Q4 2020 Comerica Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Comerica quarterly earnings call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone I would now like to hand, the conference over to Darlene persons.
Of Investor Relations. Please go ahead ma'am thank.
Thank you Regina good morning, and welcome to Comerica fourth quarter 2020 earnings conference call participating on this call will be our president Chairman and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, I'm Gonna chassis, and executive director of our commercial bank Peter Septic. During this presentation, we'll be referring to slides, which provide additional.
I'll detail.
Presentation slides and our press release are available on the SEC's website as well as on the Investor Relations section of our website Comerica Dot 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 release on slide two and I.
Incorporate into this call as well as our SEC filings for factors that can cause actual results to differ now I'll turn the call over to Curt who will begin on slide three.
Good morning, everyone and thank you for joining our call.
As we all know 2020 was a very trying year and I could not be more proud of the unwavering commitment of our team to serve our customers communities and each other during this unprecedented time it has been truly remarkable.
When I assumed the role of chairman in January the fundamentals of the economy was strong and I was looking forward to working with our executive team to execute our relationship banking strategy.
Bid in March our focus shifted due to COVID-19.
Despite the many challenges the pandemic posed we have proven our resilience and achieved many important accomplishments along the way.
This includes the bank and the Comerica charitable foundation, together, providing $11 million and assistance to local communities and businesses.
We funded $3 9 billion in Triple P loans to small and medium sized companies.
We were able to quickly enabled the majority of our employees to work remotely and introduced programs to provide support such as promised pay and dependent care stipends.
As consumers desire to utilize digital channels increased we enhanced our online capabilities for deposit accounts as well as loan originations.
Also we achieved our 2020 environmental goals set in 2012 to meaningfully reduce our water waste paper and ghd emissions are.
Our commitment to corporate responsibility was recognized recruiting receiving high marks from Newsweek diversity, Inc. Civic 50, CDP and corporate Knights, the compassion and tireless efforts of our colleagues across the bank has allowed comerica to persevere. It remain in a strong position as we move forward.
Yes.
Slide four provides a review of our 2020 financial results, which included solid loan performance and a record level of deposits.
This growth combined with prudent management of loan and deposit pricing and action, we took to deploy excess liquidity helped offset the pressure of rates dropping to ultra low levels.
In light of the Swift deterioration of the economy, we significantly increased our credit reserve and took a large provision in the first quarter.
While we saw some negative credit migration through the year. It has been manageable and our net charge offs for the year were 38 basis points or 14 basis points excluding energy.
True Testament to our relationship banking strategy and deep credit experience.
Card fees and securities trading income were strong while other fees such as deposit service charges on commercial lending fees were impacted by the slowdown in economic activity.
Expenses remained well controlled and included Covid related cost we maintained our strong capital levels and book, our book value grew 7% to over $55 per share.
In summary, a solid performance, particularly considering the difficult environment.
Our fourth quarter performance as outlined on slide five.
We generated earnings of $215 million or $1 49 per share a 3% increase over the third quarter driven by an increase in revenue is strong credit quality.
Compared to the third quarter.
Loans essentially performed as we expected.
While lower on a quarter over quarter basis average loans increased in December relative to November, but on nearly $300 million, excluding triple P loan repayments.
Our loan pipeline continues to grow through the year to pre COVID-19 levels at year end.
Average deposits increased by nearly $1 5 billion to an all time high with 55% of the growth derived from noninterest bearing accounts.
Customers continued to prudently manage their cash cutting costs and reducing leverage.
They remain cautiously optimistic that the economy will pick up in the back half of this year.
Net interest income increased $11 million benefiting from our continued careful management of loan to deposit pricing combined with the contribution from fees related to Triple P loan forgiveness.
This was partly offset by lower loan balances. In addition, lower yields on our securities portfolio were mostly offset by actions. We took in the third quarter to deploy a portion of excess liquidity by increasing the size of the portfolio.
As far as credit.
Our metrics remained strong and our provision was a credit of $17 million critical.
Criticized loans declined and net charge offs were only 22 basis points.
Positive portfolio migration and a slight improvement in the economic forecast, resulting in a reduction of the credit reserve to just under $1 billion or nearly three times nonperforming assets.
Through the cycles, our credit performance relative to the industry has been a key differentiator and I believe we will continue to outperform.
Noninterest income increased $13 million or 5% as customer activity continued to rebound. This included strong derivative income in commercial lending fees.
We continue to maintain our expense discipline as we invest for the future.
While expenses were higher in the fourth quarter. This was primarily driven by performance incentives as well as outside process related to our card platform.
Our capital levels remained strong.
<unk> ratio increased to 10.35% above our target of 10%.
As always our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
And now I'll turn the call over to Jim.
Thanks, Kurt and good morning, everyone.
Turning to slide six average loans decreased approximately $600 million from 1%, which compared favorably to the industry H eight data.
Loans in corporate banking in general Middle market decreased as customers are performing well prudently managing their business to increase cash flow and reduce debt.
For the fourth consecutive quarter energy loans decrease and are at the lowest level since 2011.
The U S rig count is less than half of what it was a year ago. However, it has from gradually increasing since late summer as oil prices began to recover.
Technology and life Sciences loans declined about $180 million, mainly due to M&A and increase liquidity driven by fund raising activity and companies reducing cash burn.
Equity Fund services, which provides capital call lines to investment companies increased $244 million as activity has picked up with new fund formation.
National dealer increased $190 million as inventory levels are slowly rebuilding yet remains $2 billion flow fourth quarter 2019.
Mortgage banker reached a new record with strong activity in both refi and home sales.
Period end loans were stable and included a decline in triple P balances of $298 million, primarily due to loan forgiveness line utilization at year end for the total portfolio remained relatively low at 48%.
Loan yields increased seven basis points with accelerated fees from Triple P forgiveness, and continued pricing actions, particularly adding LIBOR floors when possible as loans renew.
Average deposits increased 2% or $1 5 billion to a new record of $70 2 billion as shown on slide seven.
The largest driver continues to be noninterest bearing deposits and growth has been broad based with increases in nearly every business line.
<unk> continue to conserve and maintain excess cash balances.
Period end deposits increased over $4 4 billion.
Timing of monthly benefit activity in our government prepaid card business increased balances by $2 2 billion at quarter end.
However, this does not include the latest stimulus payments, which were received in early January with strong deposit growth our loan to deposit ratio decreased to 72%.
The average cost of interest bearing deposits reached an all time low of 11 basis points, a decrease of six basis points from the third quarter and our total funding costs fell to only 10 basis points.
As you can see on slide eight the average balance of the securities portfolio increased this was due to the third quarter purchase of $2 $25 billion on additional securities primarily treasuries as we took some action to put some of our excess liquidity to work.
The additional securities combined with lower rates on the replacement of Prepays, which totaled about $1 billion resulted on the yield on the portfolio declining to 195%.
We expect repayments of MBS to continue to be about $1 billion per quarter and yields on reinvestments to be in the low to mid 100 basis point range.
Turning to slide nine net interest income increased $11 billion to $469 million and the net interest margin was up three basis points to 236%.
Interest income on loans increased $6 million, adding four basis points to the margin.
Higher fees, mostly related to triple P loan forgiveness and continued pricing actions as loans renew together added $10 million and four basis points to the margin other.
Other portfolio dynamics, including higher non accrual income added $1 billion.
The decrease in loans had a $5 million unfavorable impact.
Lower securities yields had a $6 million or three basis point negative impact. This was mostly offset by the higher balance which added $5 million.
Average balances of the fed increased over $500 million impacting the margin by one basis point.
Our extraordinarily high fed balances from $13 billion continue to weigh heavily on the margin, but the gross impact of approximately 43 basis points.
Finally, prudent management of deposit pricing added $5 million and three basis points to the margin and lower rates on wholesale funding added $1 million.
Given the nature of our portfolio our loans reprice very quickly as rates dropped earlier last year. So the bulk of the impact from lower rates has been absorbed also while deposit rates are at record lows. We continue to manage deposit pricing with a close eye on the competitive environment and our liquidity position.
Overall credit quality was strong as shown on slide 10.
Gross charge offs were only 39 million a decrease of $14 million from the third quarter net.
Net charge offs were $29 million or 22 basis points.
Nonperforming assets increased $24 million remained below our historical norm at 69 basis points of total loans.
Inflows to non accrual were about half of the amount of the third quarter and the lowest level of any quarter since the pandemic began.
Criticized loans declined 459 million and comprised 6% of the total portfolio.
We believe our disciplined underwriting and diverse portfolio are assisting us in managing through the pandemic conditions.
Positive migration in the portfolio combined with a modestly improved economic outlook resulted in a small decrease in our allowance for credit losses.
As the path to full economic recovery remains uncertain due to the unprecedented challenges of the COVID-19 pandemic our reserve ratio remains elevated at one 9% or two 3% excluding triple P loans.
We are well positioned with a relatively high credit reserves and overall improving credit quality.
Slide 11 provides detail on segments that we believe pose higher risk in the current environment.
Period end loans, and the social distancing segment declined slightly.
Criticized loans were stable and non accruals remain under 1%. This segment has.
<unk> has performed better than expected, but issues can be lumpy and sudden and resulted in net charge offs of $21 billion on the fourth quarter.
The new round of Triple Pete will certainly be helpful for customers that are challenged by the current environment.
Energy loans decreased 13% to $1 6 billion at quarter end, representing 3% of our total loans.
Oil prices have increased and credit quality has improved with reductions in criticized non accruals and net charge offs, we have seen a little more capital markets activity and fall Redetermination resulted in only a slight decrease in borrowing basis due to lower reserves and additional information can be found in the appendix.
While we are pleased with the performance of these segments, we have applied a more severe economic forecast to them and believe we are well reserved.
Noninterest income increased $13 million as outlined on slide 12, continuing the positive trend we've seen since post the shutdown of the economy earlier last year.
Fourth quarter includes increased customer activity in most categories.
Customer derivative income increased $8 million with higher volume due to interest rate swaps and energy hedges combined with a change in the impact from the credit valuation adjustment spa.
Specifically, there was an unfavorable adjustment of $6 million in the third quarter and a favorable adjustment of less than $1 billion on the fourth quarter.
Commercial lending fees increased $5 million with a seasonal pickup in syndication activity and higher Unutilized line fees we.
We had smaller increases in fiduciary foreign exchange and letters of credit.
Also card fees remained very strong due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the Covid environment.
Securities trading income, which includes fair market adjustment for investments, we hold related to our technology and life Sciences business decreased $5 million from elevated levels generated over the last couple of quarters.
No deferred comp asset returns were $9 million, a $1 million increase from the third quarter and our offset in noninterest expenses.
All in all a strong quarter for fee income.
Turning to expenses on slide 13, salaries and benefits increased $14 million with higher performance based incentives severance staff insurance expense and technology related labor.
Note that on a full year basis salary and benefit expense was stable.
With a reduction in incentive compensation offsetting annual merit higher deferred comp and COVID-19 related costs.
We realized a $7 billion increase in outside processing due to card activity technology spend as well as triple P program costs.
Occupancy increased $2 million due to a catch up in maintenance projects that were delayed due to COVID-19 as well as seasonal expenses.
There is also a seasonal increase in advertising expense.
Our strong expense discipline as well on grain and is assisting us in navigating the slow rate environment as we invest for the future.
Our capital levels remained strong as shown on slide 14, our CET one ratio increased to an estimated 10, 35% above our target of 10%.
As always our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
In this regard we've maintained a very competitive dividend yield as.
As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital generated to shareholders.
As we sit here today, a great deal of uncertainty remains about the ultimate pace of economic recovery, whether it be faster or slower and economists forecast.
For that reason, we have paused our share repurchases and look forward to restarting the program as soon as we deem it prudent to do so.
Slide 15 provides our outlook for the first quarter relative to the fourth quarter as well as some color on the year ahead.
In the first quarter, we expect national dealer loans to continue to increase at a moderate pace as auto inventory rebuilds.
Also middle market is expected to grow as a result of increased economic activity.
However, this will be more than offset by mortgage banker declining from its record high due to seasonally lower purchase and refi volumes.
Energy is expected to decrease due to higher oil prices driving improved cash flow and capital markets activity.
As far as Triple P loans, we expect the pace of loan forgiveness could potentially exceed the second round of fundings.
Looking past the first quarter, excluding triple P loan activity and based on improving economic conditions, we expect loans to grow throughout the year.
We expect average deposits to remain strong in the first quarter as customers continue to carefully manage their liquidity.
As far as net interest income continued management of loan and deposit pricing is expected to be accretive, albeit to a lesser degree than we've seen so far.
We are currently in the process of deploying some excess liquidity by repaying $2 $8 billion of <unk> advances over an eight week period, which will provide a modest lift.
These benefits are expected to be more than offset by reduced loan balances and lower yields on securities slightly lower LIBOR as well as two fewer days in the quarter.
As we move through the year, assuming there is no change from rates that we experienced in the fourth quarter.
We expect quarterly pressure on securities yields on swap maturities to mostly offset to be mostly offset by loan growth excluding triple key impacts.
We expect net charge offs to increase from low levels, we've seen recently how's.
However, with a credit reserve at year end debt over 2% of loans, excluding Triple P. We believe we are well positioned to manage through this period of economic uncertainty.
We expect noninterest income in the first quarter to benefit from higher deposit service charges fiduciary and brokerage fees.
As deferred comp is difficult to predict we assume it will not be repeated.
We expect a seasonal decline in syndication activity.
Also card warrants and securities trading income are expected to decline from elevated levels.
As we progress through the year, we believe that customer driven fee categories in general should grow with improving economic conditions.
We expect expenses to be lower in the first quarter.
Our pension expense is expected to declined $9 million on the first quarter to get to the new run rate for 2021.
The decline is primarily due to strong investment performance in 2020 as.
As I mentioned, we do not forecast deferred comp of $9 billion to repeat.
Also marketing and occupancy expenses are expected to be seasonally lower and there are two less days in the quarter.
Partly offsetting all of this first quarter includes annual stock comp and associated higher payroll taxes.
We remain focused on maintaining our expense discipline, while we invest in the future.
Therefore on a full year basis, we expect higher salary expense related to normal merit and incentive comp as while as well as higher tech spend will be mostly offset by lower pension and deferred comp returns.
We expect a 22% tax rate excluding discrete items.
Finally as mentioned on the previous slide we remained focused on maintaining our strong capital levels and providing an attractive return to shareholders.
Now I'll turn the call back to Kurt.
Thank you Jim.
Paul difficult and uncertain conditions persist I am confident that our team will continue to adapt and thrive as we have over the past year, we expect the economy will improve in 2021.
We believe firming trade and manufacturing conditions, increasing business and consumer confidence as well as pent up demand will support solid economic growth, particularly in the back half of the year.
Comerica has a long history of successfully managing through challenging times.
We have demonstrated our resiliency and unwavering dedication to provide a high level of customer service as we navigate the COVID-19 pandemic.
We maintain a culture that drives continuous efficiency improvement.
We believe this will assist us in preserving our cost base as the economy improves and we continue to invest in our future.
Our disciplined credit culture, and strong capital base continues to serve us well.
Utilizing our deep expertise and experience to help our customers navigate these difficult times builds and solidifies long term relationships.
These key strengths provide the foundation to continue to deliver long term shareholder value.
This has been demonstrated by our ROE, which increased over 11% in the fourth quarter and our book value per share, which grew 7% over the past year as well as the current dividend yield which remains above 4%.
Thank you for your time and now we'd be happy to take your questions.
And at this time at the bank to ask a question simply press Star followed by the number one on your telephone keypad. Our first question will come from the line of Terry Mcevoy with Stephens.
Terry.
Everyone.
Maybe start with the outlook for loans I believe you said about $300 million of loan growth you experienced you saw on in December how much of that was within general middle market and I'm, just trying to get behind some of your optimism about growth on that portfolio at least in the early part in throughout 2021.
Hey, Terry its Peter.
Thanks for the question, Yes maam.
Month of December was felt really good it actually felt like kind of pre COVID-19 environment.
I don't know that I would say that it was robust per se, though in general middle market or our general business banking businesses. Those businesses continue to do really well, but we saw a little more of our momentum I think in some of our specialty businesses than just pure middle market now that said I do feel good about.
Sort of where the pipeline is going into the year.
We're encouraged by what we're seeing in that in that segment and hopefully the first quarter will be a little bit better than what we've been seeing in this COVID-19 COVID-19 world. So again.
<unk>.
Most of our general businesses are still.
Have this headwind.
On that Youre seeing with COVID-19 across the country, making it a little challenging.
Thanks, and then as a follow up I just saw that the severance expenses on slide 13.
Where are these higher in the fourth quarter can you just talk is there internally.
Our plan to maybe reduce the head count and focused on expenses and I know you talked about the first quarter expense trends any thoughts on full year 2021 core expense growth kind of netting out some of the moving parts that we see quarter to quarter. Thank you.
Yes, Terry this is Jim Thanks for the question regarding the severance that we had in the fourth quarter I would say that that was specifically targeted in certain areas just to restructure and make sure that we have the right staffing.
Both to fit the skill sets that we need in certain areas and also.
As part of some of the transitions, we've had with new leaders.
So it was really more optimizing our org structure as opposed to an expense reduction play.
Regarding just core expenses going forward I will just say that we clearly had some expenses in the fourth quarter that elevated on a run rate and I certainly would not look at the fourth quarter. As an example of what the run rate will be going forward.
We look to the full year for 2021, as we mentioned in the opening remarks, I do expect that lower pension expense and deferred comp will mostly offset merit tech spend and a little bit of a reset of stock comp given the COVID-19 year that we had this year. So we would expect expenses to be slightly up on a year to year.
Basis.
Great. Thanks, everyone.
Your next question comes from the line of Ken Zerbe with Morgan Stanley.
Good morning, Ken.
Great Good morning, everyone.
Question in terms of provision guidance, obviously as I say, it's reflective of the economy.
My two questions on this what does your economic model expect to happen.
On that Youre building in for your provision and if that does play out as you expect how do you see provision expense trending going forward.
Hey, Ken This is melendy. Thanks for the question I mean, obviously the small reserve release that we had this quarter was really reflective of the really strong credit performance of the portfolio and the modestly continuing to improve economic forecast, we use a variety of forecast in the <unk>.
So on provisioning process.
On that go through different scenarios, including.
Recovery as well as some additional stress in the more stress scenarios.
Assuming no material change to the credit profile, which based on all the factors that we see today, we are not expecting any material credit deterioration in the macroeconomic outlook stays stable to slightly continuing to improve as we go throughout 2021, and probably most importantly that the current level of on.
Certainty has started to abate I E. We get past. The next couple of months of this COVID-19 resurgence the vaccine rollout accelerates and the efficacy is proven out reserve levels are definitely going to come down.
It's impossible to tell you exactly how that's going to play out as you know <unk> is a very complex accounting exercise that we go through each quarter, but.
But we expect to be moving towards pre COVID-19 levels over the course of 2021.
Perhaps into the early part of 2022.
Alright.
Very helpful. And then just a follow up question in terms of the accelerated PPP fees can you just clarify again, how are you accounting for the anticipated accelerated fees in your.
NII guidance.
Yes, Ken.
We exclude triple P from that guidance since it is unpredictable in terms of where it would go.
When I look at Triple P. We noted that we had pretty strong fees in the fourth quarter, the majority of which that increase was triple P.
Expect in the first quarter that amount of accelerated fees to about double from the increase that we saw on the fourth quarter.
Wouldn't necessarily expect overall triple P income.
The double in the first quarter compared to fourth just because the rate of loan forgiveness will probably exceed the new round two that's coming on board.
Got you Okay. So when you said.
And I think if I heard this correctly for the full year for NII I think you were assuming the lower security yields largely offset by loan growth.
So if we assume relatively stable NII then.
Any accelerated PPV fees would be on top of that so it would be technically going from flat something positive on the NII side is that the right way of thinking about it.
That is the right way of thinking about it we will clearly be higher in 2021 because of accelerated triple pvs, but I was excluding that from our guidance.
All right very clear thank you very much.
Your next question comes from the line of John Ken Gary with Evercore ISI.
Good morning, John.
Morning.
I Wonder if I could just hop over to your commentary on buybacks.
You indicated that you plan on remain on the sidelines right now pending some clarity around the macro backdrop, but can you give us a little bit more detail. There what exactly are you looking for in terms of data points on the macro backdrop.
To get you comfortable that you can start to put some capital to work.
Alright, John Thanks, This is Jim.
When you look at where we're at today, we're actually at the peak of the Covid pandemic I think we just had a record in terms of daily deaths in the last week or so.
So we just think it's prudent to wait and look for a little more clearer line of sight in terms of where those things going on.
We feel like we already return a fair amount of capital just due to the relatively stronger dividend, we have compared to peers.
Looking forward to start on the share buyback.
We just think it's prudent to wait to see where things go because we want to make sure. We're there for the customers should things either take off faster than expected or what we're more focused on is what would happen. If the economy took a step backwards and we needed to be there for our customers and there were some economic ramifications to the step down.
And so we're just being careful on and watching for a clearer line of sight and well look forward to starting it at the appropriate time.
Okay.
Alright, Thank you and then separately on the on the margin front I know you don't really give explicit.
Margin guidance, but just wanted to get your thoughts on some of the <unk>.
Maybe if you can help us on how to think about the NIM progression from here given the PPP benefit, but also you've got the steeper curve, which is.
Certainly a factor.
But also the expectation on short rates remained low so just wanted to see if you can.
Help us with that and then secondarily, if you could maybe give us some color on your new money loan yields by portfolio. If you have that.
Yeah.
We can answer that in a couple of different ways.
One on the Triple P income will be a little bit lumpy by quarter. So as I mentioned earlier, we will exclude that from the guidance overall, we will have more triple P income in 2021, certainly than we did in 2020.
And as we mentioned during the script I do expect the impact from rates, even though the yield curve has steepened as you point out we're still adding securities in that low 100 bps range and so we are adding securities at a lower rate than what we are running off that on top of that you will notice in the appendix we are going to have in the second half.
Of the year, some lumpy treasury maturities as well as some hedges that start to mature and not in a big way.
But due to all of those factors, we will see a little bit of rate pressure each quarter and I do that I do see that mostly offsetting or perhaps a little more than offsetting the loan growth benefit that we get now triple P would be totally separate from that and again, we will see some significant amounts of accelerated fee income as the year goes on both due to round one is.
Well as round too so hopefully that helps make it a little bit more clear.
Do you want to comment about what youre seeing the competitive landscape on the on the.
The lending side.
Yes sure John.
Go ahead John.
Yes, no I was just asking about the new money loan yields if you happen to have that by the different types of of the different loan categories.
John as you see from the slide we've actually been having some pretty good success with our loan yields and the pricing of new business coming on board.
We actually did have a slightly lower LIBOR in the quarter about one and a half dips down yes, youll notice that due to pricing actions. We showed an increase of $3 million just due to pricing dynamics overcoming that lower LIBOR. So you could take away from that that loan yields are holding up quite well in fact, they're accretive right now.
Now we don't expect that to continue that same rate as I mentioned, because there are competitive pressures and there is a lot of excess liquidity out there.
But up until now they've been holding up quite well.
Yes, John its Peter I would just add I mean pricing continues to be very competitive out there.
And the marketplace, depending on which line of business you might be talking about it.
Maybe more opportunity for us than others. It just sort of depends but to Jim's point I think we've done a really good job of maintaining our pricing and produce some good yields for the bank.
So so far we've been able to keep doing that and I think we will be able to do it going forward.
Got it alright, thank you.
Your next question comes from the line of Bill <unk> with Wolfe Research.
Good morning Bill.
Good morning, So I wanted to ask from assuming that rates stay low at the short end then we get a bit more steepening could you give a little bit more color on when you would expect the trajectory of net interest income too.
Stopped declining and then.
I guess within the securities portfolio, if you could discuss.
What kind of reinvestment rates youre seeing relative to the $1 95%.
And then maybe a little bit more color on what opportunity a steeper curve represents that would be great.
Yeah, Bill it's Jim Thanks for the question.
It's really the short rates that drive our net interest income here at Comerica, and so even with a little bit more steepening in the yield curve, we are still going to have some pressure on.
On the Securities line in fact, the 195% you mentioned right now we are adding securities in the low ones and so it would take quite a bit of steep things to head off that.
That deterioration that we're seeing and in addition, we are seeing some lumpy maturities with treasuries as you see again in the appendix as well as swaps and that is quite a delta between what would either reinvest those in four if they just fell to cash at the fed.
So it really would take a change in short term rates to see any kind of material movement upward in our ongoing net interest income on a quarter to quarter basis.
Understood. That's very helpful and I had a follow up on expenses and efficiency more broadly if I could can we see a return to positive operating leverage without higher rates given the dynamics that you were just describing.
Net interest income.
Yeah.
Bill This is Curt I might just talk a little bit about.
Or sort of.
Generating potential and just sort of our outlook from them.
Growth perspective going forward.
Your question was specifically about efficiency ratio, but I might first just comment on the last two quarters, we were able to generate double digit Roe.
What has been a pretty challenging environment and we continue to feel really good about our long term financial model and really our long term financial outlook at our business model and as always we're focused on the things that we can control. We think we've got a very attractive franchise. We're in a lot of very high growth markets that we do believe should perform.
Better than the U S. As a whole as we come out of the Covid situation hit the second half of the year. So we do believe that it will see higher customer demand loan activity et cetera, and as you know we've got a lot of depth and expertise in middle market business banking, a number of sort of unique businesses.
Beyond just sort of the balance sheet growth opportunity, we continue to maintain a very attractive deposit base and most financial institutions are flush with deposits right now, but we really feel like what we've got is very relationship oriented deposits and we've done a very good job of a relationship pricing with those deposits credit.
Continues to do very well, we think we will outperform relative to our peer group in that area, which we think we're newer to our overall financial performance and then we're very focused on two other things I would mentioned is just fee income and how we can generate more fee income as an institution, especially on the card area of Treasury management.
Wealth management, we've got strong capabilities. There we've been doing a lot to continue to invest in those areas and we again think that will help in terms of our overall financial performance and while expenses were up some for the quarter, we do feel like that's not necessarily a run rate but.
But just some unique items that hit us in the fourth quarter and our expense discipline is very ingrained in our culture and we're always looking for opportunities to continue to manage tightly on the expense front and then just maybe lastly, as I said in my formal comments, we've managed through lots of different cycles and this is just another cycle of that remainder.
<unk> through <unk>.
As an institution, we have always struck a good balance between growth and conservative management of our balance sheet and credit and we think that will help us manage through whatever happens in the next three or four months, but position us well longer term given all the factors that I just outlined.
That's very helpful. Thank you all for taking my questions.
Thank you.
Your next question comes from the line of Jennifer <unk> with <unk> Securities.
Good morning, Jennifer.
Good morning.
A little more detail on what youre seeing in the more at risk portfolios from more social distancing right now the credit obviously continues to outperform.
Curious as to what you saw.
Moving below the surface here.
Jennifer This is melinda thanks for the question so.
Overall, as you've already sort of highlighted in Jim and Curt did in their opening comments I mean, we're.
Really pleased with the performance of the portfolio as a whole and.
Although these are at risk industries. They have actually held up I think better than what we would've expected coming into this.
The segment called social distancing, specifically are those those companies that are most directly impacted by any social mitigation.
Actions that are taking place, though obviously in the near term given the current Corona virus surging.
It's probably the portfolio that we are watching the closest.
And probably has the most opportunity for some additional migration.
All of these four portfolios that are listed on slide 11, although they have elevated credit metrics, we have not seen a high level of migration into the NPA category, which obviously npa's would need to increase in order to see significantly increasing losses.
Energy portfolio, although it has the most stress.
Credit metrics.
Actually has stabilized quite nicely and certainly prices at $50 a barrel supply demand dynamics have changed.
And.
That portfolio I would call much more stabilized even though it has elevated credit metrics and certainly charge offs the last two quarters.
They have shown that we may be through the worst of that that can change really quickly with energy obviously, given the commodity nature. So we are continuing to work with those borrowers.
So overall again, we feel pretty good about all of these at risk industries, we certainly are well reserved with almost a $1 billion.
Reserves and feel like anything that debt does migrate.
Into that MPA category, we are more than well reserved to handle.
Thanks, so much.
Thank you Jennifer.
Your next question comes from the line of John Armstrong with RBC capital markets.
John Good morning, good morning, everyone.
Melinda question for you a follow up to.
Ken's earlier question on.
The outlook for reserve levels, I know you probably hate these questions but.
When we think about pre Covid reserve levels and I look at slide 10, and I see that 133 reserve.
And I think the day one seasonal for you if I remember correctly was basically zero day, maybe a positive.
Is that the message you're sending when you say pre COVID-19 levels that we can head back to those levels by the end of 'twenty one on early 'twenty two.
You said or did I mishear that.
I think that I think thats fair and accurate I mean again, obviously seasonal is a complex accounting exercise on every single quarter, we're going to take the most recent economic forecast.
The portfolio, our portfolio and what's happening in our portfolio.
But again, given where the credit metrics are today in the overall, improving economic forecast, particularly for the second half of the year I think that Directionally, yes, we expect to be headed in the direction of pre COVID-19 level I can't tell you what that number is I don't think anybody knows what that number is I mean, we're in new in unchartered territory.
Sorry, seasonal obviously is new.
And we've never sort of come out of a recessionary environment, particularly one as severe as what we experienced in the first and second quarter. So directionally, yes by the end of 2021, beginning of 2022 and that could either slow or accelerate based on how quickly the second half of the year recovery happens.
Okay. That's all fair and then and then on the charge off thinking you're saying modest increase I guess.
Is there anything we should be aware of I mean are there any bigger charge offs coming or bigger problems.
But youre worried about or you just expect maybe some modest increases, which I think we probably all have built into the models, but was there any any way you want to flag for us in terms of.
Longer term charge off outlook.
No I think what you said that it's really just some modest increases over the particularly low levels that we've seen in the last couple of quarters. We've obviously also had some nice recoveries those are.
Lumpy and difficult to predict so there is there is nothing in the portfolio debt.
<unk> has me.
Overly concerned from a concentration perspective, I mean, I think that where we will continue to see charge offs honestly is going to be in those at risk portfolios and probably more likely in that social distancing.
Okay.
If I can squeeze in one more maybe for Peter the dealer.
Balances and the trends.
How long do you think it takes to get back to normal.
And do you think normal is that kind of high 7 billion dollar type balance range. Thanks.
Yes, John Thanks.
I don't know if normal is the $7 billion I think the getting back to normal as is probably harder to determine then we would like it's certainly.
Second half of 2021 hopefully.
Just hopefully seeing that business kind of get back to its normal inventory levels.
Which there's a lot of debate about when or if thats going to happen. We believe it will happen and we hear from our customers. They believe that that will happen as well.
So hopefully that that happens on the second part of this year and we certainly.
We love that space, we're very comfortable getting back to the numbers you see in prior quarters on slide 26.
If that can happen end of this year into next then we'd be very excited about that.
Thank you.
Our next question will come from the line of Steven Alexopoulos with Jpmorgan.
Hey, good morning, everybody. Good morning. So my first question during this period of low rates and slow growth, we've seen more banks turning to M&A to drive shareholder value and it's been quite a while since we've seen comerica uses tool as you think about 2021 priorities. How are you viewing M&A here.
Should we expect to see the company get more active on this front.
Thanks, David as I have said through the years on these calls on other.
Forms as well we believe our model really is built.
For success on organic growth we are in gray.
Great lines of business, where we have deep expertise and scale and in great markets, where we still have a lot of room to continue to grow and so we're going to be primarily focused on that.
Do think there is a lot of uncertainty around the environment on a go forward basis on how the credit cycle we.
We will play out and so I don't have a crystal ball as to what M&A activity looks like in 2000, and 2021, but really no change for us focused on organic growth and we've only done two deals in the last 20 years, we have said repeatedly debt.
If we were going to look at opportunities, we are probably first and foremost interested in Texas and California, given the growth dynamics of both of those markets.
Deal would have to make great strategic and cultural.
For us and so while there have been a number of deals announced last year.
It doesn't change our overall view and we're going to be a patient acquire it doesn't mean that we would look at opportunities, but again first and foremost focused on organic growth. We would as we have been in the past be interested in things that are non bank acquisition. So if we have a GAAP in fee income or we see an opportunity.
They're then those are the types of things, we might look at as well nothing on the immediate horizon. Okay.
Okay.
That's helpful and from my follow up if I could ask you a big picture question. So on the impacts that we've talked about has been from the pandemic as this dramatic acceleration rate the adoption of digital consumers businesses everybody.
Kurt how has this impacted how you view historical relationship banking model at the company and how have your investments in technology changed as Youre seeing customers adapt digital more freak.
Frequently thanks.
Well, Fortunately I think not only for us but for the whole industry. We've all been on this digital journey in 2020 in many regards in the Covid situation has accelerated that path as we've seen.
More migration to digital and mobile online channels for consumers as well as businesses.
We believe that we remain in a well well position there we've got a really strong talent on the Iot side in this past year, we recruited a new executive director of technology and operations Megan Crespi.
<unk> Bruce Mitchell.
They've been bringing a lot of new thoughts and ideas to us and it's always for us sort of focused on two areas. One is the things that we can do to continue to.
Enable our customers and provide attractive products and services for our customers and then secondly, how we use technology to help reduce expenses across the company things like AI et cetera, we've talked before about the fact that we've been on this path of migration to the cloud are making good progress there and we've also talked about the <unk>.
Debt, while we don't necessarily have the same scale as many of our larger competitors.
Can leverage both a good blend of proprietary capabilities with third parties and really achieve scale where needed. If we don't necessarily have it in house and there are a number of things that we've got in flight right now we rolled out a new digital Onboarding platform last year that will benefit really across all of our business.
All lines in terms of originating new relationships via mobile and web channels. We brought on a new loan origination platform for our consumer bank. We've done a lot around just how we leverage data and push data to our employees in terms of customer information, we're making a number of enhancements to our treasury management platform.
And then we've been going through some upgrades in our wealth management business line, a new trust platform and a new wealth management portal sort of single sign on portal for our wealth management clients. So I think we remain competitive we feel good about our positioning I think it's always important to remember that we are first and foremost primarily a <unk>.
<unk> bank and relationship still really matter in that business.
The intellectual capital we bring the advice we bring every deal. We do is highly customized just not something that you push out over sort of a digital channel, but we've got to have products and services that support the treasury.
Side of the house, the treasurer of the CFO et cetera in that space and we believe we do and then even in the other business lines wealth management and even in our retail bank we.
Tend to serve a more affluent client relationships still really important their advice still really important but again enabled through digital and mobile on other channels as well and we feel like we're well positioned.
Okay terrific. Thanks for all that color.
Your next question comes from the line of Peter Winter with Wedbush Securities.
Good morning, Peter.
I wanted to ask about loan growth and the confidence that.
It picks up in the <unk>.
Second quarter and the reason I ask is we've heard from other banks.
There were so much excess liquidity that borrowers would pump that excess liquidity.
Before.
Moving down on lines of credit or new loan growth.
Wondering if you could talk about that.
Yes, Peter this is Peter.
I think I think you'll probably see both of those things I don't know that I would disagree with the idea that we probably see some of the liquidity you get used up I mean, we've got very high deposits right now like all banks some of the highest we've seen and so I suspect that would be part of the turn and frankly, a good indicator that.
Loan direction is moving and that is moving up well.
While deposits are coming down so.
Regardless of which of those necessarily occurs first we still feel pretty encouraged that the second half of the year based on most of the macro indicators that we're seeing so far would would lead us to believe that we're going to see a better second half of the year. When it comes to loan growth, but I don't think you're necessarily wrong or I wouldn't disagree with that.
The idea that you would like to see deposits come down first and I think those together.
Would directionally be really good for loans.
Okay.
Okay.
Tim if I could follow up about the reinvestment pressure on the securities portfolio would you continue to shift some of that excess liquidity into securities as maybe as an offset.
Like we saw on the first fourth quarter.
Yeah, Peter Thanks for the question that is something that we're going to have to.
Examine on an ongoing basis.
We have been and we are taking incremental steps to invest excess liquidity, but we're being careful not to jump in all at once and placed a big bet that any one time given that we just don't know where things are headed so as you look at where we've been and where we're going.
Certainly starting in late second quarter of 'twenty third quarter 'twenty, we did prepay a material amount of purchase funds.
Midway through the third quarter of course, we bought the two on a quarter billion of Securities, which had a fourth quarter benefit also then as I mentioned in the first quarter of this year were prepaying $2 $8 billion in FHL be funding. So we are attempting to take steps that show some day.
A benefit each quarter in terms of doing something with the excess liquidity, but we want to do it in a very measured way, we don't necessarily want to sit on the sidelines forever, but we don't want to jump in all once either.
And so youll see us continue to evaluate this time goes on and take incremental steps as the quarters go on.
And then when there is more of a line of sight, we may take even a bigger step but.
We do think caution is in order, but totally sitting on the sidelines doesn't makes sense either so the measured pace is kind of we're managing ourselves too.
Got it.
Thanks for taking my questions.
Thank you Peter.
Your next question comes from the line of Gary Tenner with D. A Davidson.
Morning, Jerry Thanks, Good morning, Thanks My.
My questions were just answered appreciate it thank you.
Your next question will come from the line of Brian Foran with Autonomous research.
Thanks, Brian.
Good morning, I, just wanted to ask one guidance clarification, and then one follow up on your macro commentary.
So on the NII guidance.
You've referenced a line of puts and takes you gave a lot of great detail and at one point.
Like you were indicating relatively stable are you thinking more from the reported <unk>.
19 or more from like the annualized run rate we're at now.
That's really looking for.
Ryan in 2024th quarter, and Thats really our anchor point.
Obviously, youre going to get some nuances with days in the quarter and so on but the.
Detroit, where we're at right now going forward.
Got it and then on the roads.
You gave the kind of commentary on loan growth. So I don't want to ask a question that's redundant, but it didn't really jumped out to me EBIT comment that December felt really good almost like pre COVID-19.
I Wonder if you could just give the next level down was it was it the conversations with clients was it the pipelines where certain activity metrics youre looking at.
What were the things that started to feel like pre COVID-19 by the time you got end of December.
Hey, Bryan its Peter.
The one I know for sure is just the amount of deals that we approved and looked at in the month of December.
That came through the process and so that was that was probably the best.
Indicator that that I've had and Melinda and I've had together in a while are just what we see at our committees and the amount of activity. We've had so that was encouraging now end of the year is always busy youre always going to sort of see that but it certainly felt like.
Pre COVID-19 better than wed certainly seen in the last 60 to 90 days and one thing I continue to say about the pipeline as it feels in it and the numbers look good they look pre COVID-19. What is what is less certain is just the timing of some of this in and so much of it right now is M&A.
Dividend recaps its not necessarily core.
Request that companies have for capex or things like that so it's a little bit lumpy.
But it does feel better than it did.
Certainly 90 days ago is just still a little bit hard to determine when exactly all of that's going to happen. So hopefully that gives you a little double click down Brian as to what you were looking for.
That was great. Thank you.
Your next question comes from the line of Scott <unk> with Piper Sandler.
Well good morning, everybody Hey, Thank you for taking the question I think most of mine have been hit but I just wanted to ask one.
Question, just on the mortgage banker portfolio.
It's been.
Kind of swollen by.
Huge mortgage market, we had over the course of the past year or so just guess I'm curious where that ends up settling out since theres. So much air between where it where it started and where it is now I guess the bull cases debt.
You guys as sort of a strong market share player would retain more of those balances as originations for the industry.
<unk> kind of normalized but just curious on how you guys see that playing out.
Yes, Scott it's Peter Thank you.
Slide 23 in the appendix has our mortgage banker outlook for originations in 2021, and I think we've usually use that as an indicator of what we think the year is going to be as Jim indicated it'll be it'll be a little bit of a headwind on loan balances.
Overall, we think the.
Sort of annual cycle, you see in that business continues to.
Lift for Us if you will a little bit we continue to add new names.
We love the space, we've been in in a long long time, we think were very important player in it.
I think when you look at the outlook for the MBA forecast that that sort of gives you an idea of what I think we're going to see.
But we also feel like we are increasing our customer count and our opportunities in that space and we will continue to do so in the coming quarters and years.
Alright, perfect. Thank you very much.
Your next question comes from the line of Brock Vandervliet with UBS.
Good morning, Brian. Thank you good morning.
I was just wanted to ask a follow up to Steve's question regarding technology.
Yeah.
And then ironic benefit of of Covid. If you can call. It that is that it does allow kind of a reanalysis reexamination of the entire delivery structure.
You have seen banks, some banks kind of attack.
On the branch structure more aggressively and it painful.
Funds some of the tech.
Investments.
Added direction that you.
On may potentially pursue in the future as your new Tech team.
Settles in.
But.
Just a couple of comments around.
Our branch network first of all.
Just from a size standpoint, we have roughly 434% and 35 banking centers. So.
So we don't have the same sort of scale that some players have and we have less redundancy in markets.
Youre not going to drive down the street and so he took to Comerica bank centers across the street from each other and so we've kind of eliminated.
Sort of a redundancy in the platform and feel pretty good about the network. We have overall, having said that just like all financial services firms, we have been selectively continuing to prune that portfolio.
We've been changing the configuration and the banking centers, we've been leveraging technology more doing away with as like traditional total loans have been more sort of universal bankers and the banking center that can handle all things for clients, whether it's a loan or deposit need or.
Whatever advisory type capabilities, we need to deliver and that's allowed us to reduce head count in the banking centers on overtime and reduce the ftes in the bank banking centers and so.
I do think that that trend of just sort of continued slowly decreasing the size of the number of banking centers will continue but I don't think you should expect necessarily that we're going to announce some huge restructuring of our bank you sooner banking center platform.
We have other ways to continue to fund our technology journey, and we've been able to do that within our overall expense base.
Okay.
And more broadly and I know this is difficult given the uncertainty of COVID-19, but on the on the back of that.
You have any sense you can give us on how we should think about.
On the efficiency on.
On the efficiency ratio and where that could potentially potentially.
Potentially run.
Brock thats going to be dependent upon a number one where the economy goes and where interest rates go that will be a big driver and I think we're in a little bit of unchartered territory here, but in the Meanwhile, we are focused on all of those things that we can control I would echo <unk> comments in terms of some of the things we're doing on the <unk>.
Technology side.
We do focus on.
Efficiencies on an ongoing basis, and we do plan on leveraging technology. Both in terms of the IAA to make departments more efficient as well as the distribution systems, whether that'd be on the commercial banking side with Treasury management systems for the banking centers that you mentioned, so we will continue to take steps to refine how we approach the.
You should model in the <unk>.
<unk> expense base and the revenue will be somewhat driven over the next two or three years by the rate environment and in the Meanwhile, we will keep doing all of the good blocking and tackling that we've been doing historically and keep focusing on those things that we can control.
Thank you I appreciate the color.
And I will now turn the call back over to Curt Farmer, President Chairman and CEO for any closing remarks.
Let me just say that as always we appreciate everyone's interest in Comerica, we continue to hope for good health for all of you and better days ahead for our country in 2021 have a great day.
Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.
[music].
John.
[music].
Yes.
Hum.
[music].
Yes.
Sure.
[music].
Hum.
[music].
Sure.
[music].