Comerica Incorporated (CMA) Earnings Call Transcript & Summary

We're going to get started. Up next, we are excited to once again have Comerica at the conference. Comerica has done a good job managing the company returning to top line growth, rationalizing costs, starting to return capital and continues to deliver best-in-class credit. Here to tell us more about the strategy and how they continue the momentum is Chairman and CEO, Curt Farmer; also joining us on stage is CFO, Jim Herzog. Curt is going to make some quick remarks before we get into the Q&A.

Good morning, everyone. And Ryan, thank you. I'd just share a few comments with you on what we think is shaping up to be a good quarter overall and some growth in our business across the board. Before I dive into a few comments and then followed by Q&A. Let me remind you of our safe harbor statement. We posted a deck last night for some slides last night and forward-looking statements and non-GAAP financial measure notices are contained in those materials and it applies through the slides as well as to the webcast that we're doing right now. As I said earlier, a good quarter for us overall, I think, it's shaping up. Although loans continue to be somewhat flat, we do see some positive signs in terms of customer optimism and we feel that this positions us well as we head into 2025. We can talk more about that in the Q&A. Customer deposits continue to grow. And our net interest income appears to be in line with the guidance to the first quarter through the first 2 months of the quarter. Stepping back as we think about maybe the company overall. We do remain optimistic about future trends. And that starts really with what we think of as a very strong foundation of the company, a strong credit position and strong credit history, strong reserves and a very strong foundation in terms of capital. We continue to favor our conservative approach to capital and the CET1 management with a CET1 of almost 12% as of 9/30. We were pleased with having just said that is to resume our share repurchase for the quarter, believing that we had sufficient capital to do so. Let's just mentioned credit has historically, as you know, have been a strength for us. And during the quarter, we continued to outperform with low net charge-offs and very good reserves in what we believe well-managed migration in the portfolio. We do see some structural benefit to our net interest income from swaps and securities as we go forward into next year. Some of this benefit we've already seen this quarter, but we do expect this to start to increase over the next 12 months with swaps maturing and securities repaying this will help offset some of the factors we've seen in the last 24 months or so as that has weighed on profitability as these mature for us on a go-forward basis and really think it's sort of constructive positive momentum for us in the coming quarters. On top of that structural benefit, we have been pleased with favorable customer trends. Most notably, we've seen growth in customer deposits, and we can talk more about that. And while this growth has been weighted more towards interest-bearing balances, we still see a lot of benefit from what we consider to be relationship deposits that really enhance our connectivity with our customers and overall profitability. We've also been leveraging deposit growth in terms of new customer acquisition. And then finally, we've seen favorable trends from targeted investments that we've been making in the last couple of years. We believe there's good upside for us in terms of revenue from these investments. They've been in areas like capital markets, treasury management, wealth management, including in addition to some of those fee income areas, continued expansion in terms of headcount in our existing markets on the revenue side as well as our expansion into the Southeast and the Mountain West region. We're in some great markets, as you know. We're in 14 of the 15 largest MSAs at 9 of the 10 fastest-growing markets overall, and we think our differentiated commercial banking model continues to position us well for the future. So we're very optimistic about not only this quarter but about trends as we go into 2025, both the political and economic landscape seems to be providing an environment we hope for sort of sustained growth and good customer activity as we go into next year. With that, Ryan, we'll be glad to take some questions.

Great. Thanks for that, Curt. Curt, you made reference to the political and economic landscape at the end of your remarks. Obviously, since the last time we've heard from you, there's been a lot of change. Presumably, we'll see a more business-friendly environment. As you think about next year, maybe just talk about how you feel the bank is positioned to win in this current environment we're about to enter?

Well, a couple of things I would say. We said on the last earnings call and really the last couple of earnings calls that getting past the election with an important milestone for our customers given that we are primarily a commercial bank, so we did work with a lot of businesses across a lot of geographies, a lot of different business segments. There was a lot of anxiety just about the outcome and getting past the election and whoever was going to be elected. I think having said that, that the new administration seems to be very pro-business. And I think there is at least some optimism around what the tax infrastructure will look like on a go-forward basis. Hopefully, what the economic landscape looks like, potential for regulatory relief across lots of different industries, not only banking. There are some puts and takes and questions about tariffs that may come into play. I do think that having said that, that most of our customers are still a little bit cautious on the borrowing side. Our pipelines are very still very strong. Kind of across the board in most of our businesses. But we have not seen yet a lot of additional borrowing activity or pulling down in terms of the utilization on those lines. I think we will see that as we go forward, especially if tariffs come into play, This customers might potentially build inventory. Also think the forward rate curve, maybe not quite as attractive as we thought it was going to be back on the end of the third quarter. So rates may play a factor there as well. But overall, we're very constructive and optimistic about the economy and about how we're positioned on a go-forward basis.

Maybe to build on that, you say you haven't seen a lot of borrowing, your loan growth update showed average balances down slightly to I think just over $15.5 billion quarter-day with half the decline in CRE. Maybe just talk about more broadly what you're hearing from clients, how they're thinking about their business? And how do you see this translating into customer demand? And most importantly, what does this mean for loan growth into next year?

Maybe a comment about the decline in CRE. We've talked about this in prior conferences this year and on the third quarter earnings call. But a lot of that is just natural pay down in the portfolio. We had a lot of credit facilities in the pipeline as deals were getting built out, multifamily and industrial and now are moving to occupancy into the permanent market. So most of that is just sort of paydowns occurring in the CRE portfolio and less new demand for -- especially multifamily right now. So that's a way that factor. I'd say across the rest of the Board, we actually are seeing pretty good conversations and demand across most of the segments, especially core Middle Market, Business Banking, Small Business, but a number of our other segments as well. I do believe that as we get into next year and a little bit more certainty around some of the policies of the new administration that we've got potential to see loan demand increase and we're expecting growth in the portfolio kind of across most of our business lines in 2025.

Jim, I think one of the more positives was in the update, you showed deposits down about 1% but maybe up about 1% when you adjust for the $1.2 billion of average brokered runoff. Maybe just share what you're seeing on the deposit side? And what are your expectations for core deposit growth from here?

Well, thanks, Ryan. Yes, we feel really proud of the deposit growth that we've had. Customer core deposit growth has been very strong, and that is very intentional. We've had a lot of focus on collecting deposits, and that's targeting both customers that are very deposit-rich but also focused on just general hygiene in terms of how we price out our business and making sure that we get deposits along with the credit relationship. So we feel like we've been very successful there. As you see on the slide, we're up about $500 million in terms of core customer deposits. Broker deposits down about $1.2 billion on average. We actually think that's a big plus. We're happy to see some of those broker deposits dissipate and we've been able to replace those essentially with a less expensive core customer deposits. So it's been a very successful story, and we continue to be optimistic about our ability to collect core customer deposits.

Also as part of the update, you noted that noninterest-bearing remained steady at 38% of the overall deposits falling slightly. And you noted that you expect them, I guess, to remain under pressure. Maybe just talk about what you're seeing. And as you analyze the balances, where is the pressure coming from? Where do you see it leveling off? And when do you actually think this could start to grow again?

Well, we have been, as I just said, very successful in collecting deposits, those have been more on the interest-bearing side. We have continued to see pressure on noninterest-bearing deposits. Overall, we're trending a little bit down each month as we move through the quarter and maybe a little more so than we would have thought. I think the driver for that is the higher for longer phenomenon. We actually thought we'd actually see potentially even a larger cut than we got for the first 2 cuts from the FOMC. I think higher rates are still very much front-of-mind for customers. They're still very sensitized to the rate environment. And so we do expect to see continued pressure in what I see is a little bit higher for longer environment compared to what we had been expecting. As we move into December and through December here, we are hovering kind of in that mid part of the range of $23 billion to $24 billion. So a little bit below even the average that we had on the slide. And I think as we move into early '25, that will probably continue to come under modest additional pressure. I do see an inflection point in 2025. I think it's going to take a couple of things to do that. And I think it's the combination of both one is lower rates as corporate treasurers become less sensitized to the rate environment. The other is just overall nominal growth in the economy. As the economy grows, working capital needs do grow for these companies. And at some point, they just -- corporate treasurers don't have the ability to take these noninterest-bearing deposits down. In fact, they'll have to go up at some point. And so I think the combination of both the growing economy, working capital needs and lower rates. Are going to create some inflection point, probably around mid-2025. But there's a lot of uncertainty there, and it's not an exact science. So something we'll continue to monitor.

Maybe one thing to round out on deposit balances. So we got the announcement right after we were on the road regarding Direct Express and the fiscal services put out a press release that made it appear like some transition was going to happen in '25. Then you put out a press release implied that the -- any material impact was further out. So can you maybe just help reconcile this for us and give us your thoughts on the trends on the transition? And then any sort of -- anything you'd like to add to last week's announcement from the CFPB?

Yes. Thanks, Ryan. So as we've been, I think, pretty consistent in, say, in the last 2 quarters since we were made aware that we would not be chosen or selected for the program on a go-forward basis. we were anticipating, and I would say we still anticipate longer versus shorter in terms of the transition. So we now know officially that Bank of New York Mellon was selected as the new agent and provider for Direct Express for its fiscal service on a go-forward basis. We also know that at least what they have shared thus far is they will go through an opt-in process to start communicating with clients sometime in the first half of 2025. And opting means that those clients have to physically say, yes, we'd like for Bank of New York Mellon to be our provider on a go-forward basis. So it will take a while to work their way through what is 3 million or 4 million clients for that to occur. And so in light of that, the fiscal service as we sort of anticipated, opted or exercised their right to extend our contracts. So they extended us for the full 3-year period that they could extend the contract. And we are not anticipating any impact from any of these changes in 2025 in terms of deposit balances and most likely not impact in 2026. So the transition will continue to be a slow transition. And we will continue to work really hard to make sure we deliver the same level of service and care to these very important clients of the U.S. government of the physical service and will do everything we can to ensure a smooth transition. And then maybe you referenced to, Ryan, I'll just follow up on that the announcement from the CFPB on Friday, following litigation against us. You may have seen several weeks earlier in November, we initiated our own lawsuit against the CFPB. Really, we've had an exam going on with the CFPB for a number of years. I can't comment too much on litigation or legal matters. But we believe that we've cooperated with the CFPB of what is a very unique program and believe that many of the things they were citing is concerned for us. Really, we're outside the scope of the program and outside of the scope of traditional CFPB areas of responsibilities. And so we took the action to proactively reach out or file a lawsuit it gets to CFPB, what we saw as overreach on their part. And we were anticipating a response for them. And so we've had to respond, which they filed suit back against us. And so it will go through a process through the court system, mitigate or mediation or whatever might be necessary to reach conclusion there. But really no new information related to it.

Got you. So Jim, the industry thus far seems pretty successful in repricing deposits lower post the first few cuts, you had given some guidance on where you expected to be. Maybe just talk about -- you reiterated the fourth quarter NII guide. Maybe just talk about how depository pricing is progressing? What has gone well or what's been more challenging? And how does a slower easing cycle and the potential for loan growth to improve, as Curt articulated into '25 impact, your thoughts?

Well, first of all, betas are tracking very much in line with what we had expected, so we're pleased to see that. If anything, I'd say they're may be skewed a little bit to the higher end, the favorable end, which is great news. We had a really thoughtful plan with our product management group in terms of how we position our customers and manage these rates down, and it's really gone very much to plan up to this point. So we continue to be really proud of the whole team. I think our relationship model is really paying dividends here. We've had ongoing conversations with customers about their rates, and we're not sensing a lot of pushback. We feel like it's been a really good partnership. And they appreciated the fact that we were very responsive in the way up, and they're kind of reciprocating in kind on the way down. So far going very well. And I would say there's no real friction there. I mentioned in the earnings call, we are working with our customers to position them in products that kind of produce a mutual win for us. And so there is some transition going on and that creates a little bit of uncertainty. But so far, on a net basis, it's turning out very much like we thought, if not a little bit better. In terms of the projection of rates, I do think if we have slower rate movement downward, that probably creates a little bit more of a challenge, simply because customers are more sensitized to rates when they're higher. So it does keep rate pay rates a little bit front to mind for them. But again, that has not been a challenge up till now. So far, we've been very successful there. In terms of loan growth, I would say, from an industry perspective, if there is muted loan growth or not quite as high as we expected, that does take for the whole industry, and that translates to Comerica, a little bit more flexibility in terms of what you do with pay rates but I would say, specifically for Comerica, being a very much a relationship bank we're focused on acquiring customers. We're focused on retaining them. And we're not pricing just for today. We're pricing for the long term. And so we're trying to do the right thing for both the bank and our customers there. But overall, just the overall impact on the industry creates a little bit of favorability if we don't get that loan growth.

And within your slides, you reiterated 4Q NII, where you expect to be up 6% or 1 to 2 ex BSBY and you know that you expect strong growth into '25, maybe just any puts and takes to add on 4Q and any update on why you're so bullish on net interest income into next year?

Yes. Fourth quarter, turning out very nicely, right in the sweet spot of what we expected. Some puts and takes there, of course, loan volume is a little lower than we expected. So that puts a little pressure on net interest income, noninterest-bearing deposits being probably a little bit lower than we expected. So that puts pressure on it, too. The curve has shifted up, so we are parking a little more cash at the CME, which has an offset over noninterest income. So overall, we'll hold there, but it does put a little pressure on net interest income. On the plus side, we've been very successful in growing customer deposits, and those interest-bearing deposits still produce income for us. So that's very much a plus. We continue to have success, as I just mentioned, with deposit betas a little bit higher than we might have expected. That's certainly good news. And then we are having a little bit of fortune with noninterest accrual income, maybe it's just a tad higher than we would typically get. But you net all that together and we're right in the sweet spot there and really pleased with how were things netting out and pretty much being right on target for net interest income. Now in 2025, we continue to be optimistic about the tailwinds produced by the recurring swaps and securities. That's something that we continue to feel really good about I do think the X factor for 2025 for us and the industry will be deposit betas because I think it's still a little uncertainty to where those are going to end up. And then for Comerica in particular, noninterest-bearing deposits, which are such an important part of our business model. I think that's a little bit of an ex factor also just based on the higher for longer environment and where those deposits end up netting out as we move through 2025. So more to come with our January guidance statement coming up with fourth quarter earnings.

You made a reference to a little pressure on fees. Anything worth noting to highlight for 4Q? And then in the slides, you showed some pressures on noncustomer fee income lines. Maybe just talk about fee income more broadly. I think you mentioned that there could be some offsets. And do you think you could grow fees in 2025?

Well, certainly, customer fees, that's our expectations to grow them in 2025. We have been investing in a number of areas. I think Curt mentioned, certainly, capital markets, we're very excited about feel really good about our wealth division, payments. We're doing some great things there. So customer income will continue to be a tailwind, I think, over the next several years. We are going to have some pressure on noncustomer non-core income in 2025. Two principal line items there. One would be our hedge income, price alignment income specifically. To the extent we have to collateralize the position on our swaps, we park that cash at the CME. And as these swaps age, we'll park less cash at the CME, so we'll get less of an implied interest payment than noninterest income. The good news is that cash switches over to the Fed, and we get it in the form of net interest income. So it is a little bit of a closed-loop environment there. Even though rates being lower regards of where that cash is at, obviously, you're going to earn a little bit less and then FHLB dividends, we did draw on a lot of our FHLB capacity during the regional bank crisis. We do get a dividend on those FHLB draws, which go into noninterest income. And we are paying that FHLB debt down, which is good overall for net interest income, but it does have a modest impact on noninterest income as those dividends aren't there anymore. But again, you would expect to recover that within net interest income. So again, a little bit of a closed-loop environment there. And then I'll just note deferred compensation, which is offset in noninterest expense. So again, a closed-loop phenomenon that's been quite high this year with market performance, we always assume that's 0 and we did have some other miscellaneous income that you see. I would point everyone to Slide 11, though, for more detail on that.

Maybe get Curt back in the discussion here. So as we move out of this challenging environment, we've been in for the regional banks to move towards a more growth-focused backdrop. Where is Comerica focused in making investments to drive growth in the business and how do you balance making investments while driving operating efficiencies?

Well, first of all, I would reiterate, we are a relationship-based and relationship-focused bank, primarily focused on commercial clients. And so we're always focused on how we can grow and expand and deliver the best advice and service to the customers that we serve both existing customers and ones that we have a chance to acquire. Two more specific areas of focus for us though within that context have been deposit growth. And they're continuing to just enhance our deposit capabilities in the areas of treasury management, especially really customized solutions for some of our clients in that space. We've been working a lot in the small business area, trying to expand there. We've added over 100 small business bankers, and that's really a great -- been a great growth opportunity for us in terms of deposits. Really just deposit focus kind of across the board and capabilities there as well. And then secondly, we've already talked about fee income and the primary areas, capital markets, wealth, treasury management, payments, amongst others, will continue to be a focus for us. But I'd say beyond that, just in terms of where we were allocating expense dollars right now. And certainly, those are but our continued expansion into the Southeast and the Mountain West, and we continue to have opportunities to acquire talent in the markets that we serve, and we believe will build revenue for us and revenue capabilities for us longer term. And then like most banks, we continue to invest best in our digital and technology capabilities and just overall enterprise risk capabilities, especially as we've been working on that path towards $100 billion compliance.

So Jim, I know you might not be ready to give full expense guidance for next year, but you have said your objective is positive operating leverage. Maybe just help us understand how you're thinking about expenses for '25. What are the drivers of operating leverage? And how much do you think you're capable of generating?

Well, as you say, we're not going to offer guidance on 25, but happy to offer some general thoughts along those lines. It is to reiterate what we said in the earnings call, every year, it's always our expectation and our goal to have positive operating leverage and 2025 is no exception to that. As I look out over the next several years, we do have some pretty strong tailwinds that I'm excited about in the form of the maturing swaps and securities and that will create quite a tailwind for '25 and several years beyond. And that's in addition, just the other just normal core things we do to manage expenses to manage the investments in noninterest income loan growth. We know that we're -- we've demonstrated in the past that we're capable of growing loans once things get rightsized and we're investing in all of our businesses. 2025, we'll have many of those same tailwinds. We will have a couple of challenges in '25 that have probably grown a little bit since that earnings call in the third quarter. And it's really just the trajectory as we've seen throughout 2024 in both loan volume and noninterest-bearing deposits. Loans have trended just a little bit down beginning to end through 2024. So we are going to start at a low point. And even though we do expect to have nice point-to-point growth for loan growth next year, we do expect just because of the '24 trajectory that the average year-to-year will be lower than the point to point. And so that puts a little pressure on operating leverage, probably more so, it's just noninterest-bearing deposits. We have, as you know, trended down throughout the year, probably trending a little down further than we might have thought even in the third quarter earnings call for this year. And so when you look at the full year 2024 noninterest-bearing deposits to full year 2025, that does create a pretty significant headwind, which we're working to overcome. But those are a couple of challenges that have continued to grow a little bit since we had our third quarter earnings call. So we'll work on mitigating those as best we can and look forward to the January earnings call to give guidance.

And just as a small follow-up. Rates have obviously bounced around. And maybe just talk about what that could mean for pension expense into '25?

We do have some sensitivities on pension expense that we always publish in the K, and it's very -- pension expense is very sensitive to interest rates. Interest rates have taken a step up since the earnings call. And based on the sensitivities we have in the K, you would expect a headwind for pension expense for 2025. The good news is equities have really outperformed even more so than we would have thought throughout the year and since the third quarter earnings call. And so I am expecting the equity performance to, if not likely entirely offset the interest rate impact, at least mostly offset it as of now. Now there's a lot of actuarial assumptions that go into the pension expense calculation, which takes place on December 31, including things like expected lives and so on. So I'm always hesitant to give too much specific guidance at this point. But the good news is I think the equity performance is going to offset a large part of the interest rate headwind there. So as of now, I might expect a slight headwind for pension expense next year, but hoping that it's not going to be a significant one. And for right now, it's actually looking okay.

A handful of more topics I want to get to maybe one for you, Jim, before I go back to Curt. In the past, you've talked about a high 50s efficiency in the mid-teens return. Do you still think those are realistic expectations? What is it going to take to get there? And what are the drivers?

Yes, I do think getting into the 50s is very realistic, and I would even go a step further. I would say over time, it's something we have to do to get back into the teams for ROE and so that's very much our goal. Obviously, it's going to take a little bit of time. Our efficiency ratio right now is not where we want it. Now we have gone through a couple of pretty anomalous events that are putting pressure on it. Obviously, the regional bank crisis created quite a challenge from an efficiency standpoint with some of the ramifications and outcomes of that. Then, of course, the high rate environment is creating its own set of challenges. So certainly not where we want to be at this point, but we very much are committed to getting that lower. It won't happen overnight, but the first step is creating positive operating leverage over time. And if you do that, you will eventually get into the 50. So very much our goal to get there. And I would say it's an imperative. So we're very committed to getting back into the 50s over time.

Curt, you talked about investments that you've been making to be $100 billion or so bank. Can you talk about your expectations of how the regulatory environment might change for become a $100 billion bank. What does it mean for your ability to reach it? And does it change the expense curve at all in terms of the size of the institution.

Yes. So we've been on this journey now for a few years, anticipating that we would organically get over that $100 billion mark. You will recall that we were a participant in the capital planning and stress testing, CCAR process previously before tailoring occurred in 2018. We were one of a couple of banks in that $50 billion to $100 billion category. So we've been through some of the requirements before. Now the requirements have gotten harder and there's a lot more data and technology mining or data mining and technology that you need to leverage in order to comply with the requirements, in the environment we're operating in today. And so we've been working on what we need to turn back on, what else we need to build, and we think we're probably 60% plus down that journey, which should sort of match up with just sort of normal organic growth to get over the $100 billion market. We can accelerate that if we really saw that we were approaching that. We have spent a fair amount of money thus far on that journey. There is some more to spend. But I think for the most part, on a go-forward basis once we get to the $100 billion mark, we will kind of build that into our run rate and would not anticipate some big cliff spend that we would need to do to kind of pass over that final level. We are focused on growing organically over that number. So that is our primary focus and working closely with our regulators to make sure that we'll be ready when and if that happens. And then in terms of the new administration, what we saw in the Trump -- I think they're calling it Trump 1.0 administration previously, was a little bit of a lighter touch from the regulators. And so I think we've been in an environment really coming off of the events of the financial or the banking crisis in March and April of 2023, where regulatory oversight has been at a very high level across the industry. I do anticipate that will not go away, but maybe some of the requirements and some of the number of exams, et cetera, it might be a little bit of a lighter touch or less of a touch on a go-forward basis. We need regulation. We need oversight as an industry for all the reasons that we know. But I think what we saw previously was a little bit less onerous.

When you think about capital, you're sitting on in excess of 11%, which is well above your longer-term target of 10%, but obviously, the adjusted capital is lower, just given the AOCI marks. This quarter, you repurchasing $100 million of stock. Maybe a 2-part question. How do you think about the path to getting back to that 10% level? Is that still the right level? And two, just broadly speaking, how are you thinking about capital repatriation in 2025?

Well, I'll start to make a couple of comments and ask Jim to add on. As we into the third quarter and with a CET1 close to 12%, we did feel like it was an appropriate time with -- in light of the fact that we were not seeing more loan demand occurring to start we are returning some of that capital to our shareholders. So we were pleased to turn the share buyback on after having turned it off for a few years. We do anticipate that the environment holds, and we'll provide more guidance at the fourth quarter earnings call, but we do anticipate continuing with some share buybacks in 2025, yet to be determined sort of a target number, how that will play out for us. First and foremost, we'd love to use capital, not for share buybacks, but for lending money. And hopefully, we'll have a chance to do a little bit of both in 2025. I would also say that while our target is 10%, we'd like to hold a higher level of capital, just the environment that we're operating in with still a lot of uncertainty around Basel III in game, although it seems like that may be going away or are put on AOCI considerations in this higher rate environment, et cetera. And so we probably will continue to be conservative in terms of our hold level and not get back down to 10%, but certainly don't need to be at a 12% number either.

I think Curt hit all the great points, that's why he's Chairman and CEO.

Great. Maybe one last question for you, Curt. Obviously, the change of administration could be more amenable to strategic activity. You talked about going over $100 billion organically. Is there any thoughts of inorganic activity, whether buying or partnering with another bank at some point?

Yes. Nothing really has changed for us there, Ryan. I think most of you know that we've been a very patient acquirer, and have primarily grown the last 20-plus years organically. We've really done just 1 deal in the last 20-plus years, Sterling Bank in Houston. And we would continue to focus primarily on organic growth. I mean if we saw an opportunity, it would have to be a pretty -- it would be a pretty narrow lens upon which we would consider anything. It has to be a great strategic fit. And really, that would be the reason to look at something, maybe infill, et cetera, but really do not see our primary focus being in that area. We continue to focus on organic growth, and we think we've got great opportunities there.

Awesome. Well, we're out of time. So please join me in thanking Comerica.

Thank you.