Comerica Q4 2022 Earnings Results & Report

Comerica EPS Results

• Actual EPS: $2.58
• Consensus EPS: $2.56
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $1.66
• EPS Beat Rate: 7 of last 8 quarters

Comerica Revenue Results

• Actual Revenue: $1.02 billion
• Expected Revenue: $1.01 billion
• Beat/Miss: Beat by +$12.97 million
• YoY Revenue Growth: N/A

Comerica (NYSE:CMA) is a diversified financial services company headquartered in Dallas, Texas, operating as Comerica Bank. The company offers a comprehensive suite of banking and financial solutions to businesses, professionals, and individuals. Its principal business activities encompass commercial banking services—such as treasury management, lending, and international trade finance—alongside retail banking products like deposit accounts, consumer loans, and credit cards. In addition, Comerica provides wealth management and trust services, financial advisory, and capital markets solutions to support clients’ complex financial needs.

Established in Detroit in 1849 as the Detroit Savings Fund Institute, Comerica has evolved over more than 170 years to become a regional banking leader. The bank expanded its footprint beyond Michigan through strategic acquisitions and organic growth, relocating its headquarters to Dallas in 2007 to better serve its southwestern markets. Today, Comerica maintains a presence in Texas, California, Arizona, and Florida, while also delivering specialized industry expertise in sectors such as technology, healthcare, real estate, and energy.

Under the leadership of President and Chief Executive Officer Curtis C. Farmer II, Comerica emphasizes client-focused service, risk management, and digital innovation. The company’s board of directors and executive team prioritize prudent governance and community engagement, with ongoing investments in technology platforms designed to enhance the customer experience. Comerica’s regional banking model and industry-centric approach continue to shape its strategic direction and strengthen its position within core U.S. markets.

Comerica Q4 2022 Earnings Call Transcript

Key Takeaways

• In 2022, Comerica delivered record results with revenue of $3.5 billion, EPS of $8.47 and an efficiency ratio of 56%, driving ROE to 18.6% and Q4 revenue above $1 billion.
• Organic loan growth was strong, with average loans rising 8% to over $50 billion and broad-based contributions from commercial real estate, dealer services, corporate banking, wealth management and entertainment.
• Deposit and margin management remained disciplined as average deposits declined $2.2 billion, driven by customer cash use and pricing actions, while net interest income hit a Q4 record of $742 million and NIM expanded 24 bps.
• Credit quality remained exceptional, with net charge-offs of just 3 bps, $4 million in net recoveries and problem assets well below historical norms, supporting a provision expense of $33 million.
• Comerica published its inaugural TCFD report, grew green loans by 60% to $2.7 billion, achieved 85% of its $5 billion small business loan goal and earned a spot on Newsweek’s America’s Most Responsible Companies list.

Presentation

[Operator]

Hello, and thank you for standing by. Welcome to the Comerica Q4 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's re-remarks, there will be a question-and-answer session. To ask a question during this session, you will need to press one then 0 on your telephone. To withdraw your question, please press one then 0 again. I would now like to turn the conference over to Kelly Gage, Director of Investor Relations. Please go ahead.

[Kelly Gage, Director of Investor Relations at Comerica]

Thanks, Greg. Good morning, welcome to Comerica's Q4 2022 earnings conference call. Participating on this call will be our President, Chairman, and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda Chausse, and Executive Director of our Commercial Bank, Peter Sefzik. During this presentation, we will be referring to slides which provide additional details. The presentation slides and our press release are available on the SEC's website as well as in the investor relations section of our website, comerica.com. This conference call contains forward-looking statements. 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. This conference call will reference non-GAAP measures.

[Kelly Gage, Director of Investor Relations at Comerica]

In that regard, I direct you to the reconciliation of these measures on our website, comerica.com. Please refer to the safe harbor statement in today's earnings release on slide two, which is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ. Now, I'll turn the call over to Curt, who will begin on slide three.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Thank you, Kelly. Good morning, everyone, thank you for joining our call. In 2022, we generated another year of record earnings, in many ways, it has been an inflection point for our company. Colleagues returned to the office reinvigorated, ready to support our customers and reimagine the way we work, we delivered results. Strong broad-based loan growth and management of loan deposit pricing in a rising rate environment drove revenue to an all-time high of $3.5 billion. Prudent expense discipline generated an efficiency ratio of 56%, earnings per share increased to $8.47. The strategic investments and balance sheet management helped produce superior returns and position us to maintain a high level of performance.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Our refreshed logo and core values reinforce our commitment to being a leading bank for business, complemented by strong retail and wealth management solutions. Investments in more collaborative workspace, digital tools, enhanced products, and streamlined processes better enable our colleagues to put our customers first and create a more elevated experience. Striving to be a force for good in our communities, we have achieved approximately 85% of our three-year goal to provide $5 billion in small business loans and deployed unique solutions such as our Comerica BusinessHQ, which provides collaborative space in the southern sector of Dallas. Publishing our inaugural TCFD report was an important milestone in our corporate responsibility journey and highlights our long-term commitment to sustainable business. The report outlines our climate strategy, including supporting our customers, integrating climate issues into our business, and reduction of our environmental footprint.

[Curt Farmer, President, Chairman, and CEO at Comerica]

As of year-end, green loans were $2.7 billion, a 60% increase over 2021, assisted by our renewable energy business, which has already exceeded expectations with almost $350 million in loans. Our commitment to corporate responsibility was once again recognized as we were included for our fourth consecutive year in Newsweek's 2023 list of America's Most Responsible Companies and also included as one of the Greatest Workplaces for Diversity. Volunteerism remains a priority, I'm incredibly proud of the over 66,000 hours our colleagues committed to positively impacting their communities. Slide four provides further detail on our full-year results. Relative to 2021, average loans increased $1.4 billion or 3% to over $50 billion.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Putting aside PPP activities, loans were up $4 billion or 8%, our highest organic growth rate in well over a decade, with contributions from most businesses. Following growth of almost $13 billion in 2021, driven by government stimulus, deposits decreased $2.2 billion in 2022 as customers utilized excess cash and we executed strategic pricing actions. Revenue increased 19%, driven by higher interest rates and strong loan growth. Non-interest expenses reflected strategic investments, higher compensation in conjunction with favorable performance, and modernization initiatives totaling $38 million. Credit metrics were excellent, as driven by net charge-offs of only 3 basis points and problem assets remained well below our historical norm. In summary, a strong performance with an ROE of 18.6% and an ROA of 1.32%.

[Curt Farmer, President, Chairman, and CEO at Comerica]

In the Q4, we generated earnings of $350 million or $2.58 per share as outlined on slide five. Our financial results were excellent, with all-time high revenue of over $1 billion, up 4% over the Q3. Average loans grew almost $1.3 billion, which includes a $329 million decrease in Mortgage Banker, where volume has been impacted by higher rates. Average deposits declined $2.6 billion. Balances stabilized at quarter end, and we began to see some positive trends. Credit quality was exceptional with net recoveries, and our percentage of criticized loans remains well below our historical average. We built reserves in conjunction with growth and a slightly more negative economic outlook. Expenses reflected investments in our business and support our revenue-generating activities. It was a record quarter and a record year.

[Curt Farmer, President, Chairman, and CEO at Comerica]

We are excited about the investments we are making not only to support our colleagues and customers, but also to sustain our strong performance as we move forward. Now I'll turn the call to Jim to review the quarter in more detail.

[Jim Herzog, CFO at Comerica]

Thanks, Curt, and good morning, everyone. Turning to slide six, broad-based loan growth continued and exceeded expectations with average balances increasing $1.3 billion or 2.5%. Commitments, which can be a good indicator of future loan growth, increased 5% with contributions from most businesses. Utilization remained stable at 45% and remained below historical averages as commitment growth outperformed the increase in borrowings. Loans in our commercial real estate business increased nearly $880 million as the pace of payoffs slowed and we fund the construction projects already in the pipeline. Consistent with our selective strategy, nearly all of the growth was in class A multifamily or industrial projects built by large developers that we know well, providing significant equity contributions, typically averaging between 35% and 40% of costs. Credit quality in this portfolio continues to be excellent.

[Jim Herzog, CFO at Comerica]

Criticized loans remain extremely low, and we see no meaningful signs of negative migration. With our bankers that average 20 years of experience, a proven operational process, stringent underwriting, and consistent credit monitoring, we believe our approach results in a conservative portfolio appropriately positioned to navigate the current environment. National Dealer Services loans grew over $300 million as a result of new relationships and continued M&A activity by our customers. We continue to see a slow rebound in inventory levels, and with consumer auto demand dampening and supply chain improving, the industry anticipates inventory levels to continue increasing throughout 2023. Corporate banking, wealth management, and entertainment also contributed significantly to our strong loan growth. Elevated interest rates, lack of housing inventory, and normal seasonality continued to pressure mortgage banker as average loans declined $329 million for the quarter.

[Jim Herzog, CFO at Comerica]

MBA forecasts show volumes remaining at depressed levels through the Q1 before potentially increasing. Loan yields increased 81 basis points to 5.45%, primarily reflecting the benefit from higher rates. On slide seven, average deposits declined as customers continued to utilize funds in their business and seek higher yield. Balances ended the quarter better than we expected as we adjusted pricing in conjunction with aggressive Fed rate hikes. The strategy worked as period-end interest-bearing deposits increased to $31.5 billion. We did see a modest uptick in non-interest-bearing deposits late in the year, we attribute it largely to traditional seasonality with elevated business activities such as customers preparing to make tax payments and distributions in the Q1. We continue to believe future FOMC monetary actions are key to the timing of deposit stabilization.

[Jim Herzog, CFO at Comerica]

Our overall mix remained favorable with 56% of average non-interest-bearing deposits, largely in operational accounts reflecting our commercial orientation. Our liquidity position was strong with a loan-to-deposit ratio of 75% below our historical average. Beyond deposits, we have significant capacity to support loan growth, including repayments in our securities portfolio and efficient borrowing channels such as broker deposits and Federal Home Loan Bank lines. Interest-bearing deposit costs averaged 97 basis points and reflected the pricing actions taken in the Q4. Our dynamic pricing strategy will continue to balance our funding needs with customers' objectives and the rate environment. Average balances in our securities portfolio on slide eight declined $1.4 billion, primarily reflecting the full quarter effect in the Q3's mark-to-market adjustments. In addition, we are not reinvesting paydowns and are instead repurposing those funds for loan growth.

[Jim Herzog, CFO at Comerica]

Relatively stable long-term rates resulted in a positive mark-to-market adjustment of $73 million at period end. Our total net unrealized pre-tax loss of $3.0 billion affects our book value but not our regulatory capital ratios. While we maintain the portfolio as available for sale, mostly for liquidity purposes, we typically hold these securities to maturity, in which case the unrealized losses should not impact income. Despite a reduction in the overall portfolio size, securities income remained relatively stable due to higher-yielding MBS purchases in the Q3, replacing the paydown of lower-yielding securities. Turning to slide nine, net interest income increased $35 million to a record of $742 million, and the net interest margin increased 24 basis points. The benefit from higher rates lifted loan income $102 million and added 52 basis points to the margin.

[Jim Herzog, CFO at Comerica]

Loan growth added $19 million and 3 basis points. Other portfolio dynamics added $1 billion or 1 basis point, while the market remains competitive, we have successfully maintained our pricing discipline. As I mentioned, securities income was relatively stable. As far as deposits of the Fed, higher rates partly offset by lower balances added $5 million and 11 basis points to the margin. Adjustments to deposit pricing reduced income by $63 million, while lower balances added 1 basis point. Higher rates on our floating-rate wholesale debt, in addition to our August subordinated debt offering, had a $29 million impact. Altogether, the rise in rates provided a net benefit of $53 million to net interest income.

[Jim Herzog, CFO at Comerica]

Credit quality remained excellent as outlined on slide 10 with $4 million in net recoveries along with a reduction in our already low criticized and nonaccrual loans. In fact, inflows to nonaccrual loans were only $16 million, one of the lowest levels in recent history. Loan growth and the weakening economic forecast drove the provision expense up to $33 million, and the allowance for credit losses increased modestly to 1.24%. With our consistent disciplined approach as well as our relationship model and diverse customer base, we believe we are well positioned to manage through a recessionary environment. Non-interest income on slide 11 was robust at $278 million and was impacted by volatility in the rate environment and equity markets.

[Jim Herzog, CFO at Comerica]

Deferred comp, which is offset in expenses, increased $9 million, generating a $6 million return for the quarter. Higher rates earned on funds associated with settling our internal derivative portfolio drove risk management income up $8 million. The quarterly variance in the Visa Class B total return swap, along with the increase in card and brokerage, all contributed positively to the quarter. As expected, customer derivative volumes slowed from recent strong activity, there was a $1 million favorable CVA adjustment, which is a $4 million reduction from the Q3. Deposit service charges reflected positive momentum in treasury management, but they were more than offset by higher earnings credit and lower fees associated with deposit balances. Fiduciary income was negatively impacted by fees related to equity returns, and BOLI had a seasonal decline of $2 million.

[Jim Herzog, CFO at Comerica]

Despite this quarter's fluctuations, we have a solid core product set delivering a strong level of non-capital consuming fee income with promising growth potential. Turning to expenses on slide 12. We've made significant progress towards our modernization objectives, consolidating banking centers, enhancing corporate facilities, and achieving an important milestone in migrating our technology. In all, we incurred $18 million in expenses for the quarter, which is below the estimate we previously provided due to better-than-expected severance and asset write-downs. Excluding modernization and deferred compensation, which is fully offset, non-interest expenses increased $19 million. In support of our growth initiatives, we successfully attracted talent and continued to invest in products, further elevating our customer experience. Increases in T&E, legal, and marketing were correlated with the strong business activity in the Q4 and driving future revenue with initiatives such as Retail Reimagined.

[Jim Herzog, CFO at Comerica]

Foundational investments in our infrastructure enhance controls and compliance in this evolving landscape, as well as making us more nimble with regards to technology development. We have some inflationary pressures, including salaries for new staff and recent merit increases and saw seasonal increases in occupancy, marketing, and other related expenses. Overall, we successfully balanced investments and other pressures with accelerated revenue growth, resulting in a solid efficiency ratio of 53%. Slide 13 provides details on capital management. With record earnings, our strong capital generation outpaced capital needed for loan growth, increasing our CET1 ratio to an estimated 10.02%. As always, our priority is to use our capital to support our customers and drive growth while providing an attractive return to our shareholders.

[Jim Herzog, CFO at Comerica]

We closely monitor loan growth, profitability, and credit trends as we balance maintaining our CET1 target of approximately 10% with our dividend and share repurchase strategy. Our common equity increased 2%, benefiting from strong profitability. The impact from OCI losses was minor. Excluding the AOCI losses, our common equity per share increased over 3%. Note that our tangible common equity ratio was 4.89%. Excluding AOCI, it increased to 9.30%. Our outlook for 2023 is on slide 14 and assumes no significant change in economic environment. We expect loan momentum to continue and produce another year of strong growth across all of our business lines, resulting in average loans increasing 7%-8%. The pace of growth should be relatively consistent at 1%-2% each quarter.

[Jim Herzog, CFO at Comerica]

We expect average deposits to decline 7%-8% as customers continue deploying operational deposits or seek higher-yielding options. We anticipate a seasonal decline in the Q1, followed by a partial rebound and then stabilization as we move through the year. Comparing Q4 year-over-year, deposits are projected to be down only 1%-2%. As previously mentioned, we continue to believe the timing and scale of deposit activity will be influenced by FOMC monetary policy and economic activity. With this uncertainty, forecasting deposit levels is very challenging. As we look at mix, we project interest-bearing growth driven by strategic pricing actions. By year-end, we expect to be closer to our historical 50/50 deposit mix, still very favorable. As far as pricing, we expect the Q1 to reflect the full quarter impact from rate actions we took in the Q4.

[Jim Herzog, CFO at Comerica]

After that, rate adjustments should be more modest as we continue to focus on customer relationships, competitive dynamics, and our funding needs. We project strong net interest income up 17%-20% over our record 2022 level, which reflects the full year benefit from higher rates, and we are assuming rates follow the 12/31 forward curve. Q1 will be impacted by two fewer days, seasonal deposit outflows, and continued deposit pricing actions. We expect net interest income to increase through the year as we continue to benefit from rising rates and loan growth in conjunction with expanding relationships and acquiring new customers. Credit quality has been excellent, and we expect it to remain strong. Therefore, we forecast net charge-offs at the lower end of our normal range of 20-40 basis points.

[Jim Herzog, CFO at Comerica]

Assuming the economy performs in line with our expectations, we expect a gradual normalization in credit metrics and our reserve level. We expect non-interest income to grow 5%. Customer-related income is projected to increase, particularly in card, due to our payment strategy and fiduciary income, which benefits from investments in our wealth management platform. We forecast an increase in risk management income related to our internal hedging position. Note, this income will vary over time as rates move. Deferred comp was an $18 million drag in 2022, which we assume will not repeat. Elevated volumes of customer derivatives that we saw in 2022 are not expected to continue. We believe they have stabilized at a strong level and are poised to grow over time.

[Jim Herzog, CFO at Comerica]

A reduction in our deposit service charges is expected due to an increase in commercial account ECA rates and adjustments to our retail NSF fees. We also assume BOLI returns to a historical run rate of approximately $9 million-$10 million a quarter, and the $7 million CVA benefit does not repeat. Q1 is expected to be impacted by seasonality and syndication fees, and we assume deferred comp of $6 million in the Q4 will not repeat. The second half of the year is expected to be stronger than the first as loan syndication activity, card fees, derivatives, and other products trend up.

[Jim Herzog, CFO at Comerica]

Our 2023 expenses are expected to grow 7% or 4% on an adjusted basis, excluding the $64 million increase in pension, a $19 million reduction in modernization charges, and assuming the $18 million in deferred comp benefit does not repeat. Drivers of the 4% include the annual merit increase and other inflationary pressures, as well as additional growth and cost tied to revenue-generating activity, such as higher staff levels and outside processing related to card. Further, we estimate a $15 million increase in FDIC expenses and higher software costs. We expect these headwinds to be partly offset by resetting performance comp to normal levels.

[Jim Herzog, CFO at Comerica]

Q1 expenses are expected to be lower with a decline in performance comp, seasonal declines in advertising and staff insurance, as well as other items that are expected to decline from an elevated Q4 level, such as modernization expenses, deferred comp, and legal costs. Annual stock compensation is expected to partly offset these reductions. Remaining modernization expenses are expected to be weighted more towards the second half of 2023. We remain committed to prudent expense management, including investments we are making to increase revenue and enhance efficiency, evidenced by an efficiency ratio forecasted below 55% for 2023. In summary, we drove robust loan growth and fee generation in 2022. We benefited from higher rates while executing our hedging strategy and managed deposits, credit, and expenses. We generated record revenue and EPS, reduced our efficiency ratio, and delivered strong returns.

[Jim Herzog, CFO at Comerica]

Our Q4 has positioned us well for a strong 2023. I'll turn the call back to Curt.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Thank you, Jim. By leveraging our more predictable earnings stream, we are better able to strategically invest in our business, and slide 15 illustrates our roadmap. Aligned with our long-term strategy, these initiatives enhance our ability to continue to exceed our customers' expectations. Modernizing our operations and further securing our foundation creates a stable but agile platform, enabling us to better address evolving needs. Enhancing our capabilities based on the voice of our customers allows us to invest efficiently, driving fee income, retention, and new acquisition. Selectively exporting our business model to high-growth markets, capitalizing on our expertise and relationships to broaden our reach as we strive to grow at a faster pace than the economy. The calibration of our products, markets, and delivery is critical to sustaining our legacy while achieving our vision for the future. Slide 16 highlights our compelling story.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Our business demonstrated the ability to deliver broad-based revenue growth, and our pipeline, commitments, and product innovation create further momentum. As a leading bank for business, complemented by strong retail and wealth management capabilities, we feel our size, business mix, and market strategy create a unique relationship banking model. Tenure of our colleagues and customer relationships evident the success of that strategy. Credit expertise allows us to not only minimize risk but also serves as a customer acquisition tool, demonstrating our understanding of their business and needs. Looking into 2023, we expect another year of exceptional results while we continue to make critical investments which project positive operating leverage, maintaining strong profitability metrics. We feel our unique position in growth markets with a proven reputation for credit, expense, and interest rate management combine to create a powerful investment thesis for our shareholders.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Thank you for your time, and now we'd be happy to take some questions.

[Operator]

Ladies and gentlemen, if you'd like to ask a question over the phone, please press one then 0. You may withdraw your question at any time by repeating the one 0 command. Your first question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.

[Jim Herzog, CFO at Comerica]

Manan, good morning.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Hi, good morning. Thanks for taking my questions. I was just wondering, you know, for 2023, can you help us with how you expect your funding mix to evolve through the year? You know, as you mentioned, I mean, it's difficult to forecast deposit growth given the Fed actions and the overall environment. If you can help us with any updated thoughts on, you know, where you might be okay with your loan-to-deposit ratio going and how much flexibility you have there. Thanks.

[Jim Herzog, CFO at Comerica]

Good morning, Manan. It's Jim. I'll answer that question. You know, starting with the funding mix, it's really important to us to stay diversified. We're using a variety of efficient funding mechanisms while keeping some dry powder for future loan growth. When we look at what we plan to do in 2023, you know, first and foremost, we are funding much of the loan growth. To the extent we have deposit runoff, we're funding that with securities that we are allowing to mature. You know, that includes both MBS, securities that mature at a somewhat predictable rate, as well as some lumpy Treasury maturities that we have.

[Jim Herzog, CFO at Comerica]

Beyond that, you know, we are getting a little bit more competitive with our deposit pricing, both in terms of retaining deposits and attracting deposits that might not be currently on our balance sheet. Beyond that, you know, we do have efficient lines of the FHLB, which we plan on using to some extent. We do plan on adding some broker deposits. Not a lot, but we will add a modest amount likely at some point during the year. We will use a variety of sources. We will keep a lot of dry powder on the sidelines to make sure that we can fund ourselves very efficiently going forward. You know, in terms of loan-to-deposit ratio, it is currently well below historical levels at 75%.

[Jim Herzog, CFO at Comerica]

We expect it to continue to be below historical levels as we look out in the future, certainly, for 2023. No concerns from that standpoint. We feel really solid in terms of our ability to fund this loan growth and fund any deposits that might run off.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

That's really helpful. For the securities pay downs, I know you mentioned it's about $1 billion, a little bit over $1 billion for next quarter. Can you help us with how that evolves through the year? Are there any, you know, other bullet maturities coming through in the second half?

[Jim Herzog, CFO at Comerica]

Yeah. We would expect the MBS securities to continue to mature at a rate of about $450 million a quarter. you know, we do have $700 million of Treasuries that mature in the Q1, we have another $300 million in the Q2 of this year. we have a very small tranche, I believe, you know, in December that won't be a big factor for 2023. We should get somewhat of a boost from those maturing securities as they occur through the year.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Great. Thanks so much.

[Jim Herzog, CFO at Comerica]

Thank you.

[Operator]

As a reminder, if you do have a question, please press one then zero. Next, we'll go to the line of Steven Alexopoulos from JPMorgan. Please go ahead.

[Jim Herzog, CFO at Comerica]

Good morning, Steven.

[Steven Alexopoulos, Equity Analyst at JPMorgan]

Morning. I wanted to start. The guidance implies NIM expansion on tap again for the Q1. We know it's a very fluid situation, but from a big picture view, as we sit here today, how do you guys see the NIM trending beyond the Q1?

[Jim Herzog, CFO at Comerica]

Good morning, Steven. It's Jim. As you know, we typically don't like to focus on NIM just because of our business model. It does tend to be a little bit more lumpy than other banks. We like to focus on net interest income. You know, to answer your question, we do expect NIM to be relatively stable in the range that it was in the Q4. It may tick up by a few bips as we see securities run off with those lower yielding securities. I think where we're at right now in the Q4 is kind of the area that we will likely hover in.

[Steven Alexopoulos, Equity Analyst at JPMorgan]

Okay, that's helpful. Jim, what's the deposit beta you're assuming in this guidance by year-end 2023?

[Jim Herzog, CFO at Comerica]

Deposit beta is moving, as well as, of course, the overall rate environment. We, you know, we were at about a 26% beta in the Q4. You know, rates did continue to move through the Q4. I would say we were approaching, you know, 30% beta by the time you got to the month of December. We do think in the Q1, we will start moving and eventually reach, about a 35% beta. For the full quarter average in the Q1, I do think it'll be in that low to mid-30s, you know, pushing up to 35%. As we move through the Q2, I do have us moving into the upper 30s.

[Jim Herzog, CFO at Comerica]

That does include going after some higher priced deposits to make sure that we can fund our loan growth in an efficient way. You know, once we get through the Q2, as we hover in that upper 30s, if we had some broker deposits, it could push towards about 40. I would then expect it to kind of hold there, and that's about the time that rates peak also. That's kind of the trajectory we're assuming and that I see for deposit betas.

[Steven Alexopoulos, Equity Analyst at JPMorgan]

Okay. That's very helpful. Maybe for my final question, just diving a bit deeper into the declining non-interest bearing. You guys are citing customers investing in their business, but I'm curious how much is your customers chasing higher rate alternatives? Along those lines, you know, up until this quarter, what we had heard from many of the regional banks was that Treasuries were the key competitor. What's coming up this quarter is that the regional banks themselves are really stepping up competition for deposits. How much are your customers chasing, and can you talk about the competitive environment right now, particularly from pure regionals? Thanks.

[Jim Herzog, CFO at Comerica]

Yeah, I mean, I, if I understood the question, you were dipping a little bit out in terms of volume there. You know, our customers when they do look at the higher yielding options, you know, they are looking at off-balance sheet money market funds. We are increasingly becoming competitive to make sure we can compete from that standpoint. We think that's an efficient way to go. It's certainly better than wholesale borrowings for us. In terms of, you know, where the leakage is occurring, you know, we do some surge deposits still in the DDA.

[Jim Herzog, CFO at Comerica]

As we talk to customers and look at what's happening in the flows, it does seem like, you know, probably 40% of them to the extent 40% of the deposits that have gone off, gone off the balance sheet are due to rate. Then the remainder is kind of right due to, you know, funding CapEx operations and maybe a variety of other things. Certainly a mixture. We do think to the extent customers are using deposits to fund their operations, we view that as a very positive sign. It is consistent with the loan story when you look at the strong loan growth that we've seen and we forecasted. But we are increasingly becoming competitive with money market funds where we feel we need to.

[Steven Alexopoulos, Equity Analyst at JPMorgan]

Okay, great. Thanks for all the color.

[Jim Herzog, CFO at Comerica]

Thanks, Steven.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Thanks, Steven.

[Operator]

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

[Jim Herzog, CFO at Comerica]

Good morning, Jon.

[Jon Arfstrom, Managing Director and Associate Director of US Research at RBC Capital Markets]

Good morning, everyone. Jim, good morning. Just kind of a follow-up there, Jim. Are you seeing any cresting in deposit pricing pressures? Is it decelerating at all?

[Jim Herzog, CFO at Comerica]

I wouldn't say it's decelerating. I wouldn't say it's accelerating either. It kind of feels like it hit a certain pace in November, December. You know, the more price-sensitive customers have already asked to be repriced. From that standpoint, you could see the pressure start to step back a little bit. Some of these are discussions that go on for several weeks, so it's really hard to pinpoint exactly when it's cresting. It's certainly not accelerating. I do see that momentum continuing, you know, probably through the Q1 in terms of exception pricing. You know, in terms of what we need to do with standard pricing, it does feel like that maybe is abating a little bit.

[Jim Herzog, CFO at Comerica]

There are always those, exception customers that are out there, and I don't expect those to take a big step back over the next quarter.

[Jon Arfstrom, Managing Director and Associate Director of US Research at RBC Capital Markets]

Okay.

[Jim Herzog, CFO at Comerica]

We'll likely get more competitive intentionally so in terms of just going after, customers that perhaps have moved their balances off balance sheet, over the course of the last 9 months.

[Jon Arfstrom, Managing Director and Associate Director of US Research at RBC Capital Markets]

Okay. I know you just said you don't like to talk about the NIM, but I'll ask you about it anyway. You're up 170 basis points year-over-year, and you're talking about stability. What kind of threats do you see to that NIM level? I know you've done a lot of hedging, do you feel like that's a sustainable NIM level in kind of, you know, varying up and down rate environments?

[Jim Herzog, CFO at Comerica]

I think the key to that is going to be DDA. That is really the wild card, and it really has the ability to move net interest income a lot. You know, you think about just $1 billion of DDA movement could, you know, create a $55 million drag in this forward curve environment. That is going to be the wild card. We think we can hover kind of in the upper threes, you know, call it the low to upper threes or, I'm sorry, mid to upper threes, but more weighted towards the upper threes. I do think the DDA is going to be the key to that assumption and that outcome.

[Jon Arfstrom, Managing Director and Associate Director of US Research at RBC Capital Markets]

Okay, good. Then just one quick one to Melinda. Expected reserve build, how would you like us to think about that? It seems like credit's very clean, and obviously, you're talking about the lower end of charge-offs. So how do you want us to think about the reserve build?

[Melinda Chausse, CCO at Comerica]

Yeah. Jon, good morning. You know, I would say that consistent with what we said last time, that if the economic forecast stays relatively stable, you're gonna see continued loan or reserve build that's really consistent with our loan growth. The reserve right now we feel is conservatively positioned. We feel really good about it. Assuming no material deterioration in the economic forecast, I think that reserve build will approximate what we have going on from a balance sheet growth perspective. The current assumptions on the reserve build is for our baseline is a mild recession. I think we've adequately factored in what the current economic forecast is, looks like.

[Jon Arfstrom, Managing Director and Associate Director of US Research at RBC Capital Markets]

Okay. Okay, that's helpful. Thank you very much.

[Operator]

At this time, there are no further questions. I would now like to turn the conference back to Curt Farmer, President, Chairman, and Chief Executive Officer.

[Curt Farmer, President, Chairman, and CEO at Comerica]

Well, let me again say that, I'm very, very proud of our record quarter. Thank you to all my colleagues for all they do every day to take care of our customers and help our company grow. Thank you always for your interest in Comerica. I hope you have a good day. Thank you.

[Operator]

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

Participants

Executives

• Curt Farmer, President, Chairman, and CEO
• Jim Herzog, CFO
• Kelly Gage, Director of Investor Relations
• Melinda Chausse, CCO

Analysts

• Jon Arfstrom, Managing Director and Associate Director of US Research at RBC Capital Markets
• Manan Gosalia, Equity Analyst at Morgan Stanley
• Steven Alexopoulos, Equity Analyst at JPMorgan