Q3 2019 Earnings Call
And I'll be your conference operator today at this time I would like to welcome everyone to the Comerica third quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise.
The speakers remarks, there won't be a question and answer session. If he would like to ask a question during that time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound key I would now like to turn the call over to Darlene persons director of Investor Relations Ma'am you may begin.
Thank you Regina good morning, and welcome to Comericas third quarter 2019 earnings Conference call.
Moving on this call will be our president and CEO , Kurt Farmer interim CFO tempers, our chief Credit Officer pills, Pete goes well and executive director of our business Bank Peter something during this presentation, we'll be referring to slide which provides additional detail the presentation side and our press release are available on the Fccs website as well as anybody.
Relations section of our website Comerica Dot com.
This conference call contains forward looking statements and in that regard he should be mindful of the risks and uncertainties that could cause actual results could materially vary from expectation.
Forward looking statements speak only as of the date of this presentation and undertake no obligation to update any forward looking statements.
Please refer to the Safe Harbor statement in today's release insight to which I incorporate into this call as older I think the filing for factors that can cause actual results to differ.
So this conference call will reference non-GAAP measures and in that regard I direct you to the reconciliation of these measures within the presentation now I'll turn the call over to Curt will begin on slide three.
Good morning, everyone.
Today, we reported third quarter earnings of 292 million or 1.96 cents per share our third quarter results demonstrated our ability to drive stronger terms, because it or are we at 16%.
Already or 40.6% despite declines in interest rates.
Relative to the second quarter broad based fee income growth solid credit quality the benefit of discrete tax items and continued active capital raise but were positive contributors to our performance.
In addition are careful cost control helps keep our efficiency ratio like it under 52%.
The shortly well into the third quarter seasonally weak.
This year average loans were stable compared to the second quarter mortgage banker benefited from results, regardless refi activity along with the normal increase due to summer hole so activity.
However, this was offset by the people acquired a national dealer, that's where customers reduced inventory in anticipation of delivery of 2020 model. That's what was it just couple of summer slowdown in middle market.
Overall go for cement remains positive and our pipeline. The solid we're also seem to be up a number of initiative, we have undertaken over the past year or so.
Thanks, Bruce a new enterprise wide customer relationship management tool enhanced marketing analytics, and greater efficiency, resulting from our credit process redesign.
Oh deposits grew over 700 million relative to the second quarter, including 850 million increasing cost for money market balances in C D.
We have a favorable deposit mix is nearly half or non interest bearing and we believe we will continue to have the lowest component of noninterest bearing deposits amongst our peers.
As we have throughout the cycle, we're carefully managing deposit right in order to attract and retain relationships. We're closely monitoring the competitive environment. They expect to continue to modestly glide competition and adjusting our rights our strategy is working.
Broken relationship deposits allowed us to reduce firepower wholesale funding, but help reduce our loan total funding costs to 78 basis points.
Also our loan to deposit ratio decreased to 91%.
As far as net interest income over 80% of our loans or 40, right. The primarily tied to 30 day wild boar, which declined 37 basis points during the quarter.
This impact combined with a great interest bearing deposits resulted in net interest income of 586 million and a net interest margin or 3.52%.
We were able to ask $1 billion the swaps in September a relatively attractive rates. Our strategy is to build our hedging program over time closely monitoring to markets and taking advantage of market opportunities as they arise.
Credit quality remains solid with net charge also 33 basis points.
Similar to the second quarter charge offs, primarily consisted of valuation impairments on select energy credits as capital markets for this sector remain small.
Nonperforming assets declined and we're only 44 basis points of total loans and the provision the decreased to 35 million.
Our broad based increase of 6 million in fee income helped offset the more challenging rate environment.
We had good growth in commercial lending card and fiduciary income.
As expected increases in salaries and benefits along with higher occupancy and technology calls resulted in 11 million increasing access is.
This is in line with the outlook, we provided for full year expenses to remain flat, excluding 2018 restructuring costs.
We raised our timber Sophie T. One target to be ended the third quarter, we returned 467 million new capital to shareholders through our dividend, which currently provides over a 4% return.
Repurchasing 5.7 million shares under our share buyback program.
Relative to the third quarter last year, our results reflect our ability to generate solid loan growth of nearly 5%.
Fee income growth and maintain our expense discipline.
Last year very strong credit quality resulted in no provision well this quarter, our provision was more in line with historical norm.
Through active capital management, we have reduced our share count about 13% altogether earnings per share increased 5% year over year.
And now we'll turn the call the gym Herzog, who assumed the role of interim CFO last month.
Process to identify permanent CFO is underway Juno has a wealth of knowledge with over 35 years experience with Comerica and it's been our treasurer for the past eight years Jim.
Thanks, Curt and good morning, everyone.
Turning to slide four as current indicated average loans were stable, one third quarter seasonal decreases and national dealer and general middle market offset by an increase in mortgage banker, which also benefited from strong refi volumes. In addition, we had growth in commercial real estate with largest contribution coming from bolt.
Hi family activity in California.
Total period end loans were also stable essentially reflecting the same activity we saw on average balances.
On a year over year basis, we've grown loans 2.3 billion with increases in general middle market in all three of our markets as well as in many of our specialty areas such as mortgage banker energy National dealer services commercial real estate and environmental services.
Our loan yields from 4.83% a decrease of 17 basis points from the second quarter.
This was result of lower interest rates, primarily one month LIBOR, partly offset by an increase in loan fees and the lease residual adjustment we took in the second quarter, that's not repeated.
No nonaccrual interest recovery remains slightly elevated in the quarter contributing $4 million.
Slide five provides details on deposits.
Average balances increased over 700 million with growth across the majority of business lines and an all three of our markets.
Noninterest bearing deposits were stable while customer interest started balances increased over 800 million.
The growth in balances and mix shift to higher you'll end products drove a five basis point increase at our interest bearing deposit costs.
This is at the lower end of the guidance we previously provided.
The decline of interest rates, we've begun to take action to adjust deposit rates, which I will discuss further in a moment.
As you can see on slide six RMBS portfolio and stable.
Beyond the portfolio Health study.
Fourth quarter benefit of higher yielding securities reinvestment throughout the second quarter was offset by 600 million, we reinvested in the third quarter I don't several mostly mall in the portfolio average.
You also on recent purchases a benefit to 40 range. The current rate environment has not had a significant impact on our duration for the unamortized premium which remains relatively small.
Turning to slide seven net interest income was $586 million and the net interest margin was 3.52%.
Once had a negative impact of $16 million or 13 basis points to the margin.
A major factor was lower interest rates, which had a 26 million dollar impact and 17 basis points on the margin.
This was partially offset by one additional day in the quarter as well as other factors, which I previously outlined.
Higher balances in the fed added $2 million, but were offset by the lower yield and combines had a two basis point impact on the margin.
Growth and interest bearing deposits, particularly in higher ULIN products increased cost by $6 million or three basis points on the margin.
Lower rates reduced wholesale funding costs by $5 million and added three basis points to the margin.
In summary, the net impact from rates along with higher interest bearing deposit balances was partially offset by one additional day in the quarter.
Credit quality remains solid as shown on slide eight our net charge offs for $42 million or 33 basis points, which is well within our historical norm of 20 to 40 basis points.
Excluding energy net charge offs for the remainder of the portfolio were only six basis points.
This included strong recoveries of 19 million.
While total charge offs were higher we do not believe this is a trend.
The increase in charge offs from primarily due to the impairment of select energy loans.
As we indicated last quarter valuations of a few liquidating energy assets have been impacted by volatile oil and gas prices and we capital markets.
Non accrual loans remained low at $220 million or 43 basis points of our total loans.
Criticized loans represent less than 4% of total loans as of quarter end.
As far as energy nonaccrual loans decreased 10 million, while criticized loans increased $10 million, we increased our reserve for energy, which remains at a very healthy level.
Our reserve ratio held steady at 1.27% and resulted in a provision of $35 million a decline of 9 million from the second quarter.
As far as our adoption of Cecil in the first quarter next year, we are running parallel test and remain on track for a successful implementation.
Given the relatively short duration of our commercially wage and portfolio and expectation of a fairly benign economic environment.
We expect to change reserves will be plus or minus 5% and therefore had little impact on our capital ratios.
Turning to slide nine noninterest income, which increased $6 million.
Our continued focus on just one card fees resulted in a 2 million dollar increase.
Commercial lending fees also increased 2 million, primarily due to strong syndication income.
Could you share and income increased 1 million, mainly due to tax preparation fees and higher asset values.
We also had small increases in several other categories, including letters of credit and foreign exchange.
Derivative income declined 1 billion due to the impact of lower rates on the credit valuation adjustment.
Deferred comp asset returns, which were offset in noninterest expenses were 3 million compared to zero in the second quarter.
Expenses for ball control and our efficiency ratio remained low at 52% as shown on slide 10.
Salaries and benefits increased 8 million as a result of the increase in deferred comp that I previously mentioned as well as seasonally higher healthcare expense in one additional day in the quarter.
Also technology initiatives drove a 2 million dollar increase in software expense.
I can see expense increased 2 million, mainly due to seasonality.
Turning to slide 11 in the third quarter, we repurchased 5.7 million shares under our share repurchase program, which is nearly 4% or total shares.
On a year over year basis, our share count was down 13%.
Together with dividends, we returned $467 million to shareholders in the third quarter.
Our goal is to provide an attractive return to our shareholders by way of the buyback as well as a healthy dividend, which currently has a yield over 4%.
Turning to slide 12, and the rate environment.
We expect lower rates in isolation to have a 35 million dollar impact to fourth quarter net interest income.
This concludes the full quarter impact from lower rates in the third quarter as well as anticipated in the summertime right.
Consistent with our economists view.
Swaps, we've added should provide a one to 2 million dollar benefit.
Also we are expecting interest bearing deposit costs decreased three to five basis points with minimal deposit mix shift.
Our recent economic data has been mixed markets are expected in the feds cut rates again.
Runner standard model with a 25 basis point reduction in rates and a few different deposit betas scenarios as deposit rates are a major variable enrolled depend on competition in our need for funding.
Yes, we had an impact on net interest income under these scenarios ranges from $65 million to $95 million over a 12 month period.
The ultimate outcome for our net interest income depends on a variety of factors such as the pace at which LIBOR moves balance sheet movements and the competitive environment.
As Curt mentioned, we had $1 billion and interest rate swaps in September .
Together with the $2.8 billion and swaps and put on the first half of the year. The average remaining term of the swap of now sits at 3.3 years with an average received fixed rate of 204 basis points.
We continue to closely monitored market as we previously shared our strategy is to make steady progress in building our hedging program overtime.
Slide 13 provides our outlook for the fourth quarter.
We expect average loans remained stable on a quarter over quarter basis.
Seasonality in the fourth quarter typically drives an increase in national dealer services, and general middle market and a decrease in mortgage banker.
While set nearly 70% of a mortgage banker volume is tied to purchase activity, we expect a slowing down a refi volumes will further reduce mortgage banker loans.
Otherwise, we anticipate growth in several businesses and a small decrease in energy.
Given the strong loan performance. So far this year, we anticipate region. The upper end of our previous projection of 3% to 4% growth in full year average loans relative to 2018.
We also expect deposit levels to be stable, we remain focused on attracting and retaining relationship deposits and our strategies are working.
As core relationship deposits grow we plan to manage down broker deposits.
As I discussed a moment ago lower rates are expected to have about $35 million that impact on net interest income.
In addition, we believe the strong third quarter loan fees and nonaccrual interest recoveries are unlikely to repeat.
As far as credit we expect the provision to be between 25 and $45 billion, which includes some potential additional exit migration in the energy book.
We believe we will continue to have strong performance in the remainder of the portfolio.
Excluding deferred comp income of 3 million, which was offset in expenses and it's difficult to predict our noninterest income is expected to be relatively stable.
We expect modest growth or number of customer driven categories, which will likely be more than offset by a reduction in syndication fees and fiduciary income from elevated third quarter levels.
With the benefit of the strong third quarter fee income growth, we expect to exceed our previous outlook for non interest income to grow 1% to 2% on a full year over year basis.
Expenses are forecasted to increase modestly.
We expect to see higher technology costs, primarily related to investments in our retail bank and higher outside processing expenses tied to revenue generating activities.
In addition, seasonal inflationary pressures and pack certain expenses, such as occupancy employee benefits and marketing.
On a full year basis, we expect to continue to see our expenses remained stable excluding the restructuring charges incurred last year.
Finally, we are targeting RCT, one ratios remain about 10%.
As we determine the pace of the share buybacks, we carefully consider our expected earnings generation capital needs to fund future loan growth and market conditions.
Now I'll turn the call back to occur to provide some closing remarks.
Thank you Jim.
However, our 170 year history, we've managed through many different economic credit and interest rate cycles.
The tone at recent conversations I've had.
Ed with customers and colleagues across our markets is optimistic and we continue to see slow steady economic expansion.
With this backdrop, we expect to see loan growth in line with were slightly better than GDP next year as well as modest core deposit growth and continued solid credit quality.
Yes, with much less certainty on several fronts. The market is currently pricing in the rate cuts.
The impact from a possible reduction in interest rates on our net interest income and pension expense combined with inflationary pressures and continued investment in technology provides headwinds, but we believe they are manageable.
In addition, our share repurchase program has allowed us to return excess capital and lowered our share count providing a meaningful benefit to our EPS.
With our efficiency ratio was a low fiftys and an order we have 16%, we're better positioned the weather changes in the economy or interest rate environment.
We remain focused on controlling the things, we can control and maintaining our show performance.
We plan to provide a more detailed outlook for 2020 on our next earnings call in January .
In closing, we believe our key straight to provide the foundation to drive profitable growth and enhance long term shareholder value specifically, our geographic footprint, which includes faster growing diverse markets combined with our relationship banking strategy is expected to result in growth with loans deposits in fee income.
Over time.
We continue to maintain our three good expense discipline as we invest for the future.
Also our conservative consistent approach to banking, including credit in capital management has positioned us well.
Now we would be happy to take your questions.
At this time, we would like to ask a question Press Star then a number one on your telephone keypad. Our first question will come from the line of Ken Zerbe with Morgan Stanley .
Good morning, Kerry Thanks, good morning, everyone.
I guess my first question just in terms of Slide 12, you provided a $35 million impact for a December rate cuts.
No I just talked this morning, it looks like the futures curve is building in a 78% probability of an October rate cuts can you just provide us the sensitivity if we do get the October instead of December what does that imply for your Eni in fourth quarter.
Okay, Yeah, Thanks, Ken and good morning.
We do feel it is highly probable we will get a great cut before the end of the year. It is a little less certain that we will get one in October and the path at Liveworx correlate that is also a little less certain so we'd like to go with our economists forecast for the December rate cut.
I would point you to slide 12 in terms of some of the sensitivities and.
Tote October cut should be somewhat proportional to that but at this point, we're not providing specific guidance on October cut just due to just due to the uncertain path of LIBOR.
Gotcha, Okay, I understand I guess, obviously, because the futures curve.
Probability of a rate cut is actually very high might make sense to do that but I I appreciate your.
Your answer I guess, maybe different question just in that same slide the in spring deposit costs going down three to five for three to five basis points.
So can you just comment like what are you seeing in terms of deposit cost competition, I know you're going to lag peers.
It is our peers from so far what you see in fourth quarter are they only down into high single digits or like how far you lack im just curious on overall deposit competition.
This is Kurt I will take that question.
We talked about before that on the way, we lagged in increasing our deposit cost and as we've said, we believe we will lag a little bit home on the downside. We do believe that we probably have reached some inflection point and that it's why we gave the guidance that we believe deposit costs will come slowed down some in the for fourth quarter.
Still remains a fairly competitive environment, we have seen some reduction in CD pricing and we've taken actions CD pricing as well and were part probably starting to see a little bit of reduction in state prices as well, we'll continue to evaluate.
Okay, Great and then if I can squeeze in one last one just in terms of the energy portfolio.
Obviously higher charge offs. This quarter can you just talked about where the stress points RMS It sounds like your provision guidance does include the probability of additional.
Sizable energy charge offs next quarter, you just talked about where to stress points, where are you seeing.
Is there a reason to be concerned more broadly about energy. Thanks.
Sure so.
Vision forecast assumes that.
Actually charge offs remain a little bit elevated for the next quarter or two in that we would see some migration in the energy portfolio, but at this point, we're not expecting any widespread migration in the energy portfolio.
There is some impact obviously, the we'd capital markets.
The credits that are in our workout area. We expect some of that to result in additional migration.
In other weaker credits in the portfolio, but but overall, we are not expecting this to be very.
Very significant change in credit.
All right. Thank you very much.
Thank you Kim.
Your next question comes from the line of Brad Raskin with Piper Jaffray.
Good morning breadth.
Hey, good morning.
Wanted to.
Let me just go back to energy first second and just just talk about the additional weakness that you're anticipating it is that a function of redetermination season.
Did the Snick review have any impact on the portfolio and then I know some lenders are changing their reserve based lending test does that have a factor and what you're seeing in terms of fourq you as well.
Well first of all the SEC exam religion, not having any impact.
There.
But we're seeing is.
There are certain credits that.
Our.
From a liquidation standpoint.
Very weak market for.
We.
Because of that weak market. These days these assets are selling at very good deep discounts, we felt the need to take some additional charges the brain the book value of those assets in line with what we expect.
Does the asset sales.
Good.
Actually realize in probably in early 2020.
And so just like last quarter, we took some additional charges there.
Again, we're not expecting to see.
A lot of migration here most of our NP portfolio.
Our very swamp credits with very strong balance sheets low leverage good liquidity and generally speaking those those credits or less reliant on the capital markets. So it's really the credits that.
Our board dependent upon the capital markets that we're seeing migration.
Okay.
Sure the color there and then the other thing I just wanted to ask about was expenses.
Looking at looking at this year versus 2020, I know you haven't given guidance for 2020, but given given the rate pressures on the margin.
It would seem like your your expense focus would would be the same or heightens, possibly in 2020 can you give us any any high level thoughts on how you're going to react too.
Margin pressure and and does that mean expenses in 2020 for just thinking about operationally you kind of keep things pretty tight and try and maintenance expenses flattish again or can you give us any additional color on on an outlook there.
Fred you're correct in the fact that we were not to give any more formal guidance on expenses until we get to the ended the year in the fourth quarter earnings call in January but what I did say in my prepared remarks is that there are a few headwinds that we're aware of in 2020 that primarily it would be interest rate.
Related so just from a pension accounting standpoint, we'll have some pressure on the pension that side of things and then you'd have sort of a normal inflationary items, there at occupancy et cetera, but as I've said on prior calls we remain very focused on the expense side of the huh.
Alex and we will continue to employ.
The strong expense discipline that we demonstrated the the last several years to that remains a high priority for us and.
The gear up work that we did I think proved our focus on expenses and I think has positioned us well, even in a declining rate environment and even with maybe some.
Normal expense pressures that we can manage well even in.
An environment that we might experience in 2000 fluid.
Okay, great. Thanks for the color.
Your next question comes from the line of John Pancari with Evercore ISI.
Good morning, Good morning, John .
On the loan growth outlook I.
I know Kurt you had indicated for 2020 the loan growth could be in the.
In line or.
Somewhat better than GDP.
So if we're GDP is in a 2% range does that imply that you could do you are expecting some potential moderation in loan growth. When you look at 2020 versus the 4% level that you're looking out for 2019.
Now more touring and just a moment to Peter aseptic to give some more specific color commentary, but what I would say that we saw very strong growth in the first half the year in the third quarter you alluded to the fact that mortgage banker finance volume.
Coupled with a refund activity there by helped.
So we're pretty stable growth in the third quarter, but at some point.
We have sort of anticipating if there is going to be a recession or slow down to that might start translating some into loan growth overall, it's when it hits the.
The slightly more moderate or forecast forgive me for 2020 will revise that again at the end of the year. When we give a more formal outlook for 2020, we want to give you a little sits where we think things are headed right now.
Great that I think I would just that you referenced to gear up and I think that some of the work that we've done the last few years on efficiencies for our business of has helped us with the loan growth you've seen over the last several quarters here and we're encouraged that that would continue we feel like the pipeline is.
Still solid across so most of our lines of business and or feel real good about how things are for the fourth quarter and I think along the lines of workers. So for 2020.
We are encouraged we'll be able to to continue that growth.
Okay Alright. Thank you that's helpful and then separately or on the expense side I. Appreciate the color you gave in terms of your.
Your efforts to remain disciplined on that front end loaded the revenue backdrop can you help us in terms of how to think about either operating leverage for when you look at 2020 versus generally where you're coming in for 19 or more specifically be efficiency ratio, how we could speak about that trend through 2020 versus what you saw for.
Thanks.
Yes, you are what I would say that we haven't given any guidance around efficiency ratio. We're operating leverage forward 2020, yet what we did say at our last conferences that we still believe that overall.
Given the work that we've done that we can perform well on a relative basis to our peers, both an efficiency ratio or we are awaiting et cetera, given the positioning we did relative to gear up but certainly continued rate decline would have an impact on efficiency ratio.
Overall returns for the company, but we do believe that we can pull performed well on on a relative relative basis.
Okay. Thank you then lastly, do you have the energy loan loss reserve, where it stands.
Yes.
Yeah, we didnt disclose anything on the energy.
Our allocation energy I can tell you, though that we have amongst the strongest reserves in the industry and when you consider.
John that we don't really have any issues in the portfolio ex energy I would say that all those reserves are available to address whatever issues, we have an energy, but I could tell you that we do have a healthy an amount of those reserves allocates energy at this time.
And we probably would have seen.
Much larger reserve release this quarter, except for the fact, we did allocate a fair amount of reserves to energy this quarter.
Got it alright, thank you.
John .
Our next question comes from the line of Peter Winter with Wedbush Securities.
Good morning.
Kurt I was looking at slide 12, just going back to that.
With the addition of 1 billion in swaps when I look at.
The impact to estimated net interest income it it's a little bit.