Comerica Inc (CMA) 2014 Q4 法說會逐字稿

Good morning. My name is Carmen and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica fourth-quarter 2014 earnings call. (Operator Instructions)

I will now turn the call over to Darlene Persons, Director of Investor Relations. Please go ahead.

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

Before we get started I would like to remind you that this conference call contains forward-looking statements, and in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statement.

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 for factors that could cause actual results to differ. Also, the conference call will reference non-GAAP measures, and in that regard, I would direct you to the reconciliation of these measures within the presentation.

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

Good morning. Today we reported fourth-quarter 2014 net income of $149 million, or $0.80 per share, compared to $154 million, or $0.82 per share, in the third quarter. Full-year 2014 earnings per share were up 11% from 2013 to $3.16.

Turning to slide 4 and highlights for fiscal year 2014, our 2014 net income reflected lower litigation-related expenses, a decrease in pension expense, and our continued drive for efficiency. Also, credit quality continued to be strong. We had modestly lower net interest income due to a decline in accretion, along with the impact of the continued low rate environment and loan portfolio dynamics. All of which were predominately offset by the contribution from loan growth.

Our loan and deposit growth was solid in 2014 as average total loans increased $2.2 billion, or 5%, and average deposits were up $3.1 billion, or 6%, with increases in all business lines and all three of our major markets. Our capital position remains strong, supports our growth, and provides us the ability to return excess capital to our shareholders.

We repurchased 5.2 million shares in 2014 under our share repurchase program. Together with dividends, we returned $392 million, or 66%, of 2014 net income to shareholders. Our tangible book value per share increased 6% over the past year to $37.72 as we continue to focus on creating long-term shareholder value.

We recently filed our 2015-2016 capital plan with the Federal Reserve, which is expected to release its summary results in March.

Turning to slide 5 and highlights from our fourth-quarter results, when compared to the third quarter of 2014, average loans were up $202 million to $47.4 billion. As expected, our mortgage banking warehouse business lines declined with a seasonal decrease in home sales, while our dealer floor plan balances increased as auto dealers received their 2015 model inventory.

For the rest of the loan portfolio, we saw modest increases in most areas, led by energy and technology and life sciences. The market remains very competitive and we continue to focus on developing enduring relationships, therefore, we will not compromise our pricing or underwriting standards in order to hasten loan growth.

On the deposit side, we continue to see broad-based growth. Average deposits increased $2.6 billion, or 5%, to $57.8 billion compared to the third quarter of 2014, primarily reflecting growth in non-interest-bearing deposits. Fourth-quarter net interest income increased $1 million to $415 million.

Credit quality was strong with the provision for credit losses of $2 million and net charge-offs of $1 million for the quarter. Keep in mind our allowance methodology appropriately considers developments that may impact portfolio performance, but have not yet materialized in our loan book.

Specifically related to energy, while we have not yet seen adverse trends in our portfolio, our allowance now contains an allocation to reflect the recent fall in oil and gas prices. Later in this presentation, Karen will provide a summary of that portfolio, which reflects our long history and experience in underwriting energy credits.

Non-interest income increased $10 million to $225 million, reflecting increases in customer-driven fees, particularly customer derivative income, while non-customer income was stable. Non-interest expenses increased $22 million to $419 million, primarily reflecting a $4 million charge for certain efficiency-related actions compared to an $8 million net benefit in the third quarter, as well as an increase in technology-related contract labor and seasonal increases in several other categories.

Turning to slide 6, most US economic data at year-end showed strong momentum. We expect stronger labor markets, increasing business and consumer confidence, and solid consumer spending to be positive factors for the national economy in 2015. Of course, global geopolitical tensions and a cooler European economy could be headwinds for the US economy in 2015.

Taking a closer look at economic conditions within our primary footprint of Texas, California, and Michigan, we continue to see the advantages of our geographic diversity. The Texas economy expanded at a robust rate into the fourth quarter with 34,800 jobs added statewide in November, a very healthy number. However, both oil and gas prices are down significantly and we are seeing an energy sector slowdown. If this continues, we expect to see a drag on Texas economic activity in 2015.

Remember, though, the Texas economy is far more diverse than it was during the last energy downturn. Also, we have over 30 years of experience in the energy business and our expertise has been demonstrated by strong performance through a number of cycles. We believe the geographic diversity of our footprint and the strength of the US economy outside of Texas will provide important counterbalances.

Texas average loans were up 16% and deposits were up 3% compared to a year ago. We saw a broad-based improvement in the California economy in 2014.

The Northern California economy in particular has been driven by strong and widespread labor market gains in 2014. Tighter labor markets are expected to drive wage and income growth in 2015. Also, lower prices at the gas pumps should lead to increased consumer spending.

Average loans in California were up 9% compared to a year ago, while deposits were up 19%.

Michigan is an important market for us and where we have had a presence for 165 years. Strong US job growth and rising consumer confidence is a potent combination for US auto sales and the Michigan economy. In fact, light vehicle sales in the fourth quarter were at the highest level in eight years.

Average Michigan loans were down slightly compared to a year ago, while deposits were up 5%.

In closing, we believe our diverse geographic footprint is well-situated and, along with our relationship banking strategy, should contribute to our long-term growth, assisting us in growing loans, deposits, and increasing fee income. While we continue to manage headwinds, including the low rate environment and rising technology and regulatory expenses, we remain focused on the long term. Our conservative, consistent approach to banking, including credit management, investment strategy, and capital, has positioned us well for the future.

And now I will turn the call over to Karen.

Thank you, Ralph, and good morning, everyone. Turning to slide 7, quarter over quarter total average loans increased $202 million. Commercial loans were the major driver, increasing $203 million, or 1%. We also had nice growth in consumer and residential mortgage loans, which was offset by the continued decline in owner-occupied commercial real estate.

Looking at the portfolio as a whole, mortgage banking warehouse loans were seasonally lower, as anticipated, by almost $200 million and we saw a $241 million seasonal rebound in our auto dealer floor plan loan. For the rest of the portfolio we saw modest increases in most areas, led by $160 million increase in energy and $78 million in technology and life sciences.

Similar to last quarter, general middle-market commitments grew but loans declined $137 million. At the same time, the deposits increased $372 million. In other words, we continue to see line utilization for our general middle-market customers decline as our cash balances grew.

Period-end loans increased $885 million, or 2%, to $48.6 billion, primarily due to a $721 million increase in national dealer services. Remember that our loans typically spike at the end of the quarter, so quarterly averages are a better indicator of trends. Overall commitments as of the quarter end grew $1.1 billion and utilization increased to 48.8% from 48.2% at the end of the third quarter. Importantly, our pipeline remains solid.

Finally, our loan yields, shown in the yellow diamond, held steady in the quarter. Higher accretion added 5 basis points and was completely offset by a negative residual value adjustment to assets in our leasing portfolio. Slightly higher interest collected on non-accrual loans added 1 basis point and was offset by other factors such as higher prepayment speeds, improving credit quality, nominal spread compression, and a mix change in customer usage, all of which were minor.

Turning to deposits on slide 8, every business line and geography posted increases, resulting in average deposit growth of $2.6 billion, or 5%, to $57.8 billion. This comprised a 9% increase in non-interest-bearing deposits and a 1% increase in interest-bearing deposits. The bulk of the deposit growth was realized in the first two months of the quarter and has since been relatively stable.

Deposit pricing remained low at 15 basis points, as shown by the yellow diamond on the slide.

Slide 9 provides details on our securities portfolio, which primarily consists of mortgage-backed securities that averaged $9 billion for the quarter. The estimated duration of our portfolio sits at 3.8 years and the expected duration under a 200 basis point rate shock extends it modestly to 4.7 years.

The yield on the mortgage-backed securities book declined 2 basis points. We continue to reinvest prepaids and Ginnie Maes with the goal of achieving a yield at or above the current portfolio yield. However, that has been challenging in the current environment and the yields on the securities that prepaid were above the average portfolio yield.

In addition, as we prepare for the new liquidity coverage ratio, or LCR, we added about $500 million in five-year treasuries late in the quarter. If rates remain at the current levels, we anticipate continued pressure on the average yield.

As far as the LCR, we are making steady progress as we continue to work to clarify the details of the new rule and analyze our customer data. We estimate as of quarter end our LCR ratio declined modestly from 80%, where it stood at the end of the third quarter, driven by a decline in our period-end deposits at the Fed.

We continue to feel comfortable that we will meet the phase-in threshold within the required timeframe by adding high-quality liquid assets, or HQLA, over the next year to meet the 90% requirement, plus a buffer to withstand normal volatility. Exactly how much in liquid assets we may add will depend on our loan and deposit growth over the next 12 months.

We believe 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 materially or prematurely altering our overall upside to rising rates.

Turning to slide 10, net interest income increased $1 million. Loan portfolio dynamics added $2 million, with the increase in accretion of $6 million mostly offset by a $5 million increase in negative residual value adjustments to assets in our leasing portfolio. We also had $1 million in higher interest paid on non-accrual loans.

Other than these effects from the loan portfolio, interest earned on investment securities decreased $1 million and we had a $1 million increase in interest paid on deposits due to higher average balances. Also, the $2.6 billion increase in average deposits at the Fed added $1 million.

You may note that accretion was higher than anticipated in the quarter due to better-than-expected collection on a few of the credit impaired loans that we had acquired. At this point, the remaining impaired portion of the acquired portfolio is nominal and the least residual value adjustment relates to the deterioration of residual values on a few of our customer leases.

The net interest margin decreased 10 basis points, which was entirely due to average balances at the Fed, and as you can see, the other impacts offset each other.

Turning to the credit picture on slide 11, net charge-offs decreased to $1 million, or 1 basis point of average loans, and included $19 million in recoveries. While already at very low levels, criticized loans decreased $201 million and non-performing loans decreased $56 million, and we are now at the lowest level since 2007. This resulted in an increase in the allowance coverage ratio to over 2 times.

Our strong credit metrics, combined with loan and commitment growth, resulted in a decrease in the provision to $2 million and a small reserve build including an additional allowance allocation for our energy book, which I will discuss on the next slide.

Turning to slide 12 and our energy business, where our 30-plus years of expertise has been demonstrated by strong performance through a number of cycles. We maintain a granular portfolio with over 200 customers, which are primarily well-established, middle-market sized companies. We have a robust energy credit policy, which includes parameters for engineering review, well and field diversity, and hedging requirements.

More than 95% of our energy loans are secured. As of year-end, less than 3% of the portfolio is classified as criticized, with no non-accruals. And rather than a net charge-off, we had a small net recovery for the year.

Because the significant decline in oil and gas prices has just materialized in the past couple of months and our customers are generally well-hedged, we have seen no adverse trends in our portfolio. However, given the recent turn of events, we increased the allowance allocation in the fourth quarter for our energy portfolio by about 60 basis points on loan outstandings.

As you can see in the lower-right chart, this is similar to our energy net charge-off in 2009 when the average monthly price for oil fell below $50 per barrel for five months. We continue to closely monitor the total portfolio, as well as the energy sector and any residual impact on the Texas economy.

Slide 13 outlines non-interest income, which increased $10 million, or 5%, primarily driven by a $6 million increase in customer derivative income due to a few large transactions and a $3 million increase in commercial lending fees due to robust year-end closing activity. We also had smaller increases in fiduciary, card, and foreign exchange. Non-customer-driven income was stable.

Turning to slide 14, non-interest expenses increased $22 million, with $12 million of the increase related to non-core actions. As we signaled last quarter, the fourth quarter included $4 million in non-core charges related to our continual drive for efficiency primarily associated with real estate optimization. And as you hopefully recall, we had a net benefit of $8 million from non-core actions taken in the third quarter, as outlined on the slide.

Aside from these actions, expenses increased $10 million with $5 million related to an increase in contract labor for technology projects, much of which is associated with security and regulatory requirements, and includes credit card industry compliance, stress testing, and implementation of the LCR. In addition, we had typical seasonal increases in consulting, staff insurance, and advertising expenses.

Moving to slide 15 and capital management, as Ralph mentioned, we repurchased 1.3 million shares this quarter under our share repurchase program. Combining shares repurchased with dividends paid, we returned $95 million, or 63%, of net income to our shareholders in the fourth quarter and $392 million, or 66%, of earnings for the full year. Our tangible book value per share has steadily increased over the past several years as we continue to focus on creating long-term shareholder value.

Turning to slide 16, as we look forward into 2015 we face certain headwinds. On the revenue side, accretion will continue to decline. There is only about $13 million yet to be realized, which we expect to recognize in small increments each quarter over the next several years.

Accretion contributed $34 million in 2014 and we expect only $4 million to $6 million in 2015.

On the expense side, we faced -- we expect rising regulatory, technology, and pension expenses in 2015. Related to pension expense, new mortality tables were released by the Society of Actuaries last year. And with the fall in long-term rates, our discount rate in the pension was set at 4.28%, down from 5.17% at year-end 2013.

Both the decline in the discount rate and the increase in mortality assumptions resulted in an increase in the pension liability and annual expense. Particularly given the permanent shift in mortality assumptions, we elected to make a $350 million contribution to the plan at the end of the year.

The expected returns on the investment of this contribution helped substantially offset what would have been a larger pension expense increase. As a result, we expect our annual pension-related expense to be about $46 million, or about $7 million more than 2014.

Project-related technology expenses are anticipated to increase over $30 million to approximately $100 million in 2015. Much of the increase is regulatory driven.

Aside from the technology component, we project regulatory-related expenses to increase by about $8 million, driven primarily by staff additions. In total, regulatory-related expenses, including technology, are expected to double from over $25 million in 2014 to over $55 million in 2015. While we continue to manage through these headwinds, we remain focused on the long term and building profitable enduring relationships with our customers, as we have for the past 165 years.

Turning to slide 17 and our outlook for full year 2015 compared to full year 2014. Overall, assuming continuation of the current economic environment, we expect our average loans to grow about the same pace as 2014.

We believe we will see typical seasonality throughout the year in our dealer and mortgage banker businesses. And if oil and gas prices remain at current levels, we expect energy loans may increase in the near term as capital markets tighten and decline over the course of the year as companies adjust their cash flow needs.

Also, keep in mind that the pace of loan growth slowed in the second half of 2014. Finally, competition remains 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 be relatively stable, assuming no rise in interest rates. As I mentioned on the previous slide, the accretion decline is a significant headwind as we expect it to be about $30 million lower in 2015. We believe that asset yields are close to stabilizing; however, given the fact we started 2014 at higher yields, on a year-over-year basis, they should be down. Again, assuming no rise in rates.

We expect a positive effect from the growth in earning assets to approximately offset the continued pressure from the low rate environment and the decline in accretion.

As far as the provision, we expect a continuation of the current credit environment. However, given the very low provision we had in 2014, we expect our provision in 2015 to be higher, consistent with modest net charge-offs and in conjunction with loan growth. The impact from the decline in oil and gas prices on our energy book is difficult to predict, but remember our energy business strategy is built to withstand the typical volatility you see in the sector. Again, we have been in the business for over 30 years and have weathered a number of cycles.

Overall, we expect non-interest income to be relatively stable with growth in fee income as we continue to focus on cross-sell opportunities, particularly with card and fiduciary services, mostly offset by continued regulatory impacts on letters of credit, derivatives, and warrant income.

Lastly, non-interest expenses are expected to be higher. As I discussed on the previous slide, we anticipate increases in technology, regulatory, and pension expenses in 2015. Also, we will likely see the typical inflationary pressures on expenses across the board. Remember that our first quarter typically includes higher incentive comp and payroll taxes as a result of seasonality.

Of course, we continue to focus on driving efficiencies for the long term. For example, the actions taken in the past two quarters are expected to result in run rate savings of about $12 million to $14 million by year-end 2015.

Finally, turning to slide 18. While our outlook does not assume a rise in rates, we would like to remind you that we believe our balance sheet remains well-positioned for an eventual rate rise. On the left side of the slide, we run a simulation using the implied forward curve for 30-day LIBOR, the rate to which we are most sensitive.

As you can see, the forward curve assumes an increase in short-term rates in the middle of the year, with 30-day LIBOR reaching 65 basis points in the fourth quarter. In this illustration, which incorporates a dynamic balance sheet assuming historical relationships, our net interest income would increase about $45 million for the full year.

The right side of the slide provides our standard asset liability case and 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. We also showed several 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.

In closing, we are pleased with our fourth quarter and 2014 results, including broad-based average loan and deposit growth and strong credit quality. We continue to manage through the headwinds arising from the continuing low rate environment, declining accretion, and increasing regulatory and technology demand.

As we look forward to the year ahead, we remain keenly focused on the long term and the things we can control, such as growing loans and deposits, along with managing expenses as we make necessary investments. We expect that as the economy continues to improve and the potential for a rate rise nears our revenue picture looks brighter. In the meantime, we believe our relationship banking strategy, combined with our diverse geographic footprint, will continue to assist us in building long-term shareholder value.

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

(Operator Instructions) Scott Siefers, Sandler O'Neill.

Morning, guys. Let's see, Karen, I appreciated the commentary on the allocation for the energy piece. Can you just clarify, to the extent that you can, is that the only reserve allocation for the energy portfolio or is that roughly I guess $20 million or so? Is that the only reserve within energy at this point?

No, the allocation that we made is an increase to our standard reserve that we've got against the energy portfolio, so the 60 basis points is an increase.

Okay, perfect, so there's some amount that was there before, okay.

Correct.

Then, Ralph, was hoping that you could just speak qualitatively; when you talk with your customers, specifically in Texas, about sort of the potential bleed out of energy into other sectors, how they are sort of planning for the year. And then if you could conversely discuss what you are seeing from your Michigan customers as well. Presumably lower energy costs should be more of a benefit to them, so if you could sort of distinguish between those two and give any color on how your customer seems to be planning for the year, please.

I will give a couple of comments on that Scott. Then I will ask Lars to chime in as well from what he is hearing with the customers.

But I think at this point what you are seeing is that it hasn't been down at this level long enough for people really to come to conclusions about what impact it may have. And everybody is watching.

Going into the downturn in the energy prices, you will remember that we had a very conservative environment out there for our customers that we've talked about in the past, where people are being very cautious about investing for the future. Making good money and doing very well, but still concerned about the overall economic situation. Not just as we were just talking energy costs, but was going to happen longer term.

And so we haven't seen really a big change in turning into that investment for the longer term. Lars, do you want to add to that?

I don't want to repeat what you just said, because I think it is entirely accurate. Obviously, in Texas it is too early to read. There's clearly a multiplier effect out of the energy portfolio.

The Texas market is very diversified, only 15% of it is energy, so we will have to see how it plays out. Our customers are obviously aware of what's going on. They are going to make the appropriate adjustments and we will be working with them closely, but we feel confident about our continued ability to grow in Texas with a very diversified group of businesses.

And regarding Michigan though in particular, the second part of your question, frankly, I have heard some optimism from customers. I must say it is anecdotal at this point because it is a little bit early, but those industries that are energy-reliant, where this can benefit their gross margins and clearly continue to strengthen the auto industry, that is all a good thing for -- I think for the Michigan market.

Okay, that sounds great. I appreciate the color.

Brian Klock, Keefe, Bruyette & Woods.

Good morning. Just a follow-up related to energy. I guess thinking about the actual loan balances themselves; it looks like in the quarter you did see an increase of about $160 million on average. Three of the last four fourth quarters there has been that kind of an increase.

I guess was there any of this just seasonal or was this anything which draws on lines as some of those energy companies maybe have gotten into a little bit of weakness because of the drop in oil? Can you maybe comment on the growth you saw in the quarter versus normal seasonal activity?

Lars?

Brian, I think it really goes back to Ralph's comments. I think it's a little bit early in terms of what we would read into that. It has continued to be, obviously, a healthy industry throughout most of the year, but we would expect that over the coming quarter that companies would begin to adjust their cash budgets, CapEx, and certainly make adjustments there.

If we do see energy prices remain depressed for an extended period of time -- in fact, if you looked at page 12 of the earnings deck and looked back to 2009 where you saw energy, oil prices in particular around $50 a barrel for a number of months, you saw I think about four to five months of sequential declines in the energy portfolio. However, that reversed and came back as energy prices did begin to recover.

So we see it as a great long-term business, one we have been at a long time. We have a very robust process built around it and a lot of experience with great customers and even better bankers. And we think that we will do exceptionally well.

Maybe just as a follow-up to that, I guess thinking about reassessing the borrowing base and the price deck quarterly, I guess any impact in the quarter of any lines that you may have reduced to your customers during the quarter because of the drop in oil? And any to the upstream oilfield services companies that you may have actually pulled back on their available credit?

John, you want to take that?

Sure. Hello, Brian. No, not yet because the decline is relatively recent and, frankly, hasn't been reflected in financial information yet.

Over the next few months, we will be receiving fourth-quarter and annual financial statements in many cases, as well as updated engineering reports and information on our customers' plans for 2015. That will allow us to fully underwrite each credit and then update our risk ratings as appropriate over the first half of the year.

It is important to remember that prices are only one of many factors that determine a company's risk profile. We also have to look at changes in reserves, hedging, management strategies to reduce costs, asset sales or purchases for example, and overall line utilization as well. So it all gets factored together.

Okay. And I know that you guys have talked about the hedging that is in place on E&P side, so is there -- I guess maybe it's one -- my 2a follow-up question here and then I will get off, go back in the queue. But are you seeing anything in the oilfield services portfolio right now that is concerning for you? And I will get back in the queue, thank you.

Yes, the energy services portfolio, Brian, is about a $600 million portfolio for us, so it's 1.2% of Comerica's overall portfolio. Most of it is larger companies, much the same profile as our E&P portfolio. For example, over 90% of those are [SNCs].

Also, over 90% are secured, so as we take a look at our portfolio, we are hearing of pricing pressure beginning to be put on these companies by E&P companies. And as you know, services is often the first time -- the first segment to feel some impact.

But at this point in time the portfolio is very clean. Over the last several years we have averaged 6 basis points, even going through the last downturn. So we are feeling pretty comfortable, but watching it very closely.

Erika Najarian, Bank of America.

Good morning. I wanted to ask a question on expenses. Karen, thank you for going over in detail some of the expense headwinds you are facing, but I just wanted to make sure I understood the magnitude of increase for 2015.

On slide 16 you lay out about $47 million of year-over-year expense headwinds, but will that be offset by the $12 million to $14 million that you noted from cost savings on slide 17?

Yes, Erika, so we did outline the headwinds on slide 16 and we did take actions both in the third and the fourth quarter in 2014 to help reduce the run rate expenses going forward by about $12 million to $14 million, which should be phased in in 2014 and fully achieved by -- 2015 and fully achieved by year-end 2015. So those -- the $12 million to $14 million by the end of the year should help offset.

But keep in mind that we do also have normal inflationary increases on expenses in things like occupancy expense, merit expense, etc.

Got it. And I'm sorry to ask another question on energy, but in terms of your guidance for the provisions and the 60 basis points of allowance increase to your energy portfolio, does that contemplate energy prices staying here for the full year?

And it's sort of the message from the previous question. You clearly are proactively adjusting for energy prices, which is actually the first time we've heard about it this earnings season, but your next evaluation is really when these statements come in, these financial statements come in and engineering reports come in in terms of your next decision to potentially add to your allowance.

John, do you want to take that?

Sure. Let me start with how we looked at the allowance that we did allocate for energy. We looked at the portfolio in a number of different ways. We used some basic models and stress tests and applied various price levels to develop a range of possible outcomes. We also took a look at our historical migration and loss patterns and within that range of outcomes we used our best judgment based on what we know at this time.

So going forward, Erika, we will, of course, continue to monitor this very closely and adjust it as appropriate depending upon the environment at that time.

Got it. Thank you for taking my question.

Steven Alexopoulos, JPMorgan.

Maybe I will start just to pile on to the energy question for a second. Regarding you guys not receiving the 4Q financial statements, can you walk us through exactly what you (technical difficulty) fourth quarter or more recently to assess the risk? Because it sounds like you just applied a stress model.

Did you sit down with customers? What exactly was done in the quarter?

John?

So obviously we are talking to our customers on a daily and weekly basis and we are taking a look at what they're -- how they're reacting to the marketplace. For example, they are telling us that at this time CapEx plans for 2015 are being cut. In some cases as small as 20%, in some cases as large as 50%.

We are also seeing -- more acutely in December and January, we are seeing drilling rigs decline as well. As the number of drilling rigs in production and in drilling come down, the growth in the supply curve will bend. And as that happens as we go forward in 2015, hopefully demand and supply will come back in the balance and prices will rise from whatever they've bottomed out at here.

So we are in constant contact with our customers and monitoring it closely.

You might also just update how we look at the credits in a normal sequence in the reserve.

So we look at our reserves in a couple of different ways. As you know, the biggest section, the biggest portion of Comerica's total reserve is a quantitative piece, which is based on a statistical analysis and applies a standard loss factor to every loan in our portfolio that is determined on a pool basis given its risk rating. And then, of course, if something deteriorates into generally the non-accrual area, we look at those on an individual collateral basis and come up with an individual reserve.

Then the last piece would be a qualitative reserve that we have -- as you have heard from Karen, has added about 60 basis points on the energy portfolio in addition to the standard loss factor reserve that we already have on the energy portfolio.

John, when you do your reserve analysis, isn't this essentially just a waiting game for the shoe to drop, given the hedges are protecting for now but eventually will run out?

I think we have been consistent, Steve, in saying that as -- the key factor here is how low prices go and how long they stay low. The longer and the lower that things go, the more uncertainty there is; there is no question about that. That is why we thought it was the prudent conservative thing to do to add the qualitative reserve to the allowance at this point in time.

Then you will get the follow-up in the coming quarter on the --.

In the coming quarters, we will continue to get additional information, more detailed information, and of course, we will know the path of prices at that point.

And that's the normal information you look at in analysis.

Absolutely.

Maybe to shift gears, just to follow up on Erika's question on expenses. So you are flagging the $12 million to $14 million of offsets towards the end of the year, but that's it? Does that imply that's it, there's nothing else? Secondly, what do you consider typical inflationary pressure?

The $12 million to $14 million of offsets, yes, is what we -- the actions we have taken that should help partially offset the headwinds for next year. And in terms of typical inflationary pressure, you can think of that in terms of typical inflation -- 2.5%, 3% on certain line items.

Okay, and just a technical question. Why is the tax rate being guided a bit higher given it looks like the guidance is implying lower earnings for next year? Thanks.

Because of how we deal with our tax credits, we are trying to make the guidance simple for you and it is merely that.

Okay, thanks for all the color.

Terry McEvoy, Sterne Agee.

Good morning. I was wondering: did the drop in oil and the potential impact on those borrowers impact how you approached CCAR and capital returns in 2015?

You know, when we look at CCAR, part of that is stress testing and part of it is stress testing certain portfolios, like energy. So I would say that our severe cases in stress testing would include much more severity than what we are seeing today in oil and gas prices.

Then just as a follow-up, the $160 million increase in energy loans, how much of that business, if any, let's say last year would have gone to the capital markets? And did you actually see the benefit of the capital markets closing down for those borrowers and, thus, using balance sheet lenders like yourself?

Has that actually occurred or do you just think that is a potential going forward?

Lars?

Sure. Terry, I think that there is no question about it that the tightening of the debt capital markets had an impact on the increase. For me to peg it exactly would be, frankly, a guess, but I can tell you from just our conversations with customers that they are clearly looking forward towards senior debt facilities to carry their debt at this point.

And, of course, they are in the process right now putting in place their contingency plans for either sales of assets using excess liquidity to delever and such on a go-forward basis.

Great, thank you very much.

Justin Maurer, Lord Abbett.

Morning, guys. Sorry, on the energy thing again. Can I throw out a hypothetical to Steve's question about borrowing base determination?

If a -- I'm sure the answer is it depends, but I will ask anyway. If a borrower shows up today and is in reasonably good shape and has X amount of availability according to last borrowing base determination, but that is when prices were 50% higher or 100% higher I guess, how do you guys handle that? Do you do --?

My understanding is some credits allow for kind of one intermittent redetermination between six-month periods. Is that pretty unilateral or is that more credit-specific?

John?

The general rule that we see in the industry is that we have two redeterminations per year, usually based in the fall and in the spring, late fall and spring. And then oftentimes the bank group will have the option to do one more during the year to use at its discretion, but that's not used very often. So the basic is two redeterminations a year.

And, frankly, what we would do, say, in the spring is, as we get the Company plans, as we get the updated engineering reports which have complete reserve description, complete hedging picture, we factor all of that in and we redetermine as a bank group what the revolving line of credit should be. If we end up with an over advanced piece to the outstandings, there are a couple of different alternatives that could happen.

First, if the customer is fairly liquid, and many of our customers are, they may just pay off the over advance. We have also seen customers pledge additional collateral from time to time to close the gap. And then the last alternative would be to put the over advance on some kind of an amortizing basis, usually over the near term, say six months to a year.

So do you guys --? John, do you guys feel like there is less flexibility, say, between now and April 15 or May 1 by the time you get the financials in and re-underwrite it with the new borrowing base to the extent somebody shows up at the window and wants to borrow? Or is there the ability to quote-unquote have a conversation, even absent the updated financials and such?

Well, there's always the ability to have a conversation and we certainly would. However, I would point out to you -- again referring you back to slide 12 in the slide deck and look at 2009. That is the last time prices declined like this and stayed low for a while, and it's pretty interesting to see that our outstandings fell for six quarters in a row through 2009 and into 2010 because our management teams do the appropriate thing. They are looking to reduce costs wherever they can, including interest costs.

Right, got it. Okay, thank you very much.

Gary Tenner, D.A. Davidson.

Thanks, good morning. I did have one more follow-up on energy.

Karen, I think you had referenced, and it has been referenced since then, the steep drop in prices back in the 2008-2009 timeframe. That was followed, of course, with a pretty sustained period of rising oil prices. Could you give us a sense of, as you've talked to your internal experts and customers, what your working assumptions are with regard to how low prices could go, whether it's transitory, whether it's a longer-term decline?

John?

,

Sure. Actually, we firmly believe as a company that we cannot predict prices, so it would be disingenuous for me to try to speculate about where we think the bottom might be or where we think the demand and supply curves might rebalance things as we go forward.

What I will say is we try to manage the business over the years and have for 30 years for all of the ups and downs that we see in what is typically a very cyclical and sometimes volatile industry. So we try to manage knowing that to begin with.

Customer by customer.

Customer by customer, right.

As a follow-up to that, if you manage it on that basis, how do you then look at I guess the implications to the broader economy in Texas as it relates to other sectors that could have a secondary or tertiary impact from lower energy prices?

Well, when you look at the overall, and I think Lars made a comment when he was talking a few minutes ago, today energy, while a very important business in Texas, is about less than 15% of the GDP of Texas. Also, it's about 2.5%, if I remember the numbers right, of employment. And you get the offset of lower energy prices on the other side, which is -- an earlier question was talking about benefits a lot of our other customers as well.

So unlike it was years ago, where it was a significant percentage, it's not today. And as John was mentioning, the way it is underwritten and the way our customers have behaved in the past are very important as to the outlook.

I may, if you don't mind, just tag on to that. You have to keep in mind that, as you look at the Texas economy, the automotive industry has expanded significantly in this state. Transportation, petrochemicals, and that's not even including the impact on consumers in a state with a population of 28 million people with an in migration, so these could all be positives for us.

All right, guys. Thank you.

Ken Zerbe, Morgan Stanley.

Morning. Just on slide 12 I think you made a good point back in the 2009-2010 time that your loan -- energy loans went down, if I calculated it right about 36%. How much are you expecting current energy loans of the $3.5 billion to go down in your guidance of roughly 5% loan growth next year?

So in our guidance, Ken, we did say that energy loans could increase in the near term along with potential less access to capital markets for our customers, but over the longer term in the year they could decline if oil and gas prices stay where they are or get lower.

Sorry, just to clarify, so are you saying loan -- your guidance includes energy loans going up or energy loans going down for 2015?

Again, near term could see an increase. Longer term could see a decline. On average that would mean that the balances could remain about stable or slightly declining.

Got it, understood. Okay, perfect.

And just second question on energy. Is there a specific type of customer that you are actually willing to lend to currently in energy versus loan -- or energy loan categories that you actually don't want to lend to given $50 oil?

Lars, you want to take that?

Frankly, I don't think our strategy has changed. We are focused on larger, independent energy companies that have liquid positions that are well hedged with experienced management teams. In most cases have been through the cycles, many of them with us. And so none of that has changed.

I do think the metrics on the valuations, the borrowing basis, those have clearly shifted and we are taking those into consideration, obviously, as we are underwriting the credit opportunities.

In the second largest segment of energy, which would be services, the same thing applies. We are dealing with the larger, stronger companies and we will continue to look at those even in this time but we are clearly being very sensitive to the overall condition of the energy markets and what direction energy prices are going. So hopefully that's helpful to you in terms of a little insight.

It is and then one final question, do you guys still have any loans that were underwritten under the Sterling underwriting standards or has everything been converted to your standards?

In terms of the energy portfolio, Ken, or overall?

Energy specifically.

Yes, they are very minimal. In many cases, we had overlap of customers and, frankly, the balance of them that may have been less strategic, those have continued to run off over a period of time. So we feel very comfortable with the portfolio we have today.

Great, okay, thank you very much.

Ken, I would just add very briefly -- this is John -- that Sterling had a very small energy portfolio when we early on absorbed it into our Comerica Energy Group.

Got it. All right, thank you.

John Pancari, Evercore ISI.

Good morning. Wanted to see if you can give a little bit more detail on the initial draws, Karen, that you cited that you could see in the energy book initially in 2015. Can you help us with the magnitude that you are expecting?

It sounds like it could be about equivalent to the growth in the portfolio that you expect later in the year. Is that fair?

Very difficult to say. And when we give our loan outlook we focus on the total portfolio, and I think that's what I would keep pointing you back to, where we expect continued growth similar to 2014. We are mindful of what could happen to our energy growth, but very difficult to say the magnitude because there's too much uncertainty.

Right, okay. Then in terms of how you are reserving for those initial draws that you expect, or are how you will be, can you talk about how that differs? So the allocation that you will likely assume to those draws versus your reserve allocation that you have been providing to your energy credits.

John?

Let's say that a couple of those draws came here in the first quarter before we have all the information that we need to update each individual credit. Those additional draws would get our standard loss factor reserve allocation. But it's important to say that as we move through the first and second quarter and we get the information we need, we will update our risk ratings on individual company-by-company basis and those draws would then be subject to any changes that may bring.

Okay, all right. And then regarding your $3.3 billion in energy shared national credits, how much of those are considered leveraged loans?

It's a little bit under $500 million. It's between $450 million and $500 million. And that is by the FDIC definition, which is more expansive, as you know.

Okay, all right. And of your criticized energy portfolio, are any of those leveraged loans? And then separately, how does that break out between E&P and service?

I don't have the breakdown between E&P and service on the criticized loans. I would say the criticized loans are less than 3% of the energy portfolio and my intuition tells me that most of those are E&P credits, not services credits.

Okay, thank you.

Dave Rochester, Deutsche Bank.

Good morning, guys. You had mentioned recently you aimed to grow debt in the capital structure over the longer term to maybe 20% of assets or liabilities, I guess. Given that longer-term rates are pretty low now, I was just wondering how much debt you are assuming you are going to add this year that is baked into your NII guidance at this point.

Karen?

We did talk about the fact that we will need to add wholesale funding to our balance sheet as we work to be compliant with the liquidity coverage ratio by the end of the year. How much in wholesale funding or how much in HQLA we will need to add will depend on our balance sheet movement over the next 12 months, so very difficult to give you a number. It's a fluid situation that we will continue to monitor and keep track of.

So right now there's maybe nothing in your numbers at this point or in your guidance?

Our guidance does include becoming compliant with LCR by adding high-quality liquid assets and adding wholesale funding, but we expect overall that the balance of that should be relatively neutral to the bottom line.

Okay. Then back on energy one more time, sorry. You mention increasing that reserve on your oil book by 60 basis points. I was just wondering what your reserve ratio was in that portfolio at the peak in that 2009 cycle or at least how that compares to today's level.

I do not have the 2009 peak off the top of my head, but when you take our standard reserve as it sits today and add in the 60 basis points, we are at about 1.4 to 1.5 total reserve on the energy portfolio. And we will continue to adjust it as appropriate going forward.

Okay. And then should we assume that that comprehensive rebalancing you are about to do on that energy book will probably hit entirely in the first quarter?

I would honestly say probably not. Many companies have 12/31 year-ends. It takes them time to get their financials together, as well as their engineering reports, so we will begin to receive that information toward the end of the first quarter.

I would say the majority of the adjustments will be done on a case-by-case, company-by-company basis in the second quarter.

Okay. Great, thanks, guys. Appreciate it.

Jennifer Demba, SunTrust Robinson Humphrey.

Good morning. One more question on energy. Those are mostly SNCs. How much --? How many of those are you the lead?

Not very many. We typically lead about 19% of our SNCs companywide. It would be a much smaller percentage in the energy business just because of the size of the credit needs of our customers overall.

Okay. And on commercial real estate, I know it's not a big part of your entire loan portfolio, but I am curious what you are hearing from your Texas developers and what their thoughts are on new development, given the oil price decline in the last couple of months. Or is it just again too early for them to shift their thinking at all?

Sure. Our commercial real estate strategy across the whole country, including in Texas, is a large city, urban, and suburban strategy. In Texas we are concentrated in Dallas, Houston, and Austin, so I'm going to guess that you are most concerned about Houston.

In that city we have virtually no office exposure. Our primary product exposure in Houston as multifamily and, as we have talked to our customers every week, at this point we have not seen any softness in rents. And we often get traffic counts of the number of people walking through the projects and they haven't seen -- they have not seen a decline in traffic at this point.

Okay, thank you very much.

Want to add anything to that, Lars?

Well, maybe just beyond Texas in terms of the commercial real estate opportunities for us as a company. If you go to the West Coast, you are continuing to see very active projects, particularly multifamily. Los Angeles, the Bay Area, and San Francisco.

And while commercial real estate balances remain fairly stable quarter to quarter, you have to realize that there is a little bit of lumpiness as these projects stabilize and go to the permanent market or sell. That does have an impact on outstandings quarter to quarter, but our pipeline was up over $300 million linked-quarter. And, frankly, we feel very confident about the West Coast growth of our commercial real estate portfolio as well as in Austin, Dallas, Fort Worth.

Bob Ramsey, FBR.

Good morning. This is [Martin Ostarskin] for Bob Ramsey. So you mentioned that your criticized loans were about 3% this quarter. Can you talk about the trends in energy criticized and classified assets?

John?

Yes, just to clarify, the 3% was just on the energy portfolio. They are actually just under 3%. And the energy portfolio has been extremely clean for a number of years now so it has been -- I hesitate to call it a trend as much as a very clean plateau of experience over the last several years. And there are currently no non-accruals in that 3% criticized.

Got it, thank you. You have previously mentioned that your average customer has 50% of its production hedged. How do you evaluate the counterparty risk, and do you know who is on the other side of the hedge?

Yes, we absolutely do know who is on the other side of the hedge. It would be typically the kind of large energy banks that you and I could list if we wanted to go down that path, but we do keep track of that. We monitor our counterparty exposures and we have an authorization through the appropriate loan levels, committee levels to approve all of those exposures on an annual basis.

Got it. Thank you very much.

Ken Usdin, Jefferies.

Thanks. Good morning, Ralph. I wanted to ask a question about loan growth just ex-energy, if energy averages this year could be flattish. I just wanted to get a better understanding of what you are seeing in the rest of the book in terms of growth expectations.

And also, within that, if you can give us some color on those two most volatile portfolios, auto dealer and mortgage banker? Thanks.

Ken, our outlook does call for growth similar to 2014 and we do expect the continued seasonal patterns for both our mortgage banker and our dealer business, where mortgage banker would be down more in the winter, spring, and dealer would be impacted in the model changeover season.

In terms of the rest of the businesses, we do expect a little bit more growth from general middle-market, from our technology and life sciences, and we do expect a little bit more modest growth from our larger corporate business and our dealer business.

Okay. Then as far as then competition and the ability to get new loans on the books, Ralph's commentary in the intro was pretty clear on not sacrificing on quality, but any changes as far as the competition angle? And are you having to pull away from certain credits because of competition at all?

Lars, you want to take that?

Sure, I would be glad to. The marketplace continues to be very competitive, too many banks chasing too few deals, and, frankly, we are staying extremely focused on our disciplined credit and pricing discipline. So, to be quite honest, we are being highly selective in terms of our new customers and that can create a challenge.

What that means for us, we have to have our bankers out making more calls, being more active in the marketplace today, but we are not seeing any real relief in terms of structure or pricing that would create wind in the sales.

If I could just tag on to one additional thing that Karen -- a point that she made that I think is important to note, when you think about the growth in Texas on a year-over-year basis, we grew about $965 million. Of that $965 million, on a year-over-year basis $360 million, roughly, was energy.

My point is we grew in Texas through a wide array of businesses -- wealth management. We grew through our technology and life sciences, mortgage banking finance, general middle-market, and the list goes on and on. Frankly, in spite of some of the headwinds from energy, we are going to stay very focused on having the resources invested in those businesses that we can grow in this very attractive economic market.

Fair point, Lars. Karen, one just question on the fee stuff. With regards to the regulatory impacts on some of those three items, is there any change in terms of you guys pulling away a little bit more from certain areas? What -- the impacts are coming through in what way?

On the ones that we cited -- derivative, warrant income, letter of credit income -- those do have some regulatory impacts. On letter of credit, for example, the new capital and liquidity rules require that we hold more capital and more liquidity against letters of credit. For example, we're focused on getting the right returns for that product and have increased the pricing, which is resulting in some customers choosing to have less of it.

Understood, thank you.

Sameer Gokhale, Janney Capital Markets.

Good morning. I think Lars actually addressed my question, or part of it, with his commentary. But just to parse that a little bit, the discussion around competition, because I look at the financial supplement, page 19, and I look at your rates on the loan portfolio. Even if you adjust for the effect of the accretion benefit and then the offsetting impact on the lease residual, it looks like the rates held in, at least sequentially. And they were pretty stable.

So I was curious; you want to maintain your pricing discipline, yet seem to be generating relatively healthy levels of growth. So what is the other X factor here? From a competitive standpoint are you easing terms in terms of LTVs offered to customers? How should we think about that?

Because, again, it's a highly competitive environment, as you referenced, and yet your rates seem to be holding in quite well. So just some additional perspective would be helpful.

While we would like to have robust loan growth in the marketplace, what I'm really focused on is having smart growth. Growth that complements both our underwriting and pricing discipline, that, frankly, complements our relationship banking strategy. And I think that is being very, very well received in the marketplace.

As you pointed out, we really are proud that in spite of the competition in the marketplace that loan spreads have held for three quarters in a row. We saw loan yields hold for the past two quarters and yet we continue to chip away at the marketplace in improving market share. And that is what we are about: staying with our strategy, don't overreach, and make sure that we are well-positioned for the long haul. And that is what we are going to continue to do.

Okay. Then just a quick follow-up in terms of specifically your dealer floor plan inventory, the loans. When you talk to the dealers, do you have a sense for what they plan to do in 2015? Are they looking for increased inventory levels, or managing those down given some concerns about the auto market and terms in which loans are being made?

Do you see that been fairly stable? How would you -- in your discussions with dealers how would you characterize their appetite for building and managing inventory?

Right. When I think about the marketplace that we play, which is more the mega dealers, the dealers that have half a dozen or so points of sale and up, probably two things really come to mind that, Sameer, may be helpful.

First of all, we are continuing to see consolidation in the industry and we are as frequently on the acquiring side as we are on the selling side, just because of the deep relationships that we have with our customers. So I think that puts us in a good position.

But as Ralph mentioned earlier, if we continue to see that on a national basis that auto sales continue to strengthen, these mega dealers are going to want to continue to expand our inventories. Because if you look at the turn on the inventories, they continue to be at very healthy levels against historic norms and every time they turn that inventory they make money.

And so we want to be there with them. I'm hopeful that we can continue to expand as their inventories continue to expand with a strengthening auto industry, and we are on the acquiring side of a consolidating industry.

Okay, terrific. Thank you.

There are no other questions at this time. I will now turn the conference back over to Mr. Ralph Babb for any closing remarks.

Thank you all for joining us today and for your interest in Comerica. I hope everybody has a good day and happy new year.

Thank you again for joining us today. This does conclude today's conference. You may now disconnect.