Comerica's (CMA) CEO Ralph Babb on Q3 2016 Results - Earnings Call Transcript

| About: Comerica Inc. (CMA)

Comerica Inc. (NYSE:CMA)

Q3 2016 Earnings Conference Call

October 18, 2016, 08:00 AM ET

Executives

Darlene Persons - Director of IR

Ralph Babb - Chairman & CEO

Curtis Farmer - President

Dave Duprey - EVP & CFO

Peter Guilfoile - EVP & Chief Credit Officer

Analysts

Brendon - Sandler O'Neill

Mike Mayo - CLSA

David Eads - UBS

John Pancari - Evercore ISI

Erika Najarian - Bank of America

Ken Usdin - Jefferies

Ken Zerbe - Morgan Stanley

Gary Tenner - D.A. Davidson

Dave Rochester - Deutsche Bank

Steven Alexopoulos - JPMorgan

Bob Ramsey - FBR

Geoffrey Elliott - Autonomous Research

Brett Rabatin - Piper Jaffray

John Moran - Macquarie

Jon Arfstrom - RBC Capital Markets

Michael Rose - Raymond James

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's Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Ms. Persons, you may begin.

Darlene Persons

Thank you, Regina. Good morning and welcome to Comerica's third quarter 2016 earnings conference call. Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Chief Financial Officer, Dave Duprey; and Chief Credit Officer, Pete Guilfoile.

Through this presentation, we will be referring to slides, which provide additional details. The presentation slides as well as our press release are available on the SEC's website as well as in the Investor Relations section of our website comerica.com.

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 actual results to vary materially 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 Safe Harbor Statement contained in the release issued today as well as Slide two of this presentation, which are incorporated into this call, as well as our filings with the SEC for further factors that can cause actual results to differ. 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 Babb

Good morning and thank you for joining our call today. Before we discuss our third quarter results, I would like to give you an update on our expense and revenue initiative, which we call GEAR Up.

As we announced on our last earnings call, we've identified more than 20 work streams that are expected to drive a significant improvement in our bottom line. At that time, we also indicated that there was more to come as we were still identifying and analyzing other opportunities.

We've now determined that those new opportunities add about $40 million in savings due to our initial 2018 target. We now estimate that the GEAR Up initiative will drive additional pretax income of $180 million in 2017 and $270 million in 2018.

Our total restructuring charge estimate remains unchanged at $140 million to $160 million. Without any increase in rates, we believe the actions we are taking will improve our efficiency ratio to the low 60s by the end of 2017 and at or below 60% by year-end 2018.

The walk forward at the bottom of the slide illustrates how we expect to achieve our goal of a double-digit ROE in 2018. By adding our 200 basis points to our ROE, the actions under GEAR Up take us a long way towards achieving that goal and we expect to meet or exceed this goal with sustained growth net of investment, normal credit costs, continued share buyback and only a 25 to 50 basis point increase in rates.

We are not relying on a significantly better economic environment or a substantial increase in interest rates. We have already begun to execute our plan and many of our larger initiatives have been completed or are well underway.

The top of Slide 4 outline some of the progress we've made. We remain committed to our footprint; however with customers migrating to a broader use of digital channels, we are consolidating 38 banking centers or about 8% of our network. We estimate these consolidations will result in $10 million to $13 million per annum in savings.

This is net of attrition, which is expected to be nominal as we have another banking center within two to five miles from the bulk of the locations that are being closed. Also with the advancement of technology and reduction in our workforce, we need less office and operation space to run our business.

We have developed a plan to consolidate colleagues in central locations, implement alternative work solutions and shed the space we no longer need. We are targeting a 500,000 square-foot reduction in real estate, which should result in approximately $7 million in savings in 2018 and more beyond 2018.

At the bottom of the slide, you can see the two major drivers to the $40 million increase in our GEAR Up target. We are replacing our current pension and retirement account benefits with the newly redesigned retirement program. This is expected to contribute approximately $35 million in additional savings in 2017 and 2018 relative to our expected 2016 expense prior to this change.

As a result of the redesign, we were able to avoid a substantial increase in our pension expense in 2017 that was expected due to the drop in the discount rate. Comerica retirees and our colleagues in the pension plan who are nearing retirement will not be impacted by this change.

Our new retirement program will continue to provide highly competitive benefits and as we discussed last quarter, our largest initiative involve streamlining our workforce. At the end of September, we completed the review of our management structure. We have eliminated about 30% of managerial positions in order to get closer to customers and accelerate decision-making.

This also included consolidating functions and responsibilities while ensuring we maintain our high standards for customer service and deep expertise and experience. So far nearly 700 people have been notified that their positions were eliminated or most of our expected reduction -- expected reduction.

Separately in terms of new initiatives we streamlined some of our backroom operations and administrative support functions, which added approximately $5 million to our initial target.

In total we expect these workforce related initiatives to result in more than $15 million in savings in the fourth quarter. We remain confident that we will drive enhanced shareholder value and achieve the level of returns that our shareholders deserve as we deliver on our GEAR Up initiative.

In fact since we announced our GEAR Up initiative on July 19, the date of our last earnings call, our stock is up 8% and it is up 16% year-to-date significantly outperforming nearly all of our peers, the key bank index and the S&P 500.

Now turning to our third quarter results on Slide 5, third quarter 2016 net income of $149 million or $0.84 per share included after-tax restructuring charges of $13 million or $0.08 per share. Quarter-over-quarter, our earnings per share increased 45%. This reflected strong credit quality, a reduction in restructuring charges, solid revenue growth and well-managed expenses.

Slide 6 provides further detail on our results. Average loans declined $263 million including a $337 million reduction in our energy portfolio. We also had the typical seasonal decline and national dealer, as our customers reduced their inventory in anticipation of delivery of 2017 models.

In addition there was a modest decrease in technology and life sciences. This was partly offset by a seasonal increase in mortgage banker finance and continued growth in commercial real estate, albeit at a slower pace.

Our commercial real estate business continues to be driven by construction draws on existing projects with proven developers. Average deposits increased $1.5 billion driven by strong non-interest bearing deposit growth. The growth was broad-based with most business lines posting increases.

In addition, period end deposits benefited from elevated activity associated with the government card program on the last day of the quarter. The recently released FDIC data, which captures market share as of June 30, reflects our low point for the year as well as our focus on LCR-friendly operational deposits.

Net interest income increased $5 million to $450 million. This included the benefit of the increase in LIBOR, one more day in the quarter and interest earned on higher excess balances at the fed. Credit quality was strong with net charge-offs of $16 million or 13 basis points, which is well below our historical norm and included $6 million in energy charge-offs.

Criticized loans declined almost $300 million, which contributed to a reduction in our provision expense to $16 million. Over the past year, energy loans have declined almost $800 million or over 24% and commitments have declined nearly $2 billion or nearly 30%. Criticized energy loans declined $79 million.

While the overall performance of this portfolio has improved and oil prices have remained in the $45 to $50 range for the past several months, we remain cautious and continue to maintain a reserve allocation of over 8% for energy loans as of September 30.

Of note, the results of the recent shared national credit exam have been reflected in our credit metrics. We had record noninterest income, the increase of $4 million or 2% included growth in commercial lending and investment banking fees.

Noninterest expenses included $20 million in restructuring charges related to our GEAR Up initiative. The $33 million decrease in restructuring charges was partially offset by a smaller gain on sale of leased assets and increased outside processing expenses.

Our capital position remained strong in line with our CCAR plan we increased our share repurchases to do 2.1 million shares for a total of $97 million compared to $65 million in the second quarter. Restructuring charges are not expected to have an impact on the pace of our share buyback.

Recent FED announcements regarding the removal of the risk of qualitative failure and proposed tailoring of the stress test for regional banks like Comerica are certainly positive. Of course details in the final rule as well as how it is interpreted and actually implemented will be key in determining the ultimate benefit.

As far as our third quarter results compared to the same period a year ago, our earnings per share is up over 13%. This includes a 6% increase in revenue which reflects the increase in short-term rates, a larger securities portfolio as well as growth in a number of fee categories including card fees, which has been an area of focus for us, expenses were impacted by the $20 million restructuring charge we incurred this quarter as well as higher FDIC expense and technology investments.

Putting these items aside, you can see that expenses have been well-managed and of course our strong credit metrics have resulted in a lower provision for credit losses this year. Also noteworthy, last month our Board appointed a new Independent Director, Michael Van de Ven who is the Chief Operating Officer of Southwest Airlines. He brings to our board a number of key skills including a background in risk management and as a CPA, deep understanding of financial planning and accounting.

We have a strong and diverse board with a good mix of industry, financial and leadership backgrounds. Given the highly regulated nature of our industry as well as its cyclicality, we believe it's important to have long tenured directors with a deep understanding of our business and environment. However we also recognize the importance of bringing fresh perspectives and we are pleased to welcome someone of Michael's caliber to our Board.

And now I will turn the call over to Dave who will go over the quarter in more detail.

Dave Duprey

Thanks Ralph. Good morning, everyone. Turning to Slide 7, following a $1.1 billion increase in average loans in the second quarter, third quarter loan growth was challenging for us, particularly since we had a reduction of over $300 million in the energy portfolio, coupled with seasonality in our auto dealer business, which decreased about $200 million.

Technology and life sciences also declined about $150 million due to the summer slowdown in our discipline focused on maintaining a granular portfolio. Partially offsetting this was loan growth in our mortgage banking business, which benefited from summer home sales combined with robust refi activity.

In addition growth in our commercial real estate business continues be driven by well structured attractive opportunities with existing customers. Quarter-end loans were down over the second quarter with the largest declines in energy and dealer. As of September 30, commitments decreased about $700 million with the largest decline in energy.

In average loan utilization declined two percentage points to 51% with the largest decreases in dealer and energy. However, our pipeline remained strong. Interest earned on loans increased $5 million quarter-over-quarter and our loan yield increased two basis points. There was a benefit from one more day in the quarter, an increase in LIBOR and the second quarter lease residual valuation adjustment that was not repeated.

This was partially offset by lower loan balances and minor impacts from nonaccrual loans, lower fees in the margin and other portfolio dynamics.

Turning to Slide 8, deposit growth was robust as Ralph described increasing almost 3% quarter-over-quarter. Our deposit cost remained low at 14 basis points as we continue to prudently manage pricing for our relationship oriented deposits. We have not increased our standard deposit pricing.

Turning to Slide 9, we maintained our securities book at about $12.5 billion. The estimated duration of our portfolio sits at about three years and the expected duration under a 200 basis point rate shock extends it modestly to 3.9 years. Seasonally higher prepays in the third quarter, combined with the current rate environment put minor pressure in our security portfolio yield as we invest prepays at a lower rate.

To help combat this, we continue to selectively purchase securities with modestly longer duration. For example, over the last few weeks, we have purchased some Ginnie Mae CMO's in the 170s with modestly longer duration, an extension risk than the portfolio average.

Turning to Slide 10, net interest income increased $5 million while the net interest margin decreased 8 basis points. As I discussed earlier, all loan related impacts netted to $5 million and added one basis point to the margin.

Wholesale funding cost increased $2 million due to the increase in six-month LIBOR along with the $2.8 billion in FHLB advances we added during the second quarter. This had a one basis point impact on the margin.

Also securities income declined $1 million as a result of continued yield pressure. Finally the $2.3 billion increase in average balances at the fed, contributed $3 million, but had an eight basis point negative impact on the margin.

Turning to Slide 11, our overall credit picture remains very strong. Total criticized loans declined almost $300 million to $3.3 billion or less than 7% of our total loans at quarter end. Nonaccrual loans represent about 1.3% of our total loans and increased slightly with energy loans driving the increase.

Net charge-offs declined to 13 basis points or only $16 million. Our allowance for credit losses remained stable at $772 million and our allowance-to-loan ratio was 1.48%. Energy loans declined 10% to under $2.5 billion at quarter end. E&P loans make up about 70% of our energy portfolio.

As first as the fall redeterminations, we expect borrowing bases to decrease another 5% to 10% on average, which is much less than the 22% decline resulting from the spring redeterminations. Energy services accounts for about 15% of our portfolio and is most impacted by the cycle. It has had a 35% decline in loans over the past year to about $330 million or less than 1% of our total loan portfolio.

Energy net charge-offs were only $6 million, down from $32 million in the second quarter. The reserve for energy loans continues to be over 8% and of course those reserves may not turn into ultimate losses.

Slide 12 outlines noninterest income, which increased 2%. Commercial lending fees grew with continued strong syndication activity and an increase in commitment fees. Investment banking fees were also up. Partially offsetting this was a $2 million decline in fiduciary income, following seasonally strong personal trust fees in the second quarter.

In addition non-fee categories increased modestly, primarily due to an increase in income from bank owned life insurance, partially offset by a decrease in deferred compensation plan asset returns.

Turning to Slide 13, excluding the $20 million in GEAR Up related restructuring charges, noninterest expenses increased $8 million, primarily due to a $6 million reduction in the gain on sale of leased assets following a relatively large gain received in the second quarter. The remaining increase was primarily due to higher outside processing expense.

Salaries and benefits expense was unchanged. The remaining moving pieces including the impact from one more day and increase in stock comp following a stock forfeiture in the second quarter, seasonally higher staff insurance, as well as the effect from the initial phase of workforce reductions related to GEAR Up and a decline in deferred comp. As Ralph discussed, we expect to clearly see the benefits of our GEAR Up initiative starting the fourth quarter.

Moving to Slide 14 and capital management, we continue to maintain strong capital ratios while returning excess capital to our shareholders in a meaningful way. Our 2016 capital plan includes share repurchases of up to $440 million. The pace of our buyback will be dependent on the balance sheet movements in our financial performance and as Ralph previously stated, restructuring charges are not expected to have an impact on the pace of our share buyback.

In the third quarter, we increased our share buyback and rate dividend 4.5% to $0.23 per share, reflecting our confidence in the business. Through the buyback together with the dividend, we returned $137 million to shareholders or over 90% of our third quarter net income.

Our book value per share increased to $44.91 and has been steadily increasing over the past several years as we continue to focus on creating long-term shareholder value.

Turning to Slide 15, our balance sheet continues to be asset sensitive. As I mentioned a moment ago, we have benefited from the recent increase in LIBOR. About 70% of our loans are LIBOR based with the bulk driven by 30-day LIBOR. Therefore as LIBOR has increased over the past couple of months, our loan portfolio re-priced relatively quickly.

Partially offsetting this is our wholesale funding of which about 45% is based off of six-month LIBOR. Separately as shown on the table, if the Federal Reserve raises its rates 25 basis points and our deposit prices begin to move with that rise at a 25% beta, we believe we would gain about $70 million more in net interest income over a 12-month period.

Of course deposit pricing is only one assumption in our interest rate sensitivity modeling. We provided additional scenarios, other key variables and a list of assumptions in the appendix. While the outlook for rate increase in the near-term continues to fluctuate, our balance sheet is well-positioned to benefit from any increase in rates.

Now I'll turn the call back to Ralph.

Ralph Babb

Thank you, Dave. Our outlook for the fourth quarter relative to the third quarter is shown on Slide 16. We expect to average loan balances to be stable with a seasonal increase in national dealer services, a rebound in technology and life sciences and small increases in several other business.

This is expected to be offset by a seasonal decrease in mortgage banker and continued reduction in energy. Our expectation is that we will see our loan growth resume next year on pace with GDP growth and with less of a headwind from energy. We plan to provide our full outlook for 2017 on our earnings call next quarter.

Our net interest income is expected to increase slightly in the fourth quarter. This includes the effect from the recent increase in LIBOR as well as the November maturity of $650 million in sub debt. With continued strong overall credit quality, we expect the provision and net charge-offs to remain low and range between second and third quarter levels.

As far as the energy portfolio assuming prices in the environment remain relatively stable, we expect non-accruals and charge-offs to remain manageable. Overall, we expect noninterest income to be relatively stable. Excluding the expected declines from third quarter levels of bank-owned life insurance and deferred comp both of which are difficult to predict, overall we expect fourth quarter fee income to remain at the strong level we saw in third quarter.

Noninterest expenses are expected to be lower excluding estimated restructuring expenses of approximately $30 million to $35 million. We expect about $25 million in savings derived from GEAR Up including the benefit from the redesign of our retirement program.

Typical seasonal increases in staff benefits outside processing, marketing and occupancy are expected to be partially offset by a decline in deferred comp, which was $2 million in the third quarter and since it is difficult to predict, we are assuming it will not be repeated.

Given recent industry headlines, I'd like to take a moment to discuss Comerica sales culture. Overall measurement of our banker's performance and compensation is based on a balance scorecard that includes growth, customer satisfaction, operations, risk management and compliance.

While we occasionally run special programs that focus certain products, these do not represent a significant portion of a banker's compensation and are not central to a banker's performance. Our incentive plans are reviewed regularly to help ensure they motivate the appropriate behaviors and operating results. In addition, they are closely monitored including reviews by our compliance, human resources, audit and finance divisions.

Importantly, for the last past 167 years, our business has been built on providing high-quality financial services and establishing lasting client relationships. In closing, we believe we are well-positioned for the future. We benefit meaningfully from any increase in interest rates and as we continue to navigate the energy downturn, our overall credit metrics have remained strong, but we are not waiting for the environment to improve.

We are moving with urgency to execute our GEAR Up initiatives and are fully committed to delivering on these efficiency and revenue opportunities to further enhance our profitability and shareholder value.

Now we will be happy to take any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Scott Siefers with Sandler O'Neill & Partners. Please go ahead.

Ralph Babb

Good morning, Scott.

Brendon

Hey good morning guys. This is Brendan online for Scott. How are you this morning.

Ralph Babb

Oh! Good morning.

Brendon

Just wanted to ask you quickly about -- on the proposed changes to the CCAR process, I know you said it's a positive for you guys which is certainly understandable and I know it's early on in this change here, but could you may be spend a few minutes discussing how you think about capital return in light of these proposed changes?

Ralph Babb

Dave, you want to take that?

Dave Duprey

Yes obviously the MPR system issue and obviously there's been some speeches that give us some real positive expectation, but as Ralph indicated in his comments, how it ultimately ends up in final rules and quite frankly how it is implemented and viewed by the regulators will be the ultimate.

But candidly, we certainly expect to be in a position to continue to what to have the opportunity to do stronger stock buyback and continue to push for that task and candidly we're also pleased to see that there may be more flexibility in terms of our ability to move the dividend.

Brendon

Understood. Thank you for the color.

Ralph Babb

Thank you.

Operator

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

Mike Mayo

Good morning. So you had 20 work streams and out of those 20 work streams, you have 40 million of additional targeted expense benefits in 2017 and 2018. So $35 million of the $40 million would be the replacement of the retirement plan is that correct?

Ralph Babb

That's correct.

Mike Mayo

Okay. And you plan to reduce headcount by 7% in the second half of this year and 4% is done. Do you have a total targeted headcount reduction, has that changed at all?

Ralph Babb

It has not changed. We don’t really have a total per say.

Mike Mayo

Okay. And then I know we've talked about this, as far as being open to strategic moves, open to a sales of the bank, clearly you're taking some tough actions. When you say that you're still open to strategic moves, the sale of the bank, do you actually solicit other banks to see what you're worth or is it -- are you just talking about inbound phone calls and my knowledge is if my -- if my family want to renovate our house or maybe move, sometimes you say, what can we sell our house for to find out before we actually do a big renovation and to push technology you are certainly renovating the house to quite a degree, but have you found out maybe what you be worth under a sale?

Ralph Babb

What I'd say to that Mike as I have said before, we are always open to alternatives that present themselves and when they do, we look at that very carefully and look at it from the perspective of the long term value to the shareholder and its reviewed not only by management and the Board of Directors as well as we use outside people from time to time to make sure that we are evaluating appropriately.

Mike Mayo

All right. Thank you.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of David Eads with UBS. Please go ahead.

Ralph Babb

Good morning, David

David Eads

Maybe just wanted to confirm the strategy around cash balances and AFS portfolio, is it correct to expect that you guys are basically just looking to reinvest repayments at this point to keep the securities portfolio roughly flat and therefore you'll be happy to let the cash balances grow if that's what happened on the deposit side?

Ralph Babb

Yes, that's where we are today. But we are always looking at the alternatives. Dave, do you want to add anything to that?

Dave Duprey

As Ralph said, we are always looking at the alternatives. Candidly, we keep waiting and obviously as we get closer here to December, we'll ultimately see whether the fed moves or not and we will be watching that very closely. But for the time being we are continuing to just take the prepaid and repurchase from that stream.

David Eads

Great. And then maybe if you could comment a little bit on the credit side, it seems like things have really stabilized on the energy and E&P side, wondering if you have seen any change to kind of the broader business conditions and economic business factors and what are you seeing there?

Ralph Babb

Pete, do you want to take that?

Peter Guilfoile

David, we really haven’t seen any deterioration in Texas at all. The portfolio in Houston continues to perform well there are market, small business, commercial real estate down there. That portfolio is holding up really well. So we are very encouraged by that.

Ralph Babb

I would add to that too. As we look at Texas and the expectations for the general economy, while our oil and gas is a big part of the economy, it's less than 15% today and Robert Dye our Chief Economist is projecting GDP for the state for the year to be slightly down about one tenth of a percent, but it's stable.

David Eads

All right. Great. Thanks for taking the questions.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

John Pancari

Good morning.

Ralph Babb

Good morning, John.

John Pancari

On the credit side, on the shared national credit portfolio, I noticed it was down about $360 million from June and how much of that decline was energy and was there any other influence there in terms of pushing those balances lower, anything from the regulators? Thanks.

Ralph Babb

John, most of the decline in our SNC balances where in the energy portfolio. It was just that the typical one-off that we've been seeing in the portfolio for the last several quarters and we think that’s going to continue. Our borrowers in the energy space continue to find it attractive to sell assets and reduce that, get their leverage in order and we expect that to continue for at least the next couple of quarters, so that’s where the bulk of its coming from.

John Pancari

And on that is there -- what’s Shared National Credit at 20% of your loan book, is there any influence by the regulators to temper that growth?

Ralph Babb

No. We have not received that feedback from our regulators at all.

John Pancari

Okay. Good. And then separately also on the credit side, the reserve ratios stands at around 148 basis points of loans, that’s up a little bit from last quarter and your -- and then your MPAs hedged up a little bit, just wanted to get an idea of basically your longer term expectation for the reserve ratio, should we expect that it remains relatively stable here in the 145 to 150 range as a percentage of loans, just given what you are seeing broader for the economic? Thanks.

Ralph Babb

Well we look at every quarter from the ground up credit-by-credit and energy has been playing a big factor in the level of our reserves and so why that we have to do is what happens with energy. There is a lot of positive things happening in energy right now. Prices have been stable. Capital markets are improving. Asset sales remain very robust. We’re getting a lot of pay downs on our criticized credits and of course this quarter our charge-offs where down as well.

But on the other hand there is still a number of these E&P credits that are in bankruptcy and we want to see what happens there. Drilling activity has been coming back, but it's as robust as we would like to see it. And then speaking of the Shared National Credit exam, it’s very easy to downgrade credits that are Shared National Credits.

It’s a little bit sticker upgrade now because first we have to decide we want to upgrade a credit. But then also the agent and the regulators also have to decide. So the upgrades come more slowly than the downgrades. I think one thing that we feel pretty confident about though is, is that our losses continue to be much less than what we are reserving for or allocating to that energy portfolio.

John Pancari

Okay, thanks. If I could ask one more question on the margin side actually, if you could just talk a little bit about what you are seeing in terms of underlying margin trends aside from what we saw was LIBOR, aside from the impact of the excess liquidity or any of our assumptions for the Fed what they are going to do? Just in terms of underlying margin trends from the standpoint of competition on loan pricing etcetera, what are you seeing there?

Ralph Babb

I would say as I know you heard many times from the industry that it’s very competitive out there. And especially with growth as we're seeing in the industry today, looking for good credits and taking care of your current customer is a very big part of the competition today. Curt, would you like to add something to that.

Curtis Farmer

Like you said it well Ralph. I think the main thing for us is just making sure that we are staying true to our strategy, which is very relationship-focused and really trying to focus on those opportunities both with existing clients and new opportunities where we think we have a chance to expand the relationship and sell additional products and services, treasury management derivatives, deposit services etcetera. So we are being selective business-by-business and market-by-market, but it is a very, very competitive environment.

John Pancari

All right, great. Thank you.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Ralph Babb

Good morning.

Erika Najarian

Hi, good morning. You mentioned on the prepared remarks that they are moving pieces to your expenses. I am wondering as we look forward if we exclude the restructuring charges and the $180 million in savings that you have identified already, what would be the business as usual expense trajectory?

Ralph Babb

Dave?

Dave Duprey

Well you can pretty much assume that you are going to have the ongoing cost of merit prices. That’s an expectation that we’ve built-in. There are other challenges in terms of headwinds of the FDIC surcharge clearly comes into play.

We continue to make the required investments in our technology infrastructure and obviously there is -- there is not only a capital outlay to that, but there is obviously the cost associated with the amortization of those investments going forward. So that just give you a little bit of flavor for a few of the headwinds that we'll be looking to phase in 2017 and beyond.

Ralph Babb

I would underline though that given the GEAR Up and our process that has gotten our whole team motivated at looking at all expenses and making sure that we're providing the investments as Dave mentioned in the right places for right returns moving forward.

Dave Duprey

Good point. Thank you.

Erika Najarian

Got it. And so, if I exclude the restructuring charge but add back the lease gain in there, the quarter-over-quarter expense growth was 2% and year-over-year was 3.5%. Is that a fair range that we should assume for '17 in terms of core expenses ex-restructuring and ex-GEAR Up?

Ralph Babb

We'll have a far better opportunity to provide you a lot more color on the 2017 outlook in January. We are just now to the point where we're being very focused on our forecasting for 2017 and can candidly Erika we haven't yet completed that process, but to follow the direction of the points I gave in terms of where we think the headwinds are going to be coming from and I think that will give you at least a sense of direction and we'll provide better clarity on that in January.

Erika Najarian

And just if I could squeeze in one more follow-up to John's question, clearly if your energy portfolio had driven the volatility in your reserves and as we think about going forward, I was wondering, could you give us a little bit more color in terms of whether or not you released dollar reserves in the energy portfolio this quarter and how we should think about that going forward if energy prices stay at this level?

Ralph Babb

Well, I think the thing that we disclosed is that our reserves are still over 8% of the portfolio. We think that that's a good level for now. We're going to look at it at the end of this quarter and see what's going on with prices, what's going on with the portfolio. What's going on with these credits that are in bankruptcy?

The other thing that important, Erika as we look at the entire reserve in relationship to our -- what else is going on in the portfolio and right now everything looks pretty good, but we have to see what's going to be happening a quarter out with regard to commercial real estate or whatever the case may be. So we just take a look at one quarter at a time.

Erika Najarian

Thank you so much.

Ralph Babb

Thank you.

Operator

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

Ralph Babb

Good morning Ken.

Ken Usdin

Thanks good morning, Ralph. Just one more follow-up on the cost side, I understand you to give the guidance on next year at a later time. I just wanted to make sure I understood what the fourth quarter looks like? We've got to gear up and then the absence of that deferred comp expense.

Can you just help us understand the trade-off between those seasonal increases in some of those other line items and just the magnitude of expense decline just to help everyone get kind of good base for the start of the first quarter with GEAR Up?

Ralph Babb

Dave?

Dave Duprey

Well, if you look at, you said ex-restructuring, if you just start with that as the base, which I think will give you a number of above $473 million, obviously we've communicated the $25 million reduction from GEAR Up, but there are some seasonal items that will come into play.

We tend to have a much stronger marketing campaign in the fourth quarter. We do have some seasonally higher occupancy expense as we come into the winter season, coming into the fourth quarter. We also would expect as we have seen the trend, coupled along with rises in revenue, but are outside processing. We'll continue to move up and I think that will give you a general flavor.

I think we also commented in the narrative portion that we also typically see staff insurance bump up a bit in the fourth quarter as people have worked through the deductibles and looking potentially take care of certain issues before they move into the next year.

Ken Usdin

Okay. But all of that is still not enough to offset the positive of the 25 GEAR Up savings, so all of that netting still lower, but modestly lower…

Ralph Babb

Not even remotely close to offsetting the $25 million.

Ken Usdin

Okay. Got it. So it's a decent decline. Okay, great. Second question just on the loan growth side, if I set aside the seasonal businesses and energy and I'm just looking at general middle market corporate banking, business banking all flat sequentially down year-over-year, Ralph, you made the point about growing with GDP and how tough it is, Dave, you mentioned earlier, just on the competitive side.

So where do you expect to see the core business growth coming from and what are the challenges just in terms of keeping up with the industry on that? Is it choice, given the competitive side or is it just you're getting paid down a little bit more, just color on that outlook for the core commercial loan growth side.

Ralph Babb

Well, I think what we've seen to date is people are being a lot more conservative than they have been in the past. They're sitting on a lot of cash. They're in a good financial position and as things begin to pick up, which we're hopeful they will and that's the reason we focus on GDP and where GDP is going, that our customers will begin to invest more in the future as well as some of the new products and services that Curt was talking about that we have or we've upgraded that gives us opportunity as well not only with our current customer base, but also in looking for new customers and growing with the markets where we are.

When you look at the economies today in California, and I mentioned here and Michigan and the growth that's expected for the year, they're in a very good position and our footprints in a very good position. And that's the reason, we feel comfortable that we will be able to grow along with that GDP number, Curt do you want to add to that?

Curtis Farmer

I might just add a couple of comments, Ralph in the narrative earlier and Dave as well talked about what we would expect in the fourth quarter with some rebound in TLS coming off a bit somewhat soft quarter in Q3. The natural seasonality we see in dealer with new model sales both of those, I think will be the headlines for the fourth quarter. Of course, we still got energy working against us as that portfolio continues to decline.

Ralph also shared in toward the outlook going forward that as we think about 2017, we do think that energy decline will start to lessen and we're seeing a few new opportunities that we are selectively looking at with existing clients and we also expect total loan growth across the portfolio would step back in line with GDP.

The final thing, I'd say just from a customer perspective beyond just the competitive environment we face, customers with commodity prices being down, we're certainly seeing less line utilization and then some of our markets, we're seeing a fair amount of M&A activity, which is nearing to the benefit of our clients in terms of liquidity events, I think you see that reflected in some of our deposit growth.

Ken Usdin

Thanks for the color guys.

Curtis Farmer

Thanks.

Operator

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

Ken Zerbe

Great, thanks. I guess first question, just in terms of the buybacks on Slide 14 you mentioned the buybacks depend on financial performance etcetera but can you just remind us what financial performance and/or market conditions, do you need to see above and beyond what we're already seeing that might enable you to actually buy back the entire approved CCAR events?

Ralph Babb

Dave?

Dave Duprey

Well, I'm certainly not going to project that we're not going to buy back the entire amount, but we do need to watch it quarter-over-quarter. Obviously we're not anticipating any negative events in Q4, but unfortunately I can't predict the future. So we'll be watching that very closely.

Do keep in mind that with the CCAR process work, rate increases were built into that baseline. We would certainly hope that we'll see a rate increase here in the not too distant future.

But even without that, we are continuing to work diligently, obviously our provision coming down this quarter, certainly helps that picture as we implement to GEAR Up that certainly helps to add some strength to our financial performance. So on balance, we remain very focused on executing against that, against that plan. But again, I have to be a bit cautious here and say we have to monitor that quarter-over-quarter. And again the restructuring charges will not be a part of that as we go forward, that is our anticipation that's correct.

Ken Zerbe

All right, got it. And then just the other question I had, in terms of the deposit growth obviously really strong this quarter, how much of that transitory because it looks like you put a lot of it into cash rather than into securities?

Dave Duprey

Curt, you want to take that?

Curtis Farmer

Yes where we've seen the primary growth has really been in core deposits, and it's been pretty broad spread across our businesses led by the business bank and specifically middle market, but we also had nice growth in core retail wealth management.

So we have seen some run-off in what I would call interest rate sensitive or non-LCR friendly deposits in the first half of the year, but following that in the third quarter and we expect that to continue into the fourth quarter. We've seen nice deposit growth really across the Board across the markets.

Ken Zerbe

Got it. So essentially the same because its core, it's not transitory and that deposit growth will stay or that deposit balances will stay on your books going forward.

Curtis Farmer

Well I would say that we normally see heading into the first quarter some dip, some seasonality dip in the first quarter and then building as the year goes on. So you really probably in Q3 and Q4 see peak deposits with some slight reduction in the first quarter or so of the year would've building in the second half of the year.

Ken Zerbe

Got it. Understood. Thank you

Dave Duprey

Thank you.

Operator

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

Ralph Babb

Good morning.

Gary Tenner

Thanks. Good morning. Two quick questions, one in terms of Houston office you alluded to it a bit, hoping for some additional color on what you're seeing in terms of pressure on rents with increased vacancy and how that maybe begun to have drift down to impact different groups of office space?

Ralph Babb

Dave.

Dave Duprey

Sure. In Houston the portfolio is holding up very well. We had actually two projects pay off this past quarter. So we're down to 17 projects apartment projects. We're primarily an apartment construction lender in Houston. We don't do officer on other product types. It's primarily apartments and most of those apartments that are in lease up or leasing up well with one or two month worth of concessions which is substantially less, probably less than half, what we assumed in our severe adverse scenario under the stress test.

So we're very pleased with what's going on there in Houston and we're actually seeing some signs of rents stabilizing. If you take a look 12 months from now there is really no new supply coming on for another additional 18 months or so and so we think that's going to bode well for rents in the market.

And then keep in mind that there is, we know that Houston commercial real estate portfolio to withstand the ups and downs of the oil and gas cycles and each one of those project had 30% to 40% cash equity in them.

So there is a lot of room for rents to drop before we're going to see issues with our projects.

Ralph Babb

And a lot of these customers are long-time customers of ours and National as well as…

Gary Tenner

Okay. Thank you. And then I missed the comment on the expected decline in borrowing base here in the fall.

Dave Duprey

We're still very early on in our process, but we would expect to see maybe a modest decline in borrowing bases this time around. Our price stack up is fairly conservative. It's about 20% below the right now and so we would expect maybe a modest decrease, but nothing significant and I would also expect that we'll see more borrowers with stable to improve loan to value this time around than we saw in the spring.

Gary Tenner

Okay. Thank you.

Ralph Babb

Thank you.

Operator

The next question comes from the line of Dave Rochester with Deutsche Bank. Please go ahead.

Dave Rochester

Hey good morning guys.

Ralph Babb

Good morning.

Dave Rochester

I know you mentioned going through the budgeting process now and I don't mean to belabor the expense side, but I was wondering if you would be surprised if expenses actually grew next year versus 2016 given the decent decline you're talking about in 4Q and then all the expenses you've highlighted that are coming next year.

It just seems like that decent dip should possession you for lower expenses in '17 versus '16 is that fair?

Ralph Babb

Dave?

Dave Duprey

Well remember we're communicating here, we expect GEAR Up to drive $150 million in expenses. Our headwinds won't even come close to those numbers. What I'm communicating to you again first of all we haven't finalized 2017. We will see some line items that will have some pressure we typically have merit increases. We would expect that.

You're going to have increased cost with the investments we're making in technology, but those will be minor detraction to that $150 million. So you're still going to see an overall reduction of a significant magnitude.

Dave Rochester

Great, thanks for the color. And then just outside of the roll-off of the $650 million in borrowings you're talking about in 4Q, can just talk about any other benefits on that front you see coming next year?

Ralph Babb

Could you repeat the question?

Dave Rochester

Sure, sure. Are you guys looking for any other roll-off on the funding side that should support in the next year,

Ralph Babb

Well keep in mind that sub debt won't get paid off the mid-November. So you're only going to pick up six weeks of benefit of that pay off. So that will carry over throughout all of 17 and then in terms of other debt I think there's one more maturity coming up in '17 which we will do a replacement funding for at least at this point we anticipate doing a replacement funding for -- it's about $300 million excuse me, $500 million debt replacement.

Dave Rochester

Great. All right. Thanks guys.

Ralph Babb

Thank you.

Operator

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

Steven Alexopoulos

Hey, good morning everybody. I want to start on GEAR Up, given the additional $40 million you guys identified this quarter, at this point are there still more opportunities that you're looking at or has the review of that program largely been completed.

Ralph Babb

I wouldn't say it's ever completed, but I think we have gotten close to the major opportunities, but we will continue to look as well prove it, but don't expect any big changes Dave you agree with that?

Dave Duprey

I agree. Steve our focus now it's making sure each and every one of those initiatives is implemented as planned that we stay very focused on our internal controls, we execute against that strategy. Is there an opportunity maybe generate within each, one of those initiatives another million another half a million, absolutely we're going to focus on that.

But I want to make sure that we don't leave the pressure of a point here of there's going to be another millions of dollars because we have 5 or 10 more initiatives. So we have not yet identified that just is not the case.

Steven Alexopoulos

Okay.

Dave Duprey

But the main focus is there and it's now all about execution.

Steven Alexopoulos

Okay. And then in terms of the changes you are making to the retirement plan, could you just run through those, are you essentially just changing the retirement age is that what's happening here?

Ralph Babb

No, we're shifting to a new construction of the plan and one of the things I mentioned earlier was that, keep in mind that the individuals that are 60 and over and retired individuals today are not being affected and we're moving to a new plan, which will be very competitive as it is put together for the beginning of the year with our competitors.

Steven Alexopoulos

Okay. Is this moving from a defined benefit plan to basically defined contribution? Is that what you're changing?

Ralph Babb

Yes.

Steven Alexopoulos

Okay. That makes sense and separately at $50 oil, how are you guys viewing incremental pressure on the energy portfolio here and is $50 basically high enough to see a material reduction in those inflows and to criticize each quarter. Thanks.

Ralph Babb

Pete do you want to take that?

Peter Guilfoile

Yeah, I think we're getting to a point where the inflows are stabilizing with prices in this general range and we don't expect necessarily prices are going to stay at $50 or above, they’ll fluctuate between probably $40 in the mid $50. As long as it's in that trading range that's been in the last three months, I think you're going to see some stabilization of inflows to criticize.

Borrowers are doing a great job of reducing the breakevens and those that can't get their cost structure in line are selling assets to others that have lower cost structures or and/or lower leverage. So we're seeing a lot of that.

Steven Alexopoulos

Okay. Do you see material reduction in inflows and to criticize this quarter?

Peter Guilfoile

We still had some inflows into criticize, but we also had a lot of reductions too. So we’re very encouraged.

Steven Alexopoulos

Pete you mentioned how the loans that are not only in bankruptcy, but also are non-accrual are performing.

Dave Duprey

Yes. So we have about a dozen or so E&P credits in bankruptcy, another one or two in Energy services. All but one of those is in fact all but one of our nonaccrual loans is that current non-interest in performing, so another very encouraging sign.

Steven Alexopoulos

Okay. Thanks for all the color.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of Bob Ramsey with FBR. Please go ahead.

Bob Ramsey

Hey good morning. Appreciate it and were talking about loan demand earlier comments around commodity prices and M&A as headwinds. I'm just curious what else you're hearing from your borrowers? Have you seen some deceleration in the Fed HC&I loan growth data. Do you think political uncertainty is a piece of if that's short term and things rebound or are there other factors, other concerns you are hearing from customers?

Ralph Babb

I think the uncertainty that's out continues and until that gets more taking into effect and removed, we're not going to see growth that's going to exceed GDP as an example and that's one of the reasons we're using the GDP as kind of a forward indicator. Curt, do you want to add into that?

Curtis Farmer

No, I think you said it well, Ralph. Certainly the election add some uncertainty as well. The regulatory environment and just overall economic environment, just a real lack of CapEx investment really. And I think, across the board as we manage through the last couple years, most corporations have managed down expenses a fair amount, so they're operating with a lower operating base kind of across the board.

Ralph Babb

And we've seen as well, they're very liquid today and that's one of the reasons loan balances are where they are and they're watching with that uncertainty.

Bob Ramsey

Okay. Thank you.

Operator

The next question will come from the line of Geoffrey Elliott with Autonomous Research. Please go ahead.

Ralph Babb

Good morning.

Geoffrey Elliott

Good morning. Thank you for taking the question. I wondered if you could give a bit more detail on the technology and life sciences balances, what drove the decline there? I know you mentioned some are being slower, but if I look at 3Q just it looks like you had $200 million, $300 million in gross sequentially versus $150 million decline. So why the decline and what do you think it recovers going into 4Q?

Ralph Babb

Curt, do you want to take that?

Curtis Farmer

Yes, so for whatever reason we normally see a little bit of seasonality in TLS in the third quarter as we see in a number of our businesses, including core C&I, I think the BC activity slowed a little bit in the quarter, but I think still remains robust. Our pipeline is pretty strong especially in equity fund services and the market there remains healthy overall, the take out of permanent market looks good as well.

And so I think from our perspective, we would expect to see continued growth in TLS overall coming off of a little slower quarter.

Geoffrey Elliott

Great. Thank you.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of Brett Rabatin with Piper Jaffray. Please go ahead.

Ralph Babb

Good morning, Brett.

Brett Rabatin

Hey good morning, Ralph. Just wanted to ask, we've seen some movement in lenders in the Texas market especially and so I was just curious what your experience have been so far through this process in terms of retention of lenders and how you think about if that's any kind of initiative you might have with some of the growth in '17 as adding additional people, any thoughts on that?

Ralph Babb

We are always focused on our people and as well as our pipeline and how we do things from especially new individuals from college and into our credit colleges an example and that's the process we have had that I think is very important to our future both in credit and as well as always having the right number of people that we need to do the things we want to do in the market. Curt, you want to add?

Curtis Farmer

I might just add on top of that the GEAR Up initiative in terms of headcount reduction for us really has been -- we try to focus it on non-revenue producing individuals. So it's really been about increasing spans of control within our management ranks and reducing some of the layers in the corporation, reducing operational staff, but trying to keep our relationship managers fully engaged.

We typically do not do a lot of lift out type hiring. But we will hire where needed in selective markets and while we have reduced staff overall, we certainly will look for opportunities to reallocate staff and selectively add staff where we have growth opportunities including Texas.

Brett Rabatin

Okay. And would you say your net production people are about the same as when you started this process or has there been much of change there?

Curtis Farmer

I'd say all and all about the same from where we were previously. It would depend on lot of business and market by market, but we've grown net relatively the same, with the exception that we are down some producers in our banking centers, which is much about just for the long term trend with the digital and technology as it is anything else.

Ralph Babb

One of the key with the whole process though was as Curt underlined, it was focused on moving the spends and layers and not moving the individual to take care of the relationships that is very important going forward and having the ability and the depth so that we continue to grow as we were talking about it earlier.

Brett Rabatin

Okay. Great. Thanks for the color, Ralph.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of John Moran with Macquarie. Please go ahead.

Ralph Babb

Good morning, John.

John Moran

Good morning. How is it going? So just one -- one quick one on the OpEx for 4Q, the $25 million in GEAR Up savings that's inclusive of the $4 million or $5 million on the pension credit, correct?

Ralph Babb

The pension credit is expected to be about $7 million.

John Moran

Okay, so $7 million so that's inclusive of that okay. Okay, perfect. And then the only other one that I had was just circling back to securities and I think you guys alluded to watching what happened during December, but what you need to invest that cash and I think in your words you were saying waiting for to see something to change the philosophy, is it simplistic to just say if we get 25 basis points in December, January we start to reinvest at a more robust rate.

Ralph Babb

Dave, do you want to take that?

Dave Duprey

A lot of that will depend on whether or not we actually see an increase in December and what commentary do we hear from the fed, quite frankly last year you recall we did move about $2.5 billion in the fourth quarter from cash, which has worked well for us this year.

And we did that in part also anticipating from the commentary back in December that there would be multiple rate rises in 2016 and that hasn’t happened. So we're going to remain cautious, but again December could be all telling here in terms of our direction and what that strategy going forward.

John Moran

Got you. Thanks very much, guys.

Ralph Babb

Thank you.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom

Thanks. Good morning, everyone.

Ralph Babb

Good morning.

Jon Arfstrom

Just one last question here on GEAR Up, any early progress to report on the revenue side as GEAR Up, and maybe an update on confidence and expected time in those revenue flowing in?

Ralph Babb

Curt, do you want to take that.

Curtis Farmer

Yeah. I will John, the revenue side as we've shared, I think previously will layer in over the next two years and so it's not a won and done type scenario and it really --it cuts across a combination of strategies that we're pursuing, the first of which is really about freeing up sales capacity for relationship managers. So we've been working intently to try to identify opportunities to centralize some tasks and functions that are taking up time from our relationship managers today and time from the sales process and that's kind of an ongoing initiative.

The second is that we have worked with the consultant that we are leveraging Boston Consulting Group to develop some new tools that are much more data driven around customer information, helping us to really take a more of a need based approach and assisting our customers and where we think we have opportunities to provide additional services to our clients.

We are very focused on a number of products where we think we have greater contribution in margin and that would include some products that have been revamped for us like our merchant bank card, our product set and a whole number of what I would call products that complement our commercial lending activities from treasury management and card services all of our capital markets activities, syndication, derivatives et cetera.

And then I think wrapping all that up is we're very intent around just making sure that we've got the right sales training with all of our bankers across the board and so that when you look at in summary there is not one product, one idea, but it's a combination of things that we are doing and we feel pretty confident or very confident that we can achieve the overall target that we've set from a revenue standpoint. But again it would be layered in over the course of the next 24 months or so.

Jon Arfstrom

Okay. Basic message it’s still a bit early to start to call that out specifically. Is that right?

Curtis Farmer

Yeah. I think that’s fair.

Jon Arfstrom

Yeah. Okay. Okay, thanks for taking my question.

Curtis Farmer

Thank you.

Operator

Your next question comes from the line of Michael Rose with Raymond James. Please go ahead.

Ralph Babb

Good morning, Michael.

Michael Rose

Hey, good morning. Just a quick energy-related question. On the slides, it looks like a year ago your energy reserves were about 3% to 8% today, given the changes and some of the underwriting guidelines perhaps beginning of the year, how should we think about of a normalized energy provision assuming prices remain around these levels or potentially increase into next year? Thanks.

Ralph Babb

Pete do you want to take that?

Peter Guilfoile

Yeah. I think if prices stabilize I think what we’ll expect to see is that our Criticize would start to improve. We would get some stabilization of loan balances. So things that drive reserves are paydowns and risk ratings. And so what we've been seeing right now Michael is lots of paydowns, but we haven't upgraded live credits yet.

And so I think you're going to see an opportunity to reduce our allocation for reserves on energy once we get paydowns in combination with improved risk ratings. And if prices stay -- remain stable over the next quarter or two, I think we’re going to start to see the risk ratings start to improve.

Michael Rose

Okay. So the provision allocations going forward should be relatively minimal then correct?

Peter Guilfoile

Right now we feel like we are adequately reserved and we don’t see us adding additional reserves for energy or really anything else at this time.

Michael Rose

Okay. That’s helpful. And then you mentioned the pay down activity asset sales things like that driving balance low, when do you think you hit that inflection point and maybe now I know some of the larger competitors have pulled out in market, what is the competition look like now for new energy credits now, are you guys still playing in that space? Thanks.

Ralph Babb

Curt.

Curtis Farmer

Well certainly what we want to do is make sure we are taking care of our good clients and energy is certainly core to the Texas economy overall. We are -- I think we'll start to see a little bit of slowing in the decline in the portfolio overall and as Pete has alluded to our customers I think they behave very well in terms of reducing expenses and line utilization has gone down with redetermination process.

Having said that probably different than prior quarters we are starting to see some select new opportunities with our clients. They've got very strong equity support modest advance grades, very strong hedging and kind of deals that we would want to participate in, but again its had a very modest pace.

And so I think the pace of reduction will continue to slow and we’ll selectively see some new opportunities. But I think on average we’ll keep us in that range of about 5% of our portfolio overall.

Michael Rose

Okay, that’s great color. Thanks for taking my question.

Ralph Babb

Thank you.

Operator

I will now turn the conference back over to the company for any further remarks.

Ralph Babb

I would like to thank everybody for joining us today and your interest in Comerica and I hope you all have a great day. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's call conference call. Thank you all for joining. You may now disconnect.

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