Q2 2023 Comerica Inc Earnings Call

Speaker 2: Ladies and gentlemen, thank you for standing by. Welcome to the 2023 second quarter earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question at any time, please press one, then zero. If you should require assistance at any time, please press star, then zero.

Speaker 2: I would now like to turn the conference over to your host, Director of Investor Relations, Kelly Gage. Please go ahead.

Speaker 3: Thanks, Greg. Good morning and welcome to Comerica's second quarter 2023 earnings conference call. Participating on this call will be our President, Chairman and CEO , Kurt Farmer, Chief Financial Officer, Tim Herzog, Chief Credit Officer, Melinda Chossey, and Chief Banking Officer, Peter Cepsex.

Speaker 3: During this presentation, we will be referring to slides which provide additional details. The presentation slides and our press release are available on the FCC's website as well in the investment relations section of our website, Comerica.com.

Speaker 3: 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.

Speaker 3: Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements.

Speaker 3: Please refer to the Safe Harbor Statement in today's earnings release on slide 2, which is incorporated into this call, as well as our FCC filings for factors that can cause actual results to dip.

Speaker 3: Also, this conference call will reference non-GAAP measures. In that regard, I direct you to the reconciliation of these measures and the earnings materials that are available on the website, Comerica.com.

Speaker 3: Now I'll turn the call over to Kurt who will begin on slide three.

Speaker 4: Good morning everyone and thank you for joining our call.

Speaker 4: Average loans grew to $55.4 billion and the continued focus on fee income helped drive our second highest non-interest income quarter in our history.

Speaker 4: Expenses declined and their discipline approach to credit produced a third consecutive quarter of net recovery.

Speaker 4: Beyond our compelling financial results, we have launched a transformational expansion and support for small businesses.

Speaker 4: In the second quarter, we introduced tailored products designed to improve access to capital and enhance cash management capabilities for these important customers, while also providing access to valuable business insights and resources.

Speaker 4: coupled with our recognized SBA achievement.

Speaker 4: We believe we are well positioned to be a leading bank for small business, providing the tools they need to achieve their goals.

Speaker 4: Our emphasis on supporting small business is an important part of our overall commitment to communities.

Speaker 4: You can read more about our other community and sustainability efforts in our 2022 Corporate Responsibility Report that was recently published on Comerica.com.

Speaker 4: Our Southeast and Mountain West expansionary investments continue to perform well as our bankers were active in the market, adding new relationships and building pipelines.

Speaker 4: Strong, relative economic trends in these regions, coupled with the prevalence of target customer base, could create opportunity for continued growth over time.

Speaker 4: Moving to a summary of our results on slide 4, average loans grew $1.9 billion. Average deposits decreased $3.5 billion due to customer diversification efforts related to industry disruption in the first quarter and the ongoing impact of Fed monetary actions.

Speaker 4: We saw increased stabilization in both interest bearing and non-interest bearing deposits in the second half of the quarter. We believe diversification efforts are largely behind us.

Speaker 4: As we expected, net interest income declined as we saw the full impact of first quarter deposit flows and funding activity.

Speaker 4: Credit quality outperformed with another quarter of net recovery.

Speaker 4: and our criticized long percentage remains below our historical average.

Speaker 4: Noggin's income was near record levels and expenses declined.

Speaker 4: Profitability improved and I already saw the capitalization as we generated an estimated ET1 ratio 10.31% above our strategic target.

Speaker 4: It all is a strong quarter for Tamerica, and I will now turn the caller to Jim, who will review our results in more detail.

Speaker 2: Thanks, Kurt, and good morning, everyone.

Speaker 2: Turning to slide five, loan growth came in just above expectations as average balances increased 4% from the first quarter.

Speaker 4: Increased selectivity drove a slight decline in commitments, and utilization increased almost 1% but remained below historical averages.

Speaker 4: Growth in our commercial real estate business of over $520 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 payoffs.

Speaker 2: Recent origination activity and pipeline have significantly declined.

Speaker 2: Our commercial real estate strategy remains highly selective with a focus on class A projects and our office exposure is intentionally limited.

Speaker 2: Large corporate loans grew $447 million as we won new customer relationships and financed acquisitions for existing customers.

Speaker 2: National dealer services benefited from new customer acquisition, and while floor plan inventories continued to grow, they remained below pre-pandemic levels.

Typical second quarter seasonality resulted in a $325 million increase in average mortgage banker finance loans.

However, consistent with our strategic exit of that business, we expect most of our mortgage balances to be paid off by the end of 2023.

Slide six provides an overview of our deposit activity for the quarter.

Average deposit balance has declined 5% in line with expectations.

Conversations pivoted away from banking industry stability as customers refocused on broader macroeconomic issues.

such as risk of recession and elevated rates. Throughout the quarter, customer deposit balances continued to normalize, and we observed relatively stable trends since mid-May. Industry funding pressures drove deposit competition, and interest-bearing deposit costs increased to 237 basis points.

However, we feel our dynamic pricing strategy and relationship approach allowed us to maintain our forecasted deposit betas and protect balances.

While the rate environment further pressured non-interest bearing deposits, we continue to view our deposit mix as a competitive advantage, providing a more stable and cost-effective funding source than our peers.

With strategic investments underway to enhance payments and other treasury management products, in addition to our national small business banking strategy, we see opportunities to further improve our attractive deposit profile over time. As shown in slide 7, our strong liquidity position provided flexibility. We maintained excess cash.

repay maturing FHLB advances, and our remaining liquidity capacity increased.

Our quarter-end loan-to-deposit ratio was 84%, still below our 15-year average, and strategic actions announced in the second quarter are expected to keep that ratio in the mid-80s at year-end 2023.

Cash balances of a holding company position us to repay our $859 million debt due this summer, and very light remaining unsecured funding maturities create flexibility to manage funding needs and cash levels over time.

Period and balances in our securities portfolio on slide 8 declined almost $900 million with pay downs, maturities, and a $212 million negative mark-to-market adjustment.

Our security strategy remains unchanged as we stop reinvesting in the third quarter of 2022 and we maintain our entire portfolio as available for sale providing full transparency and management flexibility.

Although we have modest Treasury maturities through the end of the year, larger scheduled repayments in 2024 and 2025 are projected to benefit liquidity, profitability, and or unrealized losses within AOCI.

Altogether, we expect a 34% improvement in unrealized securities losses over the next two years. As our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities and therefore unrealized losses should not impact income.

Altogether, we expect a 34% improvement in unrealized securities losses over the next two years. As our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities and therefore unrealized losses should not impact income. Turning to slide 9. We expect a 34% increase in capital gains over the next two years.

Net interest income decreased $87 million to $621 million in line with expectations as the benefit of loan volume and one more day were offset by the impact of wholesale funding, lower deposit balances, a shift in deposit mix and deposit pricing.

A significant portion of the funding and deposit activity occurred late in the first quarter, so results reflect a full quarter impact of those actions.

With our strategic management of our asset sensitivity position, the impact of rates was nominal.

As shown in slide 10, successful execution of our interest rate 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.

By strategically managing our SWAP and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time.

A proven discipline produced another quarter of excellent credit quality as highlighted on slide 11.

Once again, we posted net recoveries, although we do not project this trend to continue.

Modest migration drove an increase in criticized loans, however at under 4% of total loans they remain well below historical averages.

Non-accrual loans declined and inflows to non-accruals remained low at $17 million. Vibration, loan growth, and a continuing economic outlook drove the $33 million provision expense, and the allowance for credit losses increased to 1.31%. Given the environment, we increased oversight in portfolios with greater relative...

growing $21 billion from an already strong first quarter.

Non-customer income contributed to results with increases in FHLB dividends and BOLI, in addition to customer-related growth in fiduciary and card.

Although not shown as a variance to prior quarter, capital markets exceeded expectations as we repeated strong first quarter results.

Risk management income related to our hedging strategy saw a modest decrease and should continue to vary based on the right environment.

While non-customer income can be hard to predict, we expect our strategic investments in products and services to drive further growth and capital-efficient fee income over time.

We remain excited about the results of these efforts to date. The expenses on slide 13 declined $16 million in line with expectations.

Quarter over quarter expenses benefited from several large first quarter items that did not recur, netting $2 million related to the Ameriprise transition, a favorable state tax refund, and a real estate asset write down.

Seasonally lower salaries and benefits expense and other non-interest expenses were partially offset by increased outside processing, SDIC insurance, and software costs. Modernization efforts were moving on track as we incurred a total of $7 billion in expenses, advancing our wealth management, corporate facilities, technology, and retail strategies.

We continue to selectively prioritize strategic investments designed to further enhance our financial results while remaining committed to prudently managing expenses commensurate with our earnings power.

Slide 14 highlights our strong capital position.

With share buybacks pause, capital generation from profitability outpaced loan growth, driving our estimated CET1 further above our target to 10.31%.

Strategic actions, including the exit of mortgage, bank or finance, and increased selectivity across the rest of the portfolio are expected to elevate capital ratios through the end of this year.

Higher rates increase unrealized losses in our securities and swap portfolios, reducing our tangible common equity ratio to 5.06%.

Adjusting for the impact of AOCI, our tangible common equity ratio would have been 9.22%.

Although potential regulatory changes have not yet been proposed, considering our size, portfolio, and projections,

We feel very good about our ability to support our customers and comply with anticipated capital requirements.

Our outlook for 2023 is on slide 15 and assumes no significant change in the economic environment.

We continue to project full year 2023 average loan growth of 8%.

The strategic exit of mortgage banker finance and increased selectivity is expected to keep loan balances relatively flat into the third quarter.

Our projected four-year average deposit decline of 14 to 15 percent is attributable to quantitative tightening that began last year and the impact of the first quarter 2023 industry events.

Assuming continued normalization of deposit trends and additional FOMC actions, we expect only a modest deposit decline through the second half of the year.

We expect our highest year of net interest income in 2023, growing 1-2% over last year's record results.

Although we anticipate short-term rates will remain high through the remainder of the year, our asset sensitivity position is designed to protect our strong profitability by minimizing the negative impact of rates when they decline.

Credit quality remained excellent and we expect continued migration to remain manageable.

Given the strong performance through the first two quarters, we forecast full year 2023 net charge offs to remain below our normal 20 to 40 basis points range.

Non-customer income exceeded expectations for the first half of the year and we expect full year to grow 7-9% over 2022. Benefits from non-customer income related to FHLB dividends and risk management income are expected to continue but likely at declining rates as we repay maturing advances and rates normalize.

While we expect strong foreign exchange income and derivative income, we anticipate levels to moderate from the incredible performance to date.

Even with potential headwinds in the second half of the year relative to the first half, the overall non-first income run rate remains compelling.

Noninterest expenses are expected to increase approximately 9% year over year and 3% of that growth is the result of higher pension expense for 2023. Talent acquisition, investments benefiting or deposit strategy, and the enhanced regulatory and compliance focus given our size and business model.

are expected to create some expense pressure compared to prior guidance.

As we look into the third quarter, the cost of filling open positions and other expenses pressures should largely offset the offset by an expected credit to modernization expense driven by corporate facilities.

although the precise timing for this type of credit can be challenging to predict. Prudent expense management remains a priority as we balance expense pressures with the need to invest for the future.

Strong profitability is expected to further grow our capital position in excess of our target and we believe that trend will continue until we resume share of purchases.

Now, I'll turn the call back to Kurt. Thank you, Jim.

Slide 16 summarizes our competitive advantage for the local delivery of sophisticated, comprehensive products.

and industry expertise by tendered bankers. We feel we encapsulate the best features to the largest and smallest competitors.

Diversification remains an important tenet of our core strategy, and exporting our business model to expansion markets has further enhanced our attractive geographic profile.

By accelerating certain investments already underway such as payments, small business, wealth management and capital markets.

We are elevating the products and capabilities tailored to meet our customers' needs while enhancing our funding profile, revenue mix, and overall return on capital.

We have successfully navigated a number of economic events.

And once again, our business model was tested and proved to be sound.

As a leading bank for business with strong retail and wealth management capabilities, we play a unique role supporting our customers as a trusted long-term banking partner.

Thank you for your time this morning and now we'd be happy to take some questions.

time this morning and now we'd be happy to take some questions.

Ladies and gentlemen, if you'd like to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 and 0 at this time. And one moment please for your first question. Your first question comes from the line of John Pincare from Evercore.

the decline in the back half. Can you maybe just give us some of the color around the rationale for the lowered growth expectation and what type of trends that you expect to develop as you look at the back half? Thanks.

Yeah, good morning John , it's Jim, thanks for the question. Yeah, the relatively stable or modest decrease was relative to the second quarter average of $64 billion. We do expect to stay very close to that on average through the end of the year. There are some dynamics turning on below that.

We do think by the end of the year we'll still be hovering around that $63 to $64 billion number. We were a little bit elevated on 630 as you see in the bar on the right. And so I would not expect all those balances to stick around. We had $800 billion of card that was elevated relative to its typical average. And then we did have some elevated customer balances on 630 that I would not They're out.

expect to stick around either. So that is a little bit of an inflated number. I would maybe stick more to the average guidance of gravitating down to $63 to $64 billion by the end of the year on average.

Okay, great. Thanks for that color. And then separately, also in the deposit front, in terms of the non-injuring mix, I know it's 48% current. Where do you see that bottoming? Already, I think you're at your pre-pandemic level. You were running at around 48% of total deposits.

So where do you think that could bottom? And then separately, sorry if I missed it, but if you can give us your updated through cycle deposit beta expectation. I believe you were thinking mid 50s and you're currently at 47 now. Thanks.

Yes, we are on average as well as June 30th hovering in that 47 to 48 percent area. You know, it's consistent with what I said earlier with June and a major investor conference. We still think we are going to dip just slightly below 45, so think about maybe 44 percent to 45 percent.

You know, the average ratio was a little bit elevated because it doesn't consider a little bit of the runoff that occurred early in the second quarter. The June 30th ratio, 47% is a little elevated due to the elevated non-interest bearing balances that I referred to before. And so I kind of think of us being on a kind of a spot basis to ignore the elevated balance.

But to the extent we're successful in bringing back interest-bearing deposits, you know, that could push that ratio down too, and we would of course welcome back those interest-bearing deposits.

In terms of the beta question, we still think we're going to end up on an accumulated basis in the mid-50s. I mean, right now I have 56 percent implied in the guidance, but pretty consistent with what we've been saying for the last few months. So we're still right around that mid-50 area.

Great, thanks so much.

Thank you. Your next question comes from the line of Steven Alexa Poolis from JP Morgan. Please go ahead.

Your next. Your next question comes from the line of Stephen alexa pus, from JP Morgan. Please go ahead. Morning D.

everyone. Jim, I just want to drill down on your answer to John's question. So the stability or modest decline in deposits for the rest of the year, you're saying that's coming from outflow slowing. It's not because you had strong outflows this quarter, but you plugged the hole with broker deposits. You're not saying you need to use brokered.

for the second half to remain fairly stable down a bit, its outflows are slowing, correct? That's right. To be clear, we have really no plans to add broker deposits between now and the end of the year. I think we're at a pretty good resting spot. We do think the customer core deposits have very much stabilized.

You know, we do see whether you define it by where we were in the second quarter average, or if you look at June 30th, which with some elevated balances, and you normalize for that number, for those elevated balances. From there we see just some very modest decline between now and the end of the year. Now, we've not really factored in a material amount of seasonal deposits, which in the past have come in.

to climb from that level on, assuming we don't get a large inflow of seasonal deposits.

Got it. Okay. And if we think about the margin, it's been that outflow of non-interest bearing, right, replacing those with basically time deposits. That's really pressured the NIMS. So if that's...

Are we at a bottom for the NIMP right now? You know, if you look at our guidance, Stephen, we do have just a little bit more pressure to go there. You see the net interest income guidance that we implied. You do see a small step down in Q3.

the cash.

If we do see cash balances go down, because that is putting a bit of a drag on the NIM, if they go down to normal levels, I would see the NIM being very close to where it's at now. You might see another 3 or 4 fits downward pressure in the NIM as the deposit mix.

is roughly offset by the smaller balance sheet as we deflate for that excess cash. If we don't reduce cash balances, and my forecast is as soon as we do, but if we hold these cash levels that we're currently at, you could see another, you know, 9, 10 dips in them. But again, I'm not expecting that at this point. I'm more focused on getting the cash down as things continue to stabilize.

So we're very near the bottom, just maybe a few bits depending on what we do with our cash position.

bottom just maybe a few bits depending on what we do with our cash position.

I know we're going to get the new capital rules fairly soon, but you guys are 91 billion of assets. Bert, how do you think about crossing that 100 billion asset threshold organically? I know this is not a great environment to be considering M&A transactions, but when you think about just the capital burden, the cost burden...

potentially, does it make sense to cross that organically? Yeah, Steve this is Kurt, I'll take that question and you're right, we are within a certain range of that $100 billion market, around $91 billion in assets.

back into the stress test, capital planning, et cetera, if we became a category four bank. We think just through organic growth, that would probably be a few years out. And our view has continued to be that, we're gonna focus on doing the right thing for the shareholders, growing the company, growing the assets of the company.

as we have over 174 year history. And if that means crossing that $100 billion market, would mean crossing that $100 billion mark. But we think that we're trying to think about from a long-term perspective. And just trying to be prepared for whatever cost by regulatory oversight might be associated with that if it is crossing it from an organic...

on Steve's last question on these capital changes. Even if you don't cross 100 billion, what are the changes you expect to make in terms of just balance sheet management, either loan to deposit ratio, liquidity, etc.?

Steve's last question on these capital changes, even if you don't cross 100 billion, what are the changes you expect to make in terms of just balance sheet management, either loan to deposit ratio, liquidity, etc. Because these rules are out.

So now the rules, this is Kurt Iberham.

Most anticipated ruling is really around the treatment of AOCI in regulatory ratios. And while all the conversation thus far has been focused on banks north of $100 billion, we do anticipate that there might be some eventual phase in below $100 billion.

south of 7%, like 6.93%. And so we would have a little bit of work to do to raise capital, but we believe it would be phased in. And just through normal earnings of the company, we could get back to an appropriate.

CET one level. We do not believe that we'd have to go to the external market to raise capital to get back to that level. So we think we're well positioned.

with whatever ruling might come out. And again, given that we're below the $100 billion mark, we think we would have some more time if you got applied to banks below that level.

And this in terms of liquidity with the loan to deposit ratio in the 80s still seems like the right place to be.

I believe, Bibram, you were asking about the stabilization of the loan to deposit ratio.

Yeah, we do expect to stay in the mid 80s. We do think it was, again, just slightly elevated on June 30th, but we do have a plan to stay in the mid 80s, and certainly some of the asset optimization things we're doing will help ensure that. So we're right around that area that we're comfortable in. And it also is below our sort of historical averages as well, where we've normally operated.

Understood, and just one separate question if I may. Given your customer base, give us a sense of your outlook in terms of credit, health of the customer. If you are a customer, give us a sense of your outlook in terms of credit, health of

There's not a lot of corporate bonds that have yet to be priced to the higher rates over the last 12 months. What's your expectation in terms of the next year and likelihood of a recession, soft landing, etc.?

Yeah, Abraham, this is Melinda. Obviously, the credit performance continues to be really strong. It was a really nice quarter for us, obviously, third quarter of net recovery is kind of unprecedented. Non-performing assets, again, modest decline and very low inflow, but we did see an increase.

in the criticized category, which is exactly what we've been expecting to see over the last couple of quarters. You know, the preponderance of the increase that we saw is in what I call core middle market C&I portfolio, which would include a number of leveraged loans in that automotive supplier sector. So again, we have expected that we would begin to see normalization. It's taken a couple of extra quarters to actually get there.

We've been bouncing around the bottom for a long time. Our current economic forecast that we use in our seasonal process does call for a mild recession. And I think, you know, whether it's a mild recession or we, you know, end up with a soft landing, I think we're prepared for a mild recession as it relates to the reserve build. And the reserve build this quarter really reflects kind of the portfolio growth, as Jim said, as well as that migration. But as of now.

We don't see a lot of lost content and as Jim guided, we think that for the remainder of this year we will be below that average that we typically guided. Thank you. Your next question comes from the line of John from RBC Capital Markets. Go ahead.

Hey, good morning everyone. Hey, good morning. Melinda, just to follow up on that one. Do you expect more normalization and how do you generally expect those numbers to progress uncriticized? Yeah, I mean I think we expect that we'll continue to have some migration in the portfolio. There's no doubt that the customer base has been incredibly resilient.

obviously came into the last couple of years challenges, very low levered, lots of liquidity, lots of availability. But, you know, inflationary pressures over the last 18 months are starting to show up in the portfolio in terms of pressure around growth and net margin. So cash flows, you know, are a little more stretched and I would expect that we'll continue to see some additional migration.

I think we're very well reserved and all of that is taken into sort of the process that we go through each quarter.

Okay, and maybe this somewhat ties into it, but maybe if you repeat, but you talked about increased selectivity in lending. Can you talk a little bit more about that kind of, you know, where you're being a little bit more cautious and then the the CRA number, it sounds like that was more construction projects funding up.

I think you said things are slowing there, but can you just confirm that?

John , it's Peter. Yeah, I think when we talk about it, it's really around quite candidly pricing expectations across the loan portfolio. And we continue to be really selective about it. I've said in the past, we're more focused on credit than we are maybe trying to earn business on.

contained here, you know, that we're being very careful about where we deploy it. We're taking care of existing customers, our expectations on profitability are higher, relationship are higher, so that's kind of across the portfolio. I think in commercial real estate specifically, you know, we'd actually kind of started dialing back a little bit on that even beginning of this year or maybe end of last.

into next year. So we feel good about it where we are. We feel good about it from a credit standpoint, our sponsor standpoint, but our expectations on pricing have definitely gone up this year.

Okay, good. Thank you for that. And then just one for you, Ralph, maybe kind of an odd question, but you've dealt with COVID, you've dealt with the funding crisis as CEO , so it's been a hell of a run for you. But do you feel like it's largely business as usual for Comerica right now? Are you still fighting some of these questions from depositors and this funding crisis that's happened over the last four months?

and remains very engaged. I was asking you. Just a minute about the comments, your question that you asked me. The last 30, 60 days, a number of us have been out.

in the markets, visiting with both employees and town hall formats, but also with customers in Michigan, California, the Carolinas, Texas, Florida, etc.

And I would say the conversations really have shifted for the most part back to more business as usual as you would refer to it when customers are asking us about things, customers normally ask us about the economy, about interest rates.

about availability to capital and credit, what we're seeing in terms of M&A activity in various industries, et cetera, industry outlooks. And so I feel like that things have definitely stabilized in terms of customer communication, customer conversations and...

And we're focused, as Peter said, on taking care of our existing customers. And that's something that I think we do very well. We've got really great, long-standing relationships. And I might just remind you and the other listeners that, really, throughout the crisis, we did not lose customers. We felt some customers diversify our deposits.

And we hope over time and seeing some signs, early signs of that, the customers will bring some of those deposits back, about deposits back where some moved out. As you alluded to earlier, it has been an interesting time. I became the CEO in April of 2019.

and you know all the events that have occurred since then. But I think our company is so resilient to manage through 174 years of all the disruptions that have occurred in the economy and the world during that time. And we just do, I think, a great job of rallying together. And it really pretty much is business as usual.

I referred to in my comments earlier a lot of things that we're focused on and we remain focused on those beyond just taking care of our employees and our customers, expanding into new markets, focusing on product capabilities, focusing on small business, growing the commercial bank, growing wealth management, growing the retail bank. And we feel like the future for us remains very bright as an organization.

Okay. Well, Kurt, I've never had so many emails in response to a question. But I know you're doing a great job. Thank you, Kurt. Thank you.

Your next question comes from the line of Brody Preston from UBS. Please go ahead. Hello, good morning. Hey, I just wanted to ask on the tech and life sciences deposits, I noticed that those continue to move down a little bit, but it looked like the rate of change kind of slowed there. I was.

I was wondering kind of what drove that decline if it's kind of back to you know normal cash burn for those clients and kind of you know what the I Guess is there a growth outlook kind of for that business line now that you know there's been this disruption with the largest competitor No longer, you know are failing

Hey Brody, this is Peter. Yeah, the decline in deposits and TLS, we really started actually seeing that back in the middle of last year.

So I think that cash started being consumed in that space with all the things that you've kind of seen happening with tech. I think what happened earlier this year probably accelerated that a little bit further. But as far as where we go from here, we're being very cautious about our relationships. You know, we're watching what's going on in the VC community.

We will be in the business. I think it's probably at some point, you're gonna, you'll start to see cash build again across the industry and certainly at Comerica. I don't know that it's necessarily in the next six months.

I think we've probably got a little more cash burn going on in this space. That said, we are bringing on new relationships. And as I said, we're adding people. We feel really good about the industry and the opportunity over the long term. But we've probably got some time to go here of cash burn and I think a number of these companies are going to...

Need to raise some raise some capital and and we'll see what happens in the industry going forward Got it You know if you could give us some indication as to You know what the what the conditional prepayment rate you're assuming within your effective duration calculation

Jeff Brody, it's Jim. I mean, that prepayment rate varies somewhat widely, depending on the type of security. Of course, we have some bullets in there on the commercial side that generally don't have much in the way of prepayment, and then we have a number of various tranches of MBS securities that have some variance to them. So I don't think there's any one number that would likely answer your question, but we certainly...

have prepayment rates factored into that. Is it reflective of kind of what the market is bearing on a quarter to quarter basis Jim? Absolutely that's something we you know prudently do every quarter is you know monitor the market prepayment rate so very much in line with the market. Got it great and then I wanted to ask just on the on the fixed rate

a relatively small part of our portfolio, you know, less than 8% of our loans. It does yield, you know, well below our current portfolio. You know, we haven't disclosed the exact rate, but I would say it is internally below, which isn't surprising given how fast interest rates have gone up.

You know, contractual life on that is about eight years, so remaining life would be about four years. We do see it amortizing along a pretty straight-line path amongst that four-year remaining life, and, you know, we see the, you know, I would say that fixed-rate portfolio price is up probably, you know, 15 bits a quarter, if you kind of...

parlay that along its percentage of the overall loan book. You know, you're looking at maybe a fifth, a quarter of loan yields going up because of their pricing, the fixed rate books. So that will be a very small tailwind for us, but, you know, just depends on where the curve goes, where they're reprised at, and, you know, how prepaid prepayment patterns kind of follow through there.

It's really one of the strengths of our model is the floating rate. Most of our loans are floating rate across our portfolio. So we're able to benefit on the actual loan book when the interest rates are going up like this to your question there, Brody. That's right. It gives us a little more control too because we can more synthetically manage our asset liability position as opposed to being at the adversity of prepayment rates. Got it. And then last one for me. I just was hoping for a reminder. Maybe its got hair. Rain.ummm.

Yeah, these are fixed receipt rates and the pay floating is pretty much aligned with LIBOR, 30-day LIBOR previously as the quarter progressed, as well as a combination of monthly SOFR and the BISB. Of course, LIBOR is behind us now, but pretty much aligned with monthly SOFR and monthly BISB.

So that obviously is changing as the Federal Reserve makes its changes and so on.

Is there any spread there over that rate? Yeah, I mean, you know that, you know, BISB, SOFR, you know, depending on where we're at with the FOMC increase coming up here, you know, obviously you're looking at kind of a pay rate in the five, you know, five and a quarter range, so.

That would give you the spread relative to this yield that you see here.

and spread relative to this yield that you see here. We received pay, we received great.

Thank you very much for taking the questions. I appreciate it. Thanks, Brody. Your next question comes from the line of Manan Gosalia from Morgan Stanley . Please go ahead.

Thank you very much for taking the questions. I appreciate it. Thanks, Brody. Your next question comes from the line of Manan Gosalia from Morgan Stanley . Please go ahead. Manan, good morning.

Hey, good morning. I just wanted to follow up on the earlier line of questioning on deposit balances. You know, so you noted that deposits are stabilized and if I look at your last update at our conference in June to the end of the quarter, NIB has actually improved quite nicely even if I strip out the card related deposits.

customers specifically.

Yeah, I would say, Manan, it's Jim, really nothing changed. We're very much on the trajectory that we had forecasted. And as I mentioned, beyond CARB, we did have some elevated customer balances on the non-interest bearing side. Really, in the last few days of the month, they're no longer with us. You know, depending on how you think about how often those types of balances come back, we're anywhere from another half billion to a billion elevated at the end of the month.

But again, we often get these types of deposits too, so I don't want to fully discount them. But it is important to understand we were a little bit elevated on June 30th. Yeah, I might just, this is Kurt, and I'll just add what I said earlier, or expound on what I said earlier. I think just as things have settled down, the understanding that the concerns were maybe overplayed for the whole industry, but you know, hopefully we'll get all of this in.

customers are back just to more business as usual. You know, they're talking to us about credit and fee income products and services and how we can take advantage or support them from an advisory standpoint. But I think just getting the banking crisis out of the media and just the noise that was associated with those first couple months dying down has really, I think, shifted the conversation quite a bit.

Got it. That's helpful. And then just separately, I realize the FDIC special assessment hasn't been finalized, but I was wondering if you know once it's finalized, does that come out all in one quarter where there's a reserve or does it come out over the course of the two years as the proposal suggests?

Well, we're still waiting, of course, for the rule to be finalized, and there's been a lot of input provided there, so we really don't know where it's going to end up. I mean, I think the best speculation is, you know, from a cash basis, we would probably pay it once the rule is established, but it would be recognized on an expense basis, and therefore it's impacted capital over a couple years. But there are— explain the data you can put in there.

You know there are a number of variables you know play there in terms of all the input being provided So I think we just have to wait and see what the final role has in it.

there are a number of variables at play there in terms of all the input being provided. So I think we just have to wait and see what the final rule has in it. Got it. Thank you.

It would be a one-time hit to capital though, once it is recognized. Your next question comes from the line of Peter Winter from DA Davidson. Please go ahead. Good morning Peter. Good morning. Good morning. I was wondering with deposits closer to stabilization or the outflow slowing, how much of a change

net interest margin nearing a bottom. Do you think net interest income could stabilize in 2024 relative to the fourth quarter? We think it's getting very close with betas. You know, based on where the curve was on June 30th, we think betas will probably stop rising.

and into the first quarter of 2024 also. So just because of those quarter-to-quarter bleed-ins, you know, I don't know that it will be 100% stabilized in Q1 of next year, but I do think it will stabilize if not Q1, you know, probably in Q2. You know, there are some other variables going on in terms of how pricing plays out in...

there's a lot going on on the expense side that's non-recurring between the the pension, the modernization. Can you just remind us what what a normal expense growth rate is and is that more likely next year?

We typically, you know, putting aside some abnormal ebbs and flows like those things relating to pension, I mean, we typically think of expenses as being in the, you know, 5% range in terms of what we shoot for, but that's going to vary from year to year depending on what pressures are on us. Things like FDIC can make a difference.

As that can be elevated for a year or two at a time, again, pension can be a big factor. So I don't think any one year is ever going to exactly be the average, but over the cycle I kind of think about it as probably 4.5 to 5%. Thanks a lot. Inflation, obviously, being a huge factor also.

Your next question comes from the line of Chris McGrady from KBW. Please go ahead. Good morning, Chris. Hey, good morning, Jim. Quick question on the rate outlook. Obviously, the market expects one next week, but if we stay in a higher for longer for the rest of the year, and next year you get the forward curve, you get a couple cuts, could you talk about how you…

I think your balance sheet will respond in terms of margin performance given all the hedges you put on. Thanks.

Yeah, we're pretty neutral right now, Chris, in terms of our interest rate positioning, so we don't think it would be an impact regardless of what the Fed does.

You know, we are just the slightest bit to the downside for both an up and down rate scenario. You know, I would say the longer the Fed holds rates at a high level, I do think that's probably puts a little more pressure than less pressure on our projections because I do think you have the potential for a very, very slow bleed if they're kept high for a very extended period of time in terms of betas and deposit flows. I don't think it's material, but.

I don't think it's necessarily helpful to have them elevated for an extended period of time. Great. And then my follow up on capital. I'm interested in your thoughts on what would need to happen to return to a buyback. Obviously, we know that the regulatory is an aspect. What is it specifically that would be the moment where you would turn it back on? Yeah, I would say two things, Chris. One obviously stabilization.

certainty that we can hit our targets based on the new rules. I think that would put us in a position to really start thinking about shared buyback. Thank you.

targets based on the new rules. I think that would put us in a position to really start thinking about share buyback. Good, thank you. Thank you.

And at this time there are no further questions. I'd like to turn the call back to Kurt Farmer, President, Chairman, and Chief Executive Officer. Well thank you so much everyone for dialing in and listening to the call today. As always, we appreciate your interest in our company and hope you have a good day. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect. Thank you for your participation and for using AT&T teleconference.