Comerica Inc (CMA) 2013 Q3 法說會逐字稿

Good morning, my name is Susan, and I will be your conference operator today.

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

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

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

(Operator Instructions).

Thank you.

Ms. Darlene Persons, Director of Investor Relations, you may begin your conference.

Thank you, Susan.

Good morning, and welcome to America's third-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 third-quarter results will be referring to the slides which provide additional details on our earnings.

Before we get started I would like to remind you that this conference call contains forward-looking statements and in that regard you should be mindful of the risks and uncertainties that can cause future results to vary from expectations.

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

I refer you to the Safe Harbor statement contained in the release issued today, as well as slide 2 of this presentation which I incorporate into this call, as well as our filings with the SEC.

Also this conference call 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 third-quarter 2013 net income of $147 million or $0.78 per share compared to $143 million or $0.76 per share in the second quarter and $117 million or $0.61 per share in the third quarter of 2012.

Quarterly earnings per share grew 28% over last year primarily due to fee income growth, expense control and continued solid credit quality.

Part of the expense improvement was due to a $25 million reduction in restructuring expense related to the successful integration of Sterling Bancshares.

Turning to slide 4 and other highlights, average total loans were up $497 million or 1% on a year-over-year basis but decreased $799 million or 2% compared to the second quarter.

Loan volume in the third quarter compared to the second quarter was impacted by the continued economic uncertainty and the understandable caution of our customers, as well as seasonality in our auto dealer floor plan loans and a decline in refinance volumes impacting our mortgage warehouse financing business.

While loans outstanding were down quarter over quarter total loan commitments increased $560 million as of September 30 with commitments increasing in nearly all business lines.

In addition, our loan pipeline remains strong and is 10% higher than it was a year ago.

And we continue to grow deposits reflecting our relationship banking strategy.

Average total deposits increased $2 billion or 4% year over year and $417 million or 1% over second quarter to $51.9 billion.

In further comparing our third-quarter results to the second quarter, net interest income remained relatively stable at $412 million reflecting the benefit from one additional day in the quarter and improved yields in the securities portfolio offset by the decline in loan balances and lower loan yields.

Credit quality continued to be strong resulting in an $8 million provision.

Net charge-offs increased slightly from their low level while nonperforming assets and watch list loans declined resulting in a small reserve release.

Noninterest income increased $6 million to $214 million primarily due to a $4 million increase in customer driven fee income.

Noninterest expenses increased $1 million to $417 million as an increase in salaries and employee benefits expense was partially offset by decreases in other categories.

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

At September 30, 2013 our tangible common equity ratio was 9.87% and we estimate our Basel III Tier 1 common capital ratio to be 10.4%.

We repurchased 1.7 million shares in the third quarter under our share repurchase program and are now two quarters into our four quarter share repurchase plan announced last March.

Turning to slide 5, we have a unique footprint that primarily covers the major metropolitan areas in the three states you see here -- Texas, California and Michigan -- where there are good opportunities to pursue the types of businesses we serve.

Our recent Texas economic activity index showed the state economy ticked up in July after being relatively stable since last November.

Gains in July were broad-based and indicated that upward momentum will likely continue in the months ahead.

We expect the Texas economy to show solid growth through the end of this year.

The FDIC's annual deposit survey as of June 30, 2013 recently made public shows that we have increased our market share in Dallas-Fort Worth and Austin.

Average loans and deposits in Texas were both up 4% year over year reflecting growth in most segments.

Our most recent California economic activity index is ahead of the 2012 average and reflects a variety of factors contributing to the improving but uneven growth in the California economy.

Labor markets are generally improving and residential real estate prices are firming statewide, so conditions look favorable for ongoing moderate economic expansion in the state.

We strengthened our market share in the San Jose area, according to the FDIC survey, while maintaining our market share position in greater Los Angeles.

Average loans in California were up $1.1 billion or 8% year over year with growth in most lines of business.

Deposits were down 3% year over year primarily due to a decline in deposits attached to our title escrow business as the mortgage refinance market slowed.

Our most recent Michigan economic activity index is well ahead of the average for all of 2012.

Stronger auto sales in late summer should lead to solid production this fall.

Labor markets are firming and house prices are improving, so there is broadening support for the Michigan economy.

We strengthened our number two market share position in Michigan according to the FDIC survey.

Average loans in Michigan were relatively stable year-over-year while deposits grew 4% reflecting increases in every segment.

We remain focused on the bottom line in this uncertain environment with prolonged low rates.

We believe our geographic footprint is well situated in Texas, California and Michigan and that our relationship banking strategy will contribute to our continued success.

We are staying the course and maintaining our discipline with an eye on the road ahead.

And now I will turn the call over to Karen.

Thank you, Ralph, and good morning, everyone.

Turning to slide 6, as Ralph mentioned, average total loans were up $497 million or 1% on a year-over-year basis.

On a quarter-over-quarter basis average loans decreased $799 million or 2% reflecting a $630 million decrease in commercial loans and a $180 million decline in combined commercial real estate construction and mortgage loans.

The decrease in average commercial loans was primarily driven by declines in general middle market, National Dealer Services and Mortgage Banker Finance, all of which I will discuss in more detail on the next slide.

Offsetting some of this decline in average loans to our technology and life sciences customers increased $112 million.

In the broad category of commercial real estate loans construction loans grew for the third consecutive quarter and commitments to developers continued to increase.

However we continue to see commercial mortgages decrease for two reasons.

One, commercial real estate construction projects continue to move quickly to the permanent long-term financing markets.

And two, owner occupied real estate, which makes up 73% of our commercial real estate loans, continue to decline with normal amortization.

You can see on the left chart that total period end loans were down $1.3 billion, primarily due to an $875 million decrease in Mortgage Banker Finance and a $354 million decrease in National Dealer Services.

As Ralph mentioned, our total loan commitments have increased in nearly all business lines.

With commitments up and outstandings down line utilization decreased to 45.4% from 48.6% at the end of the second quarter.

Mortgage banker and auto dealer were the big drivers of the decline in utilization.

But even without these two businesses utilization was down 1%.

Importantly our loan pipeline remains strong and is 10% higher than it was a year ago.

Finally, loan yields shown in the yellow diamonds declined 3 basis points in the quarter reflecting the continued mix shift of our portfolio.

Continuing with loans on slide 7, we've provided additional data on the three major areas affecting our loan performance in the quarter.

General middle market average loans were down compared to the second quarter, which we believe is related to customer cautiousness.

This belief is supported by the fact that line commitments have increased slightly and average deposits have increase compared to the second quarter.

As shown in the upper right chart, National Dealer Services, which includes auto floor plan loans, had average total loans decline $223 million in the third quarter after increasing $250 million in the second quarter.

The yellow diamonds show the period end inventory supply on dealers' lots.

As you can see, this supply increased at the end of the third quarter and along with that our dealer outstandings grew $133 million in the last two weeks of the quarter.

However, our average loan balances for the quarter were down in line with the average inventory supply shown by the orange diamond, reflecting both the strong sales level in the industry as well as the normal seasonal change over to new 2014 models.

We expect to continue to see the normal seasonal pattern which would suggest that inventory levels will continue to rebuild in the fourth quarter.

Shown in the bottom right chart, Mortgage Banker Finance, which provides mortgage warehouse lending lines, saw average loans decline $210 million in the third quarter.

And as I mentioned a moment ago, declined $875 million at period end to $1.5 billion.

This was expected given the rise in long-term rates and its impact on the refinancing market and is in line with the decline in mortgage volumes, which is shown in the yellow line on the chart.

We expect these loans will continue to decline in the near-term but eventually stabilize along with mortgage volumes.

Turning to deposits on slide 8. Our total average deposits increased $417 million or 1% to $51.9 billion, reflecting increases in most lines of business.

Non-interest-bearing deposits grew $303 million while interest-bearing deposits increased $114 million.

As shown by the yellow diamonds on the slide, deposit pricing declined to 18 basis points as higher rate CDs matured and repriced.

Period end deposits increased $1.7 billion primarily reflecting an increase of $2 billion in non-interest-bearing deposits, again reflecting growth in most business lines with the largest increase in corporate banking.

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

The MBS portfolio averaged $9 billion in the third quarter, down $411 million from the second quarter resulting from a decline in the fair value of the portfolio due to the rise in long-term rates, combined with a slowdown in the pace of purchases to reinvest prepayments.

The fair value of the portfolio decreased $34 million in pretax in the third quarter resulting in a net unrealized loss position for the portfolio of $24 million.

And the estimated duration of the portfolio increased slightly from 4.1 years at the end of the second quarter to 4.2 years at the end of the third quarter.

This increase in duration resulted in a retrospective adjustment to the premium amortization of $4 million and added 17 basis points to the yield on the portfolio in the third quarter.

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.

Based on current rate expectations we believe that the pace of prepaids will continue to slow with $350 million to $450 million in prepaids expected in the fourth quarter, down from almost $600 million in the third quarter.

We continue to manage our portfolio dynamically taking into account many factors, including our loan and deposit expectations as well as overall yields and duration available.

Turning to slide 10, despite the decline in loan volume our net interest income remained relatively stable with a small $2 million decline in the third quarter.

We've summarized in the table on the right the major moving pieces to our net interest income and net interest margin.

The net interest margin declined 4 basis points including a 5 basis point impact from the $1.2 billion increase in average excess liquidity, which added $1 million to net interest income.

Total loan portfolio dynamics reduced net interest income by $7 million or 3 basis points on the net interest margin.

This included a $6 million impact from reduced loans outstanding, $5 million from lower loan yields resulting from the continued mix shift in our loan portfolio, as well as a $1 million decline due to the drop in 30-day LIBOR which decreased over 1 basis point on average in the quarter.

You may recall that approximately 85% of our loans are floating rate of which 75% are LIBOR based predominantly 30-day LIBOR.

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

This quarter the mix shift was primarily due to higher yielding loan balances declining and continued positive credit migration.

Offsetting these negative impacts, interest on loans benefited from one additional day in the quarter which added $4 million and from a $1 million increase in accretion of the purchase discount on the acquired portfolio.

We have recorded $26 million in accretion so far this year and expect to recognize about $2 million to $4 million in the fourth quarter.

We have about $35 million of total accretion remaining which we expect to realize over the next few years at a declining pace.

Dynamics in the securities portfolio had a positive benefit increasing net interest income by $2 million or 3 basis points on the margin.

Primarily the result of a $4 million improvement in yields due to slowing prepayment speeds.

This was partially offset by a decrease in average balances.

Finally, lower funding costs, including debt maturities in the second quarter, as well as lower deposit costs, added $2 million and provided a 1 basis point increase to the margin.

We believe our asset 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 about a 13% increase in net interest income or approximately $200 million.

This number is higher than the equivalent number in the prior quarter due to our growth in deposits.

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

Net charge-offs increased slightly to $19 million or 18 basis points of average loans.

The charts on the right show our watch list loan declined $210 million and our nonperforming loans declined $12 million.

With the decline in nonperforming loans the allowance to NPLs increased to 131%.

And as you can see on the lower left chart, our $604 million allowance for loan losses covers our trailing 12 months net charge-offs over six times.

As a result of the continued positive trends in our credit metrics our provision for credit losses declined $5 million from the second quarter to $8 million resulting in a small reserve release.

Finally, as we mentioned last quarter, we received the annual shared national credit exam results at the end of June.

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

Slide 12 outlines the $6 million increase in non-interest income which was driven by a $4 million increase in customer driven fees.

Commercial lending fees were the largest contributor, increasing $6 million due to higher syndication agent fees and higher facility fees charged on commitments.

These increases were partially offset by a decline in fiduciary income primarily due to seasonally higher fees in the second quarter related to tax return preparation.

The increase and non-customer driven income was primarily due to an increase of $5 million in warrant income from the exercise of warrants related to some technology and life sciences relationships.

Somewhat offsetting this increase was a decline in incentives received from our third party credit card provider.

Last quarter we booked the full $6 million annual incentive payment.

Going forward we will record this incentive which can vary from year to year on a quarterly basis.

Turning to slide 13, our expenses remain well-controlled which resulted in relatively stable expenses in the third quarter.

Salaries and benefits expense increased $10 million; this reflected an increase in incentives as well as one additional day in the third quarter which was partially offset by lower staff insurance expense.

The incentive expense increase includes a year-to-date accrual adjustment for senior officers incentives based on favorable performance relative to peers as well as an increase in business unit incentives in line with increased loan commitments, fee income and deposits.

Offsetting the salary and benefit increase was a decline in other non-interest expenses.

This included a decrease of $6 million in litigation-related expenses primarily due to a $5 million legal reserve release following the pending settlement of a class-action case.

And we had a $4 million write-down on other foreclosed assets in the second quarter that was not repeated.

Moving to slide 14 and shareholder payout, in the third-quarter we repurchased 1.7 million shares under our share repurchase program.

Combined with the dividends paid we returned 70% of net income to our shareholders in the third quarter.

We believe our shareholder payout is a reflection of our strong capital position with an estimated Basel III Tier 1 common capital ratio of 10.4% at September 30 on a fully phased-in basis excluding the impact of AOCI.

Shares repurchased were more than offset by share dilution primarily from our warrants as average stock price increased during the quarter.

Finally turning to slide 15 and our outlook, we have typically provided a year-over-year outlook and updated it through the year.

Along those lines know that our expectations for full-year 2013 compared to full-year 2012 remains unchanged with the exception of customer driven fee income.

Given the strong fee generation we had, particularly in the third quarter, we do believe that our full-year 2013 customer driven fees will be modestly higher than our 2012 customer driven fees.

Turning to the final quarter of the year this slide outlines our expectations for the fourth quarter relative to the third quarter.

We expect average loans to be stable with third-quarter levels.

We believe we will see a rebound on our auto dealer floor plan loans as dealers receive their 2014 model inventory.

And we expect mortgage banker outstandings to continue to decline in line with the Mortgage Banker Association forecast for mortgage originations.

We also intend to maintain our pricing and structured discipline which is core to our culture and has served us well throughout economic cycles.

Net interest income is expected to be lower in the fourth quarter due to an expected decline in purchase accounting accretion, as well as the continued effect of the low rate environment.

We expect loan portfolio yields to decline due to the continued loan mix shift and improving asset quality.

With continued strong credit quality we expect net charge-offs provision and reserve release to remain low, similar to what we have seen in the past three quarters.

We expect customer driven non-interest income for the fourth quarter to be relatively stable as we believe we will be able to continue to generate the solid fees we booked in the third quarter.

On the other hand, noncustomer related income can include volatile and unusual items.

For example, we had the $6 million annual incentive payment from our third-party credit card processor in the second quarter and the $6 million in warrant income from technology and life sciences customers in the third quarter.

These types of items are difficult to predict, but overall we expect noncustomer related income should decline in the fourth quarter.

Finally, we expect slightly lower expenses in the fourth quarter as we continue to manage expenses carefully.

Incentive compensation should be lower in the fourth quarter given the year-to-date accrual adjustment we incurred in the third quarter.

This will be offset by additional expenses related to regulatory compliance, predominantly stress testing, as well as seasonality of certain expenses such as occupancy.

In summary, we will continue to focus on the things we can control, allocating resources to our faster growing markets and industry segments to grow relationships while carefully managing expenses.

Now we are happy to answer your questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

Maybe I could start, looking at core C&I loan trends excluding mortgage banker and dealer finance, you've seen a real weakening over the past few quarters.

I know you say commercial customers are cautious, something you've said over the last few quarters.

But do you have a sense why customers seem to be getting so much more cautious here?

And how do you reconcile that with your customers continuing to want more commitments but then going on to borrow even less?

Lars, do you want to take that one?

Yes, well, a couple of things, Steve.

First of all, if you look back over the last several quarters, you will see a continued increase actually.

If you look over the last year and a have, about a $4 billion increase overall in commercial loan outstandings.

That is about 18% in growth.

But your point is well taken that we have seen utilization rates decline this quarter.

If you strip out the mortgage banking finance and National Dealer Services utilization rates are down about 1% in the rest of the businesses.

Frankly I think it is a reflection, and I spend a lot of time with customers, of their just continued uncertainty about the current economic environment.

It's difficult to make investment decisions with pretty unclear economic horizon right now.

So we are going to focus on what we can control and that is making sure that in the markets we serve we continue to grow customers, which we are doing.

We are broadening customer relationships.

You see these commitments continue to rise.

And I think we're going to be well-positioned.

Once confidence returns we're going to start to see access to those commitments.

And I think we have some nice upside potential there, Steve, once that confidence does return to the marketplace, at least for the markets that we serve in Texas, California, Michigan and some of our industry groups.

Okay, thanks for that color, Lars.

And maybe one just for Karen.

How should we think about the timeline to deploy this excess liquidity position that you have built up into the securities book over the next quarter or so?

Or do you hold some of that for eventual loan growth?

Thanks.

No problem, Steve, thank you.

Our securities portfolio we treat on a very dynamic basis, that includes the excess liquidity that that we hold at the Fed.

We do want to remain positioned for loan growth.

And, as we think about that, we will manage it dynamically taking into account the forward factors around where we think our deposits are going, where we think our loans are going.

And we are also mindful of our securities portfolio, the long-term effect that that could have, particularly on our tangible common equity as that will be mark-to-market in a rising rate environment.

Does that imply that you'd just hold this position about where it stands today?

You know, we will continue to manage it dynamically.

We can't say whether we will hold it or not but it will be a dynamic equation.

Okay, thanks for taking my questions.

Keith Murray, ISI.

Maybe just to go back on the loan growth question for a second.

When you look at your footprint, places like California, Texas and healthy economies that are growing, it doesn't seem to be coming through in the loan growth.

Is it just potentially the types of industry groups that you guys are dealing with?

I am just curious, what is the disconnect there?

Well, I think what -- and Lars can follow up on this too, but underlining what he was talking about earlier is our customers are doing very well in the economies where they are and the footprint that we have.

But they are being very cautious about investing for the future like they normally would until they good a good feeling as to, as Lars put it, what the rules will be going forward.

And as we all know, we have a lot going on right now in Washington as well.

And people are holding and waiting and watching to see what is going to happen before they move forward.

I may -- just to really underscore Ralph's point, if you take Michigan as an example.

In the automotive industry we bank some of the best in the business there in the middle market space.

They are doing very well, they are generating a lot of excess cash and frankly they are delevering.

I was with a customer just a couple weeks ago, they're running three shifts, they're running about 100% capacity.

His position was we're going to continue this through the end of the year, kind of get through the window.

But he said frankly he is prepared to make some very significant investments in 2014 if the auto industry continues at the pace that it is on.

And frankly I think most would expect that.

In Texas I think if you look at those numbers, our underlying kind of general middle market activity and commitment levels are very good.

In fact, if you look at our commitments in the linked quarters they are up very nicely in Texas.

But you did have some impact from energy which is based here out of -- again a unique industry based out of Texas.

The energy portfolio has been fairly flat the last couple quarters and that certainly figures into the math and the geography as a number of our energy customers are really focused on harvesting existing investments and accessing the bond market and paying down debt.

But they are the same customers, we are well positioned and we are well positioned for growth with them as they start to refocus on CapEx and rig counts go up.

Okay, thanks.

And could we just switch to the capital side for a second.

You guys are obviously in a very strong position as you head into your first round of CCAR.

Just when you think about the potential, what you would ask for under CCAR, is there any change to the thought process under the [Cap-R] scenario?

Meaning this is the first time you are going through this particular process, any change in the mindset around that?

It is the first time that we will be moving from a [Cap-PR] bank to a CCAR bank.

We have been investing very heavily in people and technology to improve our process as a CCAR bank.

It is too early to talk about what our potential capital risk would be though.

But I think it's important to know that we continue to believe that we come at this from a position of capital strength.

Okay, thank you.

Brett Rabatin, Sterne, Agee.

Wanted to ask a question just around pricing.

And I know last quarter the large corporate segment took a bit of a decline just due to you guys stepping away from what you were seeing in terms of pricing.

Can you talk about that this quarter and maybe more in terms of middle market and what you're seeing in terms of how that has impacted your loan balances and just the decisions you had to make around that?

Lars?

Sure.

Well, let me just clarify something from the second-quarter earnings call.

The corporate banking space continues to be a very important business for us in the long-term.

We've got some great customers there that we continue to work with and grow.

And we're just having to be more selective in terms of new opportunities because that is where we see the most competitive space, not just from a pricing perspective but also from a structure perspective.

This is clearly not the time to overreach.

If you do there are consequences.

So we are being patient, we're being very focused, we've got some great bankers with a lot of experience.

And I think it's going to be a segment that is going to grow in the future.

But we are going to be patient and we're going to be disciplined about our relationship pricing.

In the middle market segment it is a competitive marketplace out there across our footprint.

It is hard to pick one geography over another to say which is the most competitive today.

I think the thing that you've got to focus on is making sure that your bankers are spending a lot of time in the marketplace and they are spending a lot of time with customers and prospects building out those relationships.

And I would remind you there are ways to improve profitability -- client profitability just beyond the credit pricing and that is through broadening relationships.

And we are focusing on that as you will see client driven noninterest income gains.

We are very focused on cross sell.

But it is a challenging market, but I think that we've got the right business model, the middle market knows that we have been committed to it for a very long time and we are very well-positioned for a recovering economic environment.

Okay.

And then my other follow-up was just around technology and life sciences and maybe any color around the growth you did have this quarter.

Was that any of that market share gains or was that all just kind of the growth of the segment?

Yes, so -- you saw the IPO market obviously pick up more recently.

And frankly at the end of the day the IPO market, the exit market really drives the whole technology and life sciences kind of space.

You've got to have active DC's and private equity investment to make that work well.

If you look at the -- if you break it down if you look at the early stage part of technology and life sciences, we continue to have very, very strong national market share and we are very active in that space.

We've also seen some excellent growth in our equity fund services business where we provide both core banking services, credit services into venture capital, capitalist and private equity firms that have been very successful.

And recently announced that we had opened a new office in New York where we've seen a lot of growth.

That has gotten a lot of traction.

We've also opened an additional office in Houston, hired some great bankers there and we are seeing some nice successes there.

So I see this as a good long-term growth business for us.

Okay, thanks for the color, Lars.

Ken Zerbe, Morgan Stanley.

First question just on expenses, I want to clarify.

Obviously your guidance is for lower expenses in the fourth quarter.

It seemed like it was because of an accrual adjustment in third quarter being a little higher.

Is that right?

But are you undertaking any more I want to say aggressive expense initiatives to keep expenses lower given what we're seeing on the loan side?

Thanks, Ken, you are right.

One of the key reasons that we expect expenses to be lower in the fourth quarter is because we did have a year-to-date accrual adjustment in the third quarter around incentive comp given our relative performance to our peers.

So that is one of the big drivers.

We do expect some expenses to increase in the fourth quarter, as I mentioned.

Namely some seasonal expenses like occupancy as well as some expenses related to stress tests and capital planning.

On expenses in general, we remain keenly focused on managing our expenses as we have for the past several years.

And we will continue to do that, but there are not any major aggressive initiatives as we manage those expenses.

It is really just continuing to do what we have done all along.

Okay, that helps.

And then, in terms of the slower prepayments, I know you highlighted the $600 million down to $350 million to $450 million.

I'm assuming that the lower premium amortization is in your lower NII guidance.

But can you quantify that?

Like how much potentially comes from slower premium amortization versus the negatives of the other items?

Yes, you are right, it is in our guidance.

And, yes, we do expect slower prepays next quarter.

We continually look at the life of our portfolio each quarter, the expected life.

And as we continue to look at it, if rates continue to rise and prepaids continue to slow, the expected life of our portfolio will extend a little bit.

And that could result in some slower premium amortization going forward and a possible reversal of premium previously recognized.

But that shouldn't be by a material amount.

Okay.

And then just a clarification question.

The incentive payment from the third party credit card provider, presumably we had it last quarter, we were not expecting it this quarter.

So actually this quarter was a surprise positive, it was extra income versus what we normally would have assumed.

Just want to make sure I am right on that.

Yes, so as I mentioned, we used to record that incentive payment on an annual basis.

We now will accrue it each quarter going forward.

So, yes, last quarter did have an annual payment and this quarter had some accrual.

Okay, great.

Thank you.

[Erica Najerian], Bank of America-Merrill Lynch.

My first question is on the efficiency outlook for next year.

I think you mentioned, Karen, that you are controlling the things that you can control and your efficiency ratio has been consistent at about 67% over the past several quarters.

As we look out into 2014, if there is not a significant improvement in the loan growth outlook and the rate environment remains what it is, is there more room on the expense side to drop that efficiency ratio from the 67% or is most of the efficiency improvement from here going to come from the revenue side?

As you know, Erica, we did set a long-term efficiency ratio target to be below 60% and we continue to focus on moving toward that target regardless of the overall environment.

Got it, got it.

So I just wanted to make sure I understood that.

If nothing changes on the revenue picture you are still committed to taking it down below 60% on the other side of the equation.

Yes, when we first announced that target we did show a walk forward of what it will take to get there, which includes loan growth, fee growth, keeping expenses as flat as possible.

And the fact that we would need a little bit of a rate environment uptick to ultimately get over the goal line, but certainly not a normal rate environment to get over the goal line.

And so, as we think about that in the near-term without a rate environment uptick we won't necessarily get over the goal line, but we will continue to bring that efficiency ratio down.

Got it.

And just a follow-up to Steve's question on the liquidity.

Are you comfortable with your liquidity levels relative to the liquidity proposals that might maybe finalize at the end of this year?

In other words, if the LCR passes as defined how much excess liquidity do you have to redeploy?

Yes, so the rules are far from final.

We don't even have an initial draft or an NPR out in the United States.

We are continuing to monitor that heavily.

On the LCR ratio as guided by the Basel III committee, we and all banks would need to add liquid assets to our portfolio.

Got it.

And just one more question, if I may.

The larger banks have to deal with the supplementary leverage ratio that has them holding 100% capital against unfunded lines of commitments.

Do you [think the thought and] opportunity for potentially market share taking for regional banks like yours that don't have to deal with the SLR or is it way too early to tell?

I think it is very early to tell because there are so many other things that can affect the competitive environment.

You are right in the case that we, at least as proposed right now, will not need to adhere to a supplemental leverage ratio.

We do, however, need to adhere to the normal leverage ratio which for us is not the binding constraint.

Okay.

Thank you for taking my questions.

John Pancari, Evercore.

(Technical difficulty) loan growth front.

I wanted to get a little bit more clarity on what you are seeing on the commercial real estate front.

I know you gave us some good color that you are seeing borrowers remain cautious on the commercial front in general.

But are you seeing any noted improvement in CRE lending?

I know that some of the other CRE lenders are starting to see improving drawdowns on that front.

Lars, do you want to take that?

Yes, sir.

As you can see in our numbers, our actual construction lending continues to make gains.

We again showed another quarter of growth there.

There is a lot of volume out there.

We are positioned in terrific states, Texas and California, where you are seeing in particular a disproportionate amount of multi-family activity.

And I think we're certainly getting our share.

In fact, if you go to page -- I think it's 24 -- in the slides, it gives you a pretty good view of what is going on with our commercial real estate portfolio.

And as you see, the construction loans continue to increase.

What you will also notice is that the commercial mortgage loans, we have not seen that kind of increase.

And there are really two components to that.

The first is the mini perms, that is the conversion of construction projects over to a short-term extension of credits, typically three to five years for our developers, for them to stabilize and position the market to go to the permanent market or sell the product.

What they are seeing is a higher velocity of these projects moving more rapidly to the permanent market.

The permanent market is taking, at this point, unstabilized, in some cases, projects, which is very unusual and different from say going back a year ago.

The other component of that would be owner occupied.

In the owner occupied space you are continuing to see, given the profile of the kinds of customers that we bank, they continue to de-lever.

You see natural amortization, you see them paying off some of that longer-term debt that is on their balance sheet.

And one last thing I would note.

There are some lenders in the marketplace that are providing what I would say is longer-term financing within banking that is outside of our underwriting standards, 15-, 20-year kind of fixed-rate financing, 30-year amortization.

And that is not something that we do.

So again, a time not to overreach.

We're going to focus working with our developers and we've got the same stable of them, we are picking up some new ones.

These are typically very strong developers that have liquid positions, they're putting a lot of liquidity into these projects.

And one of the things that I would point out with the increase in the construction portfolio, we are expecting that we will see advances under those credit facilities as we kind of go down the road and as they fulfill their obligation to properly equitize these projects.

So I think we're well-positioned.

I think we've got great long-term markets.

We've got great bankers.

And I think that this is a business that will serve us well as we head down the road.

Okay, that's helpful.

So the permanent financing players, the insurance companies and the conduits and everything are certainly getting more aggressive?

Yes, absolutely.

Both -- you see it in the pricing for sure, but you also see it in the structure.

Okay, all right.

And then secondly on the pricing side.

Can you give us a little bit of actual data points there in terms of where you're seeing new money yields come in on C&I and CRE right now?

I wish I could tell you exactly -- kind of taken off the shelf price for you that would make it easy.

But we handle one relationship at a time at Comerica.

Each one of them are individually underwritten.

There is no standardized product.

We look at the overall relationship.

It is beyond just the credit, it has to do with how deep we get into the relationship.

I am really proud of the success we are making, for example, in deepening our relationships across into Wealth Management.

We have seen a 50% increase in the penetration rate in wealth management services to our customers over the last couple years.

That is a lot of progress that has been made.

And that all goes into ensuring that we're getting the right kinds of returns on the relationship for our shareholders.

But I will sum it up maybe helping you a little bit and just to say that I don't see any easing in the competitiveness in the marketplace.

It continues to be very aggressive.

There are too few opportunities for the demand that is out there.

So we are having to be very patient and careful.

But we are also having to be more active in the marketplace, looking for the right kinds of opportunities for the companies, developers that are looking for the value proposition that we deliver, that relationship banking kind of strategy.

Okay, thank you.

Michael Rose, Raymond James.

Good morning.

My questions have been answered.

Thank you.

Bob Ramsey, FBR Capital Markets.

Just real quick, I was hoping you could talk a little bit more about the mortgage warehouse business.

I mean it looks like the average balances are down much less than I would have guessed given industry volume.

And I'm curious what to make of that.

And then the end of period balance is down a lot more.

How much of that is the normal end of period volatility?

And how much of that is something that is more of an indicator of where we are headed into the next quarter?

Lars?

Okay, very good.

I will take the second piece of it first, which is the ending balances.

I will tell you, it is very difficult to tell.

There is a lot of variability at the end of each quarter and a lot of it has to do with the investors and kind of the activity levels that we see in terms of migrating those to the investor community.

It is difficult to use that as a proxy for the fourth quarter.

But maybe going back to the first part of your question will help you with that second part.

And that is the Mortgage Banking Association's projecting is that we were down 27% in the third quarter in overall mortgage volume nationally, which you probably know.

We were down a little bit under 12% in averages.

So we clearly outperformed the industry in terms of averages.

But you get to the end of the quarter and obviously we were down significantly more, which is not all that unusual.

However, the MBA is forecasting an additional kind of 20%-30% decline heading into the fourth quarter of the year.

So that could clearly impact the outstandings that we have in our portfolio.

A strategic issue that I want to point out, and I think that has served us very well.

If you go back to 2011, we have increased the number of mortgage companies that we finance staying very true to our strategy of the strongest and the best in the industry.

We've increased the number of customers that we serve by 40%.

So the business has become much more granular, we have a broader base.

The second piece of it is this -- in the national markets, 49% of the mortgage volume was purchased.

Our average for the third quarter was 71%.

In other words, it was much more skewed towards purchased volumes which frankly has been a strategic initiative of ours to make sure that we try to capture what to me appear to be a recovering national housing market and would likely be a slowing refi market.

And I think that has played out well for us.

Okay.

So it sounds like the better performance versus the industry in the quarter is part purchase verse refi mix and part continued growth in customers?

Is that a fair synopsis?

Yes.

And then what happened to yields in that portfolio in the quarter?

We are starting to see more activity there.

There are more players in the market and we are seeing more pressure unquestionably as more competitors enter the space seeing it as an opportunity.

We're going to have to continue to stay very focused on our relationship pricing overall.

One thing that we are very much focused on in trying to offset some of the compression areas, even deepening our relationships with those customers in terms of cross sell and we are doing that.

In fact, our treasury management penetration into that space continues to grow disproportionately to the rest of the franchise and I think that that is a real positive.

But that is going to be clearly a challenge for us as there are fewer opportunities and there are more players in the marketplace.

Okay, that is helpful.

Then I guess changing gears, one last question.

I just want to be sure I'm thinking about net interest income in the fourth quarter correctly.

It sounds like it should be something on the magnitude of at least $8 million to $10 million lower.

And that you lose $4 million to $6 million a premium amortization.

And you shouldn't have the $4 million retroactive adjustment on premium adjustment on the MBS portfolio.

Is that a fair way to think about how we enter the fourth quarter and then you've got sort of the normal drag from the low rate environment?

Yes, so we do expect net interest income to be lower, as we mentioned.

You are right on the numbers that you put out for accretion on the loan portfolio.

It is difficult to predict what we would do on the securities portfolio and the premium amortization because that is a very dynamic equation.

But you have the direction correct.

Okay, thank you very much.

Brian Klock, Keefe, Bruyette & Woods.

My follow-up question is for Karen.

On the expense side, to Ken's question earlier, I'm calculating about a $6 million impact for the accrual in the quarter.

You talked about a $5 million reserve -- legal reserve release.

So I guess those two seem to be offsetting.

I guess what I'm thinking about though is when I look at the other non-interest expense line, it was $37 million this quarter.

I am thinking that that $5 million reserve release came out of there.

So that is running still a couple million dollars lighter than it has been for the last five or six quarters.

And I was trying to find out -- maybe you can update guidance to that $15 million CCAR expense item.

I thought we would have seen some of that here in the third quarter.

So maybe you can kind of -- does that make sense, first of all, all the math that I was kind of throwing together with that noninterest expense line being something that is more like a $42 million quarterly run rate?

And then where can we find the CCAR expense build in the numbers?

Sure.

On our regulatory expenses, we did talk about that being approximately $15 million in an increase in expenses.

Most of that, the vast majority of it is already built into our run rate, you are correct.

Okay.

And then a question for Lars.

I know, Karen, you said that -- I think you said at the end of the last two weeks of the quarter the National Dealer Services book grew about $133 million.

And I am wondering I guess, Lars, do think that -- we do see this fourth-quarter build in that book.

There was an article out yesterday in the Automotive News expecting that sales volumes could be down 10% here in the fourth quarter because of the government shutdown.

So does that extend the inventories a little bit longer?

Does it take the dealers a little bit longer to rebuild that inventory?

Or, I guess, how should we think about the pace and how fast dealers will rebuild inventories here in the fourth quarter?

Right.

So, first of all, regarding the government kind of issues, I don't really think that that is going to have a significant impact at this point on our overall dealer portfolio.

I have just had lunch in the last two days with one of our largest automotive customers and frankly things are as good with him and his business, which is in both Michigan and in Texas, as it has ever been.

Yes, he is seeing that typical seasonal new model turnover.

Karen talked about the days on hand in inventory that we typically see.

You didn't see that a year ago.

That was because the Japanese were rebuilding their model brands in this country, but historically you see it, you saw it -- you are seeing it this year.

We did begin to see the rebuilding of inventory levels.

But typically it happens gradually as we go through the fourth quarter up right through the end of the year.

And if you look at it historically, the average days on hand in January typically is kind of the highest level of the year, that is our peak month.

So hopefully that gives you some insight.

Frankly I am very bullish on our dealer business.

Our dealers, when I talk about there is variation in how our customers are feeling.

Clearly this is an industry where largely our customers are feeling very good.

They're making a lot of money.

They are well-positioned.

They are rebranding and refacing a lot of their facilities, you can see that probably in your own marketplace.

And auto sales remain up.

So we're well-positioned.

All right, thanks for that color.

And I guess maybe I can squeeze in one quick one.

I don't know if John Killian is there, but Texas provisions went up this quarter.

Is there anything to think about what is going on there in Texas versus all the positive credit performance in the rest of the geographies?

John?

Sure, Brian.

There is nothing unusual there from a portfolio trend standpoint.

Texas suffers a little bit from having such great basic loan quality that when one or two deals does happen to have some distress it looks like an aberration and that is how I view it as well.

So can you tell us whether that was commercial real estate or C&I or --?

It was C&I, middle market C&I.

Middle market C&I.

All right, thanks, John.

Appreciate it.

Thanks for taking my questions.

Dave Rochester, Deutsche Bank.

Just a follow-up on Bob's question on the Mortgage Banker Finance business.

You mentioned that pricing came in this quarter.

I was just wondering if you could provide the delta there over the last quarter.

And if you'd give the current yield on that portfolio, that would be great.

Yes, we don't give yields out for that specific portfolio.

It is a portfolio that has higher yields than some of our others, so --.

Yes, we have seen -- I would just put it to you this way, we have seen slight compression.

And if you look at our current portfolio against our new and renewed there is a very slight compression there.

But it continues to be a very attractive overall business for Comerica.

Great, thanks.

And just one last one.

Sorry if you already covered this.

But the bump up in the commercial mortgage yield during the quarter, what the driver was there?

Yes, that was mainly due to attrition of securities that were lower yielding.

And as well as accretion.

Great, all right, thanks, guys.

Gary Tenner, D.A. Davidson.

Lars, just had a question -- you drilled down a little bit in Texas vis-a-vis the energy portfolio, a little bit of a decline there sequentially.

But can you kind of talk about the other loan segments within the Texas market?

I was I guess surprised given the strength of that market in general that we had that sort of sequential decline in outstanding balances.

Right, yes.

So I think some of the big story, if you just look at the overall growth in Texas, obviously we had some nonstrategic assets in commercial real estate that were running off.

That certainly impacted some of our numbers.

You heard me talk about the energy portfolio that leveled out as a number of our customers accessed the overall bond market and paid down some of their senior debt.

But frankly I am very encouraged.

We've added additional middle-market bankers in the Houston market that continues to grow.

We are seeing nice growth there in middle-market.

The Dallas-Fort Worth market, we are seeing good activities there, pipelines.

And I would also point out we are seeing really nice activities in small business.

In fact, not just naturally but also in Texas in particular.

We've seen sequential quarters of small business outstandings growing.

So I think if you put all that together along with our Wealth Management, it's -- we are very well-positioned in the state.

I think we have got a lot of the right businesses.

I'd point out one other business that is fairly significant here and we've got a nice presence and we expanded and that is technology and life sciences.

I've told you I see this as a long-term growth business for us.

We have -- that is based out of Austin, Texas, which is a hotbed for tech companies, that continues to grow, be very active.

We are seeing pipelines grow there.

We've expanded into Houston.

I think we will see that grow.

We've added bankers and environment services that are really canvassing the state.

And again, as we are seeing increased cap levels or CapEx levels in environmental services as a lot of companies are very focused on going green.

Reclamation recycling is becoming a bigger part of their overall capital base and we're going to take advantage of that because we've got a lot of expertise in that industry.

All right, thanks for the color.

I would now like to turn the call back over to Ralph Babb, Chairman and Chief Executive Officer.

Thank you very much for joining us on the call today.

We appreciate your interest and hope everybody has a good day.

Thank you.

This does conclude today's conference call.

You may now disconnect.