Q1 2023 Comerica Inc Earnings Call
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Hello, and thank you for standing by welcome to the call America first quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' remarks, there will be a question and answer session to ask a question. During this session you will need to press one zero on your telephone keypad 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, Leah good morning, and welcome to America's first quarter 2023 earnings conference call participating.
Participating on this call will be our president chairman and CEO , Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer Malone, the trustee and direct a question Heath director of banking.
Peter subject.
During this presentation, we'll be referring to slides, which provide additional detail 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 <unk> Dot com.
This conference call contains forward looking statements and in that regard you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations.
Forward looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements.
Please refer to the Safe Harbor statement on todays earnings slides 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.
Also this conference call will reference non-GAAP measures and in that regard I will direct you to the reconciliation of these measures in the earning materials that are available on our website Comerica Dot com now I will turn the call over to Curt who will begin on slide three.
Good morning, everyone and thank you for joining our call.
Today, we reported first quarter earnings per share of $2 and 39% driven by continued loan growth.
Favorable rate environment, and effective management of our balance sheet credit and capital.
Despite the recent industry disruption.
Our firm the strength of our core deposit base by successfully retaining our relationships.
While we saw some deposit pressure it was predominantly local laws and very manageable.
Our prudent risk management had us well prepared.
Our effective liquidity strategy allowed us to remain laser focused on seamlessly supporting customers as we opened a significant number of new accounts.
We remain focused on business as usual.
When a new opportunity for attracting talent.
Getting credit and expanding relationships.
We believe our strong deposit franchise is now even more attractive and stable with a lower percentage of uninsured excess deposits and less concentration with price sensitive customers.
Moving to a summary of our results on slide four.
Broad based loan growth and increased noninterest income exceeds expectations.
Credit remains a key strength for the quarter and although we saw modest migration, we were starting from very low levels.
Despite some pressures related to funding cost and expenses, we maintained a solid efficiency ratio and produced a robust R&D and tier one capital ratio.
Complementing our compelling financial results, we achieved significant milestones.
<unk>, our new partnership with Ameriprise aimed at further elevating our wealth management customer experience digital tools and capabilities.
The launch of our new investment banking group and the national expansion of our small business banking platform and strengthen our solutions for customers throughout their lifecycle.
Further these initiatives advanced the priority of increasing our mix of non capital consuming fee income.
Turning to slide five.
We generated earnings of $324 million or $2 39 per share in the first quarter.
Average loans grew almost $1 1 billion.
Average deposits decreased $3 5 billion due primarily to normal first quarter seasonality and customer use like utilization of funds related to monetary actions.
Credit quality outperform with net recoveries in our criticized loan percentages remained well below our historical average.
Expenses were elevated due to pension and several larger notable items, but we maintained a solid efficiency ratio.
It all we maintained our strong capital position with an estimated CET one ratio of 10.9%.
It was a remarkable quarter for comerica and I'm excited about our future and our ability to support our customers, while delivering compelling results for our shareholders.
And now I'll turn the call over to Jim who will review the quarter in more detail.
Thanks, Curt and good morning, everyone turning to slide six.
Broad based loan growth exceeded expectations as average balances increased 2%.
Commitments grew across most business lines up 2% from the fourth quarter of 2022.
Utilization increased modestly to 46%, but remained below historical averages.
Growth in our commercial real estate business to go over $640 million continued to be driven largely by construction of multifamily and industrial projects originated over the last two years. In addition to the slower pace of pay offs.
Our commercial real estate strategy remains highly selective with a focus on class eight projects and our office exposure is limited.
National dealer services loans grew over $360 million as a result of new relationships and continued customer M&A.
Wealth management and middle market also contributed to our strong loan growth.
Elevated interest rates lack of housing inventory and normal seasonality continued to pressure mortgage banker as average loans declined to $184 million for the quarter.
The MBA forecast expect higher volumes in the second and third quarters, consistent with a normal spring and summer buying season.
Slide 11 provides an overview of our deposit activity.
Quarter to date deposits through the first week of March trended in line with guidance as customers continued to deploy funds into their business and we experienced expected seasonality.
Following the March industry events excess balance diversification efforts by our customers further impacted deposits.
We saw our peak impact in the days immediately following concentrated in certain customers balance is well in excess of their operational needs.
Outflows moderated and in the last two weeks of March we saw a return to a more normal pattern and that trend has continued.
The greatest outflows were localized in select portfolios with immediate impact across the rest of our businesses.
Despite onboarding, new customers and Tos balances decline as this disruptive sector diversified deposits.
Portfolios with larger than average deposit relationships, such as corporate banking and select customers in middle market, California also saw diversification within a portion of their excess balances.
These three business lines saw disproportionately high deposit growth through quantitative easing and much of the decline offset that increase.
Utilization of an FDIC, a reciprocal deposit product was an effective strategy and through quarter end, our customers placed $2 billion in balances in that solution.
Deposit diversification efforts were concentrated in more price sensitive customers and the increase in deposit pricing to 152 basis points was driven by the cumulative impact of previous pricing changes.
Our strategic relationship focus was proven successful as we retained and in fact grew our total number of core deposit relationships.
Slide eight highlights the strength of our core deposit franchise. It is important to note how elevated deposit levels have been since 2020.
With that context, our current position is much stronger than prior to the pandemic as we have higher overall deposits are better loan to deposit ratio and a lower percentage of uninsured deposits.
Some look to uninsured deposits as the primary metric to detect the risk of elevated outflows. However, we believe a more comprehensive view as appropriate.
As a commercial bank. It is natural to have a higher relative percentage of uninsured deposits. The majority of which are noninterest bearing which we view as a key strength and a proxy for operating accounts.
With 95% of our commercial noninterest bearing deposits rising Treasury management services at an average of more than seven Treasury management products for a middle market customer we are integrated with our customers daily operations.
We feel our market and business diversification favorable deposit mix commercial orientation and connectivity into our customers operations combined to create greater relative stability in our deposit base.
We see opportunities to even further improve the resiliency of our deposits, including strategic investments underway to enhance payments digital customer transformation and wealth management. In addition to our national small business banking strategy, which should drive granular deposit growth over time.
Ultimately our deposit base has always been and continues to continues to be a differentiating strength and we expect even more stability with a more favorable level of uninsured and a high percentage of operating deposits.
[laughter].
Successful execution of our liquidity strategy proved effective as shown on slide nine.
Following the industry events in March we conservatively increased our cash position and our abundant liquidity allowed uninterrupted support of our customers and business as usual operations.
Our quarter end loan to deposit ratio was 85% remaining below our 15 year average and very light unsecured funding maturities create flexibility to manage funding needs and cash levels over time.
Period end balances in our securities portfolio on slide 10 declined over $700 million as Paydowns and maturities offset a positive mark to market adjustment of $309 million.
The total unrealized loss after tax of $2 1 billion affects our book value, but not our regulatory capital ratios.
Our security strategy remains unchanged as we start reinvesting in the third quarter of 2022.
From that peak through the end of 2024, we expect natural portfolio attrition of approximately $4 billion and a 42% improvement in unrealized securities losses.
We maintain our entire portfolio as available for sale, providing full transparency and management capability.
As our portfolio has pledged to enhance our liquidity position, we do not foresee any need to sell a portfolio and therefore unrealized losses should not impact income.
Turning to slide 11, net interest income decreased $34 million to $708 million as the benefit of higher rates and loan volume were offset by the impact of lower deposit balances deposit pricing and fewer days we.
We still saw a net positive impact due to rising rates and net interest income remains incredibly strong relative to our historical results.
Slide 12 demonstrates our desirable interest rate sensitivity profile.
Successful execution of our strategy and the current composition of our balance sheet favorably positioned us with minimal negative exposure to a gradual 100 basis points or 50 basis points on average decline in interest rates.
As intended our strong net interest income stream is now more insulated from rate reductions.
Credit quality continues to be a strength of our franchise and remains excellent as outlined on slide 13, with $2 million and net recoveries.
Non accrual loans declined and inflows to non accruals remained low at $9 million.
Loan growth and weakening economic outlook drove the $30 million provision and the allowance for credit losses increased modestly to $1 two 6%.
Criticized loans increased but remained well below historical levels as we saw expected credit normalization and portfolios prone to pressure from the elevated rate environment.
Office is not part of our primary strategy, only making up 7% of our total commercial real estate line of business.
This limited office exposure, a majority suburban with strong contractual financial support from sponsors.
Within the overall commercial real estate portfolio pressure from the elevated rate environment contributed to a modest increase in criticized loans and we expect continued manageable migration in the coming quarters.
Robust fee generation increased noninterest income by $4 million relative to our seasonally high fourth quarter 2022 as shown on slide 14.
Capital markets income grew $5 million and is now distinguished in our reporting to reflect the investment and opportunity in that business.
Derivative income and investment banking offset the seasonal lighter quarter for syndication fees.
Brokerage benefited from the rate environment and strategic private wealth investments contributed to growth in fiduciary income.
Continued expansion of our non capital consuming fee income remains a priority and with growth in nearly every customer category. We are excited to see the results from this emphasis.
Turning to expenses on slide 15.
A number of notable expenses in the quarter, including $16 million related to modernization initiatives.
$10 million of which were attributable to the Ameriprise transition.
While litigation related expenses and operating losses were elevated the largest drivers related to isolated events.
Quarter over quarter, non salary pension expense increased $17 million as expected.
Salaries and benefits increased $8 million driven by higher stock based compensation with first quarter grants inflationary pressures and attracting talent.
FDIC insurance increased $6 million driven by the higher statutory assessment rate and the impact of funding late in the quarter.
Occupancy came down $12 million with the reduction in lease termination fees lower rental expense and a seasonal change in property tax rates.
Both consulting and advertising decline from the seasonally high fourth quarter.
With a track record of proven disciplined we are committed to carefully managing expenses balancing necessary investments for the future and overall earnings power in order to maintain a solid efficiency ratio over time.
Slide 16 provides details on capital management.
Strong profitability continued to generate significant capital to support loan growth. Our CET. One is estimated at 10, 9% above our target and we were excited to announce a 4% increase in our quarterly dividend for common stock paid April one.
Our conservative excess cash position impacted our tangible common equity ratio adjusting for our cash increased we've increased over the fourth quarter and <unk> <unk>, our first quarter TCE ratio would've increased to nine 7%.
Expected loan growth profitability and any potential regulatory changes will continue to be carefully considered as we manage our capital strategy.
Our outlook for 2020 threes on slide 17, and assumes no significant changes in the economic environment.
We expect momentum, especially in our commercial real estate and National dealer services business to drive average 2023 loan growth of 8% 9%.
We continue to expect growth in most businesses are planned to be appropriately selective supporting opportunities most aligned with our target credit pricing and relationship strategy.
Our estimated average year over year deposit decline of 12% to 14% assumes continued stabilization and reflects the impacts from fed monetary actions that began last year. In addition to the first quarter industry events.
Despite the impact of funding, we still project noninterest income to be at an all time high growing 6% to 7% over our record 2022 performance.
Through effective execution of our balance sheet strategy and based on our current composition, we delivered on our objective to limit rate exposure and protect a high level of net interest income.
Credit quality has been excellent and we expect it to remain strong we continue to forecast net charge offs at the lower end of our normal 20% to 40 basis points range and expect a gradual normalization in credit metrics.
We expect strong noninterest income performance to drive 6% to 7% growth over 2022.
Customer related income is projected to increase particularly incurred due to our payment strategy and fiduciary income, which benefits from rates and investments in wealth management.
Risk management income related to our internal hedging position is forecasted to increase relative to 2022, but will vary over time as rates move.
FHFA Shelby dividends created a new tailwind in this quarter since.
Since we do not expect to repeat the elevated derivative volumes from 2022, we expect the year over year derivative delta to offset positive momentum and other capital markets categories.
A reduction in our deposit service charges as expected due to an increase in commercial account ECA rates and adjustments to our retail NSF fees more than offsetting growth in core Treasury management income.
With robust overall noninterest income performance in the first quarter exceeding seasonally high fourth quarter results, we feel very good about our momentum.
Despite elevated expense pressures in the first quarter, we maintained our 7% guidance for 2023 expense growth considering expected adjustments to select discretionary expenses.
Even after including the expenses related to the Ameriprise transition, we still expect modernization to be lower in 2023 compared to 2022.
We acknowledge the dynamic nature of the current environment and plan to assess the longer term implications of the March disruption.
With a culture of prudent management, we expect to manage expenses as appropriate based on the new environment.
In summary, we expect strong overall financial performance and forecast record net interest income for 2023 now.
Now I'll turn the call back to Kurt.
Thank you Jim.
Slide 18 highlights our compelling story.
Risk management decisions made over the last several years prepared us to emerge from the recent disruption in a strong position.
We were resilient, we built liquidity, we protected relationships and we grew our customer base.
It was a great quarter for our company.
Broad based loan growth and robust noninterest income exceeded expectations and credit quality remains excellent.
We produced an ROE of over 24%.
Comerica has long had one of the most enviable deposit franchise.
And now it is even better.
One of our uninsured deposits.
Crude granularity and less price sensitivity.
In addition, we have a loyal blue chip customer base.
Robust fee income.
Balanced interest rate exposure strong capital and an impeccable reputation for credit.
We are diversified in great markets to support our strategy.
And I'd be remiss, if I didn't mention our tenured intonation colleagues to partner extraordinary really well with our customers.
Banking is based on trust.
Trust, we have in our customers and trust our customers have in us.
This period has proven the strength of our relationship model and reaffirmed American stable foundation as a trusted banking partner into the future.
Thank you for your time and now we'd be happy to take your questions.
Ladies and gentlemen, if you wish to ask a question over the phone. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command one moment. Please for the first question.
Yes.
And we will first go to the line of Steven Alexopoulos with Jpmorgan. Please go ahead.
Good morning, Steve and good morning, good morning, everyone.
So no surprise I wanted to start on the deposit side first the color you provided the slides is really helpful.
I'm curious when we look at the decline in the deposits from March nine through the end of the quarter.
I'm surprised that Pls, specifically was it a beneficiary of the SBB situation and even when I look at the decline in corporate mid market.
Surprised because I would've thought the company would have been somewhat of a port in the storm right I mean, you've been in markets, where decades event with customers for decades could you take us behind the scenes what did you hear from your customers. During this time in each of those and why were they moving balances away from the company.
Steve This is Peter so I would tell you that in the very beginning for sure. We actually took on a lot of accounts and Curt mentioned in his remarks that we opened a number of accounts.
From customers that were wanting to come to comerica from the other banks that had failed.
So during that time, we definitely took on new customers I think the average balance probably is just not as high but on the whole. We saw some departure of some of that is because we've got a lot of late stage also.
A lot of late stage Tls customers are going to have more deposits, but not as much credit and so thats, where you did see some diversification wanting to occur at that level.
But net net if you look at our slide in the back we are seeing deposits coming down in that space going back.
The second quarter of last year really so what's occurred I think in the space in general has been burning through cash so we saw that but.
But we didn't necessarily think that we would be taking on excess deposits fleeing from SBB coming to us out of this deal we did take on more accounts.
And we definitely saw that we also saw during the period as I mentioned already late stage fleet, but we saw some accounts sort of spreading across.
Not just us, but other banks as well out of out of the Pos So.
What about corporate and mid market.
Yes same thing there, Steve I think on the corporate side on our corporate business.
That's our sort of national business banking large corporates, we saw diversification there as well.
And then in middle market was mostly in California. So again, we haven't lost in just about all of them.
More customers, we have just seen diversification of excess balances that they have.
We believe that there's opportunities for those to return in the future we're not relying on that.
But we still have relationships with these customers, we mostly have just seen diversification. So that's really what we've seen in those three businesses that we bought got outlined on the slide Okay. That's.
That's helpful and then on the noninterest bearing so you saw a pretty sharp drop in the quarter.
Dissipated somewhat right because of seasonal factors, but given everything that unfolded.
Do you see that mix now bottoming.
Is the timeframe for that.
Good morning, Stephen It's Jim I'll take that question, we still think that we are likely to end up very close to 50% we did see.
We're likely buried in the DDA in fact, Thats, where they were and then we did have some customers that switched over using some FDIC products that had been in DDA, but for safety reasons. They were attracted to the FDIC products, which pay a nice rate of interest. So all of those things moved us closer to the 50% number we still think we're going to end up.
Right around there we moved a lot closer to it during the course of the quarter.
And so we still expect to have really one of the strongest ratios of noninterest bearing deposits to total deposits amongst all our peers, if not well above our closest peers. So we still feel really good about noninterest bearing.
Okay, Great Jim if I could ask you one last question, which is somewhat theoretical but so interest bearing deposit costs or one 5%.
If the fed does start cutting rates in the second half of this year, but the rates you're paying are still well below market rates. How do you model. This impacting your deposit cost right.
Market rates need to move below or close to what you are paying before you could start lowering deposit rates yourself, because I don't recall other periods, where the banks. We're this far out of the money with what they are paying and the fed could potentially sort of lower market rates. What are your models show you in terms of how this would flow through to your interest bearing deposit cost.
Yes of course, we do expect rates to continue to go up.
Relative to what might happen when rates go down it's important to remember that we have a pretty wide distribution.
Rates paid to a variety of customers. So I don't really view that average the typical customer we have a lot that are well below that rate a lot better well above that rate. So each one of those is going to respond differently, but we do think that there is some degree of cemetery and the betas that we pay on the way up and the way down the key is that they are likely as a couple.
One play two to three months lag when rates start to come down before we can really respond to that drop there's just.
Same leg that we saw on the way up but ultimately we do think we will be able to start cutting pay rates. If in fact that make some material boots.
We would always be sensitive to obviously the competitive landscape and what other institutions are doing as well and making sure that we're taking care of our customers appropriately.
Thanks for taking my questions.
Thanks, Dave.
Next we go to Ebrahim, putting a wawa. Please go ahead.
Hey, Brian Good morning. Good morning, Good morning, I guess just on deposits. So you mentioned the access.
<unk> diversification data at all in the quarter one.
Give us a sense of like how much of your deposit base or there might be if you didn't noninterest bearing that you would consider operationally versus excess.
And do you see some of that still continuing as businesses and.
And we would love some perspective at all and just from a customer base standpoint.
In terms of small businesses.
<unk> actively thinking about diversifying like is that Tim nor do we do you still expect that to continue.
Maybe if you can stop Danielle.
Yeah. Good morning, Abraham I'll take that and Peter May want to add on.
In terms of what percentage of our non interest bearing were operational.
We view them as largely operational in fact 90, 495% of our noninterest bearing or tied to treasury management products. So from that standpoint. It is a largely operational base now.
Now there are fluctuations in terms of how much they need to put in those non interest bearing accounts to take care of operational needs and what they can leverage from an ECA standpoint, and then there probably is still just a little bit of excess to narrow which is why we've seen the ratio coming down from.
<unk>, 52% to 53% down to around 50%.
But we think largely that attrition has gone.
In terms of where the diversification efforts might go.
<unk> seen pretty settled down right now and I think thats going to depend largely on what happens to the industry in terms of other events that might happen.
But for now it does feel like the diversification efforts have largely settled down and those are the trends that we've seen over the last two to three weeks three four week season, Yes, I would agree with that Ebrahim. This is Peter and I would just also continue to point to where we saw most of the diversification occur and you mentioned small business.
With the diversification issue, it's been sort of business as usual if you will.
People using deposits for running their businesses or what and so forth, but the strength of the rest of our deposit base is something that we're really really proud of and we're going to continue to lean into and so I think Jim is exactly right. We feel like the diversification efforts. If you will at this point are pretty much stabilized.
Noted and I guess, maybe just another question Jim around the outlook for NII and NIM was wondering if you could give a sense of could you see that 67%.
Good.
How do you see quarterly NII and NIM trending from here from <unk> levels.
Abraham I'm going to probably refrain from giving as I often do from specific NIM percentage guidance. I think this example is a great. This quarter is a great example of why we don't like to give that with our business model of being a commercial bank, we do see some variations.
A number of line items cash securities et cetera, and this particular quarter, we did put a lot of safety and that level of cash onto the balance sheet, which does put a drag on the NIM percentage.
And it just creates a kind of a non correlation between the numerator and denominator. We just don't see them going in the same direction or correlating very well so the number <unk> shine away from still.
Obviously, probably moving towards the low threes, but I wouldn't want to get more specific than that.
Stick to the percentage guidance that we gave for the quarter and the full year.
But Jim if rates don't get cut do you expect fourth quarter NII to be the low point for the year in terms of as you think about the exit.
We.
Obviously, we.
Or do a little bit of a reset with the deposit runoff and so we have the second quarter guidance out there.
I actually have net interest income probably growing slightly quarter to quarter after that and that's a function of loan growth, primarily and we do expect to get some degree seasonal deposits probably later in the second half of the year.
And thats beyond the day impact that you might get so we do think that we're going to be on a positive trajectory from the second quarter on.
And we're just essentially resetting the baseline in the second quarter.
That's helpful. Thank you.
Thank you. Thank you.
Next we have a question from Manan <unk> with Morgan Stanley . Please go ahead.
Good morning.
Hey, good morning.
Another question.
<unk> C U E.
You noted you retained a lot of the relationships and only lost some of the I guess the excess balances at that people were holding so.
Is there room to bring those deposits back.
What what is the strategy here is it just.
To pay up on grade ore through ECR to bring those deposits back or is there anything else you can do and.
Is there is there a level of deposits you think would slow back one.
No one wants to as volatility subsides.
Hey, Manav. This is Peter the last part.
Of your question and I will say is yes. We believe there is a level of deposits that would flow back I would say the number one thing that we do talk to our customers pretty regularly.
We continue to believe that we provide a better customer relationships better service than other banks and quite often it is not unusual for people to come back to us because they don't get the service that they wanted at another institution. So I think when we get to the other side of this that will probably be the number one reason we start to see deposits.
But I also want to iterate again as Jim said, that's not going to say, it's something we're relying on in our outlook. We think that we will see it though we believe that that will just be a function of us providing great customer service I don't think we're going to have to pay up for it necessarily or things like that.
Yes, I might just emphasize to Peter I don't believe that across all of our portfolios. This is probably less about rate and more about sort of two things. One is the sort of surge excess deposits flowing out that we saw.
During COVID-19 stimulus triple P et cetera, and we were expecting that in the quarter that we would lose some of that and then those that asphalt diversification I think is the.
The noise level settles down across the industry and things get back to normal I think we've got a good opportunity at some of those deposits coming back on balance sheet and we're just staying very very close to all those customers. They have access to our relationship managers, but also.
Do any of us on the leadership team as well.
Got it and then maybe to round out the discussion on the balance sheet you added a lot more short term and long term debt this quarter to boost your liquidity.
How should we think about the right level of liability makes outside of deposits and the right level of cash that that did you want to hold on the balance sheet going forward.
Yes, those are questions are connected to each other.
Certainly the level of cash that we hold will really be strongly correlated.
On an industry, we always want to make sure we have an abundant level cash during turbulent times. So we have been comfortable with our targeted $3 billion level cash prior to the disruption in the industry and obviously, we pushed closer to 9 billion as we have on the slide on slide nine.
We will hold there for some period of time until we're sure of the industry's past some of this turbulence to the extent we had loan growth of course, we'll see that start to go down.
On the funding side of the balance sheet.
Started with very low levels of unsecured debt as you can see on slide nine.
Some of the lowest amongst our peers. So we felt like we were in very good shape to begin with we have a lot of flexibility.
Did draw in a lot of FHL fee during the initial days of the crisis, which we thought was a very prudent thing to do.
The good thing is we did that in a way that gives us tremendous flexibility a lot of those maturities or ladder star.
Starting this year.
All the way through the next couple of years and so we have the option as those maturities come up to either roll them over or let them mature naturally. So we feel like we have a tremendous amount of flexibility, but it's going to depend on the environment that will drive the amount of cash we have and the amount of funding that we have on the balance sheet.
But we are starting from very low levels and we feel really good about our current position. So we're fortunate that we have that capability.
And is that largely revenue neutral because you're raising essentially closer to the fed funds rate and then you're deploying that in cash.
There is a modest drag on that there's probably 40% to 50 bps drag as I look at it and Thats one of the reasons, we shied away from NIM percentage guidance, if youre not on just cash up the capability to inflate or deflate the balance sheet, but.
Whether thats free cash coming in in the form of deposits or its cash carrying a negative spread.
It can make an impact on the new percentage too so baked into the outlook.
Do have a fair amount of cash still there and that's one of the things that I look at it as an opportunity as we move towards later in the year and into 'twenty four we will get past that modest amount of drag from the negative spread on the cash carry.
Great. Thanks for taking my questions.
Thank you. Thank you.
And ladies and gentlemen, just as a reminder, if you would like to ask a question you May press. One then zero on your telephone keypad.
Next we go to the line of Brody Preston with UBS. Please go ahead.
Morning Brody.
Hey, good morning, everyone.
Can I just circle back on the NII Guide I, just I was just hoping to get some help tying the two Q what the step down.
For <unk> versus the full year guide just because if I if I try to run through the numbers quickly it kind of looks like at the mid point of the <unk> Guide realm.
Relative to the full year guide you kind of expect like a 3% step up in the back half of the year on a quarterly NII run rate and so can you can you help me understand sort of how we get there and how much of that assumption is driven by what you do with borrowings.
Yes, theres a little bit on play in there as you take the mid points of those percentages. So I wouldn't put the step up in the second half of the year quite at that level. There is just a little bit of rounding trying to.
Navigate those mid percentages that you mentioned.
We do see a small step up in the second half of the year.
Some of that is days some of that is loan growth a little bit of seasonal deposits. We expect to come in so you will see a very small step up quarter to quarter as we go through the year, probably not quite at the level that you just mentioned Brody.
Okay.
Okay. That's helpful.
And then I guess, if I could just ask.
One more on the deposit front and I'm, sorry, if somebody else asked this and I missed it.
As you think about the.
The go forward on deposits and.
Customer concentrations and I'm thinking, particularly as a result as it relates to the Tls deposits you know what.
What are the kind of governors that needed to be put in place going forward.
To help.
Navigate.
Any future liquidity events I'm, not really talking near term because I don't think a lot of us think that's going to come to pass, but you never know what's going to happen going forward and so how should we think about the balance sheet flexibility and.
In a stressed environment going forward.
Yeah, Brady what I would say is that we've been in.
A bank for 174 years, and we've managed through lots of different cycle than one thing that we've always kept central and our creditors. Our relationship focus many of these deposit relationships, we've had for decades and while we did see some deposit decline during this period.
At a time, we did not see it as much in our core businesses retail banking small business business banking middle market wealth management et cetera, and so we're going to continue to focus on those business lines. We will obviously have an opportunity I think to bring back some of the deposits that we lost along the way, but there are.
Focus on Treasury management services are focuses on small business and retail deposits. Those types of things will continue to be sort of key drivers drivers for us we cant fully control when you're an industry issue that unfunded like it did previously but what we did control was we had a great lift.
Quiddity playbook in hand.
We're able to execute against that and again I think kind of on the back side of this we do believe that in our modeling, but we do believe we haven't chance to get some of these deposits back.
Got it and then just one more just on the the betas and again I'm sorry, if somebody else asked this but.
Have you changed your thinking about your through cycle.
Beta at all and have you changed how you think about like what your terminal beta would be just just given.
The deposit volatility and I guess I'm more trying to narrow down to the interest bearing deposit beta if you have any color around that.
Yes, Brody, we do see the betas going up above previous guidance.
I think we had been more in the mid Forty's last time, we gave an outlook, we now see that likely hitting the 50% point sometime this summer and then kind of hanging out there and then things get a little color.
Commentators rates start to go down with the lag that I mentioned earlier, but we will likely get up to around 50% sometime in the early to mid summer.
On an accumulated basis.
Got it and then and that's interest bearing right.
That is pure interest bearing all in got it.
Great.
And I think you did say earlier that you do feel like on the way down it might happen with a lag, but you do feel like you'd be able to pass through the same amount of banner to the downside that you pass through on the upside.
That's right.
Okay, great. Thank you very much for taking my questions everyone I appreciate it.
Barry.
And next we go to a question from Peter Winter with D. A Davidson. Please go ahead hey, good.
Morning, Peter House.
I'll switch gears on you and ask about credit.
Could you give a little bit more color about the increase in criticized loans.
I know you mentioned.
Interest bearing with the higher rates that that's impacted it but if you could give a little bit more color on that and then secondly.
Net charge offs is there much left in terms of recoveries.
Yes.
This is melinda so I'll take the first one the increase that we saw this quarter in criticized I think Jim mentioned data.
And in his commentary it really was expected I mean, the reality is we've been bumping along the bottom here now for four or five quarters.
<unk> kind of a non sustainable levels. So.
Last couple of calls I said, we would expect to see some normalization.
Just given all the inflationary pressures that customers have been dealing with certainly the increase in interest rates. So those interest rate sensitive portfolios, certainly our leverage portfolio kind of core middle market.
Technology and life Sciences, and we did see credit migration this quarter in our commercial real estate book.
A couple of hundred million dollars.
It is all special mentioned credits I don't see that migrating really to any kind of loss content and that's really on some projects that have pressure related to the rising interest rate environment and from a multifamily perspective.
A little bit of softness in a couple of submarkets in terms of leasing rates and leasing pace and so that softness coupled with the need of the.
Increased interest burden caused a couple of those projects to move into that criticized category, but again I do not the loss content in that commercial real estate book, We did increase our commercial real estate reserves this quarter precautionary measure.
But again that commercial real estate book is predominantly multifamily and industrial close to half of it is on the construction side loan to cost in that book is generally in the 50% to 60% range. So there's a tremendous amount of equity and room in those projects to haul a little bit longer should we need to.
And then just on the recoveries for net charge offs recovery.
I called is a gift that keeps on giving and quite frankly recoveries are almost impossible to predict they've continued to surprise us really over the last four or five quarters now.
At some point.
Ron.
But I would expect that we'll still see modest level, but declining of recovery in the coming quarters.
Now, let me get charged off an incredibly low as well, there's not a lot to recover or not.
Yeah.
And just one follow up question in the 10-K.
You had mentioned, possibly looking at resuming buybacks, but I'm just wondering just given all the uncertainty in the environment is that kind of on hold.
For now on buybacks.
I would say buybacks are on hold until further notice there was a lot of uncertainty in the environment as you mentioned.
Certainly industry uncertainty, but perhaps even more importantly regulatory uncertainty for all banks. We just don't know where this is going and we want to make sure that if there is any kind of regulatory change on the capital side that we can get there organically, which I believe we likely very likely will be able to do but I think caution is in order.
Regard and so share buybacks shortly on the sidelines.
In the foreseeable future.
Great. Thanks for taking the questions.
Thanks Peter.
And I will now turn the call back over to Curt Farmer, President Chairman and Chief Executive Officer.
So thank you again for your interest in Comerica and I Hope you have a good day. Thank you.
Ladies and gentlemen that does conclude today's conference call. Thank you for participating you may now disconnect.
Richard.
We're sorry your conferences ending now please hang up.