improvement.

Which leads us to the bottom line, that we expect net charge-offs and provision to look very similar in the second half of the year to our actual results in the first half.

Okay.

Maybe a better way to ask it is just at the relative level, assuming you are growing -- where the reserve is today even though credit is improving, would that provision not increase a little bit in the back half of the year relative to the second quarter?

Very difficult to predict how much loan growth we are going to see.

So we are pretty comfortable with the guidance that we've instituted today.

Okay, great.

Fair enough.

Thanks for all the color.

Jon Arfstrom, RBC Capital Markets.

Just a bigger picture loan growth question and then one follow-up.

Just a question on the period end loans being a bit higher, even the mortgage banker financed.

And then the large increase in the pipeline that you discussed, is there anything specific going on there?

What's the driver?

Lars?

Yes, there, Jon, I don't think there is anything that is specific on pretty much what you pointed out.

It is what you would typically see.

Mortgage banking finance and national dealer where the two big drivers for the increase at the end of the quarter.

Other than that I would say it was business as usual.

And then the pipeline?

Yes, the pipeline was up 10%, it was very broad-based in terms of the growth.

I think that that was very positive.

In fact, it was kind of a reverse correlation number of businesses that may be did not grow for the quarter.

You saw some pretty good pickups in the pipeline, so I think that that is a real positive.

International finance was up, technology and life sciences, national dealer services, entertainment, energy, our middle-market businesses in Texas and Michigan as well as US banking.

So it was very broad-based and we are encouraged with that.

If you put that back against the fact that we increased our commitments for the whole portfolio by almost $1 billion in linked quarter, I think that that paints a pretty positive picture though against what is going to be a competitive environment.

Okay.

And then just -- this may be subtle, but probably monumental from my point of view, in that Michigan is no longer your largest loan market for the first time ever, I believe.

How is the Michigan pipeline?

You seem pretty optimistic in terms of your prepared comments, but the balances have been a little bit flat.

Curious how the pipeline is and how you view the loan growth potential of that market?

Michigan is a critical market for us long term.

We have very high market shares, great long-term kind of relationships.

And as you noted, in terms of total loan growth we did not grow in Michigan for the quarter.

But in commercial loan growth we did grow for the quarter.

The automotive industry is certainly positively impacting that.

So I feel great about the Michigan market.

We've got some great bankers, great relationships and -- but it's clearly closely tied to the automotive industry.

So it is -- continues to be a very large middle-market business though for Comerica.

and is going to continue to be important point of growth for us I think in the long haul.

It's just not likely to have the same growth rates that you would find in Texas.

Okay, great, thank you.

Steve Scinicariello, UBS.

Just a real quick question on the loan portfolio mix shift dynamics.

Just kind of curious, given some of the turning that you are starting to see in the commercial real estate segments, do necessarily need higher rates for that kind of headwind to turn into a tailwind?

Or I'm just kind of curious how you are thinking about those portfolio dynamics going forward?

Yes, there are several things that are going on in the portfolio dynamics that we've talked about before.

We've got -- although we only have 15% of our portfolio in fixed-rate loans, those do continue to mature.

And we do have the mix shift that you talked about with commercial real estate continuing to come down and C&I continuing to come up.

That will (technical difficulty) turn; as it turns it will have a positive impact on both our loan growth and on our net interest income.

Got you.

And so -- and just given some of the trends that you are seeing, Lars, do you feel that is something that might be able to happen in this year or is it something maybe farther out?

Well, frankly in terms of the loan growth in our commercial real estate line of business, I think a longer, a higher longer-term rate is going to benefit us.

You are going to see less activity of our developers moving their balances to the long-term financing market.

And I think that is a real plus for us.

It is interesting, cap rates have not moved at all, they continue to be very low.

So it continues to be a very active -- active market.

And I think we're well-positioned in the right markets.

Got you, got you.

And then lastly for me, just on that jump in the pipeline, definitely good to see that.

And would you characterize the pipeline still about two-thirds coming from new customers still?

Yes, it is actually declined just a little bit on new customers just slightly.

But I would say largely it is still slanted towards new customer relationships.

But as I have cautioned in the past, just looking at the percentage on pipelines of new versus existing is a little tricky, because when you look at the pull through of the pipeline it tends to be at much higher multiples with existing customers versus new, and I'm talking multiples of five times more likely to close business with an existing customer than with a new.

But not a material shift, just slight.

Got it.

Thanks so much.

Ryan Nash, Goldman Sachs.

Just a couple of quick follow-ups.

First, Karen, you mentioned that premium amortization was $9 million in the quarter.

Can you give us the quarter-over-quarter comparison?

What was it the quarter prior?

We were about the same quarter to quarter.

Great.

And in terms of your sensitivity to higher rates, I think you talked about roughly $185 million from a 200 basis point uptick.

Can you just remind us, first, what are some of the underlying assumptions for that?

And I know you had a slide that you put out during the quarter where you showed it could vary from [145 to 220] depending on what happens with some of the underlying assumptions.

And given that we saw a 4% deposit outflow this quarter, while I understand some of that is seasonal, how sensitive are we to further outflows of non-interest-bearing deposits?

Yes, okay.

Our rate sensitivity, as you know, is dynamic and does change.

It has moved up over the last few quarters because we have greater non-interest-bearing deposits and greater amounts of floating rate loans.

And I did share that chart sort of intra-quarter that showed the dynamics and the movement.

On the sensitivities, yes, our interest rate sensitivity is based on the assumptions we put into it.

Some of the key assumptions in that number are that we do expect deposits to decline, we do expect to have a mix shift in our deposits from non-interest-bearing to interest-bearing as customers search for yield.

So we do expect continued loan growth.

We expect our securities portfolio to remain relatively stable, but we do expect our excess liquidity to decline but still remain in an excess liquidity position.

When we showed the rate sensitivity intra-quarter we did show that that interest rate sensitivity could range depending on different deposits and outflows and different loan growth.

And those sensitivities yielded somewhere between $150 million increase to over $200 million increase depending on the various assumptions that we put in.

And can you just give us a sense of what you are assuming for competition in those underlying assumptions?

I mean I would assume that if we are to see a pickup we could see further raising of standards and competition potentially compress spreads.

But I would just be interested to hear your underlying assumption.

Yes, we do assume that rates remain fairly steady from where they are today.

There would be a little bit of competition built into that and so a little bit of pressure but not a lot.

Okay, and if I could just get one quick follow-up.

How much did loan utilization change X the warehouse?

X the warehouse?

Okay, yes, if you actually take out the warehouse we were -- we were relatively stable.

Great, thanks for taking my questions.

Michael Rose, Raymond James.

I'm just [wanting] to get a sense on the employee count and kind of where we see that bottoming, where are you still trimming and in what areas are you hiring and plan to hire going forward?

Thanks.

Yes, our employee count is now just a little over -- a little under 9,000 employees versus slightly over last quarter.

So there was a small change in employee count.

We are hiring, as we mentioned, to help us work on the stress test and capital plan requirements at the same time as we see normal attrition and we tried to be focused on being as efficient as possible everywhere that we can.

Great, thank you.

And we are very focused on our growing markets and making sure that in our appropriate products we have the necessary expertise and people in place to capitalize on it.

Ralph, an example of that would be we are continuing to invest in our technology and life sciences office.

We opened a new office in Houston, we have a new one opening in New York.

We're continuing to invest in our general middle-market businesses and core markets.

Right.

Brian Foran, Autonomous.

I guess just coming back to this capital question and what is the right level to run at long term.

When I think about the Basel III progression, we kind of all came to grips a couple years ago with the minimums, and then this kind of buffer on the buffer concept emerged where banks would have to carry an extra 50 bps or so for mostly AOCI risk.

With the AOCI opt out, I realize you're not giving the spot level you are going to run down to, but with AOCI opt out do you kind of get to throw away that buffer on the buffer concept?

Or are there enough other things like the stress test uncertainty every year that you feel like, even without AOCI to worry about, it makes sense to carry an extra buffer?

I think you will have an extra buffer.

The question is how much for us longer-term as an individual bank.

And we need some time to look at that as it phases in.

And I think we will eventually get back to where we were before the downturn where we looked at and actually shared what our -- where we wanted to be from a capital standpoint so that investors understood what we were thinking about for payouts longer-term.

Got it.

That was it for me, thanks.

Brian Klock, Keefe, Bruyette, Woods.

And really just -- maybe just a quick follow-up on capital -- I think we have asked you every question we possibly can in the past hour.

So maybe I guess, Karen and Ralph, thinking about the buyback, obviously buffers or not, you guys have a significant amount of excess capital still, at least in my opinion, even when you get to Basel III.

I guess maybe talk about the idea and your thought process with the buyback.

And obviously it was somewhat of a no-brainer when the stock was below tangible book, but given the run in the shares this year I guess how are you thinking about the incremental capital you are deploying, the return you're getting on that growth organically versus the buyback and then even thinking about the potential for acquisitions.

So maybe you can kind of talk about now how you are thinking about the buyback going forward?

Karen, do you want to start?

Sure, happy to.

So we are disciplined around our buyback.

We do look at it as a use of capital and, like any other competing use of capital, it should have an internal rate of return above our cost of capital.

We do have an analysis in the model that looks at that and we are disciplined about it.

We are not going to tell you what the output of that model is, but we will say at the current stock price we feel very comfortable continuing to buy back our stock.

Okay.

And I guess, Ralph, I guess what do you think about potentials for acquisitions versus organic?

Well, first of all I would say, as I have said in the past, I am very comfortable with where our footprint is today, both in California and Texas and Michigan.

And therefore internal growth is a very good strategy for us.

That is not to say that there wouldn't be possibilities for an acquisition if it were in the right places in one of those markets from that standpoint.

And then you would have to look at it from all of the other focuses as well, price and the culture of the given potential acquisition and whether it fits in that market.

All right, well, thank you for taking my questions.

Matt Burnell, Wells Fargo Securities.

Sorry to pile on, but two quickies here.

You mentioned the trends in dealer finance all look very positive, you've seen 19 -- nearly 20% year-over-year growth in that portfolio.

I guess I'm just curious what your outlook is over the next year for demand in that business.

Do you -- are you expecting continued high teens growth in that business or is there the potential that that could slow down?

Yes, so, just from an accuracy perspective there is actually about a 24% year-over-year growth in the portfolio.

But it's a business that if we look at it historically we are running at numbers that were like 2008, both from an outstandings perspective utilization; we feel very comfortable with that as a company where it is today.

I'm expecting, as we talked about earlier, that some of the seasonality will moderate some of those balances as we head into next year.

But clearly 2014's annual sales rate on auto sales is going to have an impact on the outstandings likely for our dealers and will impact us in the longer term in terms of our growth profile of the business.

Lars, you mentioned earlier you expected prepayment fees to stabilize.

And I guess I am just curious over the last couple of years as you have seen increased competition for middle-market loans, have you been -- have your competitors been forcing you to move away from prepayment fees on some of your commitments or have you held pretty firm on that?

When I refer to structure, that is one of those things that go into that basket, it's a good insight.

We obviously try to build in a prepayment penalty into every transaction and every relationship we can because there is a cost of liquidity associated with it.

But it is part of the larger pricing of the overall relationship that we have.

But I would say from a general industry perspective that that is clearly kind of an area that has given along with durations and advance rates and a number of other areas.

But for us, we have really stayed the course.

We have been very disciplined and frankly we could have had a lot more growth in some of our businesses if we were willing to kind of reach outside of our traditional risk management relationship pricing box.

But that is what's got us here.

We think it positions us well for the long haul.

And frankly our customers appreciate what we deliver.

So I think we are well positioned.

Thanks for taking my questions.

Bob Ramsey, FBR.

Just real quick, a couple questions on the guidance.

The net interest income expectations, where that's trended lower.

If you stripped out the purchase accounting accretion piece of that, is there sort of core net interest income?

Has it reached a level where the growth offsets expected compression or would that continue to trend lower as well?

Karen?

Yes, that is difficult to say.

But, as you've seen in the last couple of quarters, the vast majority of our decline on net interest income has been due to accretion.

And so, the other impacts on the portfolio have been slowing and at some point should turn.

Okay.

And then last question, maybe if you could expand a little bit on the loan growth expectation.

I mean the commentary overall seems to be that market conditions are improving and that line utilization is up, you've got a record pipeline and yet you all are saying you expect growth at a slower pace going forward.

And I was just hoping maybe you could reconcile those two points of view.

Yes, keep in mind that our outlook is a full-year to full-year outlook.

So when we look at 2011 to 2012 we did have robust loan growth.

And in 2012 to 2013 we're expecting continued loan growth but at a slower pace than the prior year.

So that would be our overall outlook.

And, yes, we do have some positive signs that we talked about on loan growth going forward for the back half of the year.

But remember that that is against the backdrop of a slow economy and a very competitive environment under which we expect to maintain our pricing structure discipline.

Perfect.

Thank you very much.

One last thing I would add onto that.

You mentioned line utilization being up.

Remember, line utilization, when you adjust really for the end of period dealer, mortgage banking finance it was really flat.

Okay, okay.

Thank you.

Terry McEvoy, Oppenheimer.

Just one last thing on my list.

In the release it was mentioned that the provision connected to the mortgage banker finance book increased in the second quarter.

I was wondering, did the rapid move up in rates pose additional credit risk to those borrowers?

And have you taken a closer look at that customer base with the potential of weeding through some of those weaker borrowers that could add to the potential decline in that book in the back half of this year?

John?

Terry, no, it really wouldn't add to the additional risk in that business.

Our mortgage banker finance business is completely a warehouse business.

So to the extent that their loan balances are up and the reserve methodology did get a higher standard loss factor, but there is no real impact other than that.

Great, appreciate it.

Gary Tenner, D.A. Davidson.

Guys, I will let you off the hook.

I think all my questions have been answered at this point.

I appreciate it.

Okay.

Thank you.

And that will close the Q&A presentation.

I would now like to turn this call over -- back to Mr. Ralph Babb for closing remarks.

I would just like to thank everybody for being on the call this morning and their interest in Comerica.

We appreciate it very much and hope everyone has a good day.

Thank you.

And, ladies and gentlemen, with this we conclude today's presentation.

We thank you for joining.

You may now disconnect.