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Event Brief of Q1 2008 Comerica Incorporated Earnings Conference Call - Final
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| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 9151 |
PARTICIPANTS
. Darlene Persons, Comerica Incorporated, Director, IR . Ralph Babb, Comerica Incorporated, Chairman . Beth Acton, Comerica Incorporated, CFO . Dale Greene, Comerica Incorporated, Chief Credit Officer . Matthew O'Connor, UBS, Analyst . Dave Rochester, Friedman, Billings, Ramsey, Analyst . Steven Alexopolous, JPMorgan, Analyst . Brian Forem, Goldman Sachs, Analyst . Gary Townsend, Hill Townsend Capital, Analyst . Terry McEvoy, Oppenheimer, Analyst . Jeff Davis, FTN Securities, Analyst . Brian Clark, KBW, Analyst . Chris Mutascio, Stifel Nicolaus, Analyst
OVERVIEW
CMA announced 1Q08 EPS from continuing operations of $0.73.
FINANCIAL DATA
A. Key Data From Call 1. 1Q08 EPS from continuing operations = $0.73.
PRESENTATION SUMMARY
S1. Overview (R.B.) 1. 1Q08 Review: 1. Continued deterioration of California real estate market. 2. Effects on residential development portfolio affected overall performance in 1Q08. 3. Remainder of loan portfolio continued to exhibit stable credit metrics. 4. Focused on executing strategy. 1. Good loan and deposit growth, particularly in high-growth
markets. 5. 1Q EPS was $0.73 from continuing operations, down from $0.77 in 4Q07. 1. Largely impacted by increase in provision for loan losses
and decline in net interest margin, partially offset by
pretax cash gain on partial redemption of equity interest in
Visa. 6. Net loan charge-offs up $47m from 4Q07 to $110m, or 85bp of avg. total loans. 1. Of these charge-offs, $75m related to residential real
estate development portfolio. 2. Increased provision for loan losses by $51m from 4Q07 to
$159m due to continued residential real estate development
challenges in California. 7. Automotive supplier portfolio reflects satisfactory credit quality. 1. Minimal charge-offs and inflows to non-accrual in last few
quarters. 8. Net interest margin of 3.22% down 21bp from 4Q07, largely due to: 1. Planned securities purchases. 2. Expected loan growth in excess of core deposit growth. 3. Reduced contribution of non-interest-bearing funds in lower
rate environment. 9. Annualized, excluding financial services, avg. loans increased 10% vs. 4Q07. 1. Led by 14% growth in Texas market, 10% growth in Western
market, and 9% growth in Midwest market. 10. Expenses well controlled in 1Q. 1. Reduced headcount, even while continuing banking center
expansion program. 11. Annualized, excluding financial services deposits and institutional certificates of deposit, total deposits up 5% in 1Q vs. 4Q07. 1. Driven in part by banking center expansion program. 2. Lingering housing crisis has affected all financial
institutions. 3. Continued struggle of California residential real estate
developers. 4. Excess inventory, declining prices, and extended time to
sell have had a debilitating effect on California housing
market. 5. Co. addressing the situation aggressively, as market has
continued to deteriorate.
1. Conducting appraisal updates as appropriate.
2. Conduct in-depth reviews of every watch-list loan.
3. Periodically stress-test portfolio.
4. Undertake migration analysis as part of overall analytics. 6. Have moved additional experienced and seasoned lenders to
special assets group, significantly expanding workout area
for problem credits. 7. When appropriate, taking advantage of debt sales through
secondary market. 12. Opened three banking centers in 1Q, plan to open 29 more in 2008. 1. All new banking centers opened in 2008 will be in
high-growth markets. 13. Generated $2b in new deposits since launching banking center expansion program in late 2004. 14. Increased quarterly cash dividend in 1Q by 3.1% to $0.66 per share. 1. Increased annual dividend for 39 consecutive years. 2. Capital position remains solid, continues to provide co.
cushion to weather challenging economic environment. 3. Also provides flexibility to continue to invest in growth
markets. 15. Expect economy to continue to be challenged, with GDP growth essentially stalled if not contracting in near term. 1. Due to dollar slide, trade sector providing meaningful
support to mfrs., including many business customers. 16. Co. sees opportunity to raise loan spreads in 2008 as market continues to reprice credit quality over time. 1. Anticipate further loan growth, particularly in high-growth
markets. 2. Credit quality will continue to be challenged, primarily due
to lingering housing crisis. 17. Expect expenses to be well controlled for rest of year.
S2. Financial Results (B.A.) 1. 1Q08 Results: 1. 1Q08 EPS from continuing operations were $0.73 vs. $0.77 in 4Q07. 1. Largest impact was $51m increase in provision for loan
losses to $159m.
1. Reflects challenges in California residential real estate
development portfolio. 2. Good loan growth in high-growth markets. 1. Annualized avg. loans, excluding financial services, up 10%.
1. 14% increase in Texas.
2. 10% in Western markets. 3. Deposits, excluding financial services and institutional CDs, grew 5% annualized. 1. Includes 12% increase in non-interest-bearing deposits. 2. Lowered deposit rates during quarter. 4. Net interest margin decreased 21bp as expected, to 3.22% in 1Q. 1. Primarily reflects planned larger securities portfolio,
expected loan growth in excess of core deposit growth, and
reduced contribution of non-interest-bearing funds in lower
rate environment. 5. Credit quality exhibited weakness in California residential real estate development portfolio. 1. Remainder of loan portfolio continued to exhibit stable
credit metrics. 2. Net charge-off ratio excluding commercial real estate was
31bp. 6. Provision for loan losses in 1Q was $159m vs. $108m in 4Q. 1. Period-end allowance total loans to 1.16% vs. 1.10% in 4Q. 7. Non-interest expenses decreased $47m. 1. Reflects in part reversal of $13m accrued liability related
to membership in Visa. 8. Headcount decreased by 140, or 1% of total employees. 9. Tier 1 common capital ratio is 6.71%, within targeted range. 2. Net Interest Income: 1. Increases in loans, securities portfolio, and non-interest bearing deposits offset by decline in net interest margin. 2. As expected, margin declined in 1Q reflecting negative impact from securities purchases, loan growth outpacing deposit growth, and reduced contribution of non-interest-bearing deposits due to lower rate environment. 1. Partially offset by reduction in deposit rates. 3. Securities Portfolio Growth: 1. Have opportunistically increased investment securities portfolio as spreads widened. 2. Had 6bp negative impact on net interest margin in 1Q, but contributed positively to net interest income. 1. Also assists co. in meeting interest rate risk-management
objectives. 3. Invested almost exclusively in AAA-rated, mortgage-backed, government-sponsored agency securities, specifically FREDDIE MAC and FANNIE MAE. 4. Expect securities portfolio to remain at current level for remainder of the year. 4. Non-Interest Income: 1. $21m gain on sale of Visa shares reflected in net securities gains. 2. Partially offset by decrease in income from principle investing and warrants of $10m, and decrease of $7m in deferred compensation plan asset returns. 1. Offset by decrease in non-interest expense. 5. Balance Sheet: 1. Compared to prior year, avg. loans excluding financial services increased $3.8b, or 8%, paced by double-digit increases in growth markets. 1. Making progress toward achieving more geographic balance
with markets outside Midwest now 63% of avg. loans vs. 60% a
year ago. 2. All commercial businesses and private banking lines experienced growth in each geographic market in 1Q08 vs. 1Q07 except national dealer services in Midwest and Western markets, and middle market banking in Midwest. 3. 1Q increase in specialty businesses vs. prior year includes technology and life sciences portfolio, which grew $377m, and energy portfolio which grew $560m. 4. Linked-quarter avg. loans, excluding financial services, increased $1.3b, or 10% annualized. 1. Due to increases in global corporate banking of $446m,
middle market, $188m, private banking, $167m, energy, $136m,
national dealer services, $125m, and small-business banking,
$119m.
S3. Credit Quality (D.G.) 1. Credit Quality Trends: 1. Credit quality weakened due to issues largely isolated to California residential real estate development portfolio. 2. Rest of portfolio exhibited stable credit metrics. 3. Net credit-related charge-offs were $110m, or 85bp of avg. total loans in 1Q. 1. Included $75m in commercial real estate line of business,
primarily due to weakening of California residential real
estate development sector. 2. Excluding commercial real estate line of business, net
credit-related charge-offs in 1Q were 31bp of avg. loans. 4. Provision for loan losses was $159m, up $51m from 4Q. 1. Largely due to ongoing challenges in residential real estate
development, specifically in California. 5. Credit metrics in Michigan stable. 6. Texas markets continued to perform very well. 7. Watch loans were 8.8% of total loans, up from 6.9% in 4Q. 8. NPAs were 107bp of total loans and foreclosed property. 9. Loans past due 90 days or more and still accruing were $80m at 3/31, up $26m from end 2007. 1. Primarily due to Michigan and California residential real
estate development loans, which continue to pay interest and
are in process of being restructured. 10. Allowance for loan losses was 1.16% of total loans, up 6bp from 4Q. 11. Allowance for loan losses was 112% of non-performing loans. 2. Non-Accrual Loans: 1. Commercial real estate, primarily residential real estate development loans, was largest portion, accounting for entire increase in non-accrual loans QoverQ. 2. 47% of non-accruals in Western market. 3. 13 relationships totaling $202m that aggregate to $10-25m each. 4. No relationships over $25m on non-accrual status. 5. In 1Q, had $281m in loans greater than $2m transferred to non-accrual status. 6. Western commercial real estate line of business accounted for $201m or 71% of transfers to non-accrual. 7. No new non-accrual transfers over $2m from automotive suppliers segment. 3. Net Charge-offs: 1. Increase in Western division, 60% of net charge-offs in 1Q, attributed to residential real estate portfolio. 1. Commercial real estate line accounted for $58m of Western
net charge-offs, evenly split between northern and southern
California. 2. Net charge-offs for the Midwest, making up 25% of total, declined vs. 4Q. 1. Commercial real estate line accounted for $14m of
charge-offs. 2. Dealing with challenges of Midwest economy for past several
years. 3. Velocity of change stable, will continue to work through
problems. 4. Commercial Real Estate: 1. Western markets, primarily California, make up 45% of total portfolio. 2. Approx. 60% of California exposure in southern California, 40% in northern California. 3. 100% of charge-offs over last two quarters from residential real estate development loans. 1. Deterioration in California residential development apparent
in increase in net charge-offs in quarter. 4. In Midwest, net charge-offs declined in 1Q as co. worked through issues of falling home prices and slower absorption rates in portfolio for several years. 5. In commercial real estate, transferred $233m in relationships over $2m to non-accrual loans in 1Q. 1. Non-accrual relationships greater than $2m transferred to
non-accrual were 29 relationships, of which 23 in Western
market, five in Midwest, and one in Texas. 6. No charge-offs in 1Q, nor has co. seen any deterioration in non-residential commercial real estate portfolio. 5. California Residential Real Estate Market: 1. Median price of single-family homes in California declined almost 14% from 4Q and about 30% from a year ago. 2. Single-family building permits declined over 10% in 1Q, and about 33% from a year ago. 3. Currently about 14 months of unsold inventory. 4. Issues in California real estate development portfolio centered in local residential real estate developer portfolio. 1. Composed of two components: Group focused on local, smaller
residential developers which built starter and first-time
[indiscernible] homes, and group focused on larger
developers which median to higher-end homes. 5. Problems in sector generally isolated to local developer portfolio, which has about $800m in outstandings. 1. This portfolio accounted for 41% of bank's total non-accrual
loans and 100% of Western market commercial real estate line
of business net charge-offs of $58m in 1Q. 6. Co. believes issues have been identified, and have not done any new business in the segment for some time, nor will it do business in the segment for the foreseeable future. 6. Residential Real Estate Portfolio Risk: 1. Monitoring performance of customers closely. 2. All relationships in California residential real estate portfolio being reviewed at least quarterly or as new information becomes available. 3. Obtaining updated appraisals as appropriate. 4. Having discussions with secondary market sources to sell exposure. 5. Proactively restructuring facilities where necessary. 6. Transferred entire California local developer group, including relationship managers and administrative support, to special assets group. 1. Lenders are now working with workout professionals. 7. Consumer Loan Portfolio: 1. Portfolio relatively small, 8% of total loans. 2. Loans are self-originated and part of full-service relationship. 3. Co. is not in subprime mortgage business, and performance of consumer portfolio has been stable. 4. Residential mortgage portfolio continues to perform very well. 5. Home equity delinquency relatively stable, but co. remains cautious and will increase reserves in 1Q. 8. Home Equity Portfolio: 1. Roughly 75% of portfolio consists of revolving home equity lines. 2. Remaining are amortizing home equity loans. 1. Originated by co. as part of full-service customer
relationship. 2. Quality of portfolio reflected in solid FICO and LTV
statistics at origination. 9. Automotive Portfolio: 1. Dealer business represents about 75% of automotive outstandings. 2. Have not experienced significant loss in dealer portfolio in many years, as majority of portfolio is well-secured, floorplan nature. 3. Expect it to continue to perform well. 4. Non-dealer automotive exposure: 1. Reduced loan outstandings $23m in first two months of 2008. 2. Portfolio now represents about 3% of total loans. 3. Plan to continue to reduce exposure to automotive sector. 5. Non-accrual loans were flat. 6. Minimal net credit related charge-offs in portfolio in 1Q. 7. Performance of portfolio stable. 10. Summary: 1. Focused on credit issues in residential real estate portfolio. 2. Outside residential real estate development, all business lines generally displaying stable credit quality. 3. Have not seen material deterioration in other sectors, evidenced by relatively stable non-accrual loan balances co. continues to show in commercial and consumer loan portfolios over past year or so.
S4. Other Financial Metrics (B.A.) 1. Deposits: 1. Avg. core deposits, excluding financial services, were $33.8b, up $400m, or 5% annualized in 1Q vs. 4Q. 1. Includes excellent growth of avg. non-interest-bearing
deposits, excluding financial services, of $255m. 2. Money market account balances grew $194m in 1Q. 3. Achieved growth while reducing deposit rates in 1Q. 4. Non-interest-bearing deposits account for about 24% of avg.
total deposits. 2. Largest increases in avg. core deposits: 1. Private banking, $85m. 2. Middle market, $81m. 3. Retail banking, $73m. 4. Technology and life sciences, $72m. 5. Global corporate banking, $46m. 3. Excluding financial services, annualized avg. deposits in 1Q vs. 4Q: 1. Up 3% in West. 2. Up 2% in Texas. 2. Financial Services Division: 1. Continues to be good source of low-cost funding. 2. Rate of contraction of business slowed considerably in 1Q due to stronger refinance volumes. 3. Nationally, refinance volumes up 55% in 1Q vs. 4Q. 4. California home prices and home sales continued to fall. 5. Non-interest-bearing deposits decreased $166m in 1Q. 6. Related avg. loan balances decreased $139m. 7. Customer service expense down $1m from previous quarter. 8. As rate of decline has slowed, co. has increased outlook for division in 2008, but remains cautious. 1. Expect non-interest-bearing deposits to avg. about
$1.7-1.9b. 2. Increase from previous outlook of $1.2-1.4b. 3. Expect avg. loans to continue to fluctuate with level of
non-interest-bearing deposits. 3. Banking Center Expansion: 1. Opened three new banking centers of 32 planned to open this year in high-growth markets. 2. Continues to produce desired results. 1. Deposits attributed to new banking centers averaged nearly
$2b for March, up from nearly $1.8b in December. 2. New deposits well distributed, with 45% generated by retail
bank, 38% by business bank, and 17% by wealth and
institutional management. 3. Co. continues to meet goal of having collection of new banking centers accretive within 18 months. 4. Funding Base: 1. Liquidity and access to funding sources has been hot topic in banking sector. 2. Moody's recently reaffirmed bank's senior unsecured A1 rating and stable outlook. 3. In conjunction with relocation of corporate headquarters to Dallas, joined federal home loan bank of Dallas in February, and subsequently drew down $2b at very attractive rate. 4. Recently began to tap into repo market. 5. Over last several quarters, co. has brought its Tier 1 common capital ratio into target range. 1. Capital position compares well to peers. 2. Provides cushion to weather current economic environment,
and flexibility to continue to invest in growth markets. 5. 2008 Outlook vs. 2007: 1. In conjunction with weaker economic environment, expect slower avg. loan growth for remainder of 2008. 2. Anticipate avg. total loan growth in mid-single-digit range, excluding financial services division loans. 3. Growth in Texas market expected low double-digits. 4. Expect mid-to-high-single-digit growth in Western markets, and low-single-digit growth in Midwest market. 5. Based on fed funds rate declining to 1.75% by mid-year, expect avg. full-year net interest margin of about 3.10%. 6. Expect margin to be impacted by increase in 1Q of securities portfolio, expected to have 10bp negative impact on margin. 1. Reduced value of non-interest-bearing deposits in lower rate
environment, and loan growth continuing to outpace deposit
growth. 7. Expect avg. net credit-related charge-offs of 75-80bp for full year as stress in residential real estate development market continues. 8. Continue to expect non-interest income to increase, and non-interest expenses to decrease, both at low-single-digit rates. 9. Outlook to maintain Tier 1 common ratio within targeted range.
QUESTION AND ANSWER SUMMARY
OPERATOR: (OPERATOR INSTRUCTIONS) Your first question comes
from the line of Matthew O'Connor with UBS.
MATTHEW O'CONNOR, ANALYST, UBS: Good morning.
RALPH BABB, CHAIRMAN, COMERICA INCORPORATED: Good morning.
MATTHEW O'CONNOR: I was wondering if you could comment a bit on
your dividend policy here, obviously environments getting
incrementally tough and I think a lot of banks are faced with tough
decisions on the dividend and yours does scream as one of the higher
payout ratios so I'm wondering what your thinking is on that?
BETH ACTON, CFO, COMERICA INCORPORATED: This is Beth. Your
question really relates to kind of our perspective on our capital
position, and we continue to view our capital position as strong. It
continues to be in excess of our minimum targets that we have set and
clearly in excess of regulatory guidelines. We also, if you looked
at the slide I show, we are better capitalized than the median of our
peers, and that's both on a Tier 1 common ratio which we are focused
on as well as the tangible equity to tangible asset ratio basis, and
another point I'd like to make is the makeup of our capital is
strong. It's substantially composed of common equity which is in the
end is the ultimate protection for bond holders. We only have about
9% of our Tier 1 capital that's in preferred stock, compared to our
peers are on average a little in excess of 20%.
And we also run our holding Company and the bank dividend
policies in a conservative manner. For instance, in the holding
Company, we don't have incremental borrowings that we use to fund the
dividends and we maintain a healthy minimum cash level at the holding
Company, and for the bank, we operate in a fashion to ensure that we
have a cushion that's in excess of the minimum required net profit
rules, and a correlary to the point I made about the quality of our
capital position is that we have substantial capacity if we needed
to, to raise Tier 1 capital, and so I guess what I would say is we
feel very comfortable with our capital position and it isn't uncommon
during cyclical times to have the payout be a little higher. So,
we're comfortable with where we are.
MATTHEW O'CONNOR: Okay, and I think it's a very good point
regarding the quality of your capital, which is clearly declining a
lot of other banks. But at the same time, the window seems to be
opening up a bit here for some of the hybrid or preferred issuance
and could you just comment if you have any interest on doing some
issuance there?
BETH ACTON: The thing that we do periodically access on a
routine basis and have for many years is the subordinated debt market
for the bank, and those would be things that are not uncommon for us
annually or every 18 months or so to do some issuance there so that
would really be the only thing we would probably be focused on at
this juncture.
MATTHEW O'CONNOR: Okay and then just a question for Ralph. Have you seen more willingness among some of the smaller banks in
some of your higher growth markets to potentially partner up? We
keep hearing about the very small banks are heavily concentrated and
the real estate kind of running out of capacity to go at it alone.
RALPH BABB: Keeping in mind that the markets we're in,
especially Texas and California, while we talked about California
having the real estate problems, the rest of the economy in
California has been fairly resilient as has our portfolio there. So
at this point in time I can't say that I've seen any increase in
activity to your question. Texas economy continues to be very strong
in really all sectors and so I think part of the answer is you're not
seeing pressures that you might expect in other areas of the country.
MATTHEW O'CONNOR: Okay. Should we expect you to be
opportunistic if there are some deals out there that are available
or?
RALPH BABB: I think we've always said in the past and continue
to say that if there were opportunities within our market that put us
a step forward in the strategy that we really continued to espouse we
would certainly look at that. It has to meet all of our criteria,
because as we've said before, it's very important that we have an
internal model that puts us on the growth plain that we want to be
and that's part of the expansion of the banking centers which we are
now getting ramped up and will ramp up for the next year or two as
well, to find a point as to where that particular addition every year
will be like buying small banks. The difference is you don't have
the goodwill and you don't have the cultural issues and you don't
have the other portfolio issues, so direct answer to your question is
we'll always look at opportunities and certainly in the markets we're
in.
MATTHEW O'CONNOR: Okay, thank you very much.
RALPH BABB: Thank you.
OPERATOR: Your next question comes from the line of Dave
Rochester with Friedman, Billings, Ramsey.
RALPH BABB: Good morning, Dave.
DAVE ROCHESTER, ANALYST, FRIEDMAN, BILLINGS, RAMSEY: Hi, good
morning, guys, how are you?
RALPH BABB: Good.
DAVE ROCHESTER: I notice the commercial charge-offs were up in
first quarter. Can you comment on what trends you're seeing here? Are you seeing more deterioration amongst your small business
customers?
DALE GREENE, CHIEF CREDIT OFFICER, COMERICA INCORPORATED: There
are, there is some softness on the small business side but really,
the charge-offs there are relatively small in comparison. You got to
remember that the small business portfolio obviously is very granular
in terms of loan size. It's -- the average loan size there is less
than a $100,000 per deal and those are secured, guaranteed type
transactions so while there is softness there and we are watching it,
it's not risen to a level of any sort of heightened concern at this
point.
BETH ACTON: And I think if you look at the retail bank segment
information we give, which houses the small business, in fact
charge-offs were down in the quarter compared to the fourth quarter.
DALE GREENE: Right.
DAVE ROCHESTER: Okay, well, given that your charge-offs this
quarter at the higher end of your new range for 2008 charge-offs are
you expecting the economy at this point to remain in a slow growth
mode but not deteriorate further?
DALE GREENE: I'm expecting the economy to continue to be soft. I think that we're, as we point out in our call today we're very
focused on real estate, residential real estate development primarily
in the Western market. I think that particular segment will continue
to be chat edged as the statistics we referenced point out. Home
prices have declined substantially. Inventories are very high. It
will take some time to run-off those inventories and so we're really
looking at that segment as continuing to be challenged. As it
relates to our other segments they continue to show pretty good
performance. Our credit metrics as we point out continue to be good,
so the rest of the economy as it relates to our other businesses, I
think they will be challenged in a soft economy but I think we're
positioned to manage those pretty successfully.
DAVE ROCHESTER: You just mentioned the Western exposure there
and you had talked about conducting appraisal reviews. Can you give
us a sense for how much of your residential construction portfolio
has been appraised in the last three to six months?
DALE GREENE: I can tell you that specifically looking at that
there $800 million slice of the portfolio which is sort of the local,
residential real estate developer piece in the Western market which
we're really focused on, we probably got almost three-quarters of
that appraised within the last six months and the key for us there is
we have written those loans down unless there were other mitigating
factors to the value which are substantially depressed values in this
market.
DAVE ROCHESTER: For those loans that are rated substandard or
NPA, how often do you have to continue to update those appraisals as
time goes on?
DALE GREENE: Well, the rules basically are subject to some
interpretation but essentially, if you feel there's been a continued
decline since the last time you did a valuation, you need to go out
and get a new appraisal. So we typically, when the loans have
classified status, make sure we're getting appraisals that are within
the last six months, no more than six months old.
DAVE ROCHESTER: Okay. And are you currently undergoing your
2008 reg exam right now and if so when will that conclude and have
the regulators been encouraging more aggressive appraisal activity?
DALE GREENE: Well, we have gone through our safety and
soundness exam. Really can't comment on that for the moment. We
review our loan loss reserving and methodology and our actual results
with them each quarter to get their support and they've done that as
they do every quarter. We're not getting any particular pushback on
any front. I think they're satisfied with our methodology and our
process so no, we're not seeing anything of that sort.
DAVE ROCHESTER: So that's a process that's still ongoing right
now?
DALE GREENE: Well, the safety and soundness exam is concluded.
DAVE ROCHESTER: Oh, it's concluded okay. And just one last one
real quickly. Thanks for the time here. Where is most of your
growth in the commercial portfolio right now? Is that coming from
the shared national credit portfolio or smaller business?
BETH ACTON: It's really across our geography and across our
industries generally speaking. So it's pretty widespread. It's not
concentrated. We did have volume obviously in shared national
credits in the quarter but frankly, it was down from the prior
quarter as a percentage, so it's really very broad across wealth
management, small business, and many of the business bank lines,
technology and life science, energy, middle market, so it's nice and
widespread.
DAVE ROCHESTER: Would you happen to have that balance at the
end of the first quarter for the shared national credit portfolio?
BETH ACTON: It's about 22% of our loan portfolio. The details
will be in the Q.
DAVE ROCHESTER: Great. All right thank you very much, guys.
RALPH BABB: Thank you.
OPERATOR: Your next question comes from the line of Steven
Alexopolous with JPMorgan.
RALPH BABB: Good morning, Steven.
STEVEN ALEXOPOLOUS, ANALYST, JPMORGAN: A couple of things. In
regard to the $2 billion of securities that were added could you just
remind us of the motivation to grow the securities so much here, and
why so much in the first quarter rather than through the year given
the dilution to capital levels?
BETH ACTON: Yes. There are two or three reasons why we have
grown the investment portfolio over the last several quarters. One
is the -- we were getting to a level oh, toward the middle of last
year, a lower level than kind of where we want to be, which is about
7% of earning assets, and so actually the credit crunch arriving in
the third quarter was helpful in the sense of it has really widened
out the spreads on those securities, and so that provided us an
opportunity to increase the portfolio, but a key driver is really
looking at managing of our interest rate risk. It's very similar,
our alternatives to put on swaps which have the same dynamics of
receiving a fixed rate and paying a floating rate to fund those, so
it's helping us mitigate our exposure to falling interest rates over
the last several quarters so that's the combination of circumstances
of why we've done it and frankly, it's been a proficient time in the
sense that the spreads are very attractive relative to where they've
been historically.
STEVEN ALEXOPOLOUS: Beth, if you look at your funding cost,
what would you say the average spread was on the securities added?
BETH ACTON: Well, actually given where spreads are and given
where our funding cost is, it's significantly positive.
STEVEN ALEXOPOLOUS: Could you share the, is there like a margin
on that?
BETH ACTON: No, I'd rather not. It really depends on how you
want to look at it too. Incremental dollars versus the pool of
dollars, there are different analysis around that.
STEVEN ALEXOPOLOUS: Okay. Just one other question. In the
10-K, you raised the charge off guidance to the upper end of the 40
to 50 basis point range and we came in at about 85. Just wondering
what changed so dramatically from that point that came out late
February? Was this just intense pressure in the month of March on
the loan portfolio?
DALE GREENE: Well, we were getting appraisals in as an earlier
question was talking about appraisals is we were beginning to
downgrade assets based on declining home values and we were getting
appraisals and our estimates of values were light compared to what
the appraisals were coming in as and most of the appraisals were
coming in almost always on an as is valuation, so a project might be
just in the early stages of development or anywhere along the
development spectrum. So as those appraisals came in and we got a
lot of them in in the quarter but towards the end of the quarter,
those valuations were substantially below our expectations by a
significant amount and I think the whole market was surprised by that
not just us, so that had a significant impact on our view of
charge-offs and provision and clearly when we saw as is values at
such low levels we were in a position where we needed to charge those
down to the as is values in most cases. And that's the key
difference.
STEVEN ALEXOPOLOUS: Got it. Thank you.
RALPH BABB: Thank you.
OPERATOR: Your next question comes from the line of [Brian
Forem] with Goldman Sachs. Good morning, guys, how are you?
RALPH BABB: Good morning.
BRIAN FOREM, ANALYST, GOLDMAN SACHS: If I step back and think
about the guidance and the run rate, if we go back to '05 and '06, it
seems like EPS could be down by about half, and a lot of this is just
the margin being near 3 instead of 4% and can you help us just think
about how much of this is cyclical versus secular, by which I mean is
this just asset sensitivity at this point in the cycle or are assets
fee deposits going to be permanently lower and that just lowers the
margin potential of the bank?
BETH ACTON: There are a couple of factors, they're both
cyclical as well as secular I would describe. One is if you look
over the last several years, for the industry in general, not just
for Comerica, we have seen a significant compression in commercial
lending spreads. It's just there are lots, have been a lot of
additional players besides banks in the commercial lending space and
we have seen, we as an industry have seen a lot of compression which
I guess you could say is cyclical because times were good but it was
also in some sense a little different in the sense that there were
additional players in the lending market that hadn't been there
before. So I think that we are at a point now where we've come down
on the loan spread side from a higher level over the last few years
and now, with the credit crunch and the cycle coming, there is
opportunity we're already seeing opportunity to in fact increase
spreads. There is certainly a repricing of credit risk that's gone
on in the capital markets and that's beginning to flow through a
broad sector of banking customers. The other of course is the
interest rate cycle obviously because of the nature of our balance
sheet tends to have an impact on us with the lowering of rates, but
we also think we're very near the end of the lowering of rates and so
between loan spreads and more optimistic about going forward and
we're nearing the what we think is the end of the interest rate
cycle, so those are both positive things for Comerica.
BRIAN FOREM: Okay, and then I mean I guess ultimately in terms
of a normalized margin or normalized ROE, or whatever metric we
should focus on, we're kind of below trend earnings right now but
what is the normalized earnings power of the balance sheet I guess?
BETH ACTON: That's a very difficult question to answer because
there's so many moving parts on deposits and loans and the interest
rate environment and the yield curve. Stay tuned as we look forward
into '09. I don't have a good picture to give you a normalized level
at this juncture.
RALPH BABB: I think the key will be just to emphasize something
Beth said as the turn comes, and it's coming, I mean, it's starting
now. The risk is being repriced back into the lending environment
and it had gotten to a point where it was very thin and you've seen
that from a number of indicators in the industry and I see that
coming back not only fairly quickly as we're seeing but also the
availability of credit in various areas is not where it used to be,
and therefore that will have an effect on price as well. So while I
can't project whether it will come back to where it was, I think it
will come back fairly substantially from where it is today.
BRIAN FOREM: And then just lastly if I could, reserves against
the C&I portfolio, I think were 102 basis points at year-end. Do you
have an update of where that metric is now and what a normalized
level there looks like?
DALE GREENE: Well, the reserves against the whole portfolio as
you saw was at 1.16% so it's up from 110 at the end of the year, and
I don't have a sense of what we've said is we've given you our
guidance on charge-offs but we've also said that our provision will
be above that for the foreseeable future. So that's about all I can
tell you right now and again, we go through a process every quarter
that's very consistent and very disciplined and based on those
results, obviously each quarter will result in a provision
calculation. So the charge, the provision will be above charge-offs
at least as I say for the next few quarters.
BRIAN FOREM: Thank you.
DALE GREENE: Yes.
RALPH BABB: Thank you.
OPERATOR: Your next question comes from the line of Gary
Townsend with Hill Townsend Capital.
RALPH BABB: Good morning, Gary.
GARY TOWNSEND, ANALYST, HILL TOWNSEND CAPITAL: Good morning,
Ralph, how are you?
RALPH BABB: Good.
GARY TOWNSEND: Dale, a question for you. It sounds as though
most of the credit weakness was concentrated in the residential
construction and a subset of that in the smaller players in the
California market, and I was wondering, is the structure that you've
changed this last quarter with regard to the approach to the markets
there, was there a legacy issue there or was that a legacy from the
Imperial Bancorp acquisition several years ago?
DALE GREENE: As we pointed out here there are fundamentally two
residential real estate development type businesses that we have gone
after in California. One is sort of the traditional larger
developers, larger local developers that have a little more staying
power, if you will and so forth and then there's more the entry level
type of developer selling to the first time home buyer or the first
move up home buyer and it's that entry level developer where the
issues really are and yes, that was a business that came with
Imperial but that's a business we've been in now for some time and
it's really a fundamental issue around the strength of the underlying
developer and frankly, the whole market particularly in California
having substantial run up in prices which can only be sustained for
so long as you know and then the rapid deterioration that occurred,
and I think it's more along the lines of the strategy of that
business. These were as I said local developers who were smaller and
by definition probably, and obviously it's been demonstrated of
having less flexibility.
GARY TOWNSEND: Okay, thanks.
DALE GREENE: Yes.
RALPH BABB: Thanks, Gary.
OPERATOR: Your next question comes from the line of Terry
McEvoy with Oppenheimer.
RALPH BABB: Good morning, Terry.
TERRY MCEVOY, ANALYST, OPPENHEIMER: Dale, it sounds like the
Midwest at least the problems there, maybe behind the Company on the
commercial side but maybe some deterioration or pressure within the
home equity or consumer business. Is that a fair statement?
DALE GREENE: Well, let me take it in two pieces as you've
addressed it. One is I would say the credit quality issues in the
Midwest particularly on the real estate side are stable. The rest of
the portfolio there is in pretty good shape. I will tell you that
our home equity portfolio continues to perform very well. Our
delinquencies are actually performing, they're well, they're much
better than the industry performance and I'm not really concerned
about that home equity book. We changed our criteria some time ago. We're pretty conservative. It hasn't grown much. It's
self-originated, it's got good FICO scores at origination, good loan
to values and so forth so all of that is paying dividends today in
the sense of the credit metrics are very sound. It hasn't grown any
at all. It's been pretty stable but that's okay.
TERRY MCEVOY: And then the loan growth in the Midwest, 9% in
the first quarter just above your full year forecast. Is it
seasonality or was there something beyond that in Q1?
DALE GREENE: No, I think again, we've talked a little bit about
what that is. It's a number of the businesses that we've -- that
have been across-the-board. There's been some in middle market, some
in dealer and so forth, really nothing in real estate as you can see
in the footnotes, real estates actually declined, our real estate
loans in the Midwest have actually come down quarter-over-quarter so
it's generally across all of our other businesses and those
businesses are doing well. We've obviously brought down our auto
supplier book a bit and still the direction we're headed, so it's no
one particular area.
RALPH BABB: Plus, you had usage.
DALE GREENE: Yes.
RALPH BABB: The move up as well as a bit of a turmoil in the
banking industry in the Midwest today.
TERRY MCEVOY: And then just one last question. Could you just
update us on the success you're having in really transitioning your
business and small business customers into a personal banking, the
wealth management area especially in Texas where you've added quite a
few banking centers over the last couple of years.
RALPH BABB: In Texas, and really it's surrounding the move, as
well as it's a strategy that we've had in all of the markets as we
talked about before and developing both wealth management and retail
which we had not specifically done, we were a bit behind in product
and employees as well and we've now brought that up to where I think
we're very competitive. I would say the reception that we've gotten
here has been very good and the ability to bring in new customers
because of being here and having a larger group of management
available to call on customers is paying dividends. We're being
careful in this environment not to overly expand in the short-term
just because of where the environment is today, but I think we're
pretty much moving along as we, actually I think it's a little bit
better than what we expected.
TERRY MCEVOY: Thank you.
RALPH BABB: Yes.
OPERATOR: Your next question comes from the line of Jeff Davis
with FTN Securities.
JEFF DAVIS, ANALYST, FTN SECURITIES: Good morning.
RALPH BABB: Good morning.
JEFF DAVIS: Dale, the news from California I guess is grim on
the resi side but would you, based on what you know today and the in
flow of problems and what you can see over the horizon, would you
expect the problems in that portfolio to maybe peak over the next few
quarters and not necessarily get better from there but deterioration
stop?
DALE GREENE: Yes, it's, certainly that's our hope. It's a
little difficult to call. We have in addition to bringing the
lending area, the people in the lending areas into our special assets
work out area which is beginning to show some positive results, we
also brought one of our senior Real Estate Managers over there to
manage the specific strategies around that 800 million portfolio, and
as he begins to get his arms around all of that and working in
addition with our special assets people we'll have a better feel
probably in another two to three weeks, but my view is based on the
fact that all of these credits have now been reviewed that roughly
three-quarters or so of of them have gotten rather recent appraisals
that we're in the process of working through those, I would say that
it's an event that will continue through the rest of '08. I would
expect the next two quarters would be the most challenging of them
but again if the markets continue to not rebound a bit, not a lot,
just a bit, then we'll continue to see problems throughout the rest
of '08 and potentially a little bit into '09 in that segment, but I
think based on what we see today that the next couple of quarters
will be the most challenging for us in terms of trying to get these
assets modified because all of the entire environment, everyone is
kind of doing the same sorts of things. There's a lot of overhang in
the market in terms of just the absolute amount of the inventory and
there's more coming on over time.
JEFF DAVIS: Okay, and not to put words into your mouth, but it
sounds as though the balance of the portfolio is, while there's
softening, there's not a dramatic or you're not expecting a dramatic
baton pass from we've got big issues in California resi, they're
going to spread into C&I generally and income producing commercial
real estate throughout the footprint?
DALE GREENE: Clearly we haven't seen that to date. We're not
seeing that currently. Certainly some softness will be here and
there and spotty maybe some middle market companies but it's the sort
of thing you might expect in any normal sort of cycle so nothing of
any significance at all in this point.
JEFF DAVIS: Last question, Beth. The margin guidance 310 for
the year, you were 320 this quarter. Does your modeling imply the
margin goes down throughout the year or do we reach a bottom in a
quarter or two and then start to turn up?
BETH ACTON: When we're still having the impact obviously from
the higher securities portfolio for the balance of the year but also
rates, our projections are that rates will continue to fall in the
second quarter so in April we see another rate cut, in June we see
another rate cut. That will have an impact through the third quarter
and then it's less of a, obviously there's less volatility from
there.
JEFF DAVIS: Okay, thank you.
RALPH BABB: Thank you.
OPERATOR: Your next question comes from the line of [Brian
Clark] with KBW.
RALPH BABB: Good morning.
BRIAN CLARK, ANALYST, KBW: Dale, for you, I guess I just wanted
to double check some of the numbers. I think you mentioned out of
the $281 million of loans transferred to non-accrual in the quarter,
you broke out the 29 relationships that were Western, Midwest and
Texas. Do you have the dollar amounts that were by region as well of
that $281 million?
DALE GREENE: I don't have them right in front of me but you can
sort of just based on the numbers, probably would line up somewhat
similar to that in terms of the dollars, frankly, but--.
BETH ACTON: I can tell you.
DALE GREENE: Okay.
BETH ACTON: $213 million came from the West, and 50 from the
Midwest out of the 281.
BRIAN CLARK: And you also mentioned that in the slide deck that
41% of the non-accrual loans are from the California local portfolio,
that $800 million. Now within that $800 million portfolio, do you
have a break out of how much of that is land versus how much has been
vertical construction?
DALE GREENE: Yes. There's most of it's in some phase of
vertical construction. There's a couple hundred million that is in
land either raw land or entitled land, so the vast majority of what's
there, about three-quarters would be in some stage of vertical
construction.
BRIAN CLARK: All right, and did you say that $800 million was
evenly split between Northern and Southern California?
DALE GREENE: Well a little bit more in the South. 60% in the
South, 40% in the North.
BRIAN CLARK: Okay. And so I guess when we look at the other I
guess 1.5 billion or so that's in the California commercial real
estate line of business, what's the level of non-accruals there and
what are you seeing as far as the property values in that other
portfolio, the rest of that California business line?
DALE GREENE: Well, the rest of that is the other segment of the
residential development I referenced earlier, it's the developers
that are typically stronger that support the loans with the
guarantees that have remargining agreements and so forth, so those
loans are generally performing pretty well. We have not seen in the
case of those developers any particular fall off in quality. It is
softer. There is some negative migration, but there's been no
significant migration downward to a default status. There's been a
couple, but most of those as I said have some level of remargining
agreement and they aren't only able to but are quite willing to step
up and remargin and we've seen that occur. So those variables, while
they've declined substantially there's been a fair amount of equity
put in those projects. It's still a focus for us and we're looking
at it, it's not to the same level as that $800 million chunk we've
been talking about.
BETH ACTON: And obviously the numbers on the commercial real
estate line of business for Western also include non-residential and
as Dale mentioned earlier that's performing just fine.
DALE GREENE: Right.
BETH ACTON: Non-residential commercial real estate.
DALE GREENE: Right.
BRIAN CLARK: Sure, got you.
DALE GREENE: Across-the-board.
BRIAN CLARK: And I guess maybe just to last question, within
obviously the focus here for the quarter has been really the
deterioration residential construction because obviously the issues
in that sector. Have you seen any sort of contagion into the
permanent mortgage, the commercial real estate within your
geographies of obviously the Southern California area? How are your
permanent commercial mortgage portfolio performing?
DALE GREENE: Well, the overall, again, the other portfolios
including that are continuing to perform quite satisfactorily. It's
really, as you can see by the absolute level of non-accruals, in
flows and charge-offs it's really, while we keep beating on this
issue it's still all around that $800 million residential development
in California because the rest even today with the softness that's
been around real estate continues to perform satisfactorily. So
we're not really seeing any particular issues at this point.
BETH ACTON: In fact our NPAs for our commercial mortgage book
are down slightly from a prior quarter.
DALE GREENE: Just a bit.
BRIAN CLARK: Great. Appreciate it, thank you.
RALPH BABB: Thank you.
OPERATOR: Your next question comes from the line of Chris
Mutascio wit Stifel Nicolaus.
CHRIS MUTASCIO, ANALYST, STIFEL NICOLAUS: Good morning, all. Beth, if I could ask maybe Matt's original question perhaps a
different way. If I looked at dividend pay outs and the safety of
those dividend payouts of, one from a capital perspective which I
thought you answered very well but also from an earnings perspective
and when I look at the quarter and if I were to back out the Visa
gain I can get to an annualized run rate that I guess is debatable
may or may not earn the dividend pay out this year. So my question
would be when do you start looking at the earnings part of the
dividend payout and when do we get to a point that this environment
may be here for not just a quarter or two but it would be three,
four, five, six quarters down the road? Do you start looking at the
earnings side of the equation on the dividend mid year going into '09
or are we still way off from that in determining what the earnings
power of the franchise could be to support the dividend payout?
BETH ACTON: I guess I can make a couple of comments. One is as
I mentioned earlier, we are comfortable with our capital position. In addition, it's not unusual in a cyclical environment such as we're
having related to the California impact to have a larger payout and
that will mitigate -- our expectation is that that pressure will
mitigate as we get toward the end of the year. So I think we're
comfortable with looking at it. Obviously we look at it from an
earnings standpoint and also importantly from a capital standpoint
and really the transitory nature of the situation. If we get into a
different environment where we're talking about a deep recession then
you have to reevaluate things but we have a lot of flexibility on the
capital front from a lot of different perspectives that I mentioned
earlier.
CHRIS MUTASCIO: So I take that by the end of the year it would
be better time frame in determining whether it's just a cyclical or
is more sustainable than that?
BETH ACTON: Well, I think we always are looking at updating
every quarter as part of our process of looking at our quarterly
results and our outlook for the future that obviously factors into
our thinking.
CHRIS MUTASCIO: Appreciate it. Thank you very much.
RALPH BABB: Thank you.
OPERATOR: There are no further questions at this time.
BETH ACTON: One thing I'd like to mention, there was a question
earlier on the spreads that we're putting securities on and if you'll
look at, assuming that wholesale funding is what funded the
securities purchases and again, it depends on your analytics of how
you do that we're talking about an 85 basis point spread today
between our -- the yield on the securities against the wholesale
funded cost of those. So, someone had a question earlier that was
the answer.
RALPH BABB: Okay? I think there are no other questions, so I
would like to thank you all for joining us for our call today, and
for your continued interest in Comerica. Thank you very much.
OPERATOR: Ladies and gentlemen, this concludes today's
conference call. Thank you for your participation. You may now
disconnect.
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