Comerica Inc (CMA) 2015 Q3 法說會逐字稿

Good morning.

My name is Brent and I will be your conference operator today.

At this time, I would like to welcome everyone to the Comerica third-quarter 2015 earnings conference call.

(Operator Instructions).

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

Please go ahead.

Thank you, Brent.

Good morning and welcome to Comerica's third-quarter 2015 earnings conference call.

Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Vice Chairman and Chief Financial Officer, Karen Parkhill; Chief Credit Officer, Pete Guilfoile; and Executive Vice President of the Business Bank, Pat Faubion.

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 could 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 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 the filings with the SEC for factors that may 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 this presentation.

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

Good morning.

Our third-quarter results demonstrate the benefits of our geographic and business line diversity.

Our trusted advisor approach to relationship banking continues to make a positive difference.

Today, we reported third-quarter 2015 net income of $136 million compared to $135 million for the second quarter and $154 million for the third quarter of 2014.

Earnings per diluted share were $0.74 for the third quarter of 2015 compared to $0.73 for the second quarter and $0.82 for the third quarter 2014.

Turning to slide 4 and highlights from our third-quarter results, average loans were up $1.8 billion, or 4% compared to a year ago.

Average loans increased $139 million to $49 billion compared to the second quarter with increases in technology and life sciences and commercial real estate offset by decreases in corporate banking due to our continued pricing and structure discipline, as well as seasonality in general middle market and the expected run-off in energy.

Average deposits grew $4 billion or 7% compared to a year ago.

Relative to the second quarter, averaged deposits increased $1.7 billion or 3% to $59.1 billion driven by increases in nearly every business line led by general middle market, technology and life sciences and corporate banking.

In further comparing our third-quarter results to the second quarter, net interest income remained stable, increasing $1 million to $422 million, while the net interest margin declined mainly as a result of having higher balances at the Fed.

Credit quality overall continued to be strong.

At 19 basis points, net charge-offs remain well below the historical normal level and gross charge-offs declined in the quarter.

The provision for credit losses decreased to $26 million.

This marks the fourth consecutive quarter that we have prudently increased our reserves for energy, a result of increasing criticized loans and sustained low energy prices.

Net charge-offs tied to our energy-related exposure continued to be low and we had no charge-offs in the energy business line.

While negative credit migration is anticipated, any losses are expected to be manageable.

We continue to feel comfortable with our energy portfolio.

Non-interest income was up $3 million to $264 million, including increased card fees, an area we are focused on continuing to grow, as well as growth in several other categories.

This was partially offset by decreases in investment banking fees and fiduciary income due to depressed market conditions.

Non-interest expenses increased $25 million to $461 million, primarily reflecting a $3 million net release of litigation reserves in the third quarter compared to a net release of $30 million in the second quarter.

We continued to tightly manage expenses while faced with rising technology and regulatory costs.

Our capital position is solid.

Stock repurchases under our equity repurchase program, combined with dividends, returned $96 million, or 71% of earnings to shareholders in the third quarter.

Turning to slide 5 and a look at our primary markets, our most recent economic indexes have tracked data through July in each of our primary markets.

Our Texas index continues to see lighter declines.

Drilling rig count decreased and unemployment insurance claims increased.

We expect the drag from low oil prices to continue into 2016.

However, it is important to note that the Texas economy is very diverse.

Average loans and deposits in Texas were each down about 2% compared to the second quarter, both impacted by declines in general middle market and energy.

Our California index showed a small decline, the first since March.

State exports weakened; however, the labor market components of the index are showing strength and we expect that to continue through the remainder of the year.

We saw broad-based average loan and deposit growth in California.

Loans were up $360 million or more than 2% and deposits were up over $1 billion, or 6%, with growth in almost every business line.

Our Michigan index increased again fueled by the auto industry as auto production continued to climb.

In fact, auto sales on an annualized basis rose to a 10-year high of 18.2 million in September.

Low gasoline prices continue to be a plus for Michigan's economy.

Average loans in Michigan were down slightly while average deposits were up 1% due to seasonality in general middle market.

In closing, we believe our geographic footprint is well-situated and our relationship banking strategy can drive growth in loans, deposits and fee income.

We remain focused on the long term.

Our conservative consistent approach to banking, including credit management, investment strategy and capital levels, has positioned us well for the future.

Now I will turn the call over to Karen.

Thank you, Ralph.

Good morning.

Turning to slide 6, third-quarter average loans increased $139 million over the second quarter.

Technology and life sciences was the largest contributor to loan growth with a $367 million increase, driven almost entirely by equity fund services where we provide capital call or subscription lines to venture capital and private equity firms.

Loans in our commercial real estate business line increased $124 million, primarily related to multi-family.

Mortgage banker loans were up $47 million, reflecting our continued marketshare gains, as well as refinance volumes and a pickup in home sales.

Because mortgage banker outstandings tend to move up and down with the homebuying season, we expect a decline in fall and winter and in fact, we saw that trend in period-end balances.

In addition, we had modest average loan growth in several other business lines such as entertainment, private banking, retail banking and small business.

Partially offsetting this growth, corporate banking loans declined $231 million in the quarter as we remain discipline in this highly competitive environment.

As expected, loans in general middle market declined $214 million in conjunction with the typical summer slowdown.

And loans in our energy line of business declined $86 million from continued paydowns.

Average dealer loans decreased $26 million.

In fact, each successive month in the quarter declined as our customers worked down their inventory prior to receiving new models.

The decline was somewhat less than expected as manufacturers have continued to meet the strong demand, along with the fact that we've been expanding relationships.

Period-end loans declined $799 million to $48.9 billion.

This decline included a decrease in mortgage banker finance, reflecting the decline off the summer peak.

In addition, we saw decreases in general middle market, corporate banking, national dealer services and energy for the same reasons I just described.

Increases in technology and life sciences and commercial real estate partially offset the decline.

Total loan commitments decreased $464 million with declines in general middle market and corporate banking as we remain disciplined on pricing and structure, as well as mortgage banker due to the expiration of temporary increases in conjunction with seasonality.

Energy commitments also declined.

Technology and life sciences, national dealer and commercial real estate commitments grew.

Utilization decreased to 50% at the end of the third quarter from 51% at the end of the second quarter.

Importantly, our pipeline increased.

Our loan yields decreased 3 basis points in the third quarter as shown in the yellow diamond.

The benefit from a 1 basis point increase in 30-day LIBOR and the favorable impact from higher yields on loans related to energy was more than offset by lower loan fees due to decreased loan activity with the summer slowdown and a decline in portfolio spreads as a result of growth in high-quality, lower yielding loans.

Turning to slide -- to deposits on slide 7. Average deposits increased $1.7 billion in the third quarter, driven by a $1.3 billion increase in non-interest-bearing deposits.

Virtually every business line posted growth led by general middle market, technology and life sciences and corporate banking.

Period-end deposits increased $508 million to $58.8 billion.

We continue to prudently manage deposit pricing while remaining at 14 basis points.

Slide 8 shows our securities portfolio increased as we continue to position ourselves for compliance with the new liquidity coverage ratio, or LCR.

We tapped the market in July issuing $350 million in subordinated debt and an additional $175 million in senior bank debt.

Both of which we swapped to floating.

We invested a portion of the proceeds, $350 million, in a combination of five-year treasuries and Ginnie Mae CMOs.

This strategy allowed us to minimize any impact to both earnings and our asset-sensitive position.

As you know, we are required to have an LCR of 90% by January 1, 2016 and 100% by January 1, 2017.

As of quarter-end, our estimated LCR ratio meets that fully phased-in 2017 requirement, reflecting our loan and deposit movement in addition to the debt issuance.

Any future funding needs for LCR purposes will depend on our balance sheet movement and strategies over time.

Should we need to add HQLA, we continue to have several funding options, including our federal home loan bank line of credit, brokered deposits and the public debt markets.

We continue to carefully manage the securities portfolio, maintaining an estimated duration under four years.

In the current rate environment, we expect continued minor pressure on the average securities yield, as you can see in the yellow diamonds on the slide.

Turning to slide 9, net interest income increased $1 million in the third quarter.

One additional day in the quarter and loan growth were partly offset by lower loan yields, which I discussed earlier.

Increased expense from the debt issuance was mostly offset by higher securities and deposits at the Fed.

Our net interest margin decreased 11 basis points with more than half of that decline due to higher balances at the Fed.

Compared to third quarter of 2014, net interest income increased $8 million largely due to loan growth.

We continue to be well-positioned to benefit when rates rise.

Our standard asset liability case shows that a 200 basis point increase in rates over a one-year period equivalent to 100 basis points on average would result in an increase to net interest income of about $220 million.

We also share in the appendix several alternative assumptions to our standard case with changes to the pace of deposit decline, loan growth and rate rises.

And in all cases, we remain well-positioned for rising rates.

Turning to slide 10, our overall credit picture remains solid.

Net charge-offs were 19 basis points, or $23 million, derived mainly from technology and life sciences and energy-related loans.

Overall, net charge-offs remain well below what is historically normal for us.

Gross charge-offs declined slightly while recoveries were down primarily due to timing.

Our criticized loans grew $537 million to $2.9 billion, or about 6% of total loans, which is well below our historical average.

The increase was driven by a $480 million increase in criticized loans related to energy.

Inflows to non-accrual declined from the second quarter and were $69 million, of which $25 million were energy-related.

Total non-accrual loans were stable at only 73 basis points to total loans.

Specific to energy, the fall redetermination process has just begun for our E&P customers, which comprise 69% of our energy business line.

With continued low energy prices and reduction in rig count, we expect some pressure on borrowing bases.

However, we do not expect widespread issues to arise as our borrowers overall continue to act prudently in this low price environment.

In fact, utilization in our energy line of business remained flat at 48% at quarter-end.

As anticipated, we continue to see negative migration in the energy book, which has resulted in an increase in criticized loans.

However, non-accrual loans and charge-offs have remained low.

As of quarter-end, approximately 27%, or $1.1 billion of the loans related to energy were considered criticized.

However, this includes only $126 million of non-accruals equivalent to 3% of energy loans and is up only $7 million from the second quarter.

We had no charge-offs in our energy business line and modest charge-offs in energy-related loans.

And as expected, loans continue to decline with our energy business line down $66 million and energy-related down over $100 million to about $615 million at quarter-end.

The $26 million provision for our total portfolio reflected charge-offs, as well as slightly higher reserves.

Reserves for technology and life sciences loans increased due to modestly higher charge-offs and we not only added to our energy reserve due to an increase in criticized loans, but we also continue to maintain a healthy qualitative reserve.

It is important to note that while we have continued to increase the reserves for energy, we believe that the charge-offs will remain manageable.

In summary, our consistent, robust methodology resulted in a $2 million increase to the allowance for credit losses to $670 million.

And the coverage of our non-performing loans remains very strong at 1.7 times.

Slide 11 outlines non-interest income, which increased $3 million to $264 million.

Card fees increased $3 million due to higher revenue from merchant processing services and interchange.

We also had growth in foreign exchange and brokerage fees.

This was partially offset by declines in investment banking fees and fiduciary income, which were impacted by the poor market environment.

We also had several items that are difficult to predict.

Specifically, a $4 million benefit from hedges on recently issued debt, a $3 million increase in customer warrant-related income and a $5 million decrease in deferred compensation, which is offset in non-interest expense.

As a reminder, the year-over-year view of both non-interest income and non-interest expense is not directly comparable.

Each quarter this year reflects an accounting presentation that reports gross revenues and expenses rather than net revenue for our card program.

Turning to slide 12, non-interest expenses increased $25 million.

This included a $3 million legal reserve release in the third quarter compared to the $30 million release we recorded in the second quarter, resulting in a $27 million swing.

Absent the change in legal reserves, expenses declined $2 million, mainly due to items that are tough to forecast, including a decrease in deferred comp, a forfeiture of executive stock awards and lower staff insurance.

As expected, occupancy expenses were seasonally higher and software and technology-related contract labor increased.

Moving to slide 13 and capital management.

As the chart indicates, we continue to return excess capital to our shareholders in a meaningful way with a payout of 71% of third-quarter earnings.

In the third quarter, we repurchased 1.2 million shares for $59 million under the equity repurchase program.

As you might recall, the Federal Reserve scenario and the stress test incorporated a gradual increase in interest rates over the forecast period starting in the second quarter of 2015.

While a rate rise has yet to occur, you can expect that any material increase in the pace of our equity repurchases will be linked to our net income performance, which should improve with rising interest rates over time.

Turning to slide 14, our outlook for full-year 2015 compared to full-year 2014 has not changed from what we outlined at the beginning of the year and reiterated on our call in July.

Our expectations for the fourth quarter relative to the third quarter shown on this slide are based on a continuation of the current economic and interest rate environment.

Starting with loans, we expect average balances to be relatively stable with a seasonal decrease in mortgage banker and continued decline in energy offset by growth in other businesses.

We expect our net interest income to also be relatively stable.

The positive effects from asset growth and a third-quarter debt maturity should approximately offset the continued pressure from the low rate environment on loan and security yields.

With continued strong overall credit quality, we expect the provision to remain low, similar to what we saw in the third quarter.

As far as the energy portfolio, we expect continued negative credit migration, continued run-off in balances and a very manageable level of non-accrual and charge-offs.

Overall, we expect non-interest income to increase slightly.

We expect continued growth in card fees and should markets improve, return of growth in fiduciary and investment banking fees.

Third-quarter levels of warrant income, hedge ineffectiveness and deferred comp, all of which are difficult to predict, are not expected to be repeated.

Non-interest expenses are expected to be moderately higher due to seasonally higher staff benefits, outside processing, marketing, occupancy, technology-related and consulting expenses.

Also litigation reserve release, deferred comp and stock forfeiture levels benefited the third quarter and are difficult to predict; therefore are not expected to be repeated.

We continue to remain focused on controlling expenses wherever possible.

In closing, we are pleased with the continued loan and robust deposit growth, as well as increased revenue.

Overall, our credit quality remains strong.

We remain focused on the long term and we expect that as rates rise, our revenue picture looks even brighter.

As always, we believe our relationship banking strategy, combined with a diverse geographic footprint, will continue to assist us in building long-term shareholder value.

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

(Operator Instructions).

Scott Siefers, Sandler O'Neill.

First question maybe on energy.

Expect to hear a bunch of them, I guess.

So the migration into non-accrual and certainly with no charge-offs has all been very, very good.

I just wonder, now that energy prices have at least kind of stabilized, does that give you guys any confidence that this very low migration level from criticized into nonaccrual can continue to stay very low, or is it still just the duration of softness in energy prices that will drive the ultimate migration performance?

Pete, why don't you take that?

Pat, you can chime in as well.

Sure.

I think the same pattern that we have seen over the past quarter will continue.

We are seeing some migration in the portfolio still, but we are not seeing a lot of migration to non-accrual and we haven't seen a lot of charge-offs.

That's been consistent with what our expectation has been right from the beginning and it is exactly what we are seeing.

We are seeing a lot of these credits get resolved before they go to non-accrual.

In fact, we continue to get large payoffs of substandard credits and we just got one I think a week or two ago, so we are encouraged by that.

We think that's going to continue and I don't see any reason why it would change with energy prices where they are today.

Pat, anything you would add?

The only thing I would add to that, Scott, something that's really helped us is that 97% of our portfolio is secured and we have used the same engineers for years and years and that is holding up very well.

So our borrowers are really behaving responsibly at this time in the market.

That's perfect color.

Thank you very much.

And then if I can switch gears really quickly, Karen, a lot of movement within the balance sheet between some of your guys' issuances and then just the strong deposit growth and everything.

Can you maybe just sort of encapsulate how much of the movement and I guess the resulting pressure on the margin was maybe transitory as funds were just sort of waiting to be fully deployed or timing within the quarter?

What was the nature of some of those moves?

In other words, could we expect maybe some relief on the margin even though there will still be net downward pressure?

How do you see those things playing off one another?

Sure, Scott.

If you are talking about the net interest rate margin, our actual rate NIM, obviously, the biggest impact on that was the increased balances at the Fed, which, on a period-end basis, were driven by increased deposits and decreased loans.

And so that can move, so the balances that we have with the Fed can clearly move on a period-end basis.

The impact on the NIM from a securities yield and a loan yield perspective; securities yields continue to be impacted by the lower yielding on our pre-pay reinvestment and the fact that we have added treasuries to our portfolio.

The loan yield has bounced around a little bit over the last several quarters up and down and really does depend on the movement that we have in our portfolios depending on the relative loan yield and the area that is growing or declining.

So the overall impact on NIM is most impacted by balances at the Fed, which you pointed out and little impact from securities yield and then hopefully continued somewhat stable impact from loan yield.

Okay.

That's perfect.

Thank you guys very much.

Erika Najarian, Bank of America,

I'm sorry to re-ask the question again, but in terms of your outlook for flat provision for the fourth quarter, will your fall redetermination process be completely done and captured in that fourth-quarter result?

Pete.

Yes, it will, Erika.

We expect that we will be through the redetermination process really by the end of November.

Got it.

And Karen, just as a follow-up to the last question, could you give us a little bit of a sense in terms of your decision tree with regards to keeping the cash at the Fed versus extending duration to protect the margin?

Given your comments that you are already compliant with the 2017 standard for LCR, I am wondering what your thoughts were in terms of deploying that into HQLA more aggressively, or are you waiting to see how much of this deposit growth sticks with you?

Anymore movement into securities would obviously dampen the upside that we would have as rates rise and we continue to remain very mindful of the fact that, as rates rise, we will have a mark to market on our securities portfolio, which can impact our tangible capital.

So we will continue to watch the environment and be fluid, but we remain mindful of the fact that investors are focused on our asset sensitivity upside.

Got it.

And just one final one from me, Ralph.

Given your comments that some of this energy pressure is going to persist into next year and the market seems to be less optimistic about the trajectory of the short end of the curve next year, I'm wondering how you are thinking about sort of the in case of emergency break glass plan for next year.

Are there further expenses to potentially improve the efficiency ratio in light of a more difficult revenue backdrop?

Any sort of thoughts on how you are thinking about 2016 as the environment seems to be getting a little bit less friendly, especially for a model like yours that's so tethered to the short end of the curve?

Well, we are constantly looking at that, as you may remember from previous calls and we have been very focused on expenses and also growing relationships.

And I think the growing relationships, especially in the footprint that we have, is the largest opportunity for us moving forward.

We will continue to look at expenses as we always have, but that in itself is one that will not offset by itself the expenses we need going forward, especially on the regulatory and the compliance side.

So growing the business as we normally would and focus on is probably number one today.

Okay.

Thank you.

Ken Zerbe, Morgan Stanley.

Maybe a question on the provision expense or at least how you are thinking about it as it relates to energy.

Trying to tie your comments that you are going to see further credit migration in the energy portfolio and knowing that you do have to mathematically hold higher reserves against loans that see deterioration in the risk ratings, is it fair to assume that we should be expecting again further reserve build in the energy book, but then to keep your provision as low as you are guiding it to be sort of in that mid-$20 million range, that you are actually relying on further credit improvements in other areas?

Pete, do you want to take that?

Yes, Ken, we are starting off the quarter with a healthy qualitative reserve and that reserve is in place because we are looking at the fall redetermination process and we are expecting some migration to come out of that with energy prices being a little bit lower than where they were in the spring.

We are also expecting, with rig counts where they are, that fewer borrowers will report higher energy reserves and that could put a little bit of pressure on borrowing bases.

So we are expecting some migration, but we think our qualitative reserve that we have will be -- will suffice to cover that migration.

Got it.

So it's almost just moving from one bucket to the next rather than increasing the total bucket?

We are trying to stay ahead of it.

Understood.

That totally makes sense.

And then just more of a generic question, you talk about your energy customers.

Obviously, I know you know them, you know the credits.

Help me reconcile -- I'm going to say roughly $3 billion of your -- which is the vast majority of your energy loans -- are shared national credit.

How many of those energy companies like are you the primary bank for, that you have the core relationship for versus, I don't know, someone like Wells Fargo, or someone else that has the core relationship?

Pat.

We are the agent for less than 20% of our energy portfolio, but we do have a direct relationship with every single client in the book and many, many times that is a multi, multi-year relationship.

Okay, great.

All right, thank you very much.

John Pancari, Evercore ISI.

Regarding the pretty steep increase in the energy criticized loans, what was the main component of the driver?

Was it E&P or oil service?

Pete.

Yes, I think the energy services segment of the business has been the most impacted.

But bear in mind the energy services segment is much smaller than the E&P, so I would say they both were a factor this quarter.

This quarter, we moved some credits to criticized simply because of the expectation that energy prices are going to remain low for an extended period of time.

And so if there was any operational weakness at all, we moved these credits to special mention.

And the thing that I would say about that is is that our feelings about these credits hasn't changed.

Most of these credits have very strong balance sheets.

We are well-secured.

We don't expect the risk of loss to increase as a result of us moving these credits.

We just didn't feel like we could justify keeping them past credits given how long energy prices have been where they are.

Okay, all right.

And then I guess some of the quantifications would help a little bit more -- for example, what was the size of the addition to your energy loan loss reserve in the third quarter?

We don't give out that specific information, but what I would say is that we have increased our reserves to energy every quarter for the past four quarters since the price started to move down.

And we have mentioned that we maintain a healthy qualitative reserve.

And at the same time, I think it's important to realize, during that same timeframe, that our energy balances have also declined.

Okay.

And on that front, Karen, can you help us with how to think about the incremental decline in energy loan balances over the next several quarters even if oil prices stay where they are?

That's difficult to predict exactly, but, in the appendix of the deck, we do give quarter-by-quarter movement in our energy portfolio and you can see the last decline, what it did on balances.

Pat, you can comment on that?

Yes, we do expect reductions as a result of the upcoming redetermination, but we've also been advised from our clients of about $215 million in commitments today, which would translate to $125 million in outstandings that we expect to confirm pay-offs on based upon mergers or sales that are happening within the industry.

Okay.

And then, lastly, I know you indicated that the fall redeterminations should be over by November, but what's also happening in the winter is the SNC exam, which is now partly semiannual, I guess, for large banks.

Will you be part of that?

Well, we are always a part of it because we are involved in the Shared National Credit, so all the same credits are being examined.

Our SNC exam will not be until spring of next year, but we are involved in the credits that will be examined in the fall and we don't expect any impact from that.

Our regulators are looking at our energy book all the time.

In fact, they looked at it just recently and I think we are all on the same page as to where the risk rating should be on the portfolio.

So I am not anticipating any issues coming out of the SNC exam.

Okay.

All right.

Thank you.

Ken Usdin, Jefferies.

A question just on non-energy and just regular loan growth.

Can you just talk to us a little bit about the state of affairs in non-energy Texas?

And also, I noticed that just the kind of non-energy middle markets in corporate banking also look like they declined.

So just some flavor in terms of just underlying borrower demand and what's going on at the core in Texas please.

Curt, do you want to talk about overall and Pat, you can talk in Texas?

Yes, what I would say from an overall perspective, we continue to benefit.

While we are seeing some impact from energy more broadly in Texas that Pat can speak to, we continue to benefit from a diverse geographic footprint.

And as Ralph mentioned in his opening comments, the California market continues to perform well for us really across a variety of our core businesses, as well as our specialized businesses on both the loan and deposit side of the equation.

And we are starting to see some nice improvement in the overall Michigan economy tied to the auto industry, the lower gas prices, but just in general improvement in unemployment, real estate values, etc., in the Michigan market.

So we feel like we still have growth opportunities in both of those markets, which is helping to offset some of what we hope is at least a near-term impact in Texas.

But I would also say that, from a longer-term perspective, we continue to be very bullish on the Texas economy at large.

Pat, do you have anything to add to that?

I would just add further that Texas is surrendering its lead growth within our Company to California and we are really pleased to see what California has contributed.

But also Michigan has come on very strong and many good things are going on in Michigan, including in Detroit.

The Texas economy has a direct impact of about 15% from oil and gas, but the hangover, so to speak, is affecting quite a bit of our businesses and as noted, our balances are down in Texas about 2% for the quarter and I think the best indicator for that is our economic activity index, but it shows 9 straight monthly declines.

So it is just confirmed by the general economy.

Understood.

And, Karen, a follow-up.

Can you help us understand on the expense side what was the magnitude of those non-repeatable benefits that you had in the third quarter and can you also help us understand what the seasonal stepup might look like in the fourth from all the lines that you mentioned?

Yes, so outlined on our expense slide, the levels of expenses that may not be repeated would be the hedge ineffectiveness, the warrant-related income and the deferred comp.

In addition to that, as we outlined, just for the quarter-over-quarter outlook, that we do expect increases in several other categories.

Staff insurance is something that typically rises in the fourth quarter, occupancy expenses, marketing spaces, consulting expenses.

We are continuing to invest in technology, so technology-related expenses, etc.

Okay, so is it fair to say that kind of like the helpers this quarter were about 10 and then you get another 10 on top of that?

We expect our expenses to moderately increase quarter-over-quarter and in moderate, you can assume sort of mid-single digit levels.

Okay.

Understood.

Thanks, Karen.

Dave Rochester, Deutsche Bank.

Just had a bigger picture question on credit.

Just trying to figure out how criticized loans increased by over $500 million, but the reserve only increased by maybe a few million.

Can you just talk about what your typical reserve is on special mention or substandard loans?

And I realize NPAs were stable; it's just that I've heard some pretty large reserve percentages out there that some banks assign to criticized assets.

Pete.

We don't disclose specifically our reserves on particular credits, but bear in mind that our reserves come in two different forms.

One is the [decided] reserves, which are very specific to our non-accrual loans and then the other would be our standard reserves, which are what we assign generally to different categories of special mention and substandard credits.

So we did have migration in the portfolio, but the makeup of that migration makes a difference on what our reserves are going to be.

For instance, our E&P credits are much better secured than some of our other C&I loans and so we might not have the same amount of reserves assigned to those E&P credits as we would say our energy services credits that are migrating.

So it's difficult to exactly equate migration to the amount of reserves that we have.

Got you.

Thanks for that.

And then you mentioned you are just starting the redetermination process.

Just wondering how much you've done at this point.

And then we've heard other banks with energy exposure talk about price decks coming down somewhere in the high singles to mid-teens type of range for the fall redeterminations.

Is that what you guys are seeing as well in terms of magnitude?

Yes, I think we would be consistent with that.

We are about 15% to 20% of the way through the process right now and so far, we are not seeing anything unusual.

We are not seeing any widespread deficiencies.

Very similar to what we saw in the spring.

Wouldn't be surprised if we see more collateral deficiencies this fall than what we saw in the spring because, frankly, we didn't see a lot in the spring.

But so far, it's going well.

And how much have lines come in just on average for the credits you've examined so far?

Do you mean how much borrowing bases have shrunk?

Yes, exactly.

I'm almost hesitant to generalize from what we've seen so far, but we actually have seen a fair number of credits -- their borrowing bases actually increase and our loan to values decrease and we've seen just about as many of those -- seen as many loan to values decrease as we have seen increase.

But it's still early and I'm not necessarily sure that's going to hold through the whole process.

It would be great if it did, but I'm not sure if it will.

And then I know last quarter you said you were still kind of going through the re-risk rating for the service portfolio.

Is that segment done at this point and when do you typically -- when will you look at that again?

Yes, we are looking at it all the time.

It's a continuous process.

We've been through the portfolio probably two or three times.

Okay.

Got you.

All right, great.

Thanks, guys.

Terry McEvoy, Stephens.

Just a small question.

It looks like recoveries in energy happened in the third quarter.

Net charge-offs through the first two quarters were $10 million in energy and then it fell year-to-date to $3 million.

Could you just talk about any recoveries and what was behind that?

We didn't have any substantial recoveries in energy this quarter.

We just had lower charge-offs.

We didn't have any charge-offs in the line of business whatsoever and we had just a handful of energy-related charge-offs, so we were encouraged by that.

Okay.

And then just on Michigan and middle-market lending, do you expect to see or are you starting to see a pickup from the typical slowdown you see in that market during the summer months?

Yes, you are correct, Terry.

We do see a dip in the summer, but we also see a resurge in the fourth quarter and we do expect to see that.

That's great.

Thank you.

Bob Ramsey, FBR.

A lot of my questions have been answered and I hate to belabor energy, but out of curiosity, why don't you all disclose what the energy reserve is?

Bob, we firmly believe that the allowance is there to cover any and all losses.

And so we think it might be misleading to give specifics around any one portfolio and that's the key reason.

Okay.

I know you all said that most of the net charge-offs this quarter came from technology and life sciences, as well as energy, but I was just wondering if you could tell me what the dollar amount of net charge-offs was on the energy book this quarter.

Yes, I could.

It came from the energy-related, not the energy (multiple speakers).

Energy-related, okay, yes.

And maybe while you dig that number up, I will ask as well, I know you highlighted 27% of the energy book is criticized today.

Can you just remind me how that compares to the peak in the last cycle?

I don't know if we have the peak criticized in the last cycle offhand.

We can answer your question for energy-related charge-offs.

Do you want to talk about that?

Yes, our energy-related charge-offs -- sorry for the delay -- was about $9 million for the quarter.

Great.

If you don't have the exact criticize numbered, do you have any sense or any sort of outlook as to whether you expect this energy cycle to be similar in terms of where things peak or whether you think the trajectory looks better or worse?

I would expect we are going to see continued migration, but I think it's going to be at a slower pace.

We are seeing somewhat of a bifurcation in the portfolio.

There are certain credits that just are not migrating at all primarily because they have just such strong balance sheets and/or they are more gas weighted than oil weighted.

I don't expect to see those credits migrate.

A lot of the higher levered, more oily credits have already migrated, so you are not going to see any of that.

So I think we will see more migration, but I think it will be at a slower pace.

Great.

And then last question, shifting gears to capital, it looks like the pace of share repurchases is sort of running below what if I simply took your CCAR authorization and divided it by 5 quarters would come out to be.

I know you all said the pace of buybacks is linked to performance and will be higher in a higher rate environment.

But I am just curious, is it not still your intent to fully execute on that CCAR authorization before it expires regardless of what happens to rates and performance?

So in the stress test scenarios that were laid out by the Fed, they did have a decent sized interest rate increase over the nine-quarter forecast, which started in the second quarter of 2015 and went on through 2016.

Obviously, as rates rise meaningfully, that can have a good impact on our bottom line and so you can expect that our share repurchase program going forward will be tied to both our strong capital levels and to our net income performance and so we will wait and see.

Okay.

But over the horizon of this CCAR authorization, if rates do not move during this authorization period, would you still complete the existing authorization or would you scale it back?

Honestly, it depends on earnings, Bob.

Earnings can be impacted by many things, but interest rates are one of the biggest drivers of growth in earnings.

Okay.

All right, thank you.

Brett Rabatin, Piper Jaffray.

I wanted to make sure I understood guidance, just thinking about the outlook for the fourth quarter in terms of average loans.

Kind of given the mortgage banker is seasonally lower and continued decline in energy and maybe thinking about the pipeline being lower, can you maybe talk about the average balance being flattish, or relatively stable I guess is the term you use, in the fourth quarter kind of versus in the period been quite a bit lower than average in 3Q?

Yes, so, Brett, I would say that important to know that our pipeline did increase at the end of this quarter going into the fourth quarter, so that is good signs for our other lines of business.

We did note that we expect continued declines in energy; we've talked about that.

On mortgage banker finance, we also expect seasonal declines.

The amount of those declines are difficult to predict.

You can see in our appendix the fact that we've got quarter-over-quarter movement in our mortgage banker business and in the last couple of years, we have seen seasonal declines, sometimes as large as $500 million, but again very difficult to exactly predict.

Okay.

And then just wanted to make sure I was understanding -- you are obviously very mindful of higher interest rates and the effect on the securities portfolio.

Karen, what is your assumption for interest rates next year as you think about managing the balance sheet?

That is anybody's guess.

When we think about managing the balance sheet on securities, we continue to have pre-pays on our securities portfolio that range in the 240 to 250 yield area and we are focused on reinvesting those pre-pays as best we can at yields at or above our current portfolio yields.

But very difficult to say where those yields will be next year.

Okay.

Great.

Thank you for the color.

Brian Clark, Keefe, Bruyette & Woods.

So I want to kind of follow up on the discussion about the pipeline and I guess your outlook.

Thinking about -- it's been a while since we've seen commitments on utilization rates drop and obviously, there's a lot of energy-related issues there and maybe even, like you said, some of the seasonality that you see in mortgage banker finance.

I guess I'm just thinking about the guidance again about period-end loans being down almost $800 million in the third quarter, but averages expected to be flat.

So I guess my first question is is that partially because you think that the dealer floorplan, which usually has a good fourth quarter, is that expected to come in and help to grow balances in the core C&I book for the fourth quarter?

That's my first question.

Yes, the answer to that is yes.

Our dealer floorplan obviously does have seasonality, did see some declines in the third quarter and we do expect it to come back a bit from those declines.

I might just say that, across the market, we do feel good about the pipeline in sort of general middle market and some of our smaller businesses, small business, private banking and even retail, which we don't talk a lot about, but HELOC lending, consumer lending and so there are some other areas that, beyond the decline, that we are expecting in energy and mortgage banker finance that I think will be contributors in addition to the normal seasonality in dealer financial services.

Thanks for that, Curt.

I guess maybe I can follow up on that with you.

It seemed like even in JPMorgan's business bank, their middle-market line of business was down in the third quarter.

It was down for you guys $364 million.

I guess what are you seeing that makes you feel good about the fourth quarter and that line of business since it's about a 30-year total loan portfolio?

Pat, do you want to add to that?

Sure.

Our middle-market business is historically down in the third quarter.

We've looked at it for the last 15 to 18 years and it is a very repeatable trend and it does bounce back in the fourth quarter.

How we feel good about that is as we look at the pipeline and we manage that in every market and what we are hearing is that we would expect new credits, new clients, as well as increases to some existing relationships.

Okay, thank you for that.

And just one last one from me.

Pete, I don't think you gave it this quarter yet.

I think you gave it to us last quarter.

I guess with the oil and gas or energy-related, the $1.1 billion in criticized, is the makeup similar to the E&P and oilfield services in the outstandings, or can you give us an idea of how that $1.1 billion is spread across those customers?

Yes, the segment that's been most affected has been energy services.

We are a little over 40% criticized there.

E&P is about 27%.

Midstream not been very much affected at all.

It's around 10% to 12%, somewhere around there.

Thank you very much.

David Darst, Guggenheim.

I just want to ask a question on the technology and life sciences business.

That portfolio has had the largest dollar volume of growth over the past year and is now about the same size as energy.

Where could the relative size of that portfolio be and then is any of the growth you see also (inaudible) the higher losses you've seen this year?

Pat, do you want to --?

The majority of the growth that we saw in our technology and life sciences business was in our equity fund services group where we provide capital call and subscription lines to venture capital and private equity and typically those are the less risky part of the technology and life science portfolio.

So is there anything you would attribute the higher loss rate to this year?

Pete?

Yes, David, this is Pete Guilfoile.

It's not unusual for us to see elevated charge-offs in TLS.

They have been up for the last couple of quarters.

They are above where we would like to see them, frankly, but we're not seeing any systemic issues there.

We are not seeing any patterns to the charge-offs.

I really don't think we are going to see further deterioration in the portfolio but we felt it made sense to increase our reserves and we are watching it carefully but we don't expect that deterioration to continue in subsequent quarters.

Okay, great.

And then, Karen, just one quick question on the headcount increase this quarter.

Is that related to some of the technology projects you've got in place, or are those front-line sales?

It is related to mostly the technology projects.

On the frontline we are very focused on allocating our resources to our greatest growth opportunities but not necessarily adding in the headcount.

Okay, great.

Thank you.

David Eades, UBS.

Maybe following up on the tech question you just got, could you give a little bit of color on how you guys think about protection and what makes you comfortable with the exposures in that portfolio, I guess particularly on the more risky side, if you were to have a more sustained -- troubles hit the tech market?

Yes, there's a number of things, David.

We've been in the business a long time, so experience is probably the most important thing.

We have relationships with a number of venture capital firms that we've been through ups and downs in the cycles many times before, so we understand how they react in downturns.

We have a number of different businesses within the technology and life science group, so it's much more diversified than you might think.

Even within the technology sector, we have a fair amount of diversification, not just by industry, but by geography and by investor group too.

So I would say the main things we would point to are our experience, the partners that we do business with, we are very selective and then the diversification of the book.

Yes.

Great, thanks.

Just quickly on energy, a question -- can you give us any color -- I know you guys have not wanted to give any kind of numbers around the reserve -- but the relative size of the quantitative and qualitative reserves and any kind of trend -- if we've seen meaningful shifts from qualitative into quantitative over the past couple quarters?

So we don't give relative sizes either, but we do maintain a healthy qualitative reserve as we look forward.

Okay.

I can just tell you, David, we size our qualitative reserve based on events that we think have already occurred and our risk ratings have not adjusted to yet.

So we think that the migration that we are going to see this quarter as a result of redetermination processes are events that have already occurred.

So we feel comfortable setting up a qualitative reserve to cover that aspect of the migration.

All right.

Thanks.

John Moran, Macquarie Capital.

Just a couple quick follow-ups.

The $125 million in outstandings that are expected to pay down out of the energy book, would that all hit in 4Q or is that kind of 4Q and then into 2016?

To the best of my recollection, John, those should happen in the fourth quarter.

That number is based upon information that borrowers have advised us on.

So those opportunities are already in process.

Got it.

Okay, thanks.

And then maybe just a follow-up on Texas generally.

Even ex-energy, general middle market sort of down, are you guys experiencing that?

And certainly it seems like different MSAs are experiencing this slowdown in different ways.

So if you could give us a little bit of color in terms of kind of what you are seeing going on by market.

And then I know you feel good about the pipeline in general, but if you had any commentary around the pipeline as related specifically to Texas.

Curt, do you want to take that one?

Yes, I will make a couple comments about Texas overall.

While there is a general impact from the energy slowdown statewide, it definitely is being felt more in the Houston market, sort of primary, probably San Antonio secondary.

But if you look at the North Texas market, Dallas-Fort Worth, it is a more diverse economy, less energy-dependent.

We are not seeing what I would call broad impact as of yet in that part of the sector.

But more impact is starting to creep in.

Energy, energy-related certainly (inaudible) just more broadly.

Probably some longer-term impact on home values, real estate values, etc., for example, in the Houston market.

But it's a huge state, so there's a lot of diversity from an economic standpoint.

And Michigan, as you were talking about earlier, with the auto industry rebounding, there's a real strength starting in momentum there.

Yes, as well as the broad spread growth we are seeing in California as the economy continues to chug along.

And the various specialized businesses that we have that are unique as well.

Pat, do you want to add anything to that?

Well, just as it relates to Texas, competition for non-energy and non-energy services clients is pretty fierce.

People are not trying to expand their book for that and they have redirected their marketing activities towards non-energy companies.

So that's also impacting our growth in Texas.

Okay, that's helpful.

And then just one other quick follow-up on the criticized energy.

And Karen, I don't know if it was -- we are not sure if we have this, or we are not going to disclose it at this point -- but somebody had asked where they peaked last cycle and I was wondering if you tracked that down?

Yes, we peaked at the high 20%s overall in terms of the entire energy book.

Bear in mind that we did not have energy-related in that number back in the last cycle.

So we just started reporting energy-related in this cycle.

Also, the duration of that cycle was shorter, so it's not surprising that our criticized levels are a little bit higher this time around for those two reasons.

Pat, do you have anything to add?

I think we've adjusted the way that we examine our book.

We examine it more critically today based upon cash flow as opposed to an asset-based book.

The complexion of the portfolio has only gotten better since the last cycle.

It remains secured, but we are focusing more succinctly on depressed cash flow this time around.

Got it.

Thanks very much for taking the questions, guys.

Steven Alexopoulos, JPMorgan.

Just a couple of follow-ups, no surprise, I guess, on energy.

Ralph, when I look at the energy criticized, you were up $329 million last quarter.

This quarter, you are up $537 million.

Last quarter was seemingly impacted by the SNC exam, borrowing base resets.

I'm trying to get my head around what the catalyst was this quarter that we saw a bigger increase in criticized this quarter versus last quarter.

Pete.

As I stated before, we just decided to take the approach that, given that energy prices have been down for an extended period of time, that we had a number of credits that were kind of in that low pass category.

We just moved them to criticized thinking that we are not going to see a turnaround in energy prices and if any of our credits are seeing any kind of operational weakness, we decided that we really couldn't justify calling them past credits.

But, again, I don't feel any worse about those credits.

I don't think we have a big risk of loss.

Most of those credits have very strong balance sheets and most of those credits that we moved this quarter still are very, very well-secured.

So we actually don't feel any differently about the energy book today than we felt one or two quarters ago.

Okay, so you essentially changed your forecast for oil prices, essentially?

No, it's not based on really a forecast, Steve, as much as it is that, if you are seeing some operational weakness and you really don't expect that operational-- there's an impetus for that operational weakness to turn around in the short term, which now we really don't, we just decided that we should move them to special mention.

Okay.

And in terms of not needing to put incremental reserves or at least any size magnitude, were you already reserving at the new rating level?

I'm just trying to rectify a lack of provision in the quarter.

Yes, so we have always had a qualitative reserve and we have tried to stay ahead of this the whole way.

And so you are right that that qualitative reserve was available for some of the risk rating changes that we made.

Okay.

And we did increase our reserves for energy in the quarter, Steve.

Okay.

Just a final one.

So from a big picture view, with roughly a third of the energy book now criticized, seemingly above the prior peak, what gives you confidence that losses are going to remain manageable?

And by manageable, do you mean through earnings?

What exactly do you mean by that?

Well, bear in mind that the bulk of the migration has been in E&P and the vast majority of those E&P credits remain extremely well-secured.

Even the ones that are highly levered, most of the debt is below us and so our position in those credits remains solid even though the risk of default might be higher.

The concern would probably be more around our energy services book, but our energy services book is only 15% of the portfolio.

It's not 50% of the portfolio and that's by design.

Part of our strategy is to limit the size of our energy services book.

And another thing, we feel really good about our strategy around energy services.

In addition to limiting the size of it, we have really focused on companies with strong balance sheets, strong liquidity.

And then another important consideration there is just diversification.

We like to see companies that are not overly dependent on drilling activity and I think because of the strategy that we have and the size of the energy services portfolio, we feel that our losses in the energy book are going to be manageable for that reason.

Pete, you might just reemphasize that we lend at a percentage of proven reserves.

Correct.

We have a very conservative approach, as do most banks in this space, on what we are lending against in terms of reserves.

We are discounting them heavily.

We are risking them.

We're really focused on only the proved reserves and then we are taking a pretty big haircut before we apply the advance rate.

For that reason, a lot of these credits are being resolved before they go to non-accrual because many of the credits that need liquidity can actually sell their assets and generate liquidity because our advance rate against them is much lower than what they can realize in a sale.

And that's why you are seeing a lot of these credits that are special mention and substandard not migrating to non-accrual or charge-off.

Maybe just one final one.

Is your view that losses remain manageable tied to an expectation that oil prices recover from here?

I remember Lars maybe 18 months ago or so saying if oil was below $60, it was problematic and now we are $47.

Do you need to see a recovery for $47 18 months from now?

Are losses manageable in that scenario?

Yes, I think they would still be manageable even at today's prices.

What's happened over the last several quarters has been great to see.

We see our customers reducing their cost structure.

They are rightsizing their balance sheets.

They have hedging that has allowed them to bridge themselves to a point where they can become profitable at lower energy prices.

And I don't know what the magic number is, but I feel like the majority of our borrowers will be able to adjust to prices where they are today.

Okay.

Thanks for taking the questions.

Gary Tenner, DA Davidson.

Just had one follow-up energy question.

I wonder as we start looking at 2016 if you could give us a sense of how your E&P customers are hedged, what percentage of their projected production is hedged and what kind of price levels.

Gary, we update our hedging statistics based on the redetermination process and so we are only about 15%, 20% through that process.

So the number I am about to give you is not terribly different than the number I gave you last quarter.

But, right now, 59% of our borrowers have 50% or more of their PVP hedged for a year or more and about 35% of our borrowers have 50% or more of their PVP hedged for two years or more, which is very similar to where we were last quarter; it's very similar to where we were two quarters ago.

Okay, but only very early in the redetermination process?

Correct.

All right.

Thank you.

Jeffrey Elliott, Autonomous Research.

You've said a few times you kind of see energy as manageable.

Could you give a bit more thinking on what you mean by manageable?

Well, I think manageable means that we are not going to see anything out of the ordinary, that we feel like our reserves are more than adequate to cover anything that comes up, I guess.

Pat, you may want to add to this -- this is based on we have a team that has 30 years of experience.

We've seen the ups and downs and we've talked about various ways that these credits are managed, which is unique to the portfolio and the particular segment.

Pat, do you want to add to that?

Well, just to reinforce the fact that we've been in the business for over -- approximately 30 years.

We've had the same manager for that 30-year period.

Our engineers have been working with us for a long, long period of time.

Energy is a very important business to Comerica.

It's an important business to Texas and an important business to the United States.

And our credit policies have been adjusted over time to help manage through cycles and that's exactly what we are experiencing today.

And then just to follow up, you've talked about rates as being an important factor in determining earnings and so on in thinking about the buyback.

Would you rank credit equally with rates, higher than rates, lower rates in terms of swing factors for earnings and ability to complete the full buyback that was approved under CCAR?

Karen, do you want to take that?

Sure.

Obviously, credit is an important piece of what we do.

In terms of an outlook for next year, we are not giving that yet.

We will give it as we typically do on our fourth-quarter earnings call.

We are still in our planning process, but for provision at least for the next quarter, we expect it to be similar to what we had in the third quarter.

So we are feeling comfortable on the impact that it could have on earnings through the rest of this year.

Great.

Thank you very much.

Ladies and gentlemen, we have no further questions in queue at this time.

I'd like to turn the call back over to Mr. Ralph Babb, Chairman and CEO.

Thank you and thank you all for being with us this morning and your interest in Comerica.

We appreciate it and hope you all have a great day.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.