Q2 2019 Earnings Call
Good morning May have your conference I'd number.
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My name is Jacqueline Garrahan yourselves.
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We will be on music hold to turn the call over to Darlene persons director of Investor Relations Ma'am you may begin.
Thank you Regina good morning, and welcome to Comericas second quarter 2019 earnings Conference call.
Participating on the call will be our president and CEO , Curt Farmer, Chief financial officer of in their car and Chief Credit Officer Peafiel foil.
During this presentation, we will refer to slides, which provide additional details.
The presentation slides our press release are available on the secs website as well as in the Investor Relations section of our website Mirka Dotcom. This conference call contains forward looking statements in that regard and should be mindful of the risks and uncertainties that could cause actual results to materially vary 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 statements in today's release and slide two which I incorporate into this call as well as our SEC filings for factors that could cause actual results to differ also this conference call will reference non-GAAP measures and in that regard I direct you to the reconciliation of these measures within the presentation now I will turn the call over to Curt who will begin on slide three.
Good morning, everyone not to the last earnings call I was named CEO rental for I assume the position of executive Chairman.
Just becoming CEO in 2002, Ralph has created a tremendous legacy at Comerica.
He managed the company through an incredible amount of economic change and disruption in the industry.
This positions us well for the future.
I will continue to work closely with Ralph as I transition into my new role.
Turning to slide three.
Today, we reported second quarter earnings of $298 million or $1.94 per share.
This resulted in an order we have over 16%.
And then on our way of almost 1.7% for the quarter.
Our loan growth was strong reaching a record level and outpacing the industry ha data for the second consecutive quarter.
Also total commitments grew over 300 million.
Line utilization increased about 40 basis points to 53%.
Our pipeline remains solid.
Particularly in light of the loan growth, we drove the last two quarters.
Overall, our customers are performing well and we are positioned to continue to support their growing working capital capex or acquisition financing requirements.
Fee income also increased in the quarter, including growth in fiduciary and card categories.
Continued careful cost management resulted in a non million reduction in expenses.
Altogether this drove a $10 million increase in pretax pre provision net revenue, excluding the 8 million securities loss incurred in the first quarter.
The credit provision increased primarily due to loan growth as well as valuation impairments on select energy credits.
Credit quality remained solid with net charge offs at 26 basis points. The nonperforming assets remain low at 45 basis points of total loans.
We continue to return excess capital through our share buyback program repurchasing 5.7 million shares.
Combined with the dividends, we returned 525 million to shareholders.
Relative to the second quarter of last year.
Our results reflect our ability to generate solid loan and fee income growth.
While also reducing expenses as a result of the successful execution of our gear up initiatives.
Last year, very strong credit quality, including net recoveries resulted in the reserve release in a negative provision.
While this quarter, our provisioning was more in line with our historical norm.
Through active capital management, we have reduced our share count by 12%.
Altogether, our earnings per share increased 4% year over year.
And now I will turn the call over to money or who will go over the quarter in more detail. Thanks, Kurt Good morning, everyone turning to slide four.
Second quarter average loans increased $1.3 billion, our thesis when compared to the first quarter.
Mortgage banking feet over $700 million effecting a combination of seasonality and strong refi volume.
We also drove an increase of over 2% in general middle market loan with growth across all three of our primary geographies.
Known to commercial real estate that Andres, primarily in Texas also increased.
Growth in energy balances was primarily a result of higher line utilization by existing customers due in part to softer capital markets.
Total period end loans increased $1.5 billion led by mortgage banker general middle market and equity fund services.
Our loan yields decreased seven basis points.
This was a result of lower LIBOR combined with the residual value adjustment of two leases.
A minor impact from hedging and a mix shift in the portfolio.
Slide five provides details on deposit.
Average core balances, but stable, which is in line with our normal seasonal pattern.
Coincident with loan growth non interest bearing deposits have declined as customers are funding growth acquisitions and capital expenditures from debt cash balances.
As expected, we also saw a mix shift into interest bearing deposits.
In addition, we added brokered deposits, which provide low cost flexible funding for our loan growth.
Our deposit mix remained very favorable with non interest bearing deposits comprising nearly 50% of the total.
In line with the guidance, we provided deposit costs were 94 basis points and reflected the standard pricing adjustments to be made in March.
We remain focused on our relationship approach to manage deposit pricing.
For the second half of the year deposit costs are expected to move up or down a few basis points, depending on mix shift on funding requirement short term rate and the competitive landscape.
As you can see on slide six.
The yield on the securities portfolio continued to trend up.
While yield on MBS securities have been under pressure, we were able to make purchases at incrementally higher review and the securities that have paid down.
This benefit combined with the repositioning be completed at the end of the first quarter contributed $13 million of net interest income.
The current rate environment has not had a significant impact on our duration.
Or the relatively small unamortized premium of the portfolio.
Assuming a flat rate environment, we expect securities yields to remain at the current level for the remainder of the year.
Turning to slide seven.
Net interest income decreased $3 million and the net interest margin declined 12 basis points to 3.67%.
Our loan portfolio added $14 million.
Specifically known coat and one additional day in the quarter contributed $22 million.
This was partly offset by lower loan yields, which I already discussed.
Altogether, the loan portfolio had a two basis points negative impact to the margin.
Higher yields on the Securities book added $3 million and one basis points to the margin.
Deposit costs were higher with the increase in interest bearing deposits as well as higher period, which can which combined had an impact of $15 million a nine basis points.
Higher wholesale funding needed to support loan growth and our share buyback program had a $5 million up two basis point impact to the margin.
In summary, the benefit from strong loan growth and one additional day in the quarter was more than offset by the net impact from rate combined with higher funding needs.
Credit quality remained solid as shown on slide eight.
Our net charge offs for $32 million or 26 basis points, which is at the lower end of our historical norm of 20 to 40 basis points.
Excluding energy net charge offs for the remainder of the portfolios were only six basis points.
While total charge offs were higher than recent quarters, we do not see this as a trend as the increase was due to the impairment of select energy loans.
Specifically the valuations on a few liquidating energy out that were impacted by volatile oil and gas prices and weak capital markets.
We have substantially completed our semi annual redetermination process and believe our reserves are appropriate.
Total non accrual loans remained low at $224 million of 42 basis points of our total loans.
Excluding a $51 million increase from energy non accrual loans declined.
There was a small increase in total criticized loans, which represented less than 4% of total loans as of quarter end.
Energy criticized loans declined $30 million.
A combination of logo and the additional reserves for the energy loans I discussed this resulted in an $11 million increase in the reserve and the ratio of 1.27%.
We expect that the provision for the remainder of the year will be approximately $25 million to $35 million per quarter.
Turning to noninterest income on slide nine.
Recall in the first quarter, we incurred an $8 million loss from the repositioning of the securities portfolio.
Excluding this loss noninterest income increased $4 million.
Fiduciary income increased 3 million, mainly due to annual tax service fees and higher market values.
Our continued focus on growing card fees resulted in a $2 million increase.
We also had a 2 million increase in bank owned life insurance and small increases in several other categories, including letters of credit.
Deferred comp asset returns, which are offset in non interest expenses were less than 1 million, resulting in a $3 million decline from the first quarter.
Expenses remained well controlled and our efficiency ratio dropped below 50% as shown in slide 10.
Salaries and benefits decreased 20 million following annual share based compensation and higher payroll taxes in the first quarter as well as the decrease in deferred comp that I mentioned.
This was partially offset by annual Mediterranean and one additional day.
Advertising expenses increased $4 million from a seasonally low first quarter.
Legal cost increase following a recovery in the first quarter of legal expenses previously incurred.
Also outside processing increased $2 million and was mostly tied to technology initiatives and revenue generating activity.
Turning to slide 11.
In the second quarter, we repurchased 5.7 million shares under our share repurchase program, which has nearly 4% of our total shares.
On a year over year basis, our share count was down 12%.
Together with dividends, we returned $525 million to shareholders in the second quarter.
Our goal is to provide an attractive return to our shareholders by way of the buyback as well as a healthy dividend, which currently has a yield of over 3.7%.
Turning to slide 12, and the rate environment.
While recent economic data has been mixed the market's expecting the fed to cut rates later this month.
Our standard model indicates a 25 basis point rate reduction will have an estimated 60 million dollar impact to net interest income over a 12 month period.
The pace at which they are able to adjust deposit pricing will depend on competition and our need for funding.
Therefore, we have provided a couple of scenarios with different deposit betas.
Of course, the ultimate outcome from net interest income depends on a variety of factors such as the pace at which LIBOR moved.
Loan growth and balance sheet movements as well as any interest rate hedges that we may add.
In March we began hedging program.
Over a two and a half month period, we added $2.8 billion in interest rate swaps with an average tenor of 3.3 years and an average fixed rate of 223 basis points.
Current base for hedges and the corresponding downside protection provided are not attractive therefore being up on the program.
Our strategy is to make steady progress in building our hedging program over time.
Turning to our outlook on slide 13, let's assume a continuation of the current economic environment and interest rates as of June Thirtyth.
Given the strong loan performance so far this year, we adjusted our expectation and now expect to drive 3% to 4% growth in full year average loans relative to 2018.
Recall that seasonal factors can impact loan in the back half of the year.
This includes declines in mortgage banker as first time home buying season ends as well as dinner due to model year changeover.
Also middle market typically experiences a summer slowdown.
We expect average deposits to be stable for the remainder of the year, resulting in a decline of about 2% on a full year over year basis.
Based on LIBOR as of June Thirtyth, and the higher funding costs. We now expect our 2019 net interest income to increase about 2% over 2018.
The full year benefit from our solid loan growth is expected to be partially offset by higher debt to help fund our share repurchase program and loan growth as well as the deposit mix shift and lower non accrual interest recoveries.
We have updated our forecast for the provision to be between 15 to 20 basis points for the full year.
We believe our overall portfolio continued to perform well and we are adequately reserved for the issues that surfaced in the energy book in the second quarter.
There is no change in our outlook to noninterest income.
On a full year basis, we continue to expect our expenses to remain stable, excluding the restructuring charges be incurred last year.
As far as the remainder of the year, we expect to see higher technology costs, primarily related to investments in our retail bank and higher outside processing expenses tied to revenue generating activities as well as the impact from additional Dave.
In addition, we recently launched an advertising campaign related to brand awareness, which will be ramping up to the end of the year.
Finally, with the possibility that the pickup in loan growth may be sustained we are targeting a cetone ratio of about 10% by the end of 2019.
As we determine the pace of our share buyback, we will carefully consider our expected earnings generation capital needs to fund loan growth and market condition.
Now I will turn the call back to Curt to provide some closing remarks.
Thank you my earlier, we believe this outlook, which includes loan and fee income growth as well as prudent expense control and capital management will drive superior returns.
Over the past few years, we are focused on transforming ourselves to be more efficient and drive revenue growth.
We have also maintained our underwriting discipline and reduced our excess capital.
These actions are produced strong results, including an order we have over 16%.
And better positioned us to weather changes in the economy or interest rate environment.
Next month, our company will celebrate its 170 of anniversary.
Over our history, we have managed through many different economic credit and interest rate cycles.
As I've met with customers and colleagues across our geography over the past month or so the total is optimistic as soon as remains relatively positive yes, the economic backdrop remains uncertain.
When the market is currently pricing in rate curves as mere laid out the impact from a cost reduction in short term rates is manageable.
And with our efficiency ratio in the low Fiftys, we remain focused on controlling the things, we can control and maintaining strong performance metrics.
While managing our expense discipline, we continue to invest in our future.
For example through our Tech Vision 2020 program. We've adapted our systems are not contactless for faster development and deployment of products and services Burberry colleagues and customers.
In addition, this further was producing savings that can be reinvested.
In closing, we believe our key strengths will continue to produce superior returns.
Our geographic footprint combined with our relationship banking strategy provide the foundation for our steadfast goal of driving profitable growth.
And enhancing long term shareholder value.
Now we would be happy to take your questions.
At this time, if you would like to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q and a roster.
Our first question comes from the line of Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, good morning, everyone.
Good morning, Brett.
Wanted to start off on on the margin and the pressure into Q was mostly a function on the funding side and given the guidance for 2% growth for the year sort of implies a 300 <unk> average for the margin in the back half if I'm looking at the balance is right can you talk about.
Your expectations for the margin in the back half of the year and then just thinking about in the period DTA, which was.
Better than the average for the quarter can you take any solace or not and expect maybe less pressure on funding cost maybe just a little bit more color on how are you thinking about the margin.
Okay, Great I will let me an air handler. Thank you all right Brett so to give you a little bit more color on the back half of the margins I will start by saying that our margin number of key 0.67% is a pretty strong starting place for us.
The biggest impact that I see two margin turning those come from rates I mean, we are asset sensitive and so.
We've provided you a variety of scenarios on slide 12 as to what a possible rate cuts could mean to us.
It is across the spectrum you can look at the 10% beta that's essentially a repricing of our market index deposits to a 25% data, which is essentially what will happen.
If there is some lag on deposit pricing as a result of the competitive environment as well as a us continuing to use our relationship based approach from a pricing standpoint to a 50% beta which essentially reflects.
Outside of pricing adjustments that we would continue to make to the deposit base. So you can pro rate.
Those impacts that we provided I think the move across the spectrum on that front, but beyond that I adjust for third quarter and LIBOR has continued to decline through the month of July we have a slide on 15 Fyfifteen shows are known competition about 75% of our loans are tied to LIBOR. So at 10 basis points decline essentially means loan yields will be coming down about seven basis points and you can probably compute that adjustment is now I'll shift to funding since that was part of your focus from a funding standpoint.
But I think of our parent company liquidity, we had a debt maturity in may be looking to replenish that in the back half, but you can also see that they're closer to our target and so I think that overall from a funding standpoint, I think that the impacts will be nominal in the back half we will continue to use.
You know our funding from diverse sources brokered deposits FHLB.
To some extent the capital markets and continued to be efficient with our funding base hopefully that gives you some color.
Okay. That's helpful and monitor the other thing I wanted to ask about was just energy and we've seen some stress in the energy space, even though oil prices aren't that bad can you talk about.
Give us a little flavor for what's going on in the energy book and those credits such huge.
Sorry, distress and where they are where the gas related which fields, where they can you give us a little more color on on on those credits as well.
Sure Brad.
First of all our energy book remains in very good shape, we just got through our re determination process and that went very well.
We saw no meaningful migration in the portfolio at all.
Borrowing bases were up modestly hedging was was down just a tad but overall it was a good review we feel very good about our bookings and where it's situated right now.
The issues in energy really had to do with about five.
Credits a couple of rents are still left overs phones from the downturn that we're going through a liquidation process and what we found over the course of the quarter was.
Hey, guys.
Decreased appetite for energy assets are going through some kind of liquidation process, particularly ones that are damaged in some way and that and that needs. A description of these five credits. So we felt the need to take some charges to.
Moved the book value on these assets down to where our new expectations are on the sale of those assets and then we also increased our reserves to cover what we would consider to be a reasonable worst case scenario for the disposition of these five assets.
So that's basically what we're seeing.
Okay, Great appreciate all the color.
Thank you Brett.
Your next question comes from the line of Ken Zerbe with Morgan Stanley .
Great Good morning, Hello, Jim.
Maybe a question for me to start with.
Just on slide 13, your cat the two issues I just want to try to reconcile so.
The capital management your Cetone target of 10% I believe you said your debt that's higher now than the 9.5 to 10 because of the potential for sustained faster loan growth, but at the same time to top bullet the average loans of up 3% to 4%. They really reflect the very strong first half you had but it implies a fairly.
Weak seasonally lower second half loan growth.
Can you just help reconcile that why are you holding more capital with the expectation that your loans.
Oh goodness loan growth is going to slow in second half. Thanks.
Amir good morning, Ken So we are taking a longer term view than just the back half and if you look at the second quarter.
You can see that the great loan growth that we have consumed about 25 basis points of capital.
That just goes to show you how quickly capital can be impacted as a result of growth and loan growth is the best use that we can put our capital to so when we think about it that way Thats one of our consideration and then second capital ratios are calculated at a single point in time in the quarter, it's usually down on the last day and we typically do see a pretty good ramp up in our loans as we are approaching quarter end and that just becomes yet another consideration for us as we triangulate how you know how we approach the target and how they want to think about it.
Okay. So for this loan growth is a little bit stronger than expected does that sorry, if congress weaker than expected is it possible that you could accelerate buybacks versus where you're currently expecting.
I think you'll see us continuing to manage around that 10% hike effective mentioned, what I will share with you as we continue to produce a strong bottom line number and so as you think about going forward. Some of those earnings will go to pay dividend. Some of those learnings will go to help us capital accretion if necessary, but we do plan to continue to return the rest to our shareholders and you will find that our payout will continue to be strong.
Okay got it and then just one other question in terms of the provision guidance, the 15 to 20 basis points or actually specifically the 25 to 35.
Million dollars per quarter.
It seems like that that kind of implies a little bit higher provision the way your prior guidance was.
I understand there's no issues in energy beyond what you've already taken but.
Are you trying to imply that maybe we're back to sort of more normal provision numbers are more normal charge off rates versus kind of where we've done a very favorable.
Period or are things actually are you seeing any kind of deterioration I would suggest the higher provision is warranted.
Good.
Yes, Ken.
The the revision in our guidance is completely a function of second quarter results and so we were not changing our outlook at all for the second half that 25.
The 35 million per quarter would be more in line with.
With normal we've been doing better than that over the last couple of years and we would hope we could still be that we're not seeing any need to build reserves from here, we feel really good about our reserves.
And we feel really good about the loan portfolio ex energy as Minera mention.
Net charge offs were only six basis points. So.
I don't see a lot of need to to build reserves and.
This is just kind of reflects closer to what we would consider normal.
Okay. Thank you very much.
Thank you Jim.
Your next question comes from the line of John Pancari with Evercore ISI.
Good morning, John .
Back to the outlook slide just want to confirm I know you say, you're assuming a continuation of the current economic and rate environment does that mean that you are assuming no change in rates or does that mean, you're assuming the forward curve, which implies.
Hi, there John we are assuming based ads off 630 for LIBOR as an example on 630 to 40 VI not baking in the forward rate curve. This is consistent with what we did when rates are rising it is our opinion that we should give you.
Our outlook based on where things stand at quarter end and people can have differing opinions on whether or not based cups will come to pass or how many of those come to pass and so VR separately, giving you that impact on slide 12, and you can make whatever adjustment to being best to get to your expectation.
Okay. So so based on that if and I see that you gave the CN I impact on those scenarios thats fine in terms of the margin and I now if.
If we do get.
Hi.
How does that change your expense expectation I know, there's not always a clear tie into expenses when there's rate changes, but given that environment and given your asset sensitivity how does that change how you're thinking about your expense growth outlook.
John This is Curt I'll make a couple comments there.
We have done a lot of work.
Out of the gear up initiative around both.
Improving our overall efficiency to expense base, but also helping us on the revenue capacity side as well. So we think we're well positioned coming out of that work. The last few years to be able to maintain attractive efficiency and return our performance metrics, even in a declining rate environment, having said that we are always looking at.
In our DNA and our culture expense opportunities are really thinking about how we continue to leverage technology to more efficiently and adopt or things like AI artificial intelligence technology in many of our non customer facing.
Areas and thinking about things like real estate et cetera. So we're always thinking about ways that we can can operate more efficiently from an expense standpoint, and if we if we retain to remain in a low interest rate environment.
Over a longer period of time than those are things that we really lean into I would also say, though that just from the overall perspective, we are very focused on the top line on loan growth and fee income growth are we do continue to have a very favorable funding.
Platform and serve as rates come down we would at some point have the opportunity to reduce our pricing on the funding side and then lastly, I'd just say that we have managed through lots of interest rate cycles overtime in the 170 year history, and we continue to take the long term view of what we're not going to do is change our long term strategy, we are not going to sacrifice pricing or.
Structure or anything on the credit side or sacrifice our relationship focus and so those are the things that we can control that will remain focused on.
Okay. Thank you.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Hi, good morning, everybody it's either.
To follow up on John's question. So if I look at slide 12, and the scenarios, you're providing lets suppose that the.
10% deposit beta scenario plays out.
And then I was worse than expected what I think a lot of us are struggling with is okay. You had Europe is there any room left to cut expenses is there an appetite heard as a new CEO to cut expenses could earnings growth go negative.
We're trying to piece these together to see your appetite to offset well looks like it's coming in the back half of the year.
Sure. Thank you for the question and I would really emphasize a lot of the things that we said previously.
I do believe that the Europe initiatives have positioned us better.
And this has to be done.
Other announces that we are showing you is that we still can produce attractive efficiency ratios and return metrics, even in a declining rate environment and as I said earlier, we are willing to always looked at expense initiatives that not as the sacrificing our long term strategy and not to sacrifice a revenue growth and so we continue to think about other ways that we can be more efficient as organization and I mentioned some of those to you previously we are not announcing a big initiative or anything of that nature. This is more a part of as we go and some things we should be thinking about even if we were not in a declining rate environment.
Okay. That's helpful. So it sounds like a worst case scenario play out for NIM.
We should brace for earnings to potentially decline.
You're not willing to sacrifice a long time just to cut into the company. That's are you essentially saying right.
Yeah, but I would also say to you that when you look at our full year forecast, we are still calling for expenses to be flat year over year and so we've proven that region can drive growth in the balance sheet as we're showing with our loan growth and still maintain a flat expense environment. So those are obviously things that we would be focused on.
And then separately for money or if we look at the hedge program. It looks like you didnt add to it this quarter can you give us a sense of what the cost would be to reduce asset sensitivity at this stage.
Yes, best fixed rate that we could lock in almost any doesn't matter, whether it's to exceed four years out it's all hovering around 170 basis points range.
Okay. Thanks for taking my questions.
You're welcome.
Your next question comes from the line of Brock Vandervliet with DBS.
Hello, Good morning, good morning.
Just wanted to add to that prior question in terms of the.
The hedges that you have added that 2.8 billion, where do you see that by the end of the year and what's your what's your target.
For for hedging at this point.
So what we have said.
Brockton and continues to be our strategy is really view this as a as a long term rebuilding of a hedging program and if we could replace the 2020 hindsight here or we would have probably added more hedges in the latter half of last year, but at that point there were still a forecast around potential rate increases and so we were kind of protect the upside the revenue of the company and so as we go along here we have proposed the program, but I would emphasize the word calls it does not mean that we are softening at this point, but we need to be very extremely selective on a go forward basis, and if there's an opportunity for us to continue to add.
Hedges, we will do so but over a longer period of time, you would expect us to build a larger hedging portfolio as we go through our different interest rate changes over time, but right now I do not foresee us adding hedges at this point, but again it will depend on where we go from here in terms of the rate cycle.
Okay, and I'm, just going back to slide 12, all eyes on this this one slide.
The first disclosure I've seen where there's real scenario analysis.
Sean could you just kind of walk through the.
The different betas in particular and now based on what you know of your deposit mix and how should how should we kind of think about those deposit bonus.
Yes, Minister Alright, well as I mentioned in my comments earlier, I'm B. I find to be some spend on one of its cost means to us and I know that.
I expect that.
Similar to what happened at the start of the state cycle, where beta it's been a little bit slow as rates are moving up that similarly, and if rates were to decline you essentially see a gradual progression and in deposit beta and you'll see us sort of move across the spectrum that we are reflecting on slide 12, and I tried to give a little bit of color that 10% beta essentially reflects what we think would be more or less immediately pricing up our market index deposits that should come to fairly quickly that 25% beta reflects a bit of allied we'd have to wait to see how the competitive environment is doing make adjustments.
Use our relationship based model to continue to make changes as we go down go through the cycle and then the last bit is that kind of pricing changes transpire. So I think that you will see a but I'd say, it's progress down that we will be moving along this path I think they've done a really good job of managing our loan and deposit pricing and we've been able to attract and retain customers and you can expect the same if rates are to change.
Okay. Thank you.
That's right.
Your next question comes from the line of Peter Winter with Wedbush Securities.
Hello, Peter Good morning.
I'm just wondering if if I look at it.
Net interest income for 2020, just just directionally, if we do guide.
It's three rate cuts, which is in the fed funds futures or do you think you can grow net interest income in 2020.
Yeah, we are asset sensitive attendees eight do mean, a lot to us and as Craig said earlier, we will be focused on overall growing revenue organically growing loans. We are in great markets. As you know we have a lot of capacity.
All the Balco still continue but no doubt states, okay. The impact what I will share that you Peter is even out the fee based type and even after you consider the impact that the laying out on slide 12, our margins will still be quite competitive in our peer group.
Okay.
And just if I look at expenses in the second quarter. They came in lower than we were expecting you you maintain.
Your expense guidance for the for the full year.
Which would assume a pretty big jump up I guess in expenses in the second half of the year.
So any chance that maybe expenses expense growth to come in a little bit lower than guidance.
Peter the reason that the expenses are primarily the reason they were lower in the second quarter is in the in the first quarter, we have our normal stocking compensation benefits that we provide our employees and so the associated taxes that go along with that so you normally see seasonally.
The expenses in the second quarter of declining so the forecast we day for full year expenses to be flat year over year, but second half some of the items that we mentioned to you would still be there and obviously other opportunities for us to come in lower than that we will be focused on it but we're trying to give you sort of the full year guidance that we are expecting some higher outside processing technology related cost some day advertising, that's where the seasonal.
Especially around some of our sponsorships and the second half year.
Okay.
Thanks, Chris.
Thank you Peter Your next question comes from the line of Steve Moss with B. Riley FBR.
Good morning.
Good morning.
On the capital front, just with the same kind of like a move up and the C. One target here is 10% kind of a floor for capital going forward.
You know just kind of seems like even if you had better loan growth you could still manage to like an aftermarket given your profitability along with the three rate cuts.
Yes.
Steve what I would say to you is that we are guiding you to the 10% number or we have not set any longer term targets systems and we'll be working on over the course of the second half of the half of the year, but its mirror alluded to earlier, even without a revision to that target. We still believe that we turned in a meaningful way continue to return capital to our shareholders. Both in terms of dividends and buybacks.
Okay and then.
Second thing just on the deposit funding costs have you seen any decline in deposit costs, so far in the past month or two.
We are seeing some competitors starting to pull back a little bit on deposit costs and we always remain very very focused.
Well, taking care of our clients as part of our relationship strategy and so.
We do believe at some point if interest rates do come down on the competitive landscape continues to evolve that we would have a chance to revise our deposit pricing, but we want to be careful in how we do that and make sure. We're taking care of our customers along the way.
Alright, Thank you very much.
Your next question comes from the line of Erika Najarian with Bank of America.
Oh, Hi, good morning, Eric.
Good morning, I, just had one and one follow up question on on the capital side I think what I'm more surprised investors lopping off started the lower end of the day the capital.
Target for the year and I'm wondering.
Is this is the question that we should ask you do you have a different capital binding constraint that C.T. line.
No more binding.
Well.
I'm not.
Your state of near term Erika the binding constraint for us would be tier one capital.
Got it thank you.
Your next question comes from the line of Gary Tenner with da Davidson.
Thanks, Good morning scary.
Hey, just wanted to ask a.
The the really positive trends on them, but on the general middle market lending. This quarter I don't think that's really been talked about too much but after several quarters I think of a pretty.
Minimal growth Yeah. If you go back to second quarter last year, a nice little Spike this year or this quarter. So was it you know what's your sense of kind of the sustainability of growth in demand in that space is the result of pent up kind of planning on your customers.
Part in terms of investment or how do you what do you attribute that growth to.
Yeah, I would say a couple of things we have been very focused on trying to increase our activities and then in the middle market space, We've had a great and the last several years in our many of our industry verticals in areas of specialization, but we had not seen growth in middle market is so when you look at the last 12 months and really the last six months. Many of the things that we have worked on through Europe and other initiatives I believe are starting to come to pass and so we had worked very hard on a read read.
Structuring of our lending process to increase already in capacity for them to have more time interfacing with customers and prospects are redeployed, some new technology and some CRM applications et cetera that are helping or from an enabler standpoint, and then we have been very focused on new client acquisition, especially in middle market and about 40% of our new originations again. This quarter were two what we call new to new transaction huge customers and then I would say more specifically as it relates to middle market. So far I know there is some overall economic concerns out there we are.
Thank our customers remain relatively positive and so we've had some good traditional working capital opportunities that some acquisition related financing opportunities that we've been on the right side up there. We've also seen some capex would eventually if you put all building a new plant for 10 years, you've essentially got to build something and so we had a few of those types of opportunities. So we feel relatively constructive and optimistic about middle market lending going forward. The pipeline remains pretty solid the commitments that were up and utilization were up in middle market lending as well and that really is not just a new phenomenon, but it's something that has been building for us last quarter. We saw growth in all three of our geography adult sorry.
All right thanks for the detail.
Your next question comes from the line of Marty Mosby with Vining Sparks.
Well Mario.
Hello, Good morning.
Morning Mirror I want to ask him about the in a when you start talking about.
Now moving it up 2% and then you start taking it down from the interest rate sensitivity that you mentioned.
And then you start looking at the current run rate. So it's been running about $605 million in the first six months of the year.
If you kind of back yourself down from your numbers are pretty flat to last year.
Which means our implies that the number has to move.
By the fourth quarter almost back to where it was in the first quarter of last year.
What I'm getting at is last year rates went up 100 basis points.
And now we're talking about.
One or two or three at the most.
Pullback in rates.
But the sensitivity it looks like it's a racing a much bigger move on the upside.
On the backend so is there something else and funding costs or incremental balance sheet growth. That's you know costing a little bit more than as more fundamental than just interest rates because it seems like there is a a little bit more sensitivity on the downside.
With what you're guiding to right now.
So I think Marty you are absolutely right into that comment that you made funding is a big difference between last year and this year. We've done a lot on the capital front end to be able to file those shares back we have to issue a lot of that and clearly that just takes away from overall net interest income. So thats certainly by far the biggest element of it and then beyond that our balance sheet has continued to change over the last couple of years, even though we have the highest proportion of non interest bearing deposits in our peer group clearly that's something as rates have gone up customers have put some of that money to use a little bit more effectively and asset sensitivity is a good kind of asset sensitivity that come with us. It is both of what's going on on the liability side I.E. The free funds that they had and that has shrunk a little bit over time. So those are a couple of things that I can give to you to consider on why things are different on the way down.
And then when we think about when Youre talking about hedging, but also when you think about your securities portfolio.
He started doing some restructuring last year.
Which was as very valuable at this point that you did what you did last year, but you probably could have done more of that as well.
How much do we need let's say that we had short term rates go down.
In the economy does well and so eventually that gets to round up the back end of the curve.
Slightly how much of a round up would you need to be able to step in and be able to hedge the balance sheet more proactively to take away. Some of this downside risk.
All right and be able to begin to kind of bite at the Apple again to restructure the portfolio is it 10 2030 40, how many basis points on the long end do we need to have a little bit better environment. Once we do see some.
Loosening on the short end.
So there's a couple of things that you're mentioning in your question there part of it but about the securities portfolio as part of it but what type of rate would cause us to move forward on the hedging front on the securities portfolio, if you've done weve been quite opportunistic and I think you're absolutely right. We've taken a couple of.
Opportunities to really help the yield on that portfolio along as it gives us.
More fixed rate assets on our balance sheet, we like to make up their new sorry asset sensitivity. It gives us liquidity. So for all those reasons I think what I would expect that the securities portfolio is for it to be essentially stable. We will continue to look for other opportunities as they come along but as I said in my comments I would expect that that you guys would remain stable beyond map and when you talk about what kind of a base that caused us to move on the hedging front that is a complicated question and one that is discussed a lot here at comerica up our opinion today is that if the fed is.
Looking to essentially use made cuts to sustain and prolonged economic expansion then and they are successful in achieving that objective then future outcome is likely to be better than what the market has priced in and so we are being patient I don't really think the fed chasing a particular magic number for us it is.
We continue to monitor the economic benefits, we continue to monitor market prices and vivo continue to adapt to the uncertainty that we see and adjust our balance sheet profile. Accordingly, so that's sort of I gave downtown.
Thanks, and then just lastly, Curt when you look at your provisioning and the guidance that you're giving.
We've been running you know somewhere in the.
Let's call it $15 million to $20 million range per quarter. Once we back out kind of noise in the last six quarters until this quarter and the new jumped up quite a bit.
You were talking about certain loans five loans that created this jump up.
But then were kind of dropping provisioning from where it's at in this quarter, but not going back to.
Really what was closer to a $15 million kind of run rates were almost doubling.
The run rate of provision from what we have had over the last year and a half to what you're now expecting to have.
And the rest in the second half of the year. So I just want to make sure. We're just focused on these five loans in this particular quarter and Theres are some just conservatism baked into your guidance on the provision side going going forward.
I think there is always we always try to bake in some conservative.
Year end to a provision but by design. There are things you know about and anticipated in the portfolio and that sometimes things happen that.
Can be more surprising is.
Peter alluded to earlier, we do not know of anything out there right now that is a concern to us and the rest of the portfolio continues to be a fairly benign credit environment. We are seeing loan growth and that facilitates or does it necessitates us increasing supervision as we go just based on the accounting rules associated with that but we are trying to give you a view that would say.
Kind of a more normalized environment, what might that look like in it's been such a benign and learn to charge off environment for so long, it's hard to think about what a more normalized environment might look like longer term, but.
We are trying to be conservative in those estimates, but also try to give you a sense of sort of the year, but at least for the profitability could be if we see a change in the credit environment.
Thanks.
Once again for any questions. Please press star one and your next question comes from the line of John Pancari with Evercore ISI.
Well John morning. Good morning, Thanks for taking my follow up just back on the capital point I know you just indicated that your binding constraint is tier one so you're at 10.2 tier one.
Hi, this is the regulatory minimum what's your internal buffer is it about one and a half.
Percent.
Well it tends to be in the range. John just recognize that we have a lot of constituencies that we have to cater to on that front. We have to think about our regulators rating agencies are customized depositors and all of that is all part and parcel of the consideration bevy go on capital Fund.
We.
For us when we think about as Curt said the 2020 financial plan at that point, we will also look at the capital plan and and.
Have some internal discussions and see what if anything we can update on that front.
Okay and then.
Go ahead.
I guess, if the job we normally would give forward guidance on the fourth quarter earnings call.
Got it got it so then I guess regarding that.
Planning.
I might as well ask about it now so why not issue preferred stand if see if caught a tier one is your issue and then buyback common and then separately Ralph incur I'm curious on your take Europe does alright is M&A plans for the bank coming into play here. Thanks.
John .
Preferred is something that we have looked at periodically and we'll continue to look at a periodically there shortly were points along the way where we did not think preferred is very attractive and so it's something we will think about and make some assessments while returning.
There were certainly on in these forms and others. We would make you aware of that and then on the M&A front nothing has changed for US we continue to focus on organic growth and we continue to be very patient around M&A transactions. I think you know we've done two in the last 20 years of broker those were transactions. It made a lot of strategic sense for us. They really were good cultural fit and aligned with the businesses and geographies that we operate in today or appetite around M&A is continues to be limited to really primarily Texas and in California, and the potential targets are relatively few and so we are focused on growing our geographies and growing our lines of business in those primary markets. It's just like we have a lot of upward growth opportunity.
All right. Thanks, Curt appreciate it.
Hi, John .
I will now turn the call back over to Curt Farmer, President and Chief Executive Officer for closing remarks.
We appreciate everyone's interest in comerica. Thank you for joining our call today and have a great day.
Ladies and gentlemen, this will conclude today's call. Thank you all for joining you may now disconnect.