Q1 2021 Comerica Inc Earnings Call
This physical stimulus and the ramp up in the vaccine distribution in combination with ample liquidity and low borrowing calls has the potential to Spur substantial activity economic metrics or improve quickly and the outlook for the back half. The year is for strong economic growth as the economy continues to reopen and prepay endemic conditions returned many businesses are beginning to age accelerating activity. I remain very proud of the unwavering commitment of our team to serve our customers communities and each other we have again stepped up our efforts to support those affected by the pandemic last month Comerica and the Comerica charitable Foundation pledged approximately 16 million to support small businesses and communities impacted by Tobin off. This support is in addition to the 11 million committed in 2020.
as you know
Sure, we founded three point nine billion in the first round of triple P loans.
Also so far this year to the hard work of colleagues across the bank. We further assisted businesses by funding close to 1 billion in the second round of triple p in addition the first quarter we processed over six hundred million and triple P loan repayments mainly through forgiveness.
Trinity our first quarter financial performance was flagged for compared to the fourth quarter average loans decrease with seasoning lower home purchase volumes impacting our mortgage Banker Business Bank. Also Total Line utilization across nearly all businesses that remain low. However, our loan pipeline has continued to grow
Average deposits increased over 1 billion to another all-time high as customers received additional stimulus payments.
Net interest income was impacted by $17 billion in lease residual adjustments in an expiring Legacy portfolio, excluding this impact pretax pre-provision net revenue agent 5% despite the shorter quarter of the decline in Lone volume. This increase in ppnr was due to continued robust degenerating activity and our expense discipline off as far as credit or conservative culture diverse portfolio as well as deep expertise has served as well strong credit performance and an improvement in our economic forecast resolve that negative provision of 182 million dollars the credit Reserve remains healthy at 1.59% net charge-offs were only three basis points.
Through the cycles are net charge also typically been at or below our peer group average including during the past year as we navigated the pandemic.
With more confidence in the economic recovery and an estimated CT one ratio of 11.09% We plan to restart share repurchases and the second quarter we expect to gain a significant strides towards our 10% Target giving careful consideration to Ernie's generation as well as capital needs to find Future loan growth. Our ongoing goal is to provide an attractive return their chef which includes a dividend that currently has a lot of about 4% and now we'll turn the call over to Jim. Thanks Kurt and good morning everyone turning to slide five off a bridge loans decreased approximately eight hundred million dollars as Kurt mentioned. The biggest driver was mortgage Banker which declined from its record high in the fourth quarter do to lower purchase volumes.
Energy decreased as higher oil prices are resulting improved cash flow and capital markets activity.
We had expected National dealer loans would begin to Rebound in the first quarter. However, supply chain issues. Most notably with computer chips have stymied production in addition March auto sales for the second highest of all time for that month further depleting inventory.
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one point five billion dollars below the first quarter of 2020
We remain confident that floor plan balances will eventually rebuild to historical levels.
Equity Fund Services was a bright spot increasing over $200 with strong fun formation.
Total. And Loans reflected decreases of $900 in dealer and $700 and mortgage Banker land utilization for the total portfolio was declined to 47%
We feel good about the pipeline which now sits above pre pandemic levels it increased to nearly every business line and Loans in the last stage of the pipeline nearly doubled over the fourth quarter off at Lee we would expect this to translate into loan growth.
As far as loan yields there were Seventeen million dollars at least residual value adjustments mostly on aircraft and an expiring Legacy portfolio. We've not done business in this segment for many years and no further adjustments are expected excluding the 14 basis point impact from the residual adjustment loan yields increased three basis points with the benefit of accelerated life is from triple P forgiveness continued pricing actions particularly adding rate floors when possible as long as we knew offset the decline in Libor,
Average deposits increased 2% or 1.1 billion dollars to a new record as shown on slide six.
Consumer deposits increased nearly 1 billion dollars primarily due to seasonality in the additional stimulus received in January.
Customers continue to conserve and maintain excess cash balances with strong deposit growth our loan-to-deposit ratio decreased 69% the average cost of interest-bearing deposit to reach an all-time low of 8 basis points a decrease of 3 basis points from the fourth quarter and our total funding costs felt only nine basis points.
Flight seven provides details and our Securities portfolio. And balances are up modestly as we recently began to gradually deploy some of our excess liquidity by opportunistically increasing size of the portfolio.
Laura rates on the replacement of about 1 billion dollars and payments received during the quarter resulted in the yield on the portfolio declining the 1.89%
old son repayment average approximately 235 basis points while recent Investments have been in the low 180s. We expect the mostly offset the yield pressure on NBS in the near-term the modestly larger portfolio. However, maturing treasuries will likely be a slight headwind in the back half of the Year depending on the mix of MBS and treasuries we would likely replace them with as well as Mom additions.
Turning to slide eight, excluding the impact of the lease residual adjustment and two days in the quarter then interest income was roughly stable and the net interest margin would have increased two basis points.
As far as the details interest income on loans decrease twenty-eight million dollars and reduce the net interest. Margin by 8 basis points. This was primarily due to the 17 million dollars of lease residual judgments, which had a nine basis-point impact in the margin as well as two fewer days in the corridor, which had a seven million dollar impact.
Laura
And balances had a $5 impact and were partially offset by a $3 increase in fees related to Triple P loans.
Other portfolio Dynamics had a two-million-dollar unfavorable impact and included lower Libor partially offset by pricing actions.
Laura Securities yields as outlined in the previous slide had a two-million-dollar or one basis point negative impact continued prudent management of deposit pricing added three million dollars and one basis point margin and a reduction in wholesale funding added 1 million dollars and one basis point.
Average balances of the FED were relatively steady and remained extraordinarily high at 12.5 billion this continues to weigh heavily in the margin with a gross impact of approximately 41 basis points credit quality was strong and metrics are moving in the right direction as shown on slide nine net charge-offs were only three million dollars or three basis points off non-performing assets decreased thirty-four million dollars and at 64 basis points of total loans. They are about only half of our 20 year average.
Infos Donata cruel were also very low criticized loans declined 366 million dollars and comprise 5% of the total portfolio.
Positive migration in the portfolio combined with growing confidence and improving economic forecasts resulted in a decrease in our allowance for credit losses of note both the social distance related segments as well as the energy portfolio a perform better than expected. However, we continue to apply a more severe economic forecast to these areas are total Reserve ratio is very healthy at 1.59% or 1.72% excluding triple P loans and remains well above pre pandemic levels.
Not interest income increased $5 as outlined in slide ten sustaining the positive trend we've seen for the past year.
Derivative income increased $11 as volumes remain robust particularly for energy Hedges combined with the ten billion dollar benefit from a change in the credit valuation adjustment.
Know that we have made a change in reporting. We have combined foreign exchange and customer derivative income which was previously included in other non-interest income into a combined derivative income line item month prior periods have been adjusted to reflect this change.
Warrant an investment banking fees moved higher and we had smaller increases and fiduciary and deposit service charges.
Partly offsetting this commercial lending fees decreased six million dollars with the seasonal decline in syndication activity.
Deferred Comp asset returns for $3 a $6 decrease from the fourth quarter and are offset and not interest expenses.
No card fees remained elevated. They were over 20% higher than a year ago. You had a government card and Merchant activity spurred by the economic stimulus and changes in customer Behavior down to the COVID-19 environment.
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another strong quarter for fee income
turning to expenses on slide eleven which decreased $18 or 4%
starting with salaries and benefits which were up eleven million dollars due to seasonal factors. This increase was driven by annual stock compensation and payroll taxes resetting providing a partial offset was a decrease in deferred cop as well as a reduction due to fewer days in the quarter and seasonally lower staff Insurance costs.
All other expenses decreased $29 as discussed last quarter strong investment performance in 2020 has resulted in an eight million dollar reduction in pension costs is included in other non-interest expense.
In addition effective January one. We adopted a change in the accounting method for our Pension Plan previous quarters have been adjusted specifically fourth-quarter pension expense was reduced by $8,000. This change also decreased a l c i and increase retained earnings that your end by $104 billion dollars which resulted in a 16 basis point increase to our cet1 ratio off.
Finally, we realized seasonal decreases in advertising and occupancy lower operating losses and FDIC expense as well as smaller decreases in other categories.
Are strong expense discipline is assisting Us in navigating the slow rate environment as we invest for the future.
RCT one ratio increased to an estimated 11.09% as shown on slide 12.
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 have maintained a very competitive dividend yield as far as share repurchases. We have a long track record of actively managing our capital and returning excess Capital to shareholders.
With more confidence in the path of the economic recovery. We plan to resume share repurchases in the second quarter. We expect to make significant strides towards rct1 Target of 10%
slide 13 provides her outlook for the second quarter relative to the first quarter. In addition. We have provided expected friends for the second half of the Year relative to the second quarter Outlook.
In the second quarter, excluding triple P loans. We expect loan volume to be stable.
We expect growth in several lines of business led by Middle Market is a result of increasing m&a as well as working capital and capex needs.
However, this will be offset by continuing headwinds and mortgage Banker National dealer and energy.
In line with the forecast mortgage Banker is expected to decline is refi volumes begin to cool with higher rates.
We expect National dealer to continue to decrease as Auto inventory levels are challenged by strong demand combined with supply issues.
Also energy loans are expected to remain on the current declining Trend as higher oil prices are driving improved cash flow and capital markets activity.
As far as triple P loans, it is difficult to predict. However, we believe loan forgiveness will pick up towards the end of the second quarter in the bulk should be repaid by year-end.
Excluding triple P loan activity We Believe loans should grow across nearly all business lines in the second half of the Year. This is based on our robust Pipeline and expectations that the economy will continue to strengthen.
We expect average deposits to remain strong with the second quarter benefiting from the latest Federal stimulus. These record levels are expected to Wayne in the back half of the year as customers start to put cash to work wage.
As far as net interest income the 17 million dollar lease residual adjustment. We took in the first quarter will not recur.
That aside all other factors including triple P are expected to offset each other in the second quarter. For example headwinds from low reinvestment yields insecurities should be offset by a monthly larger portfolios.
As we move into the second half of the year, we expect pressure on Securities yields and swap maturities to be roughly offset by non triple P loan growth.
In addition lower triple P loan volume and accelerated fees are expected to be a headwind. Of course Triple P activity is difficult to predict and may result in variability.
Credit quality is expected to remain strong. Assuming the economy remains in the current path. We expect our allowance should move towards pre pandemic levels.
We expect non-interest income in the second quarter to benefit from higher card fees driven by recent stimulus payments as well as increased indication fees following lower seasonal activity in the first quarter.
Also expect growth if I do Sherry income reflect an annual tax related activity and new business generation.
This growth is expected to be more than offset by a decline and derivatives in Warrenton come from elevated levels as well as Deferred Comp, which is not assumed to repeat.
As we progress through the year, we believe customer-driven fee categories in general should grow with improving economic conditions. However card fees are expected to be a headwind as the benefit from growing Merchants corporate volumes could be more than offset by lower government card activity due to the absence of further individual stimulus payments.
We expect expenses to be stable in the second quarter salary and benefit expenses are expected to decrease in the second quarter with lower stock, as well as lower payroll taxes partly offset back and one additional day.
Offsetting this decrease we expect to rise an outside processing tied to growth and card fees as well as easily hire marketing and occupancy expenses.
As far as the second half of the Year by maintaining our focus on expenses. We expect to offset higher Tech spend in addition. We expect increases in certain line items due to seasonality and revenue growth.
Finally as I indicated on the previous slide, we plan to restart share repurchases in the second quarter now, I'll turn the call back to Kurt.
Thank you Jim. As I mentioned at the beginning of the call. We're off to a good start. Can we expect the economy will continue to improve throughout this year? We believe firmly manufacturing conditions wage increasing business and consumer confidence as well as pent-up demand will support strong economic growth. It is hard to believe that just over a year ago. We drastically changed the ways in which we work and live off we've demonstrated the resilience of our business model as we embraced our core values and Rose to the occasion to support our customers communities and each other. Our success is anchored by our ability to provide our expertise Xperience a building and solidified deep enduring relationships particularly during challenging times. I'm extremely proud of the work our team has done to ensure we continue to deliver the same high level of service off.
We are focused on delivering a more Diversified and balanced Revenue base with an emphasis on degeneration and our progress is demonstrated in our results is not interested in, has increased in each of the past four quarters with a robust car platform is a great example. It's helped position us for the recent and likely ongoing changes in customer Behavior. Also, our fiduciary business is growing with strong collaboration between wealth management commercial and Retail Bank divisions in February. We increase the breath and scale of our trust Alliance business through the acquisition of a small group with expertise in this area.
In addition, we are committed to maintaining Our Song expense discipline. Our technology Investments are enhancing the customer and colleague experience helping to attract and retain customers and improving College shinsei. Finally our discipline credit culture and strong Capital base continue to serve as well these key strengths provide the foundation to continue to deliver long-term shareholder value. Thank you for your time. And now we'll be happy to take your questions.
At this time. Did you buy just the question simply press star followed by the number one on your telephone keypad. Again. That is star one Thursday morning Janet great. Thanks morning in terms of BuyBacks. Good to hear that you're starting at sooner rather than later. Are you able to quantify your buyback expectation into office? Also, when do you expect that? You might be able to get back to that 10% ctr1? Well, good morning Ken. Thanks for the question. We would not expect to get right back to 10% in the same quarter. We're going to be monitoring the environment throughout the second quarter. And one of the things on our mind is that we are looking at the potential for some pretty good loan growth in the second half of the year. If not late in a second quarter. And so it's important to us to make sure that we have a buffer above 10% just to make sure that we can accommodate our customers and their needs and have the capital to support that growth wage.
So we do expect to make significant strides towards that.
10% level but we don't want to throw the needle too tightly there. We think it's important to leave some type of buffer there for potential loan growth. They could pop up late in the quarter or on the couple quarters following the second call.
Got it. So it sounds like it's more of a at least a 22 event. If you're going to keep the capital to support loan growth in the back half. Okay, and are you going to make that assessment as we move through Thursday, we would expect to keep a buffer and you know as we go through the last two quarters will make that determination as we go through twenty-one.
Got it. Okay, and then my other question you mentioned that you are investing Samir access acquitted in into Securities is your view changing at all and how much of the excess deposit stay on your balance sheet over the long-term. You know, we we do expect that some of those deposits will start to wane in the second half of the year in the long term. But we do feel pretty good about the liquidity position, you know, we're off the FED to materially change from its accommodative policy at this point. And so we are comfortable taking measured steps to invest some excess liquidity into Securities. Well, that's again that's something we're going to monitor it throughout the year. We want to avoid making any real big moves. We think it is prudent to go ahead and invest some of that excess liquidity and and then Monitor and future quarters what's going on in the economy with the fed and make that assessment as we move into the ladder quarters of the year.
All right. Thank you. Thank you Kim.
Your next question comes from the line is Terry McEvoy with Stephen morning Terry. Hi. Good morning. First question. Your expectations are on growth and middle-market lending. I know you said pipelines are higher and I think there were some commentary on on m&a but you could you just run through your your confidence behind that statement and any markets or industries that stand out Terry, it's Peter, you know, I we feel pretty good on the Outlook particularly in the second half of the year as as Jim and Kurt mentioned the the second quarter will be interesting to see how it unfolds as as the economy start to open up and we feel good about it in just about all of our markets the major markets of Michigan, Texas and California. The pipeline looks pretty good activity level looks good. What you just still aren't seeing is is utilization. So that's probably the biggest the biggest challenge but we do phone number.
On our Outlook as we've mentioned and are encouraged about the optimism that we hear from our customers and and they're sort of renewed belief that things are are turning if you will.
Things and and then as a follow-up, there's been a lot of talk about businesses and individuals moving from California to Texas. I'm just curious. What are your thoughts here? Is this a a net neutral to Comerica or do you see some outside growth on the Texas side?
Terry that's a appreciate the question. I think it's a a positive for us sort of either way. You know, we've got great franchises in both markets. And if anything it gives us ability to really support our customer to the extent that they're moving and we can help help them with that process. I think that puts us at an advantage. So, you know from the conversations we've had with customers. It's not a bulb in common conversation to have that about about the move and I think it puts us in a role advantage to be able to support on either way.
Thanks. Appreciate it.
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