Lumina Gold Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to the Comerica Fourth Quarter 2023 Earnings Conference Call and Webcast.

Speaker 1

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kelly Gates, Director of Investor Relations. Please go ahead, Kelly.

Speaker 2

Thanks, Kevin. Good morning, and welcome to Comerica's Q4 2023 earnings conference call. Participating on this call will be our President, Chairman and CEO, Curt Farmer Chief Financial Officer, Jim Herzog Chief Credit Melinda Tasi and Chief Banking Officer, Peter Cepsek. During this presentation, we will be referring to slides, which will provide additional details. The presentation slides and our press release are available on the SEC's website as well as the Investor Relations section of our website, comerica.com.

Speaker 2

This conference call contains forward looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements. Please refer to the Safe Harbor statement in today's earnings presentation on Slide 2, which is incorporated into this call as well as the SEC filings Factors that can cause actual results to differ. Also, this conference call will reference non GAAP measures.

Speaker 2

And in that regard, I direct you to Reconciliation of these measures in the earnings materials that are available on our website. With that, I'll turn the call to Kurt.

Speaker 3

Thank you, Kelly, and good morning, everyone. Thank you for joining our call. Although 2023 was challenging for our industry, We felt it was a year of achievement. Following industry disruption, we protected relationships, stabilized deposits, maintain strong credit quality, enhanced our capital and took steps to position our business for future success. In fact, we delivered record average loans and record net interest income.

Speaker 3

Despite the marketplace instability, We advanced key strategic initiatives and received impressive recognition for our results. Small Business is a highlight as we initiated a national expansion Delivered award winning products and achieved our 3 year living goal ahead of schedule. Non interest income remained a priority as We launched targeted initiatives aimed at enhancing our products and increasing our mix of capital efficient income. Although the economic environment remains uncertain, we observed a cautiously more optimistic trend in customer sentiment at year end As we believe many expect less rate pressure in 2024. We remain committed to supporting our customers and feel we are With 7% growth, we produced our highest level of average annual loans, despite the impact of deliberate optimization efforts in the second half of the year.

Speaker 3

Deposits remained a targeted focus and we were pleased to see stabilization following the industry events and ongoing quantitative tightening. We delivered record net interest income aided by higher rates and loan balances. Credit quality remained strong with net charge offs well below It all was a strong quarter for the company and we ended with a good Q4. Since there were a number of notable items in this quarter's results, I'm going to hand the call to Jim to discuss those upfront and provide context for

Speaker 4

the remainder of the presentation. Jim? Thanks, Curt, and good morning, everyone. Slide 5 details the notable items Kurt referenced, most of which were furnished in an 8 ks earlier this month. As previously announced, we recorded $109,000,000 in non interest expenses related to the one time special FDIC assessment.

Speaker 4

This was unchanged from indications provided in our December update. Next was the accounting impact from the pending cessation of Bisbee Since approximately $7,000,000,000 of our swap portfolio was designated to FYSB loans. The announcement impacted our ability to maintain hedge accounting refer that portion of the portfolio and resulted in a net non cash loss of $88,000,000 The key message is that cessation does not result in These recognized losses will creep back And the normal course pay received cash settlements and earnings recognition on the swaps remain uninterrupted. While the realization of losses flowed through to our regulatory capital ratios, they did not further impact tangible common equity or tangible book value. Also note, operationally and from a customer perspective, we feel well prepared for a seamless transition.

Speaker 4

3rd on the list were $25,000,000 in severance charges, which elevated 4th quarter non interest expenses and were intended to enhance future earnings power and create We previously signaled such efforts were being considered, and we will discuss them in more detail later in the presentation. The last item does not impact bottom line results, but created line item geography changes within our income statement. The finalization of our agreement with Ameriprise to serve as our new investment platform provider caused a decline in non interest income, offsetting a decline in non interest expenses. While relatively small impact in late 2023, We noted here because we expect a larger impact in 2024. Slide 6 summarizes our 4th quarter results.

Speaker 4

Overall, the quarter performed in line with expectations, excluding notable items. Considering the impact of those items, I'm going to move to the individual line item slides to discuss quarterly results in more detail. Turning to Slide 7. Our intentional balance sheet management reduced average loans and commitments in the 4th quarter. The exit of mortgage banker finance contributed to almost half of the reduction in average balances.

Speaker 4

At year end, approximately 2 Ongoing funding of multifamily and industrial construction projects continue to drive higher commercial real estate utilization, Commitments declined for the 2nd consecutive quarter as we strategically manage pipeline and originations. The floating rate nature of our commercial loan portfolio benefited from higher rates as loan yields continued to climb to 6.38% in the 4th quarter. Slide 8 highlights the stability of our deposit base. Average deposit balances remained relatively flat to the 3rd quarter at be $6,000,000,000 even with declines of $564,000,000 in brokered time deposits and $176,000,000 related to the exit of mortgage banker finance. Growth in general middle market and corporate banking reflects seasonal patterns, while retail benefited modestly from promotional campaigns.

Speaker 4

Declines in National Dealer Services Deposits were attributed to operations consistent with inventory and utilization trends observed in that business. Non interest bearing balances performed in line with expectations and the pace of decline continued to flatten. Ongoing success in growing interest bearing deposits drove a 42% non interest bearing deposit mix, which we continue to view as a competitive advantage. Industry competition, the rate environment and successful promotional campaigns drove deposit costs higher to 312 basis points, Resulting in a cumulative beta of 58% in the 4th quarter. Our deposit profile has historically been a strength With our favorable mix, operating nature of our accounts and uninsured trends, we feel it is even more compelling.

Speaker 4

As shown on Slide 9, we continue to normalize our liquidity position using excess cash to repay wholesale funding while retaining significant capacity. We absorbed $1,200,000,000 in maturing FHLB advances and allowed over $500,000,000 in brokered time deposits to mature in the quarter. We expect decisions on future wholesale funding maturities to follow the normal course monitoring of balance sheet dynamics and funding needs. At 78%, our loan to deposit ratio remained favorable and positions us to prioritize high return loan growth going forward. Period end balances in our securities portfolio on Slide 10 increased approximately $550,000,000 As pay downs and maturities were more than offset by a $975,000,000 positive mark to market adjustment from rate movements late in the quarter.

Speaker 4

Treasury maturities and anticipated securities repayments are projected to benefit net interest income and AOCI, And we anticipate a 25% improvement in unrealized securities losses over the next 2 years. Turning to Slide 11. Net interest income decreased $17,000,000 to $584,000,000 driven by higher rates and deposit mix As volume changes related to loans, deposits and wholesale funding were largely offset by lower balances at the Fed. Successful execution of our balance sheet optimization strategy has allowed us to reduce wholesale funding and enhance margin. As shown on Slide 12, successful execution of our interest rate strategy and the composition of our balance sheet positions us favorably for a gradual 100 basis points or 50,000,000,000 points on average decline in interest rates.

Speaker 4

Of note, Bisbee's cessation did not impact the ongoing cash flow associate it with our swaps listed on the slide. While we took a loss in the 4th quarter, we will accrete that loss back With the majority coming back into net interest income in 20252026. We expect the impact in 2024 to be relatively muted, Although there may be some mark to market volatility until we fully redesignate remaining impacted swaps to SOFR. By strategically managing our swap and securities portfolio while considering balance sheet dynamics, we intend to maintain our insulated position over time. Credit quality remains strong as highlighted on Slide 13.

Speaker 4

Modest net charge offs of 15 basis points remained below our normal range And the few we had were more concentrated in relatively higher risk portfolios. We observed some normalization in general middle market and corporate banking as rates pressured customer profitability. These normalization trends drove a slight increase in the allowance for credit losses to 1.40 percent of total loans. Nonperforming assets increased, but still remained historically low. Overall, our portfolio continued to perform as expected, include $93,000,000 in notable items.

Speaker 4

Excluding the impact of these items and an increase in deferred compensation, which is offset in expenses, Non interest income performed in line with guidance. While we continue to expect non customer income in 2024 to come down from elevated 20 We remain committed to investments to drive capital efficient fee growth over time. Expenses on Slide 15 included $132,000,000 in notable items. Beyond those items, increases in salaries and benefits Reflected the impact of higher deferred compensation offset with the non interest income. Increased consulting expenses are attributed to advancing Strategic and risk management initiatives and a smaller gain on the sale of real estate in the 4th quarter had the net impact of increasing expenses.

Speaker 4

Moving to Slide 16, we previously communicated an intention to address growing expense pressures and the structural impact to industry profitability In addition to our normal efficiency efforts, this slide details incremental actions to recalibrate expenses In support of investments and enhanced earnings. Through this process, we are prioritizing customers and positioning the business for future success. Complementing efforts already underway to rationalize real estate, we initiated a plan to further reduce our physical footprint, Including the closure of 26 banking centers, where we assess nominal customer impact. In order to enhance colleague efficiency and keep decision makers close to our customers. We are streamlining our management structure and eliminating select roles.

Speaker 4

When combined with the impact of banking center closures, These actions eliminated approximately 250 positions. Further, we are optimizing our product offering to enhance capital efficiency and returns, And select contracts are being reviewed for renegotiation. In total, these actions have the effect of reducing expected 2024 by $45,000,000 growing to an estimated benefit of $55,000,000 in 2025. These decisions are challenging and we do not take them lightly, but we feel they are necessary to support the sustainable growth of our business. Slide 17 highlights our solid capital position.

Speaker 4

Even with the impact of notable items, our estimated CET1 grew to 11.09%. Great movement, coupled with continuous pay downs and maturities in our securities portfolio, reduced losses within AOCI and increased tangible common equity The 6.30 percent. Based on the December 31st forward curve, we expect our unrealized losses to reduce by onethree by the end of 2025. Although the proposed capital changes do not apply to us based on our asset size, We favor a conservative approach in capital management and plan to monitor ongoing AOCI volatility and regulations as they evolve. Our outlook for 2024 is on Slide 18.

Speaker 4

We project full year average loans to decline 1% to 2% impacted by optimization trends late in 2023. While we expect some impact of selectivity to continue into the Q1, We anticipate 5% loan growth from December to December with contributions from almost all businesses. Full year average deposits are expected to be down 1% to 2% from 2023, but we project relative stability point to point. Following a seasonal decline in the Q1, we expect customer deposits to stabilize and rebound in the second half of the year. Based on the twelvethirty one forward curve, we expect full year net interest income to decline 11% from 2023, Driven largely by year over year deposit mix.

Speaker 4

We expect deposit seasonality and to a lesser extent, Less income from Bisbee redesignation, slightly higher deposit betas and lower loan balances to impact 1st quarter net interest income. From there, we expect a small uptick in the second quarter and more pronounced growth in the second half

Speaker 5

of the year. As it

Speaker 4

relates to Bisbee hedge accounting, Interest rates and timing of re designation could create volatility, but we expect to eliminate most or all of that potential volatility from transition of indexes by the end of the Q1. Credit quality remains strong and we expect continued migration to be manageable. We forecast full year net charge offs to move into the lower half of our normal 20 to 40 basis point range. We expect non interest income to grow 6% on a reported basis, which will be relatively flat year to year when adjusting for notable items. As we signaled last quarter, we expect FHLB dividends, price alignment income from hedges and BOLI to decline from elevated levels.

Speaker 4

Customer income is expected to increase modestly with growth in fiduciary and capital markets and deposit service charges, Partially offset by pressures in card, commercial lending fees and the assumption that favorable mark to market derivative adjustments do not repeat. Full year non interest expenses are expected to decline 4% on a reported basis, but grow 3% after adjusting for notable items. Through successful execution of our expense recalibration efforts, we believe we have created capacity to prioritize investments designed to further enhance our funding base, Revenue mix and capital efficiency as well as risk management framework. Even with 5% projected point to point loan growth, We expect to maintain capital well in excess of our 10% target. We will continue to monitor AOCI volatility and the evolving regulatory environment As we evaluate the right time to resume share repurchases.

Speaker 4

In all, we are proud of our year, and we feel we've taken the right actions to support the future of our business. Now I'll turn the call back to Kurt.

Speaker 3

Thank you, Jim. Despite the industry volatility in 2023, We think it is important to take a step back and reinforce that our core business remained unchanged as shown on Slide 19. As a leading bank for business with strong wealth management and retail capabilities, our tenured colleagues deliver value added expertise to our impressive customer base. Our highly regarded approach to credit continued to perform well and has historically outperformed our peers. Tailored products are designed to meet the needs of our customers, enhancing revenue and retention.

Speaker 3

Our deposit profile has long been a strength Investments in products and small business are expected to make this core funding source even more compelling. Actions to recalibrate our expense base are designed to benefit our future. And at well over 10% strategic capital target, we believe we have a strong foundation. In August, we will celebrate our 175th anniversary. You not achieve that kind of longevity without proving time and time again In 2023, our model proved resilient.

Speaker 3

Our colleagues rallied to support our customers to an uncertain time And we delivered record results. As we look forward into this milestone anniversary year for our company, I'm confident in our ability to deliver for our customers, colleagues and shareholders. We appreciate your time this morning and be happy to take some questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is coming Peter Winter from D. A. Davidson.

Operator

Your line is now live.

Speaker 1

Good morning, Peter.

Speaker 6

Good morning. So There's been a lot of focus this earnings season on kind of a normalized margin range. I'm just wondering As some of these swaps mature, what the margin could get back to? Do you think it could get back to Those pre COVID levels in the 3.50 range?

Speaker 4

Yes. Good morning, Peter. As you may know and recall, I don't like to get real specific on margin. I think this quarter is a great example of that where we actually Had a decrease in net interest income, but we had an increase in NIM. So bank with our business model, we have some lumpiness.

Speaker 4

You can get those correlations don't match up. But I do see NIM trending in a very good direction. We ticked up this quarter. We will have a little bit of a tick down next quarter as the Q1 guidance would imply based on the percentage growth that we put in the outlook. But then we see a steady climb from there.

Speaker 4

I do see us by the end of 2024 Actually getting above where this past Q4 was and then we continue to project up from there throughout 2025 as we have swaps and securities roll off and We get into a more normalized environment. So I do see a lot of momentum building for us in the second half of this year and I see that momentum actually accelerating As we move through 2025. And of course, that's exclusive of the Bisbee hedge accounting We're actually going to have significant income added to 2025 on top of the factors that I just talked about.

Speaker 6

Got it. Thanks, Jim. And then just a follow-up. You had really nice growth in the CET1 ratio and even adjusted for I'm just wondering, you mentioned in the prepared remarks looking at AOCI, but what are some of the parameters you're looking for to resume share buybacks? And then how much capital do you accrete on a quarterly basis?

Speaker 4

Yes. Peter, number 1, I do think we're on a very good track to comply with volatile 3 endgame rules should they end up applying to us. But with that said, we do have a little bit of flexibility based on the fact that we are in pretty good shape there. The number one thing that I continue to keep an eye on is LCI. It did come down significantly this quarter.

Speaker 4

Let's keep in mind, it came down after a number of And then since then rates have ticked back up again. So I don't want to declare a victory yet on the AOCI front. For us, we're the whole industry. I It looks like things are going in a good direction and we're certainly going to be in very solid shape to comply with any capital rules. But before we start the Sherwood purchase up again, I would put AOCI at the top of the list that we want to keep our eye on to make sure that doesn't tick the other direction again.

Speaker 4

A little more line of sight into what the overall economic environment is from an interest rate standpoint and just overall uncertainty standpoint. But it does appear we are going to be in shape at some point to start Share repurchase, but we want to be cautious and we will be cautious this year. Certainly, in the first half of the year, we won't be active in share repurchase. We'll keep our options open in the second half of the year, but I'll say that even there, we will likely be cautious unless we get a better line of sight in terms of raise an overall economic stability.

Speaker 6

And how much capital do you accrete Roughly on a quarterly basis?

Speaker 4

Well, it's going to depend on the quarter and the year and what's going on in the economy. I can tell you that in 2024, We will likely not accrete a lot of capital, maybe a tad bit above where we ended the year, but with 5% point to point growth, Even though we're going to have, I think, strong earnings next year, I don't think you're going to see us significantly above where we ended the 4th quarter. I think as you move into 2025, you're going to start seeing some nice accretion from that point on. Thanks, Jim.

Operator

Thank you. Our next question today is coming from Manan Gosalia from Morgan Stanley. Your line is now live.

Speaker 3

Good morning,

Speaker 7

Manan. Hi, good morning. I wanted to ask on your loan to Deposit ratio ticked down again in the quarter to about 78%. I get that You're looking for 5% loan growth point to point next year and you might be bringing in deposits ahead of that. But I guess if The loan growth is contingent on rates coming down.

Speaker 7

Why pay out for deposits now? Why not bring in the deposits later as the loan growth comes in? And what is the right loan to deposit ratio to consider as we look out into the end of 2024?

Speaker 3

This is Kurt. I might start and then ask Jim or Peter to add in. But on the deposit front, maybe just to keep the Perspective here is that we consider deposits part of full relationships with clients. And we have clients for whom we have lending relationships And clients for whom we have deposit relationships and clients for whom we have both. But in the case of growing deposits, we're going to grow deposits sort of in line of taking care of our customers and having lived through what the whole industry lived through last spring, I don't believe this is an environment where we're going to look any deposits, turning deposits away for lack of a better definition.

Speaker 3

We do believe that that loan to deposit ratio will go up some, but we should be able to comfortably stay within our target, we believe kind of in the mid-80s, Even with the point to point growth that we're expecting in 2024.

Speaker 4

Yes. Two points I would add on to that, Manan. I mean, we love deposits Regardless of loans, I mean, we're making money on these deposits. We're not holding capital on them. We love deposits just for what they represent amongst themselves.

Speaker 4

But having said that, we certainly don't want to operate in a just in time funding capacity for loans. I mean, we want to make sure we're prepared for when that loan comes. You can't necessarily turn deposits on a dime, but we welcome the deposits. We're not going to turn them away. We're making Money on them and they continue to add to the stability of the overall franchise.

Speaker 7

Great. And maybe a follow-up there On deposits, as rates start to go down, given your skew to commercial, how should we think about Those deposit betas on the way down. If we do get the 6 rate cuts or even more than that as we get into 2025, Do you think the first few rate cuts are more beneficial given your SKU to commercial or should you start to see more momentum in deposit costs coming down as you get into

Speaker 4

Yes. Every cycle is different, so it's hard to say for sure. But I think in this particular cycle, We could see a little bit of symmetry or what I might call LIFO approach, last in first out. I mean, certainly, we saw betas accelerate towards the end of the cycle. Even in the last couple of quarters without Fed hikes, we've seen deposits continue to tick up.

Speaker 4

And so just as we've seen them more accelerated in the second half of the cycle, I think those might be the most sensitive deposits that we can take back down early in the falling rate cycle. So I am somewhat cautiously optimistic. We are assuming in the outlook about a 60% beta with not too big of a lag following the 1st rate cut. Having said that, every cycle is different. And I do recall back in 2019, the Fed cut 50 bps, I believe, in July of 'nineteen.

Speaker 4

And I didn't see a lot of falling rates in the industry overall. That was a very controlled environment where The economy was still relatively strong and I continue to think that the reason for the Fed cuts is really going to drive that beta. If it's a very orderly take down of rates and the economy continues to be very strong, it may be a little stickier to bring them down. But if the Fed reduces rates because there is a little weakening in the economy, I think that gets banks full of more leverage. So I would just emphasize that every cycle is different, but we do think there is that potential for some significant beta in those first few cuts.

Speaker 7

Great. And do you have what percentage of your deposits are directly indexed to the Fed contract?

Speaker 4

Most of our deposits or not. We're very much a relationship based bank

Speaker 7

and many of those

Speaker 4

are 1 on 1 conversations with customers. We do have some reciprocal deposits that are you can consider to be somewhat indexed. Obviously, the broker deposits, their time deposits are somewhat Index you can consider, but the vast majority of our deposits are not.

Speaker 7

Great. Thank you.

Speaker 4

Thank you.

Operator

Thank you. Next question is coming from John Pancari from KeyBanc Capital ISI. Your line is now live.

Speaker 3

Good morning, John. Good morning.

Speaker 8

Good morning. First question just around the loan growth expectation, the 5% point to point expectation. Can you give us a little bit of Where do you see the loan growth drivers coming from and when do you really see an acceleration there in overall loan growth

Speaker 9

John, this is Peter. So It's actually pretty broad based. I mean, we mentioned this morning, we still have a little bit of mortgage banker finance at the end of December that will be Working against us a little bit through the year, but then across the rest of our businesses, it's pretty broad based. I do think I think dealer probably has Sort of momentum going into 2024 that will continue throughout the year. Our EFS business, I think is a business that If you kind of look in the appendix, we've shown has dropped a couple of quarters.

Speaker 9

I think it'll probably drop Q1, but we think it'll pick up quite a bit going into 'twenty four. But really broad based across middle market, we feel like we've got some really good momentum. I would tell you that we feel like Customer sentiment changed a little bit in the Q4 in the right direction and sort of our informal surveys that we do internally with everything seems to indicate that, there's going to be some more demand as we get into what I would really say the Q2 to answer your question, probably second, Q3 Is where I think we'll start to see that pickup. I don't as we talk about today, our outlook on Q1 is pretty flat to down a little bit. But I think as we get into the middle of the year, We're getting indications that we'll start to see some real good loan growth that results in that 5% point to point.

Speaker 8

Great. Okay. Thank you. That's helpful. And then separately, your guidance implies, Call it ballpark about 900 basis points or so of core negative operating leverage Based upon the midpoint of the guide and I'm just wondering if revenue if the revenue picture Ends up being more pressured than you currently forecast.

Speaker 8

Do you have expense flexibility to improve that Operating leverage, I know you set out the $45,000,000 in expense reduction from the recalibration in 2024. Can that Recalibration benefit that $45,000,000 cannot go up if revenue is pressured to a greater degree? Thanks.

Speaker 3

John, as Jim said in his prepared remarks that 45 $1,000,000 becomes $55,000,000 on a run rate basis in 2025. And this is an interesting period of time. The whole industry has gone through an inflection in 2023 and somewhat of a recalibration to use your words. We've tried to be thoughtful in terms of balancing the things that we believe are driving revenue for us and will drive revenue for us Going forward, that includes some of the products that we've invested in, especially in treasury management, payments, capital markets, wealth management. It also includes the focus on small business expansion into new markets into the Southeast and into the Mountain West, Colorado region.

Speaker 3

And so we want to stay focused on those because we're trying to really play the long game here and try to get beyond sort of the immediate environment that we're operating in. And then secondly, I would say, while we did have some expense initiatives in the quarter, we're always thinking note additional efficiency opportunities. And again, it's all about sort of balancing between those 2. And so, my hope is that, we would see Positive operating leverage, really based on overall revenue growth and a return to a more normalized interest rate environment and Hopefully, a soft landing on the economy and a lack of further credit deterioration, etcetera. If we don't see that then obviously we need to think about what else we can do from an efficiency standpoint.

Speaker 8

Thank you. And just regarding that, when do you expect you could break into more of a positive operating leverage trajectory?

Speaker 4

Yes. John, it's Jim. I mean, number 1, just to build on Curt's comments, I do think 2024 is a bit of a transition year, not just for us, For the whole industry, I think you're hearing that from some of the other calls too. We're in this kind of tweener stage where interest rates continue or pay rates and deposit continue to edge up a little bit. Yet, the Fed isn't raising rates.

Speaker 4

So that makes it a really challenging year. I do think things will start to move in the positive operating leverage direction in 2025. We don't have a complete line of sight into that yet, but I mentioned how we expect the interest income to really have some great momentum as we enter into 20 25 and of course that's always the goal to have a positive operating leverage. And on the topic of expenses, I'll just add that I think that really is a journey not a destination. We always have to be looking at expenses.

Speaker 4

I don't think this will be the end of taking a really hard look at what we can do over time. And I think of expense reduction is really having a purpose for 2 fold. 1 is to create capacity for investment, which continues to be critically important, probably more so now than ever. And then secondly, to make sure we get that positive operating leverage. So we will continue to kind of keep an eye on not just normal budget hygiene, but actually seeing what more significant steps we can take over time.

Speaker 4

So As I said, a journey, not a destination. And I think 25 should have things moving in better direction, but again, not a complete line of sight into that.

Speaker 3

Okay, great. Thanks, Jim.

Speaker 4

Thank you.

Speaker 1

Thank you.

Operator

Our next question is coming from

Speaker 1

Jon Arfstrom from RBC Capital Markets. Your line is now live.

Speaker 10

Hey, thanks. Good morning, Jon. Good morning, everyone. Hey, good morning. Question on your net interest income guide.

Speaker 10

What kind of rate assumptions do you have in that? And any kind of rate scenario that you think It derails that from what you're thinking today.

Speaker 4

Yes. Good morning, John. Yes, we did assume the twelvethirty one forward which has almost 6 rate cuts in it. You'll notice on our asset sensitivity page that for the first time that I can recall at least, We became liability sensitive. So I think this is a very fortuitous time for us to become liability sensitive with potentially fixed rate cuts out into the future.

Speaker 4

We do have the sensitivities there using a 60% beta. You can see that we do benefit from Following rates, assuming that we can reprice as expected without too much of a lag. So I would say if we get fewer cuts than that, That will put a little pressure on that outlook, but we are benefiting from the twelvethirty one curve if we really do get those 6 cuts. So That's the assumption and we'll continue to monitor and we'll see where the economy and where the FOMC goes.

Speaker 10

Okay. Yes. A lot going on this morning. I had to rub my eyes when I saw that slide. I guess my one of my follow-up questions and maybe you answered it is do you And I guess the answer is no at this point.

Speaker 4

That's what our models would say. You never know how customers are going to react and the competition is going to He's going to react, but I would say we're a little more liability sensitive than we are asset sensitive. Now that liability sensitive could have A little bit more of a lag in it than what we're projecting. We just don't know how customers and competition will react. But over the course of time, it does appear that we are a little more liability sensitive.

Speaker 10

Okay. Point of clarification on the expense piece of it. Is it $45,000,000 in $24,000,000 and an incremental $55,000,000 in $25,000,000 or an incremental $10,000,000 in 2025? Incremental $10,000,000 Okay. Good.

Speaker 10

And then one, Melinda, I thought you'd get a pass, but I just I wanted to ask one credit question.

Speaker 4

Sure.

Speaker 10

On Slide 13, that bottom right corner where you show the percent criticized In POS Leveraged and Auto. Curious how elevated is that relative Normal, I don't know if there is a normal, but how elevated is that? And what does it take for those to come back down?

Speaker 11

Yes. Thanks for the question. I mean, Not surprisingly, but a positive surprise this quarter was that we actually saw improvement in 3 of the for incremental monitoring portfolios. So we saw balances and criticized assets go down in TLS leverage and automotive production. I would say that that leverage portfolio at 10% to 12% is about normal.

Speaker 11

That is an elevated higher risk portfolio by its very design. TLS Again, it's going to be elevated above the normal portfolio at 18%. I would say that's still above sort of historical norm. But we are seeing positive momentum in TLS. Certainly, the rate environment, if it cooperates with the full term, is going to be a real positive For that segment as well as leverage, you didn't ask about commercial real estate specifically, but we did see that one relatively flat in the 4th quarter.

Speaker 11

So we've got some assets That are moving into the criticized bucket, but we also have assets that are moving out of the criticized bucket and they move out when they either pay off Or we re margin them and get them back into a conforming state. So I feel really good about all of those portfolios that are listed there on the right And would expect that we should again, if the rate environment cooperates and we don't see a downturn in the economy that we'll continue to see these Stable to potentially improving towards the back half of the year.

Speaker 10

Okay, good. That's very helpful. Thank you, Melinda.

Speaker 3

Welcome. Thanks, John.

Operator

Your next question today is coming from Steven Alexopoulos from JPMorgan. Your line is now live.

Speaker 3

Good morning, Steve. Good morning, everyone.

Speaker 5

So I want to start By going back to your answer to Peter's question, the first question on NIM. And it's funny, for all the years I've covered the I think you were the most asset sensitive. And if you look at the historical NIM range, it's literally all over the place. And Jim, what you've done now is you've basically the balance sheet. So it's fairly neutral.

Speaker 5

Even if I look at this 100 basis point gradual and 60% beta, it's like 6 bps or so benefit to NIM. So assuming that we get here, let's say the forward curve plays out and we go to 100 basis points Does that imply your NIM, the new NIM for Chlamyrica is like 3, Right. Historically, I mean a year ago you were 3.74, comes down a ton. And I'm trying to figure out like what the hell does the margin look like at this With this balance sheet in a normal rate environment that has actual steepness to the curve. And are you basically a 3% margin bank now because you've taken away the asset sensitivity?

Speaker 4

We have bounced around quite a bit over time, Stephen, and we didn't necessarily think that was always a great thing. I do think stability is important. The rate environment is one factor. Again, just the overall construction of the balance sheet and the lumpiness and the amount of cash we're carrying or securities We're carrying is also a factor. And just again, our business model creates a little bit more lumpiness in that regard.

Speaker 4

So we would like a little bit more stability. As I mentioned in the in Peter's question, I do see our trajectory going north of where we ended here and I think we'll continue to go north As we move through 2025, so we're above 3% on a normalized basis and I think we are going to have a much more stable NIM and net interest income earnings capacity going forward. Don't necessarily want to give an exact number, but it is north of 3% for

Speaker 3

sure. Okay.

Speaker 5

Okay. That's helpful. But keep in mind, that's why generalists don't put their money in regional banks because the black box and The management team don't really help shed some light on what expectations are. I want to ask on expenses too. So you guys are guiding to around 3% operating expense growth in 2024 and that's with the benefit of the new initiatives.

Speaker 5

Just a big picture view, why is expense growth at the company so much higher than other regionals? I'm sure you look at all the other regionals, it's higher. And then if we think about 2025, if you don't announce another initiative, should we expense the growth rate to lift off of 3? Thank

Speaker 4

you. Many of the expenses that we have in 2024, a lot of the investment we're making It's not ongoing run rate. A lot of it is more one time effort to get some of these initiatives up and running, whether they're on the revenue side, the product side or the risk Management Framework side. So I wouldn't necessarily assume that the expenses that we are incurring in 2024 all carry over to 2025. But we are in an investment mode.

Speaker 4

I mean, I think we may be underinvested in certain years if you go back historically. So I do think there's a little bit of catch up going on, but we are to make sure that we can compete in the years coming forward. And we do think a certain amount of investment is required there. And we feel comfortable it's going to pay off.

Speaker 5

Can you expand on that Jim? Like where did you under invest and where are you catching up now?

Speaker 4

Well, I would say, number 1, some of it is just moving with the times The digitization and some of the online capabilities, but I would also say that whether it be risk management framework or some of Product innovation, I just don't think we necessarily always invested as much as we could have historically. And rather than trailing on that front, we'd rather be leading. We think the easier thing to do would be to hunker down and just start the company, and that's not something we want to do. So we feel like we're doing the right thing, and we do feel like it's going to pay off the

Speaker 3

Steve, this is Kurt. I just would add that we as I said earlier, we are focus on top line revenue growth. We believe we have opportunities on both the fee income side and with the loan portfolio. But certainly, if we do not see growth materializing, if the economy does not move in the right direction, if interest rates don't move in the right direction, Allowing us to get some relief on deposit betas, etcetera. Then we'll continue to look at expense opportunities.

Speaker 3

I'd also add that part of this from a risk framework standpoint is continued investment and preparation potentially being over $100,000,000,000 or if Basel III requirements step down to banks sub $100,000,000,000 kind of in our category of $86,000,000,000 Got it.

Speaker 5

Okay. Thanks for taking my questions.

Speaker 3

Thanks, Steve.

Operator

Thank you. Next question is coming from Chris McGrani

Speaker 12

Sorry about that. Good morning. Sorry about that.

Speaker 7

On the

Speaker 12

expenses, the Jim, I think you've talked historically about Roughly $50,000,000 for the $100,000,000,000 rules as you kind of know them today. How much I guess, how much remind us how much you've accrued is in the guide for 2024 related to that?

Speaker 4

I would say we have a Small portion of that in the guide for 2024. The vast majority of that $50,000,000,000 is probably more likely to be in future years as we get closer to $100,000,000,000 but there are several $1,000,000 in there as we really try to address those things. A Category 4 that we think have a longer runway to get ready for. So those items that we think would take, say, 2, 3, 4 years to really be ready. We're getting those things in motion now.

Speaker 4

There's a the majority of the Category 4 Requirements we either already have or if we don't have them, we think we could complete them within 1 to 2 years. And so we're holding off on that. The majority of the $50,000,000 is still out there in the future, but we do have some of that in the run rate in 2023 and a little bit more in 20 24.

Speaker 12

Okay, great. And then maybe one for Kurt. I think The Street's got you roughly a low teens return on tangible common equity Can you maybe elaborate on how you think of the return potential of this company? Obviously, you've got A much more stable margin over time, but you're also balancing some of the investments.

Speaker 3

Yes, I wouldn't maybe give a forecast exactly around returns or even multiples on the company. But I would say that We believe that based on the comments we made earlier, certainly 'twenty three was a disruptive year and a reset for the 3 and 24, I think is some recalibration.

Speaker 12

I believe that interest rates are going

Speaker 3

to come down and when they do, I think it will have a positive impact NII for us and we believe as we said earlier that in the latter half or second half of the year that we will start seeing NII return. We think we've got great On the fee income side and we showed that in 2023 and we think we've got good growth opportunities in terms of the loan portfolio. And so Our goal is to get to positive operating leverage and believe that we can return at a level that's commensurate with the industry overall or better from a longer term perspective, but 2024 will be somewhat of a continued inflection year.

Speaker 12

Okay, great. Thanks for the color.

Operator

Thank you. Next question today is coming from Brody Preston from UBS. Your line is now live. Good morning, everyone.

Speaker 3

Good morning, Brady.

Speaker 1

Jim, I was hoping maybe you could help We nail down the cadence of the kind of Bisbee So, amortization, the accretion in the NII, how much of that? I think you said most of it's in 2025 and then into 2026, but How much of it happens in 2024 and then how much happens in 2025 and 2026?

Speaker 4

Yes. Good morning, Brody. Yes, we don't have a 100% clear line of sight into that because out of those $7,000,000,000 of Bisbee hedges or hedges dedicated to Bisbee loans. A little less than $3,000,000,000 of them are not re designated yet because We have not generated enough SOFR loans to redesignate those particular hedges. We do expect to have that complete At least largely complete by the end of the Q1.

Speaker 4

And I think at that point, we actually have a fair amount of certainty as to how it lays out. But in general, the way it looks right now with the forward curve, and this is exclusive of what I offered in the guidance, because again, there's a lot of uncertainty there. There is likely a very somewhat mild negative impact in 2024. To the extent there is any kind of negative impact, you accrete that back in later years. So again, it's not an economic loss.

Speaker 4

And then we are very likely to get the vast majority of it Back in 2025, think of it as maybe north of 80% of that loss accreted back in 2025. And then most of the remaining after that will come in 2026.

Speaker 1

Got it. Thank you. That's helpful. I guess if I could just ask one fine point just on the first Should we see something similar to what we saw this quarter, maybe not in terms of size, but just directionally where there's a Negative kind of nonoperating impact to fee income and maybe a small positive impact to NII?

Speaker 4

It really depends on the rate curve that's going to drive it, maybe to a lesser extent the timing and when we re designate. Certainly, it's going to be a small fraction of what you saw in the Q4. And again, whatever you do see will simply accrete back in future quarters. So I don't think there's I know there won't be any kind of economic surprise there. But from an accounting and recognition standpoint, there will be a little volatility in the Q1.

Speaker 4

And again, we'll create that back in later quarters and likely mostly in 2025. But a little bit of volatility in Q1, but also a large amount of not complete certainty after Q1 also and we can lay out that exact guidance and cadence.

Speaker 1

Got it. So you don't have the dollar impact for the first an estimate for the dollar impact to NII for the Q1 yet from this from the busy stuff?

Speaker 4

We don't. We need for the dust in terms of just getting the rest of these redesignated and where the rate curves will drive that and again, will be made whole ultimately over the next couple of years.

Speaker 1

Got it. Okay. If I could ask just another one on the NII guide for the year. I think you said it was a 60% beta that you were Running through the guidance, do you happen to have what the noninterest bearing deposit mix that's underlying the guidance is for next year?

Speaker 4

Yes, we continue to think that we're going to bottom out in the low 40s or very near 40%. So we've been pretty consistent on that over the last 2 to 3 quarters. Of course, a big driver of that isn't so much even just non interest bearing deposits, but where interest bearing goes. And We do plan on having great success with interest bearing deposits as it relates to customers. On the other hand, at some point, we probably will pay down some of these broker deposits that we have That's really a form of wholesale funding that all banks make some degree of use of.

Speaker 4

So the overall level of interest bearing will of course play some optical games with But our base case is to be in the low 40s towards nearing that 40% point.

Speaker 1

Okay. And then I did just want to ask on the liability sensitive disclosure. Could you maybe help me think about the moving parts that make you liability sensitive just because like if I just simply looked at you versus a lot of your peers, 40%, 41%, 42%, whatever it is right now, NIB and still effectively 60%, I think floating rate loans, like both of those items, 60% might be closer to what I would call regional bank kind of average for floating rate loans, but the 42% NIB is Still above average, so I would holistically think about you as being mildly asset sensitive, but what are the moving parts elsewhere on the balance sheet that Push you towards liability sensitivity.

Speaker 4

Yes, that's a good point. And we do stick out in a very good way with our High level of non interest bearing deposits in the mix. Where we also stand out and because we have that higher level of non interest bearing deposits, we did put more swaps And securities on the book to manage to a more interest neutral position over the last year. And so that's exactly why we added those hedges and that's what's offering us the protection in a down rate environment.

Speaker 1

Okay. So It's mostly the hedges then, I guess, combined with all the securities balances.

Speaker 4

Yes. I mean, it's the we always look at it holistically between both the edges we put on in the form of both swaps and securities. But that's the balancing x factor to your equation there.

Speaker 1

Got it. And then last one from you is just around the broker deposits. I think the guidance assumes flat broker deposits moving forward. I guess, would you look to use the securities maturities kind of Exclusively to pay on borrowings or is there opportunity to kind of run off broker deposits next year even though it's not contemplated in the guide?

Speaker 4

Yes. I would say the runoff of securities will be used for a combination of funding loan growth and reducing wholesale funding. And I think of wholesale funding as both being some of the debt borrowings like FHLB, any security maturities we might have or bond maturities we might have And broker deposit maturities. So, but we saw a mixture that goes on there in terms of the overall formula. But I suspect over time and it's actually a goal of ours to reduce broker deposits over time.

Speaker 4

So at some point, you will see a reduction there. And securities maturities will be one of the inputs to that equation.

Speaker 1

Thank you. We've reached the

Operator

end of our question and answer session. I'd like to turn the floor back over to President, Chairman and Chief Executive Officer,

Speaker 1

Curt Farmer.

Speaker 3

Let me again thank everyone for joining us today. As always thank you for your interest in our company in Comerica And I hope you have a nice day.

Speaker 1

Thank you. That does conclude today's teleconference and webcast.

Operator

You may disconnect your line at this time and have a wonderful day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Lumina Gold Q4 2023
00:00 / 00:00
Remove Ads