Darlene Persons - Director, Investor Relations Ralph Babb - Chairman and Chief Executive Officer Curt Farmer - President Dave Duprey - Chief Financial Officer Pete Guilfoile - Chief Credit Officer

Steven Alexopoulos - JPMorgan Erika Najarian - Bank of America Geoffrey Elliott - Autonomous Research Ken Usdin - Jefferies Michael Rose - Raymond James Terry McEvoy - Stephens David Eads - UBS Ken Zerbe - Morgan Stanley Brett Rabatin - Piper Jaffray John Pancari - Evercore ISI Scott Siefers - Sandler O’Neill Bob Ramsey - FBR Gary Tenner - D.A. Davidson Jon Arfstrom - RBC Capital Markets

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Ma’am, you may begin.

Thank you. Good morning and welcome to Comerica’s fourth quarter 2016 earnings conference call. Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Chief Financial Officer, Dave Duprey; and Chief Credit Officer, Pete Guilfoile. Through this presentation we will be referring to slides which provide additional detail. The presentation slides as well as our press release are available on the SEC’s website as well as in the Investor Relations section of our website, comerica.com. Before we get started, I would like to remind you that this conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statement contained in the release issued today as well as Slide 2 of this presentation, which I incorporate into this call as well as our filings with the SEC for factors that could cause actual results to differ. Also, this conference call will reference non-GAAP measures. And in that regard, I would like to direct you to the reconciliation of these measures within this presentation. Now I will turn the call over to Ralph who will begin on Slide 3.

Good morning and thank you for joining our call today. Today, we reported fourth quarter 2016 net income of $164 million or $0.92 per share, which included $0.07 in restructuring expenses. Quarter-over-quarter, our earnings per share increased 10%. For the full year 2016, we reported net income of $477 million or $2.68 per share, which included $0.34 in restructuring charges. 2016’s financial performance reflects a turning point on a number of fronts. We began to reap the benefits of our GEAR Up initiatives as well as rising rates. As the year went on, the energy loans continued to reduce and credit quality remains strong. Also, we increased the size of our equity buyback by 25%. Turning to Slide 4 and highlights from fiscal year 2016, average loans were close to $49 billion. Excluding the $641 million reduction in energy loans, average loans increased over $1 billion or 2%. The most notable increases were in commercial real estate, national dealer services and mortgage banker finance. Average non-interest-bearing deposits grew $1.7 billion or 6% while interest-bearing deposits declined $2.2 billion. In total, our average total deposits declined 1% to $57.7 billion. This reflects adjustments we made in light of the new LCR requirements early in 2016. Deposits grew significantly in the back half of the year. We generated almost $1.8 billion of net interest income in 2016, an increase of over 6% over 2015, primarily a result of the increase in interest rates combined with loan growth and a larger securities portfolio. Overall, credit quality continued to be strong with net charge-offs of 32 basis points, which is at the low end of our historical norm. The provision for credit losses increased $101 million with the allowance for loan losses increasing $96 million compared to 2015. This was primarily due to increases in reserves for energy loans recorded in the first quarter of 2016 partially offset by improvements in credit quality and the remainder of the portfolio. As far as non-interest income, customer-driven fees increased $22 million while non-fee categories declined $6 million. We had a large increase in card fees as well as growth in fiduciary, foreign exchange and brokerage fees. This was partly offset by lower commercial loan fees and investment banking income. Excluding restructuring charges of $93 million as well as a $33 million release of litigation reserves in 2015, non-interest expenses declined $23 million. Our GEAR Up initiative drove $25 million in expense savings, primarily in salaries and benefits. We also benefited from an additional decrease in pension expense. This was offset by merit increases, one additional day, increases in technology expenditures, outside processing fees tied to revenue-generating activities as well as FDIC expenses. We repurchased 6.6 million shares in 2016 under our equity repurchase program. Through the buyback and dividends, we returned $458 million or 96% of 2016 net income to shareholders. This reflects our strong capital position and solid financial performance. On Slide 5, we provide an overview of our fourth quarter results. Average loans declined $291 million, including $157 million reduction in our energy portfolio. We also had the typical seasonal activity with a decline in mortgage banker finance and year end growth in national dealer. Average deposits increased $1.6 billion driven by strong non-interest bearing deposit growth. The growth was broad-based with nearly all business lines posting increases. Net interest income increased $5 million to $455 million. This included the benefit of the increase in interest rates, lower debt costs and interest earned on higher excess balances at the Fed. Credit quality was solid. The provision and net charge-offs increased from the very low levels of the third quarter. Net charge-offs were $36 million or 29 basis points, which is at the low end of our historical norm and included $15 million in energy and $14 million in energy-related charge-offs. Total criticized loans declined over $400 million. Over the past year, energy loans have declined over $800 million or 27% and commitments have declined nearly $2 billion or 30%. The overall performance of this portfolio has improved, including a $319 million decrease in criticized loans in the fourth quarter. Therefore, we have modestly reduced our reserve currently allocated to energy loans to just over 7% of energy loans as of December 31. Non-interest income declined $5 million from the third quarter record levels as a result of the decline in commercial lending fees, which was partly offset by increased card fees. Non-interest expenses declined $32 million with our GEAR Up initiative driving the majority of the decrease. Expenses included $20 million in restructuring charges related to our GEAR Up initiatives similar to the third quarter. Restructuring expenses came in lower than forecasted as the related charges for some initiatives were better than we anticipated and for a few initiatives, realization of restructuring expenses is expected in 2017. However, we continue to fully believe we should meet the ultimate savings as scheduled. Our capital position remains strong. In line with our CCAR plan, we increased our share repurchases to $99 million or 1.8 million shares. And now, I will turn the call over to Dave who will go over the quarter in more detail.

Thanks, Ralph. Good morning, everyone. Turning to Slide 6, average loans in the fourth quarter were relatively stable compared to the third quarter. As a result of seasonality, our mortgage banker business decreased almost $200 million due to the fall slowdown in home sales, while our auto dealer floor plan portfolio increased $300 million as dealers took delivery of the 2017 models. We had a reduction of over $150 million in the energy portfolio. We also saw more robust declines in environmental services and general middle market partly due to some customers taking advantage of attractive valuations to monetize their investments. Finally, the strong growth in commercial real estate earlier this year has slowed as we remained focused on well-structured, attractive opportunities with existing customers as well as maintaining the diversity of our total portfolio. Growth in November and December resulted in period end loans above the average for the quarter. As you can see, the quarter ended with loans at $49.1 billion down from the third quarter with mortgage banker contributing the largest decline. As of December 31, commitments decreased $576 million, including a $220 million decline in energy and almost $300 million seasonal decline in mortgage banker. Average line utilization was stable at 51%. Interest earned on loans increased $1 million quarter-over-quarter and our loan yield increased 3 basis points. The increase in interest rates provided a $6 million benefit, which was partially offset by a lease residual valuation adjustment and lower loan balances. Deposit growth was robust again this quarter as you can see on Slide 7, increasing almost 3% over the third quarter. Our deposit costs remained low at 14 basis points as we continue to prudently manage pricing for our relationship-oriented deposits. We have not instituted any standard pricing adjustments in response to the increase in short-term rates. We are closely monitoring our deposit base as well as the market and we believe we are well positioned. We continue to maintain our securities book at about $12.5 billion as shown on Slide 8. The yield on the portfolio was stable. Recently, the increase in yields had allowed us to invest prepays at a higher rate than the portfolio average. For example, in the last couple of weeks, we purchased some mortgage-backed securities in the 230s with only modestly longer duration and extension risk than the portfolio average. Hopefully, this marks the end of the yield erosion we have been experiencing. The recent rise in mortgage rates has not had a significant impact in the pace of prepayments and the estimated duration of our portfolio sits at about 3.5 years and the expected duration under a 200 basis point rate shock extends it modestly to 3.9 years. Finally, the increase in rates resulted in the swing of the portfolio position to a small net loss of $42 million. Turning to Slide 9, net interest income increased $5 million, while the net interest margin decreased 1 basis point. As I discussed earlier, all loan-related impacts netted to $1 million and added 2 basis points to the margin. Wholesale funding costs decreased $1 million as the increase in 6-month LIBOR was more than offset by the benefit from the maturity of $650 million in sub-debt that was repaid in mid-November. Finally, the $1.5 billion increase in average balances at the Fed contributed $2 million, but had a 4 basis point negative impact on the margin. Our overall credit picture remains strong as outlined on Slide 10. Total criticized loans declined over $400 million and are now under $3 billion at quarter end. This includes a $49 million decrease in non-accrual loans, which now represents only 1.2% of our total loans. Net charge-offs were $36 million or 29 basis points, which is at the low end of our normal historical range. Our allowance for credit losses and allowance-to-loan ratio remains stable. Our reserve is built from the bottom-up every quarter and takes into consideration changing economic risk factors that may have an impact, but have not yet been reflected in our risk ratings such as the recent strength of the U.S. dollar. Energy loans now represent less than 5% of total loans. E&P loans make up about 70% of our energy portfolio. Fall re-determinations have resulted in an increase in borrowing basis of about 11% on average as many of our customers have increased reserves through acquisitions, improved production and new drilling as well as slightly higher prices. As criticized and non-accrual energy loans continued to decline and charge-offs remains manageable, the reserve currently allocated for energy loans declined slightly. Slide 11 outlines non-interest income, which fell slightly from very robust levels seen in the third quarter. We had nice growth in card fees as well as fiduciary and foreign exchange income. This was offset by decline in commercial lending fees primarily due to a slowdown in syndication activity. In addition, non-fee categories declined, including a $2 million net securities loss related to an adjustment for our Visa derivative and a decline in deferred compensation plan asset returns. The reduction in expenses, as shown on Slide 12, was a highlight in the quarter. Non-interest expenses decreased $32 million with our GEAR Up initiative contributing more than $25 million to the decline. Salaries and benefits expense declined $28 million, primarily due to the reduction in workforce as well as reduced pension expense as a result of the redesign of our retirement program we announced last quarter. In addition, a decrease in consulting expense and a gain on the early termination of certain leverage lease transactions more than offset the increase in outside processing expense, which is tied primarily to growing card fees. Moving to Slide 13 and capital management, we continue to maintain strong capital ratios while returning excess capital to our shareholders in a meaningful way. As we have previously indicated, our 2016 capital plan includes share repurchases of up to $440 million and the pace of our buyback will be dependent on balance sheet movements, our financial performance and market conditions. In the fourth quarter, we again increased our share buyback. Through the buyback, together with the dividend, we returned $139 million to shareholders or 85% of our fourth quarter net income. Of note, as a result of warrants and employee actions exercised during the quarter, we issued 5.1 million shares. Also, our average diluted share count increased by 1 million shares to 177 million as a result of the rise in our share price during the quarter. Turning to Slide 14, there are a number of potential developments that could enhance our financial performance. On the left side of the slide, we outlined the impact of rising rates. As I mentioned earlier, with our asset sensitive balance sheet, we have benefited from the recent increase in rates. Over 90% of our loans are floating rate. Therefore, as rates move, our loan portfolio re-prices relatively quickly. Assuming our deposit prices move with a 25% beta, our model indicates that the recent Federal Reserve rate increase of 25 basis points, we should gain about $70 million more in net interest income over a 12-month period. Of course, deposit pricing is only one assumption in our interest rate sensitivity modeling. We provided a range of possible outcomes as rates continue to rise based on various assumptions around positive base, pace of deposit decline and the incremental funding dates. Additional scenarios, other key variables and a list of assumptions are in the appendix. In addition, there has been much discussion about the new administration in Washington’s plans to reduce taxes, provide regulatory relief and fiscal stimulus to drive economic growth. While there is no certainty as to what changes may prevail, the table on the right provides a reconciliation of our 2016 income taxes to assist you in your analysis. We believe we are well positioned and can act quickly no matter what changes are enacted. Now I will turn the call back to Ralph.

Thank you, Dave. Turning to Slide 15 and an update on our GEAR Up expense and revenue initiative that we announced this past July, many of our larger initiatives have been completed or are well underway and already are driving an improvement in our bottom line. We estimate that the GEAR Up initiative will drive additional pretax income of $270 million in 2018 relative to when we kicked off the initiative. In 2017, we expect to drive expense savings of $150 million, including the $25 million in savings we realized in 2016 as well as an incremental non-interest income of $30 million. Even without the benefit from increases in rates, the actions we are taking are improving our bottom line. Our target is for the efficiency ratio to be at or below 60% by year end 2018. We expect to achieve or exceed our goal of a double-digit ROE in 2018 with sustained growth net of investment, normal credit costs, continued share buyback and only a modest increase in rates. We believe that the recent increase in rates will help us to reach our goals faster. At the bottom of the slide, you can see three major drivers to the savings we have achieved so far. Our largest initiative has involved streamlining our workforce. We took an expeditious yet thoughtful approach in order to minimize the disruption for our colleagues. Nearly 700 positions have been eliminated or most of our expected reduction. Managerial positions were reduced by 30% and we consolidated functions and responsibilities while ensuring we maintain our high standards for customer service and deep expertise and experience. Our total workforce at year end was below our target as a result of additional controls we have in place to reevaluate positions when they become open. In most cases, we expect those positions below our target to be filled over time based on business needs. We have also begun carefully pruning our banking center network as the chart in the center shows. We remain committed to our footprint. However, with advancing technology, we are consolidating 38 banking centers or about 8% of our network, of which 4 were closed in the second quarter, 15 were closed in the fourth quarter. We have replaced our current pension and retirement account benefits with a newly redesigned defined benefit retirement program. This is expected to contribute approximately $33 million in savings in 2017. Our new retirement program continues to provide highly competitive benefits. We remain confident that we will drive enhanced shareholder value and achieve the level of returns that our shareholders deserve as we deliver on our GEAR Up initiative. Finally, on Slide 16, we provide our outlook for the full year 2017 based on a continuation of the current economic and interest rate environment. We expect average loans to increase in line with GDP growth. We expect loan growth in most businesses led by middle market, commercial real estate, national auto dealer services and technology and life sciences. If oil and gas prices remain stable at current levels, we believe energy loans should continue to climb, but at a much slower pace. Also, we fully intend to maintain our relationship focus as well as loan pricing and credit discipline. We expect our net interest income to increase, reflecting the recent rise in rates along with loan growth. As Dave mentioned, our model indicates that the full year benefit to net interest income of the recent increase in short-term rates with a 25% deposit beta would be about $70 million. And while not included in this outlook, we are well positioned to benefit from any further rate increases. We also expect minor impacts from higher funding costs as well as limited loan yield compression resulting from the competitive environment. We expect our provision to be lower in 2017 as we believe the worst of the energy cycle is behind us. Assuming energy prices continue to be stable, we expect non-accruals and charge-offs to remain manageable. For the overall portfolio with continued strong credit quality, we expect the provision and net charge-offs to be within our historical normal range of 30 basis points to 40 basis points. As far as non-interest income, we expect it to increase 4% to 6%. This is primarily due to execution of our GEAR Up initiatives, which are expected to add about $30 million by accelerating growth in card and treasury management fees as well as brokerage services, fees and fiduciary income. Non-customer categories such as bank owned life insurance, warrant income, hedging effectiveness and deferred comp are difficult to predict and therefore, are assumed to remain stable in this outlook. Non-interest expenses are expected to decrease 4% to 5%, including a reduction in restructuring expenses, which are expected to be approximately $25 million to $50 million in 2017. Remaining non-interest expenses are expected to decline 1% to 2%. This includes about $150 million in savings derived from GEAR Up including the $25 million achieved in the fourth quarter, which is therefore already in the run rate. Offsets to this are expected to include increased outside processing, consistent with growing card revenue as well as higher FDIC expenses. Inflationary pressures are expected to have an impact on annual merit, staff insurance, occupancy and marketing. In addition, technology project expenses will continue to rise as we invest to meet customer demands as well as continuous enhancements in our cyber security. Also, $13 million in leverage lease terminations that benefited 2016 are not expected to be repeated. Finally, we expect our effective tax rate to be approximately 33%, which is higher than last year due to the expected increase in net income with about the same amount of tax credits as well as expectation that discrete items that benefited 2016 will not be repeated. In closing, 2016 was a pivotal year with the development and implementation of our enterprise wide GEAR Up initiative. We have made significant progress in executing the expense savings and are fully committed to delivering on the efficiency and revenue opportunities to further enhance our profitability and shareholder value. We also benefited meaningfully from increased interest rates and our overall credit metrics remain strong as we continue to navigate the energy cycle. We believe we are well positioned for the future as our geographic footprint is well situated and our relationship banking strategy can drive superior growth of loans, deposits and fee income over time. Now we will be happy to take any questions.

[Operator Instructions] Our first question will come from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Good morning Steve.

Thanks. Good morning to everybody. Ralph, I had a high level question first on GEAR Up. If we look at the macro environment this year and next, let’s just assume for some reason the pace of Fed hikes comes in faster than expected right and you get to double-digit ROTE faster than expected, could you see yourself easing on some of the cuts you have identified for GEAR Up or is that plan set in stone at this place irrespective of the macro?

That plan would go forward as we have been saying.

Okay, that’s helpful. And then on business sentiment seems to improve since the election almost across the country, could you guys comment on sentiment specifically in Michigan given several larger companies now talk about reinvesting in the region to Texas given what’s happened with energy? We used to look there is quite a few years back at a metric called commitments to commit as a leading indicator for loan growth. Has this changed post the election? Thanks.

I think we have seen it in what I would call the strengthening mode and it will be contingent on what we see and the changes we see, I believe in the first quarter or two, but it is a positive attitude and we have seen good increases in the economic indicators in all three states as well. California really leads that, but Texas and Michigan are catching up, especially with our state indexes that our Robert Dye, who is our economist, used to measure current activity. So, I think it’s a positive move in the right direction and could accelerate quickly if we see, as was mentioned by Dave, the right things begin to happen in the first and second quarter. Curt, you want to comment on the markets at all?

Well, I just would echo what you just said that we are starting to have conversations with clients that are indicating they are more optimistic business owners around possibilities of increased economic growth and maybe some tax relief or other things that might come with the new administration yet to be determined. And we saw that some activity in November and December kind of heading into the end of the year. As Ralph said, all three of our markets, I think, remain fairly robust. California would lead that charge and the high-tech sector, I think after maybe pausing a little bit in 2016, it seems to be coming back at the year activity, etcetera, the California market, real state values remained strong in California both in Northern and Southern California. And then Ralph already mentioned the Michigan market continues to benefit from the strong auto sales numbers that we have seen some tightening in real estate values there as well. And then Texas really outside of the Houston market remains a good story and as everyone knows is a more diverse economy than it was during prior energy down cycles.

Okay, that’s helpful. And maybe just one final one, any updated thoughts if specific threshold does get lifted, what expense saves couldn’t look like for you guys? Thanks.

If that were to happen, we will have to know kind of the exact terms and what of the existing will change going forward to put a proper estimate on that, Steve.

Okay, fair enough. Thanks for all the color.

Thank you.

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

Good morning, Erika.

Good morning. My first question is on the potential revenue upside from a rising rate environment, you cited that you expect a $70 million increase in net interest income with a 25% deposit beta, but you haven’t changed pricing and your deposit costs haven’t moved at all over the past year. I am wondering if the better number for us to use as we think about rate hikes for this year or just the previous December is that $85 million and I am wondering why you decided to give us guidance on the 25%. Do you think we are close to changing the pricing?

I don’t think we have a feel that we are close at this point in time, but I think taking the conservative approach that at some point, as interest rates increase, you will see pricing start to increase. And that’s the reason we also include all of the other comparisons on similar, whether it’s 25% or 50% beta, so that you have it in your mind as well.

And just as a follow-up question, as we think about how quickly that re-pricing may come, as we think about your deposit base and how much it’s grown over the past several years, how much of your deposit base would you classify as operational?

Dave?

We don’t really look at it that way. We really focus more on the non-interest bearing, which is predominantly our commercial customers. And while we certainly have a large base of customers that drive a significant balance, there clearly are, I don’t know, a dozen, two dozen customers that carry very significant balances with us, but do tend to move week to week, month to month. But in any event to reemphasize Ralph’s point, we are not looking to be changing our deposit pricing, but we will be watching as I said in my prepared remarks, we will be watching the market and our competition very, very, very closely, but let me make it clear we won’t be leading the way, but we certainly will be looking to match competition if there is first movers.

And just as a follow-up question, the $1.5 million in – $1.5 billion in cash, is that something that you expect to come out on the deposit side over the next few quarters, the excess cash that came in?

Yes. I think that will be determined by how much investment begins to start. And if customers feel that growth is going to pickup and started to invest in their companies and prepare for higher volumes, then you will see some of that come down over time.

Great. Thank you so much.

Thank you.

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

Good morning, Geoffrey.

Good morning. Thank you for taking the question. I wondered if you had any thoughts on how the environment for M&A is evolving in this sector after the election. Maybe start at a high level for the sector and then any thoughts on Comerica specifically and things you might do?

I think we will have to see how it plays out over time as things get better. Typically, in history, you see more acquisitions and you also see more institutions newly chartered than we have in the past, which has actually slowed the way down compared to what it used to be. And I think that will drive what happens going forward it will be all based on the economy and the pickup as we move forward.

And then your sell price is much higher than it was at the start of last year, things are looking a lot better in terms of the outlook. Does that change the way you think it’s all about Comerica either as a potential acquirer or as a potential seller?

We would look at all alternatives as we move forward and we are focused on what we control. And in addition, as we talked about earlier, being in Texas and California, which are two of the largest markets in the country and adding Michigan to it, which has been very robust, especially with the auto industry coming back and a great market for us as well, we are well positioned for growth as we move forward, which is what we control. We always look for opportunities and we have done that over time, but it’s not necessary to fuel our growth going forward.

Great. Thank you.

Thank you.

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

Thanks. Good morning.

Good morning, Ken.

A question related to just efficiency ratios and progress. I am presuming we understand that your net interest income outlook has the December rise and we know what each incremental rate hike would do for net interest income. So the first question is as we get additional rate hikes or if we do, how much do you expect that to be incremental margin, meaning, how much of that is – of extra rate hikes are built into your expense forecast? And if we get additional rate hikes, is there any delta to the expense side or should that all fall to the bottom line?

I will let Dave comment on this as well, but we haven’t built in on future interest rate hikes as we look at it. It’s focused on expenses and the current growth profile. Dave?

Yes. No, I would echo that Ken. The forecast is assuming no incremental rate hikes throughout the balance of 2017. We would be pleased to see them, but they are not embedded in the forecast as the expense side would be absolutely de minimis.

Okay. And then on the follow-up on the expense side, so I just want to ask you to parse out a little bit more. We get the GEAR Up savings part, $125 million of helper and I am just wondering can you talk about just the core side a little bit more in terms of what type of inflationary costs do you expect and is it more just that you expect some of the fee revenues to come with expense growth as you mentioned in card, just trying to understand the delta between the GEAR Up saves and underlying growth?

Yes. Well, Ken, you actually did pick up on the biggest piece of it and that is the revenue side, a lot of that big card fees, merchant side activity. As you are well aware of, there is outside processing associated with that. And in fact, the single biggest impact that we expect to see in expense growth next year is in fact that very point. It’s the cost of outside processors. Do keep in mind we do also expect to see the growth in not only fees but growth in loans. Accompanied with that is increased incentive payments as you would expect as we grow that book. We also have the standard merit increases such as due to inflationary pressures, which I know our employee base appreciates. We also have the FDIC surcharge coming through for the full year and then quite frankly, we just have ongoing increases, albeit well controlled, in technology. So on balance, that’s kind of the framework of what we expect to see. I should add remember, we also had $13 million and Ralph mentioned this in his prepared remarks, $13 million in lease termination gains last year that we do not expect to repeat.

Right. And then just bringing those two points together then, your target for ‘18 is a sub-60% efficiency ratio, do you have any thoughts on what type of progress you might make this year on the way to that sub-60%?

Well, our GEAR Up initiatives are completely underway. We will be significantly focused this year on an element of GEAR Up, that being the technology piece. That will be a significant contributor in 2018. So we do, as Ralph said, we do fully expect to execute on every element of GEAR Up.

Okay, great. Thanks a lot.

Thank you.

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

Good morning Michael.

Hey, good morning. Just wanted to get some context on your expectations for the mortgage warehouse as we move into next year and maybe have it size with NBA forecast. And then as a follow-up, just as it relates to energy, where do you think the energy kind of bottoms as a percentage of the portfolio and if prices recover to the $60 or even $70 price range this year, could we expect to see balances actually begin to increase this year? Thanks.

Okay. Curt, do you want to take that?

Yes. Michael, on the mortgage banker side of the equation, as we always say on these calls, we have the normal seasonality. So we would expect our volume to build in spring and summer and then back off in the fall and winter timeframe and that’s what we saw in 2016, we expect in 2017. The most recent MBNA forecast that we have shows a drop of refi activities somewhere in the 17%, 18% factor, but what we are hearing that the forecast would call for an increase in purchase volumes, somewhere in the near 10% type range. That bodes well for us. Our portfolio versus the industry runs about 67% on the purchase side, with most recent statistics. The industry runs about 49% and so if we do see some purchase volume kick in, in 2017, we believe that would bode well for us in terms of volume and activity. The second thing I would say would work in our favor is that we continue to be a net acquirer of new relationships and in the mortgage warehouse space and so we hope that leads to increased activity for us in 2017 as well.

That’s very helpful. And then on the energy side?

Energy.

On the energy, well, that continues to – if you saw in 2016, a headwind for us, where there is significant decline both in balances and commitments that we shared earlier on the call. As we head into 2017, we are expecting that, that will start to slowdown. We are starting to see a few new opportunities with existing customers and we are going to take care of our existing customers. That portfolio for us now is down below 5% at period end and we think it will start to level off and be less of a headwind for us in 2017. Again, as we see both the decline in reductions in the portfolio as well as some new opportunities with some existing clients.

Thanks for the color guys. I appreciate it.

Thank you.

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

Good morning Terry.

Hi, good morning. Maybe just a follow-up on the mortgage banker portfolio, I can’t remember, do you disclose average yields in that business or if not, would they be above or below that 3.3% average rate in 4Q for the total commercial portfolio?

Curt?

We do not disclose average yields for the portfolio and I don’t think I could give you a specific answer on whether the deals will be above or below our overall portfolio. I would say that we get attractive pricing in that business line and with very good connectivity in terms of opportunities to sell additional products and services, depository services, treasury management, etcetera, so the return to us overall on the business are attractive.

And then just as a follow-up, we are hearing more optimism from small businesses, do you have any comments on what you saw or heard in the second half of the fourth quarter from those clients specifically and would you expect that, I think it’s a $4 billion portfolio, would you expect that portfolio to show faster growth than that general middle market book over the course of next year?

Curt?

It is a smaller portfolio and it’s a more granular portfolio for us and I would expect the portfolio to grow in line with middle market overall. We are hearing very similar comments from small business owners that we are hearing from middle market business owners as well in terms of increased optimism. Pipeline and portfolio remains pretty strong for us overall. So again it is a smaller portfolio, but we are anticipating growth in the portfolio in 2017.

Thank you.

Thank you.

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

Good morning David.

Hi, good morning. Maybe you guys had talked a little bit about strong deposit inflows at the end of the year and kind of the more attractive opportunities to deploy, [indiscernible]. I just wondered if the recent rate hike and the expectations for a better environment have any led to any kind of change in the way you guys are thinking about deploying excess liquidity?

I think at this point in time, our strategy is going to remain the same there. I see no changes especially with the potential of the other things we have been talking about to the economy beginning to pick up. And if that continues, then we will certainly want to use our liquidity to be focused on the lending side of that. Dave, do you have any?

No, I would agree. Great number David, we have recently picked up some mortgage back in the 2.30s. And quite frankly remember you are locking into that for a 3-year, 3.5-year period. So if we continue to see rate increases, that could be a challenge in terms of not having locked into that fixed rate. I would much rather see that go into loan growth and as Ralph said, we will continue to stay with our standard pattern here and until a better picture emerges.

Okay, great. And then can you maybe talk a little bit about capital return, you have had an increase in the buyback this quarter, but you also had a pretty big increase in capital ratios and I mean do you think that – I guess what, is the plan just to continue to use the entire authorization in this year’s CCAR cycle. And then can you give any early thoughts into how you might approach capital returns in the next CCAR cycle?

Dave?

I think our confidence level is certainly increasing as it relates to completing the $440 million buyback as our CCAR plan has articulated. The increase in the capital ratios, we did indicate we did have warrant conversions in place, stock option conversions with that a little over 5 million shares has certainly a significant increase to the capital ratio and then quite frankly, our risk-weighted asset calculation also declined so both kind of contributing to that increase. In terms of next year, obviously, we will take a very hard look at that knowing where our capital ratios are, knowing our confidence in our forecast, including the expense saves and revenue enhancements coming from GEAR Up, we will have to coalesce all those thoughts as we work through our CCAR plan for its submission during the few months.

Alright. Thanks for the color.

Thank you.

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

Great, thank you. Good morning.

Good morning, Ken.

Maybe just a little more pointed question on the loan growth, your guidance is for loan growth to be up in line with real GDP, which I guess our Morgan Stanley comments is looking for something like 1.9%. Why is it not a bit stronger? I understand it sounds like energy is kind of starting to level off. Earlier in the call, you talked about solid growth in your markets, but I am just trying to reconcile the total average loan growth versus sort of the more robust environment that a lot of people are expecting? Thanks.

Curt, do you want to?

Yes. Ken, I think we are encouraged by what we are hearing from our consumers and a lot of that though is yet to play out. There is encouragement around potential for additional economic growth that might lead to more CapEx spend, possible tax relief or other changes with the administration. And so if we are seeing growth, we will have opportunities to revise this comment as we go along. But at this point, I think growth in line with GDP expectations is realistic and we are going to continue to focus on our relationship approach, where we can get good connectivity with our customers and good pricing, continue with our credit discipline overall. I think the growth areas for us would be middle-market, commercial real estate, our dealer business, technology and life sciences, and I mentioned earlier mortgage banker finance, maybe a little bit slower rate than we saw in 2017, but still growth opportunities there as well. I am sorry, go ahead.

No, I was just going to say and just to be super clear, it’s real GDP of call it roughly 2%, not nominal GDP of, say, 4%?

That’s right.

Okay, sorry go ahead.

Although I would say that our economist is a little more bullish about GDP going forward.

Got it. Understood. And then just the other question I had just in terms of the tax planning, with a higher tax rate, I understand higher income, stable tax credits. Would you guys consider implementing any new tax credits or other tax strategies this year or is it better just a way to see what comes out of Congress before you do anything? Thanks.

Dave?

I think we are going to stand down, can wait and see of what if anything is actually moving through Congress and what if anything the new President maybe inclined to sign. It’s obviously very difficult to do any kind of real forecasting with taxes other than to use today’s tax regulation to focus on.

Alright. Thank you very much.

Thank you.

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

Hi, good morning. Want to just follow-up on the loan growth guidance question one more time. Just wanted to make sure I understood the increased optimism. It’s a little bit early to maybe be more aggressive with your guidance in terms of growth this year, but I was curious if any of that is reflective of the large corporate market and maybe your concerns or just thoughts on that might not grow that much this year?

Curt?

I don’t think there is any negative on the large side, but no, I don’t think so. I would say about the large corporate space is how we play in that market. We are selective. Pricing is pretty competitive in the large corporate end of the equation and so we are expecting some growth there in 2017, but probably more growth from the businesses I outlined previously.

Okay. And then just to follow-up on CCAR and the share buyback and capital, would you anticipate being more aggressive with your CCAR plan next year?

Dave?

I think we have been saying for long that we are – part of our strategy here is to manage the level of capital. And as I said earlier, we need to look at all those factors. As we pulled together the CCAR submission here for this year, obviously our confidence level is higher than the impact of GEAR Up, the fact that the economy is improving. We have some positive interest rate movement here in December. You may or not see more increases. It certainly increases our level of confidence and when it comes to making the submission.

And historically, we have been fairly aggressive with our ask and buybacks even before the CCAR regulation and we will with current levels, as Dave was saying, of our capital, we will certainly be evaluating that as we go forward and look at the ask for a return.

Okay, great. Thanks for the color.

Thank you.

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

Good morning.

Good morning, John.

On the tax topic again, I mean, it certainly looks like you are making some decisions based upon the outlook here around the tax rate. I mean, I know you indicated that the guidance excludes any discrete items that benefited last year, but you also had a good number of discrete items that helped keep that tax rate in the 30% to 32% range over the past several years. So I guess what I am getting at is, is this – does this consider that you expect a material benefit to your bottom line with the tax cut coming from the new regime and that’s why you are making decisions around the discrete items now?

Dave?

No, John, the 33% that we are telegraphing is simply a result of an expectation of a higher level of pre-tax earnings being offset with the same level of expected low income housing tax credits and the current same level of tax exempt income, which in our case has been from life insurance. But if the other discrete items we don’t expect to repeat, which is mainly the lease termination transaction and then do remember there is about a 1% or 1.5% impact from state income tax that’s embedded in that 33%.

Right, right. I get it. It’s still just 100 basis points step up from the higher levels you have been at in prior years and I get the higher income. But again, just getting it to step up, I guess, another way to ask it would be if you did see a benefit from a tax cut under the new tax reform, how much of it that you would really expect to fall to the bottom line versus any other form of offset that you can see coming structurally or for Comerica specifically?

Well, there is three pieces that – there were four pieces that could impact that. One, what would be the new corporate tax rate? Today, it’s 35%. What does that corporate tax rate move to? The second would be does any congressional action modify the ability for us to fully utilize low income housing tax credits? Don’t know. The third would be bank-owned life insurance. From time to time over the last 20 plus years, Congress has entertained either limiting or eliminating the benefit of that tax exempt income. And then lastly and this would be a one-time adjustment, but remember, we now have a net deferred tax asset and that net deferred tax asset is recorded at 35%. So to the extent corporate tax rates decline, you have to write-down that deferred tax asset to remember the new corporate tax rate would be. That’s a one-time item, but there is significant moving pieces. So you can probably use whatever assumptions you choose to use as you see Congress move on tax legislation and that will give you a good idea of what the impact would be to Comerica?

Right. But implying that there are some good offsets there that you may not see material benefit to the bottom line ultimately?

If all remains the same, in other words, if the bank-owned life insurance, which is about $15 million, $16 million for us on an annual basis, low income housing tax credits worth about $22 million for us if they left those lone, it would be a significant benefit to us assuming corporate tax rate reduce.

And then on that line though, do you expect any of that benefit to be computed away?

Yes, all of it.

Okay, thank you.

Your next question will come from the line of Scott Siefers with Sandler O’Neill. Please go ahead.

Good morning guys.

Good morning.

I was just hoping you could spend a moment or so on the level of the energy reserve is still very elevated, I guess as I look at things with the exception of maybe that roughly $9 million or $10 million uptick in charge-offs, I mean everything is pointed in the right direction in terms of the quality and portfolio yet you still have the pretty healthy reserve, just curious where your thoughts on rationale behind keeping it so high and sort of over what period of time you might drop down to maybe a more typical level?

Okay. Pete?

Well, Scott, we have been encouraged with what we are seeing in the energy space, but we could have a rather large energy related charge-off this quarter. And so we are just trying to see what’s going to go on in that space before we do anything major to our reserves around energy. I will say though that we did reduce the amount of our energy reserves, both in terms of dollars and in terms of percentages this quarter.

Okay. And is that the large energy related charge-offs you refer to is that just sort of a single relationship that’s nothing broader right, I mean it sounds like...?

Middle market credit in Houston and we are seeing some migration in the energy related credits a bit and that’s why we are being cautious with regard to our reserves, but our energy related portfolio is rather small. It’s about $390 million, but the bulk of it is investment grade refineries. So we think the charge-offs there are going to be modest, but we are seeing some migration in that portfolio and so we are just being cautious.

Okay, alright. That sounds good. Thank you very much.

Dave, do you want to...?

Yes. I want to clarify because I am not 100% sure I heard the last statement that John made correctly, but I want to make sure I am very clear on this corporate tax rate. To the extent there is a reduction in corporate tax rates that drops to our bottom line, we expect that to enhance EPS, but I think John, I may have misunderstood you, you may have been suggesting that we would trade that away in competition. That was not my intent to answer yes, all of it. Yes, all of it falling to the bottom line to EPS, but I just want to make sure I am clear. I am not sure I heard the last point of your question correctly.

Okay.

Our last question will come from the line of Bob Ramsey with FBR. Please go ahead.

Good morning Bob.

Hey, good morning. Just wanted to talk a little bit with the share price appreciation, how that affects the way you think about share repurchases and whether there could be any sort of shift in mix and capital return plans in the future?

Dave?

Well, clearly, balance sheet growth would be a great use of capital. But at the moment, given where we are with balance sheet growth, we continue to believe stock buyback is an appropriate use of our excess capital, so if we begin to see those dynamics change, we will obviously reevaluate. But given the alternatives, we continue to believe stock buyback is the right action for us to be taking at this time.

And we have been walking up the dividends as well.

That’s correct. And we will continue to focus on that dividend and that will be another consideration as we look at next year’s CCAR submission.

Okay, fair enough. I know we have talked a lot about efficiency and GEAR Up, just curious to ask it a little bit differently, the sub-60% efficiency target, is it reasonable to expect you guys will be there in the back half of this year if you exclude the GEAR Up related costs from the calculation?

Dave?

Well, there is a couple of ways you can approach that. One is with and without restructuring charges. So I will focus on the GAAP component, which will be including restructuring charges. Absent at least one more, if not two more rate increases, I would say that, that would be a high hurdle. But again, our focus remains more on driving that number to or below 60% for 2018.

But excluding the restructuring charges, would that be reasonable?

If all other elements of our forecast fall in place exactly as we would expect, I think we will be extremely close. Another rate increase would make it a lot easier to lay up as opposed to a longer shot.

Great. And then just last question, I guess it’s reasonable to assume that you will get the remaining full benefit of the December rate increase here in the first quarter?

The vast majority should come through in first quarter, because I believe about 70% of our floating rate loans re-priced every 30 days. There are some that are 90 days. There is a real handful that’s about I believe the 6 – about six months, but the vast, vast, vast majority should re-price throughout the first quarter.

Great. Thank you.

Thank you.

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

Good morning Gary.

Good morning. I wanted to talk about loan growth again for a second, you seem to be very positive with regard to the emerging economic outlook and maybe what loan growth could be over time, but still at least for ‘17, forecasting loan growth as you said in line with real GDP, so presumably somewhere in the lower single-digit range, what would the scenario have to look like for loan generation and growth at Comerica to more fully reflect what seems to be a more positive view of what your footprint and business mix could support?

Well, to the extent we are using the current line to be looking back over history, that’s a good way to look at growth in loans versus GDP. And our experience has been if you are outgrowing that substantially, then that in general causes an issue, whether it’s from a credit standpoint or a business standpoint and – but there will be variances from GDP at any given year as things begin to pick up. If the things that we were talking about and Curt was talking about moving quicker and things accelerate, then we would expect it to outpace GDP, I think that’s fair. Dave, is it not?

No, I will agree.

And so we are kind of at that point of where is it going to start up from here or not. And if it starts up, then I think we will see loan growth that may jump ahead of it in the short-term.

Okay, that’s helpful. Thank you.

Thank you.

Our final question will come from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Good morning.

Alright. Thanks. Good morning. Just Dave a quick one for you back on deposit beta assumptions, on the 25% deposit beta assumption you are using, are you seeing anything different on deposit behavior today that’s different than what you saw a year ago after the last increase, I guess what I am getting at is why can’t it be under 25% like the last cycle, is there anything that’s different with this hike so far?

So far, no pattern has been the same. But keep in mind, only a month into the rate increase and like I said, but we won’t be first mover on standard pricing, but we will watch the competition. Anytime there is a rate increase, we do have, as I said, we have some very, very, very large corporate customers. They tend to reach out to see if they are willing to park some of those funds for an extended duration if we might be willing to be somewhat more competitive in terms of pricing. We tend to be very focused on that. We had a handful of calls last year. We have got handful of calls again this year, but nothing in that pattern has really changed.

Okay. That’s good to hear. And then just quickly on the incremental revenues from GEAR Up, the $30 million, are you starting to see that show up already and if so, what are the maybe one or two most material categories?

Most of that it’s really our treasury management. The way we have that rolling in, in 2017, we are just beginning to roll that program out. We did a fair amount of site testing throughout the third and fourth quarters with various markets, with various customers. And if we just we will begin the full ramp up of that here early in ‘17. So I think it’s reasonable to expect some minor component of that in the first quarter, but you could expect the balance of that to really be more second half as opposed to first half.

Curt, do you agree with that?

I do. Just to build on what Dave said, in addition to treasury management, it really is across a number of our fee income categories, subset of treasury would be our card platform, merchant services, on the wealth side to be sure in brokerage. A lot of it comes down to us just doing I think a better job than we have historically done. We have already done a good job in the past, but just accelerating cross-sell opportunities, using more analytics, more data driven information, more needs based approach with our customers, the new profiling tools, some additional training we have done, so really across all of our fee income areas. So those would be the primary ones. And I agree, I think you will ramp up in more second half 2017 phenomenon.

Okay, fair enough. Thank you.

Thank you.

I will now turn the call back over to Ralph Babb, CEO, for any concluding remarks.

Well, I would like to thank everyone for joining us and your interest in Comerica. And I hope you all have a good day. Thanks very much.

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