Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Comerica Incorporated (NYSE:CMA)

Q3 2011 Earnings Call

October 19, 2011 8:00 am ET

Executives

Lars C. Anderson - Vice Chairman, Member of Management Policy Committee and Vice Chairman of The Business Bank

Ralph W. Babb - Chairman, Chief Executive officer, President, Chairman of Capital Committee, Chairman of Special Preferred Stock Committee, Member of Management Policy Committee, Chief Executive officer of Comerica Bank, President of Comerica Bank and Chairman of Comerica Bank

Darlene P. Persons - Senior Vice President and Director of Investor Relations

Elizabeth S. Acton - Chief Financial officer, Executive Vice President, Member of Management Policy Committee, Executive Vice President of Comerica Bank and Chief Financial officer of Comerica Bank

Analysts

James Agah

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Peter Frank Ganucheau - Carlson Capital, L.P.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Robert S. Patten - Morgan Keegan & Company, Inc., Research Division

Justin C. Maurer - Lord, Abbett & Co. LLC

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica Third Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Ma'am, you may begin your conference.

Darlene P. Persons

Thank you, Brandy. Good morning, and welcome to Comerica's Third Quarter 2011 Earnings Conference Call. Participating on this call will be our Chairman, Ralph Babb; CFO, Beth Acton; Chief Credit Officer, John Killian; Vice Chairman of the Business Bank, Lars Anderson; and Karen Parkhill, Vice Chairman.

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

Before we get started, I would like to remind you that this conference call contains forward-looking statements and in that regard, you should be mindful of the risks and uncertainties that 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 the release issued today, as well as Slide 2 of this presentation, which I incorporate into this call, as well as our filings with the SEC. 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 W. Babb

Good morning. Today, we reported third quarter net income of $98 million, or $0.51 per share. Impacting the quarter were merger and restructuring charges of $33 million, which is $21 million after tax, or $0.11 per share, related to our acquisition of Sterling Bank shares, which we completed on July 28. Third quarter revenue was up 5% when compared to the second quarter, reflecting our Sterling acquisition.

Turning to Slide 4 and highlights from the quarter. The Sterling acquisition primarily drove our $2 billion increase in period-end loans in the third quarter. Comerica legacy loans reflected increases in Texas as well as in commercial loans, primarily Specialty Businesses including Mortgage Banker, Energy and Technology and Life Sciences, offset by decreases in National Dealer Services, Global Corporate Banking and Small Business Banking.

Specialty Businesses, along with Sterling, were the primary contributors to the $1.1 billion increase in period-end commercial loans in the third quarter. Comerica legacy commercial loans increased $668 million, or 3%. In our Texas market, Comerica legacy period-end total loans increased $113 million, or 2%. Our average core deposits were up $3.5 billion, with increases in all major markets led by Texas, which reflected average Sterling core deposits of $2.5 billion.

The net interest margin increased 4 basis points to 3.18%, primarily from the acquisition of the Sterling Loan portfolio, partially offset by the impact from higher excess liquidity.

Noninterest income was stable, with core operating fees up modestly, including the contribution from 2 months of Sterling.

Noninterest expense increased $51 million to $460 million, including $18 million from Sterling operations and the previously mentioned $33 million of merger and restructuring charges related to the Sterling acquisition. We continue to be pleased with our broad-based steady improvement in credit quality. This was the ninth consecutive quarter of decline in net charge-offs with a $13 million decrease. Internal watch list loans and nonperforming loans continue to trend downward for both Comerica legacy loans and the Sterling Loan portfolio. We continue to see reductions in inflows to nonaccrual loans and positive migration in other credit metrics.

Our customers generally are in a stronger position today with higher liquidity, lower leverage and increased efficiency. These positive attributes will assist them in whatever economic scenario emerges in the coming months. As a result of the overall improvements in credit quality we have seen, the provision for loan losses declined to $38 million. Our post-acquisition capital remained strong as evidenced by our Tier 1 capital -- common capital ratio of 10.57%. We repurchased 2.1 million shares in the third quarter and expect to continue to be an active repurchaser of shares for the balance of 2011.

Turning to Slide 5 and our acquisition of Sterling. Systems integrations are on track and expected to be completed by year-end. We have been in ongoing communication with Sterling customers throughout this transition process and look forward to officially welcoming them to the Comerica customer platform. Sterling's size, geographic footprint and customer focus uniquely fits our strategy and expands our growth in Texas. As we have mentioned previously, Sterling's solid deposit base and well-located branch network virtually triples our Houston market share, provides us entry into the attractive San Antonio region and complements our existing footprint in the Dallas-Fort Worth area.

We are dedicated to ensuring we deliver the revenue synergies that we anticipate from the Sterling acquisition. These include treasury management, wealth management, trade services and derivative products.

For 2012, excluding the impact of regulatory reform and the completed sale of Sterling's investment advisory business, we expect about a 15% lift in Sterling's noninterest income. This equates to about $4 million. We believe these synergies will accelerate in 2013 and beyond.

In addition, we believe there are opportunities to accelerate loan growth with our Specialty Businesses and at the lower end of the middle market. This could add about 10%, or $200 million, to their loan portfolio and accelerate in future years. In summary, the Sterling acquisition provides an exceptional growth opportunity in one of the most attractive markets in the U.S. Texas is a growth leader for the U.S. economy with strong high-tech and energy sectors and strong demographic growth. Our Texas economic activity index indicates the state economy is holding steady, although lower energy prices could impact the energy sector in the months ahead. Texas is expected to outperform the national economy again this year.

The Michigan economy received a boost from increased automobile production in July as supply-chain constraints eased. Sales for the 3 Detroit automakers held up in August and September despite the severe drop in consumer confidence that we saw at the end of the summer. Lower gasoline prices and ample pent-up demand are also positives for the auto sector and Michigan.

The California economy continues to struggle for traction. Consumer spending remains fundamentally constrained by a weak housing market. Silicon Valley remains a bright spot for the state economy, but some high-tech industries are vulnerable to cooler markets.

With the uncertain national and global economies, we have heightened our focus on revenue-generating initiatives and expense controls. Beth will go into more detail, but in addition to delivering the revenue and expense synergies from the Sterling acquisition, we plan to reallocate resources to faster-growing businesses, leverage opportunities to lower deposit pricing and continue to utilize technology to produce efficiencies, among many other action items. By continuing to strengthen our franchise, we believe we will be able to drive growth in this challenging economic environment.

Before turning the call over to Beth, I want to remind you that Karen Parkhill is here as well. As you may know, Karen joined us on August 8, as a Vice Chairman. Initially, she has assumed administrative responsibilities for the service company, corporate planning and development, and corporate compliance and financial intelligence. Following the filing of our Form 10-Q for the third quarter 2011, and as previously announced, it is anticipated that Karen will assume the additional role of Chief Financial Officer, succeeding Beth, who plans to retire in April 2012. As CFO, Karen will assume reporting for fourth quarter 2011 results and for all financial reporting thereafter. A special thanks to Beth for all her contributions over the years. And now I'll turn the call over to Beth.

Elizabeth S. Acton

Thanks, Ralph. Good morning, everyone. Turning to Slide 6. Total period-end loans at September 30 of $41.2 billion increased $2 billion from June 30, primarily due to the addition of Sterling.

Loan growth in Texas accelerated in the third quarter with the acquisition of Sterling. Legacy Comerica Texas loans increased for the fourth consecutive quarter by $113 million, or 2%. Commercial loans increased $1.1 billion at period end, with $393 million due to the addition of Sterling and Comerica legacy loan growth of 3%, or $668 million. This primarily reflected a $1 billion increase in the Specialty Businesses, including Mortgage Banker, Energy, Technology and Life Sciences and Entertainment. As anticipated, average outstandings in National Dealer Services were down $488 million and down $290 million at period end. This was a result of supply-chain disruptions related to the Japanese earthquakes. We expect Dealer inventories and loan outstandings will grow in the fourth quarter. As we predicted, the pace of decline in Comerica legacy commercial real estate slowed in the third quarter.

Total average loans increased $924 million to $40.1 billion in the third quarter, reflecting 2 months of Sterling. Line utilization for the Comerica legacy portfolio was up almost 1 percentage point to 45.5%, as the increase in outstandings was greater than the increase in commitments. In line with the growth in outstandings, increased commitments were noted in the Specialty Businesses. Our loan pipelines increased in the third quarter. Commitments to commit, which is the last stage in the pipeline before the dealers booked, increased nicely for the third quarter in a row across almost all business lines.

Slide 7 shows average loan growth in selected portfolios. Mortgage Banker outstanding increased 50% in the third quarter. Lower mortgage rates and industry-wide volume constraints, as well as recent market share gains have been the drivers behind Mortgage Banker outstandings. We believe outstandings will moderate somewhat as mortgage rates stabilize.

Average loans increased again in the third quarter in Global Corporate Banking in all major markets. Energy increased $179 million in the third quarter. The pace of loan growth picked up in Technology and Life Sciences with a $129 million increase in average loans recorded in the third quarter.

As shown on Slide 8, core deposit growth continued to be strong in the third quarter. Average core deposits increased $3.5 billion compared to second quarter, reflecting a $1.7 billion increase in noninterest-bearing and $1.8 billion increase in interest-bearing deposits. Sterling provided $2.5 billion of the total increase in average core deposits. Increased average core deposits were noted in all major geographic markets. By line of business, strong growth was reported in almost all lines of business, particularly Global Corporate Banking, Financial Services division, Small Business and Wealth Management.

The FDIC recently released their annual deposit market share report, which shows -- showed Comerica's market share in Texas and Michigan increased as of June 30. We believe this increase reflects our relationship banking focus, backed by the prudent yet competitive rates we offer.

Slide 9 provides an update on our investment securities portfolio. Excluding auction rate securities, the investment portfolio consists primarily of mortgage-backed securities, or MBS, and totaled $9.3 billion at September 30, a $2.4 billion increase from the prior period. The acquisition of Sterling added $1.5 billion, and this portfolio has been repositioned to look more similar to Comerica's portfolio. This resulted in securities gains of $11 million in the quarter.

In addition, in order to reduce excess liquidity and enhance revenue, we purchased an incremental $1 billion in mortgage-backed securities, which settled September 30. These securities have a controlled duration and have a higher yield than we were earning on deposits at the federal reserve. Our target is to maintain an MBS portfolio of approximately $9 billion. Thus, we will continue to reinvest the proceeds from prepayments.

As outlined on Slide 10, the net interest margin of 3.18% increased 4 basis points compared to the second quarter. Accretion of the purchase discount on the acquired Sterling loan portfolio increased the net interest margin by 20 basis points. This was partially offset by an increase in excess liquidity, which had an 8 basis point impact, as well as a 6 basis point impact from the accelerated premium amortization due to increased prepayment activity on the MBS portfolio.

Average excess liquidity, which was represented by deposits held at the Federal Reserve, increased $1.4 billion to $4.8 billion. The increase was due to primarily due to very strong deposit growth.

Loan yields were modestly higher, reflecting the purchase accounting accretion from the Sterling portfolio. We have not seen any material loan spread compression. However, we are seeing increased competition for customers as liquidity in the banking system continues to increase. Our balance sheet remains well positioned for rising rates as 80% of our loans are floating rate, of which 70% are LIBOR-based, predominantly 30-day LIBOR.

As loans represents 75% of our earning assets, our interest rate sensitivity is primarily at the short end of the curve. Our net interest margin in the third quarter was lower than we had forecasted in July due to much higher excess liquidity. In addition, Operation Twist, announced by the Federal Reserve to lower longer-term rates, affected our securities portfolio, which is a relatively smaller portion of our earning assets.

Slide 11 provides our expectations for the net interest margin for the fourth quarter and an early sense for next year. Overall, we expect the net interest margin to remain relatively stable for the near term.

For the fourth quarter, we expect the net interest margin to be about 3.15%. This reflects the benefit from a larger MBS portfolio, lower excess liquidity as a result of the September 30 settlement of the $1 billion in MBS, and one additional month of higher-yielding Sterling loans. This is expected to be offset by a reduction in the accretion of the purchase discount on the acquired Sterling loan portfolio and lower reinvestment rates on the MBS portfolio.

Our outlook assumes LIBOR remaining at the current level, which is a few basis points higher than the average for the third quarter. Based on an early look at next year, we expect the full year 2012 margin to be relatively stable compared to the fourth quarter of 2011, assuming modest loan growth. Remember, we have already largely absorbed the impact of lower rates due to our predominance of floating rate assets. We believe we are being conservative in our other assumptions, including MBS reinvestment rates at today's levels, no material change in the amount of excess liquidity and loan pricing in a competitive environment.

Turning to Slide 12. Noninterest expenses totaled $460 million in the third quarter, an increase of $51 million. The increase primarily reflected an increase in merger and restructuring charges of $28 million, which was in line with our expectations, and $18 million of noninterest expense from Sterling operations.

Merger and restructuring charges including cost related to the terminations of certain existing Sterling leases and other contracts, systems integration and related charges as well as estimated severance and other employee-related charges. As the chart on this slide illustrates, we have consistently reduced our workforce, excluding Sterling legacy employees, over the past several years. At the same time, we believe preserving customer-facing positions to maintain consistency in the customer experience is highly valued.

Comerica legacy full-time equivalent staff has decreased by approximately 17% since 2007, as we responded to the economic environment and as part of our continued efforts to leverage technology and maximize productivity. We have recently heightened our focus on expense management, which I will discuss further in a moment.

Our credit metrics are outlined on Slide 13. We continue to see steady improvement in credit trends in the third quarter. Net credit-related charge-offs decreased $13 million to $77 million and reflected an $18 million decrease in Middle Market, partially offset by an $8 million increase in Commercial Real Estate. Watch list loans and nonperforming loans continued to trend downward for both Comerica legacy loans and the acquired Sterling loan portfolio. Comerica legacy watch list loans decreased $263 million to $4.6 billion at September 30.

Nonperforming assets increased modestly, reflecting the addition of $24 million in foreclosed property from Sterling. During the third quarter, $130 million of borrower relationships greater than $2 million were transferred to nonaccrual status, a decrease of $20 million from the second quarter. Of these transfers to nonaccrual, $63 million were from Middle Market, primarily in the Western and Midwest markets, and $48 million were from the Commercial Real Estate business line, primarily in the Western market. The allowance for loan losses to total loans was 1.86%. The decrease in the ratio from the prior quarter primarily reflected the impact of the Sterling loans recorded at fair value at acquisition, without a corresponding allowance for loan losses.

The remaining fair value discounts on Sterling acquired loans was $236 million at September 30. As a result of the overall continued improvement in credit quality, the provision for loan losses declined to $38 million.

Turning to capital on Slide 14. Our capital position continues to be strong and the quality of our capital is among the best in our peer group. The acquisition of Sterling had only a minor impact on our Tier 1 Common ratio. Earlier this year, we commenced our share repurchase program, buying back 400,000 shares in the first quarter. We did not repurchase any shares in the second quarter due to the pending acquisition of Sterling. We significantly increased our repurchases in the third quarter and repurchased 2.1 million shares. We continue to target an annual earnings payout ratio, including dividends and share repurchases, of up to 50% of full year 2011 earnings.

The Federal Reserve published in June a proposal requiring banks with assets of $50 billion or more to submit annual capital plans. The comment period has ended and we would expect some direction on this proposal in the fourth quarter. We will be prepared if this proposal most forward, and believe we are approaching capital management from a position of strength.

With the uncertain economic environment, we have heightened our focus on revenue-generating initiatives and controlling expenses. Slide 15 outlines some of the challenges we are working to more than offset. These include the impact of regulatory changes such as new FDIC overdraft guidelines and lower interchange fees, as well as rising employee healthcare and pension expenses. We are in the process of implementing about 250 revenue enhancement and expense reduction projects. About 2/3 of these projects are related to expense initiatives and 1/3, revenue opportunities. Our current estimate is this will result in at least $100 million in annual profit improvement in 2012. On the revenue front, opportunities include reallocating resource to faster-growing businesses, as well as closely reviewing pricing of all fee-based products and rates on deposits. Also renewed emphasis has been placed on cross-sell referral opportunities, and, of course, we are dedicated to ensuring we deliver the revenue synergies that we anticipate from the Sterling acquisition.

Turning to the expense management side of the equation. Over the past several years, and particularly since the beginning of the past recession, we have undertaken a variety of measures to control our cost and promote efficiencies. The efforts have ranged from the consolidation and renegotiation of certain vendor relationships to the streamlining of our various operational processes to the selective outsourcing of noncore operational and technological functions. Using these same techniques and others, we believe that we can further reduce expenses while still providing ample opportunities to invest in growth businesses that will power our future. We have already taken action on a couple of balance sheet items. As I mentioned earlier, we have invested $1 billion of excess liquidity in higher-yielding MBS. Also in order to reduce interest expense and excess liquidity, we proactively repaid about $80 million of Sterling's senior debt. Additionally, we've announced the future redemption of about $31 million in Sterling troughs and expect to redeem an additional $24 million in Sterling troughs in the near future.

Slide 16 provides our outlook for the fourth quarter compared to the third quarter. Recall that Sterling results were included for only 2 months in the third quarter. Average total loans are expected to increase by low-single digit, partially reflecting the impact of one additional month of Sterling. Period-end loans are expected to be relatively stable. As I mentioned earlier, loans in the National Dealer Services business line are expected to grow, Mortgage Banker Loan growth is expected to moderate and loans in the Commercial Real Estate business line are expected to continue to decrease. Average earning assets are expected to be approximately $54.5 billion, reflecting increases primarily related to Sterling in average loans and MBS.

I already covered our outlook for the margin. We expect net credit related charge-offs of $65 million to $75 million, and the provision for credit losses is expected to trend modestly lower from the third quarter. We expect a mid-single digit decline in noninterest income primarily due to the regulatory impact on interchange fees and no further significant securities gains. This will be partially offset by one additional month of Sterling. Excluding merger and restructuring charges of approximately $25 million after-tax, or $40 million pretax, we expect a low- to mid-single digit increase in noninterest expenses, primarily due to one additional month of Sterling expenses in the fourth quarter.

In closing, we believe our geographic footprint is well situated. With the acquisition of Sterling Bank, we are accelerating our growth in Texas. We are confident we are well positioned for future growth with a strong relationship focus and with the right people, products and services in place. This is my last earnings conference call. As Ralph mentioned, Karen will be assuming the role of CFO after we file this quarter's 10-Q. It's been a pleasure working with you over the past 10 years, and I wish you all the best. Now, we're happy to answer questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brett Rabatin with Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

I wanted to first maybe get a little clarification on just the loans in the fourth -- in the third quarter in terms of Sterling and Comerica legacy. I know that Sterling ended 2Q with about $2.3 billion and you added $2 billion of loans during the quarter. Can you talk about maybe the Sterling portfolio during 3Q and then the outlook for that going forward in terms of the guidance for loans to be flat in 4Q?

Elizabeth S. Acton

Yes, I can speak to part of it. Lars may have some additional things. When you think about it, you mentioned the number of $2.3 billion. Remember we had a mark. These loans were marked 12% before they came on to our balance sheet. So at that time, we were estimating about $2.1 billion. We've seen a little runoff, not surprising particularly on real estate. And so the $2 billion number that we show on Slide 6, $2.009 billion, was what was added at September 30 -- or what was existing for Sterling at September 30. So the $2.3 billion you mentioned is pre the mark. They came on the balance sheet at the end of July at $2.1 billion. And then in terms of future opportunities, I'll let Lars speak to that.

Lars C. Anderson

Yes. Obviously, there's a little bit over $1 billion of Commercial Real Estate that's in that portfolio. We've already integrated some of the leadership and management of the Commercial Real Estate customers in our line of business and that is really going well. There's actually some good developers, some good customers in there that we're looking forward to working with. But the Commercial Real Estate portfolio overall, as we look forward, will probably have some runoff in it as we kind of integrate it into our portfolio and our underwriting, but there's some really good customers in there. They -- the balance of it is -- looks like some good C&I opportunity for us, but Small Business and a little bit of Middle Market. And it's really kind of gratifying to see already that as we look at where the majority of those loans are centered is in the Houston kind of metro area, we're really seeing a lot of lift. In fact, the market today, Houston is our #1 growth market for both Middle Market and Small Business for our company. I think part of that is the legacy franchise we have there, but part of it, clearly, is the result of the Sterling merger and some of the resources that we picked up. We just have a, really a broader franchise there. We are more broadly seen, kind of viewed in the community a better distribution. So I think that really bodes well for us. But the driver -- part of that driver will be the Commercial Real Estate portfolio and the runoff in that. So we'll just have to see how that kind of plays out, but it looks good at this point.

Elizabeth S. Acton

And as Ralph mentioned, we also are expecting, as we look into next year, about a 10% lift from that portfolio in the sectors that really Sterling has not been so much, whether it's some of our Specialty Businesses or certainly in the lower-end Middle Market.

Ralph W. Babb

Yes, I mean, you can talk about all of the other things we're bringing to the market, and there's -- all of our lines of business that we're bringing to Houston we're expanding, and to San Antonio that, I think, are pretty attractive. But also our products and services, much broader array there. So I could spend a lot of time talking about those, but I'm very encouraged about our opportunities there.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay, I -- well, I was going to say, I guess in thinking of the 4Q guidance, I'm a little surprised to hear kind of the flattish guidance with all that said and the dealer book being up, can you give us some clarity maybe around Commercial Real Estate? How much more shrinkage to go do we have there as the construction book completely run off, or can you provide a little more guidance around the flattish comment?

Elizabeth S. Acton

Yes. The -- we do see Dealer growing, but it will take some time to get that certainly at a higher level. Mortgage Banker, given how quickly it rose in the third quarter and given kind of where we've seen recently mortgage rates rise somewhat, that we'll see some moderation in the growth of Mortgage Banker in the fourth quarter. And Commercial Real Estate, I think the runoff should be, in the fourth quarter, should look fairly similar to the third quarter. But that's difficult to make assessments. Those come in chunkier pieces and so at least that's our estimate at the moment.

Operator

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

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Beth, since I know how much you're going to miss margin questions in your retirement, let me start there. In terms of the guidance for the stable margin in 2012 versus the 4Q level, do you see the securities yield is holding relatively stable for the year or are there offsets here? Like do you plan on investing more cash? Just wondering what the offsets are in this guidance for stable NIM in '12.

Elizabeth S. Acton

Yes. One of the things we've talked about is, assuming modest loan growth, doesn't have to be a lot, but any loan growth that replaces excess liquidity is powerful in terms of the NIM. We do expect and have modeled in our outlook for next year that there will be a negative related to securities. Because we have a $9 billion portfolio, we'll have significant cash flows every quarter that will be -- we're assuming will be reinvesting at rates below 2%. And so we will see -- again, we think that's a conservative assumption. But that will cause over time the average yield on the portfolio next year to decline, but we have incorporated that into our margin outlook. So -- and there's some minor changes on excess liquidity. And so in the end, it's a pretty flattish looking situation to us. We think we still have deposits -- a little more to go on the deposit cost side, more down. And we're also assuming it's a pretty competitive loan [ph] pricing situation. So I think those are pretty conservative assumptions. And at this stage, as I mentioned earlier, it is an early look at next year.

Ralph W. Babb

And that's really with a stable economy out there too, as well. So if the economy picks up then, too, we would pick up along with that, which Beth has built into our numbers.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

And then on the buyback, would you say you're targeting 50% of earnings with the dividend buyback? Are you looking at reported earnings, which would include merger costs? And then how you're thinking about this target for 2012. Similar, 50%?

Elizabeth S. Acton

We -- the 2011 earnings includes everything. It's reported earnings in terms of our 50% payout. As related to 2012, as I mentioned on the call, it could be that banks our size, based on the proposal the Fed has put out there, that $50 billion-plus banks will be part of the really the CCAR process and therefore, would be submitting capital plans as per this proposal in early January with an acknowledgment of the plan by mid-March. So we're into a little new ballgame, it appears. We will, I believe, we will know more in the fourth quarter because if we are going to participate in the similar processes, this top 19 banks, then we will have to know something soon. So it's really difficult to comment on looking forward until we put that plan forward.

Operator

Your next question comes from the line of Erika Penala with Bank of America Merrill Lynch.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

My first question is on the $100 million in annual profit improvement that you're targeting. Could you give us a sense of how much your efficiency efforts will contribute to that $100 million swing?

Elizabeth S. Acton

Yes. What we have said is about 2/3 of the $100 million is expense related and 1/3 is revenue related.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

I'm sorry if I missed that. Okay, and I guess, importantly, given that you're not part of the formal CCAR process, and given what seems to be a sub-optimal interest rate environment over the next 12 months, I guess, what do you have to see or what do you think you have to see in the underlying economic environment to perhaps target more than 50% payout?

Elizabeth S. Acton

Erika, you had mentioned that -- I just commented that we -- it appears, based on a proposal the Fed has put forward that $50 billion-plus banks will be part of a CCAR process, whether it's the same process that the 19 go through is not clear. But the timing, at least based on the proposal, appears to be similar to the top 19 banks. So a submission of an annual capital plan in early January with a comeback to give us their views formally by mid-March. So at this juncture, I really can't amplify on our plans for '12. We will be going, if we have to go through that process, we will be doing that. Obviously, we're coming from capital from a position of strength and understand interest of shareholders and take all -- and looking at balance sheet growth, et cetera as we move forward with that capital plan that we would potentially need to submit in early January.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Okay, I'm sorry if you had to repeat things to me. We're sort of dealing with multiple things. And just one more, and I promise Beth for your retirement present, it won't be about -- actually, it won't be about margin. But in terms of extracting revenue synergies from cross-sell with regards to Sterling, I guess perhaps Lars could comment on this. How much more training do you think the legacy Sterling commercial bankers need in order to do that? Or do you think they have a sort of the right culture in place to be able to be set up to meet that goal in 2012?

Lars C. Anderson

Yes, Erika, that -- a good point. I'll tell you just to start at the end of your question. And that is, are they kind of prepared, the franchisers today. If you think about Sterling, it really was kind of a business bank. That was their orientation, that's kind of what they did. And so a lot of the bankers there are really kind of already culturally focused on relationships, relationship building, looking for broader opportunities to deliver more products and services, which we bring obviously to the table for them in spades. Whether it's in trade, finance or it's in wealth management, private banking, which I think is a tremendous opportunity for us, we have, obviously, a nice array of products and services in our risk management area, whether it's FX, whether it's Energy, which for Houston obviously is right across the plate, interest rate risk management. There's a number of products and services. Our commercial card merchant services, like I mentioned earlier, I could kind of go on and on. And honestly, the bankers there are very excited about us bringing those products and services to the market. We've already gone very far down the road in terms of training the bankers. So we're talking about the conversion here at the end of the year, but we're really not waiting for the end of the year to push the accelerator here and to look for opportunities. As I mentioned before, the Houston metro area is now our leading Middle Market and Small Business area, and part of that is because of the products and services we're beginning to some really good bankers that understand what we do. It's a relationship banking model. So Erika, it really looks promising for us as we look forward.

Ralph W. Babb

I would underline what Lars has said. The integration process is going extremely well, and the excitement on both sides and having Downey there in the Houston market today is really already showing the kind of things that we wanted from the integration. It's moving along quite well.

Operator

Your next question comes from the line of Mike Turner with Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

On your -- just curious, what were kind of the average gross yield of new funded originations this quarter? I know it's kind of a meatball. I know you've got a lot of different types of products. But I mean, can you give us kind of a ballpark? Is it 3%? Is it 4.5%? I'm just -- where is that relative to the current loan book yield?

Elizabeth S. Acton

We have -- as we indicated in the comments, we haven't seen material loan spread compression. We do see things -- we are seeing, for instance, as an example, we had $1 billion of fixed-rate loans mature over the course of the quarter, which has obviously an impact on margin in terms of loan yields. But we really haven't seen a material change. We still have much nicer loan spreads today than we had 3 years ago. And while business is getting renewed and there is more competition, particularly at the high-end large corporate very creditworthy, high creditworthy, we're still holding spreads pretty well in Middle Market, in Small Business and some of the other sectors. But having said that, there's a lot of liquidity out there in the banking system, and frankly inherent in our outlook for next year is that we're going to see more competition and potentially an impact on spread. But we haven't seen a material impact at this point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And then, I guess, I have to do the back-of-envelope math, but implied in your NIM guidance, I mean, should you be able to grow net interest income dollars from, say, the fourth quarter annualized rate in 2012? I mean, is that what's embedded in your assumption?

Elizabeth S. Acton

The main -- one of the important things I -- point I made earlier is that the relatively stable margin in '12 assumes modest loan growth. So that's an important element because, as I mentioned, replacing 25 basis point deposits with the Fed with loans is a very powerful thing for NIM. So to the extent loan growth is better, as Ralph had mentioned, than we expect, which is very modest at this point, that would be a positive for the margin.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay, great. Sorry, one last question. Just on capital management, to beat a dead horse. If your stock's still trading at 80 -- call it 80% of tangible book, you've got a 10.5% capital level, even if you sat here and said, maybe 9.5%, who knows what's the final number, target number is, I mean, would it be your intention to potentially try and return more than the 50%? I mean, is that something you should contemplate in your capital plan that you'll submit in January, to buy back more shares?

Elizabeth S. Acton

I think we have approached capital from a cautious vantage point up till now because there has been -- there has not been clarity on the final capital rules. While I believe the process for us will be clarified in the fourth quarter, I don't -- my expectation is we will not see the Basel rules translated into U.S. regulations until the first quarter of next year. So that's an unknown that we feel like, as I mentioned earlier, we're approaching this from a position of strength, but we also would like to kind of know what the level is and what the consequences of thinking about being in the buffer, not in the buffer, is the buffer really a buffer and what the consequences of all those things are. So I think before we become much more aggressive, we would want to feel comfortable with those capital rules.

Operator

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

John G. Pancari - Evercore Partners Inc., Research Division

Beth, in the stable margin outlook that you provided, can you talk a little bit about what your assumptions are for the growth in the Commercial Lending segment and the Large Corporate segment? I know you talked about the floor plan and Mortgage Banker segment, but can you talk more specifically about the Commercial lines?

Elizabeth S. Acton

All right, are you talking about in the fourth quarter?

John G. Pancari - Evercore Partners Inc., Research Division

Yes, and then also going into 2012, particularly based on your stable margin assumptions.

Elizabeth S. Acton

Yes. We do highlight the ones, Mortgage Banker, Dealer, Commercial Real Estate because those are ones that have had some variability to them. Right now, if you look at the third quarter, Middle Market was kind of flat. Small Business is still struggling a bit. In fact, actually we're seeing more production in Small Business than we did a year ago, more originations have happened this year than last year. But we're seeing, as term loans mature, they're paying them off because they're not investing in additional plant capacity or machinery and equipment, those kind of things. They're being cautious. So those are things that are not providing as much lift as in a weak, weaker environment, which is not surprising. But we're very pleased at the growth we've seen in our Specialty Business, at TLS, Energy, certainly Mortgage Banker has its ups and downs. Dealer is coming back. I mentioned Entertainment, I think. So we're very pleased with those and then adding Sterling to it will be helpful as we move forward.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. But I guess I was just getting more so to your outlook for the Commercial-specific segments. I know you mentioned in that stable margin outlook for 2012 you expect modest loan growth. Do you expect a lot of that growth to come from Specialty and Energy and others, or do you expect a good lift coming from the Commercial-specific segments?

Elizabeth S. Acton

I think it would be a combination of not just the Specialty Business, but core Middle Market is 1/3 of our loan portfolio so if we can get through kind of the soft patch we're going through now, I think we'll begin to see Middle Market certainly propel itself probably sooner than Small Business.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then my last question is just around the securities portfolio. Can you give us what is the monthly cash flows you have coming off the securities book? And in terms of your reinvestment opportunities, what duration are you looking at in terms of new investments?

Elizabeth S. Acton

The cash flows, we're expecting about $900 million of cash flows in the fourth quarter and about $700 million to $800 million a quarter next year. And remember that's on a bigger portfolio, so that's on a $9 billion portfolio. If you look at the kind of duration of things we've bought, which is close to 3 years, the overall duration of the portfolio was 2.7 years at September 30. So that's kind of the duration we would probably keep looking into next year. And opportunities there, depending on whether you're into CMOs or into pass-throughs, can be anywhere from today from the 180s to the 240s. We are being cautious in the outlook we are giving and saying it's below 2% is where we're going to be reinvesting all those cash flows over the next year.

Operator

Your next question comes from the line of Brian Foran with Nomura.

Brian Foran - Nomura Securities Co. Ltd., Research Division

I guess on a year-to-date basis, I think a lot of investors feel like your loan growth has underperformed peers, even especially adjusted for business mix. I know you've kind of addressed each of the moving parts, but I'm sure you get the question a lot. So when people say to you, "Hey, it seems like you're losing market share and your loan growth is underperforming others," how should we think about that because I know there are a lot of puts and takes?

Elizabeth S. Acton

Lars, you want to talk about that?

Lars C. Anderson

Yes. I can't really speak to the overall kind of what the market is saying about. I can tell you from where we sit, when you said looking back over this year, we've had really nice Middle Market growth, in particular here in Texas. It's been a really good growth market for us, and we expect it to continue to be a nice growth market for us. Our Global Corporate Banking business has grown very nicely this year. Obviously, Commercial Real Estate, as we have shared with everybody, would continue to have some runoff in that portfolio, but that runoff has slowed. Clearly, as we shared in the past, it's lumpy in terms of the runoff, but it has slowed, which we think is a good sign. We've had a lot more new originations in there, and we think at some point, the lines will cross and that will begin to grow once we have fundings under some of our new construction facilities that are really focused mostly on multifamily kind of in-footprint, so that will be good. But think back to the first quarter and the second quarter where you did have both the impact of mortgage and dealer, which are large businesses for us and had a significant impact on our outstandings. Now you look back at Mortgage Banker Finance, that's up 50% in one quarter, so we're getting some lift out of that. We expect dealer to grow here in the fourth quarter. And as we look across the rest of our Specialty Businesses, as we mentioned earlier, Brian, frankly, they are very well positioned. I mean, just take Energy, for example. That business has been growing throughout the year. I feel very comfortable with our market share in Energy. I feel like we're working with just the right kinds of customers, have the right risk profile and are well positioned. And I think that's an industry that's going to continue to be expanding. It's going to be a long cycle, I think, and one that we're going to be a player in. But if you look at Technology and Life Sciences, we have very large market shares there. We expect that, that's going to continue to grow, and that's done very well. If you look at our Environmental Services, Entertainment, very well positioned. And remember, these are not businesses that you get into overnight. These are businesses that you have to build over many, many years. So I can't speak to the market share issue, but I will tell you that we've had, in a number of these businesses, some very nice growth. We expect to have nice growth in the future, and we see ourselves as very well positioned. So anyway, hope that helps you a little bit, Brian.

Ralph W. Babb

Lars, you might want to comment that you -- as far as existing customers continue and pick up of new customers, as well as we are very focused on making sure that we institute lending under our terms looking forward, and that's paid off very well for us through the downturn. And it's very important to us to build relationships over time.

Lars C. Anderson

Yes. No, I think that's a good point, Ralph. It is a very, very competitive market, Brian. And there's a lot of growth available to banks out there today if you're willing to price it and structure it properly. But you have to remember who we are and how we've positioned ourselves from a credit perspective, and from a client perspective, we performed better throughout the cycle, and we've positioned ourselves for the long-haul. Our customers view us as a very reliable, stable source of financial advice and capital. And that's the way that we want to position ourselves for the future.

Brian Foran - Nomura Securities Co. Ltd., Research Division

Got it. And one follow-up on the mortgage and auto dealer floor plan because there's been some big swinging parts. It seems like over the past few years, mortgage has been anywhere from $500 million to $1.3 billion. It seems like auto dealer floor plan has been anywhere from $3 billion now to as high as $5 billion back in '08. Do you have a sense just of a best guess of a normalized level? Obviously, mortgage is going to come down, auto is going to go up. I'm just trying to figure out, are the 2 of them basically a wash, or is one going to go down more than the other goes up or vice versa?

Elizabeth S. Acton

Hard to know. It is very difficult to predict, particularly on the Mortgage Banker business, but -- and industry volumes on the auto side are going to take some time to get back to the levels when it was a $5-billion business. We're talking about $13 million SARs instead of what were $16 million SARs.

Brian Foran - Nomura Securities Co. Ltd., Research Division

I guess maybe another way to think about it is, is there anything that you've done to either structurally grow or shrink either business geographically or customer-wise, or is it just the outlook for refi volume and the outlook for dealer inventories that's going to move the balances?

Elizabeth S. Acton

In fact, we're garnering market share in the Mortgage Banker business. We have picked up new customers.

Lars C. Anderson

Yes, there's been a change in kind of the mortgage market there, and I think our reliability through the cycle has been -- is well viewed by that market. And we have -- part of the growth that we've had, clearly, is from market share growth. But we do expect the dealer business to come back. Exactly pegging where that's going to be is hard to tell, but there will be growth there.

Ralph W. Babb

The economy is the big unknown there.

Lars C. Anderson

Yes, that's right.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Talking a little bit about the accretable yield that you guys gave guidance to go from $27 million to $15 million to $20 million in the fourth quarter. How long should we model this accretable yield in, and how much decay should we go? Is it going to be relevant through 2012 also?

Elizabeth S. Acton

Oh, yes, it will be. And we will -- we gave you the outlook for the fourth quarter of $15 million to $20 million, down from $27 million. We will be giving an outlook on that in January when we give our outlook for 2012. So we will be giving you more details, but it'll still be an important contributor certainly in '12.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And how long is the, I guess, the amortization schedule supposed to take place? Is it a 3- to 4-year issue or a 5- to 7-year or so?

Elizabeth S. Acton

It could be up to 5 years. The bulk of the accretion will come in the first 1 to 3 years.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Okay. And so this -- and it's a pretty big decay from this quarter to next quarter, but I don't expect that decay to be that much, I guess, going into the first quarter next year. I'm just trying to model out next year.

Elizabeth S. Acton

Yes. Well, we haven't really given an outlook for next year. But when things come on the books, and we have seen some paydowns as we mentioned earlier, that tends to accelerate it. So part of the art in this forecasting is thinking about how the loans come off the books, they are mature or are prepaid sooner than the contractual, and that's the tricky part in modeling this. But anyway, it'll still be a significant amount of money next year, which, as I said, we'll give more details on in January.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And the other issue, Beth, going back -- following up, I think, on Brian's question about the Mortgage Business, we've seen a lot of capacity, especially you have Bank of America getting out of the correspondent business, leave the mortgage business. Is that an area that you guys are looking into to try to fill some of those voids, some of those bigger guys leaving the correspondent business?

Lars C. Anderson

No. If you think about it, correspondent banking and of course mortgage banking finance is 2 different products. We're very focused on the high-quality mortgage companies and really providing warehouse facilities, as well as other products and services. In fact, some of our best cross-sell as I look at the business bank is in our mortgage banking finance. So these are real relationships. And that's really what we do for a living, and so it's very consistent with our strategy.

Paul J. Miller - FBR Capital Markets & Co., Research Division

But I definitely would think that there is some probably good companies out there looking for a new home at this point.

Lars C. Anderson

Yes. Well, it's, I think, played nicely into our hands. And we're going to be continue to be there in the market. And as far -- as we've mentioned before, we've really kind of enhanced kind of the sales culture and the focus, and part of that's in our Specialty Businesses, including mortgage banking finance and being out making the calls, and it's played nicely for us, and we continue to hope to grow that business.

Operator

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

Matthew O'Connor - Deutsche Bank AG, Research Division

Sorry for another NIM question, but obviously, it's been coming in less than expected, the macro environment has proved to be a lot different. I don't know if you can answer this question now or maybe give us some color at a future date, but I think having some sensitivities out there would be helpful. For example, if bond rates pop up 50 bps and loan growth is a little bit better than expected, do you get back the 20 basis points in NIM that kind of went away this quarter? Conversely, if the 10-year goes back below 2 and there's no loan growth and liquidity builds, do we see, kind of, meaningful NIM pressure? And I appreciate that the swings in the market have been huge but having some sensitivities out there might be helpful as well as kind of the base case guidance.

Elizabeth S. Acton

Yes. Matt, you made a reference to NIM being down 20 basis points. It's not down 20 basis points. Even if you take accretion out of the third quarter and you equalize the excess liquidity position between the second and the third, we're down about 8 basis points.

Matthew O'Connor - Deutsche Bank AG, Research Division

Yes, I just meant the guidance was for 335 to 340 for the back half.

Elizabeth S. Acton

Yes. And there are 2 reasons for that. One is that the excess liquidity is much higher than what we had assumed for that. That's a big part of the explanation. And the other piece is the -- what I view as kind of a onetime re-mark, if you will, of accelerated amortization on the securities portfolio, because rates did change so dramatically. You saw it in our yield. Our yield in our portfolio went from 3.40% to 2.87%. And because of that, we had to take this acceleration of the amortization, which, because we have shorter lives now, we have to amortize it over a shorter period, and so that onetime adjustment happened in the third quarter. So again, I don't view that as an ongoing drag. There will be an ongoing drag from lower yields in the securities portfolio, which is not unique to Comerica, but it -- we can -- we have other things that I talked about that will provide offsets, both in the fourth quarter and next year, that we feel pretty good about the stable outlook we gave.

Matthew O'Connor - Deutsche Bank AG, Research Division

Okay. And then, I mean, just going forward, anything on sensitivities would be helpful. I mean, it seems like some of the, well, what I call, NIM give up versus expectations you could can get back if rates rise and you deploy liquidity, if loan growth is better. And then conversely, I think some people worry that if rates go back down, loan growth is not there, liquidity continues to build because you're viewed as safer than some, that there could be some NIM risk. So any sensitivities you can provide now or a future date would -- I think would be helpful to many.

Elizabeth S. Acton

Okay. And the impact, when you just think about it in the macro sense, the impact on earning assets, the securities portfolio is a much smaller percentage of earning assets and loans. And so the relative impact is a handful of basis points on these kinds of things versus something more dramatic. But I'm happy to address that as we move forward.

Matthew O'Connor - Deutsche Bank AG, Research Division

And then just a separate question. I mean, I think the expense initiatives are a good theme for the industry to be focused on. I think you guys have been focused on expenses for a long time now, so it's impressive that there's more savings still to come. As we think about that $100 million for next year, is that on a run rate basis, or should we just put $100 million of basically pre-provision earnings increase into kind of whatever we have thought for next year? So do you get the full -- I guess the first question is do you get the full $100 million next year, or is it more on a run rate basis, so that the entire $100 million would be realized in 2013?

Elizabeth S. Acton

No. We would have -- we're talking about having a $100 million improvement in 2012.

Matthew O'Connor - Deutsche Bank AG, Research Division

Okay. And that would be -- I mean, there's no offsets to that? So if pre-provision earnings are running, call it, $700 million-ish, it would be $100 million on top of that?

Elizabeth S. Acton

Yes. Well, I mean, you have to factor in some of the things we talked about as some of the challenges. Whether you have those in your models, I'm not sure. We had not previously disclosed what the impact of regulatory impacts. We had disclosed those for this year, but had not talked about them. For next year, that's a $26 million negative employee pensions. Because interest rates are so low, we are going to have higher pension expense next year. And healthcare continues -- actually, we've managed pretty well and the general marketplace is low double digits. We've been handling kind of high single-digit increases. But those combined are $30 million to $40 million. So I don't know if you had those in your models. Those are some of the things we're trying to more than offset with these efficiencies and revenue improvements.

Operator

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

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

I guess most of my questions have been addressed. I guess it's a good sign that there's been relatively few credit-related questions, but maybe I'll just throw one at you. Reserve to loan ratio, now below 2%. Do you see any floor in that metric, or will that just be dictated by the improvement in underlying credit quality?

Lars C. Anderson

I think it'll be dictated by the underlying improvement in credit quality. And as we said, we've seen our major metrics improve for 9 quarters. As long as the economy continues to improve, we expect that steady improvement to continue as well. But it would be very difficult to predict a floor on that.

Ralph W. Babb

You might mention the affect of Sterling bringing in the portfolio on that ratio.

Lars C. Anderson

Yes, the -- it dropped from quarter-to-quarter to the 1.86, simply because of the math. As you add the loans from Sterling into the Comerica legacy loans, the denominator grows, but you bring those loans over consistent with purchase accounting these days without a reserve. So that does affect the trend line there.

Elizabeth S. Acton

If you just look at Comerica legacy, it would be at 1.95.

Lars C. Anderson

Yes, it's 1.95 without that.

Operator

Your next question comes from the line of Bob Patten with Morgan Keegan.

Robert S. Patten - Morgan Keegan & Company, Inc., Research Division

Kevin hit my question right on the head. I know we can't pick a floor, but can you give us like a little idea of what the accountants are saying right now in terms of how they're addressing the FASB issues? We know credit's getting better. We can look at what's going on in the ratios and so forth. Are we going to run it down like we did in the last cycle, the late '90s, or are we going to keep some kind of economic cushion on those?

Lars C. Anderson

Again, it's very difficult to predict the absolute path here. Will the ratio continue to decline? Yes, I honestly think that it will as the economy continues to improve and our overall level of nonaccrual loans continues to decline. You might recall that we took an approach early on in the recession that we had a very strong capital position, a very strong balance sheet. We were not going to engage in fire sales [ph] on the loans. We're going to continue to work those through our very experienced workout group. So we'll continue to do that, and as the nonaccrual loans come down, the ratio will adjust appropriately. But again, it's very difficult to predict how far down it'll go.

Robert S. Patten - Morgan Keegan & Company, Inc., Research Division

Yes. And the reason I asked the question is we're sitting with 300, 400 basis points Tier 1 common coming out of this cycle than we did last time, and we ended up, as you see, pushing the banks to 1% or below. So are you guys sensing any of that sort of recurrence in discussion?

Lars C. Anderson

I'm not sensing any of that at this point.

Ralph W. Babb

But you might reiterate how you build the reserves every quarter.

Lars C. Anderson

Yes, we have a methodology that served us well, we've been using for about 10 years now. It's a block-by-block every quarter based on individual reserves for nonaccrual loans, a pool approach based on statistical models for all other loans. And then some special reserves as needed for those sectors of the portfolio that might be incurring charge-offs that aren't fully reflected in our standard loss factors. So it's a very methodical approach, and the days of the old general reserve are really gone.

Operator

Your next question comes from the line of Brian Klock with KBW.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Just one real quick question on Sterling. Beth, do you actually have the net interest income impact from Sterling? I know you gave us the accretable yield impact, but -- and we know -- first, just trying to get to the total revenue impact out of Sterling. We know we have the fee income piece, the accretable yield. I just wondered if you have the rest of the NII impact from Sterling.

Elizabeth S. Acton

Excluding accretion, it's $21 million in the quarter.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Great. Okay. And really, just -- apologize again if you already went through this, but it's still pretty early out here on the West Coast. I apologize. But the $100 million in annual profit improvement from the revenue and efficiency opportunities, that's an after-tax number, or that's a pretax -- it's a -- that's a pretax?

Elizabeth S. Acton

That's pretax.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Got you. Then maybe the last thing, too. The commitments to commit, you said those were up nicely in the third quarter. I mean, can you give us an idea of where they are now versus second quarter? And any of that commitments to commit related to the Mortgage Banker Finance book and auto floor plan, how much of that is from just good old-fashioned, good-old Middle Market and Small Business versus those other business lines?

Elizabeth S. Acton

Commitments to commit are up $400 million in the quarter to $1.9 billion. And keep that in context, that number in the fourth quarter of last year was $900 million. So commitments to commit have been rising literally just about every quarter, first quarter -- from fourth to first, first to second, second to third. What we aren't seeing yet is the drawdown of some of those facilities, but the fact that they are being put in place is very positive and, I think, Lars, it's really across a lot of the business.

Lars C. Anderson

I think it is. It's really across all of our lines of business. Part of it would be in Commercial Real Estate and some of the new multi-family commitments that we've put out there. And those Commercial Real Estate properties that we're underwriting today, I mean, they have 35%, 40% cash in on -- so you're looking out at a 12-month, oftentimes, horizon before you even begin to get any outstandings against some of those closings. But we are seeing it across the board, and -- but we need utilization rates to go up, too.

Elizabeth S. Acton

And so we were encouraged by that.

Lars C. Anderson

And solicitation rate really helped us. It's up 1 tick. As we look over the last quarter, almost 1%, and I think that bodes well for us.

Ralph W. Babb

That's 2 quarters in a row.

Elizabeth S. Acton

Yes.

Lars C. Anderson

That's correct.

Elizabeth S. Acton

Two quarters in a row, right, of increasing line utilization.

Operator

Your next question comes from the line of Terry McEvoy with Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Last November, I believe you did increase the dividend and paid it out, I think, early in the first quarter. Just listening to some of the commentary earlier in the call, is that not something -- is that something we should not expect this November until we get into the new year?

Ralph W. Babb

I think we have to go back to what Beth was talking about earlier. We've got to see if there's any other rules and where they are, and we'll make our determinations accordingly there. And as I mentioned and I would underline, we have a very strong capital base, and historically, we have been -- we have appropriately managed that capital base through the ups and downs, whether it be dividend and/or buybacks.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And then just one last question. If I look at the pieces of your loan portfolio and look at your commentary for the fourth quarter, it seems like for the most part, it's flat to higher in the fourth quarter. And then looking at the runoff of Commercial Real Estate, it has slowed and has continued to slow down, but yet your guidance has called for flat loans. And I'm wondering, is it maybe -- Ralph, your comments earlier in the call where you talked about Energy maybe being a little bit -- being a little soft just given what prices have done. Is it the Energy portfolio maybe potentially trending lower? I'm trying to simply match up your commentary for the fourth quarter for all the lending categories relative to total loans.

Elizabeth S. Acton

Yes. I think it really focuses on the fact that Middle Market is still kind of going sideways right now for us and Small Business continues to be a drag. So I think until we begin to see some percolation in those 2 -- the Specialty Business, we're very pleased about. There's some ins and outs that we talked about earlier, but core Middle Market, particularly outside of Texas and Small Business, really, pretty much everywhere, we just -- there isn't momentum at this point.

Ralph W. Babb

Yes. As Lars was mentioning earlier and as Beth mentioned, too, when you talk to customers today, many of our customers are doing quite well. And -- but what they're not doing is investing as they would have in the past. And what do I mean by that? As things begin to grow, confidence is going to have to build before the customers are going to reach out and begin to -- and I'll use an example of one I talked to the other day -- begin to build additional factory capacity. So a lot of this depends on -- and I think we're being cautious, but depends on where confidence and the economy begins to move going forward. Right now, our economist, Robert Dye, is projecting GDP for the year to be under 2%. While certain states will do better than that, like Texas as an example, and Michigan will do better than his current -- what he's forecasting it to be, ahead of the national side, there's still a great deal of lack of confidence there. And we're going to have to have -- we're going to have see that from a national standpoint before you start to see the kind of -- especially our customers, begin to move forward.

Operator

Your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Just a couple of questions. I missed what the actual line utilization number increased to. Was it 45? What was the number?

Elizabeth S. Acton

45.5, up 1 percentage point.

Gary P. Tenner - D.A. Davidson & Co., Research Division

45.5. Okay, great. And just a question about your -- about the Technology and Life Sciences division. Obviously, some great growth this quarter. Is that growth coming from the kind of startups, is it coming from more established companies, is it what you consider new market growth or kind of market share shift?

Lars C. Anderson

If you think about our Technology and Life Sciences business, it's not so much about the company as it is kind of the sponsors, the equity sponsors. And those are the folks that we work with and have worked with over many, many years. And frankly, that's been a rich space. There's been a lot of startup. We're primarily focused on the early stage. It's been a great business for us. We're -- as we've shared before, we have 3:1 in terms of deposits to loans and outstanding. So not so much about the companies as it is the sponsors. The sponsors continue to be very active. There's a lot going on. And frankly, the market, until recently, has been very receptive to IPOs also for these companies. And that's kind of played into our hands in terms of our warrant strategy. But we see that as a continued growth business for us. Could there be a little bit of cooling? Could be. There's been a little bit of that in the IPO market, but overall, long-term, good growth business for us.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Okay, great. And then just one question on National Dealer. I guess I would have expected it to have been a little more stable this quarter. Was the decline this quarter more a function of the domestic auto dealers as opposed to any more hangover from the Japanese supply issues?

Lars C. Anderson

Actually, if you look at the period and balance, you'll see that, that effectively not down as much as the average is. In other words, it's beginning to turn. And so when we talk about growth in the fourth quarter, we believe, at this point, that we will see growth in outstandings as we look forward. The Japanese nameplates have been showing up, as we had shared before, on the lots. Their production is back. But those vehicles are moving very quickly, which I think is contributing to the increase in light vehicle sales nationally, up to 13.1 nationally. So I think what we're going to do is we really need kind of a combination of a couple things. What can help us is actually a slowdown in sales a little bit because it does increase inventories on the lots. But as the Japanese nameplates, which for us represents about 40% of our portfolio, as they are able to build inventories on the lots, that will certainly help the outstandings as we turn the corner.

Operator

Your next question comes from the line of Jim Agah with Millennium Partners.

James Agah

I just want to ask you a couple questions about sort of the forward look, like what bases we should be using? Because in noninterest expense, you have about $460 million in this quarter, but that, I guess, includes 2 months of Sterling, not 3, right? So it should be going up sort of $9 million-ish next quarter?

Elizabeth S. Acton

Well, that certainly -- looking at the Sterling piece of it, yes. It was $18 million in the third quarter, adding an additional month, the similar run rate would be the $9 million that you mentioned.

James Agah

Right. And then merger and acquisition -- or merger and restructuring expenses go up a little bit, right? They were $33 million, and they're going to $40 million?

Elizabeth S. Acton

Yes, and we said $40 million.

James Agah

Okay. So then -- okay, go ahead, Beth.

Elizabeth S. Acton

No, that's okay.

James Agah

Well, when you strip that out, right, and then you look forward to these $100 million of synergies -- or $100 million of pretax profit improvement, you're not double-counting the Sterling synergies as well, right? The Sterling synergies should be on top of that $100 million, right?

Elizabeth S. Acton

That is absolutely correct. So it's the $56 million, the 35%, that is incremental to the $100 million.

James Agah

Right. So all other things being equal, Sterling synergies plus the $100 million profit improvement next year should result in a $156 million of pretax profit improvement before those things you talked to...

Elizabeth S. Acton

In terms of the -- some of the challenges.

James Agah

Right. The pension and healthcare costs, you said?

Elizabeth S. Acton

$30 million to $40 million, and regulatory impacts of interchange is $26 million. And I do want to make a comment. What we've said about the expense synergies in Sterling, that the run rate, the 35% reduction or the $56 million reduction will be fully realized by the end of next year. That's what our guidance has been. So it's not a day 1, obviously.

James Agah

Right. Right, right, okay. That's a good clarification. And then what about for -- well, that's -- I mean, that's very positive. So I look forward to that improvement. Now on the noninterest expense, on the noninterest revenue side, the fee revenue side, you're backing out -- we should back out securities gains, right, of $12 million when we look at sort of a core run rate or a base?

Elizabeth S. Acton

Yes, what we had in the third quarter from the Sterling repositioning of the portfolio was $11 million. Those will not recur in the fourth quarter.

James Agah

Okay. $11 million. But that's $11 million of the $12 million, right?

Elizabeth S. Acton

Well, we had actually $8 million securities gains in the -- quarter-over-quarter, sorry. Yes. Now I'm confused. Anyway, you should back out...

James Agah

Right. $12 million reported, $8 million was the increase.

Elizabeth S. Acton

Yes, exactly. $11 million of the $12 million was related to Sterling, that will not recur.

James Agah

Okay. So -- but when I look forward -- when I, sort of, like, forecast growth or shrinkage, I should be using the number x securities gains, right?

Elizabeth S. Acton

That is correct. Well, no, no, no. We are giving our outlook based on total NII. And total NII included the securities gains in the third quarter. So, and then we're saying the fourth compared to third, you absolutely have to include everything, the $201 million of noninterest income is what we had in the third quarter.

James Agah

Okay, good. Okay. That's a good clarification. And then when you were speaking earlier with Erika about the CCAR and the buyback and how you have to present your capital plan to the Fed in January, it's most likely then that, that share repurchase activity will be -- it'll be weighted towards the final 3 quarters of 2012, one would expect. Is that right to assume?

Elizabeth S. Acton

Yes, at this juncture, I'm not prepared, really, to talk about color there. One, we don't know that, that's going to be the case. We believe it is, that we'll have to submit a capital plan, but at this juncture, I'm not going to go into details of what our thinking is because we're still working on it.

James Agah

Okay. And then when you said the portfolio yield, Beth, went from -- did you say 3.40% to 2.87%? That was year-over-year, I take it?

Elizabeth S. Acton

No, that was in the quarter. If you look at our slides related to -- I mean, our investment portfolio, there's a 3.40% yield in the second quarter and a 2.87% in the third.

James Agah

Wow. Okay.

Elizabeth S. Acton

Yes, yields on mortgage-backeds have really declined.

James Agah

Okay. And the drag from prepayment amortization on the NIM was, I think, 6 basis points this quarter?

Elizabeth S. Acton

Yes. We had to -- because of the shortening of the lives, we had to accelerate the amortization of the premium, which is 6 basis points or $8 million.

James Agah

Okay. That's not really expected to occur going forward, right?

Elizabeth S. Acton

That is correct. It is not expected to recur.

James Agah

And then lastly on the margin, the excess liquidity cost in basis points, that should go down towards next year, right?

Elizabeth S. Acton

That would be our expectation, with modest growth. But the thing that's -- with modest loan growth, the thing that's been very difficult to predict is deposits. I would not have conjectured this past quarter that we would have the -- forgetting the Sterling piece, that we would have had the growth we've had. So that's the big unknown.

James Agah

Where did that deposit growth come from? Were you running programs, or was it just...

Elizabeth S. Acton

No. If you look at our deposit costs, we're -- we have very low deposit costs, and so it relates to our relationship focus. And excess liquidity, our customers are generating cash flow. They're putting their cash on deposit with us until they need to use it. So it really is a reflection of kind of the cautiousness that's out in corporate America, and we have very good relationships across virtually all of our lines of business and virtually all of our major -- well, certainly across all of our major markets, deposits were up. So it's a good story. It just happens to create a little excess liquidity for a period, and we'll have to deal with that. And we did. We took action to put $1 billion of it to use in a more productive way.

Operator

Your next question comes from the line of Jennifer Demba with SunTrust Robinson and Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

I think all the questions have really been asked, but Beth, what are the expectations for merger charges in 2012?

Elizabeth S. Acton

We had said originally that there were $80 million after tax in total. We have now taken $24 million and have indicated that another $25 million would be in the fourth quarter. I think that's $49 million, so the balance of $41 million after tax would be in next year.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

And would that be kind of between first and second quarter most likely? Or all in the first quarter?

Elizabeth S. Acton

It's probably more in the first half.

Operator

Your next question comes from the line of Justin Maurer with Lord, Abbett.

Justin C. Maurer - Lord, Abbett & Co. LLC

The liquidity, is it -- you just mentioned deposit rates being low. What -- there's no way to really pin it down, but is that in a negative spread? I mean, I presume it probably is once it's a fully baked number with costs associated. But just on an NII basis, is it negative or close to negative spread on that?

Elizabeth S. Acton

In terms of -- are you talking about incremental deposits?

Justin C. Maurer - Lord, Abbett & Co. LLC

Yes.

Elizabeth S. Acton

Okay. Going into incremental investments with the Fed, I would say, generally, it's pretty much of a wash.

Justin C. Maurer - Lord, Abbett & Co. LLC

Because everybody's obviously fixated, as you outlined, the 8 basis point impact on NIM. But really, what matters is NII. That's where I was going with that.

Elizabeth S. Acton

Yes. Well -- and obviously, earning assets are bigger as a result. We, in fact, in the outlook we provided in the fourth quarter is $54.5 billion, which is up significantly from the third, and certainly from the second half outlook we gave back in July, it's up significantly from there.

Operator

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

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

I just wanted to come back to Slide 15 again and just ask one summarizing question, which is just, when you talk about the implementation of these projects, revenue enhancement, efficiency improvement, it's that alone that can get $100 million. But I just wanted to make sure, are you trying to signal in totality what could happen with pretax pre-provision, or is what happens actually in the business plus or minus that as well? Like, it doesn't mention just loan growth, which you mentioned could be slightly positive, or you haven't really talked about what your forward margin could be, also. So I just want to make sure if we're either reading too much or too little into the absolute numbers that we're seeing on the slide in terms of the overall business performance expected for next year?

Elizabeth S. Acton

Yes. The -- we have not given guidance on loan growth other than to say we -- margin, we have given this early read that next year, we think it will be fairly stable assuming modest loan growth. But these things describe -- the revenue enhancement and efficiency improvements described on Page 15 are not related to loan -- other things, loan growth, provision, any of those things. This is just about primarily focused on fee income, as well as efficiency on the expense side. In addition to -- we've already taken action, as I mentioned, of putting $1 billion into securities yielding a 183 versus, previously, 25 basis points. So that's part of the enhancements as well.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Right. Right. So it's tough to tease out, basically, right? But we're going to get some improvement based on these things and then there's just also what happens in the core performance of the business itself, which is not all necessarily captured in $100 million. Could be, if there is loan growth, I would presume that, that's additive as opposed to detractive versus $100 million.

Elizabeth S. Acton

Well, what I would say is, again, to remind you, that there are challenges that we are facing, whether you have those in your models, I don't know. One is regulatory impact next year, negative $26 million and higher employee pension and healthcare expenses of $30 million to $40 million, higher in '12 versus '11. So those are some of the things we're working on offsetting. But in addition, contributing additional profit improvements on top of offsetting those challenges.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Right. Right. Okay. And your comments about flat margin with a little low loan growth, so you're not commenting explicitly on loans next year, but do you have just a general backdrop for what you expect to pan out without giving necessarily explicit guidance on numbers for next year?

Elizabeth S. Acton

What I would say is, obviously, a lot depends on what the economic outlook is. We are -- a lot of economists are saying we're teetering on a recession. I think our view is that -- we're hopeful that we won't get into that again. And if it is, it's going to be a modest kind of thing like in the early 2000s where one quarter might be positive, one quarter might be a little negative. We've already been through the worst of the real estate restructuring, all of those bubbles that happened. We've been through that. So if anything slows down, in my view, in our collective view, it's not going to be a material thing. So assuming, though, we get back onto a 2%, 2% to 3% kind of trajectory on growth, GDP growth next year, we would see modest loan growth, yes. This would be our expectation.

Operator

Your next question comes from Peter Ganucheau with Carlson Capital.

Peter Frank Ganucheau - Carlson Capital, L.P.

I just heard the word "growth," and I'm getting all excited here.

Elizabeth S. Acton

I talked about next year, Peter.

Peter Frank Ganucheau - Carlson Capital, L.P.

Yes, yes. Well, next year is what people care about, guys, okay? So I know we're talking about Q4, and, okay, I go through the pieces. And it's like I listen to Lars and I get all excited and then I'd listen to the outlook and I'm like blah. Dealer is going to grow in Q4. CRE runoff is slower. The mortgage warehouse is going to normalize, but it's not going to fall off a cliff in Q4. I mean, this -- we have -- we've got the funding of all these mortgages. Michigan is doing okay. Look, I guess I'll just ask you on a 1 to 10 scale, how aggressive do you think you're being on the loan growth guidance in Q4?

Elizabeth S. Acton

Peter, you know us well. We tend to be conservative at how we approach things, but as -- you highlighted some of the positive things, but Small Business is still a drag. Wealth Management, actually, wealthy people have kind of pulled back. And so we're not seeing -- we're seeing declines in loans in Wealth Management as well. And Middle Market, as I said, has been kind of flattish. So those are important sectors, those 3 to our business that don't have a clear direction at this point. So that's why we can talk about the ones that we're more confident about whether dealer, we believe, will come back some. How much that is, to Lars' point, not sure, Mortgage Banker, yes. You're probably -- points are well taken in real estate. But it's all -- that's only a portion of the business. And so that's why we kind of put it together the way we did.

Ralph W. Babb

I would underline, too, that the Mortgage Banker and the dealer, that can move very quickly depending on where the economy and where confidence is. And positive signals there can be a significant increase there, where negative signals as we've seen, like we saw on Mortgage Finance a couple of quarters ago, can go the opposite way when things slow down. So it gets back to what Beth was talking about earlier. As we see steady growth in the economy, and if confidence builds at the same time, then things could be -- there would really be an additional, I think, to our forecast there.

Peter Frank Ganucheau - Carlson Capital, L.P.

Okay. So some hope. And then are we getting hit with any other big prepays like the $1 billion in this quarter -- I'm sorry, in the large payoffs?

Elizabeth S. Acton

Yes. We -- well, we expect, actually, pretty large prepayments in the -- just cash flows in the fourth quarter. Our portfolio is bigger, but also -- given the interest rate environment. But we do not see or expect, like we had in the third, an acceleration of the amortization of the premium. So that was kind of a onetime thing that when there's a big C change in the securities things, we have to do a catch-up. So that catch-up really happened in the third. It's not my expectation we would see that moving forward. Unless -- rates -- those yields are hard to go much lower. I mean, those are yielding anywhere in the high 1s, 1.80% to 2.30%, 2.40%, depending on the structure. So unless there's some very significant step down in rates again, I wouldn't expect that, and we're not expecting that.

Peter Frank Ganucheau - Carlson Capital, L.P.

Right. And that's why when I look at the NIM outlook, all the desk analysts have tattooed you guys as the most sensitive to falling rates, which, of course, is not true because 80% of your loan book is variable. I mean, you have the most upside, if short rates go up, but you don't have much downside to your core NIM. Given that, the 315 -- again on a scale of 1 to 10, are you being -- how aggressive is that? I'm not going ask you how conservative it is, because you're so conservative, you probably wouldn't score yourself high on being conservative. But...

Elizabeth S. Acton

It's our best guess at this point. That's all I can say. It's our best guess.

Peter Frank Ganucheau - Carlson Capital, L.P.

All right. All right. So if I laid out a scenario where the world isn't melting down and the economy does kind get a little better -- we get different guidance from different crews, right, on the management side. You're not losing massive market share to Wells Fargo in Houston, is that fair?

Lars C. Anderson

No. One thing I would say is that you can get, in today's market, about as much growth as you want if you're willing to price and if you're willing to structure certain ways. We have a very deliberate kind of pricing strategy that has served us very, very well. We're going to stick with that, and over a long period of time, we believe it will provide superior returns.

Ralph W. Babb

As well as underwriting.

Elizabeth S. Acton

Consistent underwriting has proved well in the past, so.

Ralph W. Babb

Yes.

Operator

There are no further questions at this time.

Ralph W. Babb

Well, thanks, everyone, and I appreciate you all joining us for the call today and have a good day.

Operator

This does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Comerica Incorporated Management Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts