Comerica Inc (CMA) 2013 Q4 法說會逐字稿

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

At this time I would like to welcome everyone to the Comerica fourth-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.

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

Ma'am, you may begin.

Thank you, Tony.

Good morning and welcome to Comerica's fourth-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 fourth-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.

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 fourth-quarter 2013 net income of $145 million or $0.77 per share compared to $147 million or $0.78 per share in the third quarter and $130 million or $0.68 per share in the fourth quarter of 2012.

Full-year 2013 earnings per share were up 12% from 2012 to $3.

Turning to slide for and highlights for fiscal year 2013, 2013 net income increased 9% primarily as a result of tight expense control and strong credit quality offsetting the headwinds of the continuing low rate environment.

Our relationship banking focus and our customer strength in this uncertain national economy continue to drive growth in average loans and deposits in 2013.

Average total loans increased $1.1 billion or 3% in 2013 compared to 2012, primarily reflecting an increase of $1.7 billion or 7% in commercial loans with National Dealer Services and general Middle Market providing the biggest contribution.

Average total deposits increased $2.2 billion or 4% in 2013 with increases in all three of our major markets.

Our capital position remains solid, supports our growth and provides us the ability to return excess capital to our shareholders.

We repurchased 7.4 million shares in 2013 under our share repurchase program.

Together with dividends we returned 73% of 2013 net income to shareholders.

We recently filed our 2014-2015 capital plan with the Federal Reserve which is expected to release its summary result in March.

Turning to slide 5 and highlights from our fourth-quarter results, when compared to the third quarter of 2013 average loans remained stable at $44.1 billion as increases in National Dealer Services and technology and life sciences were offset by a decrease in mortgage banker finance.

Growth trends were positive throughout the quarter resulting in period end total loans increasing $1.3 billion to $45.5 billion.

This reflected increases across most lines of business.

Total loan commitments are at their highest level in four years increasing $716 million from the end of the third quarter with commitments up in nearly all business lines.

Line utilization also increased to 46.9%.

In addition, our loan pipeline remains strong.

Average deposits increased $904 million or 2% to $52.8 billion compared to the third quarter of 2013 reflecting increases in most lines of business and all primary markets.

Fourth-quarter net interest income increased $18 million or 4% to $430 million primarily as a result of a $15 million increase in accretion on purchased credit impaired loans which was greater than expected.

Credit quality continues to be strong with the provision for credit losses and net charge-offs remaining at low levels.

Non-interest income decreased $10 million to $204 million reflecting decreases of $5 million in customer driven fee income and $5 million in non-customer driven fee income.

Non-interest expenses increased to $429 million.

Excluding an increase of $6 million in deferred compensation, other expenses increased $6 million primarily due to a $5 million increase in litigation-related expenses from a low third-quarter amount.

Turning to slide 6, recent national economic data supports a cautiously optimistic view of 2014.

Home prices continue to increase with homebuilders picking up the pace late last year.

Consumer confidence is climbing and auto sales are solid.

Job growth has been reasonable, although the unemployment rate remains high for this point in the cycle.

We expect business confidence to gradually improve this year as uncertainty diminishes.

Taking a closer look at economic conditions within our primary footprint of Texas, California and Michigan, we can see the advantages of our geographic diversity.

North Texas is positioned for ongoing growth in 2014 as labor markets continue to show strong expansion.

Energy continues to be a strong pillar of the North Texas economy and healthcare-related construction is booming contributing to strong organic growth.

The shale boom and subsequent reemergence of the US as a global leader in petroleum production has placed Houston at the center of a rapidly changing global energy market.

Economic growth is expected to be strong in 2014 as the Houston Metro area unemployment rate remains well below the US average.

Period end loans and deposits and Texas in 2013 were up 1% and 10% respectively from 2012.

The Northern California economy is expected to show moderate growth in 2014 supported by its high-tech sector and improving real estate markets.

The outlook for Northern California consumer spending is solid for next year.

The positive wealth effect from increased homeowners equity and steady income growth should be a boost to retail sales in the region heading into 2014.

While Southern California labor markets continue to underperform the national average in 2013, the region is making headway in recovering from the recession.

After a three quarter contraction beginning in the first quarter of 2012, the labor force has consistently expanded for the past four quarters ending in the third quarter of 2013.

In 2013 California period end loans were up 7% while deposits were down 4%.

The decline in deposits was primarily in our business that serves title and escrow companies.

Within Michigan, where we have had a presence for 164 years, the Detroit area is still expanding but at a slower rate.

The Detroit Metro area is still adding jobs but job growth is underperforming the US average.

The auto industry has regained its footing providing a boost to the Detroit regional and national economies and auto-related and furniture manufacturing industries are the mainstays of the Central West Michigan economy as that regional economy continues to improve.

In 2013 Michigan period end loans were down 1% as commercial mortgages continued to amortize while deposits were up 2%.

In closing, our strategy remains unchanged and we continue to stay the course focused on growing the bottom-line in this low rate environment.

Our conservative approach to banking continues to serve us well including our credit management, investment strategy and capital position.

We are pleased with our footprint where there are many opportunities to leverage our relationship banking strategy by providing our customers with the products and services they deserve.

And now I will turn the call over to Karen.

Thank you, Ralph, and good morning, everyone.

Turning to slide 7 and loan growth, we saw the typical seasonal broad-based improvement in loan demand throughout the fourth quarter with period-end loans greater than average in almost every business line.

Total average loans quarter-over-quarter were stable.

However, on a period end basis loans increased $1.3 billion or 3% to $45.5 billion.

Commercial loans increased $918 million and construction loans increased $210 million.

Our period-end loan growth significantly outpaced the industry which grew 1.3% based on the Fed's H8 data for US large commercial banks from October 2 to January 1. Also, as Ralph mentioned, our loan commitments increased in nearly all business lines.

Line utilization increased to 46.9% from 45.6% at the end of the third quarter.

National Dealer Services was the biggest driver of the increase in utilization.

Importantly, our loan pipeline remains strong.

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

Also while down on average, commercial mortgages were stable on a period-end basis.

Real estate construction projects appear to be moving less quickly to the permanent long-term financing market.

However, owner occupied real estate, which makes up about 80% of our commercial mortgages, continue to decline with normal amortization.

Finally loan yields, shown in the yellow diamonds, increased 14 basis points in the quarter with higher accretion accounting for about 14 basis points and an increase on interest collected on non-accrual loans accounting for about 4 basis points.

We've provided additional data on loan trends and the quarter on slide 8. As I mentioned a moment ago, loan trends were positive throughout the quarter with almost all of our business lines growing.

The largest contributors to the period end loan growth are listed on the slide.

Two businesses which have had some variability this year are depicted in the charts.

In the upper chart, National Dealer Services, which includes our auto floor plan loans, had average loans rebound $353 million in the fourth quarter after decreasing $223 million in the third quarter.

Loan outstandings generally follow inventory supply on dealers' lots, which increased in the fourth quarter due to normal seasonal changeover to new 2014 models.

Shown in the bottom chart, Mortgage Banker Finance, which provides mortgage warehouse lines, saw average loans decrease $496 million in the fourth quarter.

Period end balances declined $147 million to $1.4 billion.

This was expected given the industry-wide decline in mortgage volumes which is shown in the yellow line on the chart.

Turning to deposits on slide 9. Our total average deposit increased $904 million or 2% to $52.8 billion reflecting increases in most lines of business.

Non-interest bearing deposits grew $1.2 billion while interest bearing deposits declined $249 million.

As shown by the yellow diamonds on the slide, deposit pricing declined to 17 basis points due to higher rate CDs maturing and selected deposit rate adjustments.

Period-end deposits increased $383 million, primarily reflecting an increase of $404 million in interest-bearing deposits.

Slide 10 provides details on our securities portfolio which primarily consists of highly liquid, highly rated mortgage-backed securities.

The MBS portfolio was stable with the third quarter averaging $9 billion.

The fair value of the portfolio decreased $73 million pretax in the fourth quarter resulting in a net unrealized loss position for the portfolio of $97 million.

The estimated duration of our portfolio remained steady at 4.2 years at the end of the fourth quarter.

Slower prepayment speeds including a retrospective adjustment to the premium amortization similar to the third quarter added $1 million or 5 basis point to the yield.

The expected duration under a 200 basis point rate shock remained relatively constant at about 4.8 years as a result of the composition of our portfolio.

Based on current rate expectations we believe that the pace of pre-pays will be about $300 million to $400 million in the first quarter, similar to the fourth quarter and down from almost $600 million in the third quarter.

In light of the fact that Fannie and Freddie backed securities are subject to a haircut and a cap under the recently proposed liquidity coverage ratio, we have started to invest in Ginnie Mae securities.

We are selectively seeking similar duration premium and yield dimensions to what we have in our current portfolio.

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

Turning to slide 11, fourth-quarter net interest income increased $18 million or 4%.

We have summarized in the table on the right the major moving pieces of our net interest income and net interest margin.

The biggest driver was better-than-expected performance of the acquired Sterling portfolio, which resulted in a $15 million increase in accretion to $23 million in the fourth quarter.

The remaining accretion on the portfolio is about $35 million and we expect to realize this accretion at a declining pace over the next few years.

Accordingly, for 2014, we expect to recognize accretion of about $10 million to $20 million.

Also impacting loan interest income, we had a $5 million increase in interest collected on non-accrual loans.

Partially offsetting this was a $4 million decline from lower loan yields resulting from the continued mix shift in our portfolio, as well as a drop in 30-day LIBOR, which decreased 2 basis points on average to 17 basis points in the quarter.

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

And while we remain focused on holding 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 an increase in lower yielding loans like auto dealer floor plans and continued positive credit migration.

As I mentioned on the previous slide, dynamics in the securities portfolio provided a positive benefit, increasing net interest income by $1 million or 1 basis point on the margin, primarily as a result of an improvement in yields due to slowing prepayment speeds.

Lower funding costs, specifically lower deposit cost, added $1 million and provided a 1 basis point increase to the margin.

Finally we had a $1.1 billion increase in excess liquidity which had a 5 basis point negative impact on the margin.

As you have heard before, we believe we remain well-positioned for a rise in short-term 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 $210 million.

Turning to the credit picture on slide 12, credit quality continued to be strong in the fourth quarter.

Net charge-offs decreased to $13 million or 12 basis points of average loans and included $28 million in recoveries.

The chart on the upper right shows our criticized loans which are consistent with regulatory defined special mention substandard doubtful and loss classifications, and are similar to what we formerly referred to as watch list loans.

These loans declined $201 million and our nonperforming loans declined $85 million.

With a decline in nonperforming loans the allowance to NPLs increased to 160%.

And as you can see on the lower left chart, our $598 million allowance for loan losses covers our trailing 12 month net charge-offs over eight times.

As a result of the continued positive trends in her credit metrics and growth in our loan commitment our provision for credit losses was relatively stable at $9 million resulting in a small reserve release.

Slide 13 outlines non-interest income which was driven by a $5 million decrease in customer driven fees and a $5 million decrease in non-customer-related income.

As far as customer driven fees hauling a strong third quarter, the fourth quarter was impacted by slower economic activity and two fewer business days.

Therefore we had small declines in several categories such as letters of credit, card fees, customer derivative fees and investment banking.

The decrease in these items was partially offset by an increase in fiduciary income as we continue to expand this business.

The decrease in non-customer driven income was primarily due to several items which were unusually high in the third quarter, such as warrant income, bank owned life insurance and incentives received from our third-party credit card processor.

For example, in the third quarter we recognized $6 million in warrant income from the exercise of warrants related to some technology and life sciences relationships which was not repeated in the fourth quarter.

Finally, non-customer driven income was impacted by a $6 million increase in deferred compensation plan as set returns which was completely offset in deferred compensation expense.

Turning to slide 14, we continue to focus on tight expense controls.

As you can see, full-year expenses declined 4% including a $35 million reduction in restructuring expenses which accounted for about half of the decline.

Our fourth-quarter expenses were impacted by a $6 million increase in deferred compensation, which is directly offset in non-interest income.

Excluding that our expenses increased $6 million in the quarter, which includes a $3 million increase in staff insurance expense from a low third-quarter level and a $5 million increase in litigation-related expenses following a legal reserve release in the third quarter due to the favorable preliminary settlement of a class action case.

Also incentive compensation did not decline from the elevated third-quarter level based on more favorable performance relative to peers.

Moving to slide 15 and shareholder payout, we repurchased 1.7 million shares in the fourth quarter and 7.4 million shares in the full year under our share repurchase program.

Combined with the dividends paid we returned 73% of net income to our shareholders in 2013.

We believe our shareholder payout is a reflection of our strong capital position with a tangible common equity ratio of 10.1% and an estimated Basel III Tier 1 common capital ratio of 10.3% at December 31 on a fully phased in basis excluding the impact of AOCI.

The tangible common equity ratio increased 24 basis points in the fourth quarter reflecting an increase in AOCI due to favorable pension plan adjustments, partially offset by the decline in the fair value of the securities book.

As a reminder, adjustments to the pension plan are made annually while the securities book is marked each quarter.

As Ralph mentioned, we submitted our capital plan and stress test to our regulators earlier this month.

We expect the Federal Reserve will release its summary results in March.

Finally, turning to slide 16 and our outlook for the full year 2014 compared to 2013.

We expect our overall loan growth to continue at a pace similar to 2013.

We plan to remain focused on small business and middle-market, particularly where we benefit from our industry expertise such as in technology and life science.

Positive trends in commercial real estate construction are expected to improve while owner occupied real estate should continue to be impacted by amortization.

As you know, our mortgage banker business can be volatile and does have some typical seasonality aligned with home sales.

So there could be quarterly variability, though we expect mortgage banker average balances for the full year to stabilize close the level we had in the fourth quarter.

In addition, the current slow economic environment does bear on demand and competition for loans across our businesses.

And we intend to maintain our pricing and structure discipline.

We expect net interest income to be modestly lower year over year, primarily reflecting the continued reduction in accretion, which totaled $49 million in 2013 and is expected to decline to $10 million to $20 million in 2014.

In addition, we expect loan yields will continue to be impacted by the low rate environment but should be partly offset by loan growth as well as our low cost funding base.

With respect to credit, we expect our total provision expense will be similar to 2013, reflecting loan growth offset by a continued decline in problem loans.

We expect net charge offs and reserve release to remain low.

We expect non-interest income to be stable with customer driven fees increasing modestly from continued growth in fiduciary and card fees and our focus on cross-sell opportunities.

We expect noninterest expenses to be lower.

Pension expense should be less than half of the $86 million incurred in 2013, primarily as a result of the timing of the improvement in market performance and increase in long term rates.

And increases in merit, healthcare and regulatory compliance expenses should be mostly offset by our continued tight expense control.

Remember that our incentive compensation is typically higher in the first quarter when grants are made and in 2014 as a result of anticipated plan changes we expect to incur even more of the expense in the first quarter while the full year expense is expected to remain about the same.

Finally, we estimate our tax rate will be approximately 28% of pretax income.

In closing, we are pleased with our continued loan and deposit growth.

Despite the recurrent economic and low interest rate headwinds we will remain focused on the things we can control.

Deepening and growing customer relationships while carefully managing expenses.

We look forward to the year ahead and we remained keenly focused on delivering growth in both pre-provision net revenue and the bottom-line.

Now we are happy to answer your questions.

(Operator Instructions).

Stephen Scinicariello, UBS.

Just a couple of quick ones for you.

So just as I look at the loan growth guidance and try to reconcile that with your strong and building pipelines and a lot of the opportunities you have within your various markets, just kind of -- it seems a little bit conservative and I was just wondering if we do have a bit of a stronger economy next year what might the sensitivity around that loan growth potential be?

Lars?

Absolutely.

One thing I ought to remind you is that the fourth quarter or period ending balances do tend to, Steve, be elevated as we see extraordinary activity levels at that point.

But I think Karen has given a good outlook for the year where we see consistent loan growth throughout 2014.

I think we are very well-positioned, our mortgage banking finance business we would expect, as she noted, to be relatively stable.

I would (inaudible) positively GAAP to a recovering single-family residential market in the country, 70% of our volumes in mortgage banking finance are purchased versus the industry average of 47%.

Dealer it looks like is going to be strengthening, but, as you know, that has variation.

But we did see fortunately of the $1.3 billion over $600 million of that was really spread across nearly all of our businesses.

I think the general business activity and the climate next year is really going to dictate a lot of what we see in terms of the actual outcome and growth in the loan growth portfolio.

And I would just add, Steve, that this outlook is again against the backdrop of what we expect to be a continuing slow economy, low rate environment and very competitive environment.

Got you.

No, that makes sense.

Just seems like you're building up a lot of great momentum and it seems like -- get a little bit more help from the economy and that could be even better.

And so, just on that topic still, as you look forward where do you see the best kind of risk/reward to grow loans as you look ahead?

Lars?

Yes, so, we are going to be very focused on our small business and middle-market businesses.

We see nice returns in the businesses.

We have seen a pickup in traction in small business; we've actually seen some growth the last couple quarters in small business where we get good returns, nice deep relationships.

Across our middle-market businesses, whether it is technology and life sciences, our energy business if we begin to see a pickup in CapEx there and that industry, it represents a nice opportunity as well as environmental services, entertainment, there is a number of others including general middle-market.

General middle-market will be clearly impacted significantly I think by business activity levels.

Where if you look at utilization rates in general middle-market, a climb there as their balance sheets hopefully grow with a strengthening economy could certainly put upward pressure on our loan balances.

And then lastly I would mention that we are beginning to see some growth in our private banking wealth management area as the collaboration between our commercial relationships and the principles dealers is really starting to get traction and helping us to drive our portfolio.

Perfect.

I think as Lars mentioned and you mentioned earlier, as the economy picks up it will be a positive for all of our lines of business across all of our markets.

Definitely.

Thank you so much.

Keith Murray, ISI.

If you could just spend a minute on the LCR.

So you guys have showed at a conference recently that you were in very good shape on the LCR mentioned today, that you are changing the mix, adding more Ginnie Mae's.

Did you think about your assets sensitivity as you changed that mix?

Does that make you rethink what your sensitivity going forward versus what it was in the past?

Just curious how you think about that.

Karen?

Sure.

Yes, we did share that at the Goldman Sachs conference in December that as of the end of the third quarter we believe that under the proposed liquidity coverage ratio that we would be in compliance.

And we have been adding Ginnie Mae securities.

And from an asset sensitivity perspective, as you know hopefully, 85% of our loans are floating rate and so we are asset sensitive today.

The changes that we have made to the securities portfolio do not change that asset sensitivity much, if at all.

Okay.

And then just on the -- you mentioned the pension expense savings for 2014.

I guess the question is does all of that go right to the bottom line or is there anything anyplace it gets eaten up?

And then number two, what is your view for expenses outside of the pension savings?

Karen?

Yes, we did say for our outlook for 2014 that we expect our pension expense to be less than half of the $86 million that it was in 2013.

On top of that pension expense we do expect increased expenses for merit, healthcare, regulatory compliance type expensive.

But we are very focused on continued expense discipline to partly offset that other increase.

Okay, thank you very much.

Steven Alexopoulos, JPMorgan.

I just wanted to follow up on the loan growth you saw this quarter.

When you look at C&I -- I think it is up around 13% annualized -- did you see any shift in customer attitude towards expansion investment?

Or, Lars, is this really just a seasonal bounce even though you are saying commitments are up, line utilization is up, pipeline is strong?

Lars?

Yes, absolutely.

I would not say that it is a seasonal shift.

Middle-market banking tends to be a little bit more consistent, less seasonal.

I would tell you that I was really pleased to see the levels of commitment increase, which I think is a good forward indicator across a number of businesses and across our geographies.

But specifically for our middle-market I think that this is just really going to be driven as we look (inaudible) in the next year based upon business activity, I think that is going to have a significant impact on what kind of growth that we see in that area.

I would remind you that what we are seeing is a real receptivity to our relationship banking model across the markets that we are in.

And we are very fortunate that we have got California, which on a year-over-year basis grew a total of 10%; Texas year-over-year grew 5%.

I think we're well-positioned in growth markets with the right businesses and the right people.

So, Lars, and to follow up I guess on Steve's question, so the guidance implies around 1% growth in period end loans if you are seeing the average is up 3%.

Do you just not see momentum as sustainable, maybe the competitive environment?

Or are you just being very conservative given that it is so early in the year right now?

Well, I would say that as Karen pointed out that it is against a continued uncertain economic environment.

And while we are hearing what I would say mildly more positive comments from our customers about 2014, which I think is very positive, they continue to be very cautious about making investments.

They are still looking their wounds from coming through the financial crisis and they're being very reticent about making significant investments.

But they are very profitable, they are delivering, they are building their liquidity and you are seeing that in the transaction account balances that just continue to grow including in middle-market, which was very strong and I think is a good indicator of the really deep relationships that we have with our good middle-market customers.

So we're going to see how the year plays out from an economic perspective but I think we are very well-positioned.

And, Steven, I would just reiterate that on a period end basis we do typically see higher period end balances each quarter particularly at year-end, which do tend to come back down post year-end.

Okay.

Karen, maybe just a final question for you.

Can you size for us the expected securities that you think you will be purchasing to get into compliance with the liquidity coverage rules?

Sure, as I said before, based on our third-quarter balance sheet, what we disclosed at the Goldman Sachs conference is we believe if we look at -- if we interpret the rule as drafted that we currently comply.

As the economy improves the interest rate environment improves, we do expect deposits to decline, we do expect continued loan growth.

And in that scenario we will need to be adding more high-quality liquid assets for this new test.

The rule is far from final and we remain ever mindful of adding securities today in this continued low rate environment that will be marked as the rate environment increases.

Okay.

Got you.

Thanks.

Ken Zerbe, Morgan Stanley.

Karen, on slide 14 you made a comment (inaudible) talking about incentive compensation was high because of favorable performance relative to peers.

Can you just give us a little more clarity?

Like what metrics are you guys looking at?

Because I know loan growth has been a little bit soft.

But what metrics are you guys looking at that would suggest that you are performing better than peers?

Thanks.

So our incentive compensation plans as disclosed in our proxy statement look at the relative performance on both three-year and annual EPS growth and ROA -- ROE, excuse me.

And if you look at that relative performance based on our peer group, that is how we calculate our incentive compensation expense.

Okay, that helps.

And then just really quick, what is the level of excess liquidity you guys have right now?

We have a period end about $5 billion in balances at the Fed.

Great.

All right, thank you.

Bob Ramsey, FBR.

Just a quick question on the mortgage banker finance portfolio.

It obviously held up a lot better than I expected last quarter and this quarter was down a little more talking average balances.

Is that just a function of sort of the timing with the way the averages shakeout?

And then I know you guys said you expected to stay flat on average to this quarter, is that primarily a function of the purchase percentage at 75% or are there other factors that sort of give you confidence there?

Lars?

Absolutely.

So if you actually compare the reduction in our mortgage banking portfolio for the fourth quarter it is pretty much in line with the MBA.

And frankly we had expected a decline in the fourth quarter.

So we feel good about that, we are right on plan.

As we look out I think into next year, I think a really important point here is to keep in mind that we are very positively gapped to, as I pointed out before, the purchase market versus refi.

The industry overall is at 47% we are at 70%.

And if you look at the 2014 projections by the MBA there is actually an expectation for a 20% increase in purchase volumes for 2014 over annualized fourth quarter.

So for us that is not an accident, we strategically positioned ourselves with our customers to capture a higher level of purchase volumes and I think we are very well-positioned.

One last thing I would leave there is I am really proud of our mortgage banking finance bankers.

They have developed very deep relationships with these customers, we have banked them for a long time, we have over 90% treasury management cross sell, primary depository relationships and I think even with some variation in the markets we are going to be well-positioned.

But a lot of it is going to have to do with the housing market variability as Karen pointed out.

Okay.

And then in that book did spreads tighten this quarter, did they improve?

I'm just curious sort of on the pricing front what you are seeing.

Did spreads improve this quarter.

Spreads.

Yes, so we continue to see downward pressure in the mortgage banking finance sector, but it is still compares very favorably and we do have very high ROEs out of that business.

Just one thing in closing, I think from a market share overall perspective, we are well positioned.

Again, I have shared with you strategically how we positioned our business and that is not -- that is really not a mistake.

We continue to add customers, we have over the last two years, three years.

And so frankly if you take a look at our overall business you would find that it is much more granular today than it was say three years ago.

So hopefully that gives you some more insight into the business.

No, it is very helpful, thank you.

If I could ask one last question.

I know you all highlighted the seasonality in 1Q comp expenses.

Could you just remind me how much of an uptick maybe you expect in the first quarter from the fourth on the comp line?

Sure, if we look at incentive compensation expenses, these are disclosed in our Ks and our Qs.

The full year 2000 -- last year 2013 compensation expense was $37 million, in the first quarter it was $10 million.

So we do expect, as I said, the full year next year to be about even.

But because of some plan changes the first quarter to be a little bit higher than what it was last year.

Okay, great.

Thank you very much.

John Pancari, Evercore.

Yes, hi, this is [Rahul Patel] in for John.

I just want to go back to the expenses.

I know you mentioned you expect expenses to be lower in 2014 and it seems like the main driver is the pension expense.

Maybe you could give us some color around where else are you seeing expenses lower, especially given the headcount was actually up this quarter, the number of branches didn't change.

I just want to get a sense of where else are you seeing some reduction in expenses?

Karen?

So we have a strong culture of continued expense management, and that is something that we focus on each day.

As we look forward some of the things that we have been able to do are continuing to renegotiate our contracts with our vendors at better and more favorable pricing terms.

So, for example, late this past year we renegotiated our telecommunication contract, which should provide substantial year-over-year savings.

In addition, we have been consolidating our vendors.

So, for example, our IT contract labor, we have consolidated the vendors from 16 to two.

And as a result we should see both better quality and reduced expenses.

And then thirdly, if you look at litigation expenses, we have input -- we have put in place a new litigation billing management system, which enables us to better track, audit and collect reimbursables on our legal expenses.

So it's lots of little things like that that add up to continued and strong expense management.

Okay, that is helpful.

And then are you still targeting a longer-term efficiency ratio of 60% or has that changed?

Our long-term targets on both efficiency ratio and ROA have not changed.

Our efficiency ratio target is 60% and our ROA target is 1.3 times.

You have seen us move the needle in that direction over the last couple of years and we intend to continue to do so.

All right, thank you.

Brett Rabatin, Sterne, Agee.

Wanted to ask, Ralph, does the guidance for loan growth this year, does that make any assumption for the line utilization rate going forward kind of given the uptick you experienced in 4Q?

Well, I would say it is part of it.

It is overall you look at line usage, you look at what is going to happen with the economy and what your expectations are.

And as Lars was saying earlier, things are moving a little more positive, but I don't think as yet -- the uncertainty and the caution is still relatively high with our customer base.

Lars, do want to add anything to that?

Yes, I may just point something out here.

As we look at the 2014 forecast, I know I am certainly not relying on utilization rates to get us to where we need to be.

We are going to have to take action from a management perspective to make sure that we have the right resources and the right businesses.

We have built out even more enhanced accountability and a sales management system to make sure that we are out there winning more relationships.

And that is really what is going to -- deepening relationships and winning more relationships is really what is going to have to be a significant contributor to our growth in 2014.

And I would just add, Brett, that our 10-year historical loan utilization rate is about 47% exactly where we are today.

Right.

Okay, great, that is good color.

And the other thing I wanted to ask was just around energy and I know that is sort of what caused the decrease in Texas and those companies were obviously very profitable and liquid and that has caused some payoffs and whatnot.

Any thoughts on that line going forward and just energy in general in terms of growth opportunities?

Yes, absolutely.

From a long-term perspective being the largest commercial bank headquartered in Texas, obviously we are in a very strong position.

We strengthened ourselves in the Houston market, which is really critical.

That business has shown significant growth over the last few years.

If you look at the industry overall, rig counts have really leveled out over the year and that is primarily what drives CapEx in the industry.

In addition, you've seen a number of our customers accessing the debt capital markets and that is paying down senior debt.

But that is cyclical, I think we're well-positioned, we've got great customers and as they continue to reinvest in CapEx we are going to be well-positioned to drive that forward.

I'd remind you that this is not a new business to Comerica.

We have been in it a very long time; we have a time-tested robust credit underwriting policy.

It is relationship based.

And we're not changing our strategy around that.

So that can be a contributor certainly in the future for Comerica's growth.

Okay, great.

Thanks for the color.

And, ladies and gentlemen, we have reached the allotted time for questions.

I would now like to turn the conference over to Ralph Babb.

I would just like to thank everybody for joining us today and hope everybody has a great day.

Thank you very much.

Thank you for your participation.

This does conclude today's conference call.

You may now disconnect.