Comerica Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 21, 2023

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the conference over to your host, Director of Investor Relations, Kelli Gage.

Operator

Please go ahead.

Speaker 1

Thanks, Greg. Good morning, and welcome to Comerica's Q2 2023 earnings conference call. Participating on this call will be our President, Chairman and CEO, Britt Farmer Chief Financial Officer, Jim Herzog Chief Credit Officer, Melinda Chasse and Chief Banking Officer, Peter Sefzik. During this presentation, we will be referring to slides which provide additional details. The presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website, comerica.com.

Speaker 1

This conference call contains forward looking statements. In that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward looking Statements speak only as of the date of this presentation, and we undertake no obligation to update any forward looking statements. Please refer to the Safe Harbor statement in 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. Also, this conference call will reference non GAAP measures.

Speaker 1

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

Speaker 2

Good morning, everyone, and thank you for joining our call. Today, we reported 2nd quarter earnings of $273,000,000 for $2.01 per share. Average loans grew to $55,400,000,000 and the continued focus on fee income helped drive our 2nd highest non interest income quarter in our history. Expenses declined and our disciplined approach to credit produced a 3rd consecutive quarter of net recovery. Beyond our compelling financial results, we have launched a transformational expansion and support for small businesses.

Speaker 2

In the Q2, we introduced tailored products designed to improve access to capital and enhance cash management capabilities for these important customers, while also providing access to valuable business insights and resources. Coupled with our recognized SBA achievements, We believe we are well positioned to be a leading bank for small business, providing the tools they need to achieve their goals. Our emphasis on supporting small business is an important part of our overall commitment to communities. You can read more about our other community

Speaker 3

Thank you, sir.

Speaker 4

We will now begin the

Speaker 2

call to our financial results. Thank you, sir. Our Our Southeast and Mountain West expansionary investments continue to perform well as our bankers were active in the market, adding new relationships and building pipeline. Strong relative economic trends in these regions coupled with the prevalence Our target customer base could create opportunity for continued growth over time. Moving to a summary of our results on Slide 4.

Speaker 2

Average loans grew $1,900,000,000 Average deposits decreased $3,500,000,000 due to customer diversification efforts related to industry disruption in the Q1 and the ongoing impact of Fed monetary actions. We saw increased Stabilization in both interest bearing and non interest bearing deposits to the second half of the quarter, and we believe diversification efforts are largely behind us. As we expected, net interest income declined as we saw the full impact of 1st quarter deposit flows and funding activity. Credit quality outperformed with another quarter of net recovery and our criticized loan percentage remained below our historical average. Noninterest income was near record levels and expenses declined.

Speaker 2

Profitability improved in our already solid capital position as we generate an estimated CET1 ratio of 10.31 percent above our strategic target. It all was a strong quarter for Comerica. And I will now turn the call over to Jim, who will review our results in more detail.

Speaker 5

Thanks, Kurt, and good morning, everyone. Turning to Slide 5. Loan growth came in just above expectations as average balances increased 4% from the Q1. Increased selectivity drove a slight decline in commitments and utilization increased almost 1%, but remained below historical averages. Growth in our commercial real estate business of over $520,000,000 continued to be driven largely by construction of multifamily and industrial projects Originated over the last 2 years in addition to the slower pace of payoffs.

Speaker 5

Recent origination activity and pipeline have significantly declined. Our commercial real estate strategy remains highly selective with a focus on Class A projects and our office exposure is intentionally limited. Large corporate loans grew $447,000,000 as we won new customer relationships and financed acquisitions for existing customers. National Dior Services benefited from new customer acquisition and while floorplan inventories continued to grow, They remain below pre pandemic levels. Typical second quarter seasonality resulted in a $325,000,000 increase in average Mortgage Banker Finance Loans.

Speaker 5

However, consistent with our strategic exit of that business, we expect most of our mortgage banker balances to be paid off by the end of 2023. Slide 6 provides an overview of our deposit activity for the quarter. Average deposit balances declined 5% in line with expectations. Conversations pivoted away from banking industry stability as customers refocused on broader macroeconomic issues such as risk of recession and elevated rates. Throughout the quarter, customer deposit balances continued to normalize and we observed relatively stable trends since mid May.

Speaker 5

Industry funding pressures drove deposit competition and interest bearing deposit costs increased to 2 37 basis points. However, we feel our dynamic pricing strategy and relationship approach allowed us to maintain our forecasted deposit betas and protect balances. While the rate environment further pressured non interest bearing deposits, we continue to view our deposit mix as a competitive advantage, providing a more stable and cost effective funding source than our peers. With strategic investments underway to enhance Payments and other treasury management products, in addition to our national small business banking strategy, we see opportunities to further improve our attractive deposit profile over time. As shown on Slide 7, our strong liquidity position provided flexibility.

Speaker 5

We maintained excess cash, repaid maturing FHLB advances and our remaining liquidity capacity increased. Our quarter end loan to deposit ratio was 84%, still below our 15 year average and strategic actions announced in the 2nd quarter and are expected to keep that ratio in the mid-80s at year end 2023. Cash balances at the holding company position us to repay our 8 $150,000,000 debt due this summer and very light remaining unsecured funding maturities create flexibility to manage funding needs and cash levels over time. Period end balances in our securities portfolio on Slide 8 declined almost $900,000,000 with pay downs, maturities and a $212,000,000 negative mark to market adjustment. Our security strategy remains unchanged as we stop reinvesting in the Q3 of 2022 and we maintain our entire portfolio as available for sale, providing full transparency and management flexibility.

Speaker 5

Although we have modest treasury maturities through the end of the year, Larger scheduled repayments in 2024 2025 are projected to benefit liquidity, profitability and our unrealized losses within AOCI. Altogether, we expect a 34% improvement in unrealized securities losses over the next 2 years. As our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities and therefore unrealized losses should not impact income. Turning to Slide 9. Net interest income decreased $87,000,000 to $621,000,000 in line with expectations as the benefit of loan volume and one more day were offset by the impact of wholesale funding, lower deposit balances, A shift in deposit mix and deposit pricing.

Speaker 5

A significant portion of the funding and deposit activity occurred late in the Q1, so results reflect a full quarter impact of those actions. With our strategic management of our asset sensitivity position, The impact of rates was nominal. As shown on Slide 10, successful execution of our interest rate strategy and the current composition of our balance sheet favorably positioned us with minimal negative exposure to a gradual 100 basis points or 50 basis points on average decline in interest rates. By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time. Our proven discipline produced another quarter of excellent credit quality as highlighted on Slide 11.

Speaker 5

Once again, we posted net recoveries, although we do not project this trend to continue. Modest migration drove an increase in criticized loans. However, at under 4% of total loans, they remain well below historical averages. Non accrual loans declined And inflows to non accruals remained low at $17,000,000 Vibration, loan growth and a continuing weak economic outlook drove the $33,000,000 expense and the allowance for credit losses increased to 1.31%. Given the environment, We increased oversight in portfolios with greater relative exposure to elevated rates such as leverage loans and our commercial real estate business.

Speaker 5

However, we remain very comfortable with these portfolio metrics and expect continued migration to be manageable. Non interest income on Slide 12 continued to outperform, growing $21,000,000 from an already strong first quarter. Non customer income contributed to results with increases in FHLB dividends and BOLI in addition to customer related growth in fiduciary and card. Although not shown as a variance to prior quarter, capital markets exceeded expectations as we repeated strong first quarter results. Risk management income related to our hedging strategy saw a modest decrease and should continue to vary based on the rate environment.

Speaker 5

While non customer income can be hard to predict, we expect our strategic investments in products and services to drive further growth and capital efficient fee income over time. We remain excited about the results of these efforts to date. Consensus on Slide 13 declined $16,000,000 in line with expectations. Quarter over quarter expenses benefited from several large first quarter items that did not recur netting $2,000,000 related to the Ameriprise transition, Expense and other non interest expenses were partially offset by increased outside processing, FDIC insurance and software costs. Modernization efforts remain on track as we incurred a total of $7,000,000 in expenses advancing our wealth management, corporate facilities, technology and Retail Strategies.

Speaker 5

We continue to selectively prioritize strategic investments designed to further enhance our financial results while remaining committed to prudently managing expenses commensurate with our earnings power. Slide 14 highlights our strong capital position. With share buybacks pause, capital generation from profitability outpaced loan growth, driving our estimated CET1 further above our target to 10.31%. Strategic actions, including the exit of mortgage banker finance and increased selectivity across the rest of the portfolio are expected to elevate capital ratios through the end of this year. Higher rates increased unrealized losses in our securities and swap portfolios, reducing our tangible common equity ratio to 5.06%.

Speaker 5

Adjusting for the impact of AOCI, our tangible common equity ratio would have been 9.22%. Although potential regulatory changes have not yet been proposed, considering our size, portfolio and projections, We feel very good about our ability to support our customers and comply with anticipated capital requirements. Our outlook for 2023 is on Slide 15 and assumes no significant change in the economic environment. We continue to project full year 2023 average loan growth of 8%. The strategic exit Mortgage Banker Finance and increased selectivity is expected to keep loan balances relatively flat into the 3rd quarter.

Speaker 5

Our projected full year average deposit decline of 14% to 15% is attributable to quantitative tightening that began last year and the impact of the Q1 of 2023 industry events. Assuming continued normalization of deposit trends In additional FOMC actions, we expect only a modest deposit decline through the second half of the year. We expect our highest year of net interest income in 2023, growing 1% to 2% over last year's record results. Although we anticipate short term rates will remain high through the remainder of the year, our asset sensitivity position is designed to protect our strong profitability by minimizing the negative impact of rates when they decline. Credit quality remained excellent and we expect continued migration to remain manageable.

Speaker 5

Given the strong performance through the 1st two quarters, we forecast full year 2023 net charge offs to remain below our normal 20 to 40 basis points range. Non interest income exceeded expectations for the first half of the year and we expect Full year to grow 7% to 9% over 2022. Benefits from non customer income related to FHLB dividends and risk management income are expected to continue, but likely at declining rates as we repay maturing advances and rates normalize. While we expect strong foreign exchange income and derivative income, we anticipate levels to moderate from the incredible performance today. Even with potential headwinds in the second half of the year relative to the first half, the overall non interest income run rate remains compelling.

Speaker 5

Non interest expenses are expected to increase approximately 9% year over year and 3% of that growth is the result of higher pension expense for 2023. Talent acquisition, investments benefiting our deposit strategy and the enhanced regulatory and compliance focus given our Size and business model are expected to create some expense pressure compared to prior guidance. As we look into the Q3, the cost of filling open positions and other expense This pressure should largely offset be offset by an expected credit to modernization expense driven by corporate facilities, although the precise timing for this type of credit can be challenging to predict. Prudent expense management remains a priority as we balance expense pressures with the need to invest for the future. Strong profitability is expected to further grow our capital position in excess of our target and we believe that trend will continue until we resume share repurchases.

Speaker 5

Now, I'll turn the call back to Curt.

Speaker 2

Thank you, Jim. Slide 16 summarizes our competitive advantage. For the local delivery of sophisticated, Comprehensive product and industry expertise by tendered bankers, we feel we encapsulate the best features of the largest and smallest competitors. Diversification remains an important tenant of our core strategy and exporting our business model to Expansion markets has further enhanced our attractive geographic profile. By accelerating certain investments already underway such as payments, Small Business, Wealth Management and Capital Markets.

Speaker 2

We are elevating the products and capabilities tailored to meet our customers' needs while enhancing our funding profile, revenue mix and overall return on capital. Optimizing our portfolio through the strategic exit of mortgage banker finance and increasing selectivity across the rest of our business lines Prioritizes capital and funding for our target customers. Throughout our 174 year history, We have successfully navigated a number of economic events. And once again, our business model was tested and proved to be sound. As a leading bank for business with strong retail and wealth management capability, we play a unique role supporting our customers as Thank you for your time this morning.

Speaker 2

And now we'd be happy to take some questions.

Operator

If you're using a speakerphone, please pick up the handset before pressing the numbers. Your first question comes from the line of John Pancari from Evercore. Please go ahead.

Speaker 2

Good morning, John. Good morning. Good morning.

Speaker 3

On the deposit growth outlook, I know you lowered your deposit growth expectation Despite the end of period deposits actually increasing and coming in a little bit better than expected, I know you indicated you expect only a modest Deposit decline in the back half. Can you maybe just give us some of the color around the rationale for the lowered growth expectation and what Check the trends that you expect to develop as you look at the back half. Thanks.

Speaker 5

Yes. Good morning, John. It's Jim. Thanks for the question. Yes.

Speaker 5

The relatively stable or modest decrease was relative to the Q2 average of $64,000,000,000 We do expect to stay very close to that on average through the end of the year. There are some dynamics churning on below that. Core deposits will probably take a small step down from the average of Q2 just because In the first half of the second quarter, we did have just some very modest runoff. But then again, we added some broker deposits also that Roughly offset that during the quarter that on an average basis will carry through. And so we do think by the end of the year, we'll still be hovering around that $63,000,000,000 to $64,000,000,000 number.

Speaker 5

We were a little bit elevated on 6.30, as you see in the bar on the right. And so I would not expect all of those balances to stick around. We had $800,000,000 of card that was elevated relative to this typical average. And then we did have some elevated customer balances on sixthirty that I would not expect to stick around either. So that is a little bit of an inflated number.

Speaker 5

I would maybe stick more to the average Guidance of gravitating down to $63,000,000,000 to $64,000,000,000 by the end of the year on average.

Speaker 3

Okay, great. Thanks for that color. And then separately also on the deposit front, In terms of noninterest bearing mix, I know it's 48% current. Where do you see that bottoming? Already, I think you're at your pre pandemic level.

Speaker 3

You were running at around 48% of total deposits. So where do you think that could bottom? And then separately, sorry if I missed it, but if you can give us your updated through cycle deposit beta expectation, I believe you were Thinking mid-50s and you're currently at 47 now? Thanks.

Speaker 5

Yes. We are on average As well as June 30 hovering in that 47% to 48% area, it's consistent with what I said earlier in June at a major investor conference. We still think we are going to dip just slightly below 45%, so think about maybe 44% to 45%. The average ratio was a little bit elevated because it doesn't consider a little bit of the runoff that occurred early in the Q2. The June 30 ratio, 47 percent is a little elevated due to the elevated non interest bearing balances that I referred to before.

Speaker 5

And so I kind of think of us being on a kind of a spot basis as ignore the elevated balances. I really think of us today as being 45% to 46%, And I see that dipping down to maybe 44% to 45% by the end of the year. Keep in mind that there are a number of variables involved here. Noninterest Barring flows will be the most important variable, but to the extent we're successful in bringing back interest bearing deposits, That could push that ratio down too, and we would of course welcome back those interest bearing deposits. In terms of the beta question, Yes.

Speaker 5

We still think we're going to end up on an accumulated basis in the mid-50s. I mean, right now, I have 56% implied in Guidance, they're pretty consistent with what we've been saying for the last few months. So we're still right around that mid-fifty area.

Speaker 3

Great. Thanks so much.

Operator

Thank you. Your next question comes from the line of Steven Alexopoulos from JPMorgan. Please go ahead.

Speaker 2

Good morning, Steve.

Speaker 6

Good morning. Jim, I just want to drill down on your answer to John's question. So the stability or modest decline in deposits for the rest of the year, you're saying that's coming from outflow slowing. It's not because you had strong outflows this quarter, but you've plugged the hole with broker deposits. So you're not saying you need to use broker for the second half to remain fairly Stable down a bit, if outflows are slowing, correct?

Speaker 5

That's right. To be clear, we have really no plans to add Corporate deposits between now and end of the year, I think we're at a pretty good resting spot. We do think the customer core deposits have very much stabilized. We do see whether you define it by where we were in the Q2 average or if you look at June 30, which with some elevated balances and we normalize for that number for those elevated balances. From there, we see just some very modest decline between now and the end of the year.

Speaker 5

Now we've not really factored in a Material amount of seasonal deposits, which in the past have come in, but seasonal patterns have gone out the window over the last year. We're not exactly sure what to expect there. So there could be some opportunity there. But overall, if you adjust that $66,000,000,000 on June 30 for card And maybe a modest amount of elevated balances, we would see just a modest decline from that level on assuming we don't get a large and full seasonal deposits.

Speaker 6

Got it. If we think about the margin, the outflow of non interest bearing, right, replacing those with basically time deposits, that's really pressured the So if that holds the 9th inning, are we at a bottom for the NIM right now?

Speaker 5

If you look at our guidance, Stephen, we do have just a little bit more pressure to go there. You see the net interest income guidance that we implied. You do see a small step down in Q3 and then a smaller step down in Q4. Now as a partial offset, I never like to talk about NIM percentage because our NIM percentage can bounce around for reasons that don't correlate with income, Whether it be the level of securities, whether it be the level of cash that we carry and the reasons for carrying that cash. If we do see cash balances Go down, because that is putting a bit of a drag on the NIM.

Speaker 5

If they go down to normal levels, I would see the NIM being very close to where it's at now. You might Another 3 or 4 bps downward pressure in the NIM as the deposit mix is roughly offset by the smaller balance sheet as Deflate for that excess cash. If we don't reduce cash balances, and my forecast assumes we do, But if we hold at these cash levels that we're currently at, you could see another 9, 10 bps in NIM. But again, I'm not expecting that at this point. I'm more focused on getting the cash down as things continue to stabilize.

Speaker 5

So we're very near the bottom, just maybe a few bps depending on while we do with our cash position.

Speaker 6

Maybe a final question. I know we're going to get the new capital Fairly soon, but you guys are $91,000,000,000 of assets. Kurt, how do you think about crossing that $100,000,000,000 asset threshold organically? I know this is not a great environment to be considering M and A transactions, but when you think about just the capital burden, the cost for Helix

Speaker 2

Yes. Steve, this is Kurt. I'll take that Question and you're right, we are within a certain range of that $100,000,000,000 market around $91,000,000,000 in Assuming that, with just the organic growth that we would eventually cross that number, we've been planning now for the last 2 years I have a little bit more work to do just to be prepared for whatever regulatory increased oversight going back into the stress test, capital Planning, etcetera, if we became a Category IV bank. We think just through organic growth, that would probably be a few years out. And our view has continued to be that we're going to focus on doing the right thing for the shareholders, growing the company, growing the assets of the company.

Speaker 2

As we have over a 174 year history and if that means crossing that $100,000,000,000 market would mean crossing that $100,000,000,000 mark, but we think that we're trying to think about from a long term perspective, and just trying to be prepared for whatever cost Our regulatory oversight might be associated with that if it is crossing it from an organic perspective.

Speaker 6

Thanks for all the color.

Speaker 2

Thanks, Dave.

Operator

Your next question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead.

Speaker 2

Good morning, Ebrahim.

Speaker 7

Hey, good morning. I guess just following up on Steve's last question on these capital changes. Even if you don't cross $100,000,000,000 what are the changes you expect to make in terms of just balance sheet management, either loan to deposit ratio, Liquidity, etcetera, once these rules are out.

Speaker 2

The rules this is Kurt, Ebrahim. Most anticipated ruling is really around the treatment of AOCI in regulatory ratios. And while all the conversation thus far has been focused on banks north of $100,000,000,000 We do anticipate that there might be some eventual phase in below $100,000,000,000 nothing official on that right now, but we're just trying to be If you look at sort of where we are from a CET1 perspective at 10.31 Ken, if you factory in AOCI, we would be slightly south of 7% like 6.93%. And so we would have a little bit of work to do to raise capital, but we believe it would be phased in. And just through normal earnings of the company, we could get back to an appropriate CET1 level, we do not believe that we'd have to go to the external market to raise capital to get back to that level.

Speaker 2

So we think we're well positioned with whatever ruling might come out. And again, Given that we're below the $100,000,000,000 mark, we think we would have some more time if you got applied to banks below that level.

Speaker 7

And just in terms of liquidity, the loan to deposit ratio in the 80s still seems like the right place to be?

Speaker 2

I believe, Bivram, you were asking about

Speaker 5

the stabilization of the loan to deposit ratio. Yes. We do expect to stay in the mid-80s.

Speaker 3

We do think it

Speaker 5

was again just slightly elevated on June 30, But we do have a plan to stay in the mid-80s and certainly some of the asset optimization things we're doing will help ensure that. So we're right around that area that we're comfortable in.

Speaker 2

And also it's below our sort of historical averages as well, where we've normally operated.

Speaker 7

Understood. And just one separate question, if I may. Given your customer base, give us a sense of Your outlook in terms of credit, health of the customer, there's not a lot of corporate bonds that have yet repriced to the higher rates over the last 12 months. What's your expectation in terms of the next year and likelihood of a recession, soft landing, etcetera?

Speaker 8

Yes. Abraham, this is Melinda. Obviously, the credit performance continues to be really strong. It was a really nice quarter for us. Obviously, Q3 of net Recovery is kind of unprecedented nonperforming assets, again modest decline and very low inflow.

Speaker 8

But we did see an increase In the criticized category, which is exactly what we've been expecting to see over the last couple of quarters. The preponderance of the increase That we saw is in our, what I call, core middle market C and I portfolio, which would include a number of leverage loans in that automotive supplier sector. So again, we have expected that we would begin to see normalization. It's taken a couple of extra quarters to actually get there. We've been bouncing around the bottom for a long time.

Speaker 8

Our current economic forecast that we use in our CECL process does call for A mild recession, and I think whether it's a mild recession or we end up with a soft landing, I think we're prepared for a mild recession As it relates to the reserve build and the reserve build this quarter really reflects kind of the portfolio growth, as Jim said, as well as that migration. But as of now, We don't see a lot of lost content. And as Jim guided, we think that for the remainder of this year, we'll be below that average We've typically guided.

Speaker 7

It's helpful. Thank you.

Speaker 9

Welcome. Your

Operator

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

Speaker 10

Hey, thank you, Jon and everyone. Hey, good morning. Melinda, just to follow-up on that one. How do you expect do you expect more normalization? And how do you generally expect those numbers To progress on criticized.

Speaker 8

Yes. I mean, I think we expect that we'll continue to have some migration in the portfolio. There is no doubt that The customer base has been incredibly resilient, obviously came into the last couple of years challenges, Very low levered, lots of liquidity, lots of availability, but inflationary pressures over the last 18 months are starting to show up in the portfolio in terms of Pressure around growth and net margins, so cash flows are a little more stretched, and I would expect that we'll continue to see some additional migration. I think we're very well reserved and all of that is taken into sort of the process that we go through each quarter.

Speaker 10

Okay. And maybe this somewhat ties into it, but maybe if you repeat, but you talked about increased selectivity in lending. Can you talk a little bit more about that kind of where you're being a little bit more cautious? And then the CRE number, it sounds like that was More construction projects funding up. I think you said things are slowing there, but can you just confirm that?

Speaker 4

John, it's Peter. Yes, I think when we talk about it, it's really around quite candidly pricing expectations across the loan portfolio and We continue to be really selective about it. I've said in the past, we're more focused on sort of credit than we are Maybe trying to earn business on pricing over time. And right now, between those two options, we want to make sure that we're earning For the company and so our selectivity and expectations on pricing and I think you're seeing that across the industry just As capital is kind of being contained here, that we're being very careful about where we deploy it. We're taking care of existing customers, Our expectations on profitability are higher, relationship are higher.

Speaker 4

So that's kind of across the portfolio. I think in Commercial Real Estate Specifically, we've actually kind of started dialing back a little bit on that even beginning of this year, maybe end of last year, Just starting to be very careful in taking care of our existing sponsors. We've got great sponsors. We feel really good about the portfolio, very limited office exposure, Watching what's happening in multifamily, we expect though our projects to kind of carry commercial real estate balances really into next year. So we feel good about it where we are.

Speaker 4

We feel good about it from a credit standpoint or sponsor standpoint, But our expectations on pricing have definitely gone up this year.

Speaker 10

Okay, good. Thank you for that. And then just one for you, Ralph, Maybe kind of an odd question, but you've dealt with COVID, you've dealt with the funding crisis as CEO. So it's been a hell of a run for you. But Do you feel like it's largely business as usual for Comerica right now?

Speaker 10

Are you still fighting some of these Questions from depositors and this funding crisis that's happened over the last 4 months?

Speaker 2

John, first of all, I'm honored that you referred to me as Ralph.

Speaker 10

Did I say that? I apologize.

Speaker 2

Our long term Chairman Ralph Babb and his head lunch with Ralph.

Speaker 10

I'm under my desk right now.

Speaker 2

Kurt? He's doing great and remains very engaged. I was asking you. And just a minute about the comments or question that you asked me, the last 30, 60 days, a number of us have been out in the market visiting with both employees and town hall formats, But also with customers in Michigan, California, the Carolinas, Texas, Florida, etcetera. And I would say the conversations really have shifted for the most part back to more business as usual as you would refer to it.

Speaker 2

When customers are asking us about things, customers normally ask us about the economy, about interest rates, about availability to capital and credit, What we're seeing in terms of M and A activity in various industries, etcetera, industry outlooks. And so I feel like that things have definitely stabilized in terms of Customer communication, customer conversations and we're focused, as Peter said, on taking care of our existing customers.

Speaker 3

And that's something that I

Speaker 2

think we do very well. We've got really great long standing relationships. And I might just remind you and the other listeners That really throughout the crisis, we did not lose customers. We saw some customers diversify deposits, And we hope over time and seeing some signs, early signs of that, the customers will bring some of those deposits back, back deposits back where some Moved out. As you alluded to earlier, it has been an interesting time.

Speaker 2

I became the CEO In April of 2019, and you know all the events that have occurred since then. But I think our company is so resilient To manage through 174 years of all the disruptions that have occurred in the economy in the world during that time. And we just do, I think, a great job of rallying together. And it really pretty much is business as usual. I referred to in my comments earlier a lot of things that we're focused We remain focused on this beyond just taking care of our employees and our customers, expanding into new markets, Product capabilities, focusing on small business, growing the commercial bank, growing wealth management, growing the retail bank.

Speaker 2

And we feel like the future for us remains very bright as an organization.

Speaker 10

Okay. Well, Kurt, I've never had so many e mails In response to

Speaker 11

your question.

Speaker 10

Some supporters, some not so much. But I know you're doing a great job. Thank you, Kurt.

Speaker 12

Thank you.

Operator

Your next question comes from the line of Brody Preston from UBS. Please go ahead.

Speaker 12

Hello, everybody. Good morning, everyone. Hey, I just wanted to ask on the Tech and Life Sciences And those deposits, I noticed that those continue to move down a little bit, but it looked like the rate of change kind of slowed there. I was wondering kind of what drove that decline? Is it kind of back to normal cash burn for those clients?

Speaker 12

And kind of What the I guess, is there a growth outlook kind of for that business line now that there's been this disruption with the largest competitor there, no longer

Speaker 4

Yes, Brody, this is Peter. Yes, the decline in deposits in TLS, we really started Actually seeing that back in the middle of last year. So I think that cash started being consumed in that space With all the things that you've kind of seen happening with Teck, I think what happened earlier this year probably accelerated that a little bit further. But as far as where we go from here, we're being very cautious about our relationships. We're watching what's going on in the VC community, Raising capital, new codes that are being formed.

Speaker 4

We've been in that business a long, long time. We plan to stay in it. We're looking at We're very careful about where we're adding people, where we're adding relationships. And so I think that We will be in the business. I think it's probably at some point, you're going to you'll start to see cash build again across the industry and certainly at Comerica.

Speaker 4

I don't know that it's necessarily in the next 6 months. I think we've probably got a little more cash burn going on in this space. That said, we are bringing on new relationships. And as I said, we're adding people. We feel really good about the industry and the opportunity over the long term, but we probably got some time to go here of cash burn.

Speaker 4

And I think a number of these companies are going Need to raise some capital and we'll see what happens in the industry going forward.

Speaker 12

Got it. I was hoping just within the AOCI walk, if you could give us some indication as What the conditional prepayment rate you're assuming within your effective duration calculation is?

Speaker 5

Jeff Brody, it's Jim. I mean that prepayment rate varies somewhat widely depending on the type of Of course, we have some bullets in there on the commercial side that generally don't have much in the way of prepayment. And then we have a number of various tranches of MBS Securities that have some variance to them. So I don't think there's any one number that would likely answer your question, but we certainly Have prepayment rates factored into that.

Speaker 12

Got it. Is it reflective of kind of what the market is bearing on a quarter to quarter basis, Jim?

Speaker 5

Yes, absolutely. That's something we prudently do every quarter is monitor the market prepayment rate. So very much in line with the market.

Speaker 12

Got it. Great. And then I wanted to ask just on the fixed rate loan portfolio, the portion of the portfolio that's fixed rate, Yes, more purely fixed rate, not so much the swap portion. I wanted to get a sense for kind of what the quarterly repricing cadence looks Like on that and kind of what the existing yield on that book is?

Speaker 5

Yes. That book is a relatively small part Of our portfolio, less than 8% of our loans, it does yield well below our current portfolio. We haven't Disclosed the exact rate, but I would say it isn't terribly below, which isn't surprising given how fast interest rates have gone up. Contractual life on that is about 8 years, so remaining life would be about 4 years. We do see it amortizing along a pretty straight line path amongst that 4 year remaining life.

Speaker 5

And we see the I would say that fixed rate Portfolio price is up probably 15 bps a quarter. You kind of parlay that along. It's Percentage of the overall loan book, you're looking at maybe a 5th quarter of loan yields going up because of their pricing, the fixed rate book. So that will be a very Small tailwind for us, but it depends on where the curve goes, where the reprised at and how prepayment patterns kind of follow through there.

Speaker 4

It's really one of the strengths

Speaker 2

of our model is the floating rate. Most of our loans are floating rate across our portfolio. So we're able to benefit on the Actual loan book, when

Speaker 4

the interest rates are going up like this to your question there, Brody.

Speaker 5

That's right. And it gives us a little more control too because we can more synthetically manage our asset liability Position as opposed to being at the mercy of prepayment rates.

Speaker 12

Got it. And then last one for me. I just was hoping for a reminder. On the swaps, The yield that you disclosed, the $2.38 for this year, the $2.50 for next year, Are those just the received fixed rate? Or is that a net rate?

Speaker 12

And if it is just the received fixed, do you happen to Have a sense for what the current kind of pay floating rate is on those swaps?

Speaker 5

Yes. These are fixed receive rates and the pay floating is pretty much aligned with LIBOR, 30 day LIBOR previously as The quarter progressed as well as a combination of monthly sulfur and the Bisbee. Of course, LIBOR is behind us now, Pretty much aligned with monthly sulfur and monthly BISB. So that obviously is changing as the Federal Reserve makes its changes and so on.

Speaker 12

Got it. Is there any spread there over that rate?

Speaker 5

Yes. I mean, you know that Bisbee, So for depending on where we're at with the FOMC increase coming up here, obviously, you're looking at Kind of a pay rate in the 5.25 range. So that would give you the spread relative to this yield that you see here,

Operator

Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.

Speaker 2

Manan, good morning.

Speaker 11

Hey, good morning. I just wanted to follow-up on the earlier line of questioning on deposit balances. So you noted that deposits have stabilized. And if I look at your last update at our conference June to the end of the quarter, NIB has actually improved quite nicely, even if I strip out the card related deposits that you mentioned. So can you talk about what drove that and what made June just such a strong month?

Speaker 11

I know you said the conversations have moved back To business as usual, but maybe you can expand on what changed in those conversations in the last 3 weeks of June For deposit customers specifically?

Speaker 5

Yes, I would the same went on. It's Jim. Really nothing changed. We're very much on the trajectory that we had forecasted. And as I mentioned, beyond card, we did have some elevated customer balances on the non On the Permian side, really in the last few days of the month, they're no longer with us.

Speaker 5

Depending on how you think about how often those types of balances come back, we're anywhere from Another $500,000,000 to $1,000,000,000 elevated at the end of the month. But again, we often get these types of deposits too, so I don't want to fully discount them. But it is important to understand we were a little bit elevated on June 30.

Speaker 2

Yes. Mike, this is Kurt. I'll just add what I I said earlier or expound on what I said earlier, I think just as things have settled down, the Understanding that the concerns were maybe overplayed for the whole industry and customers are back just to more business as usual. They're Talking to us about credit and fee income products and services and how we can take advantage or support them from an Advisory standpoint, but I think just getting the banking crisis out of the media and just The noise that was associated with those 1st couple of months dying down has really, I think, shifted the conversation quite a bit.

Speaker 11

Got it. That's helpful. And then just separately, I realize the FDIC special assessment hasn't been finalized, But I was wondering if you know, once it's finalized, does that come out all in 1 quarter where there's a reserve? Or does it come out over the course The 2 years has the proposals to ask?

Speaker 5

Well, we're still waiting, of course, for the rule to be finalized, and there's been a lot of input provided there. So We really don't know where it's going to end up. I mean, I think the best speculation is from a cash basis, we would probably pay it Once the goal is established, but it would be recognized on an expense basis and therefore its impact to capital over a couple of years. But there are a number of variables at play there in terms of all the input being provided. So I think we just have to wait and see what the final role has in it.

Speaker 11

Got it. Thank you.

Speaker 5

Yes. It would be a one time hit to capital though once it is recognized.

Operator

Your next question comes from the line of Peter Winter from D. A. Davidson. Please go ahead.

Speaker 9

Good morning, Peter. Good morning. I was wondering with deposits closer to stabilization or the outflow slowing, Net interest margin nearing a bottom. Do you think net interest income could stabilize in 2024 relative to the Q4.

Speaker 5

We think it's getting very close with betas. Based on where the curve was on June 30, we think betas will probably stop rising once you get to around December, January. But of course, you have the Full quarter effect of that probably dipping a little bit into 2024. We're bringing loan balances down throughout the year. Most of that loan balance Stroud will occur in the Q4, so you could get a full quarter average of that kind of tripping into the Q1 of 2024 also.

Speaker 5

So just because of those quarter to quarter bleed ins, I don't know that it will be 100% stabilized in Q1 of next year, but I do think it will stabilize, If not Q1, probably in Q2. There are some other variables going on in terms of how pricing plays out in the industry that could be A potential tailwind. But yes, I think as we cross over the year, you're very close to a bottom there. And I would say by Q2, probably at an inflection point.

Speaker 9

Got it. That's helpful. And then obviously, there's a lot going on, on the expense side that's Non recurring between the pension, the modernization. Can you just remind us what a normal expense growth rate is? And is that more likely next year.

Speaker 5

We typically putting aside some abnormal ebbs and flows like those things relating to pension. I mean, we typically think of expenses as being in the 5% range in terms of what we shoot for, but that's going to vary from year to year depending on what pressures are on us. Few things like FDIC can make a difference, as that can be elevated for a year or 2 at a time. Again, pension can be a big factor. So I don't think any 1 year is ever going to exactly be the average, but over the cycle, I kind of think about it as probably 4.5% to 5%.

Speaker 9

Got it. Thanks a lot.

Speaker 5

Inflation obviously being a huge factor also.

Operator

Your next question comes from the line of Chris McGrady from KBW. Please go ahead.

Speaker 2

Good morning, Chris.

Speaker 6

Hi, Chris.

Speaker 2

Hey, good morning, Jim. Quick question on the rate outlook. Obviously, the market expects 1 next week. But if we stay in a higher for longer for the rest of the year and next year, You get the forward curve, you get a couple of cuts. Could you talk about how you think your balance sheet will respond in

Speaker 5

terms of margin performance given all the hedges you put on? Thanks. Yes. We're pretty neutral right now, Chris, in terms of our interest rate positioning. So we don't think it would be an impact Regardless of what the Fed does, we are just the slightest bit to the downside for both an up and down rate scenario.

Speaker 5

I would say the longer the Fed holds rates at a high level, I do think that's probably puts a little more pressure, the less pressure on our projections because I do think you have the potential for a very, very slow bleed if they're kept high for a very extended period of time in terms of betas and deposit flows. I don't think it's material, but I don't think it's necessarily helpful to have them elevated for an extended period of time. Great.

Speaker 2

And then my follow-up on capital. I'm interested in your thoughts on what would need to happen to return to a buyback. Obviously, we know that the regulatory is an aspect. But what is it specifically that would be the moment where you

Speaker 5

would turn it back on? Yes. I would say 2 things, Chris. 1, obviously stabilization in the overall banking industry. And I think we're doing most of it.

Speaker 5

But I think that we're not 100% as an industry out of the woods yet, even though things are very stable at Temerica. So certainly stability there would be good. And then obviously, once we understand, receive and understand the new capital rules, as soon as we can get comfortable and we are comfortable right now, but we'll wait and see How comfortable we are once the rules come out. Once we have some degree of certainty that we can hit our targets based on the new rules, I think that would put us in a position to really start thinking about share buyback.

Speaker 11

Okay. Thank you.

Speaker 5

Thank you.

Operator

And at this time, there are no further questions. I'd like to turn the call back to Curt Farmer, President, Chairman and Chief Executive Officer.

Speaker 2

Well, thank you so much everyone for dialing in and listening to the call today. As always, we appreciate your interest in our company and hope you have a good day. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Teleconference.

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Earnings Conference Call
Comerica Q2 2023
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