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Comerica Inc. (NYSE:CMA)

Q1 2014 Earnings Conference Call

April 15, 2013 08:00 AM ET

Executives

Darlene Persons - Director of IR

Ralph Babb - Chairman

Karen Parkhill - Vice Chairman and CFO

Lars Anderson - Vice Chairman, Business Bank

John Killian - CCO

Analyst

Keith Murray - ISI

Steven Alexopoulos - JPMorgan

Steve Scinicariello - UBS

Bob Ramsey - FBR Capital Markets

Craig Siegenthaler - Credit Suisse

Ken Zerbe - Morgan Stanley

Michael Rose - Raymond James

Scott Siefers - Sandler O'Neill

Dave Rochester - Deutsche Bank Research

Jon Arfstrom - RBC Capital Markets

Ken Usdin - Jefferies

Ryan Nash - Goldman Sachs

John Pancari - Evercore

Erika Najarian - Bank of America

Matt Parnell - Wells Fargo Securities

Kevin St. Pierre - Sanford Bernstein & Company

Brett Rabatin - Sterne Agee & Leach

Brian Foran - Autonomous Research

Mike Mayo - CLSA

Sameer Gokhale - Janney Capital

Gary Tenner - D.A. Davidson

Operator

My name is Carmon and I will be your conference operator today. At this time I would like to welcome everyone to the Comerica First Quarter 2014 Earnings Call. (Operator Instructions).

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

Darlene Persons

Thank you, Carmon. Good morning and welcome to Comerica's First Quarter 2014 Earnings Conference Call. Participating on this call will be our Chairman, Ralph Babb; Vice Chairman and Chief Financial Officer, Karen Parkhill; Vice Chairman of the Business Bank, Lars Anderson; Vice Chairman of the Retail Bank and Wealth Management, Curt Farmer and Chief Credit Officer, John Killian.

A copy of our press release and presentation slides are available on the SEC's website, as well as in the Investor Relations section of our website, comerica.com. As we review our first quarter results, we will be referring to the slides which provide additional detail on our earnings.

Before we get started, I would like to remind you that this conference call contains forward-looking statements and in that regard you should be mindful of the risks and uncertainties that can cause future results to vary from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statement contained in this release issued today, as well as slide 2 of this presentation, which I incorporate into this call, as well as our filings with the SEC. Also, this conference call will reference non-GAAP measures and in that regard, I would direct you to the reconciliation of these measures within the presentation.

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

Ralph Babb

Good morning. Today we reported first quarter 2014 net income of $139 million or $0.73 per share, compared to $117 million or $0.62 per share in the fourth quarter and $134 million or $0.70 per share in the first quarter of 2013. Broad based loan growth together with solid credit quality and tight expense controls contributed to the 4% year-over-year increase in net income in the first quarter.

Turning to slide 4 and first quarter highlights. Average total loans increased $458 million compared to a year ago, including a $1 billion total increase in national dealer services, technology and life sciences and general middle market, offset by an $852 million decrease in mortgage banker finance.

Compared to the fourth quarter, average and period-end loans were both up over $1 billion with good loan growth across our footprint, and nearly all of our business lines including increases in general middle market, commercial real-estate, energy, technology, and life sciences and corporate banking.

Seasonal decline in loans we anticipated following the year-end run-up did occur in January; then starting in February, the positive loan growth trend returned. We attribute the quick turnaround to the improving economy and our continued focus on relations.

Average deposits increased $2.1 billion or 4% compared to a year-ago including a $1.7 billion increase in non-interest-bearing deposits. Compared to the fourth quarter, average deposits were stable, while period-end deposits were up $458 million or 1%.

In further comparing our first quarter 2014 results to the fourth quarter of 2013 -- and further comparing our first quarter 2014 results to the fourth quarter of 2013, net interest income decreased $20 million to $410 million, primarily due to a decline in accretion, lower non-accrual interest collected, and two fewer days in the quarter, while the increase in loan balances and decrease in deposit costs offset the continued decline in loan yields.

Credit quality remained strong with the provision for credit losses and net charge offs at low levels consistent with the last few quarters. Non-interest income decreased $11 million to $208 million due to decreases of $6 million in customer-driven fee income, primarily due to lower syndication fees and $5 million in non-customer driven fee income.

Non-interest expenses decreased $67 million, reflecting a $49 million decrease in litigation-related expenses, following an unfavorable jury verdict that impacted the fourth quarter. Also, salaries and benefits expense decreased $11 million, primarily due to reduced pension expenses. In addition, we were able to drive small decreases in a number of other expense categories.

Our capital position remains a source of strength to support our growth, while continuing to provide us the ability to returning excess capital to shareholders.

We completed the 2013 capital plan in the first quarter with the repurchase of 1.5 million shares under our share repurchase program. Together with dividends, we returned 77% of first quarter 2014 net income to shareholders.

Last month, we announced the results of our company run stress test and that the Federal Reserve did not object to our 2014 capital plan. Our capital plan includes up to $236 million in share repurchases for the four-quarter period that ends in the first quarter of 2015. The plan, which was approved by our Board of Directors further contemplates a $0.01 increase in Comerica’s quarterly dividend to $0.20 per common share, a 5% increase over the current dividend rate. The dividend proposal will be considered by our Board at its regularly scheduled meeting next week.

Turning to slide 5 and a look at our primary markets, Dallas Morning News reported last month that Texas leads the nation in job growth, adding more than 322,000 jobs in the 12-month period that ended this past January, according to the U.S. bureau of labor statistics. Also, middle market companies in Texas are growing faster than anywhere else in the country according to the National Center for the middle market, and we are growing right along with the lone star state . In March, we announced that we were adding a new middle market banking team here in North Texas.

In addition, we are adding other bankers in all of our Texas markets. Texas posted the largest increase in average loans of our three primary markets with average loans up almost $600 million or 6% over the fourth quarter. All business lines posted increases and were led by energy, general middle market, corporate banking, technology and life sciences, and commercial real estate. Also, Texas deposits in the first quarter were up $339 million or 3%. We continue to capitalize on opportunities in California. Similar to Texas, we recently increased staffing in our Northern California middle market banking team to help meet the increasing demand.

In addition, we have expertise in growing sectors in the state, such as technology and life sciences, National Dealer Services, and entertainment. Average loans in California in the first quarter were up almost $400 million or 3%, with growth in technology and life sciences, commercial real estate, and general middle market. Average deposits in California declined 3%, while period-end deposits grew 5% from the prior quarter. The primary reason for the variability between period-end and average deposits was due to customer balances in U.S. banking as well as the financial services division, which serves title and escrow businesses.

We are a leading bank in Michigan where we have strong relationships with businesses and families, many spanning decades. We strengthened our number two deposit market share in the state based on the most recent FDIC data, and as a result, continue to be well-positioned with great brand recognition. Average loans in Michigan increased $149 million relative to the fourth quarter with growth in National Dealer, general middle market, and private banking. Average deposits also increased with corporate banking being the largest contributor. Our relationship banking strategy is serving us well as we continue to focus on growing the bottom line in this low rate environment. We are allocating resources to our faster growing markets and industries where we have expertise, which should contribute to our long-term growth.

Recent recognition validates that we are making a positive difference. In February, we received 16 Greenwich Excellence Awards for middle market banking as well as 7 Greenwich awards for small-business banking. Comerica received more awards than any other bank. In addition, we were recently named Best Regional Bank in the Southwest by Global Finance magazine. Details can be found in the earnings deck appendix.

Our balance sheet continues to be well-positioned when rates begin to rise. In the meantime, we continue to demonstrate that we can carefully manage expenses and maintain strong credit quality and a conservative approach to capital.

And now I will turn the call over to Karen.

Karen Parkhill

Thank you, Ralph, and good morning everyone. Turning to slide 6; we saw broad-based loan growth in the first quarter. Total average loans quarter-over-quarter increased $1 billion or 2%, and on a period-end basis, loans also increased $1 billion or 2% to $46.5 billion. We had growth on almost every loan type, as average commercial loans increased $679 million and construction loans increased $175 million. Also, average commercial mortgages increased $56 million, the first increase we have seen since the acquisition of Sterling. As mortgages to developers, post construction increased, and owner occupied real estate, which makes up about 80% of our commercial mortgages declined at a slower pace with normal amortization.

In total, average outstanding increased in nearly every business line led by increases in general middle markets of 283 million, commercial real estate of 246 million, and energy of 230 million; partly offset by $223 million decline in mortgage banker, in line with current trends in the mortgage industry.

Our average loan growth of 2% outpaced the industry which grew 1%, based on the Fed's H8 data for U.S. large commercial banks from January 1st to April 2. Also our commitments grew 416 million to 53.2 billion driven by increases in commercial real estate, energy, and technology and life sciences.

Line utilization was 48.3%, up from 47.1% at the end of the fourth quarter. Importantly, our loan pipeline increased with growth in nearly all business lines.

Finally, loan yield shown in the yellow diamonds, increased 19 basis points in the quarter of which 12 basis points can be attributed to the higher accretion and higher interest collected on non-accrual loans in the fourth quarter. Much of the remaining decrease is due to amortization and pay offs of older, higher yielding loans, a mix change in customer usage, credit improvement and a decline in LIBOR.

Turning to deposits on slide 7. Our total average deposits were stable at 52.8 billion, reflecting a $296 million decline in non-interest bearing deposits while interest bearing deposits increased 297 million. As shown by the yellow diamonds on the slide, deposit pricing declined to 15 basis points due to higher rate CDs maturing and selective deposit rate adjustment. Period-end deposits increased 458 million to 53.8 billion, primarily reflecting an increase of 378 million in interest-bearing deposits.

Slide 8 provides details on our securities portfolio, which primarily consists of mortgage-backed securities. The NBS portfolio averaged $8.9 billion for the quarter. The fair value of this portfolio increased 87 million pretax in the first quarter, resulting in a net unrealized loss position for the portfolio of 10 million. The estimated duration of our portfolio declined slightly to four years at the end of the first quarter.

Slower prepayment speed including a retrospective adjustment to the premium amortization similar to the third and fourth quarters, added 3 million or 12 basis points to the yield. The expected duration under a 200 basis point rate shock, declined slightly to about 4.6 years as a result of the composition of our portfolio. Based on current rate expectation, we believe that the pace of prepays will be about 350 million to 450 million in the second quarter, similar to the first and fourth quarters.

In light of the fact that Fannie and Freddie backed securities are subject to a haircut and a cap under the proposed liquidity coverage ratio, we have continued to reinvest the prepays in Ginnie Mae securities. As far as the liquidity coverage ratio based on our preliminary analysis of the proposed role we expect to meet the proposed pays and threshold for 2015.

Turning to slide 9, which is summarized in the table on the right the moving pieces of our net interest income and net interest margin. The biggest driver to the 20 million decrease in net interest income was a 11 million decline in accretion from an elevated fourth-quarter level of 23 million. This reduced the net interest margin by 8 basis points. Just to note, the remaining accretion on the portfolio is about 28 million and we expect to realize this accretion at a declining pace over the next few years.

Accordingly, for 2014 we expect to recognize accretion of about 20 million to 30 million, which is slightly higher than the 10 million to 20 million range we provided last quarter, as we continue to have better than anticipated performance on our credit impaired portfolio in the first quarter.

Two fewer days reduced net interest income by 7 million, and lower interest collected on non-accrual loans had a 2 million or 1 basis point impact.

The benefit from the $ 1 billion in loan growth contributed 8 million and combined with lower funding cost, which increase net interest income by 1 million, completely offset the impact from lower loan yield. Lower loan yields resulted from a decline in 30-day LIBOR as well as the continued amortization and pay off of higher yielding loans, particularly commercial mortgages, a mix change in customer usage and competitive pressures. On a declining LIBOR, you may recall that approximately 85% of our loans are floating rate, of which 75% are LIBOR -based, predominantly 30-day LIBOR.

Finally, the decrease in excess liquidity, which resulted from the loan growth had a 4 basis point positive impact on the margin. As you have heard before, we believe we remain well-positioned for a rise in short-term rates. Based on our asset liability model, using a dynamic balance sheet and assumptions based on historical experience, we believe a 200-basis point increase in rate over a one year period, equivalent to 100 basis points on average, would result in approximately 200 million or a 12% increase in net interest income.

Turning to the credit picture on slide 10. Credit quality continued to be strong in the first quarter. Net charge-offs decreased to 12 million or 10 basis points of average loans and included 18 million in recovery. Our criticized loans declined 121 million and our non-performing loans declined 36 million. With the decline in non-performing loans, allowance coverage of NTOs increased to 1.8 times and coverage of our trailing 12 months net charge-offs reached 10 times. The continued cause of the trends in our credit metrics combined with loan growth resulted in a stable provision for credit losses and a small reserve release.

Slide 11 outlines non-interest income which included a 6 million decrease in customer fees and a 5 million decrease in non-customer related income. The decrease in customer fees was primarily a result of a $7 million decrease in syndication agency which is a component of partial lending fee due to low activity in the first quarter following a robust fourth quarter. We had smaller changes in several categories such as a decrease in customer derivative fee and increases in deposit service charges fiduciary and brokerage. The decrease in non-customer driven income was primarily due to a $4 million decrease in deferred compensation plan asset return, which was completely offset in non-interest expense. I wanted to bring to your attention that we early adopted this quarter an amendment to GAAP related to the accounting for affordable housing projects that qualifies the low income housing tax credit. Amortization of the initial investment cost which was previously recorded as a reduction to non-interest income is now reported in income taxes, all prior periods have been adjusted to reflect this change.

Turning to slide 12, we continue to drive efficiency with tight expense control. Non-interest expenses decreased 67 million. This included a $49 million decrease in litigation related expenses due to an unfavorable jury verdict in a lender liability case that impacted the fourth quarter and is now under appeal. Salaries and benefits expense decreased 11 million primarily reflecting a $13 million decrease in pension expense as well as lower deferred compensation expense. This was partially offset by annual stock compensation expense, two fewer days in the quarter and higher payroll taxes. Taking into account all of the moving pieces, our first quarter salaries and benefits expense is expected to approximate the run rate for the remainder of the year. We also had small decreases in several other categories reflecting our continued focus on managing expenses.

Moving to slide 13 and shareholder payout, as Ralph mentioned, we completed our 2013 capital plan, which included the repurchase of 6.9 million shares under our share repurchase program. Combined with the 1.5 million shares repurchased in the first quarter with the dividends paid, we returned 77% of first quarter net income to our shareholders.

Our 2014 capital plan includes share repurchases up to 236 million as well as the authority to fully redeem 150 million subordinated notes at par later this year. These notes have a carrying value of 183 million at quarter end. Due to the lack of certainty about the possible execution and timing of the call, the impact of the call is not reflected in the outlook for 2014.

The average diluted share count increased in the first quarter mainly due to the impact of a higher share price on our warrants and employee option. Vesting of annual employee stock grants also impacted the share count slightly. Our capital position remained strong with a tangible common equity ratio of 10.2% and an estimated Basel III Tier 1 common capital ratio of 10.3% at March 31st on a fully facing basis excluding the impact of AOCI.

Finally, turning to slide 14 and our expectations for full year 2014 compared to full year 2013, our outlook for loan growth, net interest income and provision remain unchanged from what we provided at January. We are revising slightly our outlook for non-interest income and taxes. As a reminder, we expect our overall loan growth to continue at a pace similar to 2013.

Average loans in 2013 were 44.4 billion and grew about 3% over 2012. Keep in mind that we expect mortgage bankers to be significantly lower than its 2013 average. And national dealer and mortgage banker can be variable and typically have seasonality. Also there is stiff competition for loans across all of our businesses and we fully intend to maintain our loan pricing and credit discipline. We expect our net interest income to be modestly lower as a result of lower accretion and continued pressure from the low rate environment. Given that we are in the benign part of credit cycle, we expect the provision to remain stable with last year.

As far as non-interest income we expect it to be modestly lower with stable customer driven fees and lower non-customer driven income. Lower capital market related fees such as syndication and derivatives are expected to offset growth and fiduciary and card fee. We continue to expect non-customer income to be lower, you may recall in the third quarter last year, we reported unusually high warrant income from the exercise of warrants related to some technology and life sciences relationship. Non-customer driven income is difficult to predict because it includes items like warrant income.

We expect lower non-interest expenses with lower litigation related expenses and a reduction in pension expense from 86 million to approximately 35 to 40 million. In addition, we expect to continue to offset increases from annual merit and regulatory cost with tight expense control. The outlook for our effective tax rate has been updated to 32% to reflective the change in accounting for projects that qualifies for low income housing tax credits, as I previous mentioned.

Finally, our share account should reflect both the execution of our capital plan, as well as the dilution impact from our warrants and employee auctions previously mentioned. Our rule of thumb is that for every $1 increase in average stock price for the quarter, warrants and auction dilution is about 250,000 shares.

In closing, the year is off to a good start and we are pleased with the loan growth and expense control we had in the first quarter. With a persistent economic and low interest rate headwind, it is imperative that we continue to focus on the things we can control, deepening and expanding customer relationships while carefully managing expenses. We believe our effort can assist us in delivering growth in both, pre-provision net revenue and the bottom line.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Keith Murray with ISI.

Keith Murray - ISI

How are you? Could you just spend a minute on slide 26 on the shared national credit growth, it looks like a pretty big pickup first quarter. What drove the pickup there, and could you just give us your philosophy on SNC portfolio there?

Ralph Babb

Okay. Lars?

Lars Anderson

Sure. Hey Keith. First, a couple of points I would like to make. First of all, the underwriting of our share national credit portfolio is consistent with our disciplined credit underwriting and credit standards, relationship pricing standards for the rest of the portfolio.

Secondly, if you were internally to look at that portfolio, you would find that the profitability and asset quality metrics of the portfolio would be very similar due to our overall portfolio, but as you pointed out on page 26, you can also see that 65% of the SNC portfolio really is in middle market businesses which are typically smaller, what I would say large club syndicated credits, where we have strong relationships with those customers, it’s consistent with our relationship model.

So of the 693 increase, half of that was energy which frankly those are large syndicated credits as you know and we control our single client exposure certainly leveraging syndicated credit market, and it is a growth business for us. Middle Market business also helped drive that, which we’ve seen commitments continue to rise and we’ve been really focused over the past year. And really, the balance of it would be U.S. banking, which tends to have variability in the usage levels. So, I think that the key take away is that we treat SNCs the same as we do any other relationship in the bank and hold them to the same relationship banking standards and pricing as any other relationship.

Keith Murray - ISI

Okay. Thank you. And then just on the loan growth guidance, obviously you had very strong loan growth this quarter, it was pretty broad. When you think about the pipeline at the end of the quarter, could you just give us an update on where that stood and why would you stick with the 3% given the strength in the first quarter? Thanks.

Darlene Persons

Our pipeline grew at the end of the quarter and remains robust. When we think about our loan growth outlook, keep in mind that it is a full-year average to full-year average outlook. And our full year average loans in 2013 were $44.4 billion. We also have mortgage banker finance, which we expect to be down year-over-year on average. The full year '13 average was $1.6 billion, and we’ve said that we expect that to stabilize at the fourth quarter 2013 levels, which is about 1.1 billion. We also have our dealer portfolio that while it has increase slightly in the first quarter, we do expect normal seasonality in that portfolio to impact our full year average.

And on owner occupied mortgage loans, we do expect those to continue to be impacted by amortization. So beyond those we do expect continued growth in other areas and we also fully expect to maintain our discipline in this competitive environment.

Lars Anderson

I may just tag on and maybe do a part of your question, and that is kind of the nature of that pipeline growth. It continues to be very broad, it's across all of our businesses, and frankly if you look at the individual components they would be very complementary of really what our focus is as a company, the lines of business that we want to grow, the ones that have the highest returns and fit with our relationship banking strategy.

Operator

Your next question is from the line of Steven Alexopoulos with JPMorgan.

Steven Alexopoulos - JPMorgan

Lars, I wanted to follow up on your response of the question on the SNCs; so if you look at the 700 million increase, how much of that was for participations and credits where you guys were not the lead bank?

Lars Anderson

I can’t give you an exact number for the quarter at this point. We don’t have that, but if you are go ahead and look at that chart on, again page 26, you'd see that 15% are agented by Comerica today. But again, if you look at that 65% of the overall SNC portfolio, you know those really are typically smaller syndicated credits where we have deep relationships with the management teams. We are not just in there providing credit solutions, it’s really about my trusted advisor kind of approach to the customers, it’s the relationship banking model and it’s not just about the credit. It’s about really bringing to them all of Comerica and all of our financial solutions. So hopefully that gives you a little bit more kind of look at it, but I can’t specifically give you the number for that quarter.

Steven Alexopoulos - JPMorgan

So, Lars, should we think about that big jump this quarter as being a function of just increased demand from larger borrowers or do you guys just have more of an appetite for those types of credits here?

Lars Anderson

Well, just keep in mind that half of that number was energy, and energy by definition almost is a syndicated credit market. These are very large credit facilities where we want to make sure that we’re controlling from a conservative credit perspective . You know our exposures to single customers, but I'd also just reinforce that these are customers that are in footprint. These are customers that, you know we’re the largest commercial bank headquartered in the State of Texas, we’ve got a leverage position here, I think in Texas to be a leader in this industry, and it’s really of footprint strategy.

Steven Alexopoulos - JPMorgan

Maybe just one for Karen, how many employees do you have in the BSA/AML compliance group and how much is that have roughly cost to you now, per year?

Karen Parkhill

Steve; happy to follow up on that, I don’t have an exact breakdown of the number of employees in dollar cost, but we have maintained a very robust department in that area for a very long time.

Steven Alexopoulos - JPMorgan

Okay, thanks for the color.

Operator

Your next question is from the line of Steve Scinicariello with UBS.

Steve Scinicariello - UBS

Just a couple of quick ones. First, I am just kind of curious Lars, maybe where you see kind of the most attractive risk reward across the loan portfolio, you know, as we sit here today?

Lars Anderson

Yes, we’re very fortunate. First of all, you know we've got great growth markets that complement the businesses that we're in, and that’s I think one of the strengths of our franchises that we do have diversity of businesses. If you look at the state of California, and you look at the diversity of the businesses there that we can grow versus Texas. For example, we’re in a very attractive position. But you know, I mean, we are a middle market bank and while we do have some specialty areas, technology and life sciences, energy, commercial real estate, entertainment, you know, mortgage banking finances, these are all businesses they have typically a very attractive returns for us. But it’s not just about the credit. It’s really about the whole relationship. And as we look at each customer, we're using a very disciplined relationship pricing approach that really encapsulates all of the financial solutions that we bring to our customers.

Steve Scinicariello - UBS

It makes sense, and then, just specifically on commercial real estate, looks like that seems to be hitting an inflection point here as -- do you think that’s the case and is there an opportunity to maybe helping hands the book going forward in terms of yield and if that continues to grow?

Lars Anderson

Well, I think I heard you mention the term yield, is that correct?

Steve Scinicariello - UBS

Sure.

Lars Anderson

Yes, in your question. So I would be, honestly here that we are getting pressure in the commercial real estate portfolio, there is no question about it. You have got a lot more banks out there chasing opportunities but we are not giving in terms of our commitment to ensuring that we get the right kinds of returns from these long-term developers that we work with for a long period of time. But I would tell you this, we have been sharing with you over the last few years that we have had a lot of construction lending volume, closures, commitments and a lot of equity that has gone in first and we have expected that at some point we begin to see draws on those and a number of those move over to mini firms. And frankly that’s the key driver that we're seeing today in our portfolio. We did see relatively less activity of our larger developers going to the permanent market which also I think benefited us in the first quarter.

Whether or not it’s a permanent turn I really can’t tell you but we are really pleased to see with these long-term customers, their continued strength, success and we're proud to work with them as I think the real estate market continues to strengthen.

Steve Scinicariello - UBS

Sounds good, sounds good. And then just one quick one for Karen just on the expense side, obviously great performance this quarter, just kind of curious maybe some future opportunities whether it’s regulatory cost or more vendor consolidation types opportunities maybe going forward on the expense side?

Karen Parkhill

We are always looking for continued efficiency on our whole equation particularly on the expense side. And as we look for that continued efficiency, some of the things that we have been doing are things that we will continue to do, things like consolidating our vendors and renegotiating contracts with our vendors everywhere that we can to get better performance and better terms. And so, we will continue to do that.

Operator

Your next question is from the line of Bob Ramsey with FBR.

Bob Ramsey - FBR Capital Markets

Good morning. I wanted to ask the loan growth question a little bit different way, I know you said the 3% growth is off your base of about 44-4 last year and it looks to me as if the end of period balances this quarter are already 4.5% above that. So, does that imply that through the course of the year you actually see a little bit of contraction from where we stand today?

Karen Parkhill

Bob I mentioned that we do see contraction in certain portfolios like mortgage banker finance where the average of the full year last year was 1.6 and we do expect that to be down to about the stable level that we had in the fourth quarter which was about 1.1. So, we expect full year average contraction there and on our dealer portfolio we do typically see seasonality a little bit in the second quarter, a little bit more in the third quarter. And we expect to see that seasonality where inventory supply on lots comes down and therefore our outstanding floor plan financings come down. And then we do expect some continued contraction on our occupied real estate mortgages as amortization from our existing portfolio continues.

Bob Ramsey - FBR Capital Markets

Okay. And I know in your introductory comments you all said January started a little slow and then built but I am not sure I got the full commentary. Could you just give a little bit of color on sort of how through the course of the first quarter you also saw loan demand progress?

Karen Parkhill

Sure we typically see year-end balance as period end balances at year-end run up for us and then we typically see contraction just following the year-end and that’s exactly what we saw in January. So, we saw loan growth pick up starting in February post the contraction in January that we deem typical.

Bob Ramsey - FBR Capital Markets

And so is it just typical seasonality though, nothing more or less this quarter?

Karen Parkhill

Yes, we view it as typical.

Operator

Your next question is from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

First, just a start on the C&I portfolio, just watching the yield come down here. Can you provide a little perspective on how pricing structure in terms today compare to 2007 year key markets?

Lars Anderson

Sure, Craig, when compared to 2007 in our markets, I just want to make sure that I got the right timeframe.

Craig Siegenthaler - Credit Suisse

Okay.

Lars Anderson

Okay, Craig I am taking that as a yes. Okay, yes so, if you go back to the pre-crisis period I think you would see actually spreads a little bit thinner at that point. We are in a better position than we were there, however over I would say the past year or so, we continue to see really tightening of spreads and yields as more competitors have gotten active in the marketplace. And we're obviously staying very focused on our disciplined relationship pricing model and I think that that’s going to serve us well.

Karen Parkhill

Craig, I would also mention that our C&I yield did decline nine basis points in the quarter but half of that was related to a greater interest on non-accrual loans in the fourth quarter.

Craig Siegenthaler - Credit Suisse

Thanks Karen. In one point there, what was the average C&I yields in the new business generated in the first quarter and also the average spread there too.

Karen Parkhill

Very difficult to give you averages for our whole portfolio because it is so very diverse and so very credit dependent and so very difficult to give averages.

Lars Anderson

Yes what I would tell you is that largely our loan spreads have been holding. I mean we have been very disciplined, it’s not easy, I mean we’re having to know have our bankers out in the marketplace more than ever making more calls, really focused on our relationship banking strategy and bringing a different value proposition to our customers.

Ralph Babb

And credit is moving out as well.

Lars Anderson

Yeah absolutely.

Craig Siegenthaler - Credit Suisse

Can we assume it’s close to the tier group average in the low 2s and if yes, should we expect significant more down side in the C&I portfolio yield over the next couple of years?

Karen Parkhill

We do expect that our loan yields going forward will be impacted by the things that we've been impacted already and that would be a decline in higher yield and fixed rate loans particularly mortgages as well as a continued mix shift that can impact the portfolio of mix shift in utilization, a decline in LIBOR, LIBOR declined this past quarter in the first quarter, but yet it’s lower today than where it ended in the quarter. So there are lots of things that we expect to continue to impact our loan yields.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe - Morgan Stanley

I guess first question just about the LCR I think Karen mentioned if I heard right that you would be complying with LCR, what you think are the guidelines by 2015. But could you just be a little clear on that in terms of when do you expect to be as fully complying as you need to be and what is the impact that that could have on margin from here?

Karen Parkhill

So on the LCR as you know the rules are proposed right now and not yet final. And we obviously expect to be fully compliant with all of the phase-in requirements and the fully phased in requirement in 2017. As loans increase and the interest rate environment continues to improve, we do expect to see deposit decline and both on the loan and the deposit side of the equation can have an impact on our excess liquidity. Our excess liquidity right now does count as high quality liquid assets. So in that improving environment, we will need to be adding high quality liquid assets to meet the proposed LCR requirement.

The impact that that can have on -- that can have an impact on the net interest rate margin but we believe that it is relatively neutral to net interest income and that is the key income statement line on that we focus on much more than the net interest margin.

Ken Zerbe - Morgan Stanley

No, of course, I just wasn’t sure if there was going to be any meaningful changes, but it sounds like you’re just letting sort of the portfolio take its natural course and you'll end up with a better coverage ratio rather than taking any specific more immediate actions. Is that fair?

Karen Parkhill

That is fair. We remain ever mindful of the fact that our securities portfolio and a rising rate environment will be mark to market and that mark to market impact is the numerator in the LCR equation. And so we keep that in mind as we think about ensuring compliance.

Ken Zerbe - Morgan Stanley

Got it. Okay, then really quick question on the purchase accounting adjustments for the accretion. I think you said you had 28 now, you expect 28 to 30 this year so presumably that implies better credit or some restatement or some additions to the accretion. When you think about next year in 2015 is this for the most part largely gone or what kind of I guess amounts would you envision in 2015 for the accretion?

Karen Parkhill

Year-over-year we expect a decline in accretion, last year we had 46 million in accretion and this year we expect 20 million to 30 million, we had 12 million of that in the first quarter. The remainder accretion that we have available we did say is 28 million and we do expect that to continue to decline each quarter. It may linger in small amounts into 2015 but we expect a continued decline and ultimately to be end material.

Operator

Your next question is from the line of Michael Rose with Raymond James.

Michael Rose - Raymond James

Hey just wanted to ask about the complexion of CDs in the balance sheet. Have you guys thought about with rates being as low as they are and potentially higher rates on the horizon beginning to lock in some CDs and where would you expect that portfolio to normalize out as a percentage of the total mix?

Karen Parkhill

So currently our MMDAs and DDAs are more than 80% of our total deposit balances, our savings as DDs are then less than 20%. On the CDs in particular we recognize that we have an ability to increase deposits when needed with our client base through things like CD and pricings. It is not something that we deem we need now particularly when you look at our balance sheet and the excess liquidity that we have.

Operator

Your next question is from the line of Scott Siefers with Sandler O'Neill.

Scott Siefers - Sandler O'Neill

Good morning guys. I think most of my questions have been answered at this point but Karen may be just a quick one from you on the fee guidance. You gave a lot of good color on what would cause the year-over-year change i.e. warrants that were elevated last year. But was there anything specific that had changed from the outlook that you provided with the fourth quarter that cause it to be lower versus stable previous -- lower versus stable previously?

Karen Parkhill

Yes, I would say that the key change in the outlook again is on our customer driven side and we saw softness this quarter in our capital markets related fees particularly syndicated loan credits and customer derivative. And it is that softness that caused us to slightly change our outlook.

Operator

Your next question is from the line of Dave Rochester with Deutsche Bank.

Dave Rochester - Deutsche Bank Research

Good morning guys. On your comment on comp expense this quarter being a descent run rate going forward, I was just wondering if that could also possibly apply to total expense levels as well versus that 1Q level just given the consolidation of vendors and other steps you’ve been talking about or should we expect to see that line grow this year?

Karen Parkhill

So in total expense there are expenses that can be variable in the back half of the year, things like occupancy expenses, things like consulting type expenses. So I wouldn’t necessarily completely approximate a run rate but recognize that we are very focused on tight expense control and do intend to work very hard to maintain our expenses at a descent level.

Dave Rochester - Deutsche Bank Research

And just on that comp line itself I know you’ve got some seasonal expenses in there and you’re talking about that being a descent run rate but you’ve also talked about hiring. And so I was just wondering if there are any other areas where you could trim up to sort of offset that hiring this year?

Karen Parkhill

We are very focused as we talked about before on every place where we do have expense increases or headcount increases and trying to figure out ways to self-fund the dollar amount of that increase. And that is a discipline that we maintain continually. And so we have had to add headcount in certain areas like compliance and regulatory. We also have added headcount on our front line to make sure that we were meeting increasing customer needs and demands but we are very focused on trying to offset that with other expense control.

Operator

Your next question is from the line of Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Thanks. Good morning. Just a question back on the syndicated credits, obviously people are getting a little bit more concerned about that and you had a few questions early in the call, but maybe not necessarily what you’re putting on your books, Lars or Ralph, are you seeing anything in that market that makes you a bit more nervous or any trends that are worth watching on the negative side?

Lars Anderson

No, really don’t. In fact as I mentioned before Jon as we study that portfolio the asset quality the returns of that portfolio really are very similar to the overall company’s loan portfolio. We’re obviously going to watch the level as we do with our concentrations across any lines of business, anything we do but no we’re very comfortable, it’s relationship based and is very consistent with our strategy.

Jon Arfstrom - RBC Capital Markets

How about anything in the…

Ralph Babb

Why don't you comment on credits?

Lars Anderson

Sure. I’d be glad to. In the SNC portfolio we see it over the long term mirror our overall credit results but in the short term it’s actually performing much better than our basic credit metrics. There are things that we’re seeing in the marketplace that do kind of make your hair stand up from time to time, we don’t get into those kinds of credits and we’re going to maintain that kind of discipline.

Ralph Babb

Yes, if I could just clarify one thing that we do not have a syndicated credit trading desk, we’re not out there buying and selling syndicated credits. These are all relationship based.

Jon Arfstrom - RBC Capital Markets

Okay, that helps. Because obviously everybody has a concern when they see that kind of growth, and I think we understand your approach to it as well but we hear the anecdotal stories about the industry and some of the broader things that are happening, so that helps.

Ralph Babb

Yes, we remain very focused on building relationships with those credits.

Jon Arfstrom - RBC Capital Markets

Okay, great. Any theme in the construction growth you guys have had quite a few quarters in a row of descent growth. Is there any theme there that’s new or different?

Ralph Babb

No, there really isn't. It’s -- we’re executing our same strategy, we haven’t changed. Its urban market, it's in footprint oriented, its in-fill, closed in suburban, the majority of its multi-family and frankly we're just beginning to see I think some of the benefits of a number of the projects that we finance with some of our very long-term, well hailed developers. So we are hopeful that will continue to run.

Jon Arfstrom - RBC Capital Markets

Just here a couple more things. Do you know off-hand what’s left in the non-accretable balance on sterling?

Karen Parkhill

Non-accretable loan balance?

Jon Arfstrom - RBC Capital Markets

Yes. Credit impaired.

Karen Parkhill

Yes. It’s not much, I don’t have it off top of my head, happy to follow-up but it’s not much.

Jon Arfstrom - RBC Capital Markets

Okay. And then just to be clear on the tax change, I think it’s obvious, but same bottom line impact, it’s just geography on the P&L, is that correct?

Karen Parkhill

Yes. That’s correct. The accounting change that we adopted is bottom line neutral.

Operator

Your next question is from the line of Ken Usdin with Jefferies.

Ken Usdin - Jefferies

Thanks. Good morning. First, I wanted to just ask you about, this year on the CCAR, you got a nice approval but the total amount of the buyback was a little lower year-over-year. And I think, a little lower than the market might have anticipated. I just wanted to ask you about just any thoughts in retrospect about this, your CCAR process and generally speaking, how you feel about what you put in for and how you are thinking about the eventual -- the future CCAR now that you have been through the first one?

Karen Parkhill

Thanks for the question, Ken. We are very pleased with the outcome of our CCAR plan process. As you know that with our first year as CCAR bank and also the first year that the feds ran its own model on us and so we likely approach most things, approached it from a position of conservatism. When we think about our total payout to shareholders, we like the fact that we are able to pay to shareholders meaningfully and we think that as a result of our very strong capital position and the fact that we have had good continued credit performance through the cycle.

Ken Usdin - Jefferies

Okay. And the second question just bringing all those commentary and questions about balance sheet mix, this quarter the average earning asset number was flat and you talked in your remarks about remixing some of those cash balances, you’re moving things for LCR compliance, you still have a low loan to deposit ratio and loans are starting to at least this quarter outgrow deposits. So I am just wondering, are we at the point where we should be looking for more earning assets stability from here and if I'm incorrect in saying that how do you think about just the overall progress of earning assets, vis-à-vis loan growth as you look ahead?

Karen Parkhill

When we think about earning asset, we do recognize under the new LCR requirement, again in a better economy rising rate environment where we do expect continued loan growth and deposits to decline that we will need to be adding high quality liquid assets. So I wouldn’t necessarily say that it is stable at this stage.

Ken Usdin - Jefferies

And I guess then Karen, how would you think through or help us think through what that mean that you’ll think about starting to go for little bit more wholesale whether it's FHLB’s or issuing sub debt or rationalizing the capital structure, just how should we think about that as deposits come off, have kind of filling in from that or do you just continue to depend on more of a remixing?

Karen Parkhill

It is likely that we will fund our high quality liquid asset with wholesale funding.

Ken Usdin - Jefferies

Okay. Which you really haven’t done so far, because the securities book really hasn’t grown to date, right?

Karen Parkhill

That’s correct. And we are…

Ralph Babb

Plus with the excess funding.

Karen Parkhill

Correct.

Ralph Babb

Position.

Ken Usdin - Jefferies

Well, also what I am trying to get at, you still have the excess funding but then there’s the need to add, so that would say to me more remixing, but I just want to understand the different between remixing which keeps earning assets flat versus adding wholesale borrowings which would allowed it to grow.

Karen Parkhill

Okay. So I think it depends on the timeframe that we’re talking about here. And in a short term environment where we have a lot of excess liquidity, we would think much more about remixing, in a long term environment as I talked about with the economy and interest rate environment changing and we would think more about wholesale funding obviously.

Operator

Your next question is from the line of Ryan Nash with Goldman Sachs.

Ryan Nash - Goldman Sachs

Hey good morning. Good morning guys, just one big picture question, you talked about a nice uptick in utilization this quarter, growth was pretty broad based there, there was an article in the paper this morning about expanding CapEx. Are you actually starting to see signs of that and if so are we finally starting to see a shift towards expansionary CapEx from borrowers or is it still efficiency driven?

Ralph Babb

Lars, you want to take a shot at that?

Lars Anderson

Yes, absolutely right. Let me just make a comment about the kind of sense we’re getting from our customers and that is they are mildly or modestly more optimistic, but they are still cautious, so I would say it’s too early really to call in terms of every turn of the corner in CapEx, and the beginning of expansion there, we clearly saw it, we saw it in our general middle market, an increase in utilization rates as well as and energy which was up in utilization technology and life sciences, environmental services, so we did see a pretty broad increase in utilization rates. So again a little early to call whether or not we’ve turned the corner on CapEx but we’re very hopeful that would be very good for Comerica given where middle market kind of centered bank and you’ve seen commitments grow over a long period of time here at Comerica.

Ryan Nash - Goldman Sachs

And just as one quick follow-up given the amount of commitment growth you’ve seen, you’ve been able to grow line utilization. If we were to see a big pickup in CapEx, how high do you think utilization rates could go?

Lars Anderson

Well if you look back historically we run around the element 50% rate over a long period of time, we’ve seen variations but we’ve also seen from quarter to quarter, I mean you could see a 200 basis point change, but keep in mind that when we look at utilization rates that that’s a period in time that is not the average for the quarter.

Karen Parkhill

We are right now at our historical average per utilization and we’ve reached as high as 53% in the height of the downturn but right now we’re at our historical average.

Ralph Babb

I think one of the things you’re seeing too is people are keeping more liquidity and more potential with their lines as well than you had in the past.

Lars Anderson

And I think that that Ralph your point, that’s one of the reasons that we haven’t seen a draw down in liquidity that you typically would see is that a number of our customers are being more cautious protecting the liquidity positions.

Ralph Babb

And the result of that is you’ll see higher commitment levels and lower usage levels in total and I think that’s a trend.

Operator

Your next question comes from the line of John Pancari with Evercore.

John Pancari - Evercore

Just to beat the loan growth dead horse a little bit here, excluding the mortgage warehouse and national dealer service seasonality that you mentioned Karen, anything about the end of period link quarter loan growths that would not be sustainable or in terms of those balances where they stand as of the end of March. Anything about that that would not be sustainable, thanks.

Karen Parkhill

I mentioned that on period end we typically do see a run up at the year end and we did see a run down in January and we typically will not as high do see a little bit of run up at the end of each quarter, so that is why we focus on average balances instead of period end balances.

John Pancari - Evercore

Okay and that typical run up, which type of portfolios would that be in?

Karen Parkhill

It’s honestly across most of our portfolios.

Lars Anderson

Often time you see, what I would maybe define a little bit as window dressing as some customers really want to build cash on their balance sheet for the end of the quarter and that gets paid back and those would be middle market, US banking and such.

John Pancari - Evercore

Okay all right and then separately the -- I believe you indicated Karen that you don’t have all the detail around new loan production yields but you happen to have any of that granularity for the SNIC portfolio what the average yield is on that portfolio and then more specifically what the average yield is what you put on the quarter.

Karen Parkhill

I don’t have the average yield of the SNIC portfolio, in terms of the average yield of what we put on in the quarter we do know that our decline in loan yield was mainly due to the things that I talked about. The fact that we did have fixed rate loan run-offs, the fact that we did have credit improvement, the fact that we did have a mix change in the utilization of our customer usage and so our new loans coming on board is not necessarily causing the deterioration in our loan yields. Hopefully that’s helpful.

John Pancari - Evercore

Yes that is, and then lastly just sorry if I missed it in your commentary but the decline in the commercial lending fees on a linked quarter basis, if you can just give us the detail on that.

Karen Parkhill

Yes, that was -- we saw a decline of 8 million in commercial lending this linked quarter, 7 million of that was a decline in syndicated loans activity and that was because we have very robust syndication activity in the fourth quarter.

Lars Anderson

And that’s not unusual, in fact if you go back to the first quarter of 2013 you’d see a similar type change from the fourth to the first, as the activity levels that we did see in the syndicated fee income, agency fee income that we did get in the fourth quarter of course we benefited from those balances in the first quarter of this year.

Operator

(Operator Instructions) And we do have a question from the line of Erika Najarian with Bank of America.

Erika Najarian - Bank of America

Speaking of dead horses, could you just remind us what your charge-off experience was in your SNIC portfolio in each of the last two credit cycles versus the rest of your commercial book?

John Killian

Erika, over the long-term, the SNIC portfolio performs at the same level as the portfolio overall. I don’t have off the top of my head those numbers through the last two cycles. But I can tell you that, over the last five quarters our charge-off levels in the SNIC portfolio have been nominal.

Erika Najarian - Bank of America

Great, and just one last question, Karen, you mentioned that if rates went a few hundred basis points you would see a 12% increase in NII and that sensitivity is on the dynamic balance sheet. Could you just tell us what your deposit volume and rate assumptions are in that exercise, and maybe where you think your loan to deposit ratio would trend in that scenario?

Karen Parkhill

Sure. As we talked about in the past, that scenario is dependent on the assumptions that we put in. And in those assumptions we do expect loans to decline, we do expect deposits to -- that we do expect loans to increase, I’m sorry, we do expect deposits to decline. We do expect a continued mix shift out of interest-bearing and out of non-interest-bearing into interest-bearing. We have run sensitivity analysis on that scenario. And that sensitivity analysis that we have done in the past and shared with you in the past is things like what if deposits declined more? What if loans grow faster? What if rates move up higher? And even with those sensitivity analysis, that points to the fact that we are still very well positioned for rising rate environment. So hopefully that’s helpful. And on the deposit decline in particular, we do have deposit declines, and one of our sensitivity analysis did show more deposit declines that we shared last spring with you.

Erika Najarian - Bank of America

Okay, and given the liquidity that you mentioned that’s embedded within your customer base, is it possible that during this rate cycle we should be -- you know, you surprised at the upside or downside in terms of deposit volume behavior relative to what Comerica has experienced in the past? Or is it just we are not going to be able to tell at this point?

Karen Parkhill

We are in a very anomalous environment right now. And we recognize that history may not be the best barometer going forward, particularly from this environment. So that is why we look at the sensitivity analysis that we do look at.

Operator

Your next question is from the line of Matt Parnell with Wells Fargo Securities.

Matt Parnell - Wells Fargo Securities

Good morning everybody, just a quick question again on the commitments. I guess in the bigger picture. I would like to get a sense of how you all think about the pricing for your commitments perhaps going forward now that you are in the same bucket as the CCAR banks. And I guess I’m just curious, given some of the capital issues or capital buffers that they have to deal with some of those banks have said that commitment pricing could go up. Is that an advantage for you, particularly when you are focusing on middle market borrowers or has competition basically eroded that advantage?

Lars Anderson

Yes, I mean, we -- frankly first of all we have a really a disciplined process where we review every line of business, every quarter or every product line on a regular basis, given the changing regulatory environment. And we're making the appropriate adjustments to ensure that we get the right kinds of returns out of each one of our lines of business on an overall basis. So are we reacting? Absolutely. Are we seeing the overall market react at this point? Not really. But we are going to do the right things. We are going to make the right adjustments to make sure that we get the right kinds of returns for our shareholders, given the Basel III environment.

Matt Parnell - Wells Fargo Securities

And then just a quick one for Karen. Karen, I saw that risk weighted assets were up about 2% quarter-over-quarter. Was the driven largely by commitment growth or where there something else driving that?

Karen Parkhill

Yes, that was driven by our loan growth and our commitment growth.

Operator

Your next question is from the line of Kevin St. Pierre with Sanford & Bernstein.

Kevin St. Pierre - Sanford Bernstein & Company

Just following up on the deposits in a higher rate environment, in that 12% figure, one of the things that I look at your deposit base versus other banks, one thing that jumps out is the large percentage of deposits that are in accounts greater than $250,000, significantly higher than a lot of other banks who profess to be a lot less asset sensitive than your disclosures imply. Just could you talk a bit about specifically those large deposit accounts and how you expect those to trade when rates rise and Karen, I think it would be great if you would update those sensitivities sometime soon and I appreciate it was a year ago and I think we are all looking for a bit more on the rate sensitivity.

Karen Parkhill

Okay, happy to do that Kevin. And on your question on the greater than 250,000 in deposit, keep in mind that because we are mostly a commercial bank, we do have large commercial deposits from some of our customers, but as we focus on the full relationship with those customers, much of those deposits are operating account deposits which are tied to the other services that we provide those customers. So, they tend to be very sticky and tend to be stable.

Kevin St. Pierre - Sanford Bernstein & Company

Okay. So, if we -- I know again it’s 10 years ago the last time short rates started to rise, but if we look at the period during when short rates were rising, your funding cost moved up significantly more quickly than your asset yields and I recognize there are, there is a higher percentage of loans that are floating now and other factors but is that the main driver of why you think things will be different this time?

Karen Parkhill

Hard for me to speak as much about history but I would say going forward we do recognize that we do have a pricing ability on our deposits as needed to make sure that we maintain those deposits and maintain our loan to deposit ratio within more of a self-funding guideline that we got currently.

Operator

Your next question is from the line of Brett Rabatin with Sterne Agee.

Brett Rabatin - Sterne Agee & Leach

Hi, good morning. Just wanted to follow-up a little more on the sensitivity modeling and just go back to loan spreads and just want to make sure I understood what the analysis or what the assumption was if rates go up, what happens to loan spreads and how you think about LIBOR versus your loan portfolio yield?

Karen Parkhill

So, as rates rise, we are very hopeful that short term 30 day LIBOR rises with it. As you know we are most exposed to that metric and that should help us significantly. In terms of loan spreads, difficult to predict because that is dependent on many factors, the credit environment, the competitive environment et cetera. But we have in the past and intend to maintain our discipline around pricing credit very appropriately.

Brett Rabatin - Sterne Agee & Leach

But specifically what’s the assumption in terms of loan spreads as rates move higher?

Karen Parkhill

Now that’s something that we'll have to follow up on, I don’t have that on the top of my head.

Operator

Your next question is from the line of Brian Foran with Autonomous.

Brian Foran - Autonomous Research

Sounded like the sesame straight pronunciation of our firm, I have young kids, so. I know there has been a lot of questions on the Shared National Credit portfolio. I was just looking at one of the things we had tracked was in the supplement you give the percent where your agent as well as the balances and it looked like, if I have got the history right, you went from 18% agent in 3Q to 16% agent in 4Q to 15% in 1Q. And then if I multiply that through by the balances, it looks like over the past six months the agent led balances actually came down a little bit and then the non-agent implied balances would have gone up about a 1 billion, is that a fair way to think about it or is there anything that’s changed in the definition and just kind of any thoughts on why the agent would be going down but the non-agent going up?

Lars Anderson

I would say the largest driver there would be the energy portfolio, I mean we don’t typically agent the E&P portfolio. Those are very large credit facilities. These energy companies have very large CapEx needs and so as you see that portfolio continue to grow that would certainly have some dilution on it, but we haven’t changed our strategy around relationships. And each one of these again, if you look at page 26 whether it’s entertainment or energy or technology and life sciences, general middle market, this is all about relationships. So, no change in strategy, but I would say energy would be the biggest kind of diluter of that lead percentage.

Brian Foran - Autonomous Research

Got it. And then just on preferreds, I mean you are in a good position of having a ton of capital, it seems like there is maybe mix messages on, everyone just need preferreds to be a 0.5 of their RWAs regardless of common equity or to the excess common equity, does that kind of count against the preferred bucket or the tier 1 bucket which I really want to think about it. I mean have you gotten feedback or do you think eventually you will need preferreds as part of the capital structure or do you think as long as you’re up here with these kind of monster common equity ratios preferreds just for in a separate world and don’t matter?

Karen Parkhill

Yes, the stress test that we’ve just gone through, we’ve shown that we do have adequate levels of capital to withstand various severe stress scenarios. That said, the Basel III capital rule do fairly well dedicate the types of capital that are included in each of the different metrics and stacks. So at some point it could make sense for us to have preferred in our capital structure. But clearly we believe we need a good use of proceeds to be able to introduce it.

Operator

Your next question is from the line of Mike Mayo with CLSA.

Mike Mayo - CLSA

Good morning, with CLSA. Just a follow up deposits in the higher rate environment seems no question that you had benefit from higher interest rates and I’m just curious that 200 basis point higher interest rates that improves and 200 million if I heard that correctly. What change do you expect in CDs to go from what percentage today to what percentage in the future under that scenario?

Karen Parkhill

That again is something that we can follow up on with detail like that and some of the other questions that we’ve had Mike. I would say in general we do expect deposits to decline in that scenario and most of that decline we would expect to be in non-interest bearing and so that we do expect interest bearing to increase. As far as the amount of CDs increase a little bit but not significantly.

Mike Mayo - CLSA

Because the CDs are so far below the historical for you guys in the industry that you just think behavior has changed or rates going up 200 basis points won’t be the trigger for a whole lot more CDs?

Karen Parkhill

Well, we do recognize that we have the ability with our existing customer base to be garnering in a rising rate environment, more savings deposits from them and we will be doing that as we need to.

Mike Mayo - CLSA

And another follow up on the SNICs, if I’m calculating this correctly they look to be at 22% of loans which I have to imagine is one of the highest levels for Comerica and if you go back in time in the 80s, Comerica pull back and your 90s and then especially after the Enron [indiscernible] the early part of last decade, you guys lowered your SNICs from then it was 20% down to 15% and today I think it’s 22%. So is there any constraint for SNICs as a percentage of total loans?

Ralph Babb

Yes, I mean we do not share what our limitations are within the company but I had to tell you that we are very comfortable with where we are. If you go back to the first quarter 2010 where we’re 20%, we’re at 22% today we’ve had nice growth. The energy portfolio as I mentioned I think has a significant impact Mike on that percentage.

Mike Mayo - CLSA

And then just a more general question goes to the trade-of between generating revenues reserve in the revenue generation ability for Comerica with expenses today. And so on the one hand I see loans growing faster, loan utilization up, you still benefit from the higher rates. On the other hand I look at the expense to revenue ratio, the efficiency ratio and it just looks a lot worse than peer and if you go back two decades the 90-92 merger of equal the expense to revenue ratio then was 61%, today it’s higher 60s. So I guess the question is how do you evaluate that trade-off and when do you think you could reach your target for a 60% efficiency ratio?

Karen Parkhill

Yes, Mike, we did announce a couple of years ago that we had an efficiency ratio target, long term target to take that efficiency below 60%. We have made progress towards that target despite the impact of the low rate environment on us and we do expect to continue to make progress. We will need a little bit of a rate environment increase to ultimately get it over the goal line. If you look at LIBOR, 30 day LIBOR, to which we’re most exposed, it sits at 15 basis points today, and that is incredibly low and we would deem a more normal rate environment to be closer to 300 basis points. We certainly don’t need to get anywhere close to 300 to get it over the goal line but we will need a little bit of an uptick from here.

Lars Anderson

That’s a big difference in your comparison as the interest rate.

Mike Mayo - CLSA

And my last question is a little sensitive for Ralph that’s for you. I know you’re very young for your age, I don't mean to imply anything like that in my question but what are your plans to retire on a mandatory retirement age is what would Comerica’s consideration be towards a strategic merger acquisition, something like that?

Ralph Babb

We don’t have a mandatory retirement. The Board of Directors reviews the succession plan regularly and any time there is a meaningful decision made, appropriate announcements are made at that point. As you know we look at acquisitions from time to time and I guess we've done two in the last 10 years and they have to fit into the strategy and into the markets where we are and especially in the culture as well. And I used Sterling as our latest acquisition as a point of where the culture and the combination has turned out to be a real home run for us in our Houston market from the addition of the talent and the combination with our people and the growth that we’re seeing in that market, because of it they are doing a great job. Our strategy there has not changed.

Mike Mayo - CLSA

And just one follow-up to that. I think right here you say is that you’re very confident about your future and Comerica’s future. So under what circumstance would Comerica consider selling to another bank? And the only reason I bring that up is investors bring it up to me saying Comerica is a takeover target, just wondering what you’d say to that?

Ralph Babb

We’re very happy as I have said with our foot print and our strategy in what we have done and we’re going to continue to focus on that strategy to move forward especially to give the type of returns that our shareholders expect and deserve.

Operator

Your next question is from the line of Sameer Gokhale with Janney Capital.

Sameer Gokhale - Janney Capital

Well thanks for taking my question. I guess maybe I’ll ask the question in another way from being a potential seller to a potential buyer. I mean would you have any interest in diversifying into companies with adjacencies and say factoring businesses for example or vendor finance and the like [indiscernible] a company called CIP which is big in those businesses, has a lot of excess capital and that would be merger equals to. Is that something that you might consider at some point in time in terms of just helping to diversify your footprint from a lending standpoint?

Ralph Babb

We like our footprint, as we have said and especially being in Texas and California and with our long time home in Michigan. And that footprint has the two largest economies in the country, the two states of California and Texas. And we like our overall model, and we like to refer to ourselves as a mainstream bank. And we have spent a lot of time in making sure that’s the kind of bank that we are and moving forward that is our strategy and we don’t look to change that strategy.

Sameer Gokhale - Janney Capital

That’s helpful. And then a question on just your national dealer services business. Clearly that part of the business is benefiting from where we are in kind of the auto sales cycle and new car sales are just being taking a long, a very strong clip, March was very strong. But I am trying to get a sense for what you would look at as an early indicator of the cycle potentially turning.

One of the things I look at is used car prices, I know you predominantly I think financed new car inventory but if you were trying to find out some data points to see what would indicate a turn in that cycle or where you might turn a little more cautious in terms of that Dealer Floor Plan, lending in particular but more broadly across your footprint of auto and rental car and leasing loans. What kinds of things would you look at and how do you think about the cycle and where we’re at? I mean do you think you can benefit from another three or four quarters before you dial it back, just some perspective on that would be helpful.

Ralph Babb

Well I think if you look back at history, the auto sales peaked at little over 17 million, we’re in the 16s now, so that would be an indicator of I think where sales will be at some point in time and maybe when it gets to 17 million or above you’ll start to see a slowdown in that particular cycle. The important thing from our strategy is that we look at multiple dealers that are our customers. In other words generally they have at least five dealerships within their -- in their model. And they are very much the majority of that or in our footprint. As I remember Lars you commented on this about 60% of it is California.

Lars Anderson

Yes, that’s exactly right. That’s the biggest part and it’s naturally of all that the biggest mega dealers in the country are on the West Coast. But just to speak to that we watch a number of different metrics on a regular basis to ensure that we’re tracking the health of the portfolio and inventory days on hand and those kinds of things. And on an individual by individual basis, each of these relationships are reviewed on a regular basis. I would tell you that you are beginning to see the growth margins on new vehicles begin to narrow. Last year those have kind of reversed and we’re beginning to see an expansion in those margins and I think that’s a positive for the industry. So as I think Ralph pointed out, we see a healthy 2014 in vehicle sales, but we’re going to keep a close eye on the portfolio.

Sameer Gokhale - Janney Capital

Thanks Lars. Just in terms of some other metrics on underwriting perspective, should we think about it in terms of LTVs against the value of full plan inventory, how have the -- I mean I’m sure it’s the strength of the dealer themselves, but also if you’re lending against that and its collateralized how should we think about LTVs say in that business, have they moved, have they increased, decreased, how should we think about that?

Lars Anderson

I mean our strategy hasn’t changed, I mean our LTV is what we finance really what I would say robust credit policy for underwriting dealers has not shifted at all through the cycle and even to today, so I think you can have confidence in that.

John Killian

If I could add, this is John Killian, if I could add, we’ve been in this business for over 65 years, we’ve been in it in a very major way on a national basis for over 20 years and it is over that period of time from a credit quality standpoint the best performing line of business that we have.

Operator

And your next question is from the line of Gary Tenner with D.A. Davidson.

Gary Tenner - D.A. Davidson

Guys, good morning, thanks for extending the call so long, I just have a quick question in terms of the general middle market lending segment. Just you know curious where some of the strength there has come from, it was highest I think it’s been in three or four quarters, I assume it’s generally California and Texas, but I wonder if you could kind of comment on where any specific pockets of strength are.

Lars Anderson

Yes, absolutely, yes general middle market would typically be your manufacturers, distributors, people [indiscernible] those kinds of companies that you would expect, frankly Texas has been the biggest driver, probably no surprise to you as GDP amongst our key primary states, Texas leads the forecast for ’14, it’s at 3%, California is 2%. You know we would expect that our general middle market business would continue to go up. I would tell you it’s a very competitive market, we’re out there having to deliver the Comerica relationship banking model, every single day, win those relationships, but we’ve been very pleased to see the growth in particular in Texas and in California in the past quarter and even growth in Michigan.

Operator

And there are no further questions at this time. I will now turn the call over back to Mr. Ralph Babb for closing remarks.

Ralph Babb

I would like to thank everybody being with us this morning and also your interest in Comerica and wish everybody a good day, thank you.

Operator

And thank you again for participating in today’s conference, you may now disconnect.

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