(Operator Instructions) Welcome to the Comerica First Quarter 2009 Earnings Conference Call. Thank you Ms. Darlene Persons, you may begin your conference.
Welcome to Comerica’s First Quarter 2009 Earnings Conference Call. This is Darlene Persons, Director of Investor Relations. I am here with Ralph Babb, Chairman, Beth Acton, Chief Financial Officer, and Dale Greene, Chief Credit Officer.
A copy of our earnings release, financial statements and supplemental information is available in the EDGAR section of the SEC’s website as well as on our own website. Before we get started, I would like to remind you that this conference call contains forward looking statements and in that regard you should be mindful of the risks and uncertainties that can cause future results to vary from expectations. I refer you to the safe harbor statement contained in the earnings release issued today, which I incorporated to this call as well as our filings with the SEC.
Now I’ll turn the call over to Ralph.
We have remained attentive to our customers during this economic downturn and focused on things we can control such as expenses without being distracted by daily news events or the markets continued volatility. Our efforts have resulted in good deposit growth in the first quarter, controlled expenses, the development of new relationships and the deepening of others.
In addition, our already strong capital levels were further enhanced in the first quarter with a preliminary Tier 1 capital ratio of 11.08% at March 31. The quality of our capital continues to be solid as evidenced by a Tier 1 common capital ratio of 7.33% and a tangible common equity ratio of 7.27%.
To further preserve and enhance our balance sheet strength in the continuing economic downturn we announced in January a reduction in the quarterly cash dividend rate to $0.05 per common share in the first quarter from $0.33 per common share in the fourth quarter 2008. This action enables the retention of nearly $170 million per year in tangible equity.
We are working hard to deploy our strong capital. We had $5.6 billion in new and renewed loan commitments in the first quarter as we continued to focus our lending efforts on new and existing relationship customers with the appropriate credit standards and return hurdles in place.
To support the challenged housing market we also funded $2 billion in mortgage backed government agency securities in the quarter. We had $9 million in net income in the first quarter compared to $20 million in the fourth quarter of 2008. Preferred stock dividends to the US Treasury Department under the capital purchase program were $33 million or $0.22 per share resulting in a net loss applicable to common stock of $24 million or $0.16 per share. We plan to redeem the $2.25 billion in preferred stock at such time as feasible with careful consideration given to the economic environment.
Business and consumer confidence remained low in the first quarter as job losses continued to mount and companies of all sizes looked to conserve cash and reduce expenditures. The US economy has continued to struggle under the weight of this prolonged recession. The stark reality is that commercial and industrial loan growth has slowed sharply in all ten previous post World War II recessions with actual loans outstanding falling in eight of those recessions in inflation adjusted terms.
Companies have reduced their borrowings out of appropriate caution during this recession as well. As a result, we have seen reduced loan demand across our geographic markets. For example, the continued slowdown in auto sales which are now at their lowest levels in three decades has led to a paring dealer inventories. This in turn has reduced our average national dealer services loans by $461 million in the first quarter when compared to the fourth quarter of 2008.
Overall average loans excluding the financial services division were down $1.7 billion from the fourth quarter. These declines reflected reduced demand we are seeing from customers in this rapidly contracting economic environment.
We have continued to reserve for loan losses substantially in excess of charge offs to reflect the continued downturn in the economy. Our loan loss reserves are established using a thorough methodology in which the reserve is build credit by credit at the end of each quarter. We continually review the components of the reserve, analyze risk rating migration within industries and geographies and conduct stress testing. We are working hard to stay ahead of the credit issues in this environment.
The net interest margin declined 29 basis points from the fourth quarter primarily reflecting the limited opportunity to reduce deposit rates and the decreased contribution of non-interest bearing funds in a significantly lower rate environment, partially offset by increasing loan spreads. We believe the core margin bottomed in January and expect it will improve throughout the remainder of the year largely due to continued loan spread expansion.
We were pleased by the $1 billion increase in average core deposits, the vast majority of which are non-interest bearing. We are staying close to our customers throughout this economic cycle, delivering the exceptional service that has been a hallmark of our company for many years. Our expense controls included a workforce reduction of 5% in the first quarter brining us to a staffing level that is the lowest in more then 10 years even with our investment in about 100 new banking centers since 2005.
Clearly these are unprecedented times for our nation, the banking industry and Comerica. We believe our strong focus on credit and expense controls, together with our strong capital position, efforts to grow new and existing customer relationships and our dedicated workforce will serve us well in this economic environment and in the future.
Now I’ll turn the call over to Beth and Dale who will discuss our first quarter results in more detail.
As I review our first quarter results I will be referring to slides we have prepared that provide additional details on our earnings. Turning to slide three, we outline the major components of our first quarter results compared to prior periods. Today we reported first quarter 2009 earnings of $9 million after preferred dividends of $33 million. The net loss applicable to common stock was $24 million or $0.16 per diluted share.
Slide four provides an overview of the financial results from the quarter. Average earning assets increased $618 million reflecting a $1.4 billion increase in investment securities primarily mortgage backed government agency securities. Average loans outstanding including financial services division decline about $1.7 billion from the fourth quarter. The continuing slowdown and the economic environment has resulted in lower loan demand in all of our markets.
Deposit generation, excluding financial services division, was very strong in the first quarter, with core deposits increasing over $1 billion including an $840 million increase in non-interest bearing deposits. As expected, the net interest margin in the first quarter declined primarily reflecting the limited opportunity to reduce deposit rates at the same pace as the decline in loan yields as prime and Libor rates were significantly lower in the first quarter.
Net credit related charge offs were $157 million. The allowance to total loans increased by $46 million in the first quarter to 1.68% compared to 1.52% in the fourth quarter as we continue to reserve for loan losses substantially in excess of charge offs. We continue to successfully control expenses including further reductions in our workforce.
Our capital position is strong and was further enhanced in the first quarter. The Tier 1 capital ratio is estimated to be 11.08% at March 31. In addition, the quality of our capital is solid as evidenced by our Tier 1 common capital ratio of 7.33% and a tangible common equity ratio of 7.27%.
Slide five outlines the various factors that impacted the net interest margin the first quarter. As expected, the full effect of the fourth quarter Fed Funds rate cuts were reflected in loan yields as approximately 80% of our loans are floating rate. In addition, the net interest margin was reduced by approximately seven basis points from the $1.8 billion of average balances deposited with the Federal Reserve in the first quarter.
This over funded position resulted from strong deposit growth combined with weak loan demand as we work to close on the purchase of $2 million in mortgage backed government agency securities. Partially offsetting these items we continue to successfully expand loan spreads and selectively reduce deposit pricing. We believe the core margin bottomed in January. We expect that the margin will improve throughout the remainder of the year largely due to continued loan spread expansion and the run off of higher cost time deposits and debt.
Slide six provides details of our efforts to leverage our strong capital. We approved about $5.6 billion in new and renewed lending commitments to consumers and businesses. In addition, we funded $2 billion in mortgage backed government agency securities in support the battered housing market. We will continue to seek opportunities to grow new and existing relationships as Ralph described in his opening remarks.
Moving to slide seven, average loan outstandings declined in the first quarter compared to the fourth quarter. Loan dynamics in the first quarter included low demand in all of our markets as customers cautiously manage their businesses in the recessionary environment. As expected, National Dealer Services average outstandings were down $461 million or 10% from the fourth quarter in line with falling auto sales which were down 11% quarter over quarter.
Larger average decreases in the first quarter were noted in middle market. We saw growth in private banking and mortgage banker finance which falls within our specialty businesses. Markets outside of the Midwest comprise 63% of average loans. In addition, our loan portfolio is well diversified among many business lines. Line utilization was 52.6% in the first quarter down slightly from the fourth quarter. The decreases in outstandings were matched with decreased in commitment levels particularly in dealer and middle market.
Now Dale Greene our Chief Credit Officer will discuss recent credit quality trends starting on slide eight.
In the first quarter net credit related charge offs and the provision for loan losses increased as the macro economic conditions continued to be challenging particularly in the Western, Midwest and Florida markets. Net credit related charge offs were $157 million in the first quarter. Net charge offs included $73 million in the commercial real estate line of business, primarily related to the residential real estate development sector.
The increase in commercial real estate charge offs reflects the continued deterioration in values we are seeing as we obtain updated appraisals. Provision for credit related losses of $202 million exceeded charge offs by $45 million.
Turning to slide nine, non-performing assets were 220 basis points of total loans and foreclosed property or 103 basis points excluding the commercial real estate line of business. Our watch list loans increased to $6.7 billion in the first quarter reflecting continued negative migration in line with the economic environment particularly in Michigan. The increase also reflected our aggressive efforts to recognize and address problem loans. However, inflows to non-performing assets declined for the third consecutive quarter.
As expected, foreclosed property increased to $91 million as a result of our efforts to work through the issues in the residential real estate development portfolio. Loans past due 90 days or more and still accruing increased to $207 million reflecting the ongoing economic challenges. These loans are secured and in the process that is expected to result in repayment or restoration to current status.
The allowance for loan losses was 1.68% of total loans an increase of 16 basis points from the fourth quarter. The allowance for loan losses was 83% of non-performing loans. It is important to note that Comerica’s portfolio is heavily composed of commercial loans which in the event of default are typically carried on the books as non-performing assets for a longer period of time then our consumer loans which are typically charged off when they become non-performing.
Therefore, banks with a heavier commercial loan mix in their portfolios tend to have lower NPA coverage ratios than to retail focused banks. In addition, we have written down our non-accrual loans by 34%.
On slide 10 we provide information on the makeup of the non-accrual loans. The largest portion of the non-accrual loans continues to be commercial real estate which consisted primarily of residential real estate development loans. By geography, 39% of non-accruals are in the Western market and 38% are in the Midwest market. The average write down to non-accrual loans was 34%. As far as granularity of non-accrual loans there are 20 relationships totaling $269 million that aggregate between $10 and $25 million each and there are two relationships over $25 million.
Turning to slide 11, transfers to non-accrual slowed again in the first quarter with $241 million in loans greater than $2 million transferred to non-accrual status. This is the third quarter in a row that we have seen a decline in the transfers into non-accrual. Commercial real estate line of business primarily residential real estate development accounted for $112 million or 47% of the transfers to non-accrual in the first quarter which is a $51 million decline from the fourth quarter. As expected, we saw a $28 million increase in transfers to non-accrual coming from the middle market line of business.
On slide 12 we provide a breakdown of net credit related charge offs by geography. Almost half of the net credit related charge offs in the quarter were in the Western market of which $47 million can be attributed to the residential real estate developer portfolio. Net credit related charge offs for the Midwest which made up one third of the total were primarily comprised of $21 million in commercial real estate line of business, $15 million in middle market and $11 million in small business. The chart also illustrates the fact that provisions have continued to be substantially in excess of charge offs reflecting the uncertain economic environment.
On slide 13 we provide a detailed breakdown by geography and project type of our commercial real estate line of business which declined slightly from the prior quarter. There was further detail provided in the appendix to these slides. At March 31st, 32% of this portfolio consisted of loans made to residential real estate developers secured by the underlying real estate. Total single family construction outstandings were down $500 million or about one third from a year ago. Geographically the Western market, California primarily, comprised 41% of the total portfolio.
On slide 14 we provided the geographic breakdown of the commercial real estate line of business net loan charge offs over the last two quarters. Residential real estate development loans accounted for the bulk of these charge offs in the first quarter. Charge offs increased in the Michigan and California residential development portfolio while Texas remained relatively stable. We have seen some further softening in the Florida market but it has not manifested itself in significant charge offs.
In the commercial real estate line of business we transferred $112 million in relationship over $2 million to non-accrual in the first quarter. All but one of these inflows to non-accrual in the first quarter were related to residential development. As far as non-residential commercial real estate development we believe that we work with financially strong, well established developers who have the where with all to reduce the loan or restructure if collateral levels decline.
The issues in California continue to be largely centered in one area, the Western local residential real estate developer portfolio which is outlined on slide 15. This portfolio consists of local smaller residential developers which build starter and first time move up homes. We continue to make progress in reducing the portfolio which had $453 million outstanding at March 31st, down from over $900 million at December 31, 2007. We have not added any new business in this segment in a number of years.
This portfolio accounted for 24% of the banks total non-accrual loans and 99% of the Western markets commercial real estate line of business net charge offs of $47 million in the first quarter. We continue to obtain updated independent appraisals and take the charge offs and reserves to reflect current market values as necessary. Charge offs plus reserves for the non-accrual loans in this portfolio were approximately 53% of the contractual value up from 48% last quarter.
Slide 16 provides an overview of our consumer loan portfolio which includes the consumer and residential mortgage loan categories on the balance sheet. This portfolio is relatively small, representing just 9% of our total loans. These loans are self originated and are part of a full service relationship. As expected, given the rising unemployment rate and falling housing values we have seen some deterioration in our consumer portfolio particularly within the home equity loan portfolio. However, we believe the issues remain manageable and first quarter charge offs were lower then the previous quarter.
Slide 17 provides detail on the recent performance of the automotive portfolio. Looking at our non-dealer automotive manufacturer related portfolio we have reduced our loan outstandings $1.2 billion or 46% since the end of 2005. This portfolio now represents about 3% of our total loans and we plan to continue to reduce our loans to the automotive sector. The performance of this portfolio continue to be good. Non-accrual loans totaled only $12 million at the end of the first quarter and net charge offs were $4.4 million.
Turning to slide 18, given the level of attention the auto sector has been receiving we thought it would be helpful to provide some additional insight into how we are managing the portfolio. We know the industry and the players very well. We have worked very hard over the past several years to ensure that we are appropriately positioned within the sector. This has resulted in the decline in loans that I just mentioned plus a very tightly underwritten and structured portfolio as demonstrated by the very low level of non-accrual loans and charge offs.
We continue to tighten controls as necessary as outlined in the slide. In addition, the US Government has established a backstop for the auto sector under the US Treasury’s Automotive Supplier Support Program which should assist suppliers in weathering the challenges they face. Outstandings to Tier 1 and 2 suppliers whose revenue is 50% or more derived from GM or Chrysler totaled $310 million at the end of February. Within this group are primary suppliers, there were no charge offs and there was only one customer on non-accrual with less than $1 million outstanding.
Our auto dealer business is outlined on slide 19. Outstandings in this portfolio have declined $1.1 billion or 24% over the past year. It’s important to note that the dealer business model relies more on service and part sales then on new car sales and thus we monitor these metrics very closely. The dealer portfolio is well diversified with the majority located in the Western market and over three quarters of the portfolio with dealership selling foreign nameplates.
The bulk of our customers are classified as mega franchises operating multiple dealership. We have not had a significant loss in the dealer portfolio in many years as the majority of the portfolio is of a well secured floor plan nature. We expect it will continue to perform well.
To conclude on Credit, early recognition of issues is key. Therefore we have frequent credit review in certain segments and we are moving credits to our workout group at the first sign of significant stress. We have increased the staffing of this area over the past year and will continue to do so as warranted. We apply stress scenarios to the portfolio as we assess the adequacy of our credit reserves and we are comfortable with our current coverage. We also review our reserves with our regulators and our auditors every quarter.
Our outlook is for full year 2009 net credit related charge offs of about $650 to $700 million. This is an increase from our prior outlook as the recession is now expected to be longer and deeper. Given the economic environment we expect provision for credit losses will continue to exceed net charge offs.
Now I’ll turn the call back to Beth.
As shown on slide 20, average core deposits excluding financial service division increased $1 billion in the first quarter reflecting an $840 million increase in non-interest bearing deposits. Growth in the first quarter was experienced across all of our markets and from both commercial and retail customers. Total average personal banking deposits increased $439 million or 13% on an annualized basis primarily due to growth in CD and money market account balances.
As far as commercial accounts, non-interest bearing balances increased $728 million and customer CD balances increased over $250 million while money market balances declined. Deposit pricing conditions remained competitive in the first quarter and we believe we have hit rate floors on a number of our products. However, we were able to selectively decrease rates in certain deposit categories.
On slide 21 we’ve highlighted our diverse funding base. We have multiple funding sources and our access to liquidity has been good. We funded $2.2 billion in senior debt and institutional and brokered CDs maturities in the first quarter. Through the Federal Home Loan Bank of Dallas we have $8 billion outstanding at the end of the first quarter. These advances are at very attractive rates with original maturities of one to six years and we have significant un-drawn capacity available.
We have been regular participants in the Federal Reserve Term Auction Facility and have tapped into the repo market through Comerica Securities as well as raised several billion dollars in retail brokerage CDs. In addition, in the fourth quarter we elected to participate in the Treasury Liquidity Guarantee Program. We have not issued any senior debt under this program and have $5 billion in capacity.
Finally, at quarter end we held $9.6 billion of liquid AAA rated mortgage backed Freddie Mac and Fannie Mae securities which had an accumulated unrealized pre-tax gain of $298 million.
Slide 22 outlines the results of some of our cost saving initiatives. We are taking actions to assist us in weathering the current economic environment such as workforce reductions and freezing salaries for the top 20% of the company. The first quarter results reflect a significant decrease in salaries, incentives, and share based compensation over year ago levels. Total salary expenses were down $16 million from the fourth quarter and $29 million from the first quarter of last year.
We’re also carefully controlling discretionary expenses which is demonstrated by the fact that travel and entertainment expenses in the first quarter were 50% of what they were in the same period a year ago. Our cost cutting efforts are somewhat offset by rising FDIC and pension expenses. The FDIC has imposed higher insurance costs for all banks and our pension costs have increased as a result of a lower discount rate and market returns. Our qualified pension plan remains well funded.
Slide 23 illustrates our success in reducing our workforce while we continue to grow assets. Our workforce has been reduced by almost 1,000 positions or nearly 10% since March 2008. In addition, we announced severance in the first quarter affecting about 175 positions which will result in incremental annualized salary savings of about $10 million.
Slide 24 provides additional detail on some of the actions we’ve been taking to assist in weathering the current economic environment. We have seen a number of revenue generation opportunities including expanding our success with the Social Security pre-paid debit card, leveraging our position as a trusted advisor in developing new and expanded personal trust clients and maximizing the opportunities to assist new and existing customers in refinancing their mortgages in this low rate environment.
We will continue to carefully control expenses by streamlining operations and leveraging technology we have significantly reduced our workforce over the past year. We have slowed the banking center expansion program and are tactically reducing capital expenditure and discretionary expenses. We will continue to look for additional opportunities to increase our efficiencies.
As far as net interest income, we have had great success over the last year in increasing loan spreads and as relationships come up for renewal we expect to continue this effort as appropriate. Also we added $2 billion in mortgage backed government agency securities to the investment portfolio to temporary leverage our strong capital as we work to develop new and expanding existing customer relationships.
Finally, we will remain vigilant in managing credit. As Dale commented, early recognition of issues is very important and will result in the best possible outcome in workout situation. Also we will continue to pursue loan sales especially residential development loans.
Slide 25 updates our expectations for 2009. We will continue to develop new and expand existing relationships with appropriate pricing and credit standards. The rapidly contracting economy is expected to result in subdued loan demand as has been an historical experience in every recession. We believe that the net interest margin will expand over the remainder of 2009 as a result of the improving loan pricing and the run off of higher costs, time deposits and debt.
The target Fed Funds and short term Libor rates are expected to remain unchanged for the remainder of 2009. Our outlook for credit quality is for full year 2009 net credit related charge offs of $650 to $700 million. Provisions are expected to continue to exceed net charge offs. Cost saving initiatives are expected to assist us in achieving a mid single digit decline in non-interest expenses from 2008 levels despite increasing FDIC and pension costs.
We believe our strong capital position, vigilance in monitoring credit and focus on controlling expenses will assist us in managing through the current environment and position us well as the economy improves.
Now we’d be happy to answer any question that you may have.
(Operator Instructions) Your first question comes from Steven Alexopoulos – J.P. Morgan
Steven Alexopoulos – J.P. Morgan
Could you talk about which portfolio or geography is driving the increased expectation for charge offs for the full year compared to the guidance that you just gave last quarter?
I don’t know that I would necessarily pinpoint it in any one segment. I think our sense is that the recession is a little worse then we might have originally thought. I would start off from that perspective. We said that middle market and small business would get softer; we’re clearly seeing that in all of our geographies.
As we’ve said before, residential real estate we’re still seeing new appraisals showing lower value so that’s having an impact how we look at our assessment going forward. I would say its more around our line of business look then necessarily any one geography. Texas continues to do pretty well, it’s a little softer here but it does well. Obviously Michigan, California and Florida are struggling a bit. I’d sort of characterize it that way.
Steven Alexopoulos – J.P. Morgan
Looking at the $100 million or so direct exposure to GM and Ford is that all performing today and what happens if GM does declare bankruptcy in terms of loss content there?
First of all, in terms of our GM exposure it’s frankly relatively modest compared to where it had been historically, it’s very well secured. Even if that were to happen I believe that we’re pretty well protected. Again, it’s not that large in terms of what we’ve got. In terms of how we handle, for example, the supplier portfolio we have brought that down a lot. We have in here what our exposure is to suppliers where there’s 50% or more revenue coming from GM and Chrysler that’s in terms of the size of our portfolio not all that large.
We’re kind of paying attention to what happens. We’re obviously paying attention to the supplier program they’re putting in place; more details are emerging everyday on that. We think we’ve acted as though GM is whether it’s in a bankruptcy or not has obviously continued to struggle. We’ve think we’ve done all the right things, all the things that we can do to protect ourselves.
Your next question comes from Brian Klock – KBW
Brian Klock – KBW
Can you update us on the outstanding balances in your shared national credit portfolio?
We don’t talk specifically but they have increased a bit. I think right now our SNC credits are about 23.5% of all of our loans. As it has been over the last number of years it’s very well diversified by line of business so there isn’t just one business that would have the bulk of that. It has performed very well from a credit perspective compared to some of our other businesses. We clearly have pushed for more connectivity; more ancillary business and I think that’s been a successful strategy. Clearly we’ve gone through the SNC exams and anything that would have been out of that would have been reflected in our numbers so we’re pleased with that. Its doing fine.
Brian Klock – KBW
Was there any NPLs here in the first quarter or charge off balances related to that SNC portfolio?
Yes, there are some, it’s actually down from the fourth quarter and down from the last few quarter it’s not really of a material amount. There were some inflows in the NPL category in the SNC category.
Brian Klock – KBW
Can you give us a ballpark figure of what the NPLs are in that?
Is probably if you look at our overall SNC NPLs they’re about 20% or so of our overall NPLs.
It’s consistent with the portfolio size. The loans were down about $400 million in the quarter, SNC loans quarter over quarter. They’re about similar outstanding levels as year ago.
Brian Klock – KBW
Do you have the updated watch list loan balances first quarter versus fourth quarter?
Yes, we’ve shown them in the slide its $6.6 billion of our watch loan list and that compares to the $5.7 billion that was at the fourth quarter. That just reflects the softness in the economy a little bit more middle market and small business that we’ve been talking about and the fact that we’ve been very aggressive in getting in front of these which means we’ve been aggressive at looking at the ratings.
Brian Klock – KBW
When you give the guidance for net charge offs of $650 to $700 million for the year would we expect to see the same sort of provision to charge offs ratio that we saw in the first quarter?
I don’t know what it would ultimately be. I would tell you that we would expect that we would see provisions certainly well in excess of charge offs for at least the next few quarters if not the rest of the year and my guess is it would probably look a little bit like its looked over the last few quarters.
Your next question comes from Brian Foran – Goldman Sachs
Brian Foran – Goldman Sachs
Going back to the credit guidance we’ve had different guidance from different banks and people like BB&T saying charge offs are going to fall despite NPAs accelerating, now you’re saying NPA inflows are decelerating but charge offs are going to go up. Is the guidance predicated on NPA inflows turning for the rest of the year as the economy continues to weaken or is the guidance predicated on an expectation of higher severities despite deceleration in NPA and close?
I it’s related to NPL inflow certainly but it’s related to a number of other factors as well. Again, if you look at peak to trough decline in GDP, if you look at unemployment which we think might be somewhere in the 10% range towards the end of the year and other macro economic variables all of those kind of weigh in our thinking as we tend to look at portfolios deal by deal in the quarterly CQR process. So it’s driven by a number of factors. The NPL flow would be one of those.
Brian Foran – Goldman Sachs
If I could follow up on the SNC portfolio some of the blow ups we’ve seen at other banks have been focused on construction and commercial real estate exposure within SNC. Is your share of national credit portfolio can you give us at least of sense of how much of it is CNI versus how much of it is commercial real estate and construction?
It’s fairly granular across our business. I would say that if you look at our CRE book of SNCs it’s actually a smaller percentage then the actual SNCs of the total loans. If SNCs are 23.5% of total loans which they are, our CRE book is less than that. That should give you some sense of the size of it.
Brian Foran – Goldman Sachs
Is there any meaningful construction shared national credit exposure?
There’s some. Certainly in some of our construction deals where there were large projects we would have participated with good customers in a shared national credit participation in a large project. There is certainly some of that in there yes.
Your next question comes from Heather Wolfe – Bank of America
Heather Wolfe – Bank of America
On the margin, just curious about your comments regarding the ability to pay down borrowings and high cost deposits stems only from the over funded position or also from an expectation that non-interest bearing deposit growth is going to continue.
No, the margin outlook as we said it earlier, we believe the core margin bottomed in January so we saw February and March look better. Our expectation is that margin will further expand through the rest of the year for really largely two reasons. One is continuing to work through better pricing on loans which takes a while to work over a two to three year period to work through our portfolio.
Secondly, we will see some higher cost CDs and debt mature in the balance of the year. Our assumption is that those will be replaced either through deposit growth or through other funding alternatives at lower rates then they exist today.
Heather Wolfe – Bank of America
On the loan pricing can you give us a rough feel for what kinds of wider spreads you’re seeing and what the duration of your loan portfolio is?
We’re seeing anywhere from 50 to 125, it could be 150 basis points it just depends on the risk rating and for a particular borrower. That’s a pretty good spread but a pretty nice pickup from what we had seen previously. Our loan portfolio is two to three year duration so we’ve been underway on these efforts really for about a year. That’s why we’ll further expansion work its way through the margin this year and frankly into next year as well.
Heather Wolfe – Bank of America
Can you give us a little bit of color on the makeup of the increase in the 90 past due category, what types of loans were in there?
There’s a mixture but these are loans just to cover that point just more broadly, these are loans that are for the most part, in fact probably entirely all secured. These are loans that are appropriately rated. I feel comfortable with rating; these are loans that are in the process of renegotiation. A number of them actually are current but their note has matured. A few of them would be shared national credits that are performing but when you involve several banks in a renegotiation this environment it takes longer to draw to closure. A number of these I think in fact been brought current.
My view is that they are appropriately rated. They are being renegotiated, in a number of cases they have been brought current already. It just takes longer in this environment quite frankly to get through renegotiations of deals. Frankly our covenants want to be more restrictive. It’s just a process that’s a little different today in this kind of an environment. I’m comfortable with what’s there.
Heather Wolfe – Bank of America
What about the product makeup is there any one type of loan that’s contributing to it?
No, its actually when you look at it there’s some middle market loans, there’d be some small business loans, there’d be some real estate loans, it’s a broad array both in terms of loan type and in terms of the market.
Your next question comes from Jeff Davis – Howe Barnes
Jeff Davis – Howe Barnes
If you could comment on what sort of financial institution exposure Comerica has and if there’s anything material that might be non-performing or what are you watching? Secondly, how the energy book performing, any emerging issues there? Any issues with the Federal Home Loan Bank of Dallas as it relates to your preferred stock?
Frankly we don’t have that much in terms of our overall financial institution book, have cancelled a number of exposures, we’ve reduced the number and frankly where we have is primarily for the use of our money desk for counterparty risk. It’s all well rated exposures. We don’t do a lot of things that would not be well rates. It’s reviewed through our executive loan committee which would include me and our Vice Chairman of the Bank and so forth. I don’t have a specific number for you right this second how big that is but its come down substantially over the last year or two.
In terms of the energy book it continues to perform well. It’s come down a bit. The capital markets have actually freed up a bit so we’ve seen some of those loans actually go into a capital market type of financing structure which has paid down some of our debt. We’ve had fundamentally one problem credit that we’ve been working on but other than that the book is performing very well.
Jeff Davis – Howe Barnes
How big is the energy book and how big is this one credit?
We’re $1.7 billion in outstandings in the energy book which is down slightly I believe from the last quarter where it was about $1.8 billion. There was one credit that’s just around $10 million or so, so it’s relatively small.
On the home loan side, just to refresh everyone’s memory, joined the Federal Home Loan Bank of Dallas about a year ago and have $8 billion that we’ve accessed through them in outstanding of a variety of maturities. As part of joining the home loan bank you make equity investments, these are common stock investments in the home loan bank. Actually the Home Loan Bank of Dallas is in very good shape relative to some of its weaker peers. We do regular reviews from a credit standpoint of the home loan bank so we feel comfortable with that investment and that relationship.
Your next question comes from Terry McEvoy – Oppenheimer
Terry McEvoy – Oppenheimer
I was wondering if you could just talk about your commercial real estate portfolio in Texas at $1.2 billion, specifically how much of that is residential construction and then if you could break that out to some degree by market.
Our commercial real estate book in Texas is relatively small. The bulk of what we’ve got tends to be in the Western market. In the $5.4 billion line of business we have a slide that we’ve gone through that reflects that for you give me a second. Michigan, this would be slide 13 I referred to before, the Michigan portfolio is 14% or about $700 million, Texas is $1.2 billion, Western market as I said which is the biggest piece is $2.2 billion, Florida is $700 million, everything else is under $600 million.
That’s the composition of it; we also on that slide show you the product type. The Texas real estate portfolio continues to perform very well for us. While there is some softness there we haven’t seen any real significant issues manifest themselves yet. Texas has been a little bit different in terms of what it’s experienced, it hasn’t seen the rapid price escalation that you’ve seen in some other markets and I think that’s actually helped this market do better. That would be my comment.
In the appendix slides there are details on the residential piece of Texas that $1.2 billion that Dale mentioned $240 million is residential.
Terry McEvoy – Oppenheimer
Were there any noticeable charge offs in your technology and life science division this past quarter?
Technology and life sciences had four deals that we charged off amounting to about $10 or $11 million. It was not a big amount and it was spread around four deals. That’s pretty good performance I think in this environment.
Your next question comes from Kevin St. Pierre – Bernstein
Kevin St. Pierre – Bernstein
As we hear from more banks around the quarter there appears to be a separate set of rules about repaying the TARP capital for those that are involved in the stress test and those that are not. Given that you’re below the stress test $100 billion threshold and you printed a positive net income but a loss net income available to common and your capital ratios are strong. Could you comment on your appetite for repaying the TARP capital?
As I mentioned in my comments we are looking at that and certainly looking at the economic environment as well. That is key as we look forward. As you mentioned our capital is strong, it was strong at the time we issued the preferred stock and if we took the preferred stock out today it remains strong and well within our historic guidelines, and especially strong when you look at the tangible equity side which would be toward the high end of our peer group which is at that 7.2% tangible equity.
As Dale mentioned and Beth mentioned as well, we go through our own stress test of various portfolios as we’re building the reserve quarterly and review that not only with our regulators but our auditors. We’ll be looking at that closely as to when and what the appropriate time is to pay the preferred stock back.
Kevin St. Pierre – Bernstein
On the deposits as I look at the line of business deposits on slide 40, it appears that strength was driven by specialty businesses and finance and other. Could you comment on any special initiatives or any particular drivers of that strength?
I guess I’m not sure on the slide, specialty businesses are down quarter over quarter so I’m not sure what you’re referring to.
Kevin St. Pierre – Bernstein
I’m sorry, my quarters, I was looking left to right as opposed to right to left. Disregard. My apologies.
Your last question comes from Joe Stieven – Stieven Capital
Joe Stieven – Stieven Capital
When you talk about your potential margin improvement part of it you’re talking about getting rid of some of the wholesale funding. How much improvement are you seeing on your traditional core deposit base with the re-pricing down and how much more room do you have for that to help on the improvement side?
I’m sorry, I missed the driver.
Looking at deposit pricing and how much room is there left on lower deposit price.
On the core side we did see rates lower obviously on the core deposits in the quarter which was a positive. Obviously they did not come down as much as obviously loan yields did. I think selectively there have been opportunities to continue to be opportunities as we entered into the quarter but they’re less prevalent then they sure were a couple quarters ago.
I think we’ll see Libor funding has become more a rationalized pricing then Libor was a very elevated rate in the fall and in the fourth quarter. We have seen that more right itself which I think will be helpful. We’re very pleased about the inflow of deposits and will be continuing to work hard to retain those then grow those further.
To emphasize what Beth just said I think on the core side we’re getting pretty close to the bottom.
I’d now like to turn the call back to Ralph for any closing remarks.
Thank you very much for being with us on the call today and we appreciate your continued interest in Comerica and thanks again and have a good day.
This concludes today’s Comerica First Quarter 2009 Earnings Conference Call. Thank you for your participation you may now disconnect.
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