Q1 2022 Comerica Inc Earnings Call
Good day and thank you for standing by what comes with the Comerica Bank first quarter earnings Conference call.
At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session.
Quick question. During this session you will need to press star one on your telephone.
Any further assistance. Please press star Zero I would now like turn conference over to.
Speaker today Darlene persons director of Investor Relations. Please go ahead.
Thank you Mary good morning, and welcome to <unk> America's first quarter 2022 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 our commercial Bank Peter <unk>.
This presentation will be referring to slides, which provide additional details the presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website Comerica Dot Com. This conference call contains forward looking statements in that regard you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations.
Forward looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements.
Please refer to the Safe Harbor statement in today's earnings release, and slide two which is incorporated 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 the.
The economy in the first quarter was relatively strong despite the surge of Covid cases in January in the war in Ukraine.
On the whole our customers are in good shape and they remain cautiously optimistic about the future.
Loan growth in the first quarter was solid and exceeded our expectations in several businesses.
Compared to the first quarter last year General Middle market average loans were up 16%, excluding triple P loans and large corporate loans were up 20%.
Credit quality remained very strong at.
Expenses were well controlled.
We are actively managing our balance sheet and remain well positioned for the rising rate environment overall.
Overall, the year is off to a good start.
Highlighted on the slide our recent accomplishments associated with our corporate responsibility platform.
We are pleased with the progress we're making.
Related to environmental sustainability climb.
Climate risk is an emerging priority for all regulators and last month. The SEC released a notice of proposed rulemaking for climate related disclosures.
For the past 13 years, we have disclosed our progress reducing our scope one and two greenhouse gas emissions discussing our goals and our annual corporate responsibility report and providing annual responses to Cdp's climate change questionnaire.
We will be publishing our corporate responsibility reported June .
Through our membership in the partnership for carbon accounting financials or pks, we have begun to develop estimates of our commercial lending portfolio is financed emissions.
We expect to continue on this path and meet any reporting our regulatory requirements.
Look forward to keeping you apprised of our progress.
In light of the evolving post Covid environment, we were taking a fresh look at our retail banking approach.
Facilities and technology platform.
These areas. These are areas that we are constantly evaluating but with the pace of change accelerating we are acting with even more urgency.
For example, within our retail bank, we continue to focus on transforming the delivery of our services aligning resources to best serve our customers and enhancing our small business focus.
Also we are developing additional initiatives around optimizing our facilities for our employees.
The goal is to better accommodate flexible work arrangements reduce our footprint and improve efficiency, while maximizing locations to best serve our customers.
As far as technology, we are increasingly focused on ways to meet customers and colleagues rapidly increasing desire to utilize digital channels.
We believe these initials initiatives are essential and foundational to continuing to effectively execute our relationship banking strategy as we have for the past 173 years.
Turning to our first quarter results, which were outlined on slide four.
We generated earnings of $1 37 per share.
Solid broad based loan growth momentum was partly offset by a large decrease in mortgage banker due to lower refi volumes and typical first quarter slower purchase volume as well as the continued wind down of Triple P loans.
Deposits in the first quarter are typically impacted by seasonality and this year was no exception following record activity in the fourth quarter.
Net interest income benefited from loan growth as well as our larger securities portfolio as we work to deploy excess liquidity and lock in higher yields.
These benefits were offset by a $10 million decline in Triple P income stream.
Strong credit quality resulted in a small reserve release.
As expected maintained at record levels of fee income, we generated last year was challenging.
The first quarter was impacted by a large decline in warrant related income and negative returns on deferred compensation assets in.
In addition, we saw a seasonal decline in customer activity anticipated, but omicron in January .
We believe activity should be more revise more robust as we move through the year.
Expenses declined $13 million and included a decrease in deferred comp and seasonality in several categories such as annual stock compensation.
Overall companies are working on growing their businesses rebuilding inventory levels and increase in capital expenditures, despite higher cost and labor shortages.
In general customers have been able to pass on price increases and their balance sheets are strong with excess liquidity.
Despite some uncertainty.
Customer sentiment remains positive, which is reflected in our pipeline and growing loan commitment levels.
And now I'll turn the call over to Jim who will review the quarter in more detail.
Thanks, Kurt and good morning, everyone.
Turning to slide five as Kirt, just mentioned, we had solid broad based loan growth, which was partly offset by an $852 billion decline in mortgage banker and a $354 million decrease in triple P loans.
Loan commitments increased in most businesses in the line utilization rate held steady at about 46%.
Positive trends continued in general middle market, and corporate banking, which both grew over $400 million, excluding triple P General middle market loans increased $562 million or 5%.
Higher commodity prices and growing inventory levels are in part, resulting in increasing working capital needs.
M&A and Capex are also drivers.
We continue to have great success in our equity fund services business, where we provide capital call and subscription lines to venture capital and private equity firms. The pipeline is strong and the activity remains high.
The increase in National dealer services loans included a small increase in floor plan loans, which totaled a little over $600 million and remains extraordinarily low relative to the typical historical run rate of about $4 billion.
We expect it will take some time for inventory levels to rebuild as supply issues are resolved and pent up demand is satisfied.
Environmental services continued to build on the strong growth we've seen over the past year opt.
Opportunities are abundant and we continue to attract new relationships, resulting in record loans and strong syndication activity.
Mortgage banker declined significantly as refi activity slowed with higher rates and home sales fell to seasonal levels.
We expect to see an increase in purchase activity as we enter the spring selling season.
Also housing supply is expected to grow as we progress through the year.
We believe we are well positioned at 71% of our mix as purchase related.
Loan yields decreased four basis points as the benefit from higher rates was more than offset by lower triple P revenue.
As the bulk of our portfolio is floating rate and largely repriced at the end of the month. The full benefit of the recent rate increase is expected to be reflected in the second quarter.
As shown on slide six average deposits declined in the first quarter, mostly due to seasonality.
This follows record deposit growth in the fourth quarter, when we had the highest quarter over quarter growth rate amongst our peers.
Deposits were up 11% year over year, and we believe deposits will remain elevated but slowly decline as the fed increases interest rates insignificantly shrinks its balance sheet.
The average cost of interest bearing deposits remained at an all time low of five basis points.
With the loan to deposit ratio for us and our peers at low levels, we expect deposit rates to adjust slowly as rates rise.
Slide seven slide seven provides details on our securities portfolio.
Our goal is to prudently reduce our asset sensitivity as rates rise.
In part this can be achieved through deploying excess liquidity by opportunistically growing the securities book.
Through the first quarter, we purchased $3 $6 billion worth of securities with average yields of about 250 basis points with recent purchases exceeding 300 basis points.
The larger portfolio and to a lesser extent favorable new purchase yields resulted in a $6 million increase in securities income.
Floating balances and rates steady at the March 31st level second quarter Securities revenue would increase to about $90 million.
We will continue to assess relative value between MBS and swaps as we execute our balance sheet hedging potentially leading to some incremental growth in the portfolio, although likely at a reduced pace.
The rise in rates resulted in a mark to market impact of $965 million, which runs through OCI and affects our book value, but not our regulatory capital ratios.
This accounting treatment does not capture the significant economic value created by higher rates on other parts of our balance sheet that are not mark such as deposits.
Of note, we typically hold these securities to maturity in which case the unrealized losses should be recouped.
Turning to slide eight net interest income decreased $5 million, including a $10 million decline in Triple P income.
The net interest margin increased 15 basis points, mainly due to a decrease in excess liquidity.
As far as the details the decline in Triple P income two fewer days in the quarter and lower non accrual activity together had a $19 million impact.
This was partly offset by growth in non triple P loans, which added $5 million.
The benefit from higher rates was 4 million and included a partial offset from lower rates on floors.
With the average rate on floors now at 59 basis points floor has become less relevant as rates rise.
As I mentioned the increase in the size of the securities portfolio at higher yields added $6 million.
The decrease in balances at the fed reduced net interest income by $1 million in added 17 basis points to the margin.
So the deposits remained high at over $17 billion and weighed heavily on the margin with an impact of 52 basis points.
As far as credit, which is outlined on slide nine our metrics remained excellent including net charge offs of only six basis points.
Gross charge offs declined while recoveries decrease from elevated levels of recent quarters.
Criticized and non accrual loans remained low.
Our provision was a credit of $11 million.
Sustained strong credit metrics and a continuing favorable economic forecasts, albeit with elements of uncertainty resulted in a modest reduction in the allowance for credit losses to 121% of loans.
Through the cycles, our credit performance relative to the industry has been a key differentiator.
With our consistent disciplined approach to credit we believe we could continue to outperform in the event, we encounter a recessionary environment.
We are closely monitoring the portfolio looking for potential signs of stress from supply chain disruptions and labor constraints and inflation.
Overall, our customers have been able to manage through these challenges performing well and maintaining their strong balance sheets.
Noninterest income.
Income as outlined on slide 10.
Warrant related income decreased $14 million following elevated gains on monetization in the fourth quarter and.
In addition, deferred comp, which is offset in expenses decreased $12 million to a negative $7 million.
Derivative income declined $5 million due to a $6 million change to the credit valuation adjustment, mostly related to higher energy prices impacting our customers positions.
Several customer related categories, which reached record levels in the fourth quarter were challenged by seasonal factors market performance and a slower economic environment in January attributed omicron.
This included a decline in commercial lending fees, particularly syndications fiduciary income and card.
As Curt mentioned, we believe activity will improve as we progress through the year.
We continue to maintain our expense discipline as we position for the future growth as shown on slide 11.
Total expenses decreased $13 million in the quarter.
Salaries and benefits decreased $3 million, including the $12 million decrease in deferred comp, which is offset in noninterest income.
Performance based incentives were lower as we reset targets to normal levels.
Seasonal factors included annual stock comp higher payroll taxes, and lower staff insurance.
Of note our staff levels increased slightly as we are successfully retaining and attracting talent in a very competitive market.
Occupancy and advertising were seasonally lower.
Also legal expenses declined following elevated year end activity.
Lower outside processing is partly related to slower card activity and operational losses, and FDIC expenses, which are difficult to predict we are at elevated levels.
We kicked off certain initiatives related to modernization as kirt described which increased expenses by $6 million, specifically related to consulting severance and asset impairment.
This is a journey, which includes transformation of our retail banking delivery model alignment of corporate facilities and technology optimization.
We look forward to providing more information as these initiatives form.
The cost savings generated are expected to be reinvested as we continue to evolve.
As always our goal is to prudently managed expenses, while enhancing our customers and colleagues experiences.
Slide 12 provides details on capital management.
Loan and securities portfolio growth the impact from customer derivatives combined with share repurchases resulted in a decrease in our CET one ratio to an estimated 993%.
We continue to closely monitor loan trends and capital generation as we focus on our 10% target.
As always our priority is to use our capital to support our capitals customers and drive growth, while providing an attractive return to shareholders.
Slide 13 provides an overview of our interest rate sensitivity and the benefit of the rising rate environment.
Our standard model assumes a non parallel ryzen rates with a dynamic balance sheet.
Based on the balance sheet as of March 31, we estimate a $160 million increase in annual net interest income over 12 months as rates gradually rise 100 basis points and the benefit will be slightly greater again in year two.
We've also provided various alternative scenarios.
For the purpose of providing an outlook for 2020 to noninterest income we added the expected 50 basis point rise in May using swaps and securities at March 31st levels, and our outlook for loan and deposit activity for the remainder of the year.
In this scenario, we expect net interest income to increase by more than 13% relative to 2021 and increased 15% in the second quarter relative to the first quarter.
Our outlook for 2022 is on slide 14, and assumes the economy remains strong with gradual improvement of supply chain and labor challenges.
Aside from the significant upside from rates our outlook for the full year's unchanged from our January earnings call.
There is no change in our expectation for broad based average loan growth on a year over year basis in the mid single digit range, excluding the decline in Triple P loans.
This includes a decline in mortgage banker from the continued normalization of refi volumes and lower national deal or due to a slow rebound as a result of swap supply chain issues.
Including Triple P average loans year over year are expected to be stable.
This outlook this outlook reflects our robust pipeline and positive momentum in many businesses.
Relative to the first quarter, we expect average loans to grow 1% to 2% each quarter with a seasonal pickup in mortgage banker along with growth in nearly every business line.
Post the seasonal decline in the first quarter. Our base assumption is that deposits are expected to modestly decline for the remainder of the year with modest growth in wealth management and retail more than offset by a moderate decline in commercial deposits.
However, the magnitude may be impacted by the pace of fed tightening and economic trends as these are major drivers for deposits.
I already reviewed our net interest income expectations, but note that rate increases beyond may and the growth of our securities and swap portfolios present additional upside.
Credit quality is expected to remain strong with net charge offs continuing to trend to the lower end of our normal 20 to 40 basis points.
Assuming sustained economic strength and the impacts from supply chain issues labor constraints and inflation remained manageable, we expect criticized and non accrual loans to remain low.
As far as noninterest income there is no change to our outlook.
2021 was the highest on record and the level of some categories are unlikely to repeat in 2022, such as warrant related activity derivative income, including favorable CVA.
<unk> related card fees and deferred compensation.
For the remainder of the year, we expect significant broad based growth in customer driven fee categories as activity picks up.
This includes card deposit service charges commercial lending fees warrants as well as fiduciary, which benefits from tax filings in the second quarter.
In addition, deferred comp and securities gains and losses are difficult to predict therefore, we assume will not repeat.
We continue to expect low single digits increase in 2022 expenses.
Second quarter expenses are expected to be relatively stable relative to the first quarter.
Salary and benefits are expected to decrease modestly as the first quarter annual stock comp and lower payroll taxes are mostly offset by merit staff insurance and added staff as well as deferred comp.
Outside of salaries and benefits, we expect higher advertising due to seasonality outside processing tied to revenue and technology expense to be mostly offset by lower operating losses.
We expect the tax rate to be 22% to 23%, excluding discrete items and finally as I indicated on the previous slide we are focused in our CET one target of 10% as we monitor loan growth trends.
Now I'll turn the call back to Kurt.
Thank you Jim.
As I said in my opening remarks, many business lines are showing good momentum with increases in loans commitments and pipelines.
Our credit culture continues to produce strong results and our expense discipline was evident as we continue to invest in products and services and make progress on our ongoing digital journey.
The nature of our business results and our balance sheet structure that quickly produces benefits from rising rates and the curve.
Current rate environment, we expect to continue to appropriately grow our securities and swap portfolios with the goal of providing more consistent earnings performance through the cycles.
Our unique expertise in many areas as well as our geographic footprint offer significant growth opportunities.
I'm honored to work along with such a talented and committed team.
We are well positioned as we move forward in 2022.
Thank you for your time and now we'd be happy to take questions.
As a reminder, just a question you will need to press star one on your telephone to withdraw your question. Please.
Again to ask a question Thats star one on your telephone please standby will be compile the Q&A roster.
Our first question comes from the line of Bill Quirk.
From Wolfe Research your line is open.
Thank you good morning, Bill good morning, good morning.
Curt you said that you expect fee income to be more robust as we move through the year can you discuss a little bit more on what gives you confidence in that.
And then maybe just a little bit more color more broadly on the optimism that you're hearing from your customers and what your sense is that that optimism is going to enough to be enough to translate into continued loan growth.
I'll ask maybe Jim to talk about fee income and then maybe Peter talked about optimism overall.
Yes. Good morning, Bill Yes, there are a couple of factors in play here first it's important to remember that we are always seasonally lower in Q1, it typically gets off to a lower start.
Fewer days and just overall, a little bit lower seasonal activity.
Beyond that we had the added burden as I mentioned of <unk> that we don't expect to repeat and of course, we had a significant impact from market related fees. I think it was about $32 million just from market impacts on things like CVA deferred comp.
Warrant valuation so we had a lot of nominal things going on in the first quarter. We do expect all those to be removed as we move through the last three quarters of the year and get the normal seasonal pickup and you layer that on top of just some customer cautious optimism and we do think we'll see more activity in noninterest income as the year goes on maybe I'll flip.
But over to Peter for other yes, Bill I would just add to Jim's comment, but probably even a little more than cautious optimism I think our customer base continues to perform really well we've communicated to you guys that our pipelines are still above pre COVID-19 levels, and we're seeing that really across our footprint and just.
Every business line.
The outlook is pretty good I don't know that I can say that it is may be robust as it was middle of last year, but it's still really strong and obviously theres a number of things going on in the economy that customers are being cautious.
Cautious about or prepared for but I don't know that I would say theyre pulling back at all I think they are moving forward and we feel really good about where we sit and our ability to capture that.
That's very helpful. Thank you and if I may.
Follow up with just one additional question your peers are assuming more rate hikes in the 75 basis points that you have in your outlook.
The objective there just to be conservative and then sort of along those lines on your interest rate sensitivity assumptions on slide 13.
It looks like your asset sensitivity came down a bit you've talked about reducing some of your asset sensitivity as rates rise is that something that like.
This is.
Indicating you started doing already or do you expect to wait a bit before more aggressively lowering your asset sensitivity.
Thanks.
Yes.
Yes Bill.
We very purposefully took down our asset sensitivity to a certain degree this quarter.
It certainly deposits were a piece of that I had mentioned at the January earnings call that we did have some seasonal deposits that were inflating our asset sensitivity.
And so that piece was not a surprise, but beyond that we did enter into a very significant level of fixed receive.
Contracts six $3 billion worth of received contracts.
Made up of $3 5 billion of off balance sheet swaps.
$2 $8 billion of net securities once you account for the pay downs.
That was a pretty significant move it brings a lot of those rate hikes forward.
<unk>.
We are essentially taking 250 basis points worth of received fixed instruments, making that a certainty by pulling it forward into the run rate for the time value of money.
And then.
In exchange for that we did give up about $23 million of asset sensitivity. Most of the rest of that was deposit. So it has been a goal of ours to stabilize our net interest income take advantage of higher rates as they increase and that's exactly what we're doing we feel really good about the progress we've made this quarter.
And we continue we expect to continue to do that as the quarters go on throughout the year.
Understood. Thank you for taking my questions.
Our next question comes from the line of John Armstrong from RBC Capital markets. Your line is open.
Good morning, John .
John .
I'm here sorry about that.
Just one follow up on that last question on the hedging Jim what is what is the longer term goal or philosophy of.
Bob the hedging.
What are you really trying to accomplish there.
The ultimate goal is to smooth out our net interest income and asset sensitivity.
We don't like the feast or famine cycle that <unk> been in for really a number of cycles.
So our goal is to take advantage of the higher rates as they exist today to lock those in.
So that were protected from a risk standpoint, when rates drop and the good news is we're always going to leave a little bit of asset sensitivity on the table. So the goal is to protect ourselves from a drop in rates take advantage of the rates that we see out there today lock demand bring them forward and still leave a little bit of asset sensitivity on the table, we will likely.
We have asset sensitivity in the low single digit percentage area. So I think we're always going to benefit from rates rising, but it's important to us to lock in opportunistic rates like we're seeing today and take advantage of putting the take advantage of putting those really an income stream for the next several years.
So it's a very balanced approach and we will do this gradually over the next several quarters certainly made a lot of progress this quarter and expect to make a lot of progress over the next several quarters.
Thank you on that and then on the deposit.
Data question last quarter, you asked a little bit about the likelihood of being closer to 10% versus 30% in your standard model.
Have you seen anything in terms of deposit pricing pressure or requests from your clients. After this first hike.
Just curious on your thinking that we could be closer to 10% deposit beta at least early on the mid 30% standard model.
Yes, I'm gonna offer some general comments, then maybe I'll flip it to Peter for some customer color on that.
Still feel with all the liquidity in the economy that the first several hikes will be below 10%, we will get closer to that 10% is the subsequent hikes happen, but we still feel pretty good about following the pattern of the last cycle. The fed has gotten more hawkish since we talked in January on the earnings call. So, there's probably a little bit more.
Pressure on that better than I might have thought, but it doesn't take us above 10% for the first few so we still feel pretty good about our manageable beta.
Short to medium term, but in terms of color from the customer side I'll flip it to Jon and I think the other thing I would say is like everything that we do it's very much relationship focused and so far that hasnt been.
A major point of conversation I suspect as we get further into the year it will be.
And your larger businesses that are moving bigger deposits there might be a little more sensitivity to it just.
Just because their access to the other rates across the country, but so far it hasnt been.
Something that we've we've really faced is a big challenge, but we're prepared to talk about it and we know that it will be something as the year goes on we will need to be upfront with our customers on.
Yes.
Okay. Thank you.
Thank you.
Our next question comes from the line of John <unk> from Evercore ISI. Your line is open.
Good morning, John .
Good morning.
I appreciate all the guidance detail, particularly.
Around the fee trends and NII I guess, putting it all together.
How should we think about the level of total revenue growth expectation for 2022.
I know you gave some detail around NII of around up 13%.
A lot of puts and takes there, particularly on the fee side as we've been talking about so is it reasonable to assume perhaps.
5% to 6% revenue growth expectation for the year or could it be better than that.
Yes, John .
You'll remember one starting with net interest income and maybe I'll circle back to part of Bill's question that I'm not sure I answered fully.
We did offer some guidance we assume the 25 bps from March and our guidance, we assumed a 50 bps in may.
And I think the question Bill I had was are we being conservative we not think those future rate hikes are going to happen that is absolutely not the case.
The rationale for our guidance been set with the way. It was is there is a wide range of opinions out there in terms of where fed hikes, we're going to go I think even amongst the estimates on the sell side analysts side Theres a wide range of estimates so rather than try to pick one.
We thought it would be more helpful to give the hikes that we know are happening for certain and then give you the model and you have the $160 million for us.
Average 50 bps hike or a point to point 100, you have the model for that that you can plug in you can apply the sensitivities that we have on deposit betas that are on the slide so it's a little bit of a plug and play. So we're trying to be helpful. There in terms of giving you the certainty aspect of the Bay hike and then you can put into as many hikes as you want and pro rate it by that model that we provided.
In terms of revenue growth for the year.
I would bifurcate it between what's going to happen with net interest income and again there is a wide range of outcomes there in terms of fed hikes.
As well as what we might add on in terms of additional swaps and securities. So just some tremendous upside there. We know that noninterest income is going to be lower than 2021, we tried to make that as clear as possible.
If you look at some of the anomalous income we had in 2021, which I think is in the earnings materials, whether it be stimulus related card fees CVA in the derivative portfolio.
Warrants.
We have about $70 million of anomalous income that occurred in 2021 that will not occur in 2022. So we will have a negative percentage for 'twenty two relative to the noninterest income that's not new news at all I think we've been real clear on that.
Noninterest income, though has some tremendous capacity to create a very significant growth rate. So.
And just apply the modeling that we provided add as many swaps and securities as you think might make sense, we're certainly going to keep up a pace somewhat similar to what we had in the second or the first quarter.
We feel really good about revenue growth in 2022, but there is going to be a range of outcomes there depending on how many hikes you have.
Okay, alright, thanks for that I guess another way to.
Maybe you can go about asking me is I guess also wanted to get your thoughts on the magnitude of positive operating leverage that you think you can achieve for 2022, given your low single digit growth in expense expectation. So fair to assume that you couldnt see achieve possibly two to 300 basis points of pause operating leverage her and she can help us think about that.
Yes, I would probably go back to the previous answer again, a wide range of outcomes, depending on hikes, but it's going to be a substantially favorable number. So again, we feel really good about it and it just depends how the interest rate environment goes throughout the year.
Okay got it. Thank you for that and then one very quick last one I know you mentioned the floor plan.
Portfolio increased from three nine to $4 1 billion I think on average and just your expectation do you think you can continue to see modest increases from here.
John It's Peter.
I think the short answer to that is probably yes, but very modest.
Not expecting.
Huge recovery in floor plan, we do feel like.
You're starting to see car assembly pick up Youre, starting to see some progress I think in the auto supply chain, but I don't think thats going to translate to floorplan balances just because the demand for cars is still so high and what we hear from our customers as they are pretty much sold a moment that rolled off the truck.
That's probably going to continue.
Through the for sure the rest of this year, maybe through the rest of next year quite candidly on some of the things that we're hearing so we think we'll see a little bit. If you look at a lot of the balanced growth that we saw it was mostly financing real estate, we're financing some M&A activity because our customers are going to be on the.
The winning side, if you will of buying other dealerships and so that's where we're really staying focused right now.
Great. Thanks for taking my questions.
Our next question comes from the line of Ebrahim.
From Bank of America. Your line is open.
Abraham.
Good morning, good morning.
I guess just the first question around line utilization.
Was wondering if you can elaborate why you didn't see a pick up.
From some of your peers.
So a pick up.
During the quarter driven by capital markets being tighter.
And picking up Capex et cetera would love any sort of.
Todd said on what do you think needs to happen to see a meaningful pickup in line utilization from here.
And then just on the mortgage banking businesses.
Yeah Ebrahim, it's Peter.
A little bit of its portfolio mix or our overall corporate line utilization as we communicated was about flat, but when you look at sort of our general middle market and.
Our general businesses business banking U S banking and so forth we did see.
Good increase there quarter over quarter. So we're starting to see some utilization I wouldn't say, it's back to historic levels, but we did see a little bit of utilization. So I think I think the difference you might be seeing there is mostly portfolio mix.
It's a good segue to your question on mortgage mortgage saw a big drop in utilization in the quarter and I think our outlook there is still positive.
Anything per se that is.
Isn't normal seasonality that we've seen we still feel really good about.
About the mortgage business and I think as the year unfolds, you'll continue to see I've tried to communicate to you all that on if you look at that quarterly chart in the appendix, it's up into the right over a long period of time, and we're focused on adding new customers and increasing that overall.
Warehouse lines that we have out and we think we'll be able to continue to do that so we do think though year over year, we will be down as we've communicated in mortgage banker.
And do you also expect the mortgage banker model.
<unk> as well, so even though its a LIBOR based both given the market backdrop.
Coming down so that's going to impact that.
Thanks.
Ebrahim I think Youre, asking me about pricing and mortgage in general.
I guess my answer to that question is as we do think it's getting it's more competitive and mortgage banker then it was kind of right. When the pandemic started so theres, probably a little bit of pricing pressure, there, but nothing that we're not used to.
In all of our businesses.
Got it and just one quick one.
Turning to win.
I understand that.
Right options at all.
But do you have a number in terms of what NII would look like if you just assume that forward curve plays out as expected.
And I will let with London.
No.
Abraham Yes, we have played with a number of scenarios, but at this point again, there are so many potential permeation.
That I think for now we're going to hold to the 75% guidance that we've offered and just offer the model and let people plug that in.
Got it thanks for taking my questions.
Thanks you.
Our next question comes from the line of Scott <unk> from.
Piper Sandler your line is open.
Good morning, guys. Thanks.
Okay.
I just wanted to ask a question on deposit balances.
Is there a feeling I know you expect modest declines through the remainder of the year vis vis the first quarter, but will the first quarter had been sort of the worst of the deposit.
Contraction in your view.
Oh, it absolutely will be the worst Scott.
Yes, we had a lot of seasonality that occurred as we mentioned.
Some of those structural things cyclical things related to fed movements is not really kicked in yet and that will pressure us probably with our business model and our heavy dependence on commercial deposits.
We will be impacted probably a little bit more than other banks, but we don't expect for any one quarter that impact to be nearly as impactful as the seasonal runoff that we saw in the first quarter.
Perfect Alright, Thank you and then fourth quarter.
That record.
Yeah, Yeah understood. Thank you.
Maybe a follow up just regarding rate sensitivity can you speak qualitatively to your preference for adding securities versus swaps and moderating your rate sensitivity.
Yes.
We are always looking at relative value between the two that's certainly a factor.
We also look at capital implications some securities come with capital you have to hold against them. So thats a factor and that factors into the overall pricing comparison in relative value between the two of them and then of course liquidity levels, our cash levels are coming down.
That will probably make us a little more cautious about adding securities going forward. So we have been adding an abundant amount of both over the last couple of quarters.
And certainly we stepped it up a lot in the first quarter I do think as the quarters go on you will see fewer and fewer securities added in more and more swaps in terms of the proportion.
They both have their advantages on a relative value basis, one can look better than the other at times and so we'll utilize both going forward, but I think youll see us continue to pivot a little bit more towards off balance sheet swaps as opposed to on balance sheet securities.
Yes, okay.
Perfect. Thank you very much.
Thank you.
Our next question comes from the line of Steven Alexopoulos from Jpmorgan. Your line is open.
Good morning, Good morning, everyone. Good morning, I wanted to start on the rate sensitivity.
<unk> been very clear you have a goal to reduce asset sensitivity, but what's the thought on adding all the swaps here why not wait until rates go up before trimming your asset sensitivity because it just feels like youre, leaving a lot of economic benefit on the table by doing so much right now.
Hey, good morning, Steve.
We do not want to pick our point, where we think rates are going to peak.
We saw a little bit of that in the last cycle.
That's something we're interested in doing again I think it's really important dimension that we are just getting started we have a lot of swaps a lot of interest sensitivity is still on the table.
We will be taking advantage of these rates over the next several quarters, we have quite a ways to go so I wouldn't necessarily think about it in terms of we've put a stake in the sand in the first quarter of 2022, that's by no means the case.
We are going to try to avoid picking where we think rates are going to peak, we're going to stay methodical as I've said in the past and we have a long ways to go and by the way even when we're done we're going to leave some asset sensitivity on the table and we will still benefit from higher rates. So.
We'd like to have or taken eat at 2% to a certain extent, we're adding significant amounts of income to the run rate now, but we have a lot further to go in terms of adding swaps and as rates go up if we're fortunate enough that they do go up continuously over the next year.
We will certainly be in a position to take advantage of that.
Jim I might just add a little color. This is curt little color commentary and sort of our thinking here. So we lived through close to an eight or 10 year cycle of near zero interest rates, beginning with the financial crisis, which was really challenging for us on the revenue.
Side of the house and so we saw rates increasing in 2017 and 18.
We were a little bit more probably focused on picking a higher point in terms of where the rate cycle might go and we made some progress on hedging but not nearly enough.
And we saw the dramatic decrease in rates going to zero as the Covid crisis began so we live through one of those cycles and we're just trying to be prudent there is never going to be no change to our model. We are primarily a commercial bank. So no matter what as we add.
More loans and customer relationships, we are always going to be asset sensitive as an organization and probably highly.
Really asset sensitive relative to some in our peer group, but we want to make sure were one dollar cost averaging here. If you think about your stock portfolio and that we're adding appropriately hedges to the portfolio throughout the cycle. We're all assuming continued rate increases.
But we also weren't assuming COVID-19 , we weren't assuming that your cranium war there is a lot that.
No matter, what could derail a scenario and so we're just trying to be prudent.
And sort of.
Solidifying our revenue stream on a go forward basis, not just for a short term cycle, but over.
Several years going forward, yes.
Yes, and I might add to that there are really two components of leveling out the asset sensitivity.
There is a risk control aspect and there is a profit maximization aspect and Steve I think youre thinking of the profit maximization aspect is many equity analysts would there is a risk controls stempler aspect to this and that we want to make sure that.
If things do go south that we can be as confident as we can be in protecting that common dividend.
Which was not a sure thing back when rates were zero and we were having credit pressures, we want to make sure that from a credit rating agency standpoint were always in good stead.
The customer base, we have we think our credit rating is extremely important to our customers value that so I feel like a lot of the blood that word chop. So far is really taking care of that risk control aspect that to some extent we've secured the dividend.
Done those things to make sure that we can withstand a downturn if rates were to go the other direction.
And as rates continue to go higher I think we start transitioning from the risk control aspect to more of the profit maximization. So really a couple of objectives. There that we're trying to check the box on.
Okay.
That's very helpful color actually.
So for current and your prepared comments when you talked about modernization efforts and you indicated a greater sense of urgency is the message to the market that there could be more spend coming from the company at some point or are you simply saying that you recognize that to be competitive and improve the client experience you need to take them on.
<unk> to the next level.
Steve it's a little bit of both.
Just think over the last 12 24 months the whole world. The whole corporate America has learned a lot and I really think as the CEO of a company, whether youre a bank or non bank.
You've got to be thinking about where the operating model in a post COVID-19 world and so.
The way I think you should think about this is that it's really a continuation of a path that we've been on for some time and we're finding ways to accelerate.
Our progress in terms of our retail branch delivery and sort of the customer experience there.
Continued investment in digital and then our real estate footprint and I can go into detail on all of those but on the retail side, we've been a very good steward of.
Overtime trimming our network there we operate a fairly thin branch franchise today, but we think we've got some opportunities to continue to look selectively at locations and those would sort of bleed out over.
Future future quarters, as we have opportunities there and we're just looking at sort of our model around branch delivery to make sure. It's as efficient as it possibly can be with really the goal of always doing a good job of the customer experience, but also enabling our colleagues with digital delivery et cetera, and on the <unk>.
Real estate side, we've done a very good job there we've reduced our real estate footprint.
And the last us really since 2015 about $20 to 25%, but with all of these flexible work arrangements being more accommodative to the new world of balancing work from home and work from the office.
Think theres opportunities there to continue to rationalize some of our real estate, but also create space that we think is very attractive to.
To our employees and accommodate some more collaborative sort of open floor plan and technologies and ongoing.
A lot of savings that we realize.
Through those two initiatives, which are sort of heavy real estate focus.
Going to continue to invest in digital and the reason we're pointing this out to you is we did have some charges in the quarter that we called out they were fairly modest we anticipate as we think about these things we haven't yet decided all of them that we may in subsequent quarters has some additional charges and then let Jim add some additional color there.
Yes, I think of this in a couple aspects, we're going to have what I call some exit and transitional charges.
What she saw $6 billion in the first quarter and Youll see some additional charges in subsequent quarter, some will be smaller than the six some will be larger.
Those would not be in our outlook since theyre, not even formed yet, but I do think of those as exit and transitional charges, we talked about asset impairments and severance in this most recent.
$6 million to the extent, we actually have investment in our applications and our core product suite.
Those are not types of types of things that I think is something we would call out we try to self fund those as much as we can I think about those in terms of our normal investment portfolio that we do each year on the technology side as.
As well as just any normal evergreens of facilities and banking centers and so we'll manage it really from two aspects.
Probably reported as such we certainly will call out the exit and transitional costs that occur, but we will attempt to self fund many of the investments and this on the pure product side as we can.
But more to come and of course these are still forming.
Okay.
I appreciate all the color. Thanks, Thanks for taking my questions.
Thank you.
Our next question comes from the line of Ken <unk> from Jefferies. Your line is open.
Good morning, Ken Hi, Thanks, Good morning, Hey, good.
Good morning.
I want to go back to page 13 in the deck and the projected swap benefit.
It's as of three $1 22, so can you help us understand like is that market of certain LIBOR rate.
Or and then that will change as LIBOR goes up that slide or are you just locked in knowing that that chart and the expected contribution.
<unk> will carry with you through this period that you show on the on the lower right chart. Thanks.
Yes, good morning, Ken Yes, those those benefits are based on LIBOR rates and <unk> rates as of the end of March and so to the extent you get a rise in those rates you will bring in less income are recognized less income on the swaps of course, you more than make that up many times over on the loan side.
And the impact of both of those are already folded into the modeling that we have on the bottom left side of that page. So it is all accounted for.
Right, Okay got it and so moving to that then can you remind US then can you just walk us through just the percentage of the book that's tied to the various LIBOR rates, whether one month three months six months prime et cetera, If theres a general way that you can help us with that.
If you turn to slide 17 of course, we do.
Split out 60 day rates versus the 30 day rates 60 day, plus as well as the 30 day.
The vast majority of our.
Book is still on LIBOR, because we didn't start making does being so for loans until January one. So we started really the momentum right as the year was ending in 2021.
But at this point the vast majority is still LIBOR, we do turn our book over every two to three years. So you can kind of prorate that to get a feel for the rate at which those being sulfur it would start to replace LIBOR loans.
Got it yes, I forgot about that chart. Thank you for the reminder, and then last one just on.
Your comments about your belief that a low beta you said, 10% ish or so for the first couple of hikes Whats your line of sight on how long the betas could stay that low and how are you how do you look at that.
Just with that in is that in the second quarter guidance.
How far out do you have a line of sight on the beta staying that low thanks guys.
Yes, Ken we I've.
I've mentioned that in the first few hikes of the last cycle was really the first five we stayed below 10% beta for each of those and so that store kind of base case at this point that we will stay below 10% for the first five and the guidance that we offered and the outlook.
That takes that into account that does have a somewhat moderate data in it so that is accounted for.
Okay. Thanks, guys.
Our next question comes from the line of Jennifer agenda from tourists Securities. Your line is open.
Jennifer.
Good morning.
Question on asset quality remains excellent.
<unk> had another negative provision in the quarter, how much longer can we see negative provisions.
In this environment, where it's a bit more uncertain as rates are going up so fast and we have.
Obviously more geopolitical risk.
Good morning, Jennifer this is melinda.
It's really difficult to predict under the seasonal methodology exactly what's going to happen.
Provision, but suffice it to say as was already mentioned I mean, we feel really good about the underlying quality of the portfolio.
Assuming that the economic environment stays relatively positive and stable it.
It is possible given that seasonally it's still new we don't really know where the bottom is it is possible that we could have very modest levels of provision a negative provision and then stabilizing we expect charge offs as Jim and Kurt mentioned, a sort of stabilized to the low end of our normal range although asset.
<unk> again is excellent right now it is not sustainable in the long run that we are commercial bank, we lend money and customers have challenges and there is a lot of economic uncertainty right now.
Just given all the inflationary pressures that we saw just a little bit of migration.
In the first quarter in terms of our criticized assets nothing that.
Would lead us to be concerned about any particular portfolio, but we continue to watch those portfolios.
Are more sensitive to just the general economic challenges so possible to have a negative provision small negative provision for a couple of quarters, but very very difficult to predict specifically.
Which portfolios.
Do you feel are most vulnerable with a rising rate environment.
Certainly our leverage portfolio I mean, obviously given the amount of leverage that they have they are very sensitive to interest rate increases, we do sensitize that portfolio when we underwrite initially.
And again, our leverage portfolio is really part of our middle market kind of core C&I relationship strategy. So we underwrite strong companies and management teams.
And have a lot of confidence that they will be able to manage through that but that book is kind of the tip of the spear for credit quality concerns and we continue to watch that one closely automotives. The supplier base has obviously been challenged given the chip shortage plus you add on to that all the other uncertainty around the inflationary pressures, but it's a relatively small book compared to the total and we.
Many many decades of experience in that automotive supplier base and they have managed through many many cycles successfully. So those are the two portfolios I would say that we are watching most closely and then small business. Obviously, they have less pricing capability in terms of just all the inflationary pressures lessen.
To pass that on so that book has held up incredibly well. It has good liquidity, but we have less visibility into a small customer versus some of our larger customers. So were watching that one as well.
Thanks, so much.
Youre welcome.
Our next question comes from the line of Peter Winter from Wedbush Securities. Your line is open.
Good morning, Peter Thanks.
Kurt.
I was just curious about if there are any plans to manage the available for sales securities.
Leo in a rising rate environment.
Any thoughts on maybe.
Moving into held to maturity or hedging it, especially since I think Jim you said that you hold the available for sale to maturity anyway.
Yes, good morning, Peter Yes, we have absolutely no plans to move any of that to HTM and really we discount the entire LCI discussion I know it does have an impact on tangible book book.
Book value per share I know thats, a bit of an uptick but I think when you look through to the true economics, which I think everyone should.
You look at other parts of our balance sheet that are not marked in particular deposits as I mentioned, we benefit so much economically from an economic value of the franchise from rising rates that we are not concerned about a single line item being marked down and what that does to tangible book.
The real economic value needs to be looked at and we think it's just a bit of window dressing to put it.
And the whole to maturity so certainly no plans there.
Okay.
And then just on the energy.
It's under 3% of the loans now.
There is interest in growing this portfolio just like I feel like underwriting standards are much stronger.
Loan spreads are better just due to less competition.
Peter.
Peter.
I think we are focused on continuing to be an energy bank, we feel really good about our energy portfolio that we have today I don't know that we're going to return to the levels that you saw five or six years ago as far as the percentage of the portfolio. We did see a little increase this quarter, but not a lot.
It's a business that we've been in for a long long time, we plan to stay in it but.
But I don't think it'll get to the size that it was like I said, probably five or six years ago, we feel real good about the level that we're at and plan to maintain that.
Got it.
Thanks for taking my questions.
Thank you.
Our next question comes from the line of Chris Mcgratty from Keybanc. Your line is open.
Good morning, Chris.
Hey, good morning.
Just wanted to revisit the size of the balance sheet for a moment.
Combining the comments you made on.
The tempering of the securities growth the cash normalization process in deposit growth just taking a step back how do we think about near term, earning assets relative to the 80 385. This quarter how do we how do we think about the cadence of that over the next couple of quarters.
Yes, good morning, Chris.
We do think that to some extent, we will see attempt investments go down in loans will eat into some of that.
But the bottom line as deposits are also going to decrease and that will probably be what really moves the balance sheet. So we will see a very modest reduction in earning assets to the extent deposits go down that shrinks. The overall size of the balance sheet.
But there'll be some moving parts there definitely going both directions.
Okay, but just to reiterate the drop that we saw this quarter, we're talking much more manageable declines in earning assets.
Much more manageable, yes, okay.
And then and then from there later in the year is there are as you kind of look to next year would you expect this trend to reverse as deposit growth.
Research.
Doing everything.
The fed is going to stay active probably for a couple of years, we don't expect their balance sheet to return to the level that that's likely to target until about 2024 right.
Rate increases will probably go through at least part of 'twenty three and of course, sometimes customers react on a bit of a lag.
So I think youll see deposits kind of languish.
Just slightly down from where they're at now probably over the next couple of years is our best guess.
But there is no exact equation for this there are so many moving parts in the economy money supply that it's hard to say, but certainly the fed actions will.
Just a shadow over deposit growth and those will continue over the next couple of years most likely.
Okay, Great and then if I could just squeeze one more on the buyback seemingly.
Reaching the reaching the end.
As you've achieved your capital targets is there anything to speak of in terms of inorganic capital use.
M&A.
Yes.
Information there, Chris we continue to be very focused on organic growth and are having a lot of good success. Both in our legacy franchise, but also in examples like our expansion into the.
Southeast into North Carolina, as we set up commercial loan officers, there and have now added wealth management capabilities, we envision eventually adding a retail bank there as well down the road. We've added some staff in our Denver office as well in the middle market side, and so we've got really good opportunities in our existing.
Franchise still in some of the best markets.
United States in terms of major Metro markets, especially in Texas, and California, and Michigan is doing well also.
And then we've been able to parlay that into expansion into other markets as well.
Great. Thanks for taking the questions.
Thank you.
Our next question comes from the line of Gary Tenner from D. A Davidson your line is open.
Thanks, Good morning.
Just had a follow up on the ACO question I'm, just wondering as you work.
Through the first quarter and your seasonal model have you made any active changes to your probability weightings in terms of kind of recession risks GDP growth et cetera.
Any details you can provide on that.
Yes, Gary this is melinda.
Economic forecast that we selected in the first quarter was relatively consistent with the economic forecast in the fourth quarter and the way we approach that economic uncertainty has to look at certain portfolios and then stress them to a higher recessionary scenario, which we did.
And so we used a more severe recessionary forecast for a portion of the portfolio to add to the qualitative reserves to come up with.
Again that kind of small release number that that we had this quarter.
Okay. Thank you for that and just.
One more follow up just on the <unk> question that Peter had asked that youre pointing to.
<unk> taken in terms of it being kind of a timing issue and temporary.
But in terms of we've still seen obviously the belly of the curve rates move higher here over the first month of the second quarter.
Can you give any color in terms of the sensitivity of <unk>.
Two additional moves.
<unk>, obviously, but base that they are moving up firm is higher than it was.
From your own 2021.
Yes.
Gary and our bottling it is not a lot different from what we've seen we saw kind of that medium part of the curve, where our securities were.
Move.
About 100 bps over the last couple.
A couple of quarters, and we took that close to $1 billion hit to OCI.
It's about the same sensitivity, so 100 bps would generate about $1 billion of hit or $250 billion for every 25 bps and it's somewhat linear so kind of in that ballpark.
Okay. Thank you.
Thank you.
Our next question comes from the line of Brian Foran from Autonomous your line is open.
Hi.
Really appreciate the comments that everyone's making different assumptions on rates and you guys don't want to be.
Creating point estimates, but just coming back to your plug and play comment.
Trying to work back to.
What it seems like the central case of the market that maybe the fed has to go to three or three 5% this year.
I mean, it's the plug and play it simple as your guidance implies $2 1 billion of NII This year.
There's no rate benefit really in the first quarter. So that's more like $2 $2 billion on a run rate and then if I throw in $310 million.
That gets me close to three.
On fed funds and maybe throw in a little bit more than that if the fed goes to $3, 25% to $3 15.
Mike.
I'm working back to that central case of the market of the fixed income market at least of the three to three 5% fed funds rate.
It's like a $2 5 billion.
NII using your plug and play correctly or I guess.
It's hard for you to bless that I guess, but maybe like the fed you can issue a non objection.
To make sure I'm not reading it wrong.
Yes.
It's pretty linear and it's not going to change a lot.
As rates continue to move higher from an exact modeling standpoint, I would just remind you as I mentioned in the script that most of our floating rate loans reset at the end of the month following the rate hike, so you'd want to get that right in terms of your quarterly impact assumptions.
But it is pretty linear along the lines of what youre, describing and what the graph shows.
And then the added challenges again I believe the fixed income market I'm supposed to be maybe modeling some cuts in 2024.
So I think you said by the time. This process is done you'd like asset since it <unk> need to be in the low single digit range.
So it's just.
It's just logical implication that.
Next time around if and when the fed cuts.
We're talking like $100 million adjustment to NII not like the much bigger numbers, we would have seen historically.
That is exactly the goal.
Okay.
And then maybe if I could squeeze in the last one I mean, just trying to translate all of this to like a normalized earnings power.
If you want to just give me a normalized EPS that would be great but.
Credits the other credits the other big swing factor can you just remind us.
What do you think is a reasonable either point estimate for charge offs or range I know, it's tricky because youre always.
Books are rarely at normalized charge offs there either.
For a long time and endo briefly at a peak but.
As you think about through the cycle credit costs, what kind of range of.
<unk> offs do you plug in.
Yes. This is Melinda I think as Curt or Jim already mentioned I mean, we do expect these extremely low levels of charge offs continue to normalize and we would guide towards the low end of our kind of normal range of 20 to 40 basis points would be what we would expect.
Great.
I appreciate it thank you.
Thank you Brian .
Comes from the line of Steve Moss from B Riley. Thank you Keith Your line is open.
Morning, Steve Good morning.
I just wanted to ask a little further on balance sheet positioning here with higher rate.
We see a pretty big Mark.
Down on the Securities book, just kind of curious is there an <unk> market that could cause you to stop securities purchases and then the other part here just kind of thinking about what is the percentage of cash to assets, maybe think of it as a ratio that you guys want to hold going forward.
Alright, good morning, Steve. Thanks for the question, Yes to your first question, we are not concerned about the OCI impact. So there is no level that would cause us to not buy securities or do something different we're very focused on the economics, just as we think everybody else should be.
I'm sorry, what was the second question.
Just thinking you said you're going to focus more on.
Probably more swaps and less securities going forward, just kind of curious what's the percentage of cash.
So yes.
Yes, we've always targeted because we do have a commercial basis, a little bit lumpy and we can see some larger ins and outs out of our cash position, perhaps relative to some peer banks, we typically like to hold.
$3 to $4 billion worth of cash used to be our own benchmark of course, we will look at the changes in the environment as we come into the next cycle.
The options for tap into funding on a very expedient basis, sometimes we will move that number up or down just depending on our access to funding.
But kind of in that $3 billion, maybe three to four billing range is kind of the level of cash we like to hold.
Okay great.
Great. Thank you very much I appreciate all the color.
Thanks for the question.
Our next.
Comes from the line of Michael Rollins.
Raymond James Your line is open.
Good morning, Michael Hey, Hey, good morning, Thanks for taking my questions just wanted to hit on the technology and life Sciences business. It looks like the average loans hit an inflection point.
This quarter. So I just wanted to get the outlook there and then on the equity fund services, obviously, a good Q on Q growth.
And the outlook I think for the venture Capital Association is is still pretty robust. So just any sort of color there on outlook would be great. Thanks.
Yeah, Michael it's Peter both both of those are businesses that we want to continue to invest in that we're we're wanting to add resources to the tls businesses.
One that Youre right. It did feel like it hit an inflection point, maybe this quarter and we're seeing really good volume there and feel like we've got an opportunity to continue to grow that.
On the <unk> side I would say the same thing both of those businesses the outlook feels really good.
The pipeline activity is really good and across the country. We are finding opportunities to add people or pick up people. It is extremely competitive in the tos business I would tell you.
A number of banks I think are wanting to get into it we've been in it for a long long time and I think we're in a great position to capture what feels like a growth business. So thanks for asking about both of those we feel real good about the outlook on each.
Great. Thanks for taking my questions.
Our next question comes from the line of Ryan Nash.
From Goldman Sachs. Your line is open.
Good morning, Brian .
Hey, good morning, Kurt Good morning, Jim.
Jim maybe just a couple of follow ups on the asset sensitivity on the backup kind of Brian's question. So.
On slide 13 can you maybe just talk about what the receive rate was on the swaps that you added and Jim maybe more just philosophically can you maybe just talk about what you are looking at to trigger additions to the swaps is there a minimum receive fixed level that youre looking at based on your view of the rate environment is there a set notional amount we should expect you to.
Adding on a quarterly basis to reduce the sensitivity I'm just trying to think about mechanically how are you going to do this given that I think on our math you need to add another $25 to $30 billion of swap. So I'm just curious on the receive rate and how you think about adding over the next couple of quarters.
Hey, good morning, Brian .
Once we added in the first quarter.
<unk> received rate was just a tad over 2% very close to 2%.
And of course, we paid <unk>, which is actually running below LIBOR at this point.
So that would be giving you a perspective for the rates in terms of the volume I would go back to my more global comments that we're looking at this holistically in terms of what are the securities options on the on the balance sheet. What are the swap options off the balance sheet and as I mentioned, we will likely start pivoting more towards the swaps if you'd like.
What we did with securities and swaps in the first quarter at $6 3 billion on a net basis and that was a pretty stepped up pace I don't know if we'll run quite of that pace every quarter. It will depend on market conditions.
But we will certainly be running close to that for the next couple of quarters and you will see more of a pivot towards swaps I suspect over the next couple of quarters.
Got it and then.
Just on your follow up for the for the modest decline in deposits.
Just given the pace of rate hikes that we're expecting over the next couple of quarters. How are you thinking about the mix of deposits. You are currently in the mid fifties on noninterest bearing and I think last cycle as we got to 150 basis points or so we started to see deposits look for.
A little bit more rate on on what they were receiving so I'm. Just curious what are you assuming for mix shift over the course of over the course of the next couple of quarters.
Yes, I think to the extent, we lose deposits it will be disproportionately to noninterest bearing I think even beyond that we will likely see a modest shift each rate hike from noninterest bearing to interest bearing that's just natural we saw it go the other direction as rates were going down customers just became less rate sensitive.
So we will see a gradual remix of that.
Portfolio towards interest bearing over time.
Got it appreciate it have a color.
You said that you are.
I just have just said that our portfolio is so heavy on the commercial banking side in our deposit mix and so much of that is operating funds for.
Businesses and companies that we work with we're always going to have a high noninterest bearing component probably relative to our peer group, even if even though we see some mix shift occurring yes, yes, that's actually part of the value of the business model here at Comerica heavy in Treasury management services, and there's certainly a foundational piece in terms of operational.
<unk>.
Got it thanks again.
Brian .
I will now turn the call back over to Curt Farmer, President Chairman and CEO . Please go ahead.
Well as always thank you for your interest in Comerica and hope you have a good day. Thank you.
This concludes today's conference call. Thank you everyone for participating.
Okay.
Sure.
Hum.
[music].