Comerica Incorporated Q2 2010 Earnings Call Transcript

 |  About: Comerica Inc. (CMA)
by: SA Transcripts


Good morning, my name is [Jenica] and I will be your conference operator today. At this time I would like to welcome everyone to the Comerica’s second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

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

Darlene Persons

Thank you, Jenica. Good morning and welcome to Comerica’s second quarter 2010 earnings conference call. Participating on this call will be our Chairman Ralph Babb; our Chief Financial Officer, Beth Acton; our Chief Credit Officer, John Killian; and Dale Greene, Executive Vice President of the Business Bank.

A copy of our press release and presentation slides are available on the SEC’s website, as well as on the investor relations section of our website. Before we can start it, 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 state only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor Statement contained in the release issued today, as well as slide two 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, in that regard, I will direct you to the reconciliation of these measures within this presentation. Now, I’ll turn the call over to Ralph.

Ralph Babb

Good morning. Today we reported second quarter net income of $70 million or $0.39 per share. Second quarter total revenue increased over the first quarter and was up almost 5% compared to the second quarter last year, excluding securities gains. Our financial results will reflect the positive trends we have seen over several quarters. This includes three consecutive quarters of broad based improvement in credit quality with leading indicators of future credit quality also pointing positive. Our net interest margin continued to expand and our expenses remain well controlled.

We have strong capital and liquidity to support future growth with the flexibility to grow organically, as well as by acquisition. We continue to reach out to our customers taking their pulse on the economy, their current financial needs and future plans. As a relationship-focused ‘Main Street’ bank, this type of proactive outreach is how we differentiate ourselves. Since the onset of the economic downturn, we stepped-up our calling efforts to be sure we were ideally positioned to assist our customers in navigating the economic environment and to meet their needs as the economy improves.

While the pace of the economic recovery remains uncertain and our customer remain cautious, they are preparing for future growth. This is reflected in our loan pipeline, which is at its highest level in more than two years. Also, economic factors which support loan growth such as business, fixed investment and inventories continue to rise. We view these as encouraging and hopeful signs for the future.

The Middle Market banking teams and all of our markets report they are seeing more opportunities again due to the consistent calling efforts of our relationship managers and executive teams. The resulting new business gains include customers and prospects with an eye on acquisitions or expansions. These are full service relationships with good companies that look to us as a trusted financial advisor. We continue to see good opportunities in Texas and are adding a new small business Healthcare Profession Group to capitalize on this growing segment.

In California, our Technology and Life Sciences division has seen an increase in opportunities too, including the recent addition of more than 35 customers in the alternative energy sector. As the economy continues to improve, technology and life sciences firms are turning to Comerica because of our experience and expertise in serving this segment.

In Michigan, backlogs are continuing to grow and we are getting more interest from prospects as the economy continues to improve in that state. New and renewed loan commitments for our bank as a whole totaled $10.5 billion in the second quarter, reflecting an uptick in new commitments and the seasonality of renewals. The pace of decline in loan outstandings continued to slow in the second quarter. We are pleased to see that line utilization has remained relatively stable since the middle of the first quarter.

Second quarter average core deposits increased $1.7 billion from the first quarter. The continued broad based improvement in credit quality reflects our early recognition of issues and our ability to quickly and proactively work through problem loans. Overall, charge-offs declined in the second quarter with a notable decrease in commercial real estate charge-offs. The pace of improvement in credit quality is significant and faster than we had expected. A key indicator of future credit quality is our watch list loans, which are down $851 million from the first quarter. As a result of the positive trends we have seen, we have reduced our charge-off outlook for full-year 2010.

The net interest margin increased 10 basis points to 3.28% in the second quarter, primarily from maturing higher cost wholesale funding and a less costly blend of core deposits.

We continue to focus on expense controls. Noninterest expenses decreased $7 million from the first quarter. Our capital position remains strong and together with our strong liquidity we will help support our growth. As far as acquisition opportunities, we continue to look for those that would fit from a financial, geographic and cultural perspective. It is our sense that industry merger and acquisition activity will pick up much sooner than many may expect.

We are focused on opportunities in the urban markets of Texas and California, where we continue to grow organically through our banking center expansion program. With respect to financial reform, we have made a preliminary assessment of the impacts to Comerica. Ralph, go into more detail, but the bottom line is we expect to compare a quite favorably to our peers and larger banks, while it will take some time for regulators to implement any new rules both the industry and Comerica are expected to respond with new products and services to generate revenue opportunities and offset costs.

Our implementation efforts to support the Regulation E amendment continue on schedule and our banking center personnel relationship managers and customer contact staff and the tools they need to assist our customers with their participation decisions with respect to overdraft services.

The Fed is now expecting slower economic growth, regardless of the pace of recovery we are focused on generating improving returns. We plan to do this in number of ways through targeted investments and increasing market share in our higher growth markets.

By the proactive management of credit issues, just as we have done throughout this cycle. By maximizing relationship returns through the cross selling of products and services and by our effective management of expenses. We will continue to grow new relationships and expand existing ones with the confidence we are in the right markets with the right people and a full array of products and services to make a positive difference for our customers, shareholders and the communities we serve.

And now, I’ll turn the call over to Beth and John, who will discuss our second quarter results in more detail.

Beth Acton

Thank you, Ralph. As I review our second quarter results I will be referring to slides that we have prepared that provide additional details on our earnings.

Turning to slide three, we outline the major components of our second quarter results compared to the prior period and to the same period a year ago. Today we reported second quarter 2010 net income from continuing operations of $70 million, compared to $35 million for the first quarter. The diluted earnings per share was $0.39 for the second quarter.

The second quarter results reflected a lower provision for credit loss and the benefit of the full redemption of the preferred stock held by the US Treasury in the first quarter. Second quarter total revenue increased over the first quarter and was up almost 5% in comparison with second quarter last year, excluding net securities gains.

Slide four provides highlights of the financial results for the second quarter, compared to the first quarter. Credit quality metrics continue to improve, net credit related charge-offs decreased by $27 million from the first quarter to $146 million. The provision for credit losses was $126 million or $56 million less than the first quarter.

Non-performing assets declined $37 million and the inflow to nonaccrual slowed by $46 million to $199 million. The loss was declined by $851 million the net interest margin in the second quarter increased 10 basis points to 3.28% with little change from the impact of excess liquidity. The increase in the margin was primarily due to the maturities of higher cost wholesale funding and a less costly blend of core deposits.

We continue to carefully control expenses, noninterest expenses decreased 2% primarily a result of a decrease in credit related expenses. Our capital position remains strong as evidenced by our tangible common equity ratio of 10.11%. The pace at which average loans declined continued to slow as shown on slide 5.

Average loans declined $641 million in the second quarter, compared to the $1.4 billion decline in the first quarter. On a period end basis, total loans increased $62 million from March 31 to June 30 excluding commercial real estate lineup business which declined $305 million.

We expect to see commercial loan growth as working capital needs increased and this will be muted by decline in commercial real estate loan outstandings. Over half of the decline in average outstandings in the second quarter was in commercial real estate. Loan outstandings increased in Mortgage Banker, National Dealer Services, Private Banking and Technology and Life Sciences.

Decreased average outstandings in the second quarter were noted in a number of areas with the largest declines in commercial real estate, global corporate banking, energy and middle market.

Turning to slide 6, our loan portfolio was well diversified among many lines of business and geographies. Line utilization for the portfolio as a whole has remained stable at about 45% since the middle of the first quarter. Our customers are feeling cautiously optimistic and we are seeing our loan pipelines grow, this includes commitment issued but not yet closed which increased a $151 million in the second quarter to $588 million.

Also we expect middle market and small businesses will start borrowing as their working capital needs increase. As shown on slide 7, strong core deposit growth continued in the second quarter, as core deposits increased $1.7 billion including $1.3 billion increase in money market and NOW deposits and a $594 million increase in noninterest bearing deposits.

This was partially offset by $246 million decline in customer [CDs]. We had growth in all geographic markets and all business segments. The largest increase was in the financial services division, which primarily specializes in working with title and escrow companies and has expanded to include other deposit rich segments.

We also saw a robust growth in Global Corporate Banking, Technology and Life Sciences, Mortgage Banker Finance, Small Business, Personal Banking and Wealth Management. Declines were noted in Commercial Real Estate as well as Middle Market.

As outlined on slide eight, the net interest margin increased 10 basis points in the second quarter to 3.28%. Without the 23 basis point negative impact from excess liquidity, the net interest margin would have been 3.51% in the second quarter. The increase in the margin was driven primarily by maturities of higher-cost wholesale funding and a less costly blend of core deposits.

Excess liquidity was represented by an average of $3.7 billion deposited with the Federal Reserve Bank in the second quarter, a $373 million decline from first quarter. The excess liquidity position at June 30 was $3.3 billion. We expect that excess liquidity will remain at these levels for the rest of the year due to sluggish loan demand and strong deposit levels. This excess liquidity is above and beyond the investment securities portfolio which will continue to provide a reservoir of liquidity.

Turning to slide nine, noninterest expenses decreased $7 million or 2% in the second quarter. Credit-related costs declined $14 million with ORE expense declining by $7 million and the provision for lending-related commitments down $7 million.

Our largest expense item is salaries and therefore management of staff level is key. As you can see on this slide, we have consistently reduced personnel over the past several years. Our workforce decreased by approximately 4% from year-ago levels and is 20% lower than it was at the end of 2001. Salaries expense was higher in the quarter as a result of annual merit increases, higher stock-based compensation and one more day in the quarter.

Now John Killian, our Chief Credit Officer will discuss credit quality starting on slide 10.

John Killian

Good morning. For the third consecutive quarter we saw broad-based improvement in our credit metrics, and the improvement occurred at a faster pace than we expected. Net charge-offs and provision for credit losses improved considerably from first quarter levels. The second quarter marked the fourth consecutive quarter of decline in net charge-offs. Net credit-related charge-offs decreased $27 million to $146 million in the second quarter.

Provision for credit losses of $126 million was $56 million less than the first quarter. The provision was less than charge-offs for the first time this cycle, reflecting our overall credit performance including improving migration trends. The allowance for loan losses was 2.38% of total loans and 86% of total non-performing loans.

Slide 11 provides detail on net loan charge-offs. Net credit-related charge-offs declined to $146 million, led by a $50 million decline in commercial real estate net charge-offs. Middle market net charge-offs were $71 million with $26 million attributed to a middle market National Specialty Group which manages a $500 million portfolio of higher leveraged transactions. We are exiting this business and have established incremental reserves. Excluding this group, middle market charge-offs were $45 million, up slightly from $39 million recorded in the first quarter and well below quarterly charge-off levels last year.

By market, charge-offs declined $17 million in Western, $17 million in Texas, $4 million in Midwest, and increased $19 million in other geographic markets, primarily due to the middle market specialty group I just discussed.

Turning to slide 12. Total non-performing assets declined $37 million to $1.2 billion. Importantly, the inflow to non-performing assets decreased by $46 million in the second quarter. This marks the fourth consecutive quarter of decline. We review workout strategies, reserves and the carrying values for each individual non-performing loan at least quarterly. This proactive strategy has contributed to the decline in non-performing assets as well as an average carrying value of our non-performing assets of 55% compared to contractual values.

On slide 13, we provide information and the makeup of the nonaccrual loans. The largest portion of the nonaccrual loans continues to be the commercial real estate line of business, which decreased $103 million in the quarter. Nonaccruals increased modestly from low levels in middle market by $31 million, private banking by $24 million and global corporate banking by $13 million.

During the second quarter $199 million of loan relationships, greater than $2 million, were transferred to nonaccrual status, a reduction of $46 million from the first quarter. Of these inflows, $118 million were in middle market, primarily Midwest and other markets; $33 million were in the commercial real estate business line, which is a $95 million decrease from last quarter; and $30 million were in private banking.

TDRs increased from $48 million to $99 million in the second quarter. We sold $47 million of non-performing loans in the quarter as well as $15 million in performing loans and $18 million in short sales, whereby we settle a note with the borrower at less than par. In total, prices approximated our carrying value plus reserves. This continues to support our analysis of valuations. On slide 14, we have our watch list loans which decreased by $851 million to $6.7 billion at the end of the second quarter. The watch list is primarily comprised of special mention, substandard and nonaccrual loans. The watch list is the best early indicator we have of future credit quality. This is the third consecutive quarter of decline and reflects improvements in our portfolio in all geographic markets and across virtually all lines of business.

Loans past due 90 days or more and still accruing totaled $115 million. While this is a $32 million increase from last quarter’s low level, it was almost half of the cyclical peak of $210 million a year ago. Loans past due 30 to 89 days decreased $118 million to $338 million.

Foreclosed property remained relatively stable at $93 million. On slide 15, we provide a detailed breakdown by geography and project type of our commercial real estate line of business, which declined $305 million on a period end basis from the end of the first quarter. There is further detail provided in the appendix to these slides.

Total outstandings of $4.3 billion were down $912 million from a year ago. This included a $584 million decrease in the Western Market, $159 million decrease in Florida and $149 million decline in Michigan.

Slide 16 provides net charge-offs for our commercial real estate line of business by project type and geography. Net charge-offs for commercial real estate decreased $50 million in the second quarter. Charge-offs declined as values continue to stabilize and even improve in certain locations. Charge-offs fell in every project type and in all markets except Michigan where we have a slide uptick from a relatively low level.

Inflows to nonaccrual greater than $2 million decreased substantially and nonaccrual and watch list loans also declined in the second quarter. We continue to believe that we will see some variability in charge-offs with a general downward trend.

I’d like to take a moment to address a couple of current areas of interest. As far as European exposure, we have no direct sovereign risk and our exposure to the European banking sector is predominantly within the higher rated countries and primarily relates to the facilitating trade and corporate banking activities for our customers. As far as the Gulf of Mexico drilling exposure within our $1.1 billion energy portfolio, we have only a handful of customers that service the Gulf and no customers that have substantial revenues derived from deepwater drilling. Finally, our municipality exposure is less than $100 million and has been performing well.

There are additional slides in the appendix which provide further detail on certain segments. The consumer portfolio, representing approximately 10% of our total loans continues to perform relatively well. The slides detailing our auto dealer and automotive supplier portfolio also can be found in the appendix. We continue to have excellent credit quality in both of these portfolios.

To conclude on credit, we are pleased that the continued improvement in credits metrics, we have seen over the past several quarters, including improving migration trends. These results support our updated outlook for net credit related charge-offs of $600 million to $650 million for the full-year 2010, which is a $75 million decrease from our previous outlook. We expect the provision for credit losses will be less than net charge-offs for the full year.

Now I will turn the call back to Beth.

Beth Acton

Thanks, John. Turning to slide 17 in our capital ratios, our capital position is strong and historically we have had some of the highest capital ratios in our peer group. We have maintained a solid capital structure with a large component of common equity for many years.

Turning to slide 18, we have provided an overview of the key pieces of financial reform that are relevant to Comerica. You can see that our assessment based on currently available information is that the expected direct impacts of financial reform are manageable. With rule making and a possible correction bill still to come, it will be some time before we can provide more precise estimates.

Importantly, we also see opportunities in financial reform and we will be working to develop product and pricing strategies that will enable Comerica to continue to grow profitably in this quickly evolving environment. Overall, we believe that the direct adverse impact of financial reform will be felt less like Comerica than by many other major banks due to the nature of our business.

Regarding Reg-E, our implementation remains on schedule and often rates are similar to our expectations. Based on the trends we have been seeing, we anticipate a reduction in fee income of approximately $5 million for the second half of the year.

Slide 19 provides an update on our outlook for 2010, which is based on uncertain pace of economic recovery. We expect subdued loan demand for a while longer as loan growth typically lacks other positive economic indicators. We expect that C&I borrowings will grow as working capital needs increase and will be partially offset by declining commercial real estate outstandings as a results we believe loan outstandings will remain stable from June 30 period end to December 31 period end.

We expect the securities portfolio excluding auction rate securities to remain at the current level of about $6.5 billion. Excess liquidity has not dissipated as quickly as we have expected as strong deposit growth and continued subdued loan demand have deferred from our assumptions. Therefore we have lowered the net interest margin forecast by five basis points which solely reflects our updated expectations regarding excess liquidity continuing resulting in higher earning asset levels.

Our outlook is for net credit related charge off of 600 million to 650 million. The full year provision as we expect it to be less than net charge off. As John mentioned this is a $75 million decline from our prior outlook as a result of the continued positive trends we are seeing in our credit metrics. Noninterest income excluding 2009 securities gain is expected to decline low to mid single digits, this is a reduction from our prior outlook, primarily as a result of the lackluster performance of the stock market in the second quarter. We believe retail service charges on deposit accounts and market related fees such as brokerage and fiduciary will continue to be impacted by the cautious behavior of our customers.

Our expense outlook is unchanged, but continued careful control of cost is expected to result in a low single digit decrease in expenses.

Overall, we saw many positive trends continue in the second quarter, such as improved credit metrics a slow pace of decline in loan demand terrific deposit growth and a significant increase in the net interest margin. We believe that our relationship approach has served us well throughout this economic cycle and will assist us in attracting new business and grow existing relationships as the recovery continues.

Now, we’d be happy to answer any questions you may have.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line Ken Zerbe of Morgan Stanley.

Ken Zerbe - Morgan Stanley

Was hoping you can just elaborate a little bit on the balance sheet growth. It seems that your guidance is slightly negative, or I guess is slightly negative revision from what you had in the first quarter. You had at the same time the pipeline is stronger. You are seeing stable line utilizations. Was just hoping kind of help reconcile those two points.

Beth Acton

Let me speak to that, the guidance for loans that we gave today is a little weaker than what we had said in April. But, having said that, we see a lot of positive indicators in the quarter. And when we talk, you mention pipeline. It takes time for the pipeline to actually turn into business or in some cases we are making proposals to prospects that we may or may not get the business.

So there is mixture of things, deals in the pipeline that come at different paces. But if you look at the fact that line utilization is stabilized that our decline in commitment, not just loans, but in commitments in these second quarter was substantially less than the decline in commitments in the first quarter. We also saw an increase in new commitments, the best we’ve seen in the last five quarters and we did see growth in at period end in commercial part of things including real estate.

So there are lot of things that feel like, there are loan outstanding coming they will come, it’s just a little slower than I think we had expected. And the economy was a little weaker in the second quarter than I think many of us expected.

In terms of the rest of the guidance the securities portfolio is the same (inaudible) as we gave in April and lastly though we are expecting little higher earning assets than we had previously expected because we were not assuming that the excess liquidity which is on deposit with the Fed. We had earlier said that that would dissipate through the balance of this year now we are saying it will remain through the balance of this year. That impacts margin because earning assets are higher, but it doesn’t necessarily impact our net interest income.

Ralph Babb

This is Ralph. I think we are seeing a slowing in the economy in general and a lot will depend when that begins to pick up both on the employment side right now all of our customer’s both individual as well as commercial customers are preparing for growth, but they are being very cautious and I would say that confidence is low at the moment and our economist is looking for a pretty slow third quarter from an economic standpoint.

Ken Zerbe - Morgan Stanley

The other question, just on the NPA reduction, obviously down just a little bit, but it seems that the more positive data point was the sharp slow down in the NPA inflows. Can you just talk about some of the outlook for NPA balances, if inflows are slowing pretty sharply, how long is it going to take to start seeing that impact in terms of getting a reduction in the NPAs?

John Killian

This is John, I can address that. You are correct the NPAs in this cycle are little stickier than in prior cycles. I think that because we haven’t seen as much ability to get company’s refinanced with other institutions in this cycle than we have in the past. But the good news is as you said inflow is coming down, our watch list is $851 million down. We proactively get in front of these credits and deal with them and as a result we break down the NPAs to 55% of contractual value. While all those things are positive, NPAs on an absolute basis are going to be a little bit stickier this cycle than last and until that (inaudible) and narrows and until refinancing becomes more available, they will be stubbornly sticky, but still coming down on a gradual basis as we have seen now for three quarters in a row.


Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Steven Alexopoulos - JPMorgan

Just a follow-up first on the provision outlook, how should we be thinking about the magnitude reserve reductions in the second half, is the $20 million a quarter good that are our wider now, any color here will be actually helpful?

John Killian

This is John again. The guidance, as far as you know the provision could be less in charge-offs. We have a very rigorous process for determining reserves and therefore the provision. So it really is impossible at this point to predict the magnitude. Given the trends in the overall metrics, we are certainly very comfortable with our guidance that it would be less. But it’s important to remember that there is still a lot of work to do here. On an absolute basis, these numbers are still high. So while we are pleased about the general credit metrics, we are somewhat concerned about the economic trends in the environment. So bottom-line, it’s just very difficult to predict that.

Steven Alexopoulos - JPMorgan

I’m curious just on capital with I guess the CC ratio is at 10%, earnings are $0.39, the dividend still a penny, what’s holding it back at this point in terms of starting to rebuild the dividend?

Ralph Babb

This is Ralph. We are monitoring as we talked about the economic and the economic outlook. We would like to see more stability there as well as stability in job growth going forward as well the continued increase in our core profitability, and we will monitor that as it moves along before we make a recommendation either on dividend or buyback.

Beth Acton

And Steve you mentioned dividend is a penny; it’s actually at a nickel.

Ralph Babb

Nickel, yes.

Steven Alexopoulos - JPMorgan

And just finally Ralph, what is that you are seeing, you could see a pickup in M&A sooner than later?

Ralph Babb

I think in general just given what we’ve been through and the opportunities out there will pickup a little quicker than they have in past turns and two the fact that it’s turning a little bit slower. I think there will opportunities, so that’s an editorial comment. I can’t list you five reasons specifically why, but that’s typically in comparing the past turns and given the current environment. I think we will see opportunities out there.

Steven Alexopoulos - JPMorgan

Are you actually seeing more banks coming to you to sell today, is that driving this?

Ralph Babb

I wouldn’t really comment on specifics. It’s just a feeling I get as I’m watching and being part of the industry.


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

Craig Siegenthaler - Credit Suisse

Just looking at the compensation expense trends and given the pretty significant headcount reduction we’ve seen last year, I am just wondering why the compound rate isn’t lower, and not really looking at the sequential comp but more the year-over-year comp, which is pretty much flat.

Beth Acton

If you look at, and I am not sure where you’re getting the comps, we showed salary and benefits together. Salaries were up in the quarter, $10 million. We had several factors driving that despite having lower headcount in the second quarter compared to the first. One is the annual merit increases. A year ago for many of our people we weren’t granting merit increases as an example. We had one more day in the quarter, which also impacts banks. We had a higher stock compensation expense in the quarter, really resulting from; we updated the models that we used in the first quarter. So the first quarter ended up being lower than what it would normally have been. So the variance quarter over quarter is an increase in the second quarter.

So when you add all those things together, salaries were up, salary and benefits, up $10 million compared to the prior quarter. But if you look at certainty levels, year-over-year, we are still very stable in terms of the expense base despite a lot of different moving parts whether it’s healthcare expense, whether it’s pension expense et cetera.

Craig Siegenthaler - Credit Suisse

Got it and then, just real quickly on the C&I book and the Shared National Credit in specific. With the exam results coming out in the next half and the Shared National Credit Exam, I am just wondering how you think those results could fair kind of year-over-year when you looked at how your Shared National Credit book was stressed last year by regulators and new prospects for this year?

Ralph Babb

Well, again I think we have to take a look at that in the context of general improvement in the economy since the last year and the improvement in the credit metrics that we’ve had. As you know, we reach out in the second quarter and it is allowed by the regulators to try and get a verbal read on as many of these SNIC credits as we can and we continue to do that this year and reflected those items in the second quarter where it was appropriate. And as a result, our outlook for the third quarter on the SNIC portfolio, is that we will probably again continue to fare consistent with the way our portfolio goes overall. For example, SNIC outstandings have been down the last couple of quarters as following our portfolio trends.

Our SNIC charge-offs in the second quarter were $21 million versus $40 million in the first quarter are in PLs that are SNICS. We are $229 million at the end of the second quarter versus $283 million at the end of the first quarter. The watch list was down $400 million in the second quarter. So, the SNIC portfolio continues to mirror our overall portfolio and our relationship approach and we would expect those trends to continue on the third quarter.


Your next question comes from the line of Dave Rochester of FBR Capital Markets.

Dave Rochester - FBR Capital Markets

So Ralph, I’m going to take Steve’s part of question from another angle here. Given the comments on M&A and your commentary of the things that maybe slowed down a little bit or the outlook is slow. Are you emphasizing more M&A going forward or are you looking more closely at M&A as a growth driver right now, versus maybe a quarter or two ago.

Ralph Babb

Our focus on M&A has always been the same. We have always been looking for the right potential acquisitions that would increase or expand our presence in the urban market, so it’s especially Texas and California. My comment really was I think there will be some opportunities there. Having said that, we are beginning to ramp up our investment in our banking centers as we had slowed that during the significant downturn in the economy, we are not going back quite yet to where it was, but it is time with especially a lead time of approximately 18 months or so after you’re buying property to start ramping that back up. And so, we are being cautious, we think the turn is going to be slower than many of us expected, but I think there are going to be opportunities both for organic as well as potentially acquisition. You never know till that happens.

Dave Rochester - FBR Capital Markets

Thanks to that color there. And just one other quick follow-up on the C&I side, you talked about a lot the segments where you are seeing an increase in demand. Are you seeing that across the size of, I guess the different customer segments in terms of size? Are you seeing that in small business, large corporate as well as no market?

Dale Greene

We are seeing a pretty much across the board. I would tell you that clearly our TLS business of California, Technology and Life Sciences have seen a lot of activity as Ralph referenced some of that earlier in his comments. A mill market and small business across our markets, but particularly our growth markets are seeing a nice increase in the pipeline. But across the board we are seeing good activity and whether it’s a dealer business that we’ve reference or the mortgage banking business again. It’s just a lot of bad activity we are beginning to see, and as Beth indicated we’ve seen our pipeline grow at a level we haven’t seen in some time and a lot of that now is new activity and not just the expansion of existing relationships. But that pipeline takes some time to develop. Now all of it turns into new business obviously, but we are continuing to see customers become a little bit more optimistic about particularly supporting working capital needs and hopefully that continues.

Dave Rochester - FBR Capital Markets

Okay, thanks for that. And lastly, you gave in your comments that customers are cautiously optimistic but the confidence is still low. Has there been any difference or change in psychology from last quarter to this quarter just given all the macro concerns that we’ve seen crop up in May and June. I mean because it sounds like things are maybe getting a little more positive on the pipeline side but yet confidence maybe lower. Is that a fair statement?

Dale Greene

I think confidence has always been a little bit muted until no one is quite certain of the economic environment. I think in terms of working capital types of request, replenishment of the inventory, support of increased receivable levels we are seeing there as it relates to fixed asset, fixed investments, those type of opportunities, they are little less prevalent simply because I think people are more reluctant at this point to make any of those capital investment activities or some of that, but I think that’s where you will see more of the caution.


Your next question comes from the line of Brian Foran of Goldman Sachs

Brian Foran - Goldman Sachs

I missed the beginning of the call, so stop me if you covered this, but the debit interchange impact was bigger than I was anticipating. Can you talk through especially on the signature debit line item of potentially $31 million of losses, what is the base you are currently running at and what kind of reduction are you assuming in terms of an interchange rate and how would you characterize the degrees of confidence around that estimate, is it kind of a preliminary guess based on what you know or is it something you feel pretty tied on in terms of accuracy?

Beth Acton

Yes Brian, actually if you read carefully the slide, our actual total universe fees whether it’s PIN or signature base, is 38 in total. That’s not the risk we are putting forward, that’s just the universal fees that could be impacted. At this juncture we don’t have an estimate to give you on the impact of those, but we did want to disclose to investors what the universe of interchange fees are in total. There will clearly be an impact on this $38 million in total fees that we earned today. But at this juncture we have not quantified it.

Well, there is a lot to be done with rule making and a possible correction bill that could impact all of these as well as we are looking at other alternatives in terms of the whole revenue arena particularly in the retail side of things.

Brian Foran - Goldman Sachs

Understood, so there is $38 million, 2010 fees and it’s too early to tell how much that will be reduced by.

Beth Acton

Yes, and this is going to be promulgated at least according to the bill nine months from now. They’ll be up, [making that] the Fed will be involved in and this is not clear at this juncture how that will turn out. So, but we did want a size for investors the total universe of those fees, that is not the risk of the fees.


Your next question comes from a line of Brian Klock of KBW

Brian Klock - KBW

And I know you guys have gone through some of this so again I was trying to keep up but if you didn’t cover this, I was trying to just between John and Dale, I guess with the C&I portfolio, the growth that you guys did see in under period loan balances, there is both, the floor plan seems like it’s grown to a level that we have seen it in over a year, but then the other C&I portfolio was also up. Maybe you can kind of comment on two things; one, is that floor plan build kind of over or are dealers still building inventories or do you feel like that will level off? And then I guess from a geography perspective within the other $19.6 billion of C&I loans, is that coming out of Texas and California? Maybe just some color on that.

Dale Greene

Sure Brian, Dale here. The dealer floor plan piece number one: it’s certainly always seasonal, but I would also tell you that we picked a number of new dealer relationships, simply by pursuing the strategy we have always pursued of dealing with top tier dealers and getting good referrals from our existing customer base. So, a growth that you have seen in the dealer book is at least partially due to the fact that we’ve got some new relationships. And when I talk about pipeline, our dealer pipeline is also quite nice for us and obviously for us that’s been a very successful business.

So, if there is much customer acquisition as it is, any increases in employing, and depending on auto sales obviously that will have a direct impact on the level of inventories, et cetera, et cetera. But it is seasonal. We are in kind of a seasonal low or we will be in the July-August timeframe, and then coming back out of that in the fall is the new model [set].

As it relates to the rest of the C&I book and clearly we are seeing a lot of good growth opportunities as we have indicated earlier in the Western Market and in Texas, and particularly in the middle market side in both California and Texas. And we’ve seen some opportunities in the Michigan or the Midwest market as well, and there is some nice pipeline there as well for good middle market small business type of customer. So growth has been profitable but typical where we like to see than our growth markets.

Brian Klock - KBW

I guess one question for Beth, remind me I think within the margin guidance you have for the rest of the year and the excess liquidity balance as that are on the balance sheet, remind me of how much of the high cost time deposit I think there was a 3% or higher cost of funding that I think those are maturing here in the third quarter that was maybe you can just remind us at how much that is then I guess are you going to use that excess liquidity to pay that down?

Beth Acton

Actually Brian, we’ve kind of run through the higher cost CDs, we had $650 million of retail book of CDs mature in the second quarter, both carried away in excess of 4%. So we have $800 of debt maturing between now and the end of the year and all of that is at very normal kind of cost competitive funding. So the pick up from the maturity of the higher cost CDs has really happened.


Your next question comes from the line of Jed Gore with Diamondback

Jed Gore - Diamondback

Got a question I’m not sure you can answer but one of the things we looked out would be (inaudible) that they have shrunk their balance sheet in commercial by $63 billion year-over-year which is larger than your entire loan book, are you seeing any portion of that in terms of, I understand the economy is soft, but you are saying you are seeing some pick up in terms of utilization or interest levels, is does a bit of a market share shift, can you differentiate that at all?

Dale Greene

I think part of that for us is again, we have continually to all other cycle call on customers. We are seeing the results of that activity now particularly as you look as we keep talking about the backlog reports that we are seeing, the pipeline reports. So we are seeing good increases in activity because of what we are doing. You will continue to see as we referenced earlier, the commercial real estate will continue to decline as an offset or at least a partial offset to that. But, we are picking up some good new relationships. Again, we referenced in technology and life science a number of new relationships, particularly in the alternative fuel segment but it’s really being across the board in technology and life science.

Mortgage banking, we’ve picked up some nice good clients in our core markets throughout this cycle, very strong, profitable relationships et cetera. So, we are seeing some market share gains for us in our key markets and our key businesses but the offset of course is we are continuing to work through the real estate portfolio and that will continue to be a drag on growth.


Your next question comes from the line of Ken Usdin of Bank of America

Ian Foley - Bank of America

Hey guys, it’s actually Ian Foley for Ken. Quick question on C&I side, saw that the loan yields were kind of flattening out. Just wondering if you could talk about pricing in general and whether you are giving up any other kind of getting new relationships?

Dale Greene

This is Dale. We have a pretty disciplined approach to pricing that we’ve had now for a while. There is still a little bit of repricing left to be done in the book and most of it has been done. In terms of existing and new relationships, we’ve been pretty and the folks will tell you this, we’ve been pretty disciplined in our pricing approach. We’ve also obviously continued to be very discipline in our credit underwriting. But I think what we bring to the table is we’re a known commodity particularly in the middle market and small business side, and middle market broadly defined. And I think we are able to get some better pricing typically there. We are not chasing deals for price, for structure or size. We try to keep it very much in the kind of core competencies we have, which is primarily on the middle market side, obviously technology, dealer and so forth. While the pricing pressure is clearly there and the competitive aggressiveness is clearly there and clearly we will make exceptions for the right deal that they tend to be exactly their exceptions. So, we come pretty firm to our pricing discipline and there is a very rigorous process in place to make sure that continues.

Ian Foley - Bank of America

Okay, and to touch on commercial real-estate business real quick, obviously that continues to wind down a little bit. I was wondering if you could talk to the potential sizing of the business a couple of years from now and how much of the current business you would consider one-off per se.

Dale Greene

Well again, a couple of things I would say on commercial real estate, one is we’re going to continue to work through our credit issues as we have been doing. That’s going to take priority I think more than anything else. When we do come back to the real estate lending side of the equation, it will be in our growth markets. It will be with developers who we’ve got a good relationship with or who had referred us into a new relationship. It will be done differently than we’ve done historically. We’ve learned a lot. Some of it has been somewhat painful. So we will come back to that, and there will be some size limits, but not in terms of individual deals and the overall level of the portfolio. But we are not there yet, we got work to do on the portfolio and frankly the real estate market is still suffering and we are not anxious in the near term to jump back in the commercial real estate segment in any meaningful way. There will be the occasional opportunity that we’ll pursue and we are pursuing but it will be a while and it will be a different kind of approach that we take.


There are currently no more questions in queue. I would like to turn the call back over to Mr. Babb for any additional closing remarks.

Ralph Babb

Thank you and I would like to thank all for joining us on the call today and for your continued interest in Comerica. Thank you very much.


This concludes today’s Comerica’s second quarter 2010 conference call. You may now disconnect.

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