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

Executives

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

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

Karen L. Parkhill - Chief Financial Officer, Vice Chairman and Member of Management Policy Committee

Lars C. Anderson - Member of Management Policy Committee and Executive Vice President of The Business Bank

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

Analysts

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

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

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

Robert Placet - Deutsche Bank AG, Research Division

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

Erika Penala

Josh Levin - Citigroup Inc, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

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

Ken A. Zerbe - Morgan Stanley, Research Division

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

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

Thomas LeTrent - FBR Capital Markets & Co., Research Division

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

Daniel W. Mazur - Harvest Capital Strategies LLC

Jason Harbes - Wells Fargo Securities, LLC, Research Division

Comerica Incorporated (CMA) Q3 2012 Earnings Call October 17, 2012 8:00 AM ET

Operator

Good morning, my name is Matthew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Comerica Third Quarter 2012 Earnings Call. [Operator Instructions] Darlene Persons, Director of Investor Relations, you may begin your conference.

Darlene P. Persons

Thank you, Matthew. Good morning, and welcome to Comerica Third Quarter 2012 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 third quarter results, we will be referring to the slides, which provide additional details on our earnings.

Before we get started, I would like to remind you that this conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause future results to vary from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements.

I refer you to the Safe Harbor statement contained in the release issued today, as well as Slide 2 of this presentation, which I incorporate into this call, as well as our filings with the SEC. Also, this conference call will reference non-GAAP measures and in that regard, I would direct you to the reconciliation of the 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 third quarter 2012 earnings per share of $0.61 or $117 million compared to $0.73 or $144 million for the second quarter and $0.51 or $98 million for the third quarter of 2011. Restructuring expenses related to the Sterling acquisition were $25 million or $0.08 per share in the third quarter compared to $8 million or $0.02 in the second quarter and $33 million or $0.11 in the third quarter of 2011.

Turning to Slide #4 and further highlights, our customer relationship focus supported loan and deposit growth in the third quarter despite a slow growing national economy. Average loans were up $369 million or 1% compared to the second quarter, primarily reflecting an increase of $717 million or 3% in commercial loans. This was the ninth consecutive quarter of average commercial loan growth resulting in more than a 20% year-over-year increase, including our acquisition of Sterling in July 2011. The increase in average commercial loans in the third quarter was primarily driven by increases in Mortgage Banker Finance, Technology & Life Sciences and Energy. Our focus on faster growing markets and areas of expertise is making a positive difference for us.

Strong non-interest-bearing deposit growth continued in the third quarter. We had record average deposits of $50 billion in the third quarter 2012 with an increase of $1 billion, primarily driven by the increase in non-interest-bearing deposits.

The FDIC's annual deposit survey as of June 30, 2012, recently made public, shows that we have increased our deposit market share in Texas, Michigan, California and Arizona. Net interest income declined slightly, reflecting the expected continued shift in loan portfolio mix and decline in accretion, as well as a decline in nonaccrual interest received and a leasing residual value adjustment. Lower loan and securities portfolio yields were partially offset by increased loan volume. Noninterest income decreased primarily due to a $10 million decrease in noncustomer-driven categories, including net securities gains of $6 million and a $5 million annual incentive bonus from a third-party credit card processor, both of which were received in the second quarter and not repeated in the third quarter. In addition, net income from principal investing and warrants declined $3 million.

We maintained our tight control of expenses in the third quarter. Excluding the $17 million increase in restructuring charges related to our Sterling acquisition, noninterest expenses were down $1 million. Restructuring expenses related to the Sterling acquisition are substantially complete and, in the third quarter, were mostly a result of real estate optimization.

Credit quality continued to be strong in the third quarter with 39 basis points of net charge-offs and watch list loans at 8.3% of the total loan portfolio, we are well within our historical normal range. Our capital position remains a source of strength to support our growth. We repurchased 2.9 million shares in the third quarter under our share repurchase program. Combined with our dividend and in accordance with the capital plan approved earlier this year, we returned $119 million to shareholders in the third quarter.

Our outlook for the full year 2012 is unchanged other than a slight increase in our expectation for average loan growth, which is now for an increase of 7% to 8% over full year 2011.

Turning to Slide 5 and some comments about our markets. Average loans in Texas grew 1%, including a 3% increase in commercial loans in the third quarter compared to the second and were up 19% from a year ago, including our acquisition of Sterling in the third quarter of last year. We saw loan growth in the third quarter in Energy, Technology & Life Sciences and Corporate. Average deposits in Texas declined from the second quarter as we expected due to runoff in certain non-relationship deposits and as we adjusted Sterling legacy deposit pricing. However, deposits in Texas are up 11% from a year ago.

The Texas economy continues to be a growth leader, consistently outperforming the national economy. Overall job creation in Texas remains well above the national average and is supported by an active energy industry and strong manufacturing conditions, both of which are supporting gains in the service sector.

Average loans in our Midwest market, which is primarily Michigan, decreased modestly compared to the second quarter. Deposits in the Midwest market increased 2% in the third quarter and were up 6% from a year ago with increases noted in Middle Market, Private Banking, Corporate and Small Business.

The economic recovery in Michigan is broadening, and the state economy continues to improve at a moderate pace, supported by strengthening auto sales. We are optimistic about the continued improvement in Michigan's economy.

In our Western market, which is primarily California, average loans are up more than 2% compared to the second quarter and were up 11% from a year ago. We saw loan growth in many areas in the third quarter, including Technology & Life Sciences, National Dealer Services, Private Banking and Corporate. Average deposits in the Western market are up approximately up 6% compared to the second quarter and are up 17% from a year ago.

The California economy is showing more momentum in 2012, particularly in Northern California. Job growth is improving and housing markets are looking firmer. State fiscal conditions remain challenging and some local governments are also under financial strain. We expect California's economy to continue to improve.

In closing, we feel confident that our footprint and relationship banking strategy will assist us in growing, even in this slowly improving national economy. Given all of the political and economic headlines, particularly about the looming fiscal cliff, we expect our customers to continue to be cautious. We are allocating resources to our faster growing markets and industries where we have considerable expertise. We have demonstrated throughout the cycle that we can carefully manage expenses, offsetting regulatory headwinds. And our capital position remains strong.

And now I will turn the call over to Karen.

Karen L. Parkhill

Thank you, Ralph, and good morning, everyone. Turning to Slide 6. As Ralph mentioned, total average loan growth was 1% or $369 million quarter-over-quarter, as shown on the left-hand side of the slide. On the right-hand side, you can see commercial loans drove the increase, up 3% or $717 million, primarily due to growth in Mortgage Banker Finance, Technology & Life Sciences and Energy. Period-end loans increased $202 million, again, driven by the commercial loan growth of $445 million with increases noted in most lines of business. The green part of the bar shows Mortgage Banker average loan growing again this past quarter, driven by continued positive trends in the refinance market, as well as the market share gains we are making. As we have said in the past, Mortgage Banker outstanding can be volatile and should eventually decline as refinance volume slows.

While we continue to see growth in commercial loans, some of this growth has been offset by a decrease of $344 million or 3% in average commercial mortgage and real estate construction loans. The pace of decline is a reflection of property stabilizing and being refinanced in the end markets, as well as the expected runoff of former Sterling real estate loans that don't fit our strategy.

Total commitment increased for the fifth quarter in a row with $1.2 billion increase in the third quarter. We had commitment increases in every commercial business line, led by Middle Market and Mortgage Banker, resulting in a relatively stable utilization of 48.2%.

Also, our pipeline remains strong in the third quarter with approximately 2/3 attributed to new business.

As shown on Slide 7, our deposits continue to grow and were at an all-time high. Our average non-interest-bearing deposits increased $1.3 billion or 6.7% over the second quarter. The growth was broad based with contributions from almost every business line. We were able to lower deposit pricing by another basis point, as shown by the yellow diamonds on the slide. While we continue to monitor and scrutinize deposit pricing, we don't expect to continue the trend of lowering the overall cost. Our loan-to-deposit ratio stood at 88% at September 30.

Slide 8 provides details on our securities portfolio, which primarily consists of highly liquid, highly rated mortgage-backed securities. Interest earned on the MBS portfolio decreased $2 million from the second quarter due to lower reinvestment yields. There was only a small amount of accelerated premium amortization recognized in the quarter. While the current reinvestment rates for mortgage-backed securities are in the 1.5% range, we do try to invest as opportunistically as possible within our investment parameters to maximize the yield, minimize premium and maintain a short duration. In fact, we pre-purchase securities to replace fourth quarter runoff. Therefore, our MBS portfolio ended the quarter at about $10.1 billion.

In addition, with continued strong deposit growth during the quarter, we are managing the size of the portfolio in conjunction with our excess liquidity. At September 30, the remaining net unamortized premium was about $105 million, or just over 1% of the portfolio balance. The average duration on the portfolio remains low at 2.7 years. Prepayments were about $850 million in the third quarter, and we expect prepayments will be between $850 million to $950 million in the fourth quarter, a slight increase from our prior expectation in light of the impact of lower rates as a result of QE3, as well as the current size of the portfolio.

Turning to Slide 9, our net interest income declined $8 million in the third quarter. Absent the impact of accretion, it declined $5 million. We've summarized in the table on the right the major moving pieces in the quarter. I'll start with the first 2 items, which are highlighted. While we received some interest on nonaccrual loans every quarter, in the second quarter, it was unusually high, driving a decline of $4 million, which had a 3 basis point impact on the third quarter margin. Also, we had a $2 million adjustment to the residual value on 2 assets in our leasing portfolio, which reduced the margin by 2 basis points. Accretion for the purchased discount on the acquired Sterling loan portfolio declined $3 million in the quarter to $15 million, decreasing the margin by 2 basis points. As stated before, accretion should continue to trend downward, as we expect to recognize accretion of about $7 million to $9 million in the fourth quarter.

While we remain focused on holding spreads for new and renewed credit facilities, the continued shift in our portfolio had a $6 million or 3 basis point impact on the net interest margin, which I'll discuss further on the next slide. This impact was partially offset by the $3 million benefit from the increase in average loans in the quarter.

As I already mentioned, lower yields on the reinvestment of our mortgage-backed securities portfolio had a $2 million or 2 basis point negative impact. In addition to lower deposit costs, wholesale funding costs also declined as a result of maturities in the second quarter. Those 2 combined led to a decrease of $2 million and provided a 1 basis point increase to the margin.

One additional day in the quarter added $4 million. And finally, average excess liquidity increased $697 million, reducing the net interest margin by 3 basis points.

As we have stated before, our asset-sensitive balance sheet remains well positioned for rising rates. We believe a 200 basis point annual increase in rates, equivalent to 100 basis points on average, would result in over $170 million increase in net interest income.

Flipping to Slide 10. As shown in the top left, loan yields declined 13 basis points in total, including 9 basis points resulting from the decline in accretion, the decrease in nonaccrual interest received and the lease residual adjustment. The rest, 4 basis points of the decline, can be attributed to mix shift in the loan portfolio include our higher yielding Commercial Real Estate loan being replaced by lower yielding commercial loans, older fixed-rate loans maturing, some of which are refinanced at current yields, and positive credit migration.

The top right chart shows our proportion of fixed-rate loans has declined from 18% to 16% over the past year. While this does impact us, it is important to note that our fixed-rate loans, as a percentage of total loans, is the lowest among our peers, and 75% of our floating rate loans are LIBOR based, predominately 30-day LIBOR. Therefore, changes in LIBOR, up or down, particularly 30-day LIBOR, have an impact on our yields.

In the bottom left chart, positive credit migration is apparent in the declining proportion of the watch list loans and increasing proportion of higher quality loans. Higher quality credit loans comprise 92% of the portfolio compared to 88% a year ago. Generally, the lower the credit risk, the lower the yield on a loan.

Lastly, the portfolio mix shift of decreasing Commercial Real Estate loans being replaced by commercial loans is reflected in the bottom right chart. Commercial Real Estate loans tend to have higher yields than C&I loans, and C&I loans now make up 62% of our portfolio compared to 55% a year ago. It is important to note that we expected the impact on our yields from these mix shift factors will slow, as the repricing and replacement of fixed-rate loans bottom, Commercial Real Estate will turn at some point and we are well within our normal historical credit quality range.

Turning to the credit picture on Slide 11. Credit quality continued to be strong. Net charge-offs remain low at $43 million or 39 basis points of average loans. Our provision for credit losses was $22 million. This was a small increase from the second quarter and reflects the variability you'd expect, given the fact that our credit metrics are within normal historical ranges. As shown on the right, our watch list and nonperforming loans continue to trend downward. Watch list loans decreased $182 million to $3.7 billion, or 8.3% of total loans. Nonperforming loans decreased $55 million. We are now at the lowest level seen since 2008. The carrying value of our nonaccrual loans is currently about 60% of the contractual value. Foreclosed property also declined and remains very low at $63 million. Our allowance to NPLs was 94%.

Slide 12 outlines noninterest income, which decreased $14 million in the quarter, with $10 million due to decreases in certain noncustomer-related categories. As Ralph mentioned, in the second quarter, we recorded net securities gains and an incentive bonus received from our third-party credit card provider that were not repeated in the third quarter. Also, net income from principal investing and warrants, which varies quarter-to-quarter, declined $3 million. These declines were partially offset by a $5 million decrease in deferred compensation asset returns, which is completely offset in deferred compensation plan expense. In addition, customer-driven fees declined $4 million, including a $3 million decrease in customer derivative income. Almost all other customer fee income categories were relatively stable.

Turning to Slide 13, we continue to maintain good expense control. Excluding restructuring costs, expenses declined $1 million. We had $25 million in restructuring costs in the third quarter related to the acquisition of Sterling, which closed in July of 2011. We expect restructuring charges related to the Sterling acquisition will be complete with final restructuring expenses of $1 million to $4 million in the fourth quarter. We had a $3 million increase in salaries. The increase was primarily due to a decrease -- to a -- was primarily due to a $5 million increase in deferred compensation, which, as I mentioned, is completely offset in noninterest income. Absent the impact from deferred compensation, salaries expense would've been down, driven by a $3 million decrease in executive incentives. Our workforce was stable quarter-over-quarter and has decreased 7% over the past year, including the headcount related to Sterling as shown on the bottom chart on the slide. Other noninterest expense included a $5 million decrease in legal expenses.

Moving to Slide 14 and capital. As Ralph mentioned, we repurchased 2.9 million shares under our share repurchase program in the third quarter. And when combined with the shares repurchased in the first 2 quarters, we have completed $210 million of our $375 million capital plan put in place this past March. As far as Basel III, we continued to believe that under the proposed stricter capital and risk-weighted assets definition on a fully phased-in pro forma basis, Comerica is currently estimated to exceed the standards for well-capitalized banks. If calculated according to the proposed rules with the balance sheet as it stands today, our Tier 1 Capital ratio is estimated to be comfortably above the new 8.5% regulatory standard, which will be phased in over the next 7 years.

Finally, turning to Slide 15, our outlook for the full year 2012 compared to 2011 has not changed, other than a slight increase to our expectations for loan growth. We expect average loans to grow 7% to 8%. Our loan growth so far this year has been strong and broad based, and we have benefited from our expertise in Mortgage Banker, National Dealer Services and Energy. Going forward, we expect Commercial Real Estate loans to continue to decline and Mortgage Banker outstanding to eventually normalize, in line with refinanced activity. In addition, the current uncertain economic environment does bear on demand for new loans, and we intend to continue to exercise relationship pricing discipline. As stated earlier, on net interest income, we expect accretion to be $7 million to $9 million in the fourth quarter, down from $15 million in the third quarter, and to continue to decline, though at a slower pace, each quarter until the remaining balance of about $60 million is depleted. In addition to accretion, we expect that the impact from the continued mix shift of the loan portfolio will slow, as older fixed-rate loans mature and the decline in Commercial Real Estate ultimately turns.

On noninterest income and expense, we will continue to work to offset the regulatory headwinds by seeking full customer relationships and maintaining expense control.

In closing, we are pleased with our continued loan and deposit growth, solid customer fee income generation, tight expense management and strong credit performance. In the current environment, we remain keenly focused on the bottom line. Now we are happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steven Alexopoulos with JPMorgan.

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

Curious, if we look at the list of items impacting the margin on Slide 9, is the right way to think about pressure on the margin that the pressure from loan portfolio dynamics I know, Karen, you said, that might abate a bit and the lower MBS yield, which sounds like they might pick up because you prepurchased securities? Should that combined continue to put roughly this amount of pressure on the margin each quarter?

Karen L. Parkhill

Yes, as I said, you should think about the impact on the loan portfolio dynamics, Steve, as slowing over time because it's due to fixed-rate loans maturing, and those contractual maturities will slow over time. It's also due to the impact of the Commercial Real Estate and the improving credit quality. And again, both of those should slow. On the securities yield, that is obviously a factor of the overall rate environment. And we will think about tactically prepurchasing to try to, within our investment parameters, to try to minimize that impact.

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

Karen, could you just follow up and give us some color on the yield and duration that you're actually adding new securities today?

Karen L. Parkhill

Sure. The yield is very similar to the overall portfolio yield. As you can see, even with the actions that we took this quarter, the duration of the portfolio did not change, still at 2.7 years. And the yields under which we're purchasing today are around the 150 area.

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

Okay. Can I ask a follow-up question on that? Just to Ralph. Ralph, you communicated over the past couple of months, and again on this call, this expectation for loan growth to slow, talking about uncertainty in the business community and fiscal cliff. At this stage, is this still chatter among your clients? Or are you starting to actually see this play out?

Ralph W. Babb

I think, in answer to your question, customers are continuing to be cautious. And while we did see growth, it was slowing growth during the quarter. And I think that's what you would expect given that a lot of these issues are going to come to fruition here in the next several months. I mean, you'll have the election, you'll have the fiscal cliff, and people are waiting to see what they think will happen. Lars, you've seen anything different?

Lars C. Anderson

No, Ralph. I think that accurately kind of depicts what we're hearing from our customers. An interesting, I think, metric though that we've got to look at is our customers are clearly getting healthier. They're delevering, they're building liquidity. What, Steve, you may have picked up in the deck was we did see a very significant increase in commitments. In fact, those went up over $1.2 billion. So the interesting thing is we're seeing activity levels. And frankly, we're seeing a lot of activity level in just general Middle Market. They're just not borrowing. They're not making the investments. But frankly, we are very encouraged to see that level of commitment rise.

Ralph W. Babb

I think that's underlying, too, with the level of deposits we're seeing with the new record deposits, and that's coming in from many of our businesses.

Lars C. Anderson

That's right.

Ralph W. Babb

People are sitting on the liquidity, as Lars mentioned, and waiting to see what's going to happen here. The good news is, they're making good money and having good growth internally, but they're being very careful about investing for the future as my editorial comment.

Operator

The next question comes from the line of Ryan Nash with Goldman Sachs.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Just in terms of the loan growth commercial was strong once again, much of the growth was -- did come from the Mortgage Banker Finance, and Karen, I know you said the outlook is for a decline. But just given what the industry is seeing in refis, it's not surprising to me it's up as much as it is and you noted market share gains. But should we eventually see a decline, given -- I know you guys have used the MBA forecast? How are you thinking about normalization as we look into 4Q or even as we look into 2013? Can you give us a little bit of color in terms of how you're thinking about the normalization from here?

Karen L. Parkhill

Sure. Mortgage Banker, as we said before, can be very variable and is very difficult to predict. The Mortgage Banker Association forecast for the fourth quarter does show a decline in application volume. Given the low rate environment, it's hard to see if that will ultimately happen. But as we said before, it should decline at some point, it's just difficult to say exactly when.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Got it. And if I could ask one follow-up question. Just in terms of -- to follow up with Steve's question, in terms of securities portfolio, you're now at $9.4 billion on the MBS portfolio. You historically talked about $9 billion. Just given where reinvestment yields are right now at 1.5%, as you noted, should we expect to see that portfolio shrink over time and we could actually see the balance sheet shrink a little bit just given where loan yields currently are right now? Sorry, given where securities yields are right now?

Karen L. Parkhill

Ultimately, we do want loan growth, and we want to make sure that we are very positioned for loan growth. So ultimately, that portfolio shrinking is a good sign because it would be a result of loan growth. In the meantime, we are comfortable with our securities portfolio where it sits today. We look at it all the time, taking into account our forecast for where deposits are going to be going, where loan growth is going to be going and keeping in mind the fact that we want to be well positioned for loan growth.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Great. If I can just -- Sorry, Lars, go ahead.

Lars C. Anderson

No, I was just going to say that, that is -- the key is, Karen was saying with managing our excess liquidity.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Great. If I could just squeeze one quick last one in there. On the commercial loans, of the 14 basis points of yield compression you showed, can you break it down in terms of how much of that was from runoff of the accretion versus how much are you actually seeing core pricing pressure on the commercial side?

Karen L. Parkhill

Yes. I think it's important on the yield to know that 9 basis points of that 14 basis point decline was from accretion, the lease portfolio adjustment and the impact on the nonaccruals that we noted. The rest, the 4 basis point decline, was from those 3 portfolio impacts that we talked about on Slide 10.

Operator

Your next question comes from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

I was wondering if you could provide us some perspective on why your Midwest loan balances are still declining, especially because many of your larger Midwest competitors have grown in the last year. And I'm wondering if you can also highlight overall competition pricing and also, you can kind of cross why your optimistic earlier comments on Michigan haven't yet translated to loan growth yet.

Ralph W. Babb

Okay. Lars, would you like to comment on that?

Lars C. Anderson

Yes, I'd be glad to. Yes, in linked quarter, you did see in the Midwest market a slight decline in the balances there. And it was pretty much in a number of different categories. But on the flip side of that, and I referenced this earlier, Craig, with -- in my comments to Steve, when we look at the commitment level in Michigan, they continue to increase. And in fact, they were one of largest contributors to the increase in overall commitment levels for that portfolio. So a lot of our Middle Market customers, and even our wealth customers that bank with us, are very connected, obviously, to the auto industry. The auto industry has come back very strong. There's a lot of liquidity delevering going on. Frankly, I'm very encouraged with the numbers of customers we have, the numbers of customers we continue to pick up. We can't control the usage under the facilities, but what we can focus on is the number of customers we're serving in Michigan, the number of customers we're serving in Middle Market banking, executing our relationship banking model. And I think we've seen, even in the local -- or the most recent market share gains in deposits, that we continue to stay very focused on this critical market for our franchise. Frankly, I'm very, very encouraged there. We're doing some things right now with Wealth Management with that team cross-selling those products into -- at a much deeper level our Middle Market banking book of business. And frankly, that is going extremely well. We've got some very experienced bankers. We got some long-term relationships, and I'm very encouraged about that marketplace.

Ralph W. Babb

Just to underline that, as we were visiting with customers recently, we heard from a number of those customers that they are doing what we were indicating earlier. They're building their cash and waiting and want to run with a higher level of liquidity than they have in the past as well.

Lars C. Anderson

Yes, I think we, to that point, we see that in Michigan. We also see that across the rest of the franchise, frankly. There is a much more conservative perspective around maintaining liquidity levels for the customers that we bank and we target.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And Lars, on the National Dealer business, which is mostly a Western business, not a Midwest business for you, do have an interest in making that more diverse? So growing the Midwest and Texas business there? And also, you're very diverse in terms of the guys you work with, the manufacturers. Would you want a larger U.S. weighting in there, too, from the U.S. manufacturers?

Lars C. Anderson

Yes, well, first of all, if you look at our business today, 43% of the overall nameplates are the Japanese. We have somewhere, I think, just under 25% is the U.S. nameplates and then the balance is rounded out, hence others. Those have shifted over time as I think the market has shifted and consumer demand has changed. I think we're where we need to be right now to optimize our performance with our dealers. We're very focused on the dealers, maybe a little less so on the brand. We've got a number of dealers that we worked with for a very long period of time, deep relationships. And frankly, some of the nameplates that they carry have changed as we've come through the cycle. Now I would point out, when you look at the dealer portfolio, you will see a concentration on the West Coast in balances. That, you have to keep in mind, is where the dealers are headquartered, okay? We're very focused on local relationships, local decision making. It's very consistent with our relationship banking strategy. And frankly, the dealers on the West Coast have performed very, very well, especially the strongest, which, as you know, is what we focus on in our dealer business. But many of those dealers are doing business, frankly, throughout the country. So I think it's less about focusing on the West Coast, it's more about focusing on the very best in the industry, keeping the ones we have and frankly, keeping a very disciplined strategy and staying very focused on picking up new customers that fit in a long-term proven strategy.

Ralph W. Babb

You might mention, too, Lars, about our mega-dealer in underlining the...

Lars C. Anderson

Yes, yes, that's right, and I guess I took for granted a little bit our strategy that it's really clear, we do take a mega-dealer. We're very focused, in case you're less familiar on this, with really the larger dealers. These are dealers that, in many cases, have multiple, not just points of sale, but also have multiple brands, creates balance in their franchise, which we really appreciate. But we're really not focused on the moms and the pops, and of course, many of those got hurt more going through the most recent recession. We're focused on the best, the strongest, we think, in the business. And frankly, while we didn't have as much growth in just linked quarters, this has been a great long-term growth business for us. And frankly, I'm less concerned about the quarter-to-quarter growth in balances as I am about the numbers of dealers that we retain, we deepen our relationships with, and frankly, picking up just the best in the industry.

Operator

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

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

I guess this question is for Lars. Lars, just wondering what kind of competitive dynamics you're seeing in some of your Specialty commercial lines like Energy and Tech & Life Sciences where maybe we've seen some new entrants come in, in the last year. Are you guys -- feel like you're gaining market share in these areas? Or just can you give us some details there?

Lars C. Anderson

Right. Yes, in what I define as some of our Middle Market industry groups, it's all part of our Middle Market strategy. In some of those areas that have had very nice growth, obviously, in the U.S., the auto industry, Technology & Life Sciences and the Mortgage businesses have all benefited nicely. And while, with our unique industry expertise, we have been able to distinguish ourselves and clearly have some leadership positions in those areas, we expect to continue to grow those businesses. We have very tenured bankers. We have the right products. Frankly, we're in the right places. Now I would tell you that it is more competitive today almost across every line of business that we've got. But I've seen this throughout my career. You do see different institutions, banks will jump in and out of industries. We've stayed very consistent in our industry areas. And I think that our customers know that, the industries know that, we stayed very committed. And frankly, we get paid a premium for that. And we're going to continue to stay very focused on our relationship banking model, and we're going to stay very focused on getting paid a premium for that. Even, to point out, Jennifer, with the pricing pressures we have gotten in some of these Specialty areas, as well as Middle Market, Corporate, some of our others, we, as a company, have largely been able to hold our loan spreads now for 3 quarters in a row. I think that's pretty remarkable, and I think it's evidence of our successful relationship banking model.

Operator

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

Robert Placet - Deutsche Bank AG, Research Division

This is Rob Placet from Matt's team. Just as a follow-up on the topic of loan growth, looking at Slide 5, specifically as it relates to the Texas market. The chart seems to indicate the pace of growth is slowing a bit there the past few quarters. Just given how much of a focus Texas is for Comerica, curious if you can speak to some of the trends you're seeing down there. Is this just a function of continued uncertainty among customers or...

Ralph W. Babb

Lars?

Lars C. Anderson

Yes, absolutely. I'd be glad to answer that. What you've seen, obviously, over a long period of time, Rob, is that the Texas market has been a source of excellent growth for our company. Quarter-to-quarter, you end up with some lumpiness in particular businesses and -- but I'm very, very encouraged. In fact, if you look at our overall commitments today as a company, we saw and continue to see excellent positioning in our Texas market. Utilization rates can kind of move around a little bit, but I feel very encouraged. In fact, I would point out in the Houston market, that continues to be, which happens to be a big part of the ex-Sterling Bank footprint, that's one of our highest productivity areas for commercial banking. But that includes Small Business Banking. In fact, we're seeing record levels of pipeline building in the Houston metropolitan market in Small Business. So we're very, very encouraged about what the Sterling franchise has done for us in Texas. Frankly, one of the things that distinguishes us, I think, in our business model is our local decision-making, local leadership. Downey Bridgwater, who was CEO of Sterling, is heading that up, bringing together all the resources of the bank there. And it's not just in Small Business, it's not just in Retail, it's not just in our commercial banking, but we're seeing at a noninterest income opportunities and list there, too. So I think we're very well positioned from the macroeconomics of the Texas market but also with the execution of our relationship banking model here.

Karen L. Parkhill

And what I would just add to that, Rob, going on in Texas is the purposeful decline of the some of the Commercial Real Estate loans that we acquired with Sterling. That's happening on the loan side. And even on the deposit side, as we reprice the deposits in that market, there is purposeful decline of some of the higher-rate CDs going on in that market.

Robert Placet - Deutsche Bank AG, Research Division

Okay, great. That's helpful. And then also just a follow-up on the decline in the loan yield this quarter. Should we take your comments to imply that you're actually not seeing any core pricing pressure, but rather it's just some of the onetime items this quarter, the impact from lower accretion and the loan mix shift?

Ralph W. Babb

Lars?

Lars C. Anderson

Sure. Clearly, as Karen pointed out well before, we do have the continual runoff and refinancing of some of the higher-fixed-rate mortgage loans, kind of a remix of the business tilting towards C&I, less Commercial Real Estate and positive asset quality migration. Those all contribute to it. But if you put those aside and I look at just our core loan spreads, what we're doing with our new business, with our renewed business, overall, I'm not going to tell you it's not -- it's easy. It's a fistfight out there in terms of competitive pricing day to day. My team knows that in the footprint, the Retail Bank, the Wealth Management team. However, in spite of that, as I pointed out before, for 3 quarters in a row, our loan spreads have held. And frankly, I think that is the best evidence of our relationship banking model, our experienced bankers, frankly, our industry expertise.

Operator

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

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

This is actually Bryan Batory calling from Ken's team. My question is on the excess liquidity position. So that obviously built a little bit this quarter, and it looks like you guys put some to work at the end of the quarter just buying the securities. But if loan demand remains weak, what is your appetite to further invest or further put that to work in the securities portfolio just given where rates are today?

Ralph W. Babb

Karen?

Karen L. Parkhill

Thank you, Brian. As I mentioned, we are very focused on loan growth. That said, we do manage our overall portfolio with a continual eye looking to the future on where we think deposits will go and where we think loans will go. When we think about the securities portfolio, one of the things that we are very mindful of is the fact that we want to be well positioned for loan growth, and as rates rise, the securities portfolio will be marked and will have an extension risk on it. And as it's marked-to-market, with the new proposed Basel III capital rule and the AOCI filter, that could have a significant impact on capital. So we are weighing all of these things, where we think deposits will go, where we think loans will go, excess liquidity, the longer-term impact of the securities portfolio, should we increase it, as we make these decisions. It is a fluid process. We continually monitor it.

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

That's great. And my follow-up is just on expenses. So they've been pretty well contained over the past couple of quarters, and I think we're starting to see the efficiency plan that you guys announced earlier this year show. But given the low rate environment, are there any other levers you can pull on the expense side to offset some of the pressures that we could see on revenues?

Karen L. Parkhill

Yes, we are continually focused on expenses, and Comerica has been good for a long time at managing our expenses. But that said, as we continually focus on it and continually look at where we can be more efficient, there will be and are additional levers that we will pull to continually manage expenses flat to down.

Operator

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

Erika Penala

My question is on capital returns for next year. Clearly, this year, Ralph, you've returned a good amount of capital back to shareholders. But what I gather from this call is given the rate environment and the growth trajectory in the U.S., and you mentioned that corporates have tons of cash, the revenue outlook for the industry will remain challenging next year. I guess could you give us a sense of how aggressive well-capitalized institutions like Comerica can be next year in terms of the stress test? Additionally, what is your propensity to buy growth with that excess capital next year?

Ralph W. Babb

Well, I think just underlining what Karen was talking about earlier, this is not the time to stretch and go away from your basic model, which is relationship, as you heard Lars talk about on commercial lending, the same thing is true in Wealth Management and Retail. And what's going to happen is we're going to have to see what the rules are as well. We have not seen yet the final rules from a liquidity standpoint and other things that need to come out. And therefore, as we have historically, we've been aggressive at returning capital, as you've just mentioned, and we will look at that as well. But a lot will depend on where we think everything is moving at that point in time and where the rules stand as well. Karen, do you want to add anything to that?

Karen L. Parkhill

Yes, I would just say, Erika, in particular on the stress test, we hope to receive the scenarios from the fed in early November, so it's too early, honestly, to say anything about the stress test. We will be running it this year. We will be submitting again in January. And we do recognize that we come at this from a position of strength.

Erika Penala

Got it. And I guess is it fair to assume, if the parameters are similar to last year, that given that you're entering this year, to your point, in a position of even greater capital strength, we could assume that the capital return trajectory for Comerica can continue to keep building?

Karen L. Parkhill

I think it's too early to assume anything because it's a new process each year and a new scenario each year.

Ralph W. Babb

We'll have to work our way through it.

Operator

Your next question comes from the line of Josh Levin with Citigroup.

Josh Levin - Citigroup Inc, Research Division

I want to ask more on the NIM. When you were sort of signaling -- I just want to get -- understand, you finished the quarter 2.96% for NIM. We should think going forward that there is going to be some more compression in the current environment, although the rate of compression will abate. Is that the right way to think about things?

Karen L. Parkhill

As you know, we focus more on the net interest income on the dollar side than on the rate side. But what I will say is that you will see some continued decrease in accretion, as we've talked about. We expect the next quarter accretion to be $7 million to $9 million versus the $15 million that we had this quarter. And going forward, accretion should continue to slow as we have about $60 million left of accretion over the 4-year life of the rest of the loans. So that will come in over time, but slow each quarter. As you think about the rest of net interest income, the loan portfolio dynamics that we talked about on Slide 10 should slow over time, but they do exist still. And on the mortgage-backed securities portfolio, while we continue to manage that as best we can, that is impacted by the current rate environment.

Josh Levin - Citigroup Inc, Research Division

Okay. And Ralph and Lars, you talked about some of your clients being reticent right now to actually go ahead and invest in their businesses. Do they just need some kind of certainty? Do they just need to know the outcome of the elections and it doesn't really sort of matter who wins, they'll go ahead and invest in it? Or is it going to sort of matter who wins the election? I mean, how should we think about it? They just need certainty, or do they actually need to know what path we're going down?

Ralph W. Babb

I think it's certainty because I think as you look back over history, people can deal with certainty if they know what the rules are and what the expectations are moving forward, and that's kind of what we're hearing is more of the uncertainty. And it's a little different for each customer, depending on the businesses they're in and how they're impacted. But as was mentioned earlier, everyone is being very cautious here and waiting to get that certainty but also strengthening their balance sheets, which, longer term, will be a positive from that standpoint.

Operator

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

Stephen Scinicariello - UBS Investment Bank, Research Division

I just want to follow up on the deliberate mix shift in the loan portfolio. Just kind of curious, maybe Lars could provide some color with this, I'm just curious, given that the yields are holding up much better on the CRE side than on the C&I side, I'm just curious what's going to make the risk-reward a little bit more attractive, where you don't just see maybe the slowing of the runoff but maybe you see some attractive opportunities on that side of the portfolio.

Lars C. Anderson

Yes, and you're speaking, Steve, particularly to the Commercial Real Estate side of the portfolio, correct?

Stephen Scinicariello - UBS Investment Bank, Research Division

Exactly.

Lars C. Anderson

So first of all, we've shared before our strategy and continues to be our Commercial Real Estate strategy is very much of an in-footprint urban market kind of oriented focus. What we are seeing is primarily multifamily activities. Now just because the portfolio has seen some declines and, as Karen pointed out, a portion of that is runoff of nonstrategic kind of assets, opportunities that we've got in the portfolio, that will eventually subside. We have had, over the last number of quarters, though, a lot of volume. We have closed a lot of multifamily. We continue to see a few other asset classes where we've been very deliberate and conservative in our approach. But for example, an office in the Northern California market, which, frankly, is red-hot, industrial in Southern Cal, which is very, very strong. I think we're very well positioned. We've got the right model. We've got the right bankers. We've got a lot of experience, but we're going to be very deliberate. We're going to be very focused, and frankly, we're going to make sure that we execute our relationship banking model. This is not just about project finance. This is really more about working with developers that we've known for a very, very long period of time. And by the way, an increasing amount of them are doing their wealth business with us, which is great to see, frankly because we stood by them going through this past cycle and I think we have deeper relationships. So I do think we're going to continue to see opportunities there. I do think that a lot of the construction loans that we've closed and, as we see, fundings are going to start to impact, on a positive way, that portfolio. And clearly, we are getting better spreads in that portfolio than you would in a typical middle market C&I opportunity. I see it as source -- as an opportunity for growth. It's just we got to get out, I think, a little bit further into next year.

Stephen Scinicariello - UBS Investment Bank, Research Division

Got you. That's great color. And then my second question kind of relates to that Michigan market and a lot of the positive momentum that you're seeing up there. I'm just kind of curious how you think the recent acquisition of Citizens Republic there, does that create some more potential opportunities for you to take market share, or how do you think about that?

Ralph W. Babb

We've been in that market, as I think everybody knows, well over 160 years. We're well known. We've got a great team there, and as things move forward, as Lars was talking about earlier, the economy will provide increasing opportunities. I don't think that any one situation will change that to any degree.

Operator

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

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

I wanted to ask -- I have in my notes that the Mortgage Bankers portfolio is about 85% refi. Can you give any color around if that's sort of the case for the third quarter and generally speaking, if there's any concerted effort to move that more towards purchase-type model?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes, we have seen a bit of a shift. If you look at the third quarter, our refi volume was about 75%. So we did see some increase in the activity of purchase volumes in the third quarter for volumes. Are we positioned to capture more of the purchase market? Absolutely. The key for us is that we're working with the right mortgage companies. And there's been a lot of change and shift in how mortgages are originated in this industry, and frankly, I think that we're very well positioned. The mortgage companies that we're working with typically are the larger, stronger independent ones, and frankly, they're capturing a lot of volume, and they're doing very well. So I continue to see this as a long-term business for us. It's going to have some variation in the balances, but I pointed this out before, for me, the key is to have a deep relationship with them, to be one of the preferred lenders. Our treasury management cross-sell, which I use as a nice bellwether for deepening our relationships, is over 90% with the mortgage companies we work with.

Operator

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

Ken A. Zerbe - Morgan Stanley, Research Division

Can you just talk about National Dealer just for a second? Have you seen the falloff in average balances this quarter? And I'm asking because I'm trying to get a sense of what is going into your 7% to 8% loan growth assumptions for the year.

Ralph W. Babb

Lars?

Lars C. Anderson

Okay, speaking more specifically just about the dealer portfolio, first of all, because we do have, obviously, a couple of businesses, including mortgage banking finance, with variability, if you looked back before this year over the last decade, we really only saw one fall period where we did not see a seasonal decline in inventories as our dealers cleared the lots, really position themselves for new year models. This year, we have not seen it happen. And I would tell you the primary reason that we have not seen the declines in those balances is the Japanese nameplates, frankly, have been rebuilding their market share in the U.S., and you see that showing up in the average days on hand of inventory. That is the days that a car sits on the lot has actually increased in the industry. But that's really driven by the Asian brands. So we've just seen less variation in that particular business. The mortgage banking finance, we'll just have to see, to Karen's point, how that impacts our outstandings on a go-forward basis.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, that helps. And then just quickly on the interest on nonaccruals, obviously, you made a point saying the second quarter is very high, third quarter is not nearly as high. When you look at your, I guess, troubled -- or your credit -- troubled credit portfolio, how much room left is there potentially to get additional increases in the interest on nonaccruals as those cure themselves? Or are we more likely to see a sustainable level at these lower levels of additional interest income?

Ralph W. Babb

John?

John M. Killian

Every quarter, we see, as Karen alluded to before, kind of a steady state level of interest that we do earn on nonaccrual loans. It was just a particular event in the second quarter. One credit in particular plus a small part of another that we had a very fortunate event, where they were able to refinance and pay us off in full, and that spiked the nonaccrual interest in that quarter. On a going-run rate basis, that's really hard to predict that companies can do that, so I would say that Q2 was definitely an aberration. And I point you to the kind of the steady run rate for prior quarters as a way to look at it going forward.

Operator

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

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

All the income statement and balance sheet questions taken care of. I guess just one question for Ralph. As you look at the revenue pressure across the industry and the potential for negative earnings growth next year at Comerica, if I just look at consensus and where it could go, does that change your appetite at all to do deals as a way to maybe fill in that earnings hole in this challenging revenue environment?

Ralph W. Babb

As we've said before, we feel very comfortable today with where our footprint is. We have a lot of opportunity, especially given the growth we've had here in Texas, with the Sterling acquisition that Lars was talking about earlier and our position in California, 2 of the largest markets in the country and now, as I mentioned earlier as well, with Michigan's economy picking up. I think we're very well positioned to take advantage of growth in these markets. And the acquisitions, while we always look to see those, today, it would have to be a very strategic opportunity, and there wouldn’t be many of those from that standpoint.

Karen L. Parkhill

And Terry, I would just add that while the environment is not so rosy right now for banks, we are very focused on the bottom line and growing that by controlling what we can.

Operator

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

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

I just have one follow-up. Just in terms of, Lars, your comments on the Commercial Real Estate runoff, could you talk about kind of how much more planned runoff there would be from the Sterling portfolio?

Lars C. Anderson

Very difficult to tell. When you look at that, you got to keep in mind there's a couple of different dynamics going on there, and frankly, one is the interest rate environment. The opportunity for some of those customers to refinance at another institution will certainly have some impact on it. Frankly, I think that we continue to find some opportunities in that portfolio, too, where it's investor-owned. We're finding some good Private Banking, Wealth Management opportunities. So we're just going to kind of execute. We're going to continue to work through that portfolio. But I'll tell you it'd be very difficult to give you a projection on exactly what kind of runoff we're going to see quarter to quarter on the portfolio. But I do think that we will see continued declines.

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

And if we look at the commercial mortgage portfolio overall, is it fair to say that the end market appetite has been maybe a little greater than expected and that has attributed to the ongoing runoff at the pace it's been?

Lars C. Anderson

Yes, I think that that's the single biggest driver. I think that as we continue to have stabilization of projects and they become permanent market-ready as the permanent market rates continue to hit very attractive levels, our customers are accessing and benefiting from that.

Operator

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

Thomas LeTrent - FBR Capital Markets & Co., Research Division

This is actually Thomas on behalf of Paul. You touched a bit on, I guess, businesses and customers sort of in a wait-and-see approach, but you seem pretty positive on the economic environment. We're just trying to get a better sense of whether the loan growth you were experiencing kind of contributed -- whether you contribute that to market share gains or sort of an improving economic environment overall in your markets.

Ralph W. Babb

Lars?

Lars C. Anderson

Well, I would say it is not an improving economic environment that has driven, for the most part, our growth. If you look at our commercial loan growth, in particular, just as one segment, that's increased over 20% over the last year. That is market share gains. That is clearly some of the industry groups that we talked about earlier, where I think we're well positioned with the right bankers, industry kind of expertise. I think Texas has made a real difference in that. Obviously, in the Texas market alone, the economic environment has helped. But keeping in mind the fact that a lot of our customers continue to de-lever in order to get growth, you do have to move some market share. And frankly, I think with our balance of businesses and in the markets that we serve, frankly, the market has well received our relationship banking model, and I think we've been very well positioned to operate in a very challenging market. Frankly, I think those are the key drivers for us.

Ralph W. Babb

I would underline what Lars just said on the economies, though, that both Texas and, as I mentioned in my remarks earlier, Michigan is coming back because of the auto industry turn and auto sales now at about 14.9 million, that has provided a good economic turnaround. We're seeing some in California as well, as I mentioned, and I would underline the specific industries that we're in like Technology & Life Sciences, which has been strong through the downturn as well. So it is a business diversity as well as being in the right markets at the right time.

Lars C. Anderson

And I may just underscore the California issue because I think that we've begun to see, and this is really on a go-forward basis, that that market appears to be strengthening. We did get some growth in the past in Northern Cal kind of general middle market. And we are seeing maybe the beginnings of firming up in the economy in the Southern Cal market, some promising signs.

Operator

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

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

Your loan growth outlook, that still implies flat end-of-period balances for next quarter. I just want to confirm that that's fair or -- and that's consistent with your expectation for the fourth quarter. And then also, is that likely to be the case for the first half of '13?

Karen L. Parkhill

I think what's important in our outlook is that we do expect to continue to see some decline in Commercial Real Estate as we're growing our other businesses, so that is reflected in our new outlook of 7% to 8%, plus the fact that we can't predict with great certainty where Mortgage Banker will go.

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

Okay. And in terms of the first half of '13, can you give us a little bit of color on how you think about loan trends there?

Karen L. Parkhill

Yes, on 2013, we will provide our outlook, as we always do, on the fourth quarter earnings call. But you should think about loan growth from the perspective of where we sit today, where we continue to see some decline in Commercial Real Estate, some variability in Mortgage Banker Finance while we're growing all of our other businesses.

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

Okay. And then on the middle market side, I mean, I know that can really move the needle for you guys, and you indicated that loan growth there has been still somewhat sluggish as some of your borrowers are reluctant. Are you looking at opportunities to get more price-competitive there to really drive growth since you command such a big presence in that space?

Lars C. Anderson

Yes. No, we are not focused on being more competitive. I think we're fair today in our pricing. One of the things that we're very focused on is continuing to leverage our relationship banking model. I view us as a premium service provider. We're big enough. We have the products, the expertise, the experience of the bankers that we can go in and really compete well in all of our markets in that general middle market space. But frankly, I think we also have the advantages of being nimble enough at our size, local decision-making through the way that we're organized to be more responsive, reliable and flexible. So while I know pricing is very important, to me, that is just one piece of our strategy. It's an important piece, but what we're very really focused on spending more time in the markets developing relationships with customers. To your point about middle market, maybe not having the general middle market, some of the growth in there, you have to keep in mind that there's a lot of manufacturing in there. A lot of those companies have de-levered. But we've seen a nice pickup in commitment levels there, as I mentioned earlier, and we saw increases in general middle market commitments in California, Michigan and in Texas, and I think that bodes well for us.

Ralph W. Babb

The thing I would add to that, too, is I think today, relationships mean more than they did at the height of the economy because of an institution that has been there for our customers through the downturn.

Operator

Your next question comes from the line of Dan Mazur with Harvest Capital.

Daniel W. Mazur - Harvest Capital Strategies LLC

Just a few quick ones on excess liquidity in securities portfolio. I think the average deposits at the fed was over $4 billion in the quarter, so I think that was up around 20% quarter-over-quarter and I think that represents about 7% of earning assets now, and I think that’s probably earning about 25 basis points. So I think that's one of the higher percentages of the banks that I've looked at, and it's a pretty large drag on NIM. And so I just wanted to, on the context of your liquidity position, which I think looks pretty solid and I think that would express next year should drive some incremental deposit growth, so number one question in that context, can you explain the targeting of fixed size for the securities portfolio that you kind of target in that $9 billion to $10 billion range? And number two, with Q3 driving mortgage securities basically, arguably artificially low, are there other securities or other asset classes you may consider investing in, in that portfolio?

Karen L. Parkhill

This is something that we manage fluently -- fluidly Dan. What I would say on the excess liquidity is yes, it did reach over $4 billion at one point, but today, it's around $3 billion due to some of the purchases that we've made as well as loan growth. It is something, as I've said, that we manage looking forward with where we think deposits will go, where we think loan balances will go. We do want to make sure that we are well positioned for loan growth. As we think about potential other asset classes, we have -- we continually look at potential other asset classes, but they have to fit our strategy of highly-liquid, highly-rated portfolio. And the reality is within our strategy, there aren't a lot of other options than mortgage-backed securities. You've seen us -- as we purchased mortgage-backed securities this past quarter, we have purchased more CMOs than 15-year pass-throughs because CMOs are giving us a little bit better yield today with that short duration that we're looking for. I don't know if I can answer your question any more, Dan.

Daniel W. Mazur - Harvest Capital Strategies LLC

No. This is all we've got. So it's something you -- so have you changed the $9 billion to $10 billion -- the $9 billion target? Has that now risen given the yields have declined?

Karen L. Parkhill

We like our securities portfolio where it is today when we think of forward-looking. That $9 billion target that we've talked about in the past is something that we said we will continually manage, and you've seen us do that this quarter. It's hard to predict where the target will be going forward because, again, this is something fluid and something that we manage based on the deposit growth, based on loan growth, et cetera. But we are very comfortable with where our portfolio is today given all the parameters that I've talked about.

Operator

Your next question comes from the line of Jason Harbes with Wells Fargo.

Jason Harbes - Wells Fargo Securities, LLC, Research Division

So a question on the efficiency ratio. I know longer term, you guys are targeting to get that down below 60%, but it ticked a bit higher this quarter. I mean, is it fair to assume that you're really going to need some help on the rates to get there? Or are there other avenues that you're considering to drive that lower over time?

Ralph W. Babb

Karen?

Karen L. Parkhill

Yes, we have set an efficiency ratio target to take our ratio below 60% over time. If you look at us from a year-to-date perspective, we have moved that ratio in the right direction, where we ended 2011 at 72% and year-to-date, we are at 70%. So our focus is to continue to move it in the right direction by controlling what we can control and growing revenues faster than we're growing expenses. As we've said in the past, in order to meet our target, we will need a little bit of a rate environment pickup, but clearly, not rates back to normal to get there.

Jason Harbes - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then it looks like the tax rate was a little lower, at least, than we were looking for. I think in the past, you suggested a way to try to calculate that by netting out about, I think, $60 million or so of tax credits. Is that still a fair way to think about it, or would you provide any sort of updated guidance on the tax side?

Karen L. Parkhill

That is still a fair way to think about it. We did have the benefit this quarter in taxes of having a refund on interest paid to the IRS, and so that was helping us this quarter.

Operator

And there are no further questions at this time. I'll turn the call over to Mr. Ralph Babb, the Chairman and CEO, for any closing remarks.

Ralph W. Babb

I would just like to thank everybody for taking the time this morning to be on the call and your interest in Comerica, and I hope everybody has a good day.

Operator

This concludes today's conference call. You may now disconnect.

Ralph W. Babb

Thank you.

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

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

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

Source: Comerica Incorporated Management Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts