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Executives

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

Karen L. Parkhill - Vice Chairman and Chief Financial Officer

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

John M. Killian - Executive Vice President of Credit Policy, Chief Credit officer, Executive Vice President, Member of Management Policy Committee, Chief Credit officer of Comerica Bank and Executive Vice President of Comerica Bank

Analysts

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

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

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Raul Gamez Dugas

Ken A. Zerbe - Morgan Stanley, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Bryan Batory - Jefferies & Company, Inc., Research Division

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

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

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

Kevin Barker - FBR Capital Markets & Co., Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

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

Adam G. Hurwich - Ulysses Management LLC

Comerica Incorporated (CMA) Q4 2011 Earnings Call January 20, 2012 8:00 AM ET

Operator

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

Darlene P. Persons

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

A copy of our press release and presentation slides are available on the SEC's website, as well as in the Investor Relations section of our website, comerica.com. As we review our fourth 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 this presentation.

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

Ralph W. Babb

Good morning. Today, we reported fourth quarter net income of $96 million or $0.48 per share. Impacting the quarter were merger and restructuring charges of $37 million or $0.12 per share related to our acquisition of Sterling Bancshares, which we completed on July 28, 2011.

Turning to Slide 4, you will see highlights from the fourth quarter. We are pleased to see total loan growth of $1.5 billion or 4% on a period-end basis, which was driven by a $1.9 billion or 8% increase in Commercial loans, particularly in National Dealer Services, Mortgage Banker Finance, Energy Lending, Technology & Life Sciences and Global Corporate Banking. We had record deposits of $47.8 billion at year-end 2011, with an increase in period-end deposits of $303 million or 1% compared to the third quarter.

Net interest income of $444 million increased $21 million or 5% compared to the third quarter, primarily resulting from an increase in average earning assets of $2.4 billion. Noninterest income of $182 million decreased $19 million compared to the third quarter, primarily due to a $16 million decrease in net securities gains. Noninterest expenses increased $18 million to $478 million compared to the third quarter, primarily due to severance and related expenses, merger and restructuring charges, as well as one additional month of Sterling.

We continue to see steady improvement in credit trends in the fourth quarter. This was the 10th conservative quarter of a decline in net charge-offs with a $7 million -- $17 million decrease. The decline was larger than expected, primarily the result of higher recoveries in the quarter. Other credit metrics were in line with expectations. Nonperforming assets were under $1 billion for the first time since the fourth quarter of 2008. The former Sterling loan portfolio has performed as expected. As a result of the overall improvement in credit quality, the provision for loan losses declined to $19 million.

Our capital remains strong as evidenced by our Tier 1 common capital ratio of 10.31% at December 31, 2011. Under the share repurchase program, we repurchased 1.6 million shares in the fourth quarter and a total of 4.1 million shares in 2011. Combined with dividends, this resulted in a total return to shareholders of 47% of net income.

We continue to be an active capital manager and believe we approach capital management from a position of strength. As required, we submitted our capital plan to the Federal Reserve on January 9, 2012. We expect their response in mid-March. As previously announced, we are targeting a first quarter 2012 total payout ratio of up to 50% of net income through the share repurchase program and dividends.

With respect to our Sterling acquisition, we announced the successful completion of systems integrations and the opening of former Sterling branches as Comerica banking centers on November 14, 2011. All former Sterling customers can now bank at any Comerica banking center with complete access to our full line of extended product and service offerings.

This acquisition continues to be a great fit, as the former Sterling’s size, geographic footprint and customer focus uniquely fits our strategy and expands our presence in Texas. We continue to be focused on delivering revenue and expense synergies from the acquisition. Karen will go into more detail shortly. The Sterling acquisition provides us an enhanced growth opportunity in one of the most attractive markets in the U.S.

Turning to the economic outlook for each of our key regions. Our Texas Economic Activity Index indicates the state economy is growing, even as the pace of growth eased a bit toward year-end. Our Chief Economist expects the gains in employment and manufacturing activity toward the end of last year will lift the index going forward. Texas is expected to outperform the national economy in 2012, as we believe it did in 2011.

Strong auto sales at the end of 2011 helped charge the Michigan economy. The rate of job growth for the state is about on par with the national average, and the unemployment rate is set to resume trending downward. More stability in labor markets will, in turn, help to stabilize the state's housing markets. We're certainly pleased by these positive developments in a state where we have a long history of service to our customers through many economic cycles.

California's economy is showing signs of growth, but key components of economic activity remain soft. We believe the broadest measure of economic activity for the state, payroll job creation, is heading in the right direction and helping to bring California's unemployment rate down gradually. Ongoing job growth through the end of 2011 should help support the state's economy and firm up tax revenues. Silicon Valley continues to hire, and this is a -- more good news for our Technology & Life Sciences customers and the state.

We're anticipating a slow-growing national economy in 2012. So as you know, we have heightened our focus on profit improvement. We are tracking our revenue-enhancing initiatives, as well as our continued expense management and are on course to deliver the expected results. Karen will provide our 2012 outlook, which incorporates our profit improvement plan.

I believe we are appropriately positioned for growth in this economic environment. The Sterling acquisition accelerates our growth in Texas and provides us considerable momentum going into 2012. We have the right people, products and services in place to make a positive difference for our customers, employees and shareholders.

And now, I'll turn the call over to Karen.

Karen L. Parkhill

Thank you, Ralph, and good morning, everyone. Turning to Slide 5, you will see that we ended the year with total loans at $42.7 billion, an increase of 4% or $1.5 billion quarter-over-quarter, with increases noted in almost every line of business, as well as across our growth markets of Texas and California. Commercial loans drove the increase, up $1.9 billion or 8% quarter-over-quarter, driven in large part by National Dealer Services, Mortgage Banker Finance, Energy Lending, Technology Life Sciences and Global Corporate Banking.

In our National Dealer Services business, the auto industry began to return to more normal industry levels as expected, which helped drive outsized quarter-over-quarter growth. However, even if you strip away the growth in our National Dealer business, you can see on the right-hand chart that the rest of our Commercial loan portfolio still grew about 6%, again driven by broad-based increases across our businesses.

While not depicted on this slide, I would like to comment on our Mortgage Banker business. We had over $500 million quarter-over-quarter growth in our period-end loans in that business, driven by the continuation of low mortgage rates, industry-wide volume constraint and recent market share gains. We believe our balances in that business could be variable in the future, as mortgage rates stabilize and refinancing becomes a smaller component of the overall volume.

As you know, we track our loan growth against the industry. And as you can see on Slide 6, our loan growth has been roughly in line with the industry over most of the last 5 quarters. In the third quarter, we obviously benefited from the Sterling acquisition. But if you remove the impact of Sterling, as we have done with the dotted line on this chart, you can see our loans grew less than the industry in the third quarter, mainly due to the Japanese supply chain disruption in our auto dealer lending business. In the fourth quarter, however, loan growth outpaced the industry. We believe that our concentration in C&I lending helped this growth as you can see in the chart on the right.

Turning to Slide 7. Perhaps a good sign for the overall economy, our line utilization was up over 2 percentage points from 45.5% to 47.6%, the largest increase we've had in the last 2 years. That utilization rate increased even as our commitments, the denominator in the equation, increased 4% to $46.9 billion, a level we have not seen since the third quarter of 2009. In line with the growth in outstandings, increased commitments were noted in almost every line of business, and our loan pipeline remains strong, which is encouraging given the volume of closings we had in the fourth quarter.

As shown on Slide 8, our deposits continue to grow in the fourth quarter across all major markets and most lines of business. In fact, at $47.8 billion, we reached a record level. Our average deposits increased $2.7 billion quarter-over-quarter, due, in large part, to one additional month of Sterling. Of the increase, $1.7 billion came from noninterest-bearing deposits and $1 billion from interest-bearing deposits. Just as a reminder, at 40%, we have the highest percentage of noninterest-bearing to total deposits among our peers, based on last quarter's data. We believe this reflects our strong relationship banking focus. On a period-end basis, our deposits increased $303 million or 1%, with noninterest-bearing deposits increasing 3%. Interest-bearing deposits declined on a period-end basis, which is mainly a reflection of our prudent approach to deposit pricing.

Turning to net interest income on Slide 9, we had a 5% or $21 million quarter-over-quarter increase, primarily driven by $2.4 billion increase in our average earning assets. To give you a sense of the breakdown, loan growth contributed about $13 million to net interest income, our larger securities portfolio added about $12 million and a decrease in our deposit costs added about $3 million. These increases were partially offset by a decrease in the accretion of the purchase discount on the Sterling portfolio and the impact of reinvesting the prepayments in our mortgage-backed portfolio at slightly lower yields. Just as a reminder, our strategy with the MBS portfolio is to maintain a shorter-duration, highly liquid, lower-risk portfolio. Currently, the average yield on the portfolio is 2.74% with a duration of 2.7 years.

Loan yields were modestly lower quarter-over-quarter, reflecting lower prepayment fees and a slightly lower contribution from accreting -- accretion on the Sterling portfolio. We have not seen any material loan spread compression over the last several quarters. However, we are seeing increased competition for customers as liquidity in the banking system continues to increase.

As mentioned before, our balance sheet remains well positioned for rising rates. Approximately 80% of our loans are floating rate, and 70% of that is LIBOR based, predominantly 30-day LIBOR. We believe a 200 basis point annual increase in rates, equivalent to 100 basis points on average, will result in approximately $150 million increase in net interest income.

Turning to the credit picture on Slide 10, our metrics continued to improve. Net charge-offs decreased $17 million to $60 million in the quarter. While our gross charge-offs modestly improved in the fourth quarter, our recoveries were significantly better. Over the last 8 quarters, recoveries have averaged about $20 million per quarter, substantially higher than the $7 million average per quarter over the 2 years prior to that. These results support our prudent approach to charge-offs. That being said, the timing and size of recoveries is the most difficult credit metric to forecast.

Our watch list in nonperforming loans also continued to trend downward after a slight uptick in the third quarter, reflecting the addition of the Sterling portfolio. Watch list loans decreased over $500 million to $4.5 billion at December 31. Nonperforming loans decreased $71 million. As a result of the overall continued improvement in credit quality, our provision for loan losses declined to $19 million. We ended the quarter with a reserve ratio of 1.7%.

On Slide 11. Our expenses remained well controlled and, on a normal run-rate basis, were essentially stable. Over the last 5 quarters, you can see our expenses without restructuring charges increasing 1%, even as we increased our workforce by just over 4% due to the Sterling acquisition. It's important to note that our workforce, excluding legacy Sterling employees, decreased 1%. Our noninterest expenses totaled $478 million in the fourth quarter, an increase of $18 million, reflecting increases from one additional month of Sterling, severance costs and restructuring costs as shown on the slide.

Turning to capital on Slide 12. As you know, our capital position remains strong, with 10.35% Tier 1 capital. Importantly, the quality of our capital ranks among the best in our peer group, with common stock comprising over 99% of our Tier 1. When we began our share repurchase program last year, we announced a target total payout ratio of up to 50%. We were pleased to end the year close to that target at 47% through dividend payments and over $4 million in shares repurchased. Throughout the fourth quarter, we repurchased 1.6 million shares.

As Ralph mentioned, we submitted our stress test and capital plan to our regulators earlier this month and expect to receive a response in mid-March. While it is too early to comment on the plan, we continue to believe we are approaching the plan from a position of strength. And finally, as announced in December, we have approval to continue our current capital distribution program, targeting a total payout ratio of up to 50% through the first quarter of this year.

Turning to Slide 13. We are proud to say we completed the systems integration of Sterling in mid-November. With the conversion of over 200 systems and 49 banking centers, our legacy Sterling customers can now transact business across the Comerica network. Although the integration is behind us, we remain focused on delivering synergies we told you about at the time of the acquisition.

To reiterate, on the revenue side, we are expecting approximately $200 million in loan growth and $4 million in noninterest income growth from Sterling in 2012. On the expense side, I am proud to say we have now reached the full 35% synergies that we originally expected to achieve in 2012, mainly due to lower-than-anticipated FDIC expense and our well executed integration, enabling a reduction in staffing ahead of schedule.

Finally, as you will recall, we announced merger and restructuring charges of $125 million at the time of the acquisition. We spent $75 million of this amount in 2011 and now expect to spend approximately $40 million of this in 2012, reflecting an improvement of approximately $10 million from our original forecast. The bulk of the remaining charge should be incurred in the second half of 2012 when we expect to complete the acquisition of our real estate integration plan. The benefit of those additional savings are built into our expense outlook that I will share on the next slide. The transaction is still expected to break even to Comerica's earnings in 2012, excluding merger and integration cost, and being increasingly accretive thereafter.

Finally, our outlook. As you can see, we are modifying the format of the guidance we provide. We have spent the last few months speaking with analysts and investors, basically gathering your feedback on the type of guidance that is most helpful. We greatly appreciate that feedback and, based on this, have decided that we will provide directional indicators each year, along with good color behind it and quarterly updates as needed, for key income statement and balance sheet line items that drive our performance.

Hopefully, you will recall our profit improvement initiative that began this past fall. In order to offset the effects of a continued low-rate environment, impacts from new regulation and increases in certain expenses, we identified over 250 initiatives to help ensure we continue to deliver a growing bottom line. We shared with you some of those examples, as well as the fact that we were driving for over $100 million in some revenue enhancements and mostly expense efficiencies, to more than offset the headwinds coming our way. That profit improvement is built into our year-over-year outlook on this slide.

We expect average loans to increase moderately, which we would define as 2% to 5%. Our pipeline remains strong, and we are monitoring, tracking and incenting our teams around loan growth. As we grow our C&I book, we expect our Commercial Real Estate balances to continue to decrease but at a slower pace. Obviously, our average balances are aided by the impact of our Sterling acquisition, but we still expect to see good legacy growth against the backdrop of a slow economy. Finally, as mentioned earlier, we could see variability in our Mortgage Banker business throughout the year, with balances potentially moderating in the future if interest rates stabilize and refinancing volume decreases.

We expect net interest income to also increase moderately. Because Sterling impacted only 5 months in 2011, we will realize the full-year benefit in 2012. We expect continued loan growth while keeping our deposit cost as low as possible. Finally, as far as the accretion of the Sterling -- of the loan discount on the Sterling acquisition, we expect it to be stable year-over-year but realized at an increasingly slower pace, over 4 quarters in 2012 as opposed to 2 quarters in 2011.

With respect to credit, we expect net charge-offs to decline, albeit at a slower pace as we approach normal historical levels, and our provision to remain relatively stable. This is in line with our view that we should continue to see positive credit migration, offset by moderate loan growth, which, combined, is expected to result in a modest reserve release.

We expect noninterest income to be relatively stable despite regulatory headwind. A full year of Sterling, its revenue synergies and the positive impact of our profit improvement plan are expected to be offset by a full year of lower interchange fees and our assumption of no further significant securities gains.

Finally, we expect noninterest expenses to also be relatively stable, reflecting inflation, higher pension and healthcare cost, as well as 7 additional months of Sterling expenses, offset by lower merger and restructuring charges and our profit improvement plan. Our rule of thumb for the tax rate remains unchanged at 36% of pretax income, less approximately $65 million in tax benefit.

In closing, we are ready and excited for the year ahead. While headwinds exist, we feel confident that we can continue to deliver strong bottom line growth to our shareholders.

With that, we are happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Not to try and put you on the spot a little bit, but in terms of your guidance, when you guys used the word moderately, I mean, how should we be thinking about that? Is it sort of low single digit, high single digit? Any context would be helpful.

Karen L. Parkhill

Yes. Ken, as we said, we define moderate to be between 2% and 5%.

Ken A. Zerbe - Morgan Stanley, Research Division

I probably missed that then. Okay. No, that's helpful. And then just the other question I had on margin. Obviously, this quarter held up reasonably much better than what we had expected, I think also better than, I guess, the 3.15% that was guided for. Where were you guys surprised, like what was the driver too that actually caused margin to be better than expected?

Karen L. Parkhill

Obviously, our margin was aided by our loan growth and our decreased deposit cost, but we also saw slightly higher accretion benefit than we anticipated in our margin.

Operator

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

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

I want to start, so you had good loan growth in the quarter. Most of it was dealer finance and mortgage warehouse and loans in the largest segment, Middle Market, were flat again. Could you give us some color on what you're seeing and hearing from your Mid Market customers? And is this an area that you're expecting to see growth in 2012?

Ralph W. Babb

Yes. Lars?

Lars C. Anderson

Yes, Steven. A couple -- I guess a couple of questions in there. Maybe I'll answer the second per what we're hearing from our customers. I think they're cautiously optimistic. They've obviously delevered the liquidity. They've built up borrowing capacity and making limited investments, we think, and they're very well positioned for a growth kind of cycle, hopefully ahead, which they can benefit in. The first part of your question though, talking about Middle Markets. It's important to understand that our Middle Market designated group is companies with $2,500 million in revenues, but that excludes all of the companies that really fall in our industry-focused groups, which is very significant. So whether it’s Mortgage Banking Finance, Technology and Life Sciences, Entertainment, those are dominated by Middle Market companies also. So what I’d say, Steven, is a good proxy for our overall kind of Middle Market growth would be to look at our Commercial loan growth overall for the quarter, which was 8%. So it's a good healthy growth rate, and we feel good about that momentum into '12.

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

Okay. Maybe just a follow-up question on the margin. I know it was tough to get the guidance right in 2012, given the deposit inflows. With it stabilizing, is it your view that you could at least hold the margin relatively steady here? I'm not sure what these comments on the accretion benefit helping, that, that implies they're going away next quarter. Just wonder what you're thinking on margin stability here.

Karen L. Parkhill

Yes. As you know, Steven, we're going to focus on giving guidance on net interest income as opposed to margin, because net interest income is what truly drives earnings, and margin is clearly just a calculation of the results. So as we focus on net interest income, we do expect net interest income to benefit, obviously, from continued loan growth. And on the accretion side, we do expect it to be stable year-over-year, but realized over 4 quarters in 2012 as opposed to 2 quarters in 2011. So it will be realized at a declining pace. Hopefully, that answers your question.

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

Karen, what was the accretion benefit this quarter?

Karen L. Parkhill

We had $26 million in accretion benefit this quarter as opposed to $27 million last quarter.

Operator

Next question comes from the line of Brett Rabatin with Sterne Agee.

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

Wanted to ask a question on -- basically, the past few quarters you've been noting increased competition but no real impact on the loan spreads. And so was just curious to hear any color around if that's something that you expect to occur in the next few quarters is compressing loan spreads on the loan portfolio.

Ralph W. Babb

Lars?

Lars C. Anderson

Okay. Yes, Brett. First of all, we expect that our loan spreads will materially hold as we head into '12. The part of your question regarding kind of pricing and spread compression, we're continuing to see compression at the larger end of -- or competition, excuse me, most intensive at the larger end of the market. But it's competitive throughout the marketplace. I'll tell you though, what we're focused on doing is we've got our bankers out in the marketplace more than ever, spending time with our customers, prospects, building relationships. And I think if you do that in today's environment, you can get paid for your value, and we're seeing that in our loan spreads really holding. Personally, I'm seeing that our customers value our type of relationship more than ever in this industry. So I think we're well positioned to hold our loan spreads.

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

Okay. And then secondly, I know you're not going to talk specifically about the margin. But wanted to ask the liquidity that you have on the balance sheet, either average or end-of-period, is that a number that can decline from here? Or is that essentially kind of how you view liquidity level as a necessary run rate?

Karen L. Parkhill

So on liquidity, obviously, as we grow loans, we expect our liquidity on the balance sheet to decrease. So hopefully, that will be the case.

Operator

The next question comes from the line of Bob Ramsey with FBR Capital Markets.

Kevin Barker - FBR Capital Markets & Co., Research Division

Sorry, this is Kevin Barker for Bob Ramsey. I'm sorry about that. If you were looking at your forward guidance, if there is one thing where you would see that -- you're saying you're relatively stable on noninterest expense. Is that something where you could see more merger synergies or you could see more expense saves that maybe increase the margin? How do you look at that going through the next 4 quarters?

Karen L. Parkhill

As we look at noninterest expense, obviously, it will be -- we'll have 7 additional months of Sterling, as we talked about, year-over-year. We also expect higher pension and healthcare costs next year, amounting to about $40 million. We'll offset that by lower restructuring charges of about $35 million, and we'll have the profit improvement plan. And that's how we get to relatively stable on the expense side.

Kevin Barker - FBR Capital Markets & Co., Research Division

Is there anything you could do that would accelerate that or possibly even make that -- even have more synergies? Or is there -- I'm just saying, could you beat that, or do you see that as very conservative guidance on the expense side?

Karen L. Parkhill

We are always focused on monitoring our expenses. We've got lots of headwinds coming our way, and we're focused on offsetting those headwinds, as we talked about. As it relates to the Sterling benefit, we did say that we have received the 35% synergies that we anticipated in 2011. That said, we do have -- we will see some benefit as we focus on our final real estate integration towards the end of 2012, but we have built that into our outlook.

Operator

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 actually on the provision. We appreciate the 2012 guidance. But as we're sort of the looking out to '13 and '14, could you give us a sense of what guidepost we could look at in terms of where -- how do we measure the bottom in the provision in terms of reserve release? Do you look at it as a percentage of charge-offs, of the loan portfolio?

Ralph W. Babb

John?

John M. Killian

Yes. The main drivers on both reserves and provision, frankly, be -- would be net charge-offs, the continued improvement in our watch list and, frankly, loan growth. As you know, it's not as simple as just having a target for the reserve level as a percentage of the portfolio. We have a very rigorous methodology, which we've been using for about 10 years. That includes reviewing every sizable problem loan every quarter. The methodology has served us well in all of our cycles. Our average carrying value of nonaccrual loans is 60%. And our $726 million reserve on the ALLL is 3x our annualized fourth quarter net charge-off run rate. So we feel we are well reserved. Going forward, now the reserve level will vary as charge-offs and problem loans decline. As our loan growth increases, that will also increase the reserve level that's required.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

What are you reserving for new commercial growth? What are you putting away for new commercial growth?

John M. Killian

Well, that's statistically driven by our standard loss factors, which is consistent with our methodology. So that will vary, depending upon the assigned risk rating. So it's hard to generalize about that.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Okay. If I could just have one more question, please. Karen, I noticed that your average securities balances on the AFS portfolio was up $1.6 billion quarter-over-quarter. Could you give us a sense of what you were adding to the portfolio in terms of type and duration? And also, could you give us a sense of as you model out 2012, how sticky you believe the deposit growth is going to be?

Karen L. Parkhill

Sure. I'll tackle the first question, first. Our securities portfolio did increase in the quarter, and hopefully, you’ll remember, at the end of last quarter, we talked about putting more of our excess liquidity into mortgage-backed securities with a target portfolio of around $9 billion. You see the benefit of that in this quarter. That's what's happening. In terms of average yields and duration of that mortgage-backed portfolio, it's about 2.74% in yield and 2.7% in duration. It is a portfolio that we are continually focused on maintaining high liquidity, strong credit rating, et cetera, on it. I'm sorry, Erika, remind me of your second question.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

As you look out into 2012, how sticky do you think the deposit inflows that you received in 2011 will be?

Karen L. Parkhill

Yes. The good news about our deposits is that they're driven by full relationships. And so because they're driven by full relationships and we have all of the banking business with our customers, those deposits are obviously used to help offset the fees around that banking business. So they are more sticky than many other types of deposits. So we feel good about the stickiness.

Ralph W. Babb

I think, too, and Lars, may want to comment on this, what we're seeing with our customers today is much more liquidity from their standpoint, and therefore, they're maintaining higher deposit levels.

Lars C. Anderson

Yes. I think, Ralph, to that point, if you look at the fourth quarter, we obviously had very broad-based growth across a lot of our businesses, a lot of our growth markets. And yet, even with $1.9 billion Commercial loan growth, we also hit record deposit levels, which tells me that our customers seem to be carrying more liquidity possibly a more conservative stance or positioning themselves for growth in the future.

Operator

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

Bryan Batory - Jefferies & Company, Inc., Research Division

This is Bryan -- this is actually Bryan from Ken's team. I was wondering if you could comment on your loan growth guidance. The 2% to 5% average growth for the full year seems kind of conservative, given that loans are starting much higher on a period-end basis at the end of the fourth quarter. Could you just comment on some of the moving parts there, and specifically, what the delta from Mortgage Banker Finance could be if rates normalize?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes, okay. Let me first just tackle the Mortgage Banking piece of it and then the guidance piece of it overall. Mortgage banking is obviously an industry that we've been in a long time. We're very well positioned, and we picked up market share. But if you look at the fourth quarter volume and growth that we had, 75% of that volume, Bryan, was refis. So to the extent, I think, that underlying mortgage rates continue to change and move, they hit a 30-year record, I think, low as of yesterday. That clearly has an impact and, of course, drives variability in that particular business line. And of course, we have some other business lines with variability. To the point about the guidance for 2012, obviously, we're coming off of a very healthy fourth quarter growth, very broad based, but that's against a slow growth economic environment. And the impact of some of the -- our more variable businesses, as well as a continued expected decline in the Commercial Real Estate portfolio, albeit at a slower rate, is all factored in.

Ralph W. Babb

Lars, you might want to comment a little bit on the pipelines.

Lars C. Anderson

Yes. Just speaking of the pipelines, and again, I guess from a -- the sense of optimism that I do have though as we look at 2012. First of all, as we pointed out, our commitment levels are up. Usage levels are up over 2%, which is pretty significant in this business. Commitments to commit are stable and strong. And in fact, we're seeing a very good pipelines. Over 50% of the pipeline is new business, new customers for Comerica.

Bryan Batory - Jefferies & Company, Inc., Research Division

Okay. And one follow-up. Does the noninterest expense guidance of relatively stable include merger and integration charges, or should we be looking at that more on a core basis x the merger and integration charges?

Karen L. Parkhill

Yes, it does include merger and integration charges.

Operator

Our next question comes from the line of Gary Tenner with DA Davidson.

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

Just a few questions. In terms of the severance expense in fourth quarter, what was the actual dollars of severance?

Karen L. Parkhill

Total severance and related expenses were up $5 million. $7 million was the total.

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

Okay. And I know you're not providing specific margin guidance going forward. But just on a kind of looking back in the fourth quarter, could you give us an idea where the margin was for December?

Karen L. Parkhill

For the quarter, obviously, it was at 3.19%. We did see it improve a little bit more in December. We had the benefit of LIBOR increasing a little bit more in December than it had in October and November.

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

Okay. And then just one last question, if I can. Obviously, you are continuing -- or you've said that you are continuing your stock buyback plan in the first quarter. Could you give us just an idea? I know your target payout is 50%, but maybe just give us an idea of kind of where your bias lies between buyback and dividend as you look out through 2012.

Karen L. Parkhill

So we are obviously focused on total payout to our shareholders. When we think about the mix between dividends and share repurchase, we like a steady dividend that can grow slowly with us over time. We are more biased towards share repurchase, because it is something that enables flexibility. And particularly in this environment, when we're able to buy back our stock at lower than book value, it's very attractive.

Ralph W. Babb

I would underline that, as Karen said, we have a balanced approach to the dividend as well.

Operator

The next question comes from the line of Brian Klock with Keefe, Bruyette, Woods.

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

Okay. Just one really quick follow-up question. Karen, on the accretion coming from the Sterling deal, you said it was $26 million this quarter, $27 million last quarter. Do you have a breakout of how much of that was accelerated accretable yield from payments coming in faster than expected?

Karen L. Parkhill

I don't have that, but I would say it was in the mid single-digit area.

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

Okay, okay. And a question for Lars. You went into a lot of different details and good granularity. I guess I was wondering, you mentioned that 50% of the pipeline is new business from new customers. Did you see anything -- and the fourth quarter was so strong in Commercial growth. Was there any activity you saw from your Commercial customers trying to take advantage of the Obama stimulus plan of trying to put something into production before the end of the year to take advantage of that -- the tax deduction?

Lars C. Anderson

That issue has come up iron hot [ph]. I've heard it talked about in the industry. We have not seen that as a material driver. And I think evidence of that is you look at really the broad-based growth across a number of business lines, it's just not a -- was not a material event for us.

Operator

Our next question comes from the line of Kevin Reynolds with Wunderlich Securities.

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

Actually, my questions have all been asked and answered at this point. So great quarter, guys.

Operator

Our next question comes from the line of Adam Hurwich with Ulysses.

Adam G. Hurwich - Ulysses Management LLC

Just a follow-up, most of my questions have been asked as well. But on the Sterling acquisition, if we were to think about the return, given your outlook for the profitability of that franchise, do you have any sense as to what your incremental ROE on that -- on their capital base would look like?

Karen L. Parkhill

No. We haven't looked at it that way. We are pleased with the performance of Sterling and pleased with our ability to integrate. So I would -- we're happy with where we are, but we honestly haven't looked at the Sterling the way you talked about it.

Operator

The next question comes from the line of Michael Rose with Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

In the past, you've mentioned commitments to commit, and I think they were $1.9 billion at the end of the third quarter. Obviously, this was a strong quarter for bookings. But can you provide that number? And I'm sorry if I missed it.

Ralph W. Babb

Okay. Lars?

Lars C. Anderson

Yes. I think this is really good news, because coming off of, obviously, one of our strongest quarters in a very long time, the commitment to commit has remained stable, absolutely stable.

Michael Rose - Raymond James & Associates, Inc., Research Division

So at about $1.9 billion?

Lars C. Anderson

That's correct. That's correct, Michael.

Operator

The next question comes from the line of Mike Mayo with CLSA.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Just a question on the margin in your press release. It shows the margin's down 33 basis points in Texas, down 14 basis points in the west, down 5 basis points in Florida, but on an aggregate basis, it's kind of flat. And just what's the simple explanation for that?

Karen L. Parkhill

Yes. Obviously, our regions and our businesses are impacted by how we FTP our businesses. But the simple answer is that we benefited from the increase in our mortgage-backed securities portfolio at the top of the house.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Okay. And then separately, the commercial loan growth, I guess it's 32% annualized. And per your guidance, you're not expecting that sort of pace in 2012. But I was wondering, how much of that is for Shared National Credit? If I'm reading the page, Slide 19 of your presentation, if you could just turn to that, it looks like most of the growth is Specialty Businesses, and I'm just assuming that's more Shared National Credit or national lending.

Ralph W. Babb

Lars?

Lars C. Anderson

Well, first of all, maybe looking at the fourth quarter to give some indication. 28% of our [indiscernible] growth in the fourth quarter was Shared National Credits. 80% of that was energy, and that would be consistent with our strategy for our Energy business, which is very focused on large, high-quality energy companies. So frankly, outside of that, the majority of it was not Shared National Credit. I'd underscore also, for us for our Shared National Credit kind of strategy, we underwrite every single credit like we would any other non-SNC credit. It's held to the same stable credit underwriting policies, and it's held to the same relationship pricing model and pricing governance strategy. So -- and for us, our Shared National Credit relationships, which we continue to make a lot of progress on in terms of cross-sell, continue to improve in profitability for our company. The outlook, obviously, is moderate growth for 2012, to the other part of your question. And frankly, we're just continuing to stay very focused on our businesses and executing on those strategies. And to the extent that some, such as Energy, may leverage for risk management purposes, the Shared National Credit syndicated our credit capability, that would just kind of come along with it. But we're going to stay very focused on our strategy.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

The rest of the increase in Specialty Businesses is due to what? Again, Slide 19. I'm just trying to understand that one line.

Karen L. Parkhill

Energy was a big driver of the increase.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Okay. So Energy is most of that or?

Karen L. Parkhill

Let's say it's Energy and other of our industry businesses, including Technology & Life Sciences, Entertainment, et cetera.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

So of the $1.4 billion increase in the Business Bank loans, how much of that was due to syndicated loans?

Lars C. Anderson

Yes, in the fourth quarter, it's 28%. Great. And remember, 80% of that was Energy.

Ralph W. Babb

Right.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

All right. And the rest of the Specialty Businesses, the growth there -- I'm just -- I just want to complete my list. I want to give 2 other items. What would I include?

Karen L. Parkhill

The others wouldn't be as focused on syndicated credits, if that's what you're trying to get to.

Ralph W. Babb

Right. You may have some growth in U.S. banking, which we had. Global Corporate would leverage that. There's a little bit more activity in national Commercial Real Estate, which is REIT-oriented financing. But that would be -- Energy would be the key driver.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And also, why did loan utilization go up? It's been flat at most of the other big banks or almost all of them. Whereas in your case, it seems like demand has picked up. Any reason why you might be a little bit different than some peers?

Ralph W. Babb

We're -- we just continue to focus on our customers, and they had good activity and growth. And we've been growing with them.

Lars C. Anderson

As well as the commitments in total, we're up. And from a small business and Middle Market standpoint, Texas saw good growth.

Ralph W. Babb

That's right. In fact, small business saw a very nice funding to new customers in the fourth quarter, and commitment levels were even up for small business.

John M. Killian

And Mike, if I may add a question from a risk management standpoint on the SNCs. For the last several years, our SNC portfolio has performed, really, the same way that our portfolio has overall. It's basically been a mirror. But interestingly enough, in the last couple of quarters, it has performed even better than our total portfolio, from a credit risk standpoint.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

All right, that's helpful. I'm sorry, one last question. If I can just go back to my first question that I thought you said the yield on the MBS that you purchased, I might have heard this wrong, was 2.74%.

Ralph W. Babb

Karen?

Karen L. Parkhill

That is the yield on the overall portfolio, Mike. The yields that we are purchasing today are a little bit less than that, as you can imagine in the market.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

So I'm just looking at your yield on assets. Your yield on earning assets is close to 3.5% for the year, at least. I was just wondering, so how did that provide the boost to the margin? Was there anything else that helped the margin?

Karen L. Parkhill

No. The impact to the margin from the securities portfolio was the fact that we increased the amount in our securities portfolio to a target of about $9 billion. We did that at the end of last quarter, and you see the benefit of it this quarter. The real driver though is the fact that we had loan growth and we're maintaining our spreads in our loans, and we are continuing to focus on our cost of deposits and taking that down where we can.

Operator

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

Stephen Scinicariello - UBS Investment Bank, Research Division

Just 2 quick questions for you. First up, just given the positive trends that you're seeing in terms of loan utilization rates and commitments to commit and whatnot. Just kind of looking to get some color as to how much of a turning point maybe we've reached here in terms of demand. Do you feel some of these situations were more kind of situational or one-offs, or do you really feel there's been a shift in terms of kind of customer demand out there?

Ralph W. Babb

Lars?

Lars C. Anderson

No. I really can't. I wouldn't identify it as a onetime event, because again, if you look at where we got the growth, while it was clearly we had good quarter in Mortgage Banking Finance and Dealer and Energy, we had nice growth in Technology & Life Sciences and as well as our Global Corporate Banking, driven by international, Environmental Services, Entertainment, it was very, very broad based. So no, we feel very good about the momentum as we look forward to 2012. But we're reminded that the backdrop is, for 2012, a slow kind of economic environment, and we do have, of course, some businesses with variability in outstandings, as we've talked about.

Ralph W. Babb

I think as you said earlier, I would point out that our customers are making good money. They're well positioned. They have a very liquid balance sheet compared to several years ago, and they're beginning, as you mentioned, with that, I'll call it, cautious optimism that you pointed out, to step forward, even though there's still a concern about the slow-growing economy.

Lars C. Anderson

That's right.

Stephen Scinicariello - UBS Investment Bank, Research Division

That sounds good, and that's great color. And then just my last question is, just in terms of kind of the upcoming CCAR and process and whatnot. When we ran our stress test, you guys come out as one of the best positioned banks in terms of excess capital, and I know you've guided towards this 50% earnings payout level. But why not pay out more with your stock at these levels and just the amount of capital strength that you have? Why is 50% a ceiling? And could you increase that?

Ralph W. Babb

Let me reiterate what Karen said earlier. The 50% is in the first quarter, that we expect to continue to be at the 50% level. We expect to hear back on our plan on mid-March, and then we'll discuss what our ongoing level will be.

Operator

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

Raul Gamez Dugas

This is Raul on behalf of John. Most of my questions have already been answered. Small question on the -- follow-up question on the buybacks. Could you give us a color around just the timing or the pace of buybacks that you would expect in 2012? And also, are there opportunities in terms of capital deployment in 2012?

Karen L. Parkhill

Until we hear back from the Federal Reserve on our capital plan submission, it will be very difficult for us to talk about any pace of buyback. That said, we are focused on 50% for the first quarter. So combined with our dividend, we should be on pace to focus on that payout for the first quarter. Hopefully, that’s helpful.

Ralph W. Babb

And we would focus quarter-by-quarter.

Operator

Next question comes from the line of Jeff Davis with Guggenheim partners.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

I know the portfolio is small and it’s contracted. But could you comment on what you're seeing in Commercial Real Estate values in Florida?

Ralph W. Babb

John?

John M. Killian

The real estate portfolio in Florida that we have is down to a couple of hundred million dollars, Jeff. And what we're seeing there, basically, is some slight declines still in that portfolio. I'm not concerned about it given the fact that we've come through the recession in pretty good shape dealing with that portfolio, but I still think it's going to be a while before Florida has anything near a normal real estate market.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Would it be fair to say, though, 2012 is a stabilization year for it then?

John M. Killian

It almost -- to answer that question properly, Jeff, you almost have to look at it product by product. Let's say, on multifamily, the answer to your question would be yes. On retail, on office, for example, I don't think stabilization is here yet.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Okay. And then you may have said it, and I just missed it, in terms of maybe Mike's question on the Energy book. Did much of the Energy growth come from European banks pulling out of syndicated deals and someone else stepping up to the plate?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes. We have not seen maybe some of that volume of European banks exiting that some others talk about. We're very -- we have seen some opportunities come along in Energy and in other -- the broader corporate market, and we have selectively looked at them. But the reality of it is they really have to fit within kind of our footprint, within our industry focus. They need to individually underwrite. We're not just -- we wouldn't consider just purchasing a position, and frankly, they've got to really hit our relationship pricing model. We've got to have an opportunity to add value to the company and for us to get compensated for it.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Okay. And then last question. And I know the portfolio is even much smaller than Florida. But any comment on what you're seeing in real -- commercial real estate values in Arizona, in the Phoenix market?

Ralph W. Babb

John?

John M. Killian

Yes. It would be almost a reiteration of what I just said in Florida, Jeff. It's a very similar situation. Single family there is still struggling. Multifamily in the right location, location, location, is stabilized. But everything else is still struggling to some extent, and probably, we'll see a bit of a decline even in 2012.

Operator

Final question will come from the line of Chris Mutascio with Stifel, Nicolaus.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

My question was on the provision expense. I mean, guidance being relatively stable year-over-year, 2011 was about $153 million. If I divide that by 4, I get a quarterly run rate of $38 million, which is essentially double what it was in fourth quarter. So am I to assume that the provision expense is going to double off at the level we saw in fourth quarter going forward?

Ralph W. Babb

John?

John M. Killian

I think of this in terms of the annual run rate on the provision, and from $153 million, it actually leads us to the relatively stable guidance that we offered. Fourth quarter was a little unusual in that recoveries were abnormally high that quarter, which is good news, but it did result in the provision being a little bit lower.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So again, the $153 million is the run rate for next year is what you're looking at.

John M. Killian

Our guidance is relatively stable off of $153 million actual in 2011.

Operator

We'll now turn the call over to Ralph Babb for any closing remarks.

Ralph W. Babb

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

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, and you may now disconnect.

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