Comerica Q1 2023 Earnings Report

Comerica EPS Results

• Actual EPS: $2.39
• Consensus EPS: $2.26
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $1.37

Comerica Revenue Results

• Actual Revenue: $1.23 billion
• Expected Revenue: $966.40 million
• Beat/Miss: Beat by +$264.60 million
• YoY Revenue Growth: N/A

Comerica Announcement Details

• Quarter: Q1 2023
• Date: 4/20/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, April 20, 2023
• Conference Call Time: 8:00AM ET

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 Q1 2023 Earnings Call Transcript

Key Takeaways

• Comerica reported Q1 EPS of $2.39, driven by broad‐based loan growth, a favorable rate environment, increased noninterest income and continued strong credit performance.
• Average deposits declined by $3.5 billion due to normal seasonality, Fed monetary actions and localized outflows in TOS, corporate banking and California middle market, while core customer relationships held firm and uninsured deposit concentration fell.
• Liquidity was bolstered to nearly $9 billion in cash post‐industry stress, with a quarter‐end loan-to-deposit ratio of 85%, light unsecured funding maturities and a securities portfolio positioned to reduce unrealized losses by 42% through 2024.
• For 2023, the bank forecasts 8–9% average loan growth (led by CRE and national dealer services), a 12–14% deposit decline, net interest income up 6–7% to an all-time high, noninterest income growth of 6–7%, and net charge-offs at the low end of 0.20–0.40%.
• With an estimated CET1 ratio of 10.09%, ROE above 24% and ROA of 1.52%, Comerica raised its dividend by 4%, suspended share buybacks and maintained disciplined expense and capital management, including $16 million in modernization charges.

Presentation

[Operator]

Hello, and thank you for standing by. Welcome to the Comerica first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. To ask a question during this session, you will need to press one, zero on your telephone keypad. To withdraw your question, press one, zero 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, Leah. Good morning and welcome to Comerica's first quarter 2023 earnings conference call. Participating on this call will be our President, Chairman, and CEO, Curtis Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Chief Director of Banking, Peter Sefzik. During this presentation, we'll be referring to slides which provide additional details. The presentation slides in 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.

[Kelly Gage, Director of Investor Relations at Comerica]

Please refer to the Safe Harbor statement on today's earnings release on Slide 2, which is incorporated into this call, as well as our SEC filings for factors that can cause actual results to differ. This conference call will re-reference non-GAAP measures, and in that regard, I will direct you to the reconciliation of these measures in the earning materials that are available on our website, comerica.com. Now I'll turn the call over to Curt, who will begin on Slide 3.

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

Good morning, everyone. Thank you for joining our call. Today, we reported first quarter earnings per share of $2.39, driven by continued loan growth, a favorable rate environment, and effective management of balance sheet, credit, and capital. Despite the recent industry disruption, we affirmed the strength of our core deposit base by successfully retaining our relationships. While we saw some deposit pressure, it was predominantly localized and very manageable. Our credit risk management had us well prepared. Our effective liquidity strategy allowed us to remain laser-focused on seamlessly supporting customers as we opened a significant number of new accounts. We remain focused on business as usual, winning new opportunities, attracting talent, underwriting credit, and expanding relationships. We believe our strong deposit franchise is now even more attractive and stable with a lower percentage of uninsured excess deposits and less concentration with price-sensitive customers.

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

Moving to a summary of our results on Slide 4. Broad-based loan growth and increased non-interest income exceeded expectations. Credit remained a key strength for the quarter, and although we saw modest migration, we were starting from very low levels. Despite some pressures related to funding costs and expenses, we maintained a solid efficiency ratio and produced a robust ROE and Tier 1 capital ratio. 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 expansion of our small business banking platform strengthen our solutions for customers throughout their lifecycle. Further, these initiatives advanced the priority of increasing our mix of non-capital consuming fee income. Turning to Slide 5.

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

We generated earnings of $324 million or $2.39 per share in the first quarter. Average loans grew almost $1.1 billion. Average deposits decreased $3.5 billion, due primarily to normal, first quarter seasonality and customer utilization of funds related to Fed's monetary actions. Credit quality outperformed with net recoveries and our criticized loan % remained well below our historical average. Expenses were elevated due to pension and several larger notable items, but we maintained a solid efficiency ratio. In all, we retained our strong capital position 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. Now I'll turn the call to Jim, who will review the quarter in more detail.

[Jim Herzog, CFO at Comerica]

Thanks, Curt, Good morning, everyone. Turning to Slide 6. Broad-based loan growth exceeded expectations as average balances increased 2%. Commitments grew across most business lines, up 2% from the fourth quarter of 2022. Utilization increased modestly to 46% but remained below historical averages. Growth in our commercial real estate business of over $640 million continued to be driven largely by construction of multifamily and industrial projects originated over the last two years, in addition to the slower pace of payoffs. Our commercial real estate strategy remains highly selective with a focus on Class A projects and our office exposure is limited. National Dealer Services loans grew over $360 million as a result of new relationships and continued customer M&A. Wealth management and middle market also contributed to our strong loan growth.

[Jim Herzog, CFO at Comerica]

Elevated interest rates, lack of housing inventory, and normal seasonality continued to pressure mortgage banker as average loans declined to $184 million for the quarter. The MBA forecast expects higher volumes in the second and third quarters, consistent with the normal spring and summer buying season. Slide 7 provides an overview of our deposit activity. Quarter to date deposits through the first week of March trended in line with guidance as customers continued to deploy funds into their business and we experienced expected seasonality. Following the March industry events, excess balance diversification efforts by our customers further impacted deposits. We saw our peak impact in the days immediately following, concentrated in certain customers with balances well in excess of their operational needs. Outflows moderated, and in the last two weeks of March, we saw a return to a more normal pattern, and that trend has continued.

[Jim Herzog, CFO at Comerica]

The greatest outflows were localized in select portfolios with a muted impact across the rest of our businesses. Despite onboarding new customers in TLS, balances declined as this disruptive sector diversified deposits. Portfolios with larger than average deposit relationships such as corporate banking and select customers in middle market California also saw diversification within a portion of their excess balances. These three business lines saw disproportionately high deposit growth through quantitative easing, and much of the decline offset that increase. Utilization of an FDIC reciprocal deposit product was an effective strategy, and through quarter end, our customers placed $2 billion in balances in that solution. 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.

[Jim Herzog, CFO at Comerica]

Our strategic relationship focus was proven successful as we retained and in fact grew our total number of core deposit relationships. Slide 8 highlights the strength of our core deposit franchise. It is important to note how elevated deposit levels have been since 2020. With that context, our current position is much stronger than prior to the pandemic, as we have higher overall deposits, a better loan to deposit ratio, and a lower percentage of uninsured deposits. Some look to uninsured deposits as the primary metric to detect risk of elevated outflows. We believe a more comprehensive view is appropriate. As a commercial bank, it is natural to have a higher relative percentage of uninsured deposits, the majority of which are non-interest bearing, which we view as a key strength and a proxy for operating accounts.

[Jim Herzog, CFO at Comerica]

With 95% of our commercial non-interest bearing deposits utilizing Treasury Management Services at an average of more than seven Treasury management products for a middle market customer, we are integrated with our customers' daily operations. We feel our market and business diversification, favorable deposit mix, commercial orientation, and connectivity into our customers' operations combine to create greater relative stability in our deposit base. We see opportunities to even further improve the resiliency of our deposits, including strategic investments underway to enhance payments, digital customer transformation, and wealth management, in addition to our national small business banking strategy, which should drive granular deposit growth over time. Ultimately, our deposit base has always been 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.

[Jim Herzog, CFO at Comerica]

Successful execution of our liquidity strategy proved effective, as shown in Slide 9. Following the industry events in March, we conservatively increased our cash position, and our abundant liquidity allowed uninterrupted support of our customers and business as usual operations. Our quarter-end loans to deposit ratio was 85%, remaining below our 15-year average, and very light unsecured funding maturities create flexibility to manage funding needs and cash levels over time. Period-end balances in our securities portfolio on Slide 10 declined over $700 million as paydowns and maturities offset the positive mark-to-market adjustment of $309 million. The total unrealized loss after tax of $2.1 billion affects our book value but not our regulatory capital ratios. Our security strategy remains unchanged as we stop reinvesting in the third quarter of 2022.

[Jim Herzog, CFO at Comerica]

From that peak through the end of 2024, we expect natural portfolio attrition of approximately $4 billion and a 42% improvement in unrealized securities losses. We maintain our entire portfolio is available for sale, providing full transparency and management flexibility. As our portfolio is pledged to enhance our liquidity position, we do not foresee any need to sell our portfolio and therefore unrealized losses should not impact income. Turning to Slide 11, net interest income decreased $34 million to $708 million as the benefit of higher rates and loan volume were offset by the impact of lower deposit balances, deposit pricing, and fewer days. We still saw a net positive impact due to rising rates and net interest income remained incredibly strong relative to our historical results. Slide 12 demonstrates our desirable interest rate sensitivity profile.

[Jim Herzog, CFO at Comerica]

Successful execution of our strategy and the current composition of our balance sheet favorably position us with minimal negative exposure to a gradual 100 basis points 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. Credit quality continues to be a strength of our franchise and remained excellent, as outlined on Slide 13, with $2 million in net recoveries. Nonaccrual loans declined and inflows to nonaccruals remained low at $9 million. Loan growth and the weakening economic outlook drove a $30 million provision, and the allowance for credit losses increased modestly to 1.26%. 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.

[Jim Herzog, CFO at Comerica]

Office is not part of our primary strategy, only making up 7% of our total commercial real estate line of business. Of this limited office exposure, a majority was suburban with strong contractual financial support from sponsors. 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 $4 million relative to a seasonally high fourth quarter 2022, as shown in Slide 14. Capital markets income grew $5 million and is now distinguished in our reporting to reflect the investment and opportunity in that business. Derivative income and investment banking offset the seasonal lighter quarter for syndication fees. Brokerage benefited from the rate environment and strategic private wealth investments contributed to growth in fiduciary income.

[Jim Herzog, CFO at Comerica]

Continued expansion of our non-capital consuming fee income remains a priority. With growth in nearly every customer category, we are excited to see the results from this emphasis. Turning to expenses on Slide 15. We had a number of notable expenses in the quarter, including $16 million related to modernization initiatives, $9 million of which were attributable to the Ameriprise transition. While litigation-related expenses and operating losses were elevated, the largest drivers related to isolated events. Quarter-over-quarter, non-salary pension expense increased $17 million as expected. Salaries and benefits increased $8 million, driven by higher stock-based compensation with first quarter grants, inflationary pressures and attracting talent. FDIC insurance increased $6 million driven by the higher statutory assessment rate and the impact of funding late in the quarter.

[Jim Herzog, CFO at Comerica]

Occupancy came down $12 million with a reduction in lease termination fees, lower rental expense, and a seasonal change in property tax rates. Both consulting and advertising declined from the seasonally high fourth quarter. 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 1st. Our conservative excess cash position impacted our tangible common equity ratio. Adjusting for our cash increase, we've increased over the fourth quarter in AOCI.

[Jim Herzog, CFO at Comerica]

Our first quarter TCE ratio would have increased to 9.47%. Expected loan growth, profitability and any potential regulatory changes will continue to be carefully considered as we manage our capital strategy. Our outlook for 2023 is in Slide 17 and assumes no significant changes in the economic environment. We expect momentum, especially in our commercial real estate and National Dealer Services business, to drive average 2023 loan growth of 8%-9%. We continue to expect growth in most businesses but plan to be appropriately selective, supporting opportunities most aligned with our target credit, pricing and relationship strategy. Our estimated average year-over-year deposit decline of 12%-14% assumes continued stabilization and reflects the impact from Fed monetary actions that began last year in addition to the first quarter industry events.

[Jim Herzog, CFO at Comerica]

Despite the impact of funding, we still project net interest income to be at an all-time high, growing 6%-7% over our 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 income. Credit quality has been excellent and we expect it to remain strong. We continue to forecast net charge-offs at the lower end of our normal 20-40 basis points range and expect a gradual normalization in credit metrics. We expect strong non-interest income performance to drive 6%-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.

[Jim Herzog, CFO at Comerica]

Risk management income related to our internal hedging position is forecasted to increase relative to 2022, but will vary over time as rates move. FHLB dividends created a new tailwind in this quarter. Since we do not expect to repeat the elevated derivative volumes from 2022, we expect the year-over-year derivative delta to offset 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 and adjustments to our retail NSF fees, more than offsetting growth in core Treasury management income. With robust overall non-interest income performance in the first quarter exceeding seasonally high fourth quarter results, we feel very good about our momentum.

[Peter Sefzik, Chief Banking Officer at Comerica]

Despite elevated expense pressures in the first quarter, we maintained our 7% guidance for 2023 expense growth, considering expected adjustments to select discretionary expenses. Even after including the expenses related to the Ameriprise transition, we still expect modernization to be lower in 2023 compared to 2022. We acknowledge the dynamic nature of 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 expenses as appropriate based on the new environment. In summary, we expect strong overall financial performance and forecast record net interest income for 2023. Now, I'll turn the call back to Curt.

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

Thank you, Jim. Slide 18 highlights our compelling story. Risk management decisions made over the last several years prepared us to emerge from the recent disruption in a strong position. We were resilient, we built liquidity, we protected relationships, and we grew our customer base. It was a great quarter for our company. Broad-based loan growth and robust non-interest income exceeded expectations. Credit quality remained excellent. We produced an ROE of over 24% and an ROA of 1.52%. We feel very good about our outlook. Comerica has long had one of the most enviable deposit franchises. 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 in-interest rate exposure, strong capital, and an impeccable reputation for credit.

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

We are diversified in great markets to support our strategy. I'd be remiss if I didn't mention our tenured and tenacious colleagues who partner extraordinarily well with our customers. Banking is based on trust. Trust we have in our customers and trust our customers have in us. I feel this period has proven the strength of our relationship model and reaffirmed 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.

[Operator]

Ladies and gentlemen, if you wish to ask a question over the phone, please press one then zero on your telephone keypad. You may withdraw your question at any time by repeating the one zero command. One moment please for the first question. We will first go to the line of Steven Alexopoulos with JPMorgan. Please go ahead.

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

Morning, Steve.

[Steven Alexopoulos, Managing Director and Senior Equity Research Analyst at JPMorgan]

Good morning, everyone. No surprise, I want to start on the deposit side. First, the color you provided the slides is really helpful. I'm curious, when we look at the decline in the deposits from March ninth through the end of the quarter, you know, I'm surprised that TLS specifically wasn't a beneficiary of the SVB situation. Even when I look at the decline in corporate mid-market, I'm again surprised because I would have thought the company would have been somewhat of a port in the storm, right? I mean, you've been in markets for decades. You've been with customers for decades. Could you take us behind the scenes? You know, what did you hear from your customers during this time in each of those, and why were they moving balances away from the company?

[Peter Sefzik, Chief Banking Officer at Comerica]

Steve, this is Peter. I would tell you that in the very beginning, for sure, we actually took on a lot of accounts. Curt 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. During that time, we definitely took on new customers. I think the average balance probably is just not as high, but on the whole, we saw some departures. Some of that is because we've got a lot of late stage also, which a lot of late stage TLS customers are gonna have more deposits, but not as much credit. That's where you did see some diversification wanting to occur at that level.

[Peter Sefzik, Chief Banking Officer at Comerica]

But net-net, you know, if you look at our TLS slide in the back, we had seen deposits coming down in that space going back to second quarter of last year, really. What's occurred, I think, in the space in general has been burning through cash. We saw that. But we didn't necessarily think that we would be taking on, you know, excess deposits fleeing from SVB coming to us out of this deal. We did take on more accounts, and we definitely saw that. We also saw during the period, 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 out of TLS, so.

[Steven Alexopoulos, Managing Director and Senior Equity Research Analyst at JPMorgan]

What about corporate and mid-market?

[Peter Sefzik, Chief Banking Officer at Comerica]

Same thing there, Steve. I think on the corporate side, you know, in our corporate business, that's our sorta national business of banking large corporates. We saw diversification there as well. In middle market, it was mostly in California. Again, in just about all of these cases, we have not lost customers. We have just seen diversification of excess balances that they had. You know, we believe that there's opportunities for those to return in the future. We're not relying on that, we still have relationships with these customers. We mostly have just seen diversification. That's really what we've seen in those three businesses that we've got outlined on the slide.

[Steven Alexopoulos, Managing Director and Senior Equity Research Analyst at JPMorgan]

Okay. That's helpful. Then on the non-interest bearing, so you saw a pretty sharp drop in the quarter, which was anticipated somewhat, right, because of seasonal factors. Given everything that just unfolded, where do you see that mix now bottoming, and where's the timeframe?

[Jim Herzog, CFO at Comerica]

Good morning, Steve. It's Jim, I'll take that question. You know, we still think that we are likely to end up very close to 50%. You know, we did see most of the drop occur in the DDA space over the course of the quarter. You know, that was not a surprise to us at all. You know, as rates continued to go up with new customers, we continued to be more rate sensitive. We knew that a lot of our search balances that we have were still more in DDA than interest-bearing. We knew a lot of the season outflows relative to what came in in the second half of 2022 were likely buried in the DDA. In fact, that's where they were.

[Jim Herzog, CFO at Comerica]

We did have some customers that switched over using some FDIC products that had been in DDA, but for safety reasons, they were attracted to the FDIC products which pay a nice rate of interest. All those things moved us closer to the 50% number. We still think we're gonna end up right around there. We moved a lot closer to it during the course of the quarter. We still expect to have really one of the strongest ratios of non-interest-bearing deposits to total deposits amongst all our peers, if not well above our closest peers. We still feel really good about non-interest-bearing.

[Steven Alexopoulos, Managing Director and Senior Equity Research Analyst at JPMorgan]

Okay, great. Jim, if I could ask you one last question, which is somewhat theoretical. Interest-bearing deposit costs are 1.5%. If the Fed does start cutting rates in the second half of this year, but the rates you're paying are still well below market rates, how do you model this impacting your deposit cost, right? I mean, do market rates need to move below or close to what you're paying before you could start lowering deposit rates yourself? 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. What do your models show you in terms of how this would flow through to your interest-bearing deposit cost? Thanks.

[Jim Herzog, CFO at Comerica]

Well, of course, we do expect rates to continue to go up. Relative to what might happen when rates go down, you know, it's important to remember that we have a pretty wide distribution of rates paid to a variety of customers. I don't really view that average as the typical customer. You know, we have a lot that are well below that rate, a lot that are well above that rate. Each one of those is gonna respond differently. 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 months lag, two to three months lag when rates start to come down before we can really respond to that drop.

[Jim Herzog, CFO at Comerica]

There's just that same lag that we saw on the way up. Ultimately, we do think we'll be able to start cutting pay rates if in fact the Fed makes some material moves.

[Peter Sefzik, Chief Banking Officer at Comerica]

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

[Steven Alexopoulos, Managing Director and Senior Equity Research Analyst at JPMorgan]

Got it. Thanks for taking my questions.

[Peter Sefzik, Chief Banking Officer at Comerica]

Thanks, Steve.

[Operator]

Next we go to Ebrahim Poonawala. Please go ahead.

[Peter Sefzik, Chief Banking Officer at Comerica]

Ebrahim, Good morning.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America Securities]

Good morning. Good morning. I guess, just on deposits, you mentioned the excess deposit diversification played a role in the quarter. One, give us a sense of like how much of your deposit base or NIB within non-interest bearing that you would consider operational versus excess. Do you see some of that still continuing as businesses 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 you still expect that to continue? Maybe if you can start there. Yeah.

[Jim Herzog, CFO at Comerica]

Yeah. Good morning, Ebrahim. I'll take that, and Peter may wanna add on. you know, in terms of what percentage were non-interest bearing or operational, you know, we view them as largely operational. In fact, you know, 95% of our non-interest bearing are tied to Treasury management products. From that standpoint, it is a largely operational base. Now there are fluctuations in terms of how much they need to put in those non-interest bearing accounts to take care of operational needs and what they can leverage from an ECA standpoint. There probably is still just a little bit of excess in there, which is why we see the ratio coming down from, you know, 52%-53% down to around 50%. We think largely that attrition is gone.

[Jim Herzog, CFO at Comerica]

You know, in terms of where the diversification efforts might go, 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, you know, other events that might happen. For now, it does feel like the diversification efforts have largely settled down, and those are the trends that we've seen over the last, you know, two to three weeks, three to four weeks even.

[Peter Sefzik, Chief Banking Officer at Comerica]

Yeah. I would agree with that, Ebrahim Poonawala. This is Peter Sefzik. I would just also, you know, continue to point to where we saw most of the diversification occur. You mentioned small business. In our retail franchise, small business banking, middle market, most of those businesses really have not seen the diversification issue. It's been sort of business as usual, if you will. You know, people using deposits for running their businesses or, and what, and so forth. You know, the strength of the rest of our deposit base is something that we are really, really proud of and are gonna continue to lean into. I think Jim Herzog is exactly right. We feel like the diversification efforts, if you will, at this point, have pretty much stabilized.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America Securities]

Noted. I guess maybe just another question, Jim, around the outlook for NII NIM. Was wondering if you could give a sense of the trajectory so a 6%-7% year-over-year growth. How do you see quarterly NII and NIM trending from 1Q levels?

[Jim Herzog, CFO at Comerica]

Ebrahim, I'm going to probably refrain from giving, as I often do, from specific NIM % guidance. I think this quarter is a great example of why we don't like to give that. You know, with our business model being a commercial bank, we do see some variations in a number of line items, you know, cash securities, et cetera. 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 %. It just creates kind of a non-correlation between the numerator and denominator. We just don't see them going in the same direction or correlating very well. The NIM %, I'm shying away from still.

[Jim Herzog, CFO at Comerica]

You know, we're obviously probably moving towards the low threes, but I wouldn't want to get more specific than that. I would just stick to the %, guidance that we gave for the quarter and the full-year.

[Manan Gosalia, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Jim, if rates don't get cut, do you expect fourth quarter NII to be the low point for the year in terms of as we think about the exit?

[Jim Herzog, CFO at Comerica]

You know, we obviously we are doing a little bit of a reset with the deposit runoff. We have the second quarter guidance out there. You know, we actually have net interest income probably growing slightly quarter-to-quarter after that. You know, that's a function of loan growth primarily. We do expect to get some degree of seasonal deposits probably later in the second half of the year. That's beyond the day impact that you might get. We do think that we're going to be on a positive trajectory from the second quarter on. We're just essentially resetting that baseline in the second quarter.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America Securities]

Thanks, gentlemen. Thank you.

[Jim Herzog, CFO at Comerica]

Thank you.

[Peter Sefzik, Chief Banking Officer at Comerica]

Thank you.

[Operator]

Next, we have a question from Manan Gosalia with Morgan Stanley. Please go ahead.

[Jim Herzog, CFO at Comerica]

Morning, Manan.

[Manan Gosalia, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Hey, Good morning. You know, another question on deposits for you. You know, you noted you've retained a lot of the relationships and only lost some of the, I guess, excess balances that people were holding. In terms of the room to bring those deposits back, 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? Is there a level of deposits you think would flow back once this volatility subsides?

[Peter Sefzik, Chief Banking Officer at Comerica]

Manan, this is Peter. The last part of your question, I'll say is, yes, we believe there is a level of deposits that would flow back. I would say the number one thing that we do is we talk to our customers pretty regularly. You know, we continue to believe that we provide a better customer relationship, better service than other banks. Quite often, it's not unusual for people to come back to us because they don't get the service that they wanted at another institution. I think when we get to the other side of this, that will probably be the number one reason we start to see deposits flow back. I also want to reiterate again, as Jim said, that's not necessarily something we're relying on in our outlook.

[Peter Sefzik, Chief Banking Officer at Comerica]

We think that, we will see it, but we believe that that'll just be a function of us providing great customer service. I don't think we're going to have to pay up for it necessarily or things like that.

[Jim Herzog, CFO at Comerica]

Yeah, I might just emphasize too, Peter, I don't believe that across all of our portfolios, this is probably less about rate and more about sort of two things. One is the sort of surge excess deposits flowing out that we saw during COVID, stimulus, triple P, et cetera. We were expecting that in the quarter that we would lose some of that. Then those that have sought diversification, 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. We're just staying very, very close to all those customers. They have access to our relationship managers, but also to any of us on the leadership team as well.

[Manan Gosalia, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Got it. 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. How should we think about the right level of liability mix outside of deposits and the right level of cash that you want to hold in the balance sheet going forward?

[Jim Herzog, CFO at Comerica]

Yeah, those questions are connected to each other. Certainly the level of cash that we hold will really be strongly 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. You know, we have been comfortable with our targeted $3 billion level in cash prior to the disruption in the industry. You know, obviously, we pushed closer to $9 billion as we have on the slide, on Slide 9. We will hold there for some period of time until we're sure the industry is past some of this turbulence. To the extent we have loan growth, of course, we'll see that start to go down.

[Jim Herzog, CFO at Comerica]

On the funding side of the balance sheet, we started with very low levels of unsecured debt, as you can see in Slide 9, probably, you know, some of the lowest amongst our peers. 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 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. A lot of those maturities are laddered, you know, starting this year, all the way through the next couple of years.

[Jim Herzog, CFO at Comerica]

We have the option as those maturities come up to either roll them over or let them just mature naturally. 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. We are starting from very low levels, and we feel really good about our current position. We're fortunate that we have that capability.

[Manan Gosalia, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Is that largely revenue neutral because you're raising essentially close to the Fed funds rate and then you're deploying that in cash?

[Jim Herzog, CFO at Comerica]

There is a modest trade on that. You know, there's probably, you know, a 40 to 50-bit trade as I look at it. That's one of the reasons we shied away from net percentage guidance. I mean, 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, you know, that can make an impact on net percentage too. You know, baked into the outlook, 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. You know, we'll get past that modest amount of trade from the negative spread on the cash carry.

[Manan Gosalia, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Great. Thanks for taking my questions.

[Jim Herzog, CFO at Comerica]

Thank you.

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

Thank you.

[Operator]

Ladies and gentlemen, just as a reminder, if you would like to ask a question, you may press one then zero on your telephone keypad. Next, we go to the line of Brody Preston with UBS. Please go ahead.

[Jim Herzog, CFO at Comerica]

Morning, Brody.

[Brody Preston, Equity Research Analyst at UBS]

Hey, Good morning, everyone. Could I just circle back on the NII guide? I was just hoping to get some help tying the 2Q, what the step down that you, that you have for 2Q versus the full-year guide, just because if I, if I try to run through the numbers quickly, 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 quarterly NII run rate. Can you, 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?

[Jim Herzog, CFO at Comerica]

Yeah. There's a little bit of play in there as you take the midpoints of those percentages. I wouldn't put the step up in the second half of the year quite at that level. There's just a little bit of rounding trying to navigate those mid-percentages that you mentioned. You know, we do see a small step up in the second half of the year. You know, some of that is days, some of that is loan growth, a little bit of seasonal deposits we expect to come in. 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 just mentioned, Brody.

[Brody Preston, Equity Research Analyst at UBS]

Okay. Okay, that's helpful. I guess if I could just ask, you know, one more on the deposit front, and I'm sorry if somebody else asked this and I missed it. As you think about, you know, go forward on deposits and customer concentrations, and I'm thinking particularly as it relates to the TLS deposits, you know, what are the kind of governors that need to be put in place going forward, to kind of help, you know, navigate, you know, any future liquidity events? I'm not really talking near term because I don't think a lot of us think that's going to come to pass, but you never know what's going to happen going forward. How should we think about, you know, the balance sheet flexibility, in a stressed environment going forward?

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

You know, Brody, what I would say is that, you know, we've been in a bank for 174 years, and we've managed through lots of different cycles. One thing that we've always kept central in our approach is our relationship focus. Many of these deposit relationships we've had for decades. While we did see some deposit decline during this period of time, we did not see it as much in our core businesses, retail banking, small business banking, middle market, wealth management, et cetera. We're going to continue to focus on those business lines. We will obviously have an opportunity, I think, to bring back some of the deposits that we lost along the way.

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

You know, our focus on Treasury Management Services, our focuses on small business and retail deposits, those types of things will continue to be sort of key drivers for us. We can't fully control when there's an industry issue that unfolded like it did previously. What we did control was we had a great liquidity playbook in hand, and we were able to execute against that. Again, I think, you know, kind of on the backside of this, we do believe, while it's not in our modeling, but we do believe we have a chance to get some of these deposits back.

[Brody Preston, Equity Research Analyst at UBS]

Got it. Then just one more just on the betas. Again, I'm sorry if somebody else asked this. Have you changed your thinking about your through cycle beta at all? Have you changed how you think about like, you know, what your terminal beta would be just given the deposit volatility? I guess I'm more trying to narrow down to the interest-bearing deposit beta, if you have any color around that.

[Jim Herzog, CFO at Comerica]

Yes, Brody. We do see the betas going up above previous guidance. I think we had been more in the mid-40s last time, we gave an outlook. We now see that likely hitting the 50% point, sometime this summer and then kind of hanging out there, and then things get a little convoluted as rates start to go down with the lag that I mentioned earlier. We will likely get up to around 50%, sometime in the early to mid-summer on an accumulated beta basis.

[Brody Preston, Equity Research Analyst at UBS]

Got it. That's interest-bearing, right?

[Jim Herzog, CFO at Comerica]

That is pure interest-bearing. All in.

[Brody Preston, Equity Research Analyst at UBS]

Got it.

[Jim Herzog, CFO at Comerica]

Pure interest-bearing.

[Brody Preston, Equity Research Analyst at UBS]

I think you did say earlier that you do feel like on the way down, you know, it might happen with a lag, but you do feel like you'd be able to pass through the same amount of beta to the downside that you pass through on the upside?

[Jim Herzog, CFO at Comerica]

That's right. Okay, great. Thank you very much for taking my questions, everyone. I appreciate it. Thank you, Brody.

[Operator]

Next, we go to a question from Peter Winter with D.A. Davidson. Please go ahead.

[Jim Herzog, CFO at Comerica]

Hey, Good morning, Peter.

[Peter Winter, Managing Director and Senior Research Analyst at DA Davidson]

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

[Melinda Chausse, Chief Credit Officer at Comerica]

Yeah. Peter, this is Melinda. I'll take the first one, the increase that we saw this quarter in criticized. I think Jim Herzog mentioned it or Curtis Farmer did in his comments. It really was expected. I mean, the reality is we've been bumping along the bottom here now for four or five quarters at exceptionally kind of non-sustainable levels. Over the last couple of calls, I said we would expect to see some normalization, you know, just given all the inflationary pressures that customers have been dealing with, certainly the increase in interest rates. Those interest rate sensitive portfolios, certainly our leverage portfolio, kind of core middle market, Technology and Life Sciences. We did see credit migration this quarter in our commercial real estate book, $200 million. That is all special mention credit.

[Melinda Chausse, Chief Credit Officer at Comerica]

I don't see that migrating really to any kind of loss content. That's really on some projects that have pressure related to the rising interest rate environment and from a multifamily perspective, you know, a little bit of softness in a couple of submarkets in terms of leasing rates and leasing pace. So that softness coupled with the, you know, the increased interest burden caused a couple of those projects to move into that criticized category. Again, I do not see loss content in that commercial real estate book. We did increase our commercial real estate reserves this quarter just as a precautionary measure. Again, that commercial real estate book is predominantly multifamily and industrial. Close to half of it is on the construction side.

[Melinda Chausse, Chief Credit Officer at Comerica]

Loan to cost in that book is generally in the 50% to 60% range. There's a tremendous amount of equity and room in those projects to hold a little bit longer should we need to.

[Peter Winter, Managing Director and Senior Research Analyst at DA Davidson]

Just on the recoveries for net charge-offs.

[Melinda Chausse, Chief Credit Officer at Comerica]

Oh, recoveries. Yeah, yeah. I call that the gift that keeps on giving, and quite frankly, recoveries are almost impossible to predict. They've continued to surprise us really over the last four or five quarters. At some point, we're gonna run out of that. I would expect that we'll still see modest levels, but declining of recoveries in the coming quarters. Mostly because charge-offs have been incredibly low as well. There's not a lot to recover left.

[Peter Winter, Managing Director and Senior Research Analyst at DA Davidson]

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

[Jim Herzog, CFO at Comerica]

I would say buybacks are on hold until further notice. You know, there is a lot of uncertainty in the environment, as you mentioned. Certainly industry uncertainty, but perhaps even more importantly, regulatory uncertainty for all banks. We just don't know where this is going. You know, we wanna make sure that if there is any kind of regulatory change on the capital side, that we can get there organically, which I believe we likely, very likely will be able to do. But I think caution is in order in that regard. Share buyback certainly on the sidelines in the foreseeable future.

[Peter Winter, Managing Director and Senior Research Analyst at DA Davidson]

Great. Thanks for taking the questions.

[Jim Herzog, CFO at Comerica]

Thanks, Peter.

[Operator]

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

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

Let me just thank you again for your interest in Comerica, and I hope you have a good day. Thank you.

[Operator]

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

Participants

Executives

• Curtis Farmer, Chairman, President, and CEO
• Jim Herzog, CFO
• Kelly Gage, Director of Investor Relations
• Melinda Chausse, Chief Credit Officer
• Peter Sefzik, Chief Banking Officer

Analysts

• Brody Preston, Equity Research Analyst at UBS
• Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America Securities
• Manan Gosalia, Executive Director and Senior Equity Research Analyst at Morgan Stanley
• Peter Winter, Managing Director and Senior Research Analyst at DA Davidson
• Steven Alexopoulos, Managing Director and Senior Equity Research Analyst at JPMorgan