Q2 2021 Comerica Inc Earnings Call
Good day and thank you for standing by 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.
I asked a question during the session you will need to press star 1 on your telephone I would now like to hand, the conference over to Darlene persons director of Investor Relations. Please go ahead.
Thanks for Dana Good morning, and welcome to Comerica second quarter 2021 earnings conference call participating on this call will be our president Chairman and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda chassis, and executive director of a commercial bank Peter subject. During this presentation, we will be referring to slides which provide.
Additional detail the.
The presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website at Comerica Dot com.
This conference call contains forward looking statements and in that regard you should be mindful of the risks and uncertainties that could cause actual results to materially vary from expectations.
We're looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements. Please refer to the safe Harbor statement in today's earnings release, and slide 2 which I incorporate into this call as well as our filings with the SEC for factors that can cause actual results to differ now I will turn the call over to Curt who will begin on slide 3.
Good morning, everyone and thank you for joining our call for <unk>.
Second quarter results showed continuation of several favorable trends, including strong deposit growth robust fee income and excellent credit quality.
Revenue increased quarter over quarter and year over year, despite the low rate environment.
We remain focused on expense control, while supporting our revenue generating activities.
We repurchased nearly 6 million shares reducing our share count by over 4%.
We generated earnings of $2.32 per share and an ROE of over 17%.
ROA of 1.5%.
Above our historic norm.
We continue to demonstrate our unwavering dedication to providing a high level of service and support for our customers communities and each other.
During the quarter, we committed $5 billion to small business lending over 3 year period.
Also we appointed a National Asian American business development manager, who joined our Hispanic and African American development managers to support and strengthen our relationships in our communities.
In conjunction with this announcement, we made a deposit into an Asian American minority depository institution.
With regard to sustainability.
Yes. She council recently defined the most significant ESG issues for our company specifically those that are most impactful for our customers and colleagues and in which we feel we can make a meaningful difference we call. This our ESG commitments as outlined on the slide I look forward to sharing with you our continued progress in this critically.
Important areas.
Turning to our second quarter financial performance on slide 4.
We saw solid loan growth in several business lines led by general Middle market.
This was more this was more than offset by a large decline in auto dealer floor plan due to supply constraints as well as mortgage banker due to lower refi volumes.
Our pipeline again increased as companies ramped up with the economy reopening.
Deposit deposit growth continued to be very strong average balances increased 6% for over 4 billion to another all time high.
The full quarter benefit of federal stimulus payments, along with seasonality contributed to a $1.7 billion increase in consumer deposits commercial deposit growth, mostly reflects our customer solid profitability and capital markets activity.
Net interest income increased $22 million.
You may recall, the first quarter was impacted by $17 million in lease residual adjustments.
We continue to carefully manage loan and deposit pricing as well as the securities portfolio in this ultra low rate environment.
Credit improved from already strong levels, we had net recoveries of $11 million.
Highest level of net recoveries.
At least 20 years.
Criticized and non accrual loans declined a true reflection of our disciplined credit culture diverse portfolio and expertise in the industries we serve.
Our credit reserve continued to decrease and resulted in a negative provision of $135 million as the portfolio continues to perform better than expected going into the pandemic.
The reserve ratio remains healthy at 1 point for 4% excluding triple P loans.
Fee generating activity was again robust noninterest income grew 5% with increases in card commercial lending and fiduciary income.
Also expenses were well controlled and our efficiency ratio improved.
As I previously mentioned, we repurchased nearly 6 million shares during the second quarter.
We expect to continue to make strides towards our 10% CET 1 target keeping a close eye on the loan growth trends and capital generation.
Using our capital to support our customers and drive growth remains our top priority, while providing an attractive return to our shareholders.
Our customers and colleagues across our markets remain optimistic about the future <unk>.
We expect economic metrics to remain strong in the back half of the year, despite labor and supply chain constraints.
We believe that these issues will fade with sustained economic momentum.
And now I'll turn the call over to Jim.
Thanks, Kirk and good morning, everyone.
Turning to slide 5 average loans decreased $761 million.
As Curt mentioned the biggest driver was an $870 million decrease in national dealer services as auto inventory levels are very low due to supply chain challenges.
Looking back 2 years Floorplan loans are down over $3 billion.
We believe that we are close to the bottom and over the next few months inventory should start to slowly rebuild and returned to normal levels sometime next year.
Mortgage banker declined approximately $300 million coming off of the record levels reached at the end of last year.
Seasonally higher purchase volume was more than offset by lower refi volume, which is expected to continue.
Of note our purchase related volume was 67% in the quarter compared to the industry at 44%.
On the other hand activity in several other businesses has begun to pick up including general Middle market Environmental services commercial real estate Entertainment equity fund services and corporate banking.
As far as Triple P average loans decreased a little over $100 million during the quarter. However on a period end basis Triple P loans declined nearly $1 billion as debt forgiveness process accelerated at the end of the quarter.
Excluding the decline in Triple P loans period end loans were up $613 million.
Due to increases in general middle market, Environmental services, and commercial real estate, partly offset by a decrease in dealer.
Total loan commitments increased $1.5 billion with growth in most business lines led by general Middle market <unk>.
<unk> also grew resulting in line utilization holding steady at 47%.
Our pipeline increased despite the strong level of commitments closed during the quarter and the portion in the last stage of the pipeline again grew significantly.
This bodes well for future loan growth.
Loan yields increased 16 basis points, including the 14 basis points impact from the lease residual adjustment in the first quarter and 2 basis points from fees, including accelerated fees on triple P loan forgiveness.
All other factors offset each other.
Average deposits increased $4.1 billion climbing to a new record as shown on slide 6.
Noninterest bearing deposits accounted for almost 75% of the growth.
The full quarter benefit of recent fiscal stimulus stimulus along with strong cash generation drove the increase.
With strong deposit growth our loan to deposit ratio decreased to 66%.
The average.
Cost of interest bearing deposits reached an all time low of 6 basis points, a decrease of 2 basis points from the first quarter and our total funding costs fell to only 7 basis points.
Slide 7.7 provides details on our securities portfolio during the quarter, we purchased approximately $2 billion of MBS to replace about 1 billion in MBS repayments and $750 million in treasury maturities as well as continued to deploy some of our excess liquidity.
The net result was about a $250 million increase in the portfolio at period end and a slightly higher proportion of MBS.
By increasing the size of the MBS portfolio by over $1.5 billion since yearend, we have been able to mitigate the rate headwinds and maintain approximately the same level of securities income.
MBS purchases in the second quarter had average durations of 6 to 7 years and yields of about 185 basis points.
This compared to securities Rolling off at 230 to 250 basis points, which resulted in a decline in the portfolio yield of 182%.
Our goal is to continue offsetting the pressure from lower reinvestment yields by gradually and opportunistically, increasing the portfolio size.
Turning to slide 8 net interest income increased $22 million, including $17 million in lease residual adjustments recorded in the first quarter.
The net interest margin was stable as the impact from the lease residual adjustments was offset by the large increase in excess liquidity.
As far as the details interest income on loans increased $18 million and added 8 basis points for the net interest margin.
This was primarily due to the lease residual adjustments.
1 additional day in the quarter added $4 million and fees, primarily triple P related added $2 million and 1 basis point to the margin.
Lower loan balances had a $3 million impact and lower LIBOR and non accrual interest recoveries for each had a $1 billion impact.
The benefit from a modestly larger securities portfolio was mostly offset by the lower securities yields.
Average balances of the fed increased over $3 billion, which added $1 billion and had an 8 basis point negative impact on the margin.
So net deposits remain extraordinarily high at nearly $16 billion and weigh heavily on the margin, but the gross impact of approximately 50 basis points.
Continued prudent management of deposit pricing added $2 million and 1 basis point to the margin.
Credit quality was very strong as shown on slide 9.
Net recoveries of $11 million for comprised of a decrease in gross charge offs still only 8 million combined with a relatively high level of recoveries of $19 billion.
Nonperforming assets decreased slightly and remained low at 64 basis points of loans.
Also criticized loans declined to nearly every business line and are now close to pre pandemic levels.
Strong credit metrics combined with our growing confidence in sustainable economic growth resulted in a decrease in our allowance for credit losses.
The social distancing reported segments continued to perform better than we expected.
Also with help from an increase in oil prices the energy portfolio had significant decreases in non accrual and criticized loans as well as net recoveries of $12 million.
However, we continue to apply a more severe economic forecast at both of these areas are.
Our total reserve ratio was very healthy at 136%, our 1 for 4% excluding triple P loans.
Non interest income increased $14 million or 5% as outlined on slide 10, and continuing the positive trend we've seen over the last 5 quarters.
Card fees increased $13 million or 23% higher than a year ago, primarily due to government card and to a lesser extent also merchant consumer and commercial card activity.
These have all been spurred by economic stimulus changes in customer behavior, as well as new and expanded customer relationships.
Commercial lending fees increased $9 million to the highest level we've seen in over 5 years, primarily driven by an increase in syndication fees.
Fiduciary income set a record with a $7 million increase mainly due to annual tax service fees, a full quarter benefit of the trust advisory business, we acquired in March as well as equity market performance.
Deferred comp asset returns were $6 million or $3 million increase over the first quarter and our offset in noninterest expenses.
Partly offsetting these increases derivative income decreased $8 million as there was a $1 million benefit from a change in the credit valuation adjustment compared to the $10 million benefit in the first quarter.
Aside from this change underlying derivative activity remains robust.
Following strong performance in the first quarter warrant income decreased $4 million and bully declined $2 million.
In summary, we are pleased with another strong quarter for fee income.
As shown on slide 11 expenses were up $16 million in the quarter.
The primary drivers for a $7 million increase in outside processing in line with higher revenue and elevated litigation costs related to pending resolution of certain legal matters.
Also we had a seasonal increase in advertising and higher operational losses, which returned to a more normal level.
Salaries and benefits decreased $5 million, mainly due to annual stock compensation and payroll taxes resetting in the first quarter.
Providing a partial offset was an increase in performance based incentives annual merit tax related labor as well as deferred comp.
We continue to demonstrate that we are committed to maintaining our strong expense discipline as we invest for the future.
Slide 12 provides details on capital management.
With our CET, 1 sitting well above our target we entered into an accelerated share repurchase program for $400 million at the end of April.
We also repurchased an additional $50 million of shares in June.
Our CET 1 ratio decreased to an estimated 10, 39% and our goal is to continue to make strides towards our CET, 1 target of 10%, while carefully watching loan growth trends and capital generation.
In addition, we have maintained a very competitive dividend yield which is currently yielding about 4%.
Slide 13 provides our outlook for the expected trends for the second half of the year relative to the second quarter.
Excluding triple P loans, we expect loan growth in most businesses led by middle market as a result of increasing working capital and Capex needs.
This is supported by a robust pipeline and expectations that the economy will continue to grow.
Of note, we believe mortgage banker will decline modestly due to lower refi volume some seasonality.
In addition, we believe national dealer is close to a bottom as auto inventory levels are expected to start to rebound as we get closer to year end.
As far as Triple P loans, it is difficult to predict.
However, we expect loan forgiveness will continue to pick up in the bulk should be repaid by year end.
We expect average deposits remained strong customers continue to maintain excess balances. However at some point, we believe they will start to put the cash to work.
We expect net interest income the benefit from loan growth, excluding triple T and additional days.
However, we believe this will be more than offset by the anticipated decrease in triple P loans.
Credit quality is expected to remain strong assuming the economy remains on the current path. We believe the allowance should continue to move towards pre pandemic levels.
We expect customer driven fee categories to continue to benefit from strong economic conditions, along with our focus on attracting and enhancing customer relationships.
However card fees are expected to decrease as the benefit from growing merchant and corporate volumes could be more than offset by lower government card activity as truck stimulus payments Wayne.
In addition in the second quarter there were categories that were also somewhat elevated.
Such as fiduciary due to the second quarter tax preparation fees and deferred comp which is difficult to predict.
On a year over year basis, we expect to see solid growth in the second half.
We expect expenses to decrease.
Certain line items should be seasonally higher such as occupancy advertising and travel and entertainment.
In addition, as we continue to invest for the future technology investments are expected to rise modestly as they typically do in the second half of the year.
However, more than offsetting these factors, we expect second quarter levels of litigation related expenses and deferred comp will not repeat.
Finally, as I indicated on the previous slide we plan to continue share repurchases.
Now I will turn the call back to Kurt.
Thank you Jim.
As I mentioned at the beginning of the call. We are seeing many favorable trends, including some loan growth momentum in certain business lines, including general middle market.
With strong <unk> services, and manufacturing indices, and a record number of job openings business and consumer confidence remains positive and is supportive of continued growth in the back half of the year.
As we continue to navigate this ultra low interest rate environment, we are focused on delivering a more diversified and balanced revenue base with an emphasis on fee generation.
And our progress is demonstrated in the consistent increase in noninterest income over the past 5 quarters.
We're investing for the future to ensure we can provide high caliber products such as our Treasury management services in the second quarter Comerica became 1 of the first banks to offer commercial banking customers the ability to send real time payments.
In addition business deposit capture now includes the ability to scan images of checks for for deposit with a mobile device.
Finally, utilizing intelligent automation, we improved our integrated receivables offering.
Our expertise and experience continues to help us build and solidify long term relationships, particularly in extraordinary times like these we are uniquely positioned with our nimble asset size large customer deposit funding base and commercial bank waiting complemented by a robust retail and wealth management capabilities.
Finally, we are committed to maintaining our conservative credit culture strong capital base and expense discipline.
These key strengths provide the foundation for creating long term shareholder value.
Thank you for your time and now we'd be happy to take your questions.
At this time, if you'd like to ask a question simply press star followed by the number 1 on your telephone keypad again that is star 1 for any questions are for.
First question will come from the line of Gary Tenner with D. A Davidson.
Good morning, Gary.
Hey, good morning, Thanks for taking my questions.
I wanted to just ask about.
The loan outlook for the back half of the year.
Now talking about generally more positive and close to a bottom on dealer floor plan.
Wondering about the energy segment in particular looks like E&P balances kind of stabilized this quarter. After a decline last quarter. How are you thinking about that segment now given the increase in commodity price.
Gary It's Peter and I appreciate the question.
We are still an energy bank and over the years, you've seen our portfolio. We migrated away from the services business still in midstream still an E&P, we are seeing opportunities, but we're being very selective about what we do.
The underwriting is probably more <unk>.
<unk> that it was in years past I don't know that I would tell you that.
What commodity prices have done lately has necessarily made us dive.
Dive into it more.
We've seen improvement in the credit portfolio, which is really good.
And so I think we're going to continue to have opportunities there I do feel like the headwind we've seen over the last few years of balances dropping is slowing.
So we're encouraged we're encouraged by that and feel like it's a space, we're going to continue to be able to.
To be successful at.
Okay. I appreciate that and then just a follow up if I could on kind of expectations for liquidity deployment back half for the year.
And for.
Thanks for deposits continues for quite a bit in debt.
Net increase in the securities portfolio, which was fairly modest for the quarter.
So even with your with your commentary about expectations bank customers start to use those deposits at some point.
It seems like you've got plenty of excess liquidity that you can put to work and just thinking about how you are.
Viewing that.
Going forward.
Good morning, Gary Jim Thanks for the question.
First starting with second quarter Youre right. It may look on the surface like a modest increase in our securities portfolio, but there was a lot of wood to chop in the second quarter, we did have $750 million of what I'll call. It lumpy treasury maturities up and beyond the almost $1.1 billion of MBS. So we feel we're very busy on the securities front.
In the second quarter going after good quality securities just to get the average up to $250 million for the purchases up so what we feel like we had some good momentum in the second quarter are planned for the second half of the year is of course to replace the MBS maturities as we always do.
We do have $400 million of treasury maturities in the third quarter and another.
In the fourth quarter and we outlined these on slide 18 in the appendix and so we plan on replacing not only the MBS maturities, but also those lumpy treasury maturities and then we plan on also find some modest additional amount above that to offset the rate pressures in the securities portfolio.
Having said that we certainly have a lot of excess liquidity to deploy and we are deploying some of it as we did in the second quarter at the same time, if you look at what the market is doing right now we're not sure we want to rush into that and dramatically increased the size of the portfolio given all the maturities and given the MB assets, we're putting on to replace them. So we will.
To make steady progress in deploying the excess liquidity, making sure that we're going forward on the overall securities balances as well as offsetting any rate pressures, but.
But I wouldn't look for the excess liquidity to take a massive dive in the next quarter or 2 we want to be very measured about how we increase the securities portfolio.
Great. Thank you.
Your next question will come from the line of Ken Zerbe with Morgan Stanley.
Good morning, Ken Greg Good morning.
Thanks for taking my question.
Maybe just starting off in terms of fee income, obviously very strong quarter, but it does seem that from your guidance.
There's some of that is sort of unusual in nature. I think you mentioned like the tax prep and fiduciary.
Something in card as well can you just quantify how much was let's just say unusual in this quarter that needs to reverse going into <unk> the back half.
Yes, Ken.
Yes ill be happy to answer that we have been very strong in noninterest income not just in this quarter, but if you look at the slides on page 10, the numbers and the trends.
Have gradually been increasing every quarter for the last 5 quarters and I'll remind everyone that our run rate for noninterest income prior to the pandemic was about $1 billion, a year, which we hit in the third quarter of 'twenty as we came back in the recovery of the pandemic. Since then we continue to elevate and you see some of the unusual items.
For the current quarter over on the right side of the slide.
I don't think were going to slide back to the old billing dollars a year that we used to run at but we're not going to stay at these current levels either that would be a very dramatic increase in a short period of time. So card fees, we'll certainly take a step back from where we're at today.
No I don't think they will go back to pre pandemic levels, because we've had a change in customer behavior. There is a lot more electronic use of cards.
Other channels beyond some of the cash usage, we used to see and so card fees will probably end up somewhere in between where they started.
During the pandemic and where they're at now.
Marshall lending fees, obviously high this quarter, 1 of the highest quarters, we've ever seen for <unk>.
<unk> income, we will maintain half of that increase you see in this quarter. We have added customers and we did make a small acquisition for trust advisory business, you will see a portion of that continue.
<unk> comp of $3 million, that's the increase but the absolute number of deferred comp was $6 million and we always assume that zero each quarter and so you do some extraordinary levels of non interest income currently occurring we will take a small step back, but we will not return to the old pre pandemic levels either so.
Overall, we think going forward, we're going to show some nice percentage growth on a year to year noninterest income. If you go back to the base year of 2019.
Got it okay, alright, that's very helpful.
I guess just in terms of second question, you've mentioned the dealers it could be close to a bottom I was just hoping you could talk a little bit more about that.
You mentioned the rebalance is should you get the new inventory coming in in the fall, but can you just layer in.
The supply chain issues, and if thats still an issue and if that's still affecting your dealers and how that might affect growth in the back half.
Ken It's Peter I think the answer to your question is it is still affecting the supply chain is still affecting things you've obviously seen some.
Some plant closures in Michigan.
But in talking to our customers. We're we're encouraged that we're getting to the bottom I don't know that I can tell you exactly when that's going to be or when the uptick what month that would occur in but we do feel like the.
The headwind again is going to get slower going into the back half of the year. We're encouraged at what we think would occur, particularly in Q4 going into next year I do think though.
We're talking 2022 before we really start to see some improvement in floor plan balances and I think it's probably it's probably even a little further out I've been asked in the past about getting back to.
For the numbers that you see on slide 23 for example in prior years I think thats probably.
At least a year and a half or 2 out but we do feel like we're reaching the quote unquote bottom if you will of where.
The supply chain constraint as for the dealer business.
And again, our dealers continue to perform really really well.
We're adding customers.
We feel like we bank the best of the best in the space, we had great deposit growth in dealer.
So it's a business that we really really love, we feel like we're a leader in and we're committed to figuring out a way to support our customers through this.
Alright, great. Thank you.
Your next question will come from the line of John Armstrong with RBC capital markets.
Morning, John Hey, Thanks, Good morning, good morning.
Kind of a follow up on that can you touch a little bit more on the general middle market growth.
And.
Are you seeing things may have changed relative to a quarter ago.
It feels like we're seeing a commercial bank and recovery in front of our eyes here, but just curious what your thoughts are on it and then also can you touch on you mentioned the pipeline of loans in the last stages.
Can you talk a little bit about that as well.
Yes, John It's Peter again, so let me maybe I'll talk about the pipeline part for so what we've continued to say is that our pipeline is above pre pandemic levels and I would say.
Candidly well above prepayment pandemic levels of what we're seeing of late.
When we mentioned the latest stages it feels very good about what we feel like the closings are going to look like in the next 90 to 180 day. So.
When we talk about that we're pretty positive that.
But those are going to.
To lead to new opportunities, new commitments and Outstandings, we had a great commitment quarter in Q2 increases in so we're encouraged that debt that would occur when we tell you guys. The latest stages of our pipeline are feeling very very good as far as middle market I would tell you and I think John the affirm what you said it does feel across the board.
Really really encouraging.
And just about all of our geographies.
Many of our verticals, we are seeing the pipeline growth were seeing activity pick up.
Michigan had a fantastic quarter.
Followed by Texas, and then kind of California, and I think Thats, just a little bit indicative of the size of the books in those markets and the number of customers and opportunities, but as things start to open up across the country I think youre going to see it unfold pretty quickly and we are seeing it in that middle market space.
Ken we had a very good Q2, historically Q3 has been a challenged quarter for us in middle market, but we are encouraged.
This time, just based on what we're kind of seeing as of the recent quarter end.
Okay. Good thank you for that.
And then maybe 1 for Jim just on the net interest income guidance.
It feels like things are.
Positive and maybe the margin is bottoming here, but there's this phrase.
For his more than offset.
The decrease in PPP loans, how material is that and really what needs to happen for your net interest income guide so potentially flattened out.
Good Thanks, John happy to take that question.
I'll try to boil this down to really the big drivers are net interest income is really going to be driven by loan volume.
Over the coming quarters.
If you look at deposit pay rates securities for which we're going to try to offset any rate pressures with volume on <unk>.
<unk> funds, they're all going to be likely very stable from an income standpoint going forward. So that takes you right back to loans is the big driver. So let's talk about loan and their impact on the net interest income line item.
Peter was saying ex Triple P. We do think we're going to get some good loan growth in the second half of the year in our core businesses and so you can do the math on that and that will be a nice pickup in net interest income.
However, the major headwind will be the triple P volume and the pay downs that occur there that will certainly more than overpower any core growth we get on the other end and just to kind of throw out the numbers here as we disclosed in the package I think on page 19, our quarterly average in the second quarter for.
Triple P was $3.5 billion and.
And as we disclosed the ending balance at the end of the quarter was $2.8 billion. So when you look at the third quarter average and what we're headed for a universe relative to what we're seeing for.
We're probably going to end up with the third quarter average, that's probably half it could be a little bit less than half of what we saw in the second quarter. So thats approaching a $2 billion drop in <unk>.
Triple P balances keep in mind those are earning about 2%. So that's a pretty significant headwind and then as we move to the fourth quarter Youll, probably see that triple P balance going have yet again.
Now putting aside the normal yield which includes amortized fees, we think our accelerated fees in the third quarter will likely be around the same 15 million that we saw in the second quarter.
But it's probably going to be about half that in the fourth quarter.
And so when you look at those factors just from Triple P more than overshadowing, what's going on in the core portfolio that will create a headwind now just some smaller items to consider we do some smaller headwinds from swap maturities that we itemize on page 18 that includes a second maturity second quarter maturity in June that will have a small impact on.
Q3, and then I will just say LIBOR.
Yes, a force loan mix competitive pressures all of those things can move it up or down slightly we will see where those go but again I'll just summarize it as it's really going to be a function of loan volume for the most part and to what extent, we can offset the triple P average rundown, so hopefully that helps.
Yeah that helps thank you very much.
Thank you John Youre in ex U.
Your next question comes from the line to Ebrahim <unk> with Bank of America.
Ebrahim good morning.
Good morning, I guess, just first question on the slide 18.
Jim If you could talk about some alkyl standpoint, you talked about the duration of the new Securities that you bought how are you thinking about and no 1 knows when we get to at any time from deferred but talk to us as we approach a federally take cycle.
How are you thinking about maintaining asset sensitivity and how we should think about the duration of the securities book leading into debt.
Alright, Abraham Thank you for the question and by the way welcome to the coverage.
When we look at when we look at our Decisioning around securities portfolio, and how we grow it in the type of securities. We add to it there are a lot of considerations, but we think we're in a very advantageous position to take advantage of.
What good rates might be out there for certain types of securities.
When I look at Comerica, our asset sensitivity.
It is high and it actually it's grown since the end of the year. Since we added all these securities that's mostly a function of deposit growth, but there are some other factors also.
So we feel like with all the assets sensitivity, we have certainly adding securities fixed rate securities as something we can afford to do and we can afford to spend some of that asset sensitivity.
We did add securities with longer duration.
Over the last couple of quarters, but again, if you look at our average duration is pretty reasonable and we think it's pretty manageable, especially when you consider the rest of the complexion of our balance sheet and some of our long term deposits.
We consider the fact that we have the excess liquidity, that's certainly not an issue we could probably afford to do more.
And then just when you look at the kind of the sweet spot out there in terms of what's available.
Swaps really arent good value right now treasuries.
Good value, we think given the capacity we have to add some longer duration securities for the balance sheet and the yield that offers is really the right way to go for us and we feel like we can continue to go this direction, having said that no 1 knows where rates are going there is no free lunch out there there could be regret either direction.
But we think given the complexion of our balance sheet and our business model.
This duration is something that we can afford to add to the balance sheet.
Jim I might add as we see rising rates occur, which would be it would be a good thing obviously for the banking industry.
Some combination of leveraging our securities portfolio and synthetic hedges.
Really our focus at that point in.
We made good progress on hedging before the pandemic and then obviously rates fell so dramatically that we really were not able to fully hedge the portfolio, but we're always going to be an asset sensitive bank.
But in a rising rate environment wed like to mute some of that asset sensitivity and then secondly, I would say just our focus on fee income continues to be a way that we're trying to diversify the overall asset sensitivity of the revenue base.
Got it that's helpful and just on a separate.
Based on your response to 1 of the questions. It doesn't sound like you're seeing a big divergence geographically in terms of non demand Midwest versus California versus Texas give us a sense of there's been a lot of headlines around this move from California to Texas.
<unk> actually seen debt in any discernible way when you look at sort of clients movement and just demand from your customers.
Ebrahim, it's Peter so yes.
Do feel like our growth that we've seen has been sort of across the country.
So to answer that question and then second we feel like with our geographic footprint. We are in a great spot to support.
Customers, moving from California to Texas, or Texas day, Michigan or sort of either way I mean, I think you are seeing anything else that we're seeing on population movement.
We continue to feel really good about the California economy and the opportunities that are there.
And so.
The answer to your question is yes, we are able to support our customers through that but both markets.
Are really opportunities for us to continue to grow our customer base in our portfolio and we're seeing that occur.
Peter I might just add that could maybe just add a comment on California, because we do get that question periodically and as Peter said, we're still very bullish on that market I mean, it's still the sixth largest economy in the world is still a very.
A diverse economy.
Seeing some positive trends in import export activity.
Travel and leisure are there are a number of things for a positive to 0.2. Despite some of the challenges that have been very public for the California market.
Got it that's helpful perspective, thanks for taking my questions. Thank you.
Your next question will come from the line of John <unk> with Evercore ISI.
Good morning morning.
Good morning.
Just a question on back to the loan growth front online utilization I know you indicated that it remained steady at around 47%.
I guess based upon the activity that youre seeing I mean youre encouraged by is it fair to assume that you do expect an increase there in drawdowns.
Thank you.
Can you also help us frame out what's your longer term.
Utilization level that you think is fair to assume in the timing that you believe you can get back to that level. Thanks.
John It's Peter.
I think we're seeing utilization as we mentioned sort of level out.
I think that we'll probably see it I hope, we'll see it sort of bounce along there to slightly up as we go forward I don't know that youre going to see.
A tremendous increase in utilization I mean, obviously the big question in the industry is when does this liquidity deposits get used up first vs borrowings occurring second and when does all of that going to occur I think that as you get into the back half of the year Youll see a little bit of utilization.
<unk> increase but I.
I think customers are going to do a little of both is what Ive said I think they are going to maintain higher cash balances I think they'll start to use a little more credit I don't think theyre going to swing heavily 1 way or another just because despite the encouraging outlook across the country all of our customers are more cautious about the future.
Then they have been as we all are so I think that I think the timing of those 2 things occurring are going to be interesting to unfold, but we're encouraged by the utilization we saw in Q2.
We think that it's going to hang in there start to increase a little bit and I think it'll probably be into next year or maybe even further before we get back to quote unquote normal utilization levels that you might have seen in years past or pre pandemic.
Okay, Alright, that's helpful and then separately on the on the capital front.
Q1 ratio of 10, 4% I know your internal target, though was around you reiterated at around 10%.
We are seeing some regional peers.
2.
Thats down their internal targets and Scott can you just talk about that potential.
There is any likelihood of being able to move that target lower overtime.
Great John It's Jim happy to take that question.
For now we are comfortable with that 10% target, we're always observing the environment and just taken note of whats going on both on the regulatory front and just the overall economy.
Right now we are comfortable with the 10%.
Always in tune with some of our key constituents, such as regulators and rating agencies to make sure that we're properly positioning our capital having said that we will continue to observe what's going on and certainly 1 of our internal goals is to as rates go up to take pretty significant steps to smooth out our.
Our earning stream with respect to asset sensitivity.
We know that we have a very good credit risk profile, we would like to improve our earnings stability profile from an asset sensitivity standpoint, and I can tell you that once we do that I will feel better about potentially considering and I think our board with 2 considering going below 10% that may accompany a little bit of a shift in the capital stack. We may issue some preferred to that time.
<unk>.
But for now I'll say, we are comfortable with the 10% target.
Got it that's helpful. Alright, thanks for taking my questions.
Your next question will come from the line of Scott <unk> with Piper Sandler.
Good morning, Scott.
Okay.
Thanks for taking the question I just wanted to ask on the reserve.
And so what you guys consider kind of the steady state once we.
Sorry to complete the reserve drawdowns as the plan too.
Sort of level it out at the pre pandemic.
Seasonal day, 1 reserve or just given the improving macroeconomic backdrop is there an opportunity to take it down below that level in your guys' eyes.
Yes, Scott this is melinda. Thanks for the question, obviously first and foremost diesel is really a complex accounting exercise that we go through every single quarter based on what the economic forecast is at that time as well as how our portfolio is performing as Jim mentioned in his comment we do.
Back.
Based on the performance the strong performance of the credit portfolio and what we believe to be the economic forecast at this time that we're going to continue to see reserve levels.
Moderating down to pre pandemic levels are day, 1 fees all day, 1 DSO was about 123.
Worried about $1.40 for right now so it's reasonable to assume that will continue to trend downward over the course of the next couple of quarters.
Given the fact that seasonal is new I don't know that anybody really knows where the bottom quote unquote of seasonal is but I do think it's possible that we could see reserve levels fall slightly below that that day, 1 T cell number.
Okay perfect. That's excellent color. Thank you and then I wanted to revisit the.
Floorplan business for just a second and see if you guys have any updated thoughts on what you would consider sort of a normal level.
For that business I think I think historically, you've bounced around sort of debt fixed.
$7 billion level, but just given.
Sort of how dealers have adopted to.
Inventory world.
<unk> to a low inventory world.
Do you don't need for your customers I would tell you that there is some middle ground, where there is like a net benefit to having lower inventory levels than they've carried in the past.
Scott It's Peter.
Yes, I think I think the dealers would tell you that.
They are having as much profitability as they've ever had in these lower inventory levels for them.
Actually work worked pretty well for the dealership. The question really is about the industry in general and what do the Oems due at the end of the day and our belief is is that when we get to the other side of this it would be.
Back to normal 100% back to normal I don't know I think thats, probably debatable amongst the in the industry as you see on slide 23, I mean, youre right. Our balances have been in the 6 to 7 range for a long long time and in particular floor for plan has been $3 billion higher than what it's running today.
We think we will get back to that.
I don't know if we'll get all the way back to it but we definitely think in the coming years that will get.
Pretty close to it and again I think that comes back to Windows normalization hit the space.
And we believe based on the conversations that we're having that that will happen. It's just a question of timing and so that's why we feel that way.
Okay, Alright, thats perfect. Thank you guys very much yes, thanks guys.
Your next question comes from the line of Steven Alexopoulos with Jpmorgan.
Hey, good evening and good morning, everyone.
I wanted to start so if we look at the $671 million of general Middle market loan growth that you saw in the quarter did you see those companies drawdown their deposit balances prior to drawing on credit lines or are they drawing on lines concurrent with deposit balances being highly elevated.
Steven It's Peter I'd say, it's a little more of the ladder that you said I think that they are borrowing in conjunction with still having the deposit balances. So.
I believe middle market loans in general.
Still grew so.
Back to what I was kind of saying a little bit earlier.
Some of this is a timing issue.
<unk> got it.
And optimistic encouraged economic environment, but cautious leadership of middle market companies that want to make sure that they've got liquidity for whatever comes so theyre comfortable borrowing some more money, but they still want to have cash in the bank and.
Candidly thats why our credit quality looks so good so I think as we sit today I would answer you that it feels like they are borrowing more money, but still maintaining cash balances and back to I would tell you utilization a little bit back to this question, even though it was flat for the company it was up a little bit in middle market.
Got you, Okay and then thank you and where you are seeing new loan opportunities right every bank in the same boat you guys are with a low loan to deposit ratio.
Is the competitive environment I imagine it's significantly more intense as it is it primarily rate are you starting to see structure.
In terms of companies trying to win away from you guys, Yes, David I continue to feel like it's primarily rate.
Thank the banks for the most part continue to be really really responsible loan credit structures.
So the most competitive piece of it right now does seem to be right.
Yeah.
That's helpful and then if I could squeeze 1 more in just final on the environmental services business ex it saw a nice growth this quarter, that's been flat for most of the past year.
Is this a onetime bump for should we should we be expecting this to be a more significant contributor to loan growth each quarter.
<unk>.
I know I am expecting it to be a more significant contributor to loan growth. Steven. So we think this is a great business for us we feel like we are a leader in this we've talked about dealer mortgage energy.
POS there is a number of businesses that we stand out in ESD is another 1 where we are.
We are really encouraged by the opportunities we're seeing we're adding talent to this space.
We're exploring lots of different avenues that we can do any SD, including renewables solar opportunity. So.
We're encouraged with why we have a slide in here this quarter and so we believe it's an opportunity for us to continue to grow this business.
Thanks for taking my questions.
Thanks, David.
Our next question will come from the line of Ken Houston with Jefferies.
Good morning, Ken Hey, Thanks, Good morning, everyone. Just a follow up on the capital return question you used.
70 basis points of CET, 1 with the combination.
The risk weighted asset inflation.
Big buyback.
I'm just wondering as you go forward and expect better loan growth, which would imply continued if not faster <unk> growth how does the buyback foot against that in terms of the magnitude. It would seem that you could get to your 10% pretty close with without even doing much buybacks. So I'm just wondering what the balancing act between the 2 thanks.
Ken Good morning, It's Jim Yes, Youre exactly right. We expect earnings continue to continue to be strong.
The dividend of course is already strong.
But we are expecting as we saw it into the second quarter. We are expecting continued good core loan growth and so that will make us far less reliant on share repurchases in the third and fourth quarter and I would certainly expect our share repurchase dollar amount to be far less than what we saw.
<unk> in the second quarter. So yeah that will be we will be winding down probably the absolute amounts of that towards loan growth starts to step in and.
Bob.
It can be become essentially a very productive use of our capital.
Okay. Okay got it and then just on you made the point earlier about balancing out your asset sensitivity and I'm. Just wondering if you can elaborate on that a little bit more vis vis like does it make you think about.
Changing the orientation of the swaps book, adding terminating just kind of we have got great lay out on 2018, but just any.
<unk>, but just any updated thoughts on how you would anticipate doing that as we get closer to the rate cycle. Thanks.
Yes, Ken we are very asset sensitive currently even with all the securities we've added.
So and we're always going to be asset sensitive to some extent, but we do want to reduce debt asset sensitivity gradually and probably pick up the pace of reducing it as rates go up over time, and so right now we do with the excess liquidity, we do have the room on the balance sheet. The best value right. Now we feel is adding securities I think what youll see.
As rates go up you'll see us start to transition from on balance sheet tools to more synthetic tools and adding off balance sheet hedges and off balance sheet hedges will become probably the primary way we do it once we start seeing rates go up but for right. Now we think we do have the room in the balance sheet to use cash instruments.
You'll just see us gradually transition as rates go up over time, and we will ultimately reduce.
Very large amount of the asset sensitivity, but now is not the time to do that but at the same time, we're not going to sit and do nothing either right now so it'll be measured over time is how I would describe it.
Okay, and so you haven't done anything in terms of changing the look and feel.
Of the off balance sheet book as it stands right now it looks pretty consistent versus where it's been.
That's not a tool we're going to utilize at this point and we do have some swaps maturing over the next year you could see the overall swap number actually decrease we may be able to offset that with cash instruments, but for now we just don't see the value with swap rates being where they are at right now, but certainly will be our primary tool over time as rates start to go up.
Okay got it thanks, a lot John.
Thank you.
Your next question will come from the line of Bill <unk> with Wolfe Research.
Good morning, Bill good morning.
It sounds from your earlier comments that there is an appetite among your dealer partners for keeping floorplan levels lower versus history, even after the supply chain issues have been resolved from comerica as perspective, what are your thoughts on the idea that lower floorplan balances wouldn't necessarily be a negative since dealer floor plan loans are 100% risk weighted.
And they're relatively low yielding.
Such that you may actually find that it's actually accretive to your ROE. If we did see dealers already with lower inventory levels in the future can you speak to that thought process.
Bill its Peter I don't know if Jim wants to add in here, but you know.
Our approach is to make sure we're supporting our customers.
That's the number 1 focus for us so.
Your question, you're asking is a really big picture win on what what does the business look like going forward.
We're going to support them, whether they've got low inventory levels right.
Right now they've got huge deposits, we're supporting them with wealth management opportunities finding other ways to take care of our customers.
In this environment the day will probably come that they will need the floor plan availability because it may candidly be something that gets pushed on them. It may not be something that they can necessarily decline and so we will be there to support them through that.
And we've been in this business.
Over 50 years and it's been good for the bank. The whole time, we continue to believe it will be going forward in and are very encouraged about what that could look like into the future Peter I might add debt busy.
A business, where we also have other opportunities you mentioned wealth management, but we do a lot of real estate lending.
For for new AD points for dealers and then Theres, a fair amount of M&A activity that we support on the lending side.
Well sure there are other ways that we support the dealerships beyond just the for plan.
That's super helpful. If I may just follow up on the point that it may get pushed on them and it may not just be their decision. So it's just the dealer does want to run with less inventory and customers remain willing to as I think we've seen during the pandemic either take whatever inventories on hand or wait a few months if they want something more specific debt.
Debt willingness is there I guess what are some of the other variables that would lead to sort of debt.
Being pushed on them.
Maybe if you could give a little color.
Yes.
It's just the manufacturing of cars I mean, the industry historically has been.
Cars are manufactured and they are sold at the point that arrives on the dealership. So in the past that's the sort of model that you have I don't know that we're moving to a completely just in time type environment, maybe we are.
Attempting to try to predict what that does or doesn't look like but 1 way or another are and our job is to support our customers and.
Whatever unfolds, there we're going to be there to do it don't forget we're huge auto.
Lender in Michigan as well, so we're very comfortable with the auto industry space, whether that's on the car manufacturing side, the dealer side, whatever happens with autonomous driving whatever Hopkins with electric vehicles, we feel like we're a bank that's able to be a leader in the auto space as it unfolds in the next couple of decades and Theyre going.
A lot of macro things that happened, but we are well positioned to be in the front of that.
Understood. That's really helpful commentary. Thank you so much for taking my questions.
Thank you.
Your next question comes from the line of Chris Mcgratty with K B W.
Good morning credit great. Good morning, I wanted to follow up on Ken.
Interest rate sensitivity question to ask a little bit differently.
We've seen some of your peers talk about taking down rate sensitivity.
Rates go down go rates go up.
And some of them are doing it through.
Purchasing of resident resi mortgages to add duration.
And they're saying, it's a better risk adjusted.
Yield than just buying MBS I'm wondering if that's at all on the table as you kind of consider broader Alco strategy. Thanks.
Yes, good morning, Chris and welcome to the coverage.
Being a commercial bank, we're actually quite comfortable with our current approach of buying the MBS securities.
They carry far less capital that you have to hold on them. We feel we have expertise to manage it and so that's where we choose to put that liquidity is.
On the mortgage backed security side, and then from a pure business standpoint, we're comfortable with our current business mix.
Great and then as a follow up.
Just interested in maybe I missed it in your prepared remarks normalized cash levels. Obviously, there are pretty high right now.
I guess to the degree.
And timing you expect to hit normalized thanks.
You know, Chris that'll be a function of what happens in the economy right. Now we have incredible fiscal stimulus. We are very accommodative monetary policy and that is driving.
A large amount of excess liquidity.
David will start tapering at some point, but taper doesn't mean stop it just means taper.
While I just see this fiscal stimulus continuing to occur.
The economies are running at a very high rate right now and will for some time and that creates a bit of a.
Velocity factor, a multiplier, which creates deposits in the system and I do see these deposits they will move around the banking system, but I don't see them, leaving it to any large extent.
So I do see deposits waning a little bit for Comerica, we do have some businesses that are.
<unk>.
Specific to some of the stimulus that's occurred in some of those businesses will lose some of the deposits over time.
I think we are going to be very flushed with deposits for some time to come we will see loan growth start to eat into that but I don't see us getting back in the foreseeable future to the more minimal levels of cash that we're holding prior to the pandemic. So just feels like this environment is here to stay for some time.
Okay, great. Thanks for the color.
Thank you.
Your next question will come from the line of Steve Moss with B Riley Securities.
Good morning, Steve Good morning.
Just on commitments here you guys mentioned.
I had a really strong increase for the quarter here I think was up about 5% of first quarter, just kind of curious as debt how strong. It was and also just are these from existing customers or new customers.
Steve It's Peter Yeah. So the commitments were up on slide 5.1 billion and a half in the quarter, which was a really really good quarter compare to the last 5.
It was a little mix of both.
We've got we typically run on average historically.
About half half and half half new to new half new to existing and I'd say right now is a little more new to existing but.
It was a little bit of both and again, a very very good quarter for commitment increases.
Okay. That's helpful and then in terms of just loan pricing maybe.
Drilling down a little further on that just kind of curious as to where loan spreads are now versus maybe prior quarters over the last couple of quarters or pre pandemic levels.
Yes, Steve.
Kind of reluctant to say anything about where loan spreads are I would just tell you that again pricing is more aggressive than it has been historically, it's definitely the more challenged part on winning business versus credit exposure.
So I think you can infer from that that loan spreads in general are lower than they historically have been but we don't usually comment about what sort of spreads we're seeing.
Alright, Thank you very much.
Your next question will come from the line of Jennifer <unk> with <unk> Securities.
Morning, Jennifer.
Good morning, I think everything has probably been asked but I just wanted to ask you about.
What youre seeing in terms of competition for talent wage pressure right now.
Jennifer I think each of US has a perspective around the table here, it's somewhat of a recent phenomenon, but in general I think it's fair to say that it has gotten more competitive and more challenging.
That society has really gone through a transformation here it feels like in <unk>.
There are a lot of people not just the comerica, but friends family people are making life changes and life choices about how they move forward for the pandemic and that's created a little bit of churn.
John that you just have what we see is a little bit of wage inflation that might be coming not just our way, but in the whole industry and you're seeing this across the whole economy and for US. It's anecdotal a lot of that is not in the run rate at this point in time, but just as we stay in touch with the market.
Does feel like there is a.
A bit of a challenge there just as other manufacturers and service industries, you are seeing in terms of getting the talent and for the same price that we used to so it does feel like we're going through a little bit of a transition as an economy and that's something we're going to have to adjust to.
Jennifer I might just add this is curt debt, we feel like we did a really good job of being sensitive to our employees need throughout the pandemic.
Being accommodative and supportive financially and otherwise of our employee base and we as a company.
Sort of pride ourselves on having longer tenured employees and deep relationships with.
Not only customers, but employees over over time and certainly there is some pressure out there and we're trying to stay in front of it in terms of the right benefits in terms of retention, where it's needed and just in terms of being proactive in communicating and connecting with our employees.
What is the.
Post pandemic work environment looks like for your employees.
How many are going to be 8 we'll be back in the office full time versus flexible vs or totally were met.
So for we are about this is Curt again, we are about halfway maybe more than halfway through our return to office planning we.
Our execution will have.
Be completing that in sort of the August September timeframe, unless something significantly changes. We all were dealing with this sort of this COVID-19 resurgence in various et cetera, but assuming that debt is manageable that debt is our plan right now and what we are focused on or what we've been saying is that the majority of our employees will be in the office for majority.
Pretty at a time that does not mean that everyone will be here 5 days a week. We will certainly have employees, who are here 5 days a week, but we will have employees, where we're providing more flexibility it's really dependent upon the job.
The employees needs as well so we'll have some that are working through 3 days of the office 2 days at home or for days in the office 1 day at home those types of things. We will have very few employees that are working completely remotely.
I think thats important just from the standpoint of maintaining our culture our environment.
Apprenticeship development of employees.
<unk> amongst our employees et cetera.
Okay.
I'll now turn the call back over to Curt farmer, President and CEO for any concluding remarks.
Okay well. Thank you as always we appreciate your continued interest in Comerica and we hope you have a great day. Thank you.
Ladies and gentlemen that does conclude today's call. Thank you all for joining you may now disconnect.
[music].
Okay.
Okay.
[music].
John.