Q4 2024 Comerica Inc Earnings Call
Speaker Change: Greetings and welcome to the Comerica fourth quarter and fiscal year 2024 financial review conference call.
Speaker Change: At this time, all participants will be in listen-only mode. The question and answer session will follow the formal presentation.
Speaker Change: If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: If anyone today should also require operator assistance, please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: At this time, it is now my pleasure to introduce Kelly Gage, Director of Investor Relations. Thank you, Kelly. You may now begin.
Rob: Thanks Rob. Good morning and welcome to Comerica's fourth quarter and fiscal year 2024 earnings conference call. Participating on this call will be our President, Chairman, and CEO, Curtis Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda Chaucey, and Chief Banking Officer, Peter Sepsic.
Rob: During this presentation we will be referring to slides which provide additional details. The presentation slides and our press release are available on the SEC's website as well as in the investor relations section of our website Comerica.com
Rob: The presentation in 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 differ materially from expectations.
Rob: Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements.
Rob: Please refer to the Safe Harbor Statement in today's earnings presentation on slide 2. Also, the presentation and this conference call will reference non-GAP measures. And in that regard, I direct you to the reconciliations of these measures and the earnings materials that are available on our website, Comerica.com.
Kurt: Now I'll turn the call over to Kurt, who will begin on slide 3.
Good morning everyone and thank you for joining our call.
Kurt: We felt 2024 was a year of strength as we prioritized further enhancing our foundation to better position ourselves for long-term success and solve promising customer trends.
Kurt: We continue to favor a conservative approach to capital management, producing an 80 basis points increase in our estimated CET1 capital ratio while resuming share repurchases.
Kurt: Even with ongoing volatility in the rate curve, we grow both book and tangible book value.
Kurt: Although loan demand remained muted throughout much of the year, we saw encouraging trends in the fourth quarter with improved settlement and higher production levels, which supports our expectations for growth in 2025.
Kurt: Credit quality remained a strength as we maintained our discipline underwriting and produced historically low net charge-offs.
Kurt: Through deliberate reduction in wholesale funding and with favorable customer trends, we optimize liquidity, benefiting net interest income.
Kurt: Beyond our financial results, we advance strategic priorities such as investing in relationship managers and growth businesses and financial advisors in support of our wealth management focus.
Kurt: Investments in capital markets produced results as the team closed their first M&A advisory transaction and built a strong pipeline for expanded revenue in the coming years.
We continue to modernize our real estate footprint and technology.
Kurt: In fact, we expect to have almost all of our applications managed in the cloud or on a SAS platform by the year 2025.
Kurt: Supporting our communities remained a priority as we provided critical business resources to small businesses and helped nonprofits broaden their reach.
Kurt: In preparing for the future, we continue to make progress towards eventual Category 4 readiness.
And lastly, with an ongoing commitment towards driving efficiency.
Kurt: We executed expense recalibration initiatives, creating capacity for strategic and risk management investments.
Kurt: We believe our progress towards these important initiatives will help us achieve our long-term strategic objectives.
We reported earnings of $698 million, or $0.052 per share.
Although the 2023 industry disruption weighed on year-over-year average comparisons,
Kurt: We saw encouraging trends throughout the year across a number of categories.
Kurt: Persistently higher rates muted loan demand across the industry, but late in the year we saw improved customer sentiment, anticipating a more favorable business and regulatory environment.
Kurt: Although the subsequent risk of higher rates dampened that optimism somewhat, we still hear customers are bullish about increasing business investment throughout 2025.
Average deposits were pressured about 2,023 units.
but also reflected an intentional reduction in brokered time deposits.
Kurt: Other than broker deposits, we saw growth in customer balances from the year 2023 to 2024.
Kurt: Both non-interest income and expenses were impacted by notable items, and our proven credit management approach produced very strong results.
Kurt: Slide 5 summarizes the fourth quarter, where we generate earnings of $170 million, or $1.22 per share.
Kurt: Loans, deposits, and net interest income performed consistent with commentary we provided at a fourth quarter industry conference.
Kurt: Leveraging our strong relationship model, we believe we successfully managed deposit pricing commiserate with rate cuts.
Kurt: A modest securities repositioning pressured non-interest income and a number of other specific items impacted non-interest expenses for the quarter.
Kurt: In all, we feel the momentum with customer deposits and interest income, coupled with improving sentiment, positions us for growth in 2025.
Speaker Change: Thanks, Curt, and good morning, everyone. Turning to loans on slide 6.
Speaker Change: and we do not generally expect to be a permanent lender in that space.
Speaker Change: The clients in Corporate Banking were partially attributed to senior housing exits and energy grew by winning new and expanding existing relationships.
Speaker Change: Total commitments were relatively flat as declines in commercial real estate and corporate banking were offset by production in middle market general, energy, and environmental services.
Speaker Change: Average loan yields increase one basis point as the impact of BISB cessation and higher non-accrual interest offset the impact of a lower rate environment.
Speaker Change: On slide 7, we continue to be encouraged by customer deposit activity.
Speaker Change: Excluding the impact of the 1.4 billion dollar decline in brokered CDs, customer deposits grew over 800 million dollars, or over 1% in the quarter, with the largest contribution coming from middle market general.
Speaker Change: Growth continues to be centered in interest-bearing deposits, and although cyclical pressures persisted, non-interest-bearing deposits, as a percentage of total, remain flat at 38%, continuing to reflect a compelling mix.
Speaker Change: Period end deposits increased $700 million. Adjusting for the timing-related increase in direct express deposits and the decline in brokered CDs, period end customer deposits grew $400 million on a net basis.
Speaker Change: Lower brokered CDs coupled with a successful pricing strategy drove a 40 basis points decline in deposit pricing quarter over quarter.
Speaker Change: Going forward, we intend to continue our relationship pricing approach, monitoring the rate and competitive environment, while balancing customers' objectives with their own funding needs and profitability.
Speaker Change: Our securities portfolio on slide 8 declined as the shift in the rate curve reduced the valuation and we saw continued paydowns and maturities.
Speaker Change: Late in the fourth quarter, we executed a modest repositioning, selling approximately $800 million over lower-rate treasuries and reinvesting at a market yield.
Speaker Change: We expect to accrete the $19 million pre-tax loss in the net interest income within 2025.
Speaker Change: Turn to slide 9. Net interest income increased $41 million to $575 million.
Speaker Change: Excluding the benefit of Bisbee cessation, net interest income would have grown $16 million quarter over quarter.
Speaker Change: The benefit of maturing swaps and securities, higher customer deposits, strong deposit betas, and non-accrual interests all contributed to a strong net interest income quarter.
Speaker Change: Moving to slide 11, we continue to believe the successful execution of our interest rate strategy allows us to better protect our profitability from rate volatility.
Speaker Change: Despite the slight benefit this slide shows in a lower rate environment, we generally consider ourselves to be asset neutral, though we remain cognizant of the impact the rate environment may have on non-interest bearing deposits.
Speaker Change: By strategically managing our swap and securities portfolios while considering balance sheet dynamics, we intend to maintain our insulated position over time.
Speaker Change: Net charge-offs remain low at 13 basis points and only reflect a slight increase from the prior quarter with lower fourth quarter recoveries.
Speaker Change: Persistent inflation and elevated rates continue to pressure customer profitability and drove expected normalization in both criticized and non-performing loans, largely in our general middle market businesses.
Speaker Change: We feel our proven, conservative credit discipline continues to position us well to outperform our peers through the cycle.
Speaker Change: On slide 13, fourth quarter non-interest income decreased $27 million, including the $19 million realized loss from the securities repositioning and a $4 million decline in deferred compensation, which was largely offset with the non-interest expenses.
Speaker Change: Despite modest pressures observed in the quarter across select categories, we continue to prioritize non-interest income and expect to see customer-related income growth in 2025.
Speaker Change: Expenses on Slide 14 increased $25 million over the prior quarter, inclusive of seasonally higher costs which impacted a number of line items, including salaries and benefits.
Speaker Change: In addition, we saw an increase in legal and litigation-related expenses, and we made the strategic decision to increase funding to increase the size of our charitable foundation.
Speaker Change: These increases more than offset lower operational losses and the gains of real estate as we continue to optimize our real estate and banking center footprint.
Speaker Change: Expense discipline remains a key priority as we continue to focus on driving efficiency.
Speaker Change: As shown on slide 15, we continue to favor a conservative approach to capital with our estimated CET1 at 11.89%.
Speaker Change: This remained well above our 10% strategic target, and even if the proposed Basel III removal of the AOCI opt-out was in effect, we would have exceeded regulatory minimums and buffers.
Speaker Change: Movement in the forward curve caused unrealized losses in AOCI to shift higher in the quarter, but we expect them to improve over time with maturities and paydowns.
Speaker Change: Even with volatility in the rate curve, we return capital to shareholders through $100 million in share repurchases in the fourth quarter and intend to repurchase approximately $50 million of common stock in the first quarter.
Speaker Change: As we consider future capital decisions, we intend to be measured in our approach and calibrate the size and frequency of future repurchases with expected loan trends.
Speaker Change: We will also continue to closely watch the forward curve, our profitability, the economy, and any regulatory updates as they may also influence our strategy.
Our outlook for 2025 is on slide 16.
Speaker Change: In fact, excluding the impact from commercial real estate, we project 2% average loan growth year over year. And in the first quarter, commercial real estate pay downs are expected to fully offset production in most other businesses, resulting in a relatively flat average loans compared to fourth quarter of 24.
Speaker Change: Excluding brokerage CDs, we expect 4-year average customer deposits to grow 1%.
Speaker Change: Following seasonal declines in the first quarter, we project customer deposit growth throughout the rest of 2025.
Speaker Change: With the elevated rate environment, we expect most of that growth will continue to be concentrated in interest-bearing balances, but believe our non-interest-bearing deposit mix will remain relatively consistent in the upper 30s.
Speaker Change: Also, as a point of clarity, we are not assuming deposit attrition in 2025 for Direct Express within this outlook based on our current understanding of the transition strategy.
Speaker Change: We expect full year 2025 net interest income to increase 6% to 7% compared to 2024 with the benefit of FISB cessation, maturing and replaced securities and swaps.
Speaker Change: A more efficient funding mix and higher loans, more than offsetting lower non-disparaging balances.
Speaker Change: In the first quarter, we expect non-interest income to take a slight step down with a 1-2% decline from the fourth quarter as the impact of day count, lower non-interest bearing deposits, and lower non-accrual interest income offsets the benefit of BISB cessation and our swap and securities portfolios.
Speaker Change: With the potential for ongoing inflationary pressures and elevated rates, we expect manageable migration towards more normal credit levels to continue in our portfolio.
Speaker Change: As a result, we project full-year net charge-offs to be at the lower end of our normal 20 to 40 basis points range in 2025.
Speaker Change: We expect 2025 non-interest income to increase 4% over reported 2024 levels, which includes a 2% expected growth in customer income.
Speaker Change: For the first quarter of 2025, we expect seasonal declines in customer-related non-interest income, and then generally expect to see growth in customer fees through the balance of the year.
Speaker Change: First quarter 2025 expenses are projected to increase 2% over the fourth quarter of 2024 with normal seasonality and compensation expenses.
Speaker Change: Expense discipline remains a priority as we seek to self-fund strategic and risk management investments to support our future long-term efficiency.
Speaker Change: Moving to capital, we continue to appreciate the importance of a strong capital position and intend to consider a number of variables, including loan growth, the forward curve, and the broader economic environment as we execute our plan for the year.
Speaker Change: We intend to maintain a CET1 ratio well above our 10% strategic target in 2025.
Speaker Change: In all, we expect favorable sentiment and trends to drive responsible customer-related growth throughout 2025.
Now, I'll turn the call back to Kurt.
Thank you, Jim.
Jim Herzog: as one of the few banks who have celebrated 175 years in business.
Jim Herzog: We understand the importance of strong capital, credit, and liquidity in delivering long-term success. And as discussed, we feel those foundational strengths really shine through in 2024.
On top of that, we saw positive customer deposit trends.
Jim Herzog: successfully managed deposit pricing and returned capital to shareholders through resumption of share repurchases.
As we look forward, we feel our model is compelling.
Jim Herzog: We have a unique geographic strategy that is diversified and focuses on growing markets.
Jim Herzog: Our talent is differentiated and tenured colleagues who have deep expertise that deliver consistency to our customers.
Jim Herzog: We continue to invest in our development program, which creates a consistent pipeline of colleagues for the right mix of sales and credit skills.
Our Pride Suite is strong.
Jim Herzog: Tailored to meet the needs of our customers, and we are making strategic investments which will enhance our solution set.
Jim Herzog: Importantly, we feel well-positioned to deliver responsible long-growth, supported by higher deposits, complemented by increased customer-related fee income.
Jim Herzog: No doubt there's always some level of economic uncertainty, but we are managing our business for the long term by making important investments that support existing customers and win new relationships.
Jim Herzog: Before we go to Q&A, I'd like to take just a moment and acknowledge individuals and businesses who have navigated the unprecedented flooding in the Southeast late last year and the recent wildfires in California.
And with that, we are happy to take your questions.
Thank you.
Jim Herzog: Thank you. At this time, we'll now be conducting a question and answer session.
Jim Herzog: If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Jim Herzog: You may press star 2 to remove yourself from the queue.
Jim Herzog: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Thank you. Our first question is from the line of John Arstrom with RBC Capital Markets.
Speaker Change: Good morning John. Hey, good morning. Can you touch a little bit on your loan growth outlook? You talked a little bit about the pipelines maybe being a little bit better, but I think you're showing commitment stable as well, but you said better sentiment. Can you talk a little bit about what you've seen over the last few months?
Speaker Change: the year off with a better pipeline than we did a year ago. So I think all that together is...
Speaker Change: tied to interest rate outlook than maybe it did when we finished the third quarter.
Speaker Change: John, that's a good question. I probably should add a disclaimer to what I just said. I think interest rates are probably affecting that business more than any. And so I suspect that...
Speaker Change: opportunities out there and balance is probably staying on longer. So a little bit of moving parts. I think our baseline is just expecting sort of quarterly payoffs through the rest of this year and probably into the first or second quarter of 26.
Speaker Change: Alright, I'll step back. Thank you guys very much. Thanks, John. Thanks, John.
Speaker Change: Our next questions are from the line of Marion Gosalia with Morgan Stanley. Please receive your questions.
Good morning, we're live.
Marion Gosalia: Hi, good morning. On broker deposits, I know those are coming down nicely and you expect to pay down some more as you go through the first half of the year. Can you talk about how much room there is to pay down some of these high-cost sources of funding as we go through the year if loan growth remains weak?
Marion Gosalia: Yes, good morning. We did end the year with just over about $1.1 billion of broker deposits.
Marion Gosalia: And we do see those coming down pretty continuously throughout 2025, you know, probably more so starting in the second, third quarters, but all the way through early fourth quarter.
Marion Gosalia: It's very feasible that we have no broker deposits, no broker time deposits by the end of 2025.
Marion Gosalia: So those are a little bit pricey, you know, we're paying about 5.4% for those.
Marion Gosalia: and it is our goal with strong core customer deposit growth to eliminate most or all of those by the end of 2025. Now that will of course depend on loan growth trends and other factors, but overall we continue to improve the efficiency of our funding mix and we're quite optimistic about that.
Speaker Change: Got it. And in terms of capital, I know you're managing that reported CET1 to about 10%, but is there a number you're managing too for CET1 including AOCI?
Speaker Change: You know, there is no one number, because there are a number of capital ratios that different constituencies value. So we are considering kind of a smorgasbord of capital ratios, but of course CET-1 is likely the most important there.
Speaker Change: With higher levels of ALCI like we had this quarter, we are being a little bit more cautious on capital.
Speaker Change: But I think it's fair to say, regardless of where things go this year,
Speaker Change: We plan on staying well above 11% CET1, and then as ALCI continues to come down later this year and into 2026, that gives us more options from a capital standpoint. But overall, considering a number of ratios, I think it's fair to say we'll be well above 11% for this year.
So is it fair to say that...
Speaker Change: if the long end of the curve goes up more and that CD1 including AOCI comes down.
Speaker Change: You would just manage your capital levels by flexing buybacks, and you still have enough balance sheet available for customers of Long Road to pick up?
Speaker Change: Absolutely, we have a lot of options with capital, certainly loan growth is not an issue.
Speaker Change: You know, low growth, as Peter was saying, is going to be a little bit of a wild card depending on where commercial real estate goes, so...
Speaker Change: First and foremost, we will pay attention to where loan growth trends go in determining what we do with capital. But again, AOCI is probably the number two factor right behind where loan growth goes.
Great, thank you.
Speaker Change: Our next question is from the line of John Tancari with Evercore ISI. Please receive your questions. Morning, John.
Morning.
Speaker Change: I'm just looking at the the expense side. You're running at a high 60s efficiency ratio currently. As you look at 2025, given your guide, it looks like you may still be in that general range.
Speaker Change: What do you view as the appropriate long-term efficiency ratio for Comerica and what can drive you You know back, you know down, you know off of that upper 60s level. Is it primarily going to be a revenue Catalyst or is there an expense opportunity there?
Speaker Change: Good morning, John. Yeah, we have seen some elevated efficiency ratios and we really saw this take place, you know, following the regional bank crisis with some of the shifts in deposit mix, so we are working to return back to what we think is an acceptable efficiency ratio, which we believe ultimately needs to be in the 50s.
Speaker Change: to hit some of the ROE objectives that we have in the future. So we are working towards that. It's always a combination of both revenue and expenses.
Speaker Change: But we are very committed to making sure that we have very strong revenue, you know, we're not going to short expenses and investment.
Speaker Change: to get there. So, a combination of both, but, you know, in the long run, I believe it is, you know, more of a revenue play with responsible investment and expense decisions and making sure that we have positive operating leverage.
Speaker Change: Okay. All right. Thanks. And then, separately, on the deposit side...
Speaker Change: You had indicated the direct express three and a half billion
Speaker Change: an average deposit balances. You don't expect a material change based upon the extension and the way the agreement is right now. Is there anything that could change that and you could see potentially a faster decline in those balances than you anticipate at this point?
Speaker Change: John, it's Peter. I think the answer to that question is...
As the year unfolds, we will certainly communicate that.
Speaker Change: as we can to what the outlook appears to be. But at the moment, we don't see anything changing in 25 and really.
Speaker Change: Certainly into 26 at the moment either so I think the answer is we don't see any real changes to what we've communicated The last several quarters on this and to the extent that it does We will we will do our best to share that but but no changes at the moment
Okay, great. Thanks for your call. Great shot.
Speaker Change: Our next question is from the line of Bernard Von Fusicki with Deutsche Bank. Please receive your questions.
Morning, Bernard.
Speaker Change: Hey guys, good morning. Just a question on expansion efforts. So you talked about expanding in areas like the southeast and the mountain west. Are there targets for like number of hires you're looking to add this year? Is there some way to think about how much of the expense base is in incremental expense initiatives?
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Speaker Change: Bernard is Peter. So in the southeast I would say that we are certainly looking at opportunistic hiring. We did a lot of hiring the last couple of years and feel pretty good at
Speaker Change: sort of the ramp up that we've had so far. I think we feel like going into 2025, we're going to see opportunities and we tend to take advantage of those in the southeast, but probably not the same ramp up that we had the last two years, but definitely looking at folks and adding that market, particularly in our Florida market.
Speaker Change: In the Mountain West, it's a little bit more, probably a little more aggressive in the Mountain West to the extent that we can...
Speaker Change: We're certainly looking at opportunities in the Denver market as well as in Phoenix. And so, you know, I think that both of those are markets that we would continue to add folks in. Now, I would remind you too, though, we have tremendous opportunity to add folks in markets like DFW.
Speaker Change: And we feel like there's opportunities to continue to add folks in each of those markets on a go-forward basis.
Speaker Change: Okay, I appreciate that. And then maybe just on M&A, like with an easing in the regulatory environment expected from here, you know, just thoughts on, you know, how would you think about potentially doing a whole bank deal or a branch or like a portfolio acquisition, just any areas of those that could be a potential interest?
Speaker Change: Thank you, Bernard. The strategy for us has really not changed. We have historically been a very patient acquirer. We've only done one deal in the last 20 plus years and are continuing to focus on organic growth. Peter just talked about the markets that we operate in. We think we've got lots of opportunities to continue to grow in those markets.
Speaker Change: and focus as an organization, especially with our strong commercial focus as the best bank for what we believe businesses in the marketplace, but also a really strong wealth management and retail franchise. So we'll continue to be patient.
Speaker Change: and really focus primarily on organic growth. Certainly, there might be some opportunities that come along that, in terms of team lift-outs, in terms of product capabilities, etc., that we'll look at periodically, but again, primarily focus on organic growth.
Okay, great. Thanks for taking my questions.
Speaker Change: The next questions are from the line of Anthony with JP Morgan. Good morning Anthony. Hi everyone, does your loan growth outlook for 2025 include any uptake in utilization rates which look like have been flat the past couple of quarters?
Anthony, it's Peter. No, it really doesn't. I think that...
Speaker Change: That would be a good thing. Of course, any one of our businesses is going to have utilization sort of moving up and down depending on what's going on in that particular industry. But on the whole, what I would tell you is we've pretty much kept it flat.
Speaker Change: Thank you. And then my follow-up, could you provide more color on NPAs, maybe for Melissa? I know you called out the impacts from higher rates, but was there anything specific in the fourth quarter that contributed to the increase you saw? Thank you.
Speaker Change: This is Melinda. The MPA increase was about $58 million quarter over quarter, which on the whole for a portfolio of our size, I would consider that very, very modest.
Speaker Change: It was centered in around four or five different names, so still very granular. We did have one commercial real estate loan move into the NPA category.
Speaker Change: and that was approximately 30 million dollars, so nothing really unusual.
Speaker Change: Again, the commonality there is pressure from higher interest rates on overall profitability and ability to service debt.
Speaker Change: And the other commonality that we've seen, not just in NPAs, but really in the charge-offs this quarter, were companies that have an orientation towards serving consumer discretionary products. There's just still some pressure there from a consumer perspective in terms of what they have available.
Speaker Change: But on the whole, the credit portfolio, I think, performed quite well and the migration that we saw was pretty much expected and very much in line with sort of the normalization trend.
Speaker Change: And just as one other comment, our absolute levels of NPAs at about 60 basis points is about half of what our long-term average is. So yes, we saw an increase, but still relatively low, and consider that pretty manageable from our perspective.
Thank you. You're welcome.
Good morning, Chris.
Chris: Hey, good morning. Jim, a question on the modest balance sheet restructuring that you did in the quarter, the bond sale. I mean, the earn-back within a year is pretty compelling. I guess the question, why not be more aggressive either now or in the coming quarters? You've got the capital to absorb it. Just do it. I think a lot better efficiency than you talked about.
Good morning, Chris.
Chris: You know, when we look at the options for capital return, you know, we still really do favor share repurchase over securities repositioning. You know, securities repositioning, you know, is essentially neutral to tangible book value in the long run. It's just time geography. I realize it does, you know, move around earnings and maybe from an optics standpoint spruce things up.
Chris: But if we have to make choices, we would much rather put it in the share repurchase and other capital return options that we think have a real return to shareholders.
Jim Herzog: Okay. And then I guess my follow-up, just a clarification, Jim, on the guidance. Are all the guide NII fees, expenses relative to GAP reported numbers? Can you confirm that? Yes. Yeah, yeah. Very relative to GAP numbers.
Thank you. As all the guides are.
Thank you.
Speaker Change: At this time, there are no additional questions. I'll now turn the call back to Mr. Curtis Farmer for closing remarks.
Curtis Farmer: Well, thank you to all of you for joining our call this morning. As always, thank you for your continued interest in Comerica. We hope you have a very good day. Thank you.