Comerica Inc (CMA) 2014 Q3 法說會逐字稿

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

At this time I would d like to welcome everyone to the Comerica third-quarter 2014 earnings conference call.

(Operator Instructions)

Thank you.

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

Ms. Persons, you may begin.

Thank you, Regina.

Good morning and welcome to Comerica's third-quarter 2014 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; Vice Chairman of the Retail Bank and Wealth Management, Curt Farmer; 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 we will be referring to the slides which provide additional details on our earnings.

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

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

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

Also this conference call will reference non-GAAP measures and in that regard I would redirect 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 2014 net income of $154 million, or $0.82 per share compared to $151 million, or $0.80 per share in the second quarter and $147 million, or $0.78 per share in the third-quarter 2013.

The third quarter reflected broad-based average loan and deposit growth, solid credit quality and expenses that continued to be well-controlled.

The quarter also included a $32 million gained from the early redemption of debt as well as $15 million in charges related to efficiency incentives, initiatives and a contribution to our Charitable Foundation of $9 million, all of which we consider to be non-core.

Altogether these actions provided an after-tax benefit to our third-quarter results of $5 million, or $0.03 per share.

Turning to slide 4 and highlights for the quarter, average total loans were up $3 billion, or 7% on a year-over-year basis and were up $434 million, or 1% compared to the second quarter.

Loan growth was led by mortgage banker finance, which increased $276 million in line with the summer home selling season.

Notable loan growth was also seen in technology and life sciences, energy and commercial real estate.

As expected this was partly offset by a $178 million decline in auto dealer floor plan loans as our customers worked down their inventory in preparation of receiving new models.

And with reduced line utilization general middle market loans declined $142 million.

Overall the pace of loan growth declined relative to the second quarter due to the typical summer slowdown as well as moderating GDP growth.

We believe our customers are becoming stronger and more confident; however, they remain somewhat cautious and continue to build liquidity.

We grew deposits in the third quarter in almost every business line with the bulk in non-interest-bearing deposits accounts.

Average total deposits increased $3.3 billion, or 6% year-over-year to $55.2 billion.

Relative to the second quarter deposits grew $1.8 billion, or 3% with almost half coming from general middle market.

In further comparing our third-quarter results to the second quarter, net interest income decreased $2 million to $414 million primarily due to the decline and accretion of $7 million as expected partially offset by the benefit from loan growth.

Credit quality continued to be strong as the provision for credit losses and net charge-offs remain at low levels as we have seen for the last several quarters.

Noninterest income declined $5 million to $215 million driven by a $3 million decline in customer-driven fees primarily foreign exchange income and a $2 million decline in non-customer income.

Excluding the $8 million net benefit, or $5 million after-tax from the non-core actions we took in the third quarter that I mentioned earlier, noninterest expenses remain stable.

Finally, we continue to execute our capital plan.

We repurchased 1.2 million shares in the third quarter under our share repurchase program.

Combined with dividends we returned $95 million, or 62% of third-quarter net income to shareholders.

Turning to slide 5 and a look at our three primary markets, Texas has been enjoying a remarkable period of economic expansion.

The ensuing population growth has supported even more job growth in the construction trades and in the service sector.

Our third-quarter average loans in Texas were up 12% compared to a year ago and average deposits increased about 3%.

California is showing above average economic growth as labor market conditions are improving quickly.

In August California created more jobs than any other state coming in right ahead of Florida and Texas.

Our California average loans have grown 11% over the past year and average deposit growth has also been strong posting a 12% increase.

The Michigan economy is benefiting from strong auto sales and gains in other durable goods manufacturing.

Overall, our customers' financial performance has been strong and they continue to delever and build cash.

This is reflected in the stable average loans and solid deposit growth.

Before turning it over to Karen I wanted to mention a couple of other items.

As you may know, Comerica is the prepaid card issuer for the U.S. Treasury Direct Express Program.

The Treasury has recently selected us as the financial agent for the Direct Express Program for an additional five years.

Separately, we recently announced that we entered into an agreement with Vantiv to provide payment processing solutions for our merchant services customers.

Comerica's merchant services enable businesses to enjoy the convenience of accepting card payments with a focus on providing those businesses with a means to improve efficiency as well as adapt to the latest technology and payment solutions.

The Direct Express Program, our new merchant services platform as well as our trust alliance business, which we discussed at an Investor Conference in September, are all great examples of how we leverage partnerships to provide a wide array of growing products and services for our customers.

In closing, we are focused on the long term and building enduring relationships.

We offer our customers a value proposition by providing them products and services that meet their needs, which enables us to hold our pricing parameters while not varying from underwriting standards that have served us well through many cycles.

We continue to face rising regulatory and technology demands as well as the possibility of higher pension expense next year if long-term rates remain at their current level.

We have taken some actions this quarter intended to assist us in partially mitigating these headwinds.

We remain focused on controlling the things we can control and are well-positioned to benefit as the economy improves and rates ultimately rise.

And now I will turn the call over to Karen.

Thank you, Ralph, and good morning, everyone.

Turning to slide 6, quarter-over-quarter total average loans increased 1%, or $434 million.

Commercial loans were the major driver increasing $298 million, or 1%.

Commitment growth of over $850 million outpaced loan growth resulting in a decline in utilization rate to 48.3%, down from 49.3% at the end of the second quarter.

Importantly, our pipeline remains robust and increased during the quarter.

Similar to the commercial loan trends we have seen in the H.8 data reported by the Fed, our pace of loan growth slowed in the third quarter relative to the first half of the year.

As Ralph mentioned, we believe this is in line with the typical summer slowdown including seasonality in our national dealer business along with moderating GDP growth.

While the pace slowed the growth we had in the third quarter was broad-based.

The larger increases in average loans compared to the second quarter were noted in mortgage banker with $276 million, technology and life sciences $110 million, energy $95 million, and commercial real estate $88 million.

Two businesses declined.

National dealer services by $178 million due to model year changeover and general middle market by $142 million, due to lower line utilization with the summer slowdown.

Period-end loans declined $174 million to $47.7 billion, yet remained well above the third-quarter average.

This decline included decreases in national dealer services of $356 million and general middle market of $246 million for the same reasons I just described as well as a decrease in mortgage banker finance of $102 million reflecting the beginning of the decline of the summer peak.

Increases in almost all other business lines partially offset the decline.

Remember that our loans typically spike at quarter end so the average for the quarter is a better indicator of trends.

Finally, loan yields shown in the yellow diamonds, decreased 9 basis points in the quarter of which 6 basis points can be attributed to lower accretion and 1 basis point each attributed to lower interest collected on nonaccrual loans and negative residual value adjustment to assets in our leasing portfolio and a decline in loan yields resulting from loan portfolio dynamics such as a mix change in customer usage.

Turning to deposits on slide 7, our total average deposits increased $1.8 billion, or 3% to $55.2 billion consisting of a 5% increase in non-interest-bearing deposits and a 2% increase in interest-bearing deposits.

Almost every business line posted growth with the most significant increase in general middle market, which increased 6% and accounted for almost half of the increase in our total average deposits.

We believe general middle market's increase in deposits and decrease in loans go hand-in-hand as customers increase their cash and have less need to borrow against their lines.

Period-end deposits grew $3.4 billion to $57.6 billion and like our loans tend to spike at quarter end.

In fact our deposits increased $1.5 billion in the last two weeks of the quarter.

For that reason remember that average balances are what drives our net interest income.

Deposit pricing remains low at 15 basis points as shown by the yellow diamonds on the slide.

Slide 8 provides details on our securities portfolio, which primarily consists of mortgage-backed securities that average $9 billion for the quarter.

The estimated duration of our portfolio still sits at four years and the expected duration under a 200 basis point rate shock extends it slightly to 4.7 years.

The yield on the mortgage-backed securities book declined 6 basis points as the second quarter included a $1 million retrospective adjustment to the premium amortization and there was no adjustment recorded in the third quarter.

Our goal is to reinvest prepays at or above the current portfolio yield.

However, the yields on the securities that are prepaying are typically above the average portfolio yield and therefore if rates remain at current levels we anticipate continued slight pressure on the average yield.

Based on current rate expectations we believe that the pace of prepays will be about $350 million to $450 million in the fourth quarter in line with what we've experienced the past couple of years.

In light of the fact that Fannie and Freddie backed securities are subject to a haircut and a cap under the liquidity coverage ratio, or LCR, we continue to reinvest the prepays in Ginnie Mae securities.

As far as the LCR, the final rule was issued last month.

Banks our size will now need to phase in compliance beginning in 2016 and will be subject to a monthly calculation.

While we are still in the process of assessing the final rule and will continue to do so while we work to clarify the detail and analyze our customer data, we estimate as of quarter end our LCR ratio stands at about 80%.

We continue to feel comfortable that we will meet the phase-in threshold within the required time frame, which is now 90% by January 2016.

We will need to add high-quality liquid assets, or HQLA, over the next year to meet the 90% plus a buffer to withstand normal volatility.

Exactly how much in liquid assets we add will depend on our loan and deposit growth over the next 15 months and the resulting change to our excess deposits at the Fed, which counts as HQLA.

We have said before that adding securities should not have a significant impact to our earnings and the impact to rate sensitivity will depend on the fixed or floating nature of both the funding and the investment side.

As we make decisions on fixed versus floating we will remain mindful of the current rate environment with a focus on not prematurely altering our overall upside to rising rates.

Turning to slide 9, net interest income decreased $2 million primarily due to a decline in accretion as expected of $7 million.

Loan growth and one additional day in the quarter each added $4 million to net interest income.

This was partially offset by a $2 million negative residual value adjustment to assets in our leasing portfolio, $2 million impact from portfolio dynamics such as the mix in customer usage as well as a $1 million decline in interest collected on nonaccrual loans.

Other than these effects from the loan portfolio a decline in our debt interest cost reflective of the net impact of recent maturities, redemptions and issuances provided a $2 million benefit.

And interest earned on investment securities decreased $1 million as I discussed on the prior slide.

Finally, the $1.1 billion increase in average deposits at the Fed added $1 million.

The net interest margin decreased 11 basis points with a decline in accretion having a 5 basis point impact and the increase in liquidity at the Fed having a 4 basis point impact.

Loan portfolio dynamics and the lease residual value adjustment had a combined 2 basis point impact.

Movements related to lower securities yield and interest on our wholesale debt netted to zero.

Just to note, we expect accretion in the fourth quarter to be about $5 million for a total of approximately $30 million for the full year.

There is only about $20 million in total accretion yet to be realized, which we expect to recognize in small increments each quarter over the next couple of years.

We believe our balance sheet remains well-positioned for a rise in short-term rates.

As of September 30, our standard asset liability case which calculates a dynamic balance sheet assuming historical relationship, shows that a 200 basis point increase in rates over a one-year period equivalent to 100 basis points on average would result in a benefit to net interest income of about $225 million.

In past Investor Conferences we have shared alternative assumptions to our standard case including the pace of deposit, loan and rate changes and in all cases we remain well-positioned for rising rates.

Turning to the credit picture on slide 10, net charge-offs decreased to $3 million, or 3 basis points of average loans and included $21 million in recoveries.

Our criticized loans decreased and nonperforming loans and the allowance coverage ratio were both stable.

Our allowance covers are trailing 12 months net charge-offs 16 times.

Our solid credit metrics and strong recoveries combined with the loan and commitment growth resulted in a decrease in the provision to $5 million and a small reserve build.

Slide 11 outlines noninterest income, which declined $5 million.

Customer-driven fee income decreased $3 million including a $3 million decrease in foreign exchange income from a high second quarter level and a $2 million decrease in investment banking fees.

This was partially offset by a $3 million increase in commercial lending fees.

Non-customer driven income decreased $2 million.

Turning to slide 12.

Non-interest expenses included a net benefit of $8 million from non-core actions taken in the third quarter.

Aside from these actions expenses were stable increasing just $1 million as the impact from one additional day of salaries expense and small increases in occupancy and several other categories were partially offset by lower litigation-related expenses.

The non-core net benefit of $8 million included the early redemption of debt, a contribution to our charitable foundation as well as changes related to our continual drive for efficiency.

As far as the debt, I mentioned last quarter that we had called $150 million in subordinated notes effective July 15.

These notes had a carrying value of $182 million, which resulted in a $32 million gain in the third quarter.

We also made a $9 million contribution to Comerica's Charitable Foundation, which supports nonprofit organizations in the communities we serve.

As you know, we are continually focused on efficiency.

We did take actions in the third quarter amounting to $15 million in non-core charges on a number of small projects intended to assist us in partially offsetting the headwinds we are facing from rising regulatory and technology demands in addition to the possibility of higher pension expense next year.

For example, we continuously review our real estate requirements to ensure we are optimizing our square footage.

As a result we are consolidating space and taking a charge as we exit a handful of properties.

We anticipate taking a further charge of approximately $5 million to $7 million in the fourth quarter primarily related to real estate optimization as we complete the remaining items identified.

While the implementation of the projects is ongoing we estimate that by the end of next year we should achieve run rate savings of about $12 million to $14 million.

Related to rising technology and regulatory demands, we will need to continue to invest in technology projects related to evolving cyber security and compliance including the liquidity coverage ratio and changes required by the card industry.

Related to pension expense, there are several factors that determine our annual pension expense such as the discount rate which is set at yearend.

If long-term rates remain at the current level, which is lower than where they were at yearend 2013, the discount rate on liability could be lower driving an increase in our annual pension expense.

In our 10-K we disclosed that for every 25 basis point change in the discount rate the impact is about $8 million.

In addition, a new draft mortality table was released earlier this year and it is possible that the new mortality assumptions could also drive the expense higher.

Moving to slide 13 and capital management.

As Ralph mentioned, we repurchased 1.2 million shares this quarter under our share repurchase program.

Combining shares repurchased with the dividends paid we returned 62% of net income to our shareholders in the third quarter and year-to-date we have returned 67% of earnings.

Our capital position remained strong with a tangible common equity ratio of 9.9% and 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.

Turning to our final slide, 14, our outlook for full-year 2014 compared to full-year 2013 has not changed from what we outlined on our call in July.

We have, however, narrowed our year-over-year expectations for average loan growth to be about 5%.

It was previously 4% to 6%, and we now expect accretion to be about $30 million at the upper end of the $25 million to $30 million range we had provided.

Turning to our expectations for the fourth quarter relative to the third quarter as outlined on the slide, we expect average loans to grow slightly assuming continued moderate economic growth.

We believe we will see a rebound in our floor plan loans as auto dealers receive their 2015 model inventory and we expect mortgage banker outstandings to decline as home sales are typically lower in the fourth quarter.

For the rest of the loan portfolio we expect a small increase.

Keep in mind that competition is stiff across all of our businesses and we fully intend to maintain our loan pricing and credit discipline.

We expect our net interest income to grow slightly with a small increase in accretion to about $5 million from the $3 million in the third quarter.

The positive effect from loan growth in our portfolio should approximately offset the continued pressure from the low rate environment.

With continued strong credit quality we expect net charge-offs and provision to remain low similar to what we saw in the first two quarters of the year.

Overall, we expect noninterest income to be relatively stable with customer-driven income similar to the third quarter.

While we expect fees to be modestly higher in several areas we have seen lumpiness in certain categories such as syndication fees, which were elevated in the third quarter.

Non-customer driven income contains items such as warrant income, deferred comp and securities gains and losses, all of which are difficult to predict.

Overall we expect them to decline.

Noninterest expenses are expected to be higher.

Remember that our third quarter included a net benefit of $8 million from non-core items.

And as I mentioned, we expect additional non-core charges in the fourth quarter of about $5 million to $7 million, primarily focused on real estate optimization.

Furthermore, we expect a modest increase in core expenses related to higher technology and consulting expenses as well as a seasonal increase in benefits expense.

In closing, we are pleased with our third-quarter broad-based average loan and deposit growth and strong credit quality.

We continue to demonstrate our expense discipline and took actions in the third quarter intended to help offset some of the expense headwinds arising from increasing regulatory and technology demands.

We will continue to focus on the things we can control and we believe our relationship banking strategy combined with our geographic footprint will serve us well as the economy improves.

Now we would like to open up the call for questions.

(Operator Instructions) Terry McEvoy, Sterne Agee.

Hi, good morning.

I guess just start with a question for you, Ralph.

As you look at the energy portfolio, what is your outlook going forward, any concerns given the drop in prices?

And then specifically the servicing piece of energy, is that something that we need to focus on going forward?

Okay, John, do you want to answer that?

Sure.

The short answer is no, we're not concerned at this time.

We have been in this business for 30 years so we have seen lots of ups and downs.

In fact, the price was in the low 80s in 2012, 2010 and 2009 as well.

We have about $3.4 billion in outstandings at the end of the quarter, which is about 7% of the portfolio.

Approximately 95% of our portfolio is secured.

Most of our customers are well hedged.

On average 50% are hedged for two full years and many are for longer periods.

At current prices drilling activity probably will plateau but production is going to be fine.

So overall I'm very comfortable at this time.

To address your services issue, that is about 17% of the total energy portfolio right now.

And then what do you expect to spend this year -- question for Karen -- on technology and regulatory issues?

Just trying to establish a base for them to build off next year.

And then on the expenses, if things were to stand today at the end of the year, what would the pension costs look like in 2015?

Sure, I will take those in pieces.

In technology we typically have an investment spend, an annual investment spend, between $75 million and $100 million and an annual expense between $30 million and $40 million.

As I mentioned, we do expect that spend and expense to increase because of the increase in technology demands related to the regulatory environment, related to card industry compliance and related to cyber security.

On regulatory issues and matters, we have said before that year-to-date or in 2014 we have added about 85 people amounting to a little bit more than $25 million in annual run rate expense.

Much of that or the vast majority of that already built into our run rate and we do expect that to increase as we continue to have new regulatory requirements.

On the pension expense, that expense is set at the end of every year based on key assumptions made, particularly the discount rate on our liability.

That rate is set based on a long-term AA corporate bond index, which matches the liability -- matches the duration -- of our pension liability.

Last year that discount rate was 5.17%.

And we will see what the discount rate is at the end of this year.

But given the current rate environment if this sticks, the pension expense related to the discount of the liability could increase.

And if new mortality tables are introduced this year by the Society of Actuaries, our potential expense related to mortality assumptions could increase as well.

Our pension expense this year is about $39 million.

You may recall last year it was about $86 million.

Okay.

Thank you, Karen.

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

Maybe for John Killian, I am curious at what price does oil need to fall for you to become concerned over the portfolio?

Okay.

John?

Sure.

Hi, Steve.

You know it depends of course on every individual borrowers' specific set of facts and their set of costs.

But remembering that generally speaking we are pretty comfortable at the 80s, as I mentioned earlier.

If we go into the 70s activity will slow more.

If we go into the 60s on oil you will see it slow a lot.

And you will probably see some credit issues begin to arise if we go in the 60s and stay there for a prolonged period of time because as I said, a lot of our customers now are well hedged.

That is completely different than prior ups and downs in the oil business.

So that is going to give us some runway here to get through a temporary period of lower prices.

If it goes into the 60s and stays there for let's call it two or three years, you will begin to see some credit issues.

Okay.

That's helpful.

Karen, for the pension expense given the discount rate that you just highlighted, why wouldn't this go back up to $86 million or higher based on -- I assume that you are trying to telegraph that this expense is going up meaningfully in 2015?

Yes, it could go up meaningfully in 2015, Steve, but again the discount rate is set at the end of the year and we don't have a crystal ball on what long-term rates will be at the end of the year.

And we don't know what the mortality tables that could be introduced between now and the end of the year would say.

So difficult for us to give you any specifics.

Right.

Karen, do you have a sense though let's just say rates stayed where they were today and the mortality tables didn't change, where that level goes to next year?

Yes, in our 10-K, Steve, we do disclose that for every 25 basis point change in the discount rate, that would equate to about an $8 million impact on the pension expense.

Okay, maybe one final one.

Regarding the guidance calling for the seasonal decline in mortgage warehouse, following up on that rates are lower, any signs of the pickup in mortgage warehouse given where rates have moved down to here in The quarter and maybe what was the mix in 3Q of purchase and refi?

Thanks.

Lars, do you want to take that?

Yes, absolutely.

So looking at the third quarter we did see the seasonal decline.

As Karen pointed out to you, $276 million increase over the prior quarter but if you look at the period end we were down $102 million.

One point I would like to make is that the decline in linked-quarter averages was down substantially less than we saw in the prior year, which I think positions us well on a go-forward basis.

Maybe to frame that a little bit for you, we actually increased our averages by 21% and that was against an industry that had an increase of about 3% in mortgage volume.

But we would expect to see softness in the fourth quarter.

Exactly where that lands is going to be very difficult to tell but I think we have all heard with the U.S. Treasury, 10-year Treasury where it is, mortgage activity has picked up in the most recent few days I think across the industry.

I think we are very comfortable with our position in the industry.

We continue to capture more and more customers with each quarter.

We have very deep cross-sell within the highest treasury management cross-sell across the entire Company.

And so we see this as a growth business working with some of the best mortgage companies in America.

Lars, how about the mix on current --?

Yes, thank you, Ralph.

So the mix for us we have, as I mentioned in previous earnings conference calls, we have really taken an active position to pick up more of the purchase volume.

We're up to 80%.

The industry is at 58%.

I think that that is part of what helped us in this last quarter, linked-quarter, us outperforming the industry.

Okay.

Thanks for taking my questions.

Ken Usdin, Jefferies.

Hey, this is actually Josh in for Ken.

So you noted that expenses this quarter were helped by lower litigation.

How should we think about the trend for this expense item going forward?

Karen?

Yes, I would say our litigation-related expenses compared to larger banks in the industry are low.

They can be lumpy and are difficult to predict, but at this stage we feel very comfortable with the reserves that we've got on our balance sheet.

Yes.

Okay, that's fair.

And then to what extent do you expect the efficiency savings to offset the increases that you are expecting in compliance and technology?

Yes.

We are right now in the details of working through our 2015 budgeting process.

And as we typically do, we will give an outlook on 2015 in the fourth-quarter earnings call in January.

But we have said that we expect these run rate savings from the actions taken, both this quarter and expected next quarter resulting in $12 million to $14 million run rate savings, are intended to help partially offset some of the rising demands and increases that we see.

Okay.

And then just one final question.

FX volume was stronger generally across the industry, and it declined a bit for you in the third quarter.

Can you just provide color for that line item?

Lars?

Fixed volume -- you are talking about in the lending space?

FX.

I'm sorry, FX.

Foreign exchange.

Yes, foreign exchange.

We've really had an anomalous quarter in the second quarter of this year.

We had several large transactions, so I think we are back to really a normal run rate.

Yes.

Okay.

Well, thanks for the color, guys.

Ken Zerbe, Morgan Stanley.

Maybe a little more specific question on expenses.

Hope you can give us a magnitude here, because I guess in fourth quarter we are going to add the $8 million plus the $5 million to $7 million, so that's roughly $14 million.

But when Karen mentioned the technology consulting benefits expense, are we talking about like another $14 million, or what is the magnitude of that unknown piece?

Yes, of the rest of the piece -- and you are right, Ken, you should add back the $8 million, then add back the additional $5 million to $7 million.

And then on top of that we expect a modest increase quarter over quarter related to as we said consulting, technology and a seasonal increase in healthcare benefits.

Okay, so maybe $5 million, $10 million, is that modest in your view, broadly?

We don't give specific numbers.

Alright, okay.

Then the second question I had, just on slide 7, when you guys think about deposit runoff in a higher interest rate environment do you guys assume that sort of a stable percentage of non-interest-bearing deposits run off, or does that percentage increase as deposits grow disproportionately to loan growth?

So in our standard interest rate scenario in the up 200 scenario, we do assume a modest decline in deposits and we do expect that over time as interest rates rise we will continue to see a mix shift out of non-interest-bearing into interest-bearing.

Is that your question?

Well, I guess let's take your $1.3 billion of non-interest-bearing this quarter, which phenomenal growth -- do you just assume that you will keep most of that in the model that you use?

Or do you assume that as we get further into the cycle, as you just get a ton more of this non-interest-bearing that it just increases the risk that a greater percentage actually starts to run off in a different environment?

I am just trying to think of how you are assessing that 200 basis point scenario?

Yes, keep in mind that much of our non-interest-bearing is related to commercial deposits.

And much of those commercial deposits are tied with an earnings credit rate to pay for operating services that our customers have at the bank.

So they tend to be far more sticky than normal non-interest-bearing deposits.

And we do take that into account in our interest rate sensitivity that we expect some decline but we recognize that there is stickiness to those deposits.

Okay, great.

And then just last question, are you replacing the debt that you redeemed this quarter with other long-term borrowings, or changing your liability structure in any way?

Yes, this year you will note that we have -- did have some debt maturities.

And we did issue $600 million in debt.

Next year as we look forward to needing to add high-quality liquid assets for the LCR ratio we will need to be funding those and do expect to be in the debt markets next year.

Great.

All right, thank you.

Ralph, if I could add maybe just one point to the question about the commercial DDA in particular that may be helpful.

As those continue to grow we are being very active in terms of bringing payment solutions, treasury management to these core relationships and encumbering these deposits.

And I think that is one of the reasons that as Karen develops her forecast for the runoff, one of our obviously strategies is to ensure that we make those as sticky as possible.

And in addition, we are hearing from treasurers, CFOs of our customers that they are planning to run at higher liquidity levels than they did before the Great Recession.

So I think that speaks favorably to our liquidity position.

Good.

Perfect, thank you.

Bob Ramsey, FBR.

Good morning.

I was hoping you could just touch on the build in the interest-bearing deposits held at banks, the liquidity buildup on the balance sheet.

Is this in anticipation of investing some of that in high-quality liquid assets, or how should we think about that build?

For us the high-quality liquid assets in the numerator of the LCR equation obviously do include the excess deposits at the Federal Reserve.

And so as we have seen an increase in deposits this quarter that has increased the excess deposits that we have at the Federal Reserve and has helped in the LCR calculation.

Does that answer your question?

I guess I am asking is the intent to keep it there as excess deposits and that is your high-quality liquid assets, or would the thought be that you would invest that at some point in Ginnie Maes or something with a little bit more yield?

Yes, so as we think about our liquidity position and how we should invest it, we do remain mindful of the current low interest rate environment and the fact that locking in a lot more additional securities in this low rate environment is not that appealing, particularly when these securities will be mark-to-market and the numerator in the LCR equation is a mark-to-market numerator.

So we will be making decisions over the next year around the investment but we will certainly keep the rate environment in mind.

Okay.

All right, that is helpful.

And then I think I get it but I just wanted to touch on the purchase accounting accretion.

Based on the $7 million decline you all describe this quarter, I think the total accretion was $3 million this quarter, is that a good number?

That is correct.

It was $3 million this quarter and we said that we expect it to be about $5 million next quarter.

At this stage we believe the benefit from accretion will be small every quarter going forward because we only have about $20 million left in a accretion to be realized.

Okay.

And then I guess after the fourth quarter that would be down to $15 million and then is the expectation it just sort of diminishes from that $5 million level over time?

Yes.

It would diminish over time.

Okay.

Great, thank you guys.

Erika Najarian, Bank of America.

Yes, good morning.

If I could start with the other side of the efficiency equation.

Ralph, you mentioned Direct Express, payment processing and trust alliance in your prepared remarks, I was just wondering if you could give us a sense of how much in terms of revenue contribution incrementally those initiatives can add to 2015?

You know I would like to ask Curt to talk about our alliance, especially business.

These are growing businesses, some like the alliance business we have been in for a long time.

And that is one that let me have Curt comment on that and then I will bounce back to the others.

Erika, thank you for the questions.

So on the alliance business is where we are providing third-party trust services to broker dealers and we've got 13 relationships across the country with some of the larger broker dealers providing fiduciary services to their clients.

It has been a growing business for us.

We've added additional broker-dealers to the network.

In fact if you look at a year-over-year comparison third-quarter 2014 and third-quarter 2013 we are up about $3 million in total revenue.

We've got lots of opportunities to continue to cross-sell into those broker dealers and we also have some opportunities to add some additional broker dealers during the course of the next couple of years.

It's a nice supplemental business for us, for our fiduciary business overall and sort of a distinguishing niche for us in the trust space.

Lars, you want to talk a little bit about merchant services, which has been a business again for us for a long time?

Yes, and I think we are all very excited about the new relationship with Vantiv that is really positioning ourselves to as we mentioned earlier, expand the product offering.

The payment solutions really have a cutting edge technology payment platform available for our customers.

But I tell you in spite of that year-to-date we are up 14%.

On a year-over-year basis we were up 6% in just linked-quarter growth and merchant services.

Frankly, I see this as one of our best opportunities for fee income growth on a percentage basis on a go-forward basis.

We are much better efficient today and we are seeing pipelines at levels that we have frankly never seen before in our Company.

You also mentioned Direct Express.

We are obviously very excited about the fact that we were reselected to serve the U.S. Treasury as their financial agent and we are expecting that this program will continue to grow.

We have over 5 million cards outstanding and we continue to grow a very substantial deposit base over $800 million that continues to grow.

You can see that in the -- I think it is slide number 24 the pricing deck -- that that just continues to grow and we would expect that that trend would continue in the coming years.

Got it.

Thank you.

And my second question is, the regulatory and technology headwinds that you mentioned, I assume that that is above and beyond, Karen, what you mentioned is your annual technology investment spend?

And I was wondering if you could help us get a little bit more color on what you are spending on in terms of the regulatory-related expenses and the tech upgrades for next year?

What that incremental expense spend would be related to those two issues?

And how sticky is that in your deposit base as we think through what could carry over to 2016?

Okay, so on the regulatory and technology spend, we do continue to invest in technology around cyber security, around our card industry compliance.

As you probably know in the credit card space with PCI and EMV and things like that, it requires a technology investment.

On the regulatory front, we are continuing to invest in things, in stress testing, in the new liquidity coverage ratio, so hopefully that gives you some color.

Got it.

And are you prepared to give us a sense on what the incremental dollar spend maybe for 2015 and how sticky that could be?

Yes, we are not prepared to give dollar amounts because we are working through our budgeting process right now and setting our priorities.

But we will talk about it on the fourth-quarter call.

Okay.

And just last one for me, you have a significant amount of capital and your shareholders have been enjoying well above industry average in terms of your ability to return that back to them.

If we are in a scenario where we are lower for longer and that could induce some smaller banks to be more open to selling, I guess would you be interested in maybe taking advantage of that opportunity given how much excess capital you have?

Or would you rather be prepared for stronger balance sheet growth as the macro bounces back?

As we have said before, we are very comfortable with our footprint today and our geographic diversity, which is one of the things that was a key strategy for us.

And especially with when we added Sterling into the Houston market here in Texas, and California now has been filled out as well, through an acquisition about 10 years ago.

And we certainly have a good footprint in Michigan.

We will look at opportunities as they come up but the key is we now have that footprint that we can grow from an internal standpoint and it is not based on the need to have to do acquisitions.

So it depends on what it is, where it is and the culture and the fit into what our strategy is for internal growth.

Thank you.

I appreciate the color.

Jennifer Demba, SunTrust Robinson Humphrey.

Good morning.

My question is a follow-up on the previous questions on the energy price decline and their impact.

Just wondering hypothetically if oil prices were to stay in the low 80s, what you would expect the impact on just the general Texas economy to be, or if they were to drop down to the 60s?

Okay.

John, do you want to comment on that?

Yes, that's an excellent question but it's also a very difficult one to estimate.

When I look at the statistics about the Texas economy, the mining or energy business accounts for 10% to 12% of the Texas economy, so there would definitely, Jennifer, be an impact.

How big it would be would be tough to tell.

The good news is given the economic expansion in Texas right now, there is some leeway for things to slow down a little bit and still be in a growth environment.

Yes, I would underline the diversity in the Texas market today versus what it has been a number of years ago.

Energy is a very important sector certainly in the contribution, but as John mentioned, it is a lower rate today of -- what's the right word -- fueling the economy because of the diversity that is out there.

So it won't have near the impact it did 20 years ago.

Okay.

Thank you very much.

Brian Foran, Autonomous.

Hi, good morning.

I guess on the kind of middle market trends that you outlined, if I think through the cycle utilization rates are up.

I think they bottomed at like 44 for you guys but they still haven't gotten back to the 50 to 55 where they were historically and we are pretty far into the recovery and yet the deposits just keep going up.

So I know it's a qualitative question but just when you talk to your customers and look at the data, how much of this feels like it is just cyclical, there's these kind of two step forward, one step back pattern to the economy and people get cautious?

Versus how much of it do you think is secular, i.e.

your customers are just going to carry more liquidity and maybe use their lines less than they did 10 years ago?

I think -- I will ask Lars to comment on this too -- I think it's a little bit of both.

That people are being more conservative today as was mentioned earlier but also as they look forward because of what we have been through in the economic downturn I think customers will generally tend to want stronger lines, larger lines and also more excess liquidity than they have had in the past.

To be prepared for it.

Lars, do you agree with that?

Yes, I think Brian is right on the mark.

I think it's a combination of the two.

But clearly the economy going sideways, the geopolitical environment, health issues, the healthcare costs are all contributing to creating a very cautious environment for our customers.

But I do think that they're going to carry higher levels of liquidity on a go-forward basis.

I would point out, though, that in middle market California we did see an increase in utilization rates this past quarter, which I thought was a very good sign.

Because the California market has been lagging in terms of the economic recovery until more recently and that is our largest loan portfolio.

I guess another question on liquidity, more from your perspective.

I guess reading through the LCR documents you can see some of the penalties on commercial deposits have bigger outflows, the liquidity you have to hold against lines.

I guess I am still I struggle a little bit with you have an 83% loan, a deposit ratio, you have nearly $8 billion of cash on the balance sheet and that kind of spits out an 80% LCR ratio.

When you work through the details of the calculation is it some pieces of the business that are getting disproportionate penalties, or is this just the way the calculation works if you are kind of a bread-and-butter middle-market commercial bank you need to have cash at 10% of balance sheet and you need to have a loan-to-deposit ratio in the 80%s?

Karen?

Brian, you are absolutely right that the LCR ratio does treat commercial-oriented banks a little more punitively than retail-oriented banks.

Because the outflow required in the calculation on a commercial deposit is much greater than the outflow on retail deposits.

In addition, it does assume that several commercial facilities are drawn and so it just is a little bit more punitive to banks like us.

That said, with our LCR ratio currently estimated at about 80%, we feel very confident that we can easily comply starting in 2016 and it shouldn't have a significant impact on us.

Great.

Thank you for taking my questions.

John Pancari, Evercore.

Good morning.

Want to see if you can give us a little more color on your thoughts on the potential trend in the efficiency ratio through 2015?

I am sorry to beat a dead horse here on expenses but just given all of the factors you have been citing, Karen, around the impacts to expenses here where you are spending, wanted to get a little bit of color on how we think about the efficiency ratio for the full year.

Thanks.

Yes.

Thank you, John.

So as you know we have been focused on moving our efficiency ratio toward our target below 60% for the last several years.

And over the last several years we have successfully been able to offset the headwinds that we have been facing from the low rate environment, from the decline in accretion and from increased regulatory expenses to be able to move that efficiency ratio down.

We are not ready to give our outlook for 2015, mainly because we are still working through the detailed process.

But we are being honest in saying that we do have significant headwinds next year that we are facing and we are taking action this quarter to help partially offset it.

Okay.

All right.

And then separately around loan pricing I wanted to see if you can give us a little more color on what you are seeing in terms of loan pricing competition.

And if you could, if you could provide us with some details on new money loan yields by type, particularly C&I versus CRE, and maybe the energy portfolio as well?

Thanks.

Lars?

Okay, so first of all just in general I would say we are just continuing to see a competitive environment out there across all of our lines of business.

I would characterize California geographically as the most competitive market in our footprint.

I should point out that if you look at the core yield on a linked-quarter basis, the yield was down 1 basis point on an overall basis which I thought was a real positive for us in terms of the evidence of our discipline relationship pricing approach to the market.

And also the mix of our business.

We are putting the resources in the right businesses and in the right markets where we can get the right kinds of growth.

In particular you mentioned maybe some of the businesses specifically like our energy business.

We are seeing more competitors jump into the marketplace, both bank and non-bank, and that is not putting just pricing pressure I think in the segment, it is also stretching credit structure.

So we are sticking to our strategy and we are not stretching on either one of them.

We are being very selective in that.

But it is a competitive marketplace out there.

But areas like technology and life sciences, mortgage banking finance, commercial real estate, those are all areas that we continue to garner nice attractive yields and we deliver a great value proposition.

We are really pleased to see small business begin to turn and begin to make contributions and that will certainly help us in our loan yields on a go-forward basis.

So we are going to manage this very carefully.

We got to manage it day-to-day.

It is a very challenging environment but I think we are well-suited to operate in this environment.

Okay.

Thank you.

Sameer Gokhale, Janney Capital.

Hi, good morning.

I had a couple of questions.

My first one was in terms of the recoveries that you have had in your commercial mortgage portfolio in the quarter, they seem to be little outsized at $12 million compared to what you had over the last few quarters.

If you could give us some perspective or insights into what led to the high recoveries that would be helpful.

Okay, John?

Yes, thanks Sameer.

Actually if you look at our recoveries over the last four or five quarters, they have been pretty consistent in that 18, 19, 21 range.

So this quarter was frankly higher than we expected but not out of line with current trends.

Sometimes it will fluctuate between C&I and CRE and this was a quarter where it did turn towards CRE.

In particular we had one large credit that was refinanced, which resulted in a bit of an outsized recovery for CRE but the overall trends have been pretty consistent at a higher level than we would've expected at this point.

Okay.

And then just switching gears in terms of your national dealer services business, I think in your prepared comments you referenced the fact that the sequential decline in balances both on an average and in the period basis were partly the result of seasonality.

But given where we are at in the kind of auto lending cycle, I am curious as to what you are seeing in your discussions with dealers as far as their appetite for building inventories going into next year, or are they being cautious?

There's been talk about auto lending bubbles, an oversupply of vehicles, some people seem to suggest, so is it your view, or when you talk to them what are they saying to you?

Do they intend to keep inventory levels low going forward, or is this really this seasonality playing out?

Lars?

Yes, so frankly the point about keeping inventories low, we have heard that for years in the industry.

But it is very tempting to make sure that you've got all of the new models on your lot and we continue to see that.

I would tell you that from a floor plan utilization perspective we saw a 10% decline end of quarter to end of quarter.

So our dealers, our customers are clearly operating consistent with the way that they have in prior quarters.

They are drawing down.

They've gone through the heavy sales season of the summer.

They are drawing down their inventories.

You are seeing a higher inventory turnover and the $17.5 million annualized sales unit is helping to contribute to that.

So we would expect to see that new model builds, which typically begin in November, will help us grow our balances as we head towards the end of the quarter.

I don't see any real change in terms of the overall industry.

And in fact, I see the confidence levels of the owners at maybe the highest levels that I have ever seen.

They are making a lot of money and generating a lot of liquidity.

So the corollary to that then, we should assume that you haven't changed any of your lending parameters for floor plan ending either.

In terms of LTVs or any other parameters you don't feel that you need to be more conservative there just because it seems like the environment still appears quite bullish from the standpoint of the dealers?

Yes, I think that is right.

We really haven't changed anything.

I would tell you we are being more vigilant, more just about the regulatory environments but our customers are too.

And we deal with mega dealers that typically have robust compliance, consumer finance departments that are really staying on top of CFPB issues and are preparing themselves for the future but we have not changed our strategy at all.

Okay.

That's helpful.

Thank you.

I will now turn the call over to Mr. Ralph Babb, Chairman and CEO, for any closing remarks.

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

We appreciate it.

And everybody have a good day.

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

Thank you all for joining and you may now disconnect.