Comerica Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 10 speakers on the call.

Operator

Welcome to the Comerica First Quarter 2023 Earnings Conference Call. I would now like to turn the conference over to Kelly Gage, Director letter of Investor Relations. Please go ahead.

Speaker 1

Thanks, Leah. Good morning, and welcome to Comerica's Q1 2023 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 Chasse and a listen only mode. Chief Director of Banking, Peter Sefzik. During this presentation, we'll be referring to slides, which provide additional details.

Speaker 1

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 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. Please refer to the Safe Harbor statement on today's earnings release on Slide 2, which is incorporated into this call as well as listen only mode. Also, this conference call will reference non GAAP measures.

Speaker 1

And in that regard, I will direct you to the reconciliation of these measures and the earning materials that are available on our website, comerica.com. Now I'll turn the call over to Kurt, We'll begin on Slide 3.

Speaker 2

Good morning, everyone, and thank you for joining our call. Today, we reported 1st quarter earnings per listen only mode, driven by continued loan growth, a favorable rate environment and effective management of balance sheet,

Speaker 3

to credit and capital.

Speaker 2

Despite the recent industry disruption, we affirm the strength of our core deposit base listen only mode. While we saw some deposit pressure, it was predominantly localized and very manageable. Listen only mode. Our prudent risk management had us well prepared. Our effective liquidity strategy allowed us to remain laser focused

Speaker 3

in a listen

Speaker 2

only mode. We remain focused on business as usual, listen only mode. We believe our strong deposit to the operator. The franchise is now even more attractive and stable with a lower percentage of uninsured excess deposits and less concentration with price sensitive customers. Listen.

Speaker 2

Moving to a summary of our results on Slide 4. Broad based loan growth and increased non interest income exceeded expectations. Listen. Credit remained a key strength for the quarter. And although we saw modest migration, we were starting from very low levels.

Speaker 2

Despite some pressures related to funding costs and expenses, we maintain a solid efficiency ratio and produce a robust ROE and Tier 1 capital listen only mode. Complementing our compelling financial results, we achieved significant milestones, including our new partnership with Ameriprise, aimed at further elevating our wealth management customer experience, digital tools and capabilities. The launch of our new Investment Banking Group and the national listen only mode. Listen only mode. Further, these initiatives advance the priority of increasing our mix of non capital consuming fee income.

Speaker 2

Turning to Slide 5. We generated earnings of $324,000,000 or $2.39 per share in the Q1. Listen. Average loans grew almost $1,100,000,000 Average deposits decreased $3,500,000,000 due primarily to normal listen only mode. 1st quarter seasonality and customer utilization of funds related to Fed's monetary actions.

Speaker 2

Credit quality outperformed

Speaker 3

listen only mode. With net recoveries in our criticized loan percentage,

Speaker 2

it remained well below our historical average. Expenses were elevated with an estimated CET1 ratio of 10.09%. It was a remarkable quarter for Comerica, and I'm excited about our future and our ability to support our customers while delivering compelling results for our shareholders. And now I'll turn the call over to Jim, to review the quarter in more detail. Thanks, Kurt, and good morning, everyone.

Speaker 2

Turning to Slide 6. Listen. Broad based loan growth exceeded expectations as average balances increased 2%. Commitments grew across most business lines, up 2% from the 4th listen only mode. Utilization increased modestly to 46%, but remained below historical averages.

Speaker 2

Growth in our commercial real estate business of over $640,000,000 continue to be driven largely by construction of multifamily and industrial projects in a listen only mode. Our commercial real estate strategy remains highly selective

Speaker 3

listen only

Speaker 2

mode with a focus on Class A projects and our office exposure is limited. National Dealer Services Loans grew over listen to $360,000,000 as a result of new relationships and continued customer M and A. Both management and middle market also contributed to our strong loan growth. Listen. Elevated interest rates, lack of housing inventory and normal seasonality continue to pressure mortgage banker as average loans declined to $184,000,000 for the quarter.

Speaker 2

The MBA forecast expects higher volumes in the second and third quarters listen only mode. Slide 7 provides an overview of our deposit activity. Quarter to date deposits through the 1st week of March trended in line with guidance as customers continue to deploy funds into their business and we experienced expected seasonality. Following the March industry events, excess balance diversification listen to our customers further impacted deposits. We saw our peak impact in the days immediately following concentrated in certain customers with balance listen only mode.

Speaker 2

Outflows moderated and in the last 2 weeks of March, we saw a return to a more normal pattern and that trend has continued. Listen. The greatest outflows were localized in select portfolios with a muted impact across the rest of our businesses. Listen. Despite onboarding new customers in TOS, balances declined as this disrupted sector diversified deposits.

Speaker 2

Listen only mode. Portfolios with larger than average deposit relationships such as corporate banking and select customers in middle market California listen only mode. These three business lines saw disproportionately high listen to the Q1 of 2019. We are pleased with the progress we made in the quarter. We are pleased with the strategy and through quarter end, our customers placed $2,000,000,000 in balances in that solution.

Speaker 2

Listen. Deposit diversification efforts were concentrated in more price sensitive customers and the increase in deposit pricing to 152 basis points was driven by the cumulative impact of previous pricing changes. Our strategic relationship focus was proven successful as we retained listen and in fact grew our total number of core deposit relationships. Slide 8 highlights the strength of our core deposit franchise.

Speaker 3

Listen only mode.

Speaker 2

It is important to note how elevated deposit levels have been since 2020. With that context, our current position is much stronger than prior listen to the pandemic as we have higher overall deposits, a better loan to deposit ratio and a lower percentage of uninsured deposits. Listen to uninsured deposits as the primary metric to detect risk of elevated outflows. However, we believe a more comprehensive view is appropriate. Listen.

Speaker 2

As a commercial bank, it is natural to have a higher relative percentage of uninsured deposits, the majority of which are non interest bearing, listen, which we view as a key strength and a proxy for operating accounts. With 95% of our commercial non interest bearing deposits utilizing treasury management services listen to the call. At an average of more than 7 treasury management products for a middle market customer, we are integrated with our customers' daily operations. Listen only mode. We feel our market and business diversification, favorable deposit mix, commercial orientation and connectivity into our customers' operations

Speaker 3

listen to the operator.

Speaker 2

We see opportunities to even further improve the resiliency of our deposits, including

Speaker 3

listen only mode. Our strategic investments underway to

Speaker 2

enhance payments, digital customer transformation and wealth management in addition to our national small business listen to our banking strategy, which should drive granular deposit growth over time. Ultimately, our deposit base has always been listen and continues to be a differentiating strength and we expect even more stability with a more favorable level of uninsured and a high percentage of operating deposits. Successful execution of our liquidity strategy proved effective as shown on Slide 9. Listen. Following the industry events in March, we conservatively increased our cash position and our abundant liquidity allowed uninterrupted support listen to our customers and business as usual operations.

Speaker 2

Our quarter end loan to deposit ratio was 85%, remaining below our 15 year average listen and very light unsecured funding maturities create flexibility to manage funding needs and cash levels over time. Listen. Curated balances in our securities portfolio on Slide 10 declined over $700,000,000 listen as paid down to maturities offset the positive mark to market adjustment of $309,000,000 The total unrealized loss after tax listen to $2,100,000,000 affects our book value, but not our regulatory capital ratios. Our security strategy remains unchanged as we stop reinvesting in to the Q3 of 2022. From that peak through the end of 2024, we expect natural portfolio attrition of approximately $4,000,000,000 listen and a 42% improvement in unrealized securities losses.

Speaker 2

We maintain our entire portfolio as available for sale, listen

Speaker 3

only mode.

Speaker 2

As our portfolio is pledged to enhance our liquidity position, we do not foresee any need to sell our listen only mode and therefore unrealized losses should not impact income. Turning to Slide 11, net interest income decreased $34,000,000 to $708,000,000 as the benefit of higher rates and loan volume were offset by the impact of lower deposit balances, deposit pricing and fewer days. Listen. We still saw a net positive impact due to rising rates and net interest income remained incredibly strong relative to our historical results. Listen.

Speaker 2

Slide 12 demonstrates our desirable interest rate sensitivity profile. Successful execution of our strategy and the listen only mode. The current composition of our balance sheet favorably position us with minimal negative exposure to a gradual 100 basis points listen or 50 basis points on average decline in interest rates. As intended, our strong net interest income stream is now more insulated from rate reductions. Listen.

Speaker 2

Credit quality continues to be a strength of our franchise and remained excellent as outlined on Slide 13 with $2,000,000 in net recoveries. Listen to non accrual loans declined and inflows to non accruals remained low at $9,000,000 Loan growth and weakening economic outlook listen to the $30,000,000 provision and the allowance for credit losses increased modestly to 1.26%. Listen only mode. Criticized loans increased but remained well below historical levels as we saw expected credit normalization in portfolios prone to pressure from the elevated rate environment. Office is not part of our primary strategy, only making up 7% of our total commercial real estate line of business.

Speaker 2

Of this limited office exposure, a majority is suburban with strong contractual financial support from sponsors. Listen. Within the overall commercial real estate portfolio, pressure from the elevated rate environment contributed to a modest increase in criticized loans, and we expect continued manageable migration in the coming quarters. Robust fee generation increased non interest income by to $4,000,000 relative to a seasonally high Q4 2022 as shown on Slide 14. Listen.

Speaker 2

Capital Markets income grew $5,000,000 and is now distinguished in our reporting to reflect the investment and opportunity in that business. Listen. Derivative income in Investment Banking offset the seasonally wider quarter for syndication fees. Brokerage benefited from the rate environment and strategic private wealth investments contributed to growth in fiduciary income. Continued expansion of our non capital consuming fee income remains a priority And with growth in nearly every customer category, we are excited to see the results from this emphasis.

Speaker 2

Listen. Turning to expenses on Slide 15. We had a number of notable expenses in the quarter, including $16,000,000 related to modernization initiatives, listen only mode, which was attributable to the Ameriprise transition. While litigation related expenses and operating losses were elevated, listen to the largest drivers related to isolated events. Quarter over quarter, non salary pension expense increased $17,000,000 as expected.

Speaker 2

Listen. Salaries and benefits increased $8,000,000 driven by higher stock based compensation with 1st quarter grants, in a listen only mode. SBIC Insurance increased $6,000,000 driven by the higher listen to the statutory assessment rate and the impact of funding late in the quarter. Occupancy came down $12,000,000 with a reduction in lease termination fees, lower rental expense and a seasonal change in property tax rates. Both consulting and advertising declined from a seasonally high 4th quarter.

Speaker 2

With a track record of proven discipline, we are committed to carefully managing expenses, balancing necessary investments for the future and overall earnings power in order to maintain a solid efficiency ratio over time. Slide 16 provides details on capital management. Strong profitability continued to generate significant capital to support loan growth. Our CET1 is estimated at 10.09% above our target, and we were excited to announce a 4% increase in our quarterly dividend for common stock paid April 1. Our conservative excess cash listen to the impact of our tangible common equity ratio.

Speaker 2

Adjusting for our cash increase we've increased over the 4th quarter in listen to the Q1 TCE ratio would have increased to 9.47%. Expected loan growth, listen only mode. Profitability and any potential regulatory changes will continue to be carefully considered as we manage our capital strategy. Listen. Our outlook for 2023 is on Slide 17 and assumes no significant changes in the economic environment.

Speaker 2

Listen. We expect momentum, especially in our commercial real estate and national dealer services business to drive average 2023 loan growth of 8% to 9%. We continue to expect growth in most businesses, but plan to be appropriately selective, supporting opportunities most aligned with our target credit,

Speaker 3

listen to

Speaker 2

our strategy. Our estimated average year over year deposit decline of 12% to 14% assumes continued stabilization and reflects the impact from Fed monetary actions that began last year in addition to the Q1 industry events. Despite the impact of funding, we still project net interest income to be at an all time high, growing 6% to 7% over a record 2022 performance. Through effective execution of our balance sheet strategy and based on our current composition, we delivered on our objective to limit rate exposure and protect a high level of net interest listen to the question and answer session.

Speaker 3

Credit quality has

Speaker 2

been excellent and we expect it to remain strong. We continue to forecast net charge offs at the lower end of our normal 20 to 40 basis points range and expect a gradual normalization in credit metrics. Listen. We expect strong non interest income performance to drive 6% to 7% growth over 2022. Customer related income is projected to increase, particularly in card due to our payment strategy and fiduciary income, which benefits from rates and investments in Wealth Management.

Speaker 2

Risk management income related to our internal hedging position is forecasted listen to increase relative to 2022, but will vary over time as rates move. FHLB dividends created a new tailwind in listen to the Q1. Since we do not expect to repeat the elevated derivative volumes from 2022, we expect the year over year derivative delta to offset listen to positive momentum in other capital markets categories. A reduction in our deposit service charges is expected due to an increase in commercial account ECA rates listen only mode and adjustments to our retail and SFDs more than offsetting growth in core treasury management income. Listen only mode.

Speaker 2

With robust overall non interest income performance in the Q1 exceeding seasonally high 4th quarter results, we feel very good about our momentum. Despite elevated expense pressures in the Q1, we maintained our 7% guidance for 2023 expense growth, listen to the discretionary expenses. Even after including the expenses related to the Ameriprise transition, listen to the current environment and plan to assess the longer term implications of the March disruption. With a culture of prudent management, we expect to manage listen only mode. In summary, we expect strong overall financial performance and forecast record net interest listen only mode.

Speaker 2

Now I'll turn the call back to Curt. Thank you, Jim. Listen. Slide 18 highlights our compelling story. Risk management decisions made over the last several years prepared us to emerge listen only mode.

Speaker 2

We were resilient, we built liquidity, we protected relationships and we grew our customer base. Listen only mode. It was a great quarter for our company. Broad based loan growth and robust non interest income exceeded expectations listen and credit quality remains excellent. We produced an ROE of over 24% and an ROA of 1.52%, and we feel very good about our outlook.

Speaker 2

Comerica has long had one of the most enviable deposit franchises and now it is even better with lower uninsured deposits, improved granularity and less price sensitivity. In addition, we have a loyal Blue Chip customer base, robust fee income, balanced interest rate exposure, listen only mode. We are diversified in great markets to support our strategy. And listen only mode. And I'd be remiss if I didn't mention our tenured and tenacious colleagues who partner extraordinarily well with our customers.

Speaker 2

Banking is based on trust. Listen only mode. I feel this period has proven the strength of our relationship model and reaffirm Comerica's stable foundation as a trusted banking partner into the future. Thank you for your time. And now we'd be happy to take your questions.

Speaker 2

Listen.

Operator

Listen. And we will first go to the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Speaker 2

Listen. Good morning, Steve. Good morning, everyone.

Speaker 4

So no surprise, I want to start on the deposit side. First, the color you provided the slides is really helpful. Listen. I'm curious, when we look at the decline in the deposits from March 9 through the end of the quarter, I'm surprised listen. I'm surprised because I would have thought the company would have been somewhat of a port to start, right?

Speaker 4

I mean you've been in markets for decades, you've been with customers for decades. Could Could you take us behind the scenes, what did you hear from your customers during this time in each of those and why were they moving balances away from the company? Listen.

Speaker 2

Steve, this is Peter.

Speaker 5

So, I would tell you that in the very beginning, for sure, we actually enabled. And Kurt mentioned in his remarks that we opened a number of accounts from customers that were wanting to come to Comerica from the other banks that had failed. So during that time, we definitely took on new customers. I think the average balance listen. Probably it's just not as high, but on the whole, we saw some departures.

Speaker 5

Some of that is because we've got a lot of late stage also, Which a lot of late stage TLS customers are going to have more deposits, but not as much credit. And so that's where you did see some diversification wanting to occur listen to that level. But net net, if you look at our TLS slide in the back, we have seen deposits coming down in that space going back listen to Q2 of last year really. So what's occurred, I think in the space in general has been burning through cash. Listen.

Speaker 5

So we saw that, but we didn't necessarily think that we would be taking on excess deposits fleeing from SEB coming to us listen to the details. We did take on more accounts, and we definitely saw that. We also saw during the period, listen. As I mentioned already, late stage fleeing, but we saw some accounts sort of spreading across not just us, but other banks as well out of

Speaker 3

a loop.

Speaker 4

What about corporate and mid market?

Speaker 5

Listen. Yes, same thing there, Steve. I think on the corporate side, on our corporate business, that's our sort of national business of Banking large corporates, we saw diversification there as well. And then in middle market, it was mostly in California. So listen.

Speaker 5

Again, we haven't lost in just about all of the cases, we have not lost customers. We have just seen diversification of excess balances that they had. So we believe that there's opportunities

Speaker 2

for those to return in

Speaker 5

the future. We're not relying on that. But we still have listen only mode. Relationships with these customers, we mostly have just seen diversification. So that's really what we've seen in those three businesses that we've got outlined on the slide.

Speaker 3

Listen. Okay.

Speaker 4

That's helpful. And then on the non interest bearing, so you saw a pretty sharp drop in the quarter, which is anticipated somewhat, right, because of seasonal factors. Listen. But given everything that just unfolded, where do you see that mix now bottoming? Where is the timeframe for that?

Speaker 2

Listen. Good morning, Stephen. It's Jim. I'll take that question. We still think that we are likely to end up very close listen to 50%.

Speaker 2

We did see most of the drop occur in the DDA space over the course of the quarter. Listen. That was not a surprise to us at all. As rates continue to go off with new customers, we continue to be more rate sensitive. Listen.

Speaker 2

We knew that a lot of our surge balances that we have are still more in DDA than interest bearing. We knew a lot of the seasonal outflows listen to what came in, in the second half of twenty twenty two, were likely buried in the DDA. In fact, that's where they were. And And then we did have some customers that switched over using some FDIC products that have been in DDA, but for safety reasons, they were attracted to the FDIC products, listen only mode. And so we still expect to have really one of the strongest ratios of non interest bearing deposits to total deposits listen amongst all our peers, if not well above our closest peers.

Speaker 2

So we still feel really good about non interest bearing.

Speaker 4

Listen. Okay, great. Jim, if I could ask you one last question, which is somewhat theoretical. But so interest bearing deposit listen. Sure.

Speaker 4

1.5%. If we if the Fed does start cutting rates in the second half of this year, but the rates listen. How do you model this impacting your deposit cost, right? I mean, do market rates listen to the call. We need to move below or close to what you're paying before you could start lowering deposit rates yourself because I don't recall other periods where the banks were this far out of the money with what they're paying and the Fed could potentially start lowering market rates.

Speaker 4

What do your models show you in in terms of how this would flow through to your interest bearing deposit cost?

Speaker 2

Thanks. Yes. Well, of course, we do expect rates to continue to go up. Listen. But relative to what might happen when rates go down, it's important to remember that we have a pretty wide distribution of rates paid to a variety of customers.

Speaker 2

So listen. So I don't really view that average as a typical customer. We have a lot that are well below that rate, a lot that are well above that rate. So each one of those is going to respond differently. Listen only mode.

Speaker 2

We do think that there is some degree of symmetry in the betas that we pay on the way up and the way down. The key is that there likely is a couple of months lag, 2 to 3 months lag when rates start to come down before we can really respond to that drop. There's just that same lag that we saw on the way up. Listen. But ultimately, we do think we'll be able to start cutting pay rates if in fact the Fed makes some material moves.

Speaker 3

Yes.

Speaker 2

We would always be sensitive to listen to the competitive landscape and what other institutions are doing as well and making sure that we're taking care of our customers appropriately.

Speaker 4

Listen. Thanks for taking my questions.

Speaker 2

Thanks, Steve.

Operator

Next, we go to Ebrahim Poonawala. Please go ahead. Listen.

Speaker 6

Good morning. I guess, just on deposits. So you mentioned the excess deposit listen. Thank you. Thank you.

Speaker 6

Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you.

Speaker 6

Thank you. Thank you. Thank you. Thank you.

Speaker 3

Our next question comes from

Speaker 6

the line of that you would consider operational versus excess. And do you see some of that still continuing as businesses? Listen. And we would love some perspective around just from a customer base standpoint in terms of small businesses, treasurers, CFOs actively thinking about diversifying like is that trend done or do we do you still expect that to continue? Maybe if you can start that, yeah.

Speaker 2

Listen. Yes. Good morning, Abraham. I'll take that and Peter may want to add on. In terms of what percentage were non interest bearing or operational, listen.

Speaker 2

We view them as largely operational. In fact, 95% of our non interest bearing are tied to treasury management products. So from that standpoint, it is a largely operational base. Now there are fluctuations in terms of how much they need listen to put on those non interest bearing accounts to take care of operational needs and what they can leverage from an ECA standpoint. And listen.

Speaker 2

There probably is still just a little bit of excess in there, which is why we see the ratio coming down from 52% to 53%, down to around 50%. But we think largely that attrition is gone. In terms of where the diversification efforts might go, listen. Things seem pretty settled down right now, and I think that's going to depend largely on just what happens to the industry in terms of other events that might happen. Listen.

Speaker 2

But for now, it does feel like diversification efforts have largely settled down and those are the trends that we've seen over the last 2 to 3 weeks, 3 to 4 week season.

Speaker 5

Yes. I would agree with that, Ebrahim. This is Peter. And I would just also continue to point to where we saw

Speaker 3

most of the diversification occur. And you mentioned

Speaker 5

small business. In listen to the question and answer session. In our retail franchise, small business, business banking, middle market, listen. Most of those businesses really have not seen the diversification issue. It's been sort of

Speaker 2

business as usual, if you will.

Speaker 5

Listen to people using deposits for running their businesses and what and so forth. But the strength of the rest of our deposit base is listen to something that we are really, really proud of and are going to continue to lean into. And so I think Jim is exactly right. We feel like the diversification efforts, if you will, at this point have pretty much

Speaker 3

stabilized.

Speaker 6

Noted. And I guess maybe just another question, Jim, around the outlook for NII NIM. I was wondering if you listen. Could you give a sense of the trajectory that saw a 6% to 7% year over year growth? How do you see quarterly NII and NIM trending from your

Speaker 2

listen listen to NIM percentage guidance. I think this example is a great this quarter is a great example of why we don't like to give that. Listen. With our business model being a commercial bank, we do see some variations in a number of line items, cash, listen to the securities, etcetera. In this particular quarter, we did put a lot of safety net level of cash onto the balance sheet, which does Put a drag on NIM percentage, and it just creates kind of a non correlation between the numerator and denominator.

Speaker 2

We just don't see them going in the same direction or correlating very well. So the numbers that I'm shying away from still. Listen. We're obviously probably moving towards the low 3s, but I wouldn't want to get more specific than that. And I would just stick to the percentage guidance

Speaker 6

listen only mode. But Jim, if rates don't get cut, do you expect listen. 4th quarter NII to be the low point for the year in terms of as we think about the exit?

Speaker 2

We obviously, we are doing a little bit of a reset with the deposit runoff. And so we have the 2nd quarter guidance out there. We actually have net interest income probably growing slightly quarter to quarter after that. That's a function of loan growth primarily. Listen and we do expect to get some degree of seasonal deposits probably later in the second half of the year.

Speaker 2

And that's beyond the day impact that you might get. Listen. We do think that we're going to be on a positive trajectory from the Q2 on. And we're just essentially resetting that baseline in the Q2.

Operator

Listen from Manan Gosalia with Morgan Stanley. Please go ahead.

Speaker 2

Good morning, Manan.

Speaker 7

Hey, good morning. Listen. Another question on deposits for you. You noted you've retained a lot of the relationships and only lost some of the, I guess excess balances that people were holding. So in terms of the room to bring those deposits back, listen.

Speaker 7

What is the strategy here? Is it just to pay up on rate or through ECR To bring those deposits back or is there anything else you can do? And is there a level of deposits you think would

Speaker 5

Manan, this is listen. Peter, the last part of your question, I'll say is yes, we believe there is a level of deposits that

Speaker 2

would flow back. I would

Speaker 5

say the number one thing that we do is to talk to our customers pretty regularly. We continue to believe that we provide a better listen to customer relationship, better service than other banks. And quite often, it's not unusual for people to come back to us because they don't get the listen to the service that they wanted at another institution. So I think when we get to the other side of this, that will probably be the number one reason we start to see listen. But I also want to reiterate again, as Jim said, that's not necessarily something we're relying on in our listen.

Speaker 5

We think that, we will see it, but we believe that that will just be a function of us providing great customer service. I don't think we're going to have to listen

Speaker 2

Yes, I might just emphasize too, Peter, I don't believe that across all of our portfolios, listen. This is probably less about rate and more about sort of 2 things. 1 is the sort of surge excess deposits flowing out that we saw listen to the listen. I think as the noise level settles down across the industry and things get back to normal, I think we've got a good opportunity at some of those deposits coming back on balance sheet and we're just staying very, very close to all those customers. They have access to our relationship managers, but also listen to any of us on the leadership team as well.

Speaker 7

Got it. And then Maybe to round out the discussion on the balance sheet, you added a lot more short term and long term debt this quarter to boost your liquidity. Listen. How should we think about the right level of liability mix outside of deposits and the right level of cash that listen to the balance sheet going forward.

Speaker 2

Yes, those questions are connected to each other. Certainly, the level of cash that we hold will really strong and correlated to what's going on in the industry. We always want to make sure we have an abundant level of cash during turbulent times. Listen. We have been comfortable with our targeted $3,000,000,000 level of cash prior to the disruption in the industry.

Speaker 2

Listen. Obviously, we pushed closer to $9,000,000,000 as we have on the slide on Slide 9. And we will hold there for listen to some period of time until we're sure the industry has passed some of this turbulence. To the extent we have loan growth, of course, we'll see that start to go down. On the funding side of the balance sheet, listen.

Speaker 2

We started with very low levels of unsecured debt, as you can see in Slide 9, probably some of the lowest amongst our peers. Listen. So we felt like we were in very good shape to begin with. We have a lot of flexibility. We did draw on a lot of FHLB listen to the call.

Speaker 2

During the initial days of the crisis, which we thought was a very prudent thing to do. The good thing is we did that in a way that gives us tremendous flexibility. Listen. A lot of those maturities are laddered starting this year, all the way through the next couple of years. Listen.

Speaker 2

And so we have the option as those maturities come up to either roll them over or let them just mature naturally. So listen. So we feel like we have a tremendous amount of flexibility, but it's going to depend on the environment that will drive the amount of cash we have and the amount of funding that we have on the balance sheet. Listen. But we are starting from very low levels and we feel really good about our current position.

Speaker 2

So we're fortunate that we have that capability.

Speaker 7

A listen. And is that largely revenue neutral because you're raising essentially close to the Fed funds rate and then you're deploying that in cash?

Speaker 2

Listen. There is a modest drag on that. There's probably a 40 to 50 bps drag as I look at it. And that's one of the reasons we shied away from listen only. Not only does cash have the capability to inflate or deflate the balance sheet, but whether that's free cash coming in, in the form of deposits or it's cash carrying a negative spread that can make an impact on the percentage too.

Speaker 2

So baked into the outlook, listen. We do have a fair amount of cash still there, and that's one of the things that I look at as an opportunity as we move towards later in the year and into 2024. Listen. We'll get past that modest amount of trade from the negative spread on the cash carry.

Speaker 7

Great. Thanks for taking my questions.

Speaker 2

Listen. Thank you.

Speaker 6

Thank

Operator

you. Next, we go to the line of Brody Preston with UBS. Please go ahead.

Speaker 2

Good morning, Brody.

Speaker 8

Hey, good morning, everyone. Listen. Could I just circle back on the NII guide? I just need I was just hoping to get some help tying listen to the 2Q, what the step down that you have for 2Q versus the full year guide, just because if I try to run through the numbers quickly, listen. It kind of looks like at the midpoint of the 2Q guide relative to the full year guide, you kind of expect like a 3% step up in the back half of the year on the listen only mode.

Speaker 8

And so can you help me understand sort of how we get there and how much of that assumption is driven by what you do with borrowings?

Speaker 2

Listen. Yes, there's a little bit of play in there as you take the midpoints of those percentages. So I wouldn't put the step up in the second half of the year listen to the question and answer session. We do see a small step up in the second half of the year. Some of that is days, some of that is loan growth, little bit of seasonal deposits we expect to come in.

Speaker 2

So you will see a very small step up quarter to quarter as we go through the year, probably not quite at the level that you in a

Speaker 8

listen. Okay. Okay, that's helpful. And then I guess if I could just ask listen. One more on the deposit front, and I'm sorry if somebody else asked this and I missed it.

Speaker 8

Listen. As you think about the go forward on deposits and customer concentrations, and I'm thinking particularly as it listen. As it relates to the TLS deposits, what are the kind of governors that need to be put in place going forward listen to kind of help navigate any future liquidity events. I'm not really talking near term because I don't listen. A lot of us think that's going to come to pass, but you never know what's going to happen going forward.

Speaker 8

And so how should we think about the balance sheet flexibility in a stressed environment going forward? Listen.

Speaker 2

Yes. Brody, what I would say is that we've been in a bank for 174 years and we've managed through lots of different cycle. Listen. And one thing that we've always kept central in our approach is our relationship focused. Many of these deposit relationships we've had for decades.

Speaker 2

Listen. While we did see some deposit decline during this period of time, we did not see it as much in our core listen to the business. We're going to continue to focus on listen only mode. We will obviously have an opportunity I think to bring back some of the deposits that we lost along the way. But listen.

Speaker 2

Our focus on treasury management services, our focus is on small business and retail deposits, those types of things will continue to be sort of key listen to drivers for us. We can't fully control whether it's an industry issue that unfolded like it did previously, but what we listen to the liquidity playbook in hand. We were able to execute against that. And again, I think kind of on the backside of this, listen. We do believe, Bob, it's not in our modeling, but we do believe we have a chance to get some of these deposits back.

Speaker 8

Got it. And then just one more, just on the betas. And again, I'm sorry if somebody else asked this, but listen. Have you changed your thinking about your through cycle beta at all? And have you changed how you think about like what your listen only mode.

Speaker 8

The listen to the call

Speaker 2

today. Yes, Brody. We do see the betas going up above previous guidance. Listen. I think we had been more in the mid-40s last time we gave an outlook.

Speaker 2

We now see that likely hitting the 50% point sometime this listen to the summer and then kind of hanging out there and then things get a little complicated as rates start to go down with the lag that I mentioned earlier. But we will likely get up to around 50%, sometime in the early to mid summer on an accumulated basis.

Speaker 8

Got it. And that's interest bearing, right?

Speaker 2

That is pure interest bearing.

Speaker 8

All in. Got it. And I think you did say earlier that you do feel like on the way down, it might have happened with a lag, but you do feel like you'd be able to pass through listen. The same amount of beta to the downside that you pass through on the upside?

Speaker 2

That's right. Okay, great. Thank you very much

Speaker 8

for taking my questions, everyone. I appreciate it.

Speaker 7

Listen. Thank you, Brady.

Operator

And next we go to a question from Peter Winter with D. A. Davidson. Please go ahead.

Speaker 9

Listen. Good morning, Peter. Good morning. I'll switch gears on you and ask about credit. Could you give a little bit more color about the increase in criticized loans.

Speaker 9

I know you mentioned it's interest bearing with the higher rates that's impacted it. But if you could give a little bit more color on that. And then secondly, net charge offs, is there much left in terms of recoveries?

Speaker 1

Listen. Yes. Peter, this is Melinda. So I'll take the first one, the increase that we saw this quarter in criticized. I think Jim mentioned it or listen to the comments that it really was expected.

Speaker 1

I mean, the reality is we've been bumping along the bottom here now for 4 or 5 quarters listen to the question and answer session. I'm very pleased with the listen only. I see some normalization, just given all the inflationary pressures that customers have been dealing with, certainly the increase in interest rates. So those interest rate sensitive portfolios, listen only mode. Certainly, our leverage portfolio kind of core middle market, technology and life sciences, and we did see credit migration this quarter in our commercial listen to the real estate book, a couple of 100,000,000 that is all special mention credit.

Speaker 1

I don't see that migrating really to any kind of loss listen only mode. And that's really on some projects that have pressure related to the rising interest rate environment and from a multifamily perspective. Listen to a little bit of softness in a couple of submarkets in terms of leasing rates and leasing pace. Listen. So that softness coupled with the increased interest burden caused a couple of those projects to listen to that criticized category.

Speaker 1

But again, I do not see lost content in that commercial real estate book. We did increase our commercial real estate reserves quarter just as a precautionary measure. But again, that commercial real estate book is predominantly multifamily and industrial, listen. Close to half of it is on the construction side. Loan to cost in that book is generally in the 50% to 60% range.

Speaker 1

So there's a tremendous amount of equity listen and room in those projects to hold a little bit longer should we need to.

Speaker 9

And then just on the listen. Recoveries for net charge offs.

Speaker 1

Recoveries. Yes, I call that a gift that keeps on giving and quite frankly recoveries are almost impossible listen to predict. They continue to surprise us really over the last 4 or 5 quarters. So at some point, listen. We're going to run out of that, but I would expect that we'll still see modest levels, but declining of recoveries in the coming quarters.

Speaker 1

Listen. Mostly because charge offs remain incredibly low as well. There's not a lot to recover left.

Speaker 2

Yes.

Speaker 9

Listen. And just one follow-up question. In the 10 ks, you had mentioned possibly looking at resuming buybacks. Listen. I'm just wondering, just given all the uncertainty in the environment, is that kind of on hold for now on buybacks?

Speaker 9

Listen.

Speaker 2

I would say buybacks are on hold until further notice. There is a lot of uncertainty in the environment, as you mentioned, listen. Certainly, industry uncertainty, but perhaps even more importantly, regulatory uncertainty for all banks. We just don't know where this is going. And listen.

Speaker 2

We want to make sure that if there is any kind of regulatory change on the capital side that we can get there organically, which listen. I believe we likely very likely will be able to do, but I think caution is in order in that regard. And so share buybacks certainly on the sidelines in the foreseeable future.

Speaker 9

Great. Thanks for taking the questions.

Speaker 2

Thanks, Peter.

Operator

And I will now turn the call back over to Curt Farmer, President, Chairman and Chief Executive Officer.

Speaker 2

Let me just thank you again for your interest in to America and I hope you have a good day. Thank you. Listen.

Operator

Ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Comerica Q1 2023
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