The operator welcomes participants to the Comerica First Quarter 2024 Earnings Conference Call. The call will be recorded and a Q&A session will follow the presentation. The participants include the President, Chairman and CEO, Chief Financial Officer, Chief Credit Officer, and Chief Banking Officer. The presentation slides and press release are available online. The call will include forward-looking statements and reference non-GAAP measures. The CEO reports first quarter earnings of $138 million or $0.98 per share.

In the second paragraph, the article discusses the improvement in customer sentiment and increased pipelines, leading to opportunities for growth. The company's strong deposit franchise also demonstrated resilience, allowing for the normalization of their liquidity position. The company has also received recognition for prioritizing employees and communities and is focusing on small business growth. The first quarter financial highlights show a decrease in average loans due to rationalization efforts, but deposits outperformed expectations. Net interest income was impacted by lower loans and slightly higher deposit costs, but still performed better than projected.

The company's credit remains strong and net charge offs have decreased. Non-interest income and expenses were impacted by notable items, but there was a discrete benefit to taxes. The company's prudent capital management and lower loans have led to an increase in estimated CET1 to 11.47%, above their strategic target of 10%. The company's strong liquidity, credit, and capital position them for responsible growth in the second half of the year. The speaker then turns the call over to Jim, who reviews the company's financial results in more detail. The intentional balance sheet management efforts and soft demand led to a decrease in average loan balances, but the company expects growth based on a steadily increasing pipeline. The company's deposit base remains stable, with declines in certain areas offset by increases in others. Retail balances are nearing pre-pandemic levels.

The bank's mix of non-interest-bearing balances remained a competitive advantage in the quarter, with both interest-bearing and non-interest-bearing deposits exceeding expectations. The bank's deposit profile remains a strength and they were able to repay over $5 billion in wholesale funding while retaining significant capacity. The bank also had a successful $1 billion debt issuance, signaling progress towards more normal market activity and interest in their value proposition. The bank's loan to deposit ratio remains lower than their medium-term target, positioning them for high return loan growth in the future. Net interest income decreased due to lower loan balances and higher deposit pricing, but deposits overall performed better than expected.

In the fifth paragraph, the company discusses their favorable deposit trends, lower FHLB advances, and moderating deposit beta, which has resulted in net interest income exceeding guidance. They attribute this success to their strategic management of their swap and securities portfolio, which positions them well for a potential decline in interest rates. The company also addresses the impact of BSBY Cessation on their swap notional and provides projections for net interest income. They expect the attrition of their swap and securities portfolio to create positive earnings momentum, and credit quality remains strong with net charge offs below their normal range.

The elevated interest rates are still putting pressure on customer profitability and debt service ratios, leading to migration in the middle market and senior housing sectors. However, the company's limited senior housing exposure, diverse construction orientation, and potential for favorable macroeconomic and demographic trends make the risk manageable. The allowance for credit losses increased and non-performing assets also increased, but are still below historical averages. Non-interest income was impacted by a non-cash loss related to BSBY loan hedges, but this is not expected to continue. Fiduciary income was also impacted by adjustments related to the Ameriprise transition, but initial feedback has been positive and the partnership is expected to drive revenue growth. Capital markets income was lower due to declines in interest rate and energy derivative products, but there was a one-time benefit related to a vendor contract. Expenses included an additional special FDIC assessment and a charge taken in the fourth quarter.

The company's expenses for the quarter were in line with expectations, with seasonal declines in most categories offset by stock compensation and lower pension expenses. Expense recalibration actions are underway and the company is focused on managing expenses to support investments and improve earnings. The company's capital position is strong, with estimated CET1 above regulatory minimums and buffers. For 2024, the company projects a decline in average loans due to optimization efforts, but still expects growth in the second half of the year. Average deposits are also expected to decline slightly from the previous year.

The company expects their new lower level of brokered time deposits to remain steady, resulting in an improved average customer deposit outlook for the year. The year-over-year net interest income outlook remains unchanged, despite changes in the rate curve. Credit quality is expected to remain strong and non-interest income is projected to grow, with a decline in expenses after adjusting for special assessments and expenses. Expenses are expected to decrease in the second quarter due to seasonal compensation and savings from recalibration efforts.

The company remains focused on strategic investment and regulatory compliance, and is working to offset these pressures. They saw a discrete tax benefit in the first quarter and expect to maintain a 24% tax rate for the full year. Despite projected loan trends, they anticipate maintaining a strong capital position. The company emphasizes their differentiated value proposition and their commitment to customer service and risk mitigation. They also highlight their strong deposit base and strategic partnerships.

The company is committed to managing for the long-term, and will take targeted expense actions while prioritizing investments in the future. They have a strong capital base and approach to credit, and see positive momentum for growth and profitability. The floor is now open for questions, and the first one is about the improvement in profitability and NII throughout the year. The company expects to see a gradual increase in NII as the year progresses, with the potential for even more improvement in the future. The main drivers of this momentum are the maturing swaps and securities, which will provide a significant benefit as they reach maturity.

The biggest drivers for the company's growth are expected to be loan volume and increased income in the last few quarters of the year. The company also expects to see an increase in deposits, with a consistent mix of non-interest-bearing and interest-bearing deposits. The company does not include brokered deposits in their projections and believes their deposit mix is a competitive advantage.

John Pancari of Evercore ISI asked a question about the company's net interest income (NII) expectations. Curt Farmer, Jim Herzog, and John Pancari discussed the impact of potential Fed rate cuts on NII and loan growth. Herzog mentioned that they follow the forward curve for rate cuts and are currently expecting two cuts in the second half of the year. If these cuts do not happen, there may be a slight impact on NII due to a decrease in liability sensitivity and potential increases in pay rates. The company has also revised their average loan growth guide to a decrease of 3%.

Peter Sefzik, responding to a question from John Pancari, discusses the company's confidence in a pickup in loan generation in the second half of the year. He mentions that the company's outlook is for a 4-5% point-to-point increase in 2024, with middle market being the strongest area. Sefzik also mentions that the company has recently undergone some rationalization but is now past that and sees good opportunities in their pipeline. He also notes that the utilization rate for the quarter is slightly down. Curt Farmer, the CEO, thanks John for his question. The next question is from Scott Siefers of Piper Sandler.

Scott Siefers is asking Curt Farmer and Jim Herzog about the potential impact of swaps and securities on Comerica's net interest income (NII) in the next few years. Jim Herzog states that the NII will see a significant improvement, with an increase of over $100 million in 2022 and positive momentum continuing through 2025. Scott also asks about Comerica's capital management plans and when they may resume repurchases, to which Jim responds that they will continue to be conservative but may resume repurchases in the future as their liquidity improves.

The company is closely monitoring its capital usage and is prioritizing customer needs. Loan growth is expected in the second half of the year, and the company will be in a strong position to support this growth. However, share repurchase plans are on hold due to uncertainty in the interest rate environment and the potential impact of new regulations. The company previously projected a dip in net interest margin in the first quarter but now expects it to bottom out in the second quarter, with a steady climb towards a target NIM of 2.91% by the end of the year.

The speaker clarifies that while net interest income may decrease in the second quarter, the NIM percentage has already reached its lowest point in the first quarter and is expected to rise throughout the year. Loan growth is expected to pick up in the second half of the year, leading to a positive trajectory for both net interest income and NIM percentage. The speaker expresses confidence in this prediction despite past experiences of improved pipelines not translating into actual loan growth.

Peter Sefzik, speaking to Steve Alexopoulos, discusses loan growth prior to the banking crisis and how it has been strong in the middle market and across diverse geographies. He notes that while California is facing challenges, the national businesses are not as impacted. Sefzik expresses confidence in the overall trajectory for the second half of the year, despite lower than expected first quarter results. When asked about the potential impact of Fed rate cuts, Sefzik acknowledges that it may play a role in some markets and businesses, particularly in California middle market.

The company's expense recalibration plan is on track and expected to result in $45 million in cost savings. Some headcount reductions have already been made, but the remaining changes will occur in the second quarter. The company expects to see continued attrition of talent as they implement their savings ideas.

The speaker mentioned in the previous call that they plan to use the savings to invest in risk management and hire new employees in that area. They expect to see a decrease in gross basis but not necessarily on a net basis. They are on track with their $45 million plan. They have reduced a large portion of FHLB borrowings and have no near-term maturities. They plan to let some brokered deposits roll off and issue more senior debt depending on market conditions. There will not be a significant change in the next nine months compared to the first quarter.

Manan Gosalia asks Curt Farmer about the impact of interest rate expectations on deposits in the commercial bank. Farmer responds that the move from non-interest bearing (NIB) to interest bearing (IB) balances is mostly over, but there may still be some adjustments if interest rates remain high. He also mentions that customers are happy with Comerica's products and services and that the bank has a strong retail bank and wealth management deposit base.

The speaker discusses the positive impact of a diverse deposit base on the company's balance sheet and mentions the manageable increase in non-performing loans and criticized assets as a normalization phase. They also mention the challenges faced by the healthcare industry due to high interest rates and labor issues. Overall, the speaker believes that the company's credit is in good shape.

The speaker discusses the challenges faced by the company in getting back to a stable occupancy level, which has been impacted by inflationary pressures. They have conducted a thorough review of their portfolio and have taken a conservative approach to risk rating. The majority of the portfolio has recourse and there is only one non-performing asset. The speaker is optimistic about the outcome, despite continued headwinds in the form of a higher interest rate environment. The senior housing portfolio has been the biggest mover in the quarter, while other sectors such as commercial real estate, leverage portfolio, automotive, and TLS have been stable. The company's reserve levels are appropriate for the current cycle. The speaker responds to a question about credit being in "really good shape."

Melinda Chausse, speaking on behalf of Comerica, addresses a question about the bank's lower charge offs, criticized loans, and flat loan loss reserves. She also mentions that there have been no major net charge-offs in commercial real estate since 2014. However, the questioner raises concerns about potential external factors that could impact the bank's multifamily portfolio, such as falling rental rates, higher interest rates, and impending loan maturity. Chausse explains that Comerica has a conservative underwriting approach in this area and is seeing successful exits and stable appraisals, despite some softness in rent growth.

The speaker discusses the strong performance of the company's portfolio, with no criticized assets, charge-offs, or delinquencies. They express confidence in the portfolio's stability and low risk of losses, even in the face of potential interest rate increases. Recent appraisals have shown a decrease in value, but the company's conservative underwriting and low loan-to-value ratios mitigate any potential concerns. The speaker also mentions potential headwinds in the multifamily space, but notes that the company's projects are located in strong areas with positive employment and population growth. Overall, the speaker does not anticipate any credit deterioration in the company's portfolio.

The analyst asks about the bank's securities and when they will reach their lowest point. The bank's representative responds by saying they are still carrying a higher level of securities than usual, but they anticipate reaching a trough in the first quarter of next year and will start reinvesting in their MBS portfolio.

The bank is currently conducting minor treasury reinvestments and expects to increase its securities on the balance sheet by a few percentage points in the future. The bank also received a discrete tax benefit of $11 million in the quarter. The NII guide is based on a beta assumption of 60%, which is close to the alternate sensitivity provided on the asset sensitivity slide.

The speaker expects the cumulative beta to decrease by about 60% in response to Fed cuts, with a one month lag. The speed of the cuts will depend on the state of the economy and the reason for the cuts. The company plans to focus on reducing the beta of customers who recently pushed it up, as they will be easier to push back down. The speaker concludes by thanking participants for their interest in Comerica.

This summary was generated with AI and may contain some inaccuracies.