Comerica Incorporated : 2023 Quarterly Earnings Q3 Earnings Transcript

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EDITED TRANSCRIPT

CMA.N - Q3 2023 Comerica Inc Earnings Call

EVENT DATE/TIME: OCTOBER 20, 2023 / 12:00PM GMT

OVERVIEW:

Company Summary

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Curtis Chatman Farmer Comerica Incorporated - Chairman, CEO & President

James J. Herzog Comerica Incorporated - CFO & Senior EVP

Kelly Gage Comerica Incorporated - Senior VP & Director of IR

Melinda A. Chausse Comerica Incorporated - Senior EVP & Chief Credit Officer

Peter L. Sefzik Comerica Incorporated - Senior EVP & Chief Banking Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brandon Thomas King Truist Securities, Inc., Research Division - Associate

Broderick Dyer Preston UBS Investment Bank, Research Division - Analyst

Christopher Edward McGratty Keefe, Bruyette, & Woods, Inc., Research Division - Head of United States Bank Research & MD

Ebrahim Huseini Poonawala BofA Securities, Research Division - MD of United States Equity Research & Head of North American Banks Research John G. Pancari Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

Jon Glenn Arfstrom RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst Kenneth Michael Usdin Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

Manan Gosalia Morgan Stanley, Research Division - Equity Analyst

Peter J. Winter D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

Steven A. Alexopoulos JPMorgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks

P R E S E N T A T I O N

Operator

Hello, and welcome to the Comerica Third Quarter 2023 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kelly Gage, Director of Investor Relations. Please go ahead, Kelly.

Kelly Gage - Comerica Incorporated - Senior VP & Director of IR

Thanks, Kevin. Good morning, and welcome to Comerica's Third Quarter 2023 Earnings Conference Call. Participating on this call will be our President, Chairman and CEO, Curt Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Chief Banking Officer, Peter Sefzik. 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 in the Investor Relations section of our website, comerica.com.

This conference call contains forward-looking statements, and in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. Please refer to the safe harbor statement in today's earnings presentation 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. And in that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on our website comerica.com. With that, I'll turn the call over to Curt Farmer.

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

Curtis Chatman Farmer - Comerica Incorporated - Chairman, CEO & President

Well, thank you, and good morning, everyone. Thank you for joining our call. Today, we reported third quarter net income of $251 million or $1.84 per share, exceeding expectations. Deliberate optimization and moderation in customer demand drove a decline in average loans to $54 billion. Successful execution of our targeted deposit strategy grew customer balances, enabling us to repay $5 billion in maturing FHLB advances. Our continued focus on fee income produced another robust quarter and credit quality remained very strong with modest net charge-offs following 3 consecutive quarters of net recoveries. Complementing our compelling financial results, we advanced other strategic initiatives. Small business remains a priority, and I'm excited to announce that we exceeded our $5 billion lending goal ahead of our 3-year commitment.

With our investments in talent, products and services for this important sector, we believe small business will become a growth engine over time. Achievements such as publishing our first financed emissions report, making community development investments and recognition for our volunteer program further underscore the value we place on supporting the communities we serve. Advancing our Ameriprise partnership and selective talent acquisition within Wealth Management, position us to achieve our noninterest income objectives while deepening customer relationships. We continue modernizing our approach to technology to better enable agile product enhancements as we leverage off-premise platforms to run over 3/4 of our business applications. Progress towards these initiatives allow us to balance the strength of our legacy for the future vision to sustainably support our customers as a trusted banking partner.

Moving to a summary of our results on Slide 4. Average loans declined $1.4 billion with the largest reduction resulting from our strategic exit of Mortgage Banker Finance. Success in winning new deposits and bringing back customer balances drove an increase in average deposits of $1.6 billion. Net interest income exceeded expectations for the quarter, even with the impact of competitive deposit pricing and loan trends. Credit quality remained very strong despite continued expected migration. Outperformance to noninterest income partially offset higher-than-expected expense pressures.

Finally, profitability and loan selectivity further enhanced our capital position as we generated an estimated CET1 ratio of 10.79%, above our 10% target. Despite the disruptive industry events earlier this year, we eventually managed our balance sheet to create abundant liquidity, enhance returns over time while taking care of our customers and exceeding the profitability expectations. Now I'll turn the call over to Jim, who will walk through the quarter in more detail.

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

Thanks, Curt, and good morning, everyone. Turning to Slide 5. Our strategic actions and shift to optimization caused average loans and commitments to decline. The exit of Mortgage Banker Finance is progressing as expected, and contributed to almost half of the reduction in average balances. We still expect the exit to be substantially complete by year-end. Declines in equity fund services were largely concentrated in nonrelationship customers, but we remain committed to this important business. Lower utilization within General Middle Market reduced balances, reflecting softening loan demand in this elevated rate environment. Ongoing funding of multifamily and industrial construction projects continued to drive higher commercial real estate utilization, but we saw an inflection in commitment growth as we strategically manage pipeline and origination volume. The floating nature of our commercial loan portfolio benefited from rising rates as loan yields continued to climb to 6.34% in the third quarter.

Slide 6 demonstrates our successful deposit generation. Average deposit balances increased 2.4%, exceeding expectations and H8 trends as we added new deposits and won back customer balances that diversified earlier in the year. In fact, Corporate Banking and Middle Market California both closed the quarter in line with their early March balances after experiencing more concentrated diversification in Q1. As expected, noninterest-bearing deposits trended down at a decelerating rate with the lowest balance decline in the last 4 quarters. Considering that modest reduction, our deposit mix was more impacted by growth in the denominator with success in winning 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. Industry efforts to enhance liquidity drove competition. And when combined with a higher rate environment, deposit costs increased to 290 basis points, resulting in a cumulative beta of 55%. In the recent weeks, deposit betas have been moderating, and we intend to remain nimble in our relationship pricing approach so we're able to balance customer needs with profitability targets while closely monitoring the market. With an even lower

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

percentage of uninsured deposits, the operating nature of our accounts and an enviable customer base, we believe our strong deposit profile is now even more attractive.

As shown on Slide 7, our effective liquidity strategy and strong deposit growth allowed us to absorb all of our contractual wholesale funding maturities this quarter. We expect to continue to utilize excess cash to further reduce wholesale funding in the coming quarters. Our loan-to-deposit ratio continued to trend favorably, closing at 80% for the quarter. With significant liquidity capacity and very light remaining unsecured funding maturities, we have flexibility to manage funding needs and are better positioned to prioritize high-return growth in 2024.

Period-end balances in our securities portfolio on Slide 8 declined $1.1 billion with paydowns, maturities and a $710 million negative mark-to-market adjustment. Although we have nominal treasury maturities remaining in 2023, larger scheduled maturities and anticipated securities repayments over the next 2 years are projected to benefit net interest income and AOCI. Altogether, we project a 25% improvement in unrealized securities losses over the next 2 years. This estimated burn off is sensitive to the dynamic rate environment and lengthened at quarter end. However, since 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.

Overall, our security strategy remains unchanged as we stop reinvesting over a year ago, and we maintain our entire portfolio as available for sale, providing full transparency and management flexibility. We will continue to closely monitor final regulatory rules to consider the impact on our security strategy as we consider the need for future compliance.

Turning to Slide 9. Net interest income decreased $20 million to $601 million, but outperformed expectations. We were encouraged by the lower pace of decline in net interest income as we move closer to what we believe may soon be an inflection point. Competitive deposit pricing and lower loan balances offset the benefits of loan yields and reduced wholesale funding balances. With the strategic management of our interest rate sensitivity, rates have nominally impacted income, and we remained effectively asset-neutral.

As shown on Slide 10, successful execution of our interest rate strategy and the current composition of our balance sheet favorably position us with minimal negative exposure to a gradual 100 basis points for 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. Credit quality remains very strong as highlighted on Slide 11. Following 3 consecutive quarters of net recoveries, we observed modest net charge-offs of $6 million. As expected, credit migration continued with greater concentration in businesses with more relative exposure to elevated rates and inflationary pressures, including commercial real estate, leveraged loans and technology and life sciences.

While the economic forecast improved slightly from the prior quarter, the outlook remained uncertain, which when coupled with lower loan balances, which impacted loan mix, contributed to an increase in our allowance for credit losses to 1.38% of total loans. Notably, nonaccrual loans declined for the sixth consecutive quarter and inflows to nonaccruals of $14 million also declined. Consistent with our proven credit discipline, we continue to closely monitor our portfolio and expect further migration to remain manageable.

On Slide 12, noninterest income of $295 million was our third highest quarter on record following our second highest quarter in 2Q. Deferred compensation, which was fully offset in expenses reduced $7 million, contributing to most of the noninterest income decline. Softer derivative activity more than offset increased loan syndication fees pressuring capital markets revenue. Fiduciary income was negatively impacted by annual fees received in the prior quarter. Movement in the rate curve benefited risk management hedge income, but will vary in the future based on the rate environment and the position of our hedging portfolio. Growth in noninterest income continues to enhance our overall revenue profile and capital efficiency over time.

Expenses on Slide 13 increased $20 million. Salaries and benefits were up $9 million and $8 million of that increase was in temporary labor due to staff augmentation, advancing technology and wealth management initiatives. Outside processing increased $7 million, driven by certain vendor terms that are sensitive to interest rates and our trust platform conversion. Other expenses benefited from large modernization credits from the sale of real estate, offset by increased litigation and regulatory-related expenses, consulting fees and operational losses. We believe we and the industry are in a period of calibration as we balance the profitability and risk management impacts from the first quarter disruption with strategic

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

investments critical for future growth. We remain committed to managing an efficient organization and are assessing opportunities to offset some of these pressures so that we may continue to deliver strong returns over time.

Slide 14 highlights our solid capital position. Capital generation from profitability and lower loan balances drove our CET1 ratio further above our target to an estimated 10.79%. Our third quarter tangible common equity ratio of 4.62% includes a negative 502 basis point impact from AOCI. Higher rates increased unrealized losses in our securities and swap portfolios, driving a more negative impact than the prior quarter. Based on the September 30 forward curve, we anticipate approximately a 37% reduction in our unrealized losses 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 to capital management and feel it is prudent to remain mindful of the regulations as they evolve.

Our outlook for 2023 is on Slide 15 and assumes no significant change in the economic environment. We project full year 2023 average loan growth of 7%, which would be our highest annual loan growth rate in a decade. The strategic exit of Mortgage Banker Finance and increased selectivity is expected to continue to impact fourth quarter balances. Our projected full year average deposit decline of 13% improved over prior expectations with the success in winning new deposits and bringing back customer balances. With the exception of the impact from our Mortgage Banker Finance exit and utilizing excess cash to modestly reduce the maturing broker deposits, we expect deposits to remain relatively flat in the fourth quarter. Our outlook does not assume a significant benefit from seasonality, but if we did see a return to more normal fourth quarter seasonal patterns that may provide more upside than projected.

We still expect another record year of net interest income in 2023, growing 1% to 2% over last year's record results. Competitive deposit pricing, continued deposit mix change and a modest decline in loans are expected to drive a 5% to 6% reduction in fourth quarter net interest income. Although short-term rates are expected to remain high through year-end, our asset sensitivity position is designed to protect our profitability by minimizing the negative impact of rates when they decline. Credit quality remained very strong, and we expect continued migration to be manageable. We forecast full year and fourth quarter annualized net charge-offs to remain below our normal 20 to 40 basis point range. Noninterest income has exceeded expectations for the first 3 quarters and we project full year growth of 9% over 2022. Benefits from noncustomer income from FHLB dividends are expected to continue, but at declining rates as we repay maturing advances.

Risk management income is expected to eventually reduce over time with rates and our swap position. For the fourth quarter, noninterest income is expected to decline 3% to 4%, largely driven by a reduction in capital markets income, considering market dynamics and increased selectivity. Noninterest expenses are expected to increase approximately 11% year-over-year with 3% of that growth attributed to higher 2023 pension expense and almost 2% due to higher FDIC expense. Fourth quarter expenses are projected to increase 3% as we observe pressures related to investments in technology and risk management in addition to third quarter modernization gains that are not expected to repeat.

While we're not offering 2024 guidance, we're mindful of the need to mitigate expense pressures as we recognize the new funding paradigm in the industry. These pressures are largely concentrated in the need for selective ongoing strategic investments in addition to investments to further enhance risk management and regulatory compliance. We're in the process of evaluating cost reduction opportunities with the objective of keeping 2024 costs only modestly higher than 2023. This assumes no change in pension expense, which will be determined largely by year-end rates and market performance.

Prudent expense management remains a priority as we work to balance our expense base commensurate with our earnings power. Strong profitability is expected to further grow our capital position in excess of our 10% target. Share repurchases remain paused considering the ongoing volatility within unrealized AOCI losses and subject to further regulatory clarity. In all, it was a solid quarter with strong deposits, liquidity, fee income and credit. We believe we're in great shape as we look to finish out the year and prepare for 2024. Now, I'll turn the call back to Curt.

Curtis Chatman Farmer - Comerica Incorporated - Chairman, CEO & President

Thank you, Jim. Slide 16 summarizes our differentiated value proposition. As a leading bank for business, with strong wealth management and retail capabilities, our tenured colleagues deliver value-added industry expertise to our blue-chip customer base, while our highly regarded approach to credit has historically outperformed our peers. Complementing our commercial loan expertise, our relationship model is exemplified by a product set tailored to meet our customer needs enhancing revenue and retention. Our deposit profile has long been a strength with a focus on commercial

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

operating deposits and a consistent retail base. With new products already in the market and additional efforts underway to expand small business and payments, we expect this core funding source to be even more compelling.

Finally, we remain committed to running an efficient organization and we'll be taking steps to offset expense pressures while leveraging investments designed to enhance productivity and optimize resources. Before we open the line to questions, I just want to comment on what the remarkable quarter we think this was for our company. After the significant industry disruption for the past spring, once again, our relationship-based model has proved resilient. We're very proud to see a return to deposit growth, especially when the H8 data shows declines across the industry. Our liquidity is in great shape. We repaid significant FHLB advances, and our loan-to-deposit ratio puts us in a very favorable position. Credit remains strong, and fee income continued to perform at near record levels.

During this disruptive time, we have taken care of our customers, we've won back deposits, we've added new relationships and still exceeded profitability expectations. As I shared on our prior calls throughout our almost 175-year history, we have managed through a number of challenges, and I'm confident in our ability to navigate this environment. We remain focused on our core strategy, enhancing efficiency, managing risks, protecting returns and positioning for organic growth. With the uncertain economic landscape, and being just under $86 billion in assets, I feel very good about Comerica's position. We're proud of our colleagues to the performance we delivered. We appreciate your time this morning. And now operator, we'd be happy to take some questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Our first question today is coming from Jon Arfstrom from RBC Capital Markets.

Jon Glenn Arfstrom - RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst

Quick question for you just on one of the last comments you made about deposit growth. You mentioned that you're adding and bringing back customer deposits. Can you talk about the extent of what you brought back and why these clients are coming back and kind of the extent of it and what's left to bring back?

Peter L. Sefzik - Comerica Incorporated - Senior EVP & Chief Banking Officer

Jon, this is Peter. So yes, the bringing back clients, I would say a lot of that has occurred probably in our middle market and our businesses. So if you look back to pre-SVB, and Jim mentioned this, for example, Middle Market California, corporate banking, we're back to pre-SVB levels in those businesses. But that's true in a couple of our other businesses as well. Environmental Services has that sort of results and middle market overall, I think, has performed really well. A lot of our new deposit growth, I would say, would be in middle market, small business, business banking where we're really being aggressive on trying to attract granular deposits, small business deposits. We're making a lot of investments there in people and product. And so that's the success that we've had. I think as the year has gone on, our customer base and prospects have continued to have a lot of confidence in our name and our success. And while all the banks were challenged between March and April, I think we've proven to be pretty resilient through this.

Jon Glenn Arfstrom - RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst

How rate sensitive are those deposits? Or is this kind of, call it, relationship gathering?

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

Peter L. Sefzik - Comerica Incorporated - Senior EVP & Chief Banking Officer

I think it's a little bit of both. I think some of it is providing confidence overall that occurred early in the year. But certainly, you're attracting some of it with interest-bearing rates that we're being competitive on. I mean I think we talk a little bit about what we're seeing on our deposit betas here today. But -- so there's a little bit of both. I think some of it's product investment that we've made to make it easier for our customers to manage their liquidity. But we're certainly doing what we need to do to be competitive with other banks on the interest rate environment.

Jon Glenn Arfstrom - RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst

Okay. Jim, one for you. You kind of danced around this in terms of -- you're talking about betas moderating. And we still have this down net interest income sequentially and down margin. But the way things sit today, if the Fed is done, what's your best guess on NII inflection for the company?

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

Yes. Thanks, Jon. I do feel like the pathway on that inflection point is becoming a little bit more in the focus, even though there is still some degree of uncertainty and I would say right now, our base case is that we'll probably hit a trough in Q1. But whether or not that's the inflection point and again that is the base case. And more importantly, what that upward slope of the line will be from there, it really depends on a lot of things, as you know, a lot of uncertainty out there, deposit betas, if the Fed stays higher for longer, how do betas respond.

And just as importantly, if rate cuts occur, how much is there in terms of a deposit pricing lag, monetary policy. Loan volume, we do anticipate growing at some point in '24, that's certainly a variable. Loan pricing is out there, it's a variable. We think that the new funding paradigm commands wider spreads or higher yield, but it remains to be seen that the market will accept that. So a lot of variables out there, but I'll just circle back and say, at this point, we think the trough is likely to be Q1, then a little bit of a slope up from there.

Operator

Next question is coming from Ebrahim Poonawala from Bank of America.

Ebrahim Huseini Poonawala - BofA Securities, Research Division - MD of United States Equity Research & Head of North American Banks Research

Maybe, Jim, first for you, looking at the Slide 10 rate sensitivity. When we look at -- so it looks like, obviously, you've not added any new swaps this year. When we look at the trajectory of the swaps and the outlook, is the jag from the swaps fully baked into, as we look into the third quarter or fourth quarter outlook? Incrementally, does it get worse? Or does it just level off if rates don't change? And just give us a sense, do you expect any additional changes around balance sheet mix going into next year and whether or not you're thinking about protecting eventually against rate cuts or not?

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

Yes, Ebrahim, you were cutting out a little bit, but I think I got the gist of the question. We're relatively interest-neutral as how I think of it right now. We do have some swaps that will mature over the next 5 quarters. But we also have a number of forward starters that are coming on to the books over the next 5 quarters also. And so based on the amount of forward starters that are coming on, and I think we have more forward starters coming on than maturing swaps, I don't see a need to go out and acquire any more swaps. Now we'll continue to monitor how the balance sheet responds and noninterest-bearing deposits respond, which have an impact on that sensitivity equation. But for now, I feel really comfortable that we're well prepared for a drop in rates should they occur.

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

Ebrahim Huseini Poonawala - BofA Securities, Research Division - MD of United States Equity Research & Head of North American Banks Research

And I guess, maybe just a separate question on credit quality. Maybe if we can unpack the 3 areas that you called out on CRE leveraged loans and tech. Like how do you expect the losses to evolve within those 3 buckets? And any impact on your sort of auto exposure when you think about the UAW strike? And if that gets prolonged, if we could see some negative migration or losses?

Melinda A. Chausse - Comerica Incorporated - Senior EVP & Chief Credit Officer

Yes, Ebrahim. This is Melinda. I'll just make some overarching comments around credit just to reiterate what both Curt and Jim said, we're really proud of the quarter. Credit continues to hold up really, really well. As you can see on Slide 11, we did have an increase in our criticized assets. We absolutely projected that we would continue to see normalization. That is exactly how it's playing out. The majority of the increase in criticized this quarter came from that commercial real estate book. And as of right now, we do not really see a lot of loss content in that commercial real estate portfolio. Just as a reminder, we're very heavily concentrated in construction financing with very strong borrowers and sponsors, very low loan to cost is really how we underwrite and it's predominantly multifamily and industrial.

The industrial segment is holding up incredibly well. We don't have any criticized assets in industrial. Multifamily is really where we're seeing some of the migration. And that's, again, expected just given what the rate environment has done just as well as a bit of oversupply in certain markets. So there is some rent leveling out and starting to see a little bit of rent concessions. We have no delinquencies, no past dues in this portfolio. Our sponsors are stepping up as we would have expected them to based on their historical performance, and they are covering shortfall. So I do not expect to see losses coming through the commercial real estate portfolio, but cautionary. We're continuing to build a reserve there. So our coverage ratio was up to 1.58% this quarter, which I think is up 5 or 6 basis points from last quarter.

The charge-offs that we did see this quarter, there is no concentration. It was very granular business banking, TLS, middle market, but they're very small in nature. So I'm not really seeing any themes as of right now in terms of like where loss content would come from. Levers would be one that it would be very possible that's again because of the elevated rate environment and the cumulative impact of the 500 basis point interest burden on those borrowers.

Automotive production, we've got about $1 billion in automotive production loans. Obviously, we've been in this business for many, many decades, and we've been through many cycles with this customer base. I would say, overall, they are very resilient. This particular pool have been relatively stressed honestly, from 2019 on. You have the 2019 tariff, then you had COVID, then you had chip shortages and supply chain disruption, but we really haven't experienced losses in this sector. So we're watching the UAW strike very closely. The longer it goes on, there will be more impact to the portfolio. We're very well reserved, but again, we have a lot of experience managing through this, and we have a very, very strong customer base that knows how to do this. So hopefully, I hit all of your questions, but happy to follow up.

Ebrahim Huseini Poonawala - BofA Securities, Research Division - MD of United States Equity Research & Head of North American Banks Research

No, that was comprehensive.

Operator

Next question is coming from John Pancari from Evercore ISI.

John G. Pancari - Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

On the expense growth commentary for 2024. I know you indicated the objective is for keep expense growth modestly higher versus 2023. Can you -- it looks like the Street is out there modeling maybe 3% to 4% or so year-over-year. Can you maybe help us think about what modestly higher could mean? What's a reasonable pace of growth to assume as you're looking at the initiatives playing out that you're reviewing?

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

Curtis Chatman Farmer - Comerica Incorporated - Chairman, CEO & President

John, this is Curt. I'll start and then I'll ask Jim to add in some more color commentary. First of all, maybe just from a backdrop standpoint, as you and others on the call are aware, '21 and '22 were really record years of performance for our company across the board. Revenue growth, loan growth, liquidity, really a great performance from an ROE standpoint. In fact, at the end of 2022 performed in the mid-20% range on ROE and we were able to do all that and maintained a very low efficiency ratio. As Jim mentioned, and I think I did as well in my comments, I do think that we and the whole industry are in this period of transition and sort of recalibration as we're looking at lower NII really based on funding dynamics.

And then the second thing I'd say here is just that there are some anomalies in our 2023 numbers. We certainly have a pension impact that others maybe not -- do not have all -- everyone has the FDIC component. So when you factor that out, the rate of growth in 2023 over '22 is not quite as high as it might appear. That said, we're committed to managing expenses and managing efficiently as a company. And as you just said, a more modest growth in expenses '23 over '24. But I want to be careful here and just caution that we have been in a new investment, our net investment focus of the company. We've been doing a lot of things in the last 2 years that we believe are driving revenue growth for us, helping us on the client acquisition side, a lot of investment in payments, treasury management, wealth management, capital markets.

We've expanded into some new markets of the Southeast and Colorado, a lot of focus on small business. So we've got a lot of initiatives underway, and I want to keep our focus on those because we believe those are the right things for our company long term and once we get beyond sort of the period of time that we're in right now. But having said all that, we're going to strike the right balance, and we've proven over time in our history that we know how to manage expenses well, and we're looking at sort of what levers we have. We typically provide some guidance at our fourth quarter call. You can go into some more details at that point. But we're working on some initiatives we believe will help us reduce expenses and offset some of what we -- I think it's really sort of more near-term pressure versus longer-term pressure. Jim, what would you add to that?

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

The only thing I would add is we -- to reemphasize Curt's comments, I -- we do recognize the new funding paradigm, a new profitability equation. And I do think there's a lot of work to be done, and we're committed to getting that work done. And I think we're going to make significant progress for 2024. But I don't view it as a one-and-done deal either. I think this is probably going to play out for some period of time, where we have to continue on the cost reduction initiatives to make sure that we can fund the necessary investments.

So something we've done before. We know how to do, we're committed to. There was a pivot in the industry that's occurred over the last few months, and we're going to have to adjust to that. But we do recognize that. So fully committed to getting it done, and we'll be sharing more at some later point in time, as Curt said.

John G. Pancari - Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

Okay. I appreciate all that detail. And then separately, I guess, when it comes to capital or more specifically capital deployment, maybe can you talk about what would you need to see to be willing to ramp up buybacks here? I just want to get your updated thoughts on the potential for deployment?

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

Yes, John. I would say the #1 factor for me is the uncertainty. That would be the uncertainty in the general economy and geopolitical events and so on, but also uncertainties as it relates to interest rates and AOCI. We did take a step up this quarter as the whole industry did. And I'd like to see a better line of sight in terms of where that's going before we turn on share repurchase. I would say capital rules are something we're watching also. I would say that's more of a secondary factor. We're well below $100 billion. But we do want to be prepared in case things changed in the economy with whether it be monetary policy or anything else that may catapult us towards $100 billion faster than we're expecting. But the uncertainty is really the key factor there.

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OCTOBER 20, 2023 / 12:00PM, CMA.N - Q3 2023 Comerica Inc Earnings Call

I will note that even without share repurchase, we do have one of the stronger common dividends in the industry. So we do feel like we're returning capital to shareholders. But I would love to buy at these prices also. We think the share price is a fantastic buy and very attractive. The idea of buying back those shares is very attractive. But certainly, for this year, we're on pause, and then we'll assess the uncertainty factor as we get into 2024.

Curtis Chatman Farmer - Comerica Incorporated - Chairman, CEO & President

Jim, I would add that while we have been cautious on RWA and managing down some aspects of our loan portfolio, that's not sort of our long-term perspective, our long-term objective. We do want to grow again as a company, and we see opportunities to grow really based on sort of how the economy plays out as we get into 2024. And that's always the first place we want to use our capital is around the loan growth equation. And then secondly, John, I think you are aware that we've done a good job over the course of the last 3 or 4 years of leveraging buybacks. And so we do think it's an important tool. But again, sort of balancing between the 2 will be really important.

Operator

Next question is coming from Steven Alexopoulos from JPMorgan.

Steven A. Alexopoulos - JPMorgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks

So I want to go back to your response to Jon Arfstrom. His question where you said NII would likely bottom in the first quarter. Maybe, Jim, from a NIM view, do you see NIM following the same trajectory maybe stepping down in 4Q than 1Q and then we bottom there?

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

Steve, thanks for the question. I mean, as always, I'll put my disclaimer out there that we're not being NIM percentage [sharp]. The lumpiness of our commercial business model often results in a NIM percentage that doesn't necessarily correlate with income. So one that I'm always hesitant to comment on. I'll just say in general that I do expect NIM percentage to improve as we bring down cash and purchase funds over the next quarter. So I do think we'll see some positive traction there. And I do think it's fair to -- in a very general way to say if we see net interest income troughing in Q1. That's slightly the trough for NIM also. So we'll continue to keep an eye on that. But that's what I would say, big picture.

Steven A. Alexopoulos - JPMorgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks

And then, Jim, given the comments that you're fairly neutral now in terms of ALCO positioning, if rates stay higher for longer, I know you don't like commenting on this, but I'm going to ask you anyway. Directionally speaking, if we bottom in the first quarter, how do you think we trend through the year assuming no cuts, assuming that the Fed just stays really on hold? Do you think directionally NIM trends favorably through the year?

James J. Herzog - Comerica Incorporated - CFO & Senior EVP

That's going to depend on some of those variables that I mentioned early on, loan growth, loan spread pricing, those are all big factors. But I do think that if we do stay higher for longer and QT continues, that does have the potential to put pressure on NIM. It's not our base case. It's not what the forward curve is saying, higher for longer, but we haven't been in the situation in a long time with an economy and an industry. So it's really hard to say, but we will see some continued deposit pressures if we do stay higher for longer, I believe.

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