Q3 2022 Comerica Inc Earnings Call
Hello, and thank you for standing by and welcome to the Comerica third quarter 2022 earnings Conference call. At this time all participants are in listen only mode. After the Speakers' remarks, there will be a question and answer session to.
To ask a question. During this session you will need to press one then zero on your telephone.
To withdraw your question press, one zero again.
I would now like to turn the conference over to Kelly gauge director of Investor Relations. Please go ahead.
Thanks, Brad Good morning, everyone and welcome to America's third 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 centric. During this presentation, we will be referring to.
Slides, which we will provide additional detail the presentation slides on 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.
We're looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements.
This conference call will reference non-GAAP measures and in that regard I direct you to the reconciliation of these measures on our website Comerica Dot com.
Please refer to the Safe Harbor statement in today's earnings release on 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 our call over to Curt who will begin on slide three.
Good morning, everyone. Thank you for joining our call.
Today, we reported third quarter 2022 results, including a record earnings of $351 million or $2 60 per share.
An increase of 35% over the second quarter.
We generated excellent financial results with all time high revenue of $985 million up 19% improved our efficiency ratio to 51% and maintained our strong credit position with our percentage of criticized loans well below our historical average.
We continue to benefit not only from the rising rate environment, but also from investments and strategic management of our business to support long term success.
We produced another quarter of broad based loan growth.
Continued to generate solid fee income.
While our customers are closely monitoring and recessionary risk and its potential impacts they remain generally confident in their ability to successfully navigate the changing landscape.
Corporate responsibility remains a priority as we continue to demonstrate our commitment to supporting economic growth in our local communities.
We announced the dedicated business banking team for the southern sector of Dallas County, with a mandate to provide capital solutions for underserved entrepreneurs and small businesses.
We enhanced our national community impact manager role responsible for leading our public purpose and community impact investments.
Our green loans and commitments continue to grow and totaled $2 2 billion at quarter end.
Our recently announced renewables group is already off to a strong start with over $200 million of new commitments year to date and a growing pipeline.
We are incredibly proud of our community impacted financial results and we continue to focus our efforts on the future.
Through our modernization initiatives, we are making strategic investments to adapt to the changing landscape and move into a new era of banking.
We announced an expanded office footprint in Frisco, Texas, and Farmington Hills, Michigan.
<unk>, we are excited to make in important markets.
These innovation hubs deliberate enhanced colleague work experience and assist us in attracting and retaining top talent.
Also we realigned our organization to create an even more synergistic structure supporting our commercial bank banking expertise, while adding transformational leadership in payments.
We believe this structure will better serve the comprehensive and evolving needs of our customers, allowing us to deepen relationships and enhanced revenue.
Further in conjunction with our strategic modernization eject objectives, we refresh our company's core values.
Driving collaboration encouraging bold thinking and behaviors and empowering our employees all while remaining essentially focus on our customer is critical to achieving continued success.
Let's review the highlights of our third quarter results on slide four.
Following second quarter significant loan growth third quarter activity remained strong.
Average loans were up $1 1 billion, reflecting increases across a number of businesses the largest being commercial real estate Nash.
National dealer services and environmental services in wealth management.
Commercial real estate benefited from the continued build out of projects.
And the pace of pay offs normalizing due to the rate environment.
We have made selective investments to expand our wealth management business and we are excited to see the growth and momentum this quarter.
Our other business lines saw merger and acquisition activity and continued investment in working capital, albeit at a slower pace in the second quarter.
We continue to strategically manage deposits as customers draw down on their operating accounts and seek higher yielding products for excess balances.
We've made significant progress on our hedging strategy, which should help insulate earnings through rate cycles.
We maintained most of the benefit from higher rates, which combined with the growth in our loan and securities portfolios drove record net interest income.
Credit quality remained excellent and fee income strong with increased derivative activity.
Expenses were driven by performance based compensation and investments to support growth.
Our efficient efficiency ratio further improved to 51% as a result of record revenue and solid expense management.
Retention of earnings drove our CET, one ratio back up to an estimated 992% overall, an excellent quarter and we feel very positive about the trajectory of our business as we move through the remainder of the year.
And now I will turn the call over to Jim who will review the quarter in more detail.
Thanks, Curt and good morning, everyone turning to slide five.
As Curt mentioned, we continued to have broad based loan growth with balances increasing $1 $1 billion.
Favorable environmental factors and demonstrated expertise across a number of our specialty businesses drove our astounding is higher.
Also loan commitment reduction was very strong which can be a good indicator of future loan growth.
As of quarter end loan commitments increased almost $2 $8 billion, or 5%, which outpaced loan draws resulting in a small decline in line utilization to about 45%.
Loans in our commercial real estate business increased over $350 million as we funded construction of projects.
It really all of the growth was in class a multifamily or industrial projects built by large developers that we know well providing significant equity contributions.
Credit quality in this business is excellent criticized loans remain extremely low and we see no meaningful signs of negative migration.
National dealer services loans continue to slow rebound and grew over $200 million.
This includes a $140 million increase in floor plan loans to $980 million, however, inventory levels remain low and these balances were well below our pre COVID-19 run rate.
We havent benefiting from acquisition activity in this space.
We still believe it will take some time for inventory levels to rebuild as supply issues are resolved and pent up demand is satisfied.
Growth in environmental services, and corporate banking resulted from a combination of new customers M&A as well as investment in working capital and Capex.
Wealth management had a strong quarter with 3% loan growth in part due to customer's tax related activities, such as 10 31 exchanges.
Average loans in both equity fund services and mortgage banker finance were down in.
And equity fund services following very strong growth in the past couple of quarters. We saw it moderate early in the quarter, but momentum resumed in period end loans and total commitments were up.
Mortgage banker average loans decreased $62 million and 657 billion at quarter end significantly muting, our total period end balances.
Volumes in that business remained depressed due to higher interest rates and lack of housing inventory.
Loan yields increased 100 basis points to 464%, primarily reflecting the benefit from higher rates.
In line with expectations Slide six shows our average deposits continued to decline.
Customers put their excess liquidity to work and we prudently manage pricing related to nonrecurring ship based deposits and highly rate sensitive segments.
We continue to see the largest decreases in our interest bearing deposits, particularly in financial services financial institutions and corporate banking businesses.
Our strategy through this cycle has been balanced deposit pricing with our liquidity needs, while most importantly, retaining our customer relationships.
We have taken an agile and customized approach to finding that right balance.
Our mix remains favorable at 57% noninterest bearing reflecting the relationship and operational nature of our deposits.
Our overall liquidity position is strong with a loan to deposit ratio of 71%, which is well below our historical average.
We have significant capacity to support loan growth, including efficient borrowing channels available such as broker deposits or federal home loan bank lines, which we began utilizing at the end of the quarter.
Interest bearing deposit costs remained low at 20 basis points with.
With a year to date beta of only 7%, we do not expect to achieve a cumulative beta of 25% until sometime next year.
Of course, the ultimate cumulative beta will depend on Epsilon C. Monetary actions in addition to loan and deposit activity.
Our securities portfolio continues to play an important role in achieving our asset sensitivity objectives slide.
Slide seven demonstrates the significant growth in balances and yield over the past year.
Quarter over quarter average balances increased $1 $5 billion, reflecting the full benefit of our second quarter purchases net of mark to market adjustments.
Higher rates resulted in a mark to market of almost $1 $2 billion at period end and this impact runs through OCI and affects our book value, but not our regulatory capital ratios.
While we maintain the portfolios available for sale, mostly for liquidity purposes. We typically hold these securities to maturity in which case the unrealized losses should not impact income.
As another avenue to provide liquidity for loan growth, we see securities purchases partway through the quarter, which contributed to period end balances declining to $19 $5 billion.
As the portfolio shrinks, we plan to manage our asset sensitivity through additional swaps as needed.
Over the past year, we have concentrated our purchases in agency MBS with the goal of delivering more consistent cash flows with an average duration of slightly over five years.
The larger average portfolio along with the favorable new purchase yields resulted in a $19 billion increase in securities income.
Turning to slide eight net interest income increased $146 million to a record $707 million and the net interest margin increased 80 basis points.
The benefit from higher rates lifted loan income $128 million in added 64 basis points to the margin.
Although the rate environment has increased the cost of borrowing for our customers. We have not seen a meaningful increase in competitive pressure pressure on spreads.
Loan growth added $13 million and two basis points, one additional day in the quarter provided $4 million as I mentioned the increase in the size of the securities portfolio at higher yields added 19 billion.
As far as deposits at the fed higher rates can buy the floor balances added $11 million and 26 basis points to the margin.
Higher rates on our floating rate wholesale debt. In addition to our subordinated debt offering had a $15 million impact.
Altogether the rise in rates provided a net benefit of $151 million to net interest income.
Credit quality remained excellent as outlined on slide nine.
Net charge offs were only 10 basis points well below historical averages.
Criticized and non accrual loans also stayed low.
With the heightened economic uncertainty our allowance for credit losses increased modestly to $1 two 1% of loans.
Our provision increased to $28 million.
As always we are closely monitoring the portfolio for signs of stress and are proactive in our credit management.
We have begun to see some signs of normalization in certain portfolios with our consistent disciplined approach as well as our relationship model and diverse customer base. We believe we are well positioned to manage through a recessionary environment.
Noninterest income increased $10 million or 4% as outlined on slide 10.
The FERC comp, which is offset in expenses increased $11 million and was still a headwind in absolute terms with a $3 million negative return for the quarter.
Overall fee generation remained strong led by growth in derivative income of $6 million due to energy and interest rate related activity, which included a 2 million dollar increase in favorable CVA adjustments.
Brokerage service fees grew as a result of increased money market funds revenue.
This growth was partially offset by reductions in fiduciary income and card fees.
Annual tax fees received in the second quarter and market activity impacted fiduciary income and a decline in volumes affected card fees.
Turning to expenses on slide 11.
Our efficiency ratio improved seven percentage points to 51% as we continued to maintain our expense discipline, while revenue generation accelerates and we positioned for future growth.
Salaries and benefits increased $13 million, primarily due to the $11 million change in deferred compensation, which is offset in noninterest income.
Beyond deferred compensation, we saw an increase in performance based incentives tied to our strong financial results of.
Of note our staff levels were stable as we successfully retain and attract talent in this competitive market.
Occupancy expense increased $4 million, driven by seasonality and a new lease at our Farmington Hills location.
Outside processing for our card programs, largely driven by rate related pricing increased $2 million.
We made progress on certain modernization initiatives and incurred $7 million in costs consistent with the second quarter expense.
As previously discussed this is a journey, which includes transformation of our retail banking delivery model alignment of corporate facilities and technology optimization.
The cost savings generated are expected to be reinvested as we continue to evolve.
Slide 12 provides details on capital management.
With record earnings our strong capital generation outpaced capital needed to support loan and commitment growth.
Thus, our CET one ratio increased to an estimated 992%.
As always our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
We closely monitor loan and profitability trends as we balance maintaining our CET, one target of approximately 10% with our dividend and share repurchase strategy.
Our common equity declined in the third quarter as a result of the impact of OCI losses from our securities and swap portfolios.
Excluding the OCI losses are common equity per share increased $1 98 or over 3%.
Also note that our tangible common equity was $4 eight 2%, however, excluding <unk> increased to nine 1% 2%.
Slide 13 provides an update on our interest rate sensitivity.
Over the past year, we have been working to fulfill our strategy to lock in higher rates and achieved a strong and more predictable earnings stream through the rate cycle by reducing volatility to net interest income.
Based on our standard model with a 100 basis point decrease in rates over 12 months, we have achieved our target for a low single digit percent impact to net interest income and yet maintain some upside should rates continue to rise.
We are now focused on smoothing the periods further out to maintain our target level of sensitivity mainly through the purchase of forward dated swaps.
Considering expected loan and deposit activity, including some acceleration of our deposit pricing along with the September 30th forward curve, we forecast net interest income to grow by 4% to 5% in the fourth quarter relative to the third quarter.
Full year 2022 is expected to exceed 2021 by more than 33%.
We utilized our model to provide scenarios, including a 100 basis point and gradual increase in rates over a 12 month period, which resulted in an approximate $35 million increase in net interest income.
In addition, we bought at a catch up of a 25% cumulative beta since when rates begin to rise in March on top of the 100 basis point up scenario, which resulted in an estimated 35 million dollar headwind to net interest income.
Of course, there are many dynamics, which may cause modeled results to differ from actual outcomes.
Overall, we believe our predictability of earnings provides us the ability to more consistently invest in our business and thereby grow customers and revenue and provides a more compelling investment thesis for our shareholders.
Our outlook for the fourth quarter and full year 2022 is on slide 14 and assumes the continuation of the current economic environment.
We are working on our 2023 financial plan and expect to provide our customary full year guidance during our fourth quarter conference call, but I will offer some color as we go through each line item.
Loan growth has been robust so far this year and we expect 2022 full year loan growth to exceed 7% excluding triple P loans.
This includes our expectation for average loan growth of approximately 1% in the fourth quarter.
Positive trends are expected in most of our businesses in the fourth quarter. However, at a more moderate pace given the slowdown in economic activity.
Mortgage banker is expected to continue to be a headwind.
Assuming economic conditions do not change materially.
We expect continued solid growth into next year.
We expect deposit trends to continue as customers draw down on deposits to support their businesses and in some cases seek higher yielding options.
Looking into next year, the timing and the scale deposit activity is expected to be highly influenced by fed tightening actions in the economic environment.
As discussed in the previous slide we project strong fourth quarter net interest income up 4% to 5% over our record third quarter.
As we think about 2023, we expect to benefit from higher rates and loan volume.
On the other hand deposit balances and pricing could put pressure on 2023 net interest income relative to the fourth quarter run rate.
Regardless, we expect net interest income to be at another all time high next year.
Credit quality has been excellent and we expect it to remain strong in the fourth quarter.
Therefore, we forecast net charge offs at the lower end of our normal range of 20 to 40 basis points.
We believe we will begin to see gradual normalization, assuming the macroeconomic challenges remain manageable.
We expect fourth quarter noninterest income to decline approximately 3% from strong third quarter levels.
We expect pressures on derivatives, given recent elevated levels deposit service charges from higher ECA rates are softening syndication market and equity trends may impact fiduciary revenue.
This is expected to be partly offset by positive seasonal trends in areas such as card.
As we look into 2023, we expect noninterest income to grow as we start to see the benefit of our investments.
Okay.
We expect fourth quarter expenses to grow approximately 2% to 3%, including expenses tied to revenue generating related activity such as outside processing for card.
In addition, we expect seasonally higher occupancy advertising staff insurance as well as travel and entertainment expenses.
This outlook excludes up to $25 million of modernization initiatives that we anticipate in the fourth quarter.
We believe the strategic investments in our business will deliver value over time and are essential in meeting the evolving needs of our customers and colleagues.
In 2023, we expect moderately higher staffing levels as the tight labor market exists and we continued to make progress in implementing our revenue strategies.
Given the market's performance pension expense is likely to move significantly higher.
We also anticipate inflationary factors to impact many areas such as salaries and benefits along with higher FDIC expense.
In summary, based on our expectations for the fourth quarter and our performance to date we.
We will believe we believe we will produce very strong and record revenue results. This year.
We have driven robust loan growth and strong fee generation. In addition, we benefited from higher rates, while executing our hedging strategy and careful management of credit and expenses.
We expect to carry our momentum into the fourth quarter and finished the year strong.
Now I will turn the call back to Kurt.
Thank you Jim.
Many business lines are showing positive trends with strong loan growth. In addition to increases in commitments and a very solid pipeline.
Our unique expertise and credit culture provide us a steady foundation and helped produce a record level of profitability, while our investments in talent technology and markets facilitate continued growth to support our future.
Management of our balance sheet allows us to benefit from rising rates, while reducing the impact from lower rates, which we believe will provide a more consistent earnings trajectory through the cycles. It was a record quarter.
I remain grateful for the continued commitment of my colleagues, who are dedicated to ensure comerica success. We believe we are well positioned to deliver strong results as we end the year and move into 2023.
Before we take questions I would like to recognize Darlene persons, who recently announced your retirement after a 36 year career with our company 16 years as director of Investor Relations one of the longest serving IR directors in the banking industry. She has steered us through many cycles and her guidance not only to.
Me and our leadership team to our whole company has been invaluable I'd also like to introduce our new IR director Kelly gauge, whose had an 18 year career with us deep commercial banking background and most recently as a national direct yourselves and strategy for the commercial Bank Kelly will do a great job in her new role as <unk>.
Our director and I know you will look forward to getting to know her right. So with that we'd be happy to take your questions and open up the lines.
And ladies and gentlemen, if you wish to ask a question over the phone. Please press one zero you may withdraw your question at any time by repeating the one then zero command.
One moment please for our first question.
And our first question comes from the line of John Armstrong with RBC capital markets. Please go ahead.
Good morning, John .
Good morning, Congrats Sterling.
I just wanted to say congratulations.
Just a question for you Jim on some of the comments, where you talked about I know you don't want to go into 2023 too much but you talked about the potential for 2023, NII pulling back a little bit from Q4.
Help us understand that a little bit more and then just remind us of the overall goals of what you are trying to do.
In this kind of rate environment in terms of the rate hedging.
Yes, good morning, John and thank you for the question.
I do think that fourth quarter run rate is a great starting point in terms of how to start thinking about 2023.
There are reasons, we could be a little bit below that there are reasons, we could be a little above it.
If deposit betas catch up very quickly.
And on accumulative basis, or exceed 25% and ore deposit runoff continues through 2023, I think we could be below that run rate.
On the other hand, if deposit betas take some time to catch up say some time after the first quarter or through mid year and deposits start to level off the run off starts to level off in the beginning of 'twenty three I think.
There's a reasonable chance, we could be above that run rate. So I think it could go either direction. There's still some open questions in terms of how the pipe deposit pricing will progress and how the runoff will progress over the next several quarters.
But again I would just say that I think the run rate.
In the fourth quarter is a pretty good place to start and just be aware that there are some factors that could potentially move that down but there is some upside to that also.
You know in terms of what we're trying to accomplish I think the message has been consistent I think we've met the objectives that we've set we are trying to stabilize net interest income we feel like we've achieved that we've left a little bit to the upside if rates do continue to go up as we approach the peak here.
As I mentioned in my comments I don't think we're going to be doing any hedging activity.
Other than replacing securities that run off.
That would start in the next 12 months.
If you'd look at in the appendix, we have a little bit of a maturity curve of our.
Swaps and from that you would infer that we're really going to work on.
Forward starters that might start in later 'twenty four eventually maybe even 25, but we feel like we've taken care of business in the near term. So we feel really good about our positioning we've essentially achieved by far and away a record level of net interest income and at the same time, partially protected that record level of net.
Interest income, so and I think we've gotten to where we want to be and we're enjoying the fruits of that right now.
Yes, that's fair.
Surprised by the increase in the margin. So that was that was nice to see and I guess, one more question I think I know the answer to it but I've had a couple of.
Emails back in my note. This morning can you touch a little bit on your tangible common equity ratio and how you view that.
I know you may not think it's a big deal, but some people ask about it. So can you just touch on how you think about that level.
Yes, I continue to believe that's an optic but nothing more than that.
As I mentioned before from an economic standpoint, the value of our deposits has gone up significantly offsetting if not more than offsetting that loss on securities and swaps so economically.
Like what we're seeing you see that in the results in terms of the earnings.
As we stay in touch with various constituents.
Everyone in midst synoptic, but everyone's struggles to find really any substantial issue with it. So it's really not a point of concern for us and I just think it's an odd looking optic given the unprecedented run up in interest rates and really nothing more than that.
Okay. Thank you.
Thanks, John .
And our next question comes from the line of Scott <unk>. Please go ahead.
Good morning, guys.
Hey, Thanks for taking the question.
Jim I wanted to ask about the deposit levels and I think previously we had sort of been hoping the bulk of deposit runoff would finish and so forth, Florida fourth quarter first quarter, you guys still have a very very low loan to deposit ratio, but I guess just curious on your thinking on sort of winter, where we could see the the deposits level out and.
At what point would you want to get more aggressive on pricing to protect those balances and in other words, just a little more color on the sort of the push and pull between volume and rate and in your view.
Yes, Scott. Thank you for the question first of all say that I think we're pretty comfortable with the pricing approach up to this point, we obviously have a low year to date beta low beta for the quarter by being a primarily a commercial bank. We feel like we do have these conversations with our customers and to.
To the extent.
We've lost deposits it's been very.
Knowingly.
And we certainly haven't lost any relationships and we have the ability to ramp up some of that exception pricing. If you really need to we have raised our standard pricing on the retail side, which touches retail and wealth customers. So we feel real comfortable with the pricing approach, but in terms of word deposit runoff goes I really think it's going to be.
Highly dependent on fed policy I think the combination of Q T as well as rising rates as you know those two factors will drive what happens in 2023, we obviously expect the runoff to continue through the fourth quarter at a similar pace that we've seen I do want to caveat that we could see some seasonal deposits in.
The fourth quarters, we often see seasonal trends had been rendered a little bit.
Not as reliable over the last odd two or three years.
So it is possible we could get some seasonal deposits that mute that run off in the fourth quarter, but I think that runoff within just manifest in the first quarter I think it would be probably a temporary reprieve, if we get those seasonal deposits.
But it's still our outlook that things start to level off early in 2023.
I do think as the fed continues with Qt.
For the next year year, and a half as they plan to I guess its actually two years you know you could see some deposits continue to run off even after early 2023, but I would like to remind people the fed never did fully.
Unwind its QE from previous cycles. It seems very plausible to me they won't fully unwind at this cycle, you've already seen some literature and various industry magazines that.
There are some concerns by the regulators and the fed regarding just some of the deposit run off at banks. So at this point our house case is still a source to level off in early 'twenty three and we certainly have plenty of efficient borrowing lines. We have access to broker deposits, we could even get more aggressive in conversations with our customers in terms of where they place their money. So.
We feel like we have a lot of optionality there.
Okay wonderful. Thank you for that color and then was hoping you could also discuss the higher modernization cost in the fourth quarter will that will that be kind of a high watermark or will they continue much beyond the fourth quarter or sort of end with <unk>.
The end of this calendar year.
Yeah. Thank you for that question I think that's an important one based on the initiatives that we've identified up till now.
The fourth quarter would be the high watermark and that assumes we set up to 25 million Theres always a chance. Some of these lease exits could be delayed until next year. So my answer obviously caveat or based on the timing of when these actually happen, but if they do happen in the fourth quarter of 'twenty twos, we expect based on the initiatives we've identified.
This would be the high watermark.
Having said that there could be some additional initiatives that we identify over time, we're always talking about some of the potentials out there, but this one will be a little bit more of an outsized one and could be at the high watermark.
Okay.
Alright, Thank you very much for taking my questions.
Thanks for the question Scott.
And our next question comes from the line of Abraham Poon wallet with Bank of America. Please go ahead.
Hey, Brian Good morning.
Good morning, I guess, so maybe just first question.
Banks are not really seeing anything in terms of credit athene, yet, but what's the sense of like the fed.
Even interest rates, obviously is benefiting from low teens.
How long customers kind of absorbing these <expletive> are you worried about.
This may mean as you look out into next year in terms of just the ability of your.
Your customer base too.
In Florida, 5% fed funds rate and just the level of visibility you have in terms of all of a sudden seeing a big drop off in.
How are customers.
Yes.
So it sounds like the question as you know the ability of our customers to withstand that.
The economic pressures of the higher rates from a credit standpoint, yeah. That's Melinda I would say that overall, we feel really good about our customers' ability to kind of manage through the current interest rate environment. Every time, we do an underwriting lease interest rates, whether we're in a low rate environment or a high rate environment.
And we think we do a really nice job of making sure that whatever the debt load is that the customer that they've got the ability to manage through that we also have relatively low leverage bump overall, so the lap of the actual leverage portfolio would be the one that we're watching really closely obviously getting their debt levels. They are more sensitive that we also use strategy.
He's like swaps and fixing rates in order to make sure that we can protect the the cash flow and the companys ability to kind of repay the debt. So overall I think we feel really good about our customers' ability to navigate the environment.
Got it how big is that leverage book.
Little over $3 billion.
And just wanted to follow up Jim.
On the asset side, you saw the 100 basis pointing these quarter over quarter, just talk to us in terms of how you see that asset yields trending going from here in terms of any spread compression that you expect the 100 basis points relative to the Disney types. We saw in the third quarter that should hold for the next few quarters.
Yes, I think these metrics will largely hold up this was struck on 930 is a model run.
<unk>.
As deposits run off you could see a little bit of movement in those calculations, but I think the rule of thumb will hold pretty well.
Do you expect asset yields to behave consistent with third quarter.
I'm, sorry expect what.
Asset yields.
So Neil replacing.
Consistent with what we saw in the third quarter.
Your loan yields will continue to go up.
In the fourth quarter over the third quarter.
And what are the investment yields in the securities book relative to what's maturing.
Oh, yes, I'm sorry.
We are not buying securities as I mentioned at this time, we are letting the securities run off.
Theyre running off kind of in that 2015 to 17 range.
Slightly above the overall portfolio average so.
We expect securities yields to stay pretty flat I mean, you could see some very minor yield movement down quarter to quarter.
But it's going to be almost a noticeable I think given how close to run off as to the overall portfolio yield.
But thank you.
Thank you.
And our next question comes from the line of John <unk> with Evercore. Please go ahead.
Morning, John .
Good morning.
Just wanted to see if I get a little bit more detail on slide 13, I know you broke out the $35 million of NII demonstrate these are standard model, but.
Assuming a 25% cumulative data you can see F $35 million NII decline pretty notable delta between the two and is that maybe could you walk us through the puts and takes is it primarily just debate that assumption or are there others.
Yeah.
Which of the noteworthy swing.
So that is the beta assumption that's driving that so if you do the math the beta obviously is having a $70 million impact relative to the.
The 100 basis points up so thats, how you swing from 35 billion positive to 35 million negative we do have that cumulative beta kind of feathering in over the 12 months. So that came as a shock it could even be higher but it is important to note that in our fourth quarter guidance, we actually have a lot of this accumulative beta.
In there in fact.
We get up to about 17% cumulative beta by the end of the fourth quarter. So I think you can take some assurance by the fact that our guidance already has about half of this cumulative beta entered already so.
You've probably if you've got the other half of the cumulative beta you'd probably be closer to.
Closer to zero as opposed to this negative 35 billion. So just some additional color for you there.
Got it okay. Thanks, and then just a quick follow up too.
<unk> question.
You mentioned, the London Securities run off but are you just to clarify are you reinvesting the cash flows back into the bond book and what are those reinvestment.
Yeah to be clear, we are not reinvesting them into the bond book, we are using this run off to fund our loan growth, which we expect to continue to stay strong.
So for the probably for the next for the foreseeable future at least we will not be buying securities. We think this is the most efficient way to fund our loan growth.
Okay got it and if I could just ask one more.
Back to the TCE a topic.
I know that you indicated that it's more optics from your point of view, so given that how low.
Are you willing to let that TCE to Ta ratio go below that.
<unk> 22 level, where it's at now and does that influence you in any way at all when it comes to buyback interest when it comes to the repurchases. Thanks.
Yeah, you know I mean large it's largely out of our control of course based on where interest rates go and how low that goes but I can tell you. There is no magical number that we're focused on and I would just reiterate that we don't think it's a concern we don't think it should be a concern of others and again I just think it's an oddity of the times that we're seeing this.
Type of movement, not just the comerica, but to some extent at other banks too.
Got it thank you.
Thanks, John .
[noise].
And our next question comes from the line of Ken <unk> with Jefferies. Please go ahead.
Morning, Ken Hey, Thanks, Good morning, I had a follow up question on the deposit side.
Obviously, you talked about the expected decline from year, one thing Thats been interesting is that the interest bearing has been declining faster than the noninterest bearing it looks like youre about 57% noninterest bearing can you help us understand how you expect that mixture trajectory do you think you can actually you know uphold this this better mix of refunding versus.
Maybe what had happened in past cycles or is that just a TBD still as well.
Thanks for the question Ken You know this is this was a little bit of a surprise to us too for.
For the mixed actually improved towards the higher noninterest bearing so we have done a little research into that and talk to customers and just analyzed various customers' accounts.
My conclusion is number one we're just seeing the price sensitivity at this point of the cycle more on the interest bearing side I do think it will tip to the noninterest bearing side eventually but it feels like customers are force first more price sensitive on the interest bearing side of this.
The other thing that we found kind of confirms a suspicion that we've had all along and Thats something thats been very similar to previous cycles. When we come out of some stress we do see the corporate treasures are carrying higher safety net levels of cash and that explains why there may be going to their interest bearing accounts first to the extent they have use of <unk>.
Funds so.
So I think those higher safety nets will probably be around for some time.
The other anecdotally interesting thing that I don't know how large of a factor it is but it might be a growing factor we have heard from some corporate treasures that real time payments is making it more unpredictable or more difficult to predict cash flows and so they're keeping some higher cash levels for that reason also and thats.
Something that micro over time.
So those are some of the observations that we've made we do think it will reverse to some extent eventually but I had mentioned in the last earnings call that I thought it would get back to the historical 50, 50 ratio if not slightly below where we'd done historically I'm now questioning whether or not we really get back there given the.
Higher levels of safety in our cash of these corporate treasures are taking are holding so I do think it will reverse but theres. Some question now as to whether or not it's really ever going to get back to that 50 50 mix.
Yeah, Great color. Thank you and second question just.
On the on some of the.
The loan buckets.
Youre talking about 1% growth sequentially average in the fourth quarter, but where there is always a little bit of ups and downs in some of those national businesses can you just run us through some of the most important trends that youre seeing.
Noting the really big CRE growth this quarter and then your expected decline in mortgage just kind of a.
The ins and outs of that period end versus average difference as we as we look ahead. Thanks.
Yeah, Ken it's Peter I think as we get into the fourth quarter. We continue to feel pretty directionally positive about just about all of our businesses I think in the comments, we talked about broad based loan growth.
For the first time in a long time all of our businesses are seeing really good loan growth. The only kind of real headwind does continue to be mortgage banking finance going into the fourth quarter I think for obvious reasons of challenges in that space with higher interest rates and lower housing inventory, but the rest of our sort of larger businesses as you mentioned commercial real estate.
We expect equity fund services to have a good quarter corporate banking continues to be on a good trajectory, albeit.
We also don't know that the fourth quarter it looks like the third quarter.
But it is positive trending in going into the end of the year. So we're pretty excited about sort of what we're seeing on those larger businesses dealer continues to slightly creep up.
We get asked a lot about when that will return and I don't know the answer to that but quarter over quarter Youre, starting to see a little bit of floor plan usage and we continue to be a very active lender in that space and as mentioned.
Finance some of the M&A activity that youre seeing in dealer. So it's nice to see a little bit of usage there as well.
Great. Thanks very much.
And our next question comes from the line of Jennifer demo with <unk> Securities. Please go ahead.
Good morning, Jennifer.
Good morning, Thanks for taking my question and congratulations to Darlene and welcome to Kelly.
You mentioned in the monologue you were starting to see signs of normalization of credit could you give us some more color on that and I believe you saw a slight increase in criticized loans from Pls area could you give us some color and.
From that as well.
Jennifer Thanks for the question Melinda.
Overall, we're really pleased with how the really the entire portfolio has performed and we have guided the last couple of quarters that at some point, there's going to be some normalization of the credit metrics from these really really historic low levels and that's what we're starting to see but very very modest level of softening of performance in a couple of months.
Portfolios and those portfolios as I already mentioned would be leveraged portfolio.
Just given kind of the nature of that book, we watch that very very closely it continues to have some modest level of elevated elevated criticized and criticized.
I have to ask that.
We're also watching the automotive portfolio, that's not a huge portfolio for us about $1 billion and they have had obviously a lot of challenges coming out of the pandemic. The chip shortages and then just kind of layer on all the other inflationary pressures and then technology and life Sciences that business by its very nature also has a more elevated level of risk just give.
The fact that we do.
Early stage and mid stage anthem late stage companies and some of those late stage companies also tend to deleverage that we don't see anything in the portfolio that is giving us a lot of pause or a lot of reasons for concern and we have the rest of the portfolio, which quite frankly continues to perform extremely well, so I would say kind of leverage.
Emotive and Tls are the areas that we're watching and yes, we did see a slight increase in the criticized but our NPA and our inflow to NPA has remained very very well behaved.
Great. Thank you and my second question is on FDIC premiums Jim.
Yeah, we know Theyre going up next year do you have any preliminary thoughts.
On what we can expect in 'twenty three.
We could see an increase on the 15 12 to 15 I'll call it $15 million range. So it will be significant not just for comerica, but for other banks also.
So that will be a pressure point for 2023.
Thanks, so much.
Thanks, Jennifer.
And our next question comes from the line of Bill Karachi with Wil.
Research. Please go ahead.
Good morning Bill.
Hey, good morning, following up on your credit commentary could you give a little bit more color on the increase in the reserve rate and where you would expect that to go with unemployment were to increase to see five or five 5% just curious for some of the assumptions underlying the current rate and where it could go under those circumstances.
Sure. This is Melinda again as you know.
The T cell process happens every single coronary and it's really highly dependent on the economic forecast at that time as well as the performance of the portfolio. So what we saw this quarter was a forecast and economic forecast that was slightly deteriorated from where we were at the end of the second quarter. Although it was still positive unemployment about 4%.
And GDP moderating bill.
Well below 1% for for the next 12 months or so.
We use that base case scenario as well as a downside case in our downside case, we've already accounted for much higher unemployment in the range of 6% to 8% as well as negative GDP all the way through 2023. So we believe that we have accurately and adequately.
<unk> the risk of a downside scenario and a recession in the reserve and we do that by the use of the qualitative. So we feel really good about our coverage ratio right. Now again, if you look at our four quarter trailing net charge offs. If you look at what our NPA levels are and then the overall strength of the book overall I think our coverage ratio right now is is reflective.
With an adequate amount of conservatism.
So following up on that could you give a little bit more color on the weightings that you ascribe to each of those scenarios and perhaps if we did enter into that more.
Greater downside scenario, where unemployment goes higher to what extent you would ascribe a higher weighting to that scenario and the impact that would have on the overall reserve rate.
Yes, we don't we don't we don't like Waitlist scenarios, specifically, we use our baseline scenario and look at the entire portfolio from a quality from a quantitative perspective, and then we use that downside case and certain portfolios and an overlay to the entire portfolio. So if you looked at the.
The mix between our quantitative and qualitative.
It's about 60 40, and that's been pretty consistent over the last couple of quarters and is very meaningful to the total reserve. So again I think we feel really confident that we've captured a downside risk at least over the life of our portfolio, which is important to remember that's a relatively short duration portfolio.
That's helpful. Thank you and then separately following up on the.
Tangible capital questions. Your investment Securities portfolio is classified as available for sale, which stands in contrast to many of your peers that have a larger mix of held to maturity. It's been very clear that you view the OCI marks associated with higher rates as optical but.
Some investors have expressed concern that we could enter a credit cycle that would exacerbate the rate Mark headwinds could you speak to that dynamic and whether there's anything that would lead you to consider.
Using the held to maturity designation or perhaps thinking differently about tangible capital.
Yes Bill.
At this point I don't anticipate us, making any movements you didn't get a few were inclined to moves something to held to maturity probably wouldn't do it at this point in the cycle.
So we just continue to be comfortable I know a lot of the larger banks.
Don't have the OCI shielded from capital do you have a lot of HTM I know a lot of her peers did not have much in HTM summit move some in recently or over time after some of the losses had already occurred.
But we continue to be comfortable there and again I believe it is an optic that won't cause any real issue for us.
Okay. Thank you for taking my questions.
Bill.
And our next question comes from the line of Steven Alexopoulos with Jpmorgan. Please go ahead.
Hey, good morning, everyone.
Steven.
To start so when you look at noninterest bearing deposits, which have seen a very material increase over the past two years.
Down to the account level, how much larger are the account balances today and can you size for us the balance that could be at risk Jim I heard your commentary about treasuries carrying more of a safety net but let's face it that could easily go into three months. He builds right. It doesn't need to stay at the bank. So could you size that for us.
Yes, Stephen good morning.
Certainly when we look at average balance per account that is.
The main driver that's the largest driver in terms of the higher deposits, that's not too surprising to me.
I think it is consistent with the theme of corporate treasurers carrying higher safety net levels of cash.
Do you think there could be a tipping point, where once they move some of the price sensitive interest bearing deposits. Eventually we will probably see a little bit of a migration down of the noninterest bearing deposits. So I think that day will come but for now they.
They seem to be more price sensitive in the interest bearing side and I do think there is a limit to how far they'll take down their noninterest bearing I think they are very comfortable with the levels of noninterest bearing they have in and I'll remind you or maybe educate those out there that a lot of our customers have multiple legal entities, sometimes complex structures.
It's not as easy as you might think for them to move cash around these different structures.
Kind of hours or days notice so they do like to keep their various entities well funded with non interest bearing DDA and I think theres a limit to how far it will come down, but I do think it will come down at some point.
Jim and Steve I might add to this is Kurt.
Just to remind you around the complexity of our deposit book I mean, we have a heavy concentration of commercial deposits and the heavy concentration of wealth management deposits.
Where we've got very close relationships with those customers, we know sort of what they're doing they talk to us or frequent communication around deposit flow Treasury management and movement of funds etcetera, and so it's not like a very granular mass market retail portfolio, where you really don't have sort of a lot of side.
And conversations occurring with those customers. So we're going to continue to do the right thing in terms of pricing and taking care of those relationships, but we are in frequent communication. We've got a good sense of sort of what people are planning to do or not do with deposits and I will add on I mean keep in mind that being a very strong Treasury management bank a lot of our DDA are tied into.
Two ECA, so customers and getting some degree of value and incentive to keep their noninterest bearing for that too.
If we stay with that theme of having a good line of sight into what customers are thinking or they might eventually do if we take that and apply it to whatever the fourth quarter. NIM is I know, Jim you said Theres a lot of variables right, we know that but what's your base case for where we go through 2023 from the <unk>.
Q NIM based on this line of sight that you guys have into your customer base.
Yes, I'd ever because of our commercial orientation and variability with cash balances that we've seen through the years as well as what we're doing with our securities book, which affects the mix of the balance sheet. We've always been and continue to be very hesitant to provide NIM percentage guidance, if thats what youre asking.
Just maybe revert back to the guidance that we do expect the deposits to level off some time in early 2023 and things to stabilize from that standpoint.
Okay fair enough and if I could squeeze one more in I'm, just trying to put together all of the commentary around expenses I know I know, it's early to think about for giving us guidance for next year, but should we at least be thinking about a similar growth rate of expenses in 2023 versus 2022.
<unk>.
We will certainly have some expense pressures as I mentioned, so it's not a bad starting point I mean, that's that's a very rough answer theres a lot of work to be done still.
But we certainly will have some degree of expense growth next year.
Okay. Thanks for taking my questions.
Thanks, Steve.
And our next question comes from the line of Terry Mcevoy with Stephens. Please go ahead.
Good morning, Thanks, Hey, good morning.
Last quarter, you added an EVP from a larger bank to run payments for Comerica I'm wondering if you can just talk about the investments needed kind of what the strategy is there and what the revenue opportunities are going forward.
Hey, Terry this is Peter Yeah, we're very excited about our investment in payments I mean, we continue to believe that we have a real opportunity to be a leading bank in that space, particularly with commercial customers, but across our entire enterprise. We we think theres a lot of opportunities in our Treasury management business, what we do in car, Jim talked a little bit about.
What's going on in real time payments all of those are opportunities that are the comerica has to be a leader and.
There's a lot of ways you can be competitive if you don't have to be the big banks are necessarily at this point to be successful and we think we've got a real agile approach and have the ability to partner with lots of different ways to be successful. So you know it's a space that we're excited about we did hire some talent there both on the payment side.
And in our Tech and ops side, we're also investing there as well so.
We're very excited about what we see on that are on the horizon.
Great. Thanks for that and then as a follow up I.
Just want to make sure that you maintain the relationships with all the dealers over the last two years or said another way when inventory builds do you expect to maintain that market share and kind of go back to where it was pre 2000.
Well Terry Yeah, two questions. There have we maintain the relationships absolutely we have so we're very active in the space.
Parker customers a lot have added customers.
Continue to believe that we are going to be on the winning side of M&A activity, because we do focus on sort of the mega dealers.
Whether or not inventory levels return to to your question. When those return I don't know if they were to return to historical levels. Then we would certainly benefit from it but I think as I said youre going to continue to just sort of see a slight uptick in floor plan usage over the coming years, and we believe we will.
Be there to capitalize on that.
Great. Thank you thanks Terry.
And with no further questions in queue I'll now turn it over for closing remarks to Curt Farmer, President Chairman and Chief Executive Officer. Please go ahead Sir.
Let me just say again that we are very proud of our results for the quarter really a record quarter for us.
I want to thank our colleagues for all they do everyday to take care of our customers and help us grow.
The company overall for our shareholders. So thank you as always for your interest in Comerica I Hope you have a very good day.
And this concludes today's conference call. Thank you all for your participating participation and you may now disconnect.
Yeah.
We're sorry your conferences ending now please hang up.