Ralph Babb - Chairman and CEO Curtis Farmer - President Karen Parkhill - Vice Chairman and -CFO Pete Guilfoile - Chief Credit Officer Pat Faubion - EVP, Business Bank Darlene Persons - Director, Investor Relations

Scott Siefers - Sandler O’Neil Erika Najarian - Bank of America Ken Zerbe - Morgan Stanley John Pancari - Evercore ISI Kenneth Usdin - Jefferies & Co. David Rochester - Deutsche Bank Securities Terry McEvoy - Stephens Inc. Robert Ramsey - FBR Capital Brett Rabatin - Piper Jaffray Brian Klock - Keefe, Bruyette & Woods David Darst - Guggenheim Securities David Eads - UBS John Moran - Macquarie Capital Steven Alexopoulos - JP Morgan Gary Tenner - D.A. Davidson Geoffrey Elliot - Autonomous Research

Good morning. My name is Brent and I will be your conference operator today. At this time, I’d like to welcome everyone to the Comerica Third Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d now like to turn the call over to Darlene Persons, Director of Investor Relations. Please go ahead.

Thank you, Brent. Good morning. And welcome to Comerica’s third quarter 2015 earnings conference call. Participating on this call will be our Chairman, Ralph Babb; President, Curtis Farmer; Vice Chairman and Chief Financial Officer, Karen Parkhill; Chief Credit Officer, Pete Guilfoile; and Executive Vice President of the Business Bank, Pat Faubion. A copy of our press release and presentation slides are available on the SEC’s Web site, as well as in the Investor Relations section of our Web site, 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’d like to remind you that this conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statements contained in the release issued today, as well as slide two of this presentation, which I incorporate into this call, as well as our filings with the SEC for factors that may cause actual results to differ. Also the conference call will reference non-GAAP measures and in that regard, I’d direct you to the reconciliation of these measures within this presentation. Now, I’ll turn the call over to Ralph who will begin on slide three.

Good morning. Our third quarter results demonstrate benefits of our geographic and business line diversity. Our trusted advisor approach to relationship banking continues to make a positive difference. Today we reported third quarter 2015 net income of $136 million compared to $135 million for the second quarter and a $154 million for the third quarter of 2014. Earnings per diluted share were $0.74 for the third quarter of 2015 compared to $0.73 for the second quarter and $0.82 for the third quarter 2014. Turning to Slide 4 and highlights from our third quarter results, average loans were up $1.8 billion or 4% compared to a year-ago. Average loans increased $139 million to $49 billion compared to the second quarter with increases in technology and life sciences and commercial real estate offset by decreases in corporate banking due to our continued pricing and structure discipline as well as seasonality in general middle market and the expected run off in energy. Average deposits grew $4 billion or 7% compared to a year-ago. Relative to the second quarter, average deposits increased $1.7 billion or 3% to $59.1 billion driven by increases in nearly every business line led by general middle market, technology and life sciences and corporate banking. In further comparing our third quarter results to the second quarter, net interest income remains stable, increasing $1 million to $422 million, while the net interest margin declined mainly as a result of having higher balances at the Fed. Credit quality, overall, continued to be strong at 19 basis points net charge-offs, remain well below the historical normal level and gross charge-offs declined in the quarter. The provision for credit losses decreased to $26 million. This marks the fourth consecutive quarter that we have prudently increased our reserves for energy, a result of increased -- increasing criticized loans and sustained low energy prices. Net charge-offs tied to our energy related exposure continue to be low and we had no charge-offs in the energy business line. While negative credit migration is anticipated any losses are expected to be manageable. We continue to feel comfortable with our energy portfolio. Non-interest income was up $3 million to $264 million including increased card fees, an area we are focused on continuing to grow, as well as growth in several other categories. This was partially offset by decreases in investment banking fees and fiduciary income due to depressed market conditions. Non-interest expenses increased $25 million to $461 million primarily reflecting a $3 million net release of litigation reserves in the third quarter compared to a net release of $30 million in the second quarter. We continue to tightly manage expenses while faced with rising technology and regulatory costs. Our capital position is solid. Stock repurchases under our equity repurchase program combined with dividends, returned $96 million or 71% of earnings to shareholders in the third quarter. Turning to Slide 5 and look at our primary markets, our most recent economic indexes have tracked data through July in each of our primary markets. Our Texas index continues to see lighter declines. Drilling rig count decreased and unemployment insurance claims increased. We expect the drag from low oil prices to continue into 2016. However, it is important to note that the Texas economy is very diverse. Average loans and deposits in Texas were each down about 2% compared to the second quarter both impacted by declines in general middle market and energy. Our California index showed a small decline, the first since March. State exports weakened, however, the labor market components of the index are showing strength and we expect that to continue through the remainder of the year. We saw a broad-based average loan and deposit growth in California. Loans were up $360 million and more than 2% and deposits were up over $1 billion or 6% with growth in almost every business line. Our Michigan index increased again fuelled by the auto industry as auto production continued to climb. In fact, auto sales on an annualized basis rose to a 10-year high of $18.2 million in September. Low gasoline prices continued to be a plus for Michigan's economy. Average loans in Michigan were down slightly, while average deposits where up 1% due to seasonality in general middle market. In closing, we believe our geographic footprint is well situated and our relationship banking strategy can drive growth in loans, deposits and fee income. We remained focused on the long-term. Our conservative consistent approach to banking including credit management, investment strategy, and capital levels has positioned us well for the future. And now I'll turn the call over to Karen.

Thank you, Ralph and good morning. Turning to Slide 6, third quarter average loans increased $139 million over the second quarter. Technology and life sciences was the largest contributor to loan growth with $367 million increase driven almost entirely by equity fund services where we provide capital call or subscription lines to venture capital and private equity firms. Loans in our commercial real estate business line increased $124 million primarily related to multi family. Mortgage banker loans were up $47 million reflecting our continued market share gain, as well as refinance volumes and a pickup in home sales, because mortgage banker outstandings tend to move up and down with the home buying season, we expect a decline in fall and winter. And in fact we saw that trend in period end balances. In addition we had modest average loan growth in several other business lines such as entertainment, private banking, retail banking, and small business. Partially offsetting this growth, corporate banking loans declined $231 million in the quarter as we remain disciplined in this highly competitive environment. As expected, loans in general middle market declined $214 million in conjunction with the typical summer slowdown. And loans in our energy line of business declined $86 million from continued pay down. Average dealer loans decreased $26 million. In fact each successive month in the quarter declined as our customers worked down their inventory prior to receiving new models. The decline was somewhat less than expected as manufacturers have continued to meet the strong demand along with the fact that we’ve been expanding relationships. Period end loans declined $799 million to $48.9 billion. This decline included a decrease in mortgage banker finance, reflecting the decline off the summer peak. In addition, we saw decreases in general middle market, corporate banking, national dealer services, and energy for the same reasons I just described. Increases in technology and life sciences and commercial real estate partially offset the decline. Total loan commitments decreased $464 million with declines in general middle market and corporate banking as we remain disciplined on pricing and structure, as well as mortgage banker due to the expiration of temporary increases in conjunction with seasonality. Energy commitments also declined. Technology and life sciences, national dealer, and commercial real estate commitments grew. Utilization decreased to 50% at the end of the third quarter from 51% at the end of the second quarter. Importantly, our pipeline increased. Our loan yields decreased three basis points in the third quarter as shown in the yellow diamond. The benefit from a one basis point increase and 30 day LIBOR and the favorable impact from higher yields on loans related to energy was more than offset by lower loan fees due to decreased loan activity with the summer slowdown and a decline in portfolio spreads as a result of growth in high-quality lower yielding loans. Turning to slide -- to deposits on Slide 7, average deposits increased $1.7 billion in the third quarter driven by a $1.3 billion increase in non-interest bearing deposit. Virtually every business line posted growth led by general middle market, technology and life sciences, and corporate banking. Period end deposits increased $508 million to $58.8 billion. We continue to prudently manage deposit pricing while remaining at 14 basis points. Slide 8 shows our securities portfolio increased as we continue to position ourselves for compliance with the new liquidity coverage ratio or LCR. We tapped the market in July issuing $350 million in subordinated debt and an additional $175 million in senior bank debt, both of which we swapped to floating. We invested a portion of the proceeds $350 million in a combination of five-year treasury and Ginnie Mae CMO. This strategy allowed us to minimize any impact to both earnings and our asset sensitive position. As you know we are required to have an LCR of 90% by January 1, 2016 and 100% by January 1, 2017. As of quarter end, our estimated LCR ratio meet that fully phased-in 2017 requirements reflecting our loan and deposit movement in addition to the debt issuance. Any future funding needs for LCR purposes will depend on our balance sheet movement and strategies over time. Should we need to add HQLA, we continue to have several funding option, including our federal home loan bank line of credit, broker deposit, and the public debt market. We continue to carefully manage the securities portfolio, maintaining an estimated duration under four years. In the current rate environment, we expect continued minor pressure on the average securities yield as you can see in the yellow diamond on the slide. Turning to Slide 9, net interest income increased $1 million in the third quarter. One additional day in the quarter and loan growth were partly offset by lower loan yields which I discussed earlier. Increased expense from the debt issuance was mostly offset by higher securities and deposits at the Fed. Our net interest margin decreased 11 basis points with more than half of that decline due to higher balances at the Fed. Compared to third quarter of 2014, net interest income increased $8 million largely due to loan growth. We continue to be well positioned to benefit when rates rise. Our standard asset liability case shows that a 200 basis points increase in rates over a one-year period equivalent to a 100 basis points on average, would result in an increase to net interest income of about $220 million. We also share in the appendix several alternative assumptions to our standard case with changes to the pace of deposit decline, loan growth, and rate rises. And in all cases we remain well positioned for rising rates. Turning to Slide 10, our overall credit picture remains solid. Net charge-offs were 19 basis points or $23 million derived mainly from technology and life sciences and energy related loans. Overall, net charge-offs remain well below what is historically normal for us. Gross charge-offs declined slightly while recoveries were down primarily due to timing. Our criticized loans grew $537 million to $2.9 billion or about 6% of total loans which is well below our historical average. The increase was driven by a $480 million increase in criticized loans related to energy. Inflows to non-accruals declined from the second quarter and were $69 million, of which $25 million were energy related. Total non-accrual loans were stable at only 73 basis points to total loans. Specific to energy, the fall re-determination process has just begun for our E&P customers, which comprise 69% of our energy business line. With continued low energy prices and reduction in rig count, we expect some pressure on borrowing bases. However, we do not expect widespread issues to arise as our borrowers overall continued to act prudently in this low price environment. In fact utilization in our energy line of business remained flat at 48% at quarter end. As anticipated, we continue to see negative migration in the energy book which has resulted in an increase in criticized loans. However, non-accrual loans and charge-offs have remained low. As of quarter end, approximately 27% or $1.1 billion of the loans related to energy were considered criticized. However, this includes only $126 million of non-accruals equivalent to 3% of energy loan and is up only $7 million from the second quarter. We had no charge-offs in our energy business line and modest charge offs in energy-related loan and as expected loans continue to decline with our energy business line down $66 million and energy-related down over $100 million to about $650 million at quarter end. The $26 million provision for our total portfolio reflected charge-offs as well as slightly higher reserves. Reserves for technology and life sciences loans increased due to modestly higher charge-offs. And we not only added to our energy reserve due to an increase in criticized loans, but we also continue to maintain a healthy qualitative reserve. It is important to note that while we have continued to increase the reserves for energy, we believe that the charge-offs will remain manageable. In summary, our consistent robust methodology resulted in a $2 million increase to the allowance for credit losses to $670 million and the coverage of our non-performing loans remains very strong at 1.7x. Slide 11 outlines non-interest income which increased $3 million to $264 million. Card fees increased $3 million due to higher revenue from merchant processing services and interchange. We also had growth in foreign exchange and brokerage fees. This was partially offset by declines in investment banking fees and fiduciary income, which were impacted by the poor market environment. We also had several items that are difficult to predict, specifically a $4 million benefit from hedges on recently issued debt, a $3 million increase in customer warrant related income and a $5 million decrease in deferred compensation, which is offset in non-interest expense. As a reminder, the year-over-year view of both non-interest income and non-interest expense is not directly comparable. Each quarter this year reflects an accounting presentation that reports the gross revenues and expenses rather than net revenue for our cards program. Turning to Slide 12, non-interest expenses increased $25 million. This included a $3 million legal reserve release in the third quarter compared to the $30 million release we recorded in the second quarter, resulting in a $27 million swing. Absent the change in legal reserves, expenses declined $2 million mainly due to items that are tough to forecast, including a decrease in deferred comp, a forfeiture of executive stock awards and lower staff insurance. As expected, occupancy expenses were seasonally higher and software technology related contract labor increased. Moving to Slide 13 and capital management. As the chart indicates, we continue to return excess capital to our shareholders in a meaningful way with a payout of 71% of third quarter earnings. In the third quarter, we repurchased 1.2 million shares for $59 million under the equity repurchase program. As you might recall, the Federal Reserve scenario in the stress tests incorporated a gradual increase in interest rate over the forecast period starting in the second quarter of 2015. While the rate rise has yet to occur, you can expect that any material increase in the pace of our equity repurchases will be linked to our net income performance which should improve with rising interest rates over time. Turning to Slide 14, our outlook for full year 2015 compared to full year 2014 has not changed from what we outlined at the beginning of the year and reiterated on our call in July. Our expectations for the fourth quarter related to the third quarter shown on this slide are based on a continuation of the current economic and interest rate environment. Starting with loans, we expect average balances to be relatively stable with a seasonal decrease in mortgage banker and continued decline in energy offset by growth in other businesses. We expect our net interest income to also be relatively stable. The positive effects from asset growth and a third quarter debt maturity should approximately offset the continued pressure from the low rate environment on loan and security yields. With continued strong overall credit quality, we expect the provision to remain low similar to what we saw in the third quarter. As far as the energy portfolio, we expect continued negative credit migration, continued run-off in balances, and a very manageable level of non-accrual and charge-offs. Overall, we expect non-interest income to increase slightly. We expect continued growth in card fees and should markets improved return of growth in fiduciary and investment banking fees. The quarter levels of warrants income, hedge and effectiveness and deferred comp all of which are difficult to predict, are not expected to be repeated. Non-interest expenses are expected to be moderately higher due to seasonally higher staff benefits, outside processing, marketing, occupancy, technology related and consulting expenses. Also litigation reserve release, deferred comp, and stock forfeiture levels, benefited the third quarter and are difficult to predict, therefore are not expected to be repeated. We continue to remain focused on controlling expenses wherever possible. In closing, we are pleased with the continued loan and robust deposit growth, as well as increased revenue. Overall, our credit quality remains strong. We remain focused on the long-term and we expect that as rates rise our revenue picture looks even brighter. As always we believe our relationship banking strategy combined with diverse geographic footprint will continue to assist us in building long-term shareholder value. Now operator, we would like to open up the call for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers with Sandler O’Neil. Please go ahead.

Good morning.

Good morning, Scott.

Good morning, guys. First question maybe on energy, I expect to hear a bunch of them, I guess, but so the migration into non-accrual and certainly with no charge-offs has all been very, very good. I just wonder now that energy prices have at least kind of stabilized, does that give you guys any confidence that there is very low migration level from say criticized into non-accrual can continue to stay very low or is it still just the duration of softness in energy prices that will drive the ultimate migration performance?

Pete, why don’t you take that? Pat, you can chime in as well.

Sure. Yes, Scott, I think the same pattern that we -- we’ve seen over the past quarter will continue. We are seeing some migration in the portfolio still, but we’re not seeing a lot of migration to non-accrual and we haven’t seen a lot of charge-offs. That’s been consistent with what our expectation has been right from the beginning and it’s exactly what we’re seeing. We’re seeing a lot of these credits get resolved before they go to non-accrual. In fact, we continue to get large pay-offs of substandard credits and we just got one I think a week or two ago. So we’re encouraged by that. We think that’s going to continue and I don’t see any reason why it would change with energy prices where they’re today.

Pat, something to add to that?

The only thing I would add to that, Scott, is something that’s really helped us is that 97% of our portfolio was secured and we’ve used the same engineers for years and years and that’s holding up very well. So our borrowers are really behaving responsibly at this time in the market.

That’s perfect. All right. Thank you very much. And then, if I can switch gears really quickly, Karen, a lot of movement within the balance sheet between some of your guys’ issuances and then just the strong deposit growth and everything. Can you maybe just sort of encapsulate how much of the movement and I guess the resulting pressure on the margin was maybe transitory as funds were just sort of waiting to be fully deployed or its kind of timing within the quarter, what was the nature of some of those moves? In other words, could we expect maybe some relief on the margin even though there will still be net downward pressure? How do you see those things playing off one another?

Sure. Scott, if you’re talking about the net interest rate margin …

Yes.

… or actual rate NIM, obviously the biggest impact on that was the increased balances of the Fed, which on a period end basis were driven by increased deposit and decreased loans. And so that can move, so the balances that we have at the Fed can clearly more on a period end basis. The impact on the NIM from a securities yield and a loan yield perspective, securities yield continued to be impacted by the lower yielding on our prepay reinvestments and the fact that we’ve added treasury to our portfolio. The loan yield has bounced around a little bit over the last several quarters up and down and really does depend on the movement that we have in our portfolio depending on the relative loan yield in the area that is growing or declining. So the overall impact on NIM is most impacted by balances of the Fed which you pointed out and little impact from securities yield and then hopefully continued somewhat stable impact from loan yield.

Okay. That's perfect. Thank you guys very much.

Thank you.

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

Good morning, Erika.

Hi, good morning. I'm sorry to re-ask the question again, but in terms of your outlook for flat provision for the fourth quarter, will your fall re-determination process be completely done and captured in that fourth quarter results?

Pete?

Yes, hello Erika. We expect that it will be through the re-determination process really by the end of November.

Got it. And Karen, just as a follow-up to the last question. Could you give us a little bit of a sense in terms of your decision tree with regard to keeping the cash at the Fed versus extending duration to protect the margin and given your comments that you are already compliant with the 2017 standard for LCR, I'm wondering what your thoughts were in terms of deploying that into HQLA more aggressively or are you waiting to see how much of this deposit growth sticks with you?

You know anymore movement into securities would obviously dampen the upside that we would have as rates rise and we continue to remain very mindful of the fact that as rates rise we will have a mark to market on our securities portfolio which can impact our tangible capital. So we will continue to watch the environment and be fluid, but we remain mindful of the fact that investors are focused on our asset sensitivity upside.

Got it. And just one final one from me Ralph, given your comments that some of this energy pressure is going to persist into next year, and the market seems to be less optimistic about the trajectory of the short end of the curve next year, I'm wondering how you're thinking about sort of the -- in case of emergency break glass plan for next year, are there further expenses to potentially improve the efficiency ratio in light of a more difficult revenue back drop, any sort of thoughts on how you're thinking about 2016 as the environment seems to be getting a little less friendly especially for a model like yours that's so tethered to the short end of the curve?

Well, we are constantly looking at that as you may remember from previous calls and we have been very focused on expenses and also growing relationships and I think the growing relationships especially in the footprint that we have is the largest opportunity for us moving forward. We will continue to look at expenses as we always have, but that in itself is one that will not offset by itself the expenses we need going forward especially on the regulatory and the compliance side. So growing the business and as we normally would and focus on is probably number one today.

Okay. Thank you.

Thank you.

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

Ken, good morning.

Great. Thank you. Good morning. Maybe a question on the provision expense or at least how you’re think about it as it relates to energy, trying to tie your comments that you're going to see further credit migration in the energy portfolio, and knowing that you do have to sort of mathematically hold higher reserves against loans that see deterioration in the risk ratings, is it fair to assume that that we should be expecting again further reserve build in the energy book, but then -- but to keep your provision as low as you’re guiding it to be sort of in that mid $20 million range that you’re actually relying on further credit improvements in other areas?

Pete, you want to take that?

Yes Ken, we’re starting off the quarter with a healthy qualitative reserve and that reserve is in place, because we’re looking at the fall re-determination process and we’re expecting some migration to come out of that with energy prices being a little bit lower than where they were in the spring. We are also expecting with rig counts where they’re that fewer borrowers will report higher energy reserves and that could put a little bit of pressure on borrowing basis, so we are expecting some migration, but we think our qualitative reserve that we’ve will be -- will suffice to cover that migration.

Got it. So it's almost just moving from one bucket to the next rather than increasing the total bucket?

We're trying to stay ahead of it.

Understood. That totally makes sense. And then just more of a generic question, you talk about like your energy customers, obviously I know you know them, you know the credits, but help me reconcile, so I’m going to say roughly $3 billion of your -- which is the vast majority of your energy loans are shared national credits. How many of those energy companies are like -- are you the primary bank for, that you have the core relationship for versus, I don’t know someone like Wells Fargo or is there someone else that has the core relationship?

Pat?

We are the agent for less than 20% of our energy portfolio. But we do have a direct relationship with every single client in the book and many, many times that is a multi, multi year relationship.

Okay, great. All right. Thank you very much.

Thank you.

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

Good morning.

Good morning, John.

Good morning. Regarding the pretty steep increase in the energy criticized loans, what was the main component of the driver, was it E&P or oil service?

Pete?

Yes, I think the energy services segment of the business has been the most impacted. But bear in mind the energy services segment is much smaller than the E&P. So I would say that both were a factor this quarter. This quarter we moved some credits to criticize simply because of the expectation the energy prices are going to remain low and that for an extended period of time. And so if there was any operational weakness at all we move these credits to special mention and the thing I would say about that is, is that our feelings about these credits hasn’t changed. Most of these credits have very strong balance sheets, we’re well secured. We don’t expect the risk of loss to increase as a result of us moving these credits. We just didn’t feel like we could justify keeping the past credits given how long energy prices have been where they are.

Okay. All right. And then, I guess some of the quantifications would help a little bit more for example, the -- what was the size of the addition to your energy loan loss reserve in the third quarter?

We don’t give out that specific information. But what I would say is that we have increased our reserves to energy every quarter for the past four quarters since the price started to move down, and we -- I’ve mentioned that we maintain a healthy qualitative reserve. And at the same time I think it’s important to realize during that same timeframe that our energy balances have also declined.

Okay. And on that front, Karen is it -- can you help us with how to think about the incremental decline in energy loan balances over the next several quarters even if oil prices stay where they are?

That’s difficult to predict exactly, but in the appendix of the deck we do give quarter-by-quarter movement in our energy portfolio and you can see the last decline what it did on balances.

Pat, do you want to comment on that?

Yes, we do expect reductions as a result of the upcoming re-determination, but we’ve also been advised from our clients of about $250 million in commitments today which would translate to $125 million in outstandings that we expect to confirm payoffs on based upon mergers or sales that are happening within the industry.

Okay. And then lastly, I know you indicated that the fall re-determination should be over by November. But what's also happening in the winter is the, the SNC exam which is now partly semi-annual I guess for large banks. Will you be part of that?

Well we’re always a part of it because we’re involved in Shared National Credit. So all the same credits are being examined. Our SNC exam will not be until spring of next year, but we’re involved in the credits that will be examined in the fall and we don’t expect any impact from that. Our regulators are looking at our energy book all the time, in fact they looked at it just recently. And I think we’re on the same page as to where the risk rating should be on the portfolio. So I’m not anticipating any issues coming out the SNC exam.

Okay. All right. Thank you.

Thank you.

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

Good morning, Ken.

Hi. Thanks. Good morning, Ralph. A question just on kind of non-energy and just regular loan growth. Can you just talk to us a little bit about just the State of Affairs in non-energy Texas and also I noticed that just the kind of non-energy middle markets and corporate banking also look like they declined. So just some flavor in terms of just underlying borrower demand and what's going on at the core in Texas pleases?

Curt, do you want to talk about overall, and Pat you can talk in Texas.

Yes, what I would say from an overall perspective, we continue to benefit while we’re seeing some impact from energy more broadly in Texas that Pat can speak to. We continue to benefit from a diverse geographic footprint and as Ralph mentioned in his opening comments, the California market continues to perform well for us really across a variety of our core businesses as well as our specialized businesses on both the loan and deposit side of the equation and we’re starting to see some nice improvement in the overall Michigan economy tied to the auto industry, the lower gas prices. But just in general improvement in unemployment, real estate values et cetera in the Michigan market. So we feel like we still have growth opportunities in both of those markets which is helping to offset some of the, what we hope is at least a near-term impact in Texas. But I would also say that from a longer term perspective we continue to be very bullish on the Texas economy at large.

Pat, do you have anything to add there.

Well I’ll just add further that Texas is surrendering its lead growth within our company to California and we’re already pleased to see what California has contributed. But also Michigan has come on very strong and many good things are going on in Michigan and including in Detroit. The Texas economy has a direct impact of about 15% from oil and gas but the hangover so to speak is affecting quite a bit of our businesses. And as noted our balances are down in Texas about 2% for the quarter and I think the best indicator for that is be our economic activity index which shows nine straight monthly declines, so it’s just confirmed by the general economy.

Understood. And carrying a follow-up, can you help us understand on the expense side the -- kind of what was the magnitude of those non-repeatable benefits that you had in the third quarter and can you also help us understand what the step up -- seasonal step up might look like in the fourth from the -- all the lines that you mentioned?

Yes, so outlined on our expense slide, the levels of expenses that may not be repeated would be the hedging ineffectiveness, the warrant related income and the deferred comp. In addition to that as we outlined just for the quarter-over-quarter outlook that we do expect increases in several other categories. Staff insurance is something that typically rises in the third quarter -- in the fourth quarter, occupancy expenses, marketing expenses, consulting expenses. We are continuing to invest in technology, so technology related expenses et cetera.

Okay. So, I mean is it fair to say that kind of like that helper this quarter were about $10 million and then you get another $10 million on top of that?

We expect our expenses to moderately increase quarter-over-quarter, and in moderate you can assume sort of mid single digit levels.

Okay. Understood. Thanks, Karen.

Thank you.

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

Good morning, Dave.

Hi. Good morning, guys. I just had a bigger picture question on credit. I was just trying to figure out how criticized loans increased by over $500 million but the reserve only increased by maybe a few million. Can you just talk about what your typical reserve is on special mention or substandard loans, and I realize NPAs were stable; it’s just that I’ve heard some pretty large reserve percentages out there that some banks have signed to criticize the assets?

Pete.

Yes, we don’t disclose specifically our reserves on particular credits, but bear in mind that our reserves come in two different forms, one is the side big [ph] reserves, which are very specific to our non-accrual loans and then the other would be our standard reserves which are what we assigned generally to different categories of special mention and substandard credits. So we did have migration in the portfolio, but the make up of that migration makes a difference on what our reserves are going to be. For instance our E&P credits are much better secured than some of our other C&I loans, and so we might not have the same amount of reserves assigned to those E&P credits, as we would say our energy services credits that are migrating. So it’s difficult to exactly equate migration to the amount of reserves that we have.

Got you. Thanks for that. And then you mentioned you are just starting the re-determination process, so I mean just wondering how much you’ve done at this point? And then we’ve heard other banks with energy exposure talk about price tax coming down, somewhere in the high singles to mid-teens type of range for the fall re-determinations. Is that what you guys are seeing as well in terms of magnitude?

Yes, I think we’d be consistent with that. We’re about 15% to 20% of the way through the process right now. And so far we’re not seeing anything unusual. We’re not seeing any wide spread deficiencies very similar to what we saw in the spring. Wouldn’t be surprised if we see more collateral deficiencies this fall than what we saw in spring because very frankly we didn’t see a lot in the spring, but so far it’s going well.

And how much have lines come in just on average for the credits you’ve examined so far?

Do you mean how much foreign basis have shrunk?

Yes, exactly.

Yes, its -- I’m almost hesitant to generalize from what we’ve seen so far. But we’ve actually have seen a fair number of credits, their borrowing base is actually increased and our loan to values decrease. And we’ve seen just about as many of those -- seen as many loan to value decrease as we’ve seen increase. But it’s still early and I’m not necessarily sure that’s going to hold through the whole process. It’d be great if it did but I’m not sure if it will.

And then I know last quarter you said you were still kind of going through the re-risk grading for the service portfolio. Is that segment done at this point and when do you typically, when will you look at that again?

Yes, we’re looking at it all the time, it’s a continuous process. We’ve been through the portfolio probably two or three times.

Okay, got you. All right, great. Thank you guys.

Thank you.

Your next question comes from the line of Terry McEvoy with Stephens. Please go ahead.

Good morning, Terry.

Hi, good morning. Just a small question. It looks like recoveries in energy happened in the third quarter, net charge-offs through the first two quarters were $10 million in energy and then it fell year-to-date to $3 million. Could you just talk about any recoveries and what was behind that?

Pete.

We didn’t have any substantial recoveries in energy this quarter. We just had lower charge-offs. We did not have a lot -- we didn’t have any charge-offs in the line of business whatsoever and we had just a hand full of energy related charge-offs. So we were encouraged by that.

Okay. And then just on Michigan in middle market lending, do you expect to see or are you starting to see a pick up from the typical slowdown you see in that market during the summer months.

Yes, you’re correct Terry, we do see a dip in the summer but we also see a resurge in the fourth quarter and we do expect to see that.

That’s great. Thank you.

Thank you.

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

Good morning, Bob.

Hi, good morning. A lot of my question have been answered and I hate to belabor energy, but out of curiosity, why don’t you all disclose what the energy reserve is?

Bob, we firmly believe that the allowance is there to cover any and all losses and so we think it might be misleading to give specifics around any one portfolio and that’s the key reason.

Okay. I know you all said that most of in that charge-offs this quarter came from technology and life sciences as well as energy. But I was just wondering if you could tell me what the dollar amount in that charge-offs was on the energy book this quarter?

Pete.

Yes, I could.

It came from the energy related.

Yes.

Of the energy related.

Energy related, okay. And maybe while you dig that number up, I’ll ask as well, I know you highlighted 27% of the energy book is criticized today. Can you just remind me how that compares to the peak in the last cycle?

I don’t know if we have the peak criticized in the last cycle offhand. We can't answer your question for energy related charge-off, can't talk about that.

Yes, our energy related charge-offs, sorry for the delay -- was about $9 million for the quarter.

Great. If you don’t have the exact criticized number, do you have any sense or any sort of outlook as to whether you expect this energy cycle to be similar in terms of where things peak or whether you think that the trajectory looks better or worse?

I would expect we’re going to see continued migration but I think it’s going to be at the slower pace. We’re seeing somewhat of a bifurcation in the portfolio. There are certain credits that just are not migrating at all primarily because they have just such strong balance sheet and/or they are more gas weighted than oil weighted. They don’t expect to see those credits migrate. A lot of the higher levered more oily credits have already migrated. So you’re not going to see any of that. So I think we will see more migration but I think it will be at a slower pace.

Great. And then last question, shifting gears to capital. It looks like the pace of share repurchase is sort of running below what if I simply took your CCAR authorization and divided it by five quarters would come out to be. I know you all said the pace of buybacks is linked to performance and will be higher in a higher rate environment. But I’m just curious is it not still your intent to fully execute on that CCAR authorization before it expires regardless of kind of what happens to rate and performance?

Karen.

Yes, so in the stress test scenarios that were laid out by the fed, they did have a decent size interest rate increase over the nine quarter forecast which started in the second quarter of ’15 and went on through 2016. Obviously as rates rise meaningfully that can have a good impact on our bottom line. And so you can expect that our share repurchase program going forward will be tied to both our strong capital levels and to our net income performance and so we will wait and see.

Okay. But over the horizon of this CCAR authorization; if rates do not move during this authorization period, would you still complete the existing authorization or would you scale it back?

Honestly it depends on earnings Bob. Earnings can be impacted by many things, but interest rates are one of the biggest drivers of growth and earnings.

Okay. All right. Thank you.

Thank you.

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

Good morning, Brett.

Hi. Good morning, Ralph. I wanted to make sure I understood guidance, just thinking about the outlook for the fourth quarter in terms of average loans. I think given the mortgage banker seasonally lower and continued decline in energy and maybe thinking about the pipeline being lower. Can you maybe talk about the average balance being flattish or relatively stable I guess is the term you used in the fourth quarter kind of versus in the period being quite a bit lower than average in 3Q?

Yes, so Brett I would say that important to know that our pipeline did increase at the end of this quarter going into the fourth quarter, so that is good times for our other lines of business. We did note that we expect continued declines in energy, we have talked about that. On mortgage banker finance we also expect seasonal declines. The amount of those declines are difficult to predict. You can see in our appendix the fact that we’ve got quarter-over-quarter movement in our mortgage banker business and in the last couple of years we have seen seasonal declines, sometimes as large as $500 million, but again very difficult to exactly predict.

Okay. And then just want to make sure I was understanding you’re obviously very mindful of higher interest rates and the effect on the securities portfolio. Karen, what is your assumption for interest rates next year as you think about managing the balance sheet?

That is anybody’s guess. When we think about managing the balance sheet on securities we continue to have prepays on our securities portfolio that range in the $240 million to $250 million yield area and we are focused on reinvesting those prepays as best we can at yields at or above our current portfolio yield, but very difficult to say where those yields will be next year.

Okay. Great. Thank you for the color.

Thank you.

Your next question comes from the line of Brian Klock with Keefe, Bruyette & Woods. Please go ahead.

Good morning, Brian.

Good morning. Good morning, Ralph. Good morning, everyone. So I wanted to kind of follow-up on the discussion about the pipeline and I guess your outlook. Thinking about, I came over the -- its been a while since we’ve seen commitment then utilization rates drop and obviously there’s a lot of energy related issues there and some maybe even like you said some of the seasonality that you see at mortgage banker finance. I guess I’m just thinking about the guidance again about period end loans being down almost $800 million in the third quarter but average is expected to be flat. So, I guess my first question is, is that partially because you think that the dealer floor plan which usually has a good fourth quarter, is that expected to kind of come in and help to grow balances in the core C&I book for the fourth quarter, that’s my first question.

Yes, the answer to that is yes. Our dealer floor plan obviously does have seasonality, did see some declines in the third quarter and we do expect it to come back a bit from those declines.

Okay.

And then in the overall, I might just say that across the markets we do feel good about the pipeline in sort of general middle market and some of our smaller businesses, small business, private banking and even retail which we don’t talk a lot about, but a few lock many consumer lending and so there are some other areas that beyond the decline that we’re expecting in energy and mortgage banker finance, that I think will be contributors in addition to the normal seasonality and dealer financial services.

Thanks for that, Curt. I guess I can follow-up on that with you, it seemed like even JP Morgan business bank their middle market line of business was down in the third quarter, it was down for you guys $364 million. I guess what are you seeing that makes you feel good about the fourth quarter in that line of business since it’s about 30 year total loan portfolio?

Pat, do you want to add to that?

Sure. Our middle market business is historically down in that third quarter. We have looked at it for the last 15 to 18 years and it’s a very repeatable trend and it does bounce back in the fourth quarter. How we feel good about that is, as we look at the pipeline and we manage that in every market and what we’re hearing is that, we would expect new credits, new clients as well as increases to some existing relationships.

Okay. Thank you for that, and just one last one for me if, Pete I don’t think you gave it this quarter yet, I think you gave it to us last quarter. I guess what the oil and gas or energy related they are the $1.1 billion in criticized. Is the make up similar to the E&P in oil filled services in the outstandings or is it -- can you give us an idea of how that $1.1 billion is spread across those customers?

Yes. The segment that’s been most effective has been energy services were a little over 40% criticized there, E&P is about 27%, mid-steam not been very much affected at all, its around 10% to 12% somewhere around there.

Thank you very much.

Thank you.

Your next question comes from the line of David Darst with Guggenheim. Please go ahead.

Good morning, David.

Hi, good morning. So, I just want to a question on the technology and life sciences business, I mean that portfolio has had the largest kind of dollar volume of growth over the past year of same size synergy. Where could the relative size of that portfolio be and then is any other growth you’ve seen also to fit [ph] the higher losses you’ve seen this year?

Pat, do you want to?

The majority of the growth that we saw in our technology and life sciences business was in our equity fund services group where we provide capital call and subscription lines to venture capital and private equity and typically those are the less risky part of the technology and life science portfolio.

And if there’s anything you’d attribute the higher loss rate through this year?

Pete.

Yes, David this is Pete Guilfoile, its unusual for us to see all bigger charge-offs in TLS, they have been up for the last couple of quarters, they’re above where we’d like to see them frankly. But we’re not seeing any systemic issues there, we’re not seeing any patterns to the charge-offs. I really don’t think we’re going to see further deterioration in the portfolio. But we felt it made sense to increase our reserves and we’re watching it carefully. But we don’t expect that deterioration to continue in subsequent quarters.

Okay, great. And then Karen, just one quick question on the headcount increase this quarter. Is that related to some of the technology projects you got in place or those frontline sales?

Yes, it is related to mostly the technology projects. On the frontline we are very focused on allocating our resources to our greatest growth opportunities but not necessarily adding in the headcount.

Okay, great. Thank you.

Thank you.

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

Good morning, David.

Good morning. Following up on the tax question you just got, did you give a little bit of color on how you guys think about protections and what makes you comfortable with the exposures in that portfolio, I guess particularly on the more risky side if we were to have a more sustained troubles hit the tech market?

Pete.

Yes, there was a number of things David. We’ve been in the business a long time, so experience is probably the most important thing. We have relationships with a number of venture capital firms that we’ve been through ups and downs in the cycles many times before, so we understand how they react in downturns. We have a number of different businesses within the technology and life science. So its much more diversified than you might think, even within the technology sector we have a fair amount of diversification not just by industry but by geography and by investor group too. So I would say the main things we point to are experience, the partners that we do business with, we’re very selective and then the diversification of the book.

Great, thanks.

Thank you.

Just quickly on energy, a question, can you give any color; I know you guys have not wanted to give any kind of numbers around the reserve. But the relative size of the quantitative and qualitative reserves and any kind of trends, if we’ve seen meaningful shifts from qualitative into quantitative over the last past couple of quarters?

Karen.

Yes. So we don’t give relative sizes either but we do maintain a healthy qualitative reserve as we look forward.

Okay.

I can just tell you that, we size our qualitative reserve based on events that we think have already occurred and our risk ratings have not adjusted to yet. So, we think that the migration that we’re going to see this quarter as a result of re-determination processes are events that have already occurred. So we feel comfortable setting up a qualitative reserve to cover that aspect of the migration.

All right. Thanks.

Thank you.

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

Good morning, John.

Hi. Good morning. Thanks. Just a couple of quick follow-ups, the $125 million in outstandings that are expected to pay down out of the energy book, would that all hit in 4Q or is that kind of 4Q and then into ’16?

Pat.

To the best of my recollection, John those are -- those should happen in the fourth quarter.

Okay.

We’ve already been -- that number is based upon information that borrowers have advised us on. So those opportunities are already in process.

Got it. Okay, thanks. And then maybe just a follow-up on Texas generally, even ex-energy [ph] general middle market is sort of down, are you guys experiencing that, and it certainly it seems like different MSAs are experiencing this slowdown in different ways. So if you could give us a little bit of color in terms of kind of what you’ve seen going on by market and then I know you feel good about the pipeline in general, but if you had any commentary around the pipeline as related specifically to Texas.

Curt, do you want to take that one?

Yes, I’ll make a couple of comments about Texas overall, while there is a general impact from the energy slowdown state wide. It definitely is being felt more in the Houston market sort of primary probably San Antonio is secondary, but if you look at the North Texas market, Dallas/Fort Worth it is a more diverse economy less energy dependant. We are not seeing what I’d call sort of broad impact as of yet in that part of the sector. But more impact is starting to creep in energy, energy related [technical difficulty], but just more broadly probably some longer term impact on home values, real estate values et cetera for example in the Houston market. They’re the huge states, so there’s a lot of diversity from economic standpoint.

And Michigan as you were talking about earlier with the auto industry rebounding and there’s a real strength starting and momentum there.

Right, yes. As well as the kind of broad spread growth we’re seeing in California as the economy continues to chug along.

And the various specialized businesses that we have that are unique as well. Pat, do you want to add anything to that?

Well, just as it relates to Texas the competition for non-energy and non-energy services clients is pretty fierce. People are not trying to expand their book for that and they’ve redirected their marketing activities towards non-energy companies. So that’s also impacting our growth in Texas.

Okay, that’s helpful. And then just one other quick follow-up on the criticized energy and Karen, I don’t know if it was -- we're not sure if we have this or we’re not going to disclose it at this point, but somebody has asked where they peaked last cycle and I was wondering if you have tracked that down?

Yes, we peaked at the high 20s overall in terms of the entire energy book. Bear in mind that we did not have energy related in that number back in the last cycle. So we just started reporting energy related in this cycle. Also the duration of that cycle was shorter. So it’s not surprising that our criticized levels are a little bit higher this time around for those two reasons.

Pat, do you have anything to add?

I think we’ve adjusted to say that we examine our book. We examine it more critically today based upon cash flow as opposed to an asset based book. The complexion of the portfolio has only gotten better since the last cycle. It remains secured but we are focusing more succinctly on depressed cash flow this time around.

Got it. Thanks very much for taking the questions guys.

Thank you.

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

Good morning, Steven.

Good morning, everyone. Just a couple of follow-ups, no surprise, I guess on energy. Ralph, when I look at the energy criticized, you were up $329 million last quarter. This quarter, you are up $537 million. Last quarter was seemingly impacted by the SNC exam, borrowing base resets. I'm trying to get my head around what the catalyst was this quarter that we saw a bigger increase in criticized this quarter versus last quarter.

Pete.

Yes, Steve as I stated before, we just decided to take the approach that given that energy prices have been down for an extended period of time that we had a number of credits that were kind of in that low pass category, we just moved them to criticized thinking that we’re not going to see a turnaround in energy prices and if any of our credits are seeing any kind of operational weakness, we decided that we really could justify calling them past credits. But again, I don’t feel any worse about those credits. I don’t think we have a big risk of loss. Most of those credits have very strong balance sheets and most of those credits that we moved this quarter still are very, very well secured. So, we actually don’t feel any differently about the energy book today than we felt one or two quarters ago.

Okay, so you essentially changed your forecast for oil prices, essentially?

No, it’s not based on really a forecast Steve as much as it is that, if you’re seeing some operational weakness and you really don’t expect that operational -- there’s an impetus for that operational weakness to turnaround in the short-term which now we really don’t. We just decided that we should move them to special mention.

Okay. And in terms of not needing to put incremental reserves or at least any size, magnitude, were you already reserving at the new rating level? I’m just trying to reconcile the lack of provision in the quarter.

Yes, so we’ve always had a qualitative reserve and that we have tried to stay ahead of this the whole way and so you’re right, that qualitative reserve was available for some of the risk rating changes that we made.

Okay.

And we did increase our reserves for energy in the quarter, Steve.

Yes, right.

Okay. And just a final one; so from a big picture view, we’re roughly a third of the energy book now criticized, seemingly above the prior peak. What gives you confidence that losses are going to remain manageable? And by manageable, do you mean through earnings? What exactly do you mean by that?

Well, bear in mind that, the bulk of the migration has been in E&P. And the vast majority of those E&P credits remain extremely well secured, even the ones that are highly levered, most of the debt is below us and so our position in those credits remain solid even though the risk of default might be higher. The concern would probably would be more around our energy services book, but our energy services book is only 15% of the portfolio, it's not 50% of the portfolio and that's by design, its part of our strategy as to limit the size of our energy services book. And another thing we feel really good about our strategy around energy services in addition to limiting the size of it, we have really focused on companies with strong balance sheets, strong liquidity, and then another important consideration there is just diversification. We like to see companies that are not overly dependent on drilling activity. And I think because of the strategy that we have and the size of the energy services portfolio, we feel that our losses in the energy book are going to be manageable for that reason.

Pete, you must just reemphasize that we lend at a percentage of proven reserves …

Correct.

… wealth is another.

Yes and we’ve a very conservative approach as to most banks in the space on what we're lending against in terms of reserves. We are discounting them heavily, we're risking them, we’re really focused on only the proved reserves and then we’re taking a pretty big haircut before we apply the advance rate. For that reason, a lot of these credits have been resolved before they go to non-accrual, because many of the credits that need liquidity can actually sell their assets and generate liquidity because our advance rate against them is much lower than what they can realize in the sale. And that's why you are seeing a lot of these credits that are special mentioned and substandard not migrating to non-accrual charge-off.

Maybe just one final one, is your view that losses remain manageable tied to an expectation that oil prices recover from here? I remember Lars maybe 18 months ago or so saying if oil was below $60, it was problematic and now we are $47, do you need to see a recovery for at $47 18 months from now, are losses manageable in that scenario?

I think it still be manageable even at today's prices. What's happened over the last several quarters its been great to see -- we see our customers reducing their cost structure, they’re right sizing their balance sheet, they have hedging, that has allowed them to bridge themselves to a point where they can become profitable at lower energy prices and I don't know what the magic number is, but I feel like the majority of our borrowers will be able to adjust to prices where they are today.

Okay. Thanks for taking my questions.

Thank you.

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

Good morning, Gary.

Hi. Thanks. Good morning, guys. I just had one follow-up energy question. I wonder as we start looking at 2016, if you could give us a sense of kind of how your E&P customers are hedged, what percentage of their projected production is hedged and what kind of price levels?

You know Gary, we update our hedging statistics based on the re-determination process and so we are only up about 15%, 20% through that process, so the number I am about to give is not terribly different than the number I gave you last quarter. But right now 59% of our borrowers have 50% or more of their PVP hedge for a year or more. And about 35% of our borrowers have 50% or more of their PVP hedged for two years or more, which is very similar to where we were. Last quarter is very similar to where we were two quarters ago.

Okay, but only very early in the re-determination process?

Correct.

Okay. All right. Thank you.

Thank you.

Your next question comes from the line of Geoffrey Elliot with Autonomous Research. Please go ahead.

Good morning.

Good morning. You said a few times you kind of see energy as manageable. Could you give a bit more thinking on what you mean by manageable?

Well, I think manageable means that we are not going to see anything out the ordinary that we feel like our reserves are more than adequate to cover anything that comes up I guess.

And Pat, you may want to add to this, which is based on we’ve a team that has 30 years of experience. We’ve seen the ups and downs and we’ve talked about various ways that these credits are managed, which is the portfolio in the particular segment. Pat, you want to add to that?

Well just to reinforce the fact that we’ve been in the business for over 30 -- approximately 30 years. We have the same manager for that 30-year period. We have our engineers have been working with us for a long, long period of time. Energy is a very important business to Comerica; it's an important business to Texas, and an important business to United States. So and our credit policies have been adjusted over time to help manage through cycles and that's exactly what we are experiencing today.

And then just to follow-up, you’ve talked about rates as being an important factor in determining earnings and so on into be thinking about the buyback. I mean, would you kind of rank credit equally with rates, higher than rates, lower rates in terms of swing factors for earnings and ability to complete the full buyback that was approved under CCAR?

Karen, you want to take that?

Sure. Obviously credit is an important piece of what we do. In terms of an outlook for next year we're not giving that yet. We will give it as we typically do on our fourth quarter earnings fall. We're still on our planning process, but for provision at least for the next quarter we expect it to be similar to what we had in the third quarter. So we are feeling comfortable on the impact that it could have on earnings through the rest of this year.

Great. Thank you very much.

Thank you.

Ladies and gentlemen, we have no further questions in queue at this time. I’d like to turn the call back over to Mr. Ralph Babb, Chairman and CEO.

Thank you and thank you all for being with us this morning and your interest in Comerica. We appreciate it and hope you all have a great day. Thank you.

Thank you. This concludes today’s conference call. You may now disconnect.