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Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].
I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Ma'am, you may begin.
Thank you, Regina. Good morning and welcome to Comerica’s first quarter 2018 earnings conference call. Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Chief Financial Officer, Muneera Carr; and Chief Credit Officer, Pete Guilfoile.
During this presentation, we will be referring to slides which provide additional detail. The presentation slides and our press release are available on the SEC’s website, as well as in the Investor Relations section of our website, comerica.com.
This conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially 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. I refer you to the Safe Harbor statement in today’s release on Slide 2, which I incorporate into this call as well as our SEC filings for factors that could cause actual results to differ.
I also discuss in this call the referenced non-GAAP measures and, in that regard, I would direct you to the reconciliation of these measures within this presentation.
Now I’ll turn the call over to Ralph, who will begin on Slide 3.
Good morning and thank you for joining our call. Today we reported first quarter earnings of $281 million or $1.59 per share. Adjusted net income was $271 million or $1.54 per share after excluding restructuring charges, tax benefits from employee stock transactions and a small deferred tax adjustment. Earnings per share on an adjusted basis increased 20% over the fourth quarter. Relative to the first quarter of last year our earnings per share increased significantly, and pretax income is up 25%. This is primarily due to higher interest rates as well as continued successful execution of our GEAR Up initiatives. Note that in the first quarter, we adopted a new accounting standard for revenue recognition which net certain expenses against the related fee income. This change in presentation has no impact on net income. The adjusted non-interest income and expense figures are reflected on the slide for comparability.
On slide 4 consistent with the previous quarter, we are outlining adjustments related to certain items including restructuring, impacts from the new tax law and the tax benefited related to employee stock transactions. The adjusted return on assets was 1.56% and adjusted return on equity was 13.85%.
Turning to slide 5 and an overview of our first quarter results as a result of typical seasonality and mortgage banker finance as well as a decrease in corporate banking, average loans for the first quarter decline. A part of each two business lines, average loans increased $327 million are nearly 1%. As far as deposits, we saw the normal seasonal decline in non-interest-bearing deposits following strong growth in the fourth quarter. We continue to closely monitor our deposit base and recently adjust to standard pricing for certain products in conjunction with the fed’s rate increase last month.
Starting to mid-quarter, we began seeing the rebound in loan and deposit balances, which is consistent with trends in prior years. Net interest income increased $4 million. The net benefit from increased interest rates was $27 million as we continue to prudently managed loan and deposit pricing. This was partially offset by two less days in the quarter and lower loan balances. Our provision for credit losses decline $5 million in conjunction with decreases and non-accruals and criticized loans.
Net charge offs were 23 basis points remain below our historical norm. On an adjusted basis, non-interest income decreased $7 million, this included a $4 million decrease in commercial lending fees due to decline in syndication fees following a strong fourth quarter and relatively weak first quarter market activity. On an adjusted basis, non-interest expenses decrease $1 million and increased in salaries and benefits expenses in conjunction with annual stock compensation was more than offset by decreases in outside processing and advertising as well as business tax refunds.
During the first quarter employee stock activity added 1.2 million shares and resulted in a credit to our income tax provision of $19 million. We continue to actively manage our capital and repurchased and $149 million or 1.6 million shares. As you know, we have submitted our annual CCAR plan and expect to receive the response from our regulator towards the end of the second quarter. We are encouraged by the progress been made on the regulatory front including recent bipartisan legislation and the fed’s proposal to simplify capital requirements.
And now, I will Muneera, who will go over the quarter in more detail.
Thanks Ralph. Good morning, everyone. Turning to slide 6. Loan growth across the industry is weak in the first quarter and typical seasonality further hampered on loan growth. Average mortgage banker loans declined over $400 million with the normal winter slowdown in home sales. However, balances began to rebound this quarter and are expected to continue to grow as spring/summer home sales pick up. Following a strong fourth quarter corporate banking declined about $400 million partly due to seasonality and repayment of relatively large bridge facility and client exits. Average energy loans declined as a result of capital market activity due to [premise] commodity prices partly offsetting these declines, there was seasonal increase in dealer floor plan loans as well as growth in general middle markets. We also have smaller increases across many of our specialty and national [ph] business lines including technology and life sciences, environmental services, commercial real estate as well as entertainment. Total period-end loans were stable and went above the average for the quarter in the period with the positive trend in the back half of the quarter. In addition, loan utilization has increased and our loan pipeline is up significantly. Overall, customer sentiment has remained positive.
Our loan yield increased 22 basis points primarily due to the increase in 30-day LIBOR. recall, the bulk of our LIBOR-based loans repriced at the beginning of the month so the impact of the most recent rise in short term rate has not been fully captured yet. This was partly offset by other portfolio dynamics primarily a decrease in loan fees as well as decline in normal non-accruals interest recoveries to more normal level.
Seasonality also impacts deposits in the first quarter as you can see on slide 7. Average deposits declined $1.6 billion, following strong deposit growth of $1.1 billion in the fourth quarter. However, the decline in deposits this year has been less than we have seen in the past two years. Also indicating a positive trend, period-end deposits of $57.6 billion was well above the average.
Deposit rates increased 6 basis points, to rely on a relationship model to stay close to our customers and help ensure there are offering competitive inappropriately priced products. As Ralph mentioned, in conjunction with the Fed accident marks we adjusted our standard rates of certain products. Our primary objective is to retain and attract deposits while managing our total costs.
Our securities book remains at above $12 billion as shown on slide 8. That portfolio unrealized loss position of $270 million had a minor impact on the carrying value. The yield on the portfolio continues to transact modestly. Recent securities purchases have been in the low-3 which was above the average rate of two and a quarter on the $450 million decline and paydowns each quarter. The estimated duration of our portfolio remains short at about 3.3 years and the expected duration under 200 basis points way sharp extends the commodity to 3.9 years.
Turning to slide 9. Net interest income increased $4 million and the net interest margin was up 14 basis points. Our loan portfolio added $11 million and 17 basis points to the margin.
The increase in interest rates provided 32 million or 20 basis points benefit to the margin. This was partly offset by two less days in the quarter and lower loan balances. As a reminder, in recent quarters being benefited from higher loan fees, which we include in other portfolio dynamics as well as elevated non-accrual interest recoveries, those returns to more typical levels in the first quarter. Balances of the fed contributed 1 million and 3 basis points to the margin.
On the funding side, deposit costs were up 2 million, primarily due to increased pay rates on certain products. Also, wholesale funding costs increased 5 million as a result of the increase in six months LIBOR along with some additional funding that was added at attractive rates. In summary, the net impact from increased rates contributed 27 million or 17 basis points to the margin. This included the full quarter benefit of the December rate rise, the faster pace of LIBOR increasing during the quarter and the March fed rate rise.
Turning to credit quality on slide 10. Total criticized loans declined 111 million and now represents less than 4.3% of total loans at quarter end. This includes a 76 million decrease in non-accrual loans which comprised only 70 basis points of our total loans. Net charge-offs were 23 basis points or 28 million. As far as energy loans, total balances, criticized and non-accruals loans all decreased. Well credit quality remains strong we remain vigilant and continue [indiscernible]. At this point, we are not seeing any concerning trends. However, we are maintaining a conservative stance regarding trade, economic and market conditions.
Turning to slide 11. As Ralph mentioned, non-interest income and expense included the effect of the new accounting presentation whereby certain expenses are netted against the corresponding income mainly in card fees. The blue bars provide the competitive figures excluding this change. On this adjusted basis, non-interest income decreased 7 million with a 4 million decline in commercial loan syndication fees and a 3 million decrease in bank-owned life insurance. Both are difficult to predict and are thus typical levels. Customer derivative decline 2 million from the higher run rate we had in the second half of last year.
First, this partly offsets, this increases in fiduciary and brokerage fee income. We remain on track to achieve our GEAR Up revenue targets. To highlight our progress, you can see the growth we achieved on a year-over-year basis in card, fiduciary and brokerage. Adjusted expenses decreased 1 million as shown on slide 12. This excludes the change in presentation, a 3 million increased in restructuring charges and the 5 million one-time employee bonus received in the fourth quarter. Outside [ph] processing decreases 4 million, after adjusting for the accounting and advertising expense decreased 2 million.
In addition, we received business tax refund of 5 million, which are not expected to be repeated. And increases in salaries and benefits resulted from annual stock compensation which was partly offset by the $5 million onetime tax bonus paid in the fourth quarter as well as fewer days in the first quarter. Of note, we have adopted new accounting rules as requires the portion of the pension costs to be included in miscellaneous expense in higher periods have been adjusted. More detail can be found in the appendix. Expenses remain well controlled with helped from higher interest rates and capital management of loan and deposit pricing as well continued achievement of our GEAR UP initiative, our efficiency ratio has declined to 56%.
In the fourth quarter, we've repurchased $149 million or 1.6 million shares under our equity repurchase program as you can see on slide 13%. Together with dividend, we've returned over $200 million to shareholders. Also, during the first quarter, employee stock activity added about 1.2 million shares. This activity resulted in a credit to our income tax provision of $19 million or $0.11 per share.
Slide 14 outlines the positive impact of higher rates. As we have previously indicated, the full year 2018 benefit of the 2017 rate increases is expected to be $125 million. In addition, as a result of LIBOR moving up at an accelerated pace in the first quarter, we have added $20 million to our full year expectations. This is reflected in our first quarter run-rate. Furthermore, we have increased our estimates for the March fed actions to $60 million to $70 million which now includes a sustained higher LIBOR comfort somewhat by an expected higher deposit beta.
In total, we believe this will give benefits from higher rates to be $205 million to $215 million of our full year 2017. Recall that we realized $27 million benefit in the first quarter from rising rate. Of this benefit, $5 million relates to the loss actions. The ultimate outcome depends on a variety of factors such as the pace at which LIBOR moves, deposit betas and balance sheet movement. Our balance sheet continues to be well positioned to benefit from increase in rates. Approximately 90% of our loans are floating rate with a majority type with 30-day LIBOR. Also, the bulk of our deposits are non-interest bearing, and the majority of our interest-bearing deposits are retailed. This benefit of our asset sensitive balance sheet is illustrated by our cumulative loan and deposit betas which is the increase in our loan yields or deposit costs expect as a percentage of the increase in the Fed's real fund rate since the beginning of the rate cycle in the third quarter of 2015. Our cumulative loan beta was 84% while our cumulative deposit beta was only 8%. We have not added hedges to change our asset sensitivity. Our asset liability committee continues to assess our position to determine the appropriate path given balance sheet movements and our outlook for rates.
Now, I will turn the call back to Ralph to provide an update for our outlook for 2018.
Thank you, Muneera. We have been furnished our outlook for 2018 by incorporating the March rate increase into our expectations for net interest income.
Our outlook for all other categories is unchanged. As usual, we are assuming a continuation of the current economic and interest rate environment. We continue to expect total average loans to increase in line with GDP. We believe we can drive growth in most businesses somewhat muted by energy and corporate banking, which should be stable. We expect to see the typical second quarter seasonal rebound in most areas, particularly mortgage banker as wholesales pick-up in the spring.
Overall customer sentiment is positive and activity is picking up. As Muneera indicated, we expect net benefit of $205 million to $215 for the full year from the 2017 rate increases combined with the recent drives in short-term rates. As far as a second quarter, we expect an increase from the full quarter benefit of the March short-term rate increases partly offset by somewhat higher deposit costs along with the return of loan growth. And while not included in this outlook, we are well position to benefit from any further rate increases.
We continue to expect the provision to be between 15 and 25 basis points as credit quality remains strong. Following a relatively low provision in the first quarter, second quarter provision is expected to be higher. With the contribution from our GEAR Up initiatives, we continue to expect 4% growth in non-interest income excluding changes in deferred comp a 1% increase in expenses excluding restructuring charges. Fee income in the second quarter is typically stronger with seasonally higher card and fiduciary income. Second quarter expenses should decline modestly from the first quarter primarily due to lower compensation expense.
We’ve adjusted the 2017 base for the effect of the new accounting presentation which was discussed earlier. Finally, we expect our effective tax rate to be approximately 23% excluding any impact from employee stock transactions which are difficult to predict.
In closing, our [related shift] [ph] banking strategy is serving as well. It is helping us prudently manage loan and deposit pricing as interest rates have increased as low as maintain strong credit metrics. The result has been significant increase in our returns and helped drive our efficiency ratio to 56%.
The year after a good start, our pipeline is strong and we expect loan growth to return with typical seasonality in the second quarter. We believe, the continued achievement of our GEAR Up initiatives will assist in growing fees and controlling expenses. Furthermore, we are well position to benefit from additional rate increases favorable changes in regulation and economic growth.
Now, we will be happy to take any of your questions.
[Operator Instructions]. Our first question will come from the line of Ken Usdin with Jefferies. Please go ahead.
Just a couple of questions on the net interest income side. First of all, you give in fed that solid 426 loan yield outlook in February and it ended about the same. And I just want to understand, can you help us just understand the way that variable rates move through the quarter. And how you'd expect that March hike to move through as you look forward?
As far as the loan yields are concerned that 426. I talked about fees that for elevated in the fourth quarter and non-accrual recoveries. A lot of that impact was felt in the month of March. And essentially negated some of the benefits that we otherwise would have seen for the month of March. From a go-forward basis, as we have said the March rates will provide $60 million to $70 million benefits and clearly a substantial portion of that benefit will be in loan yields. You can see that in the first quarter we picked up about 20 basis points coming from $32 million as a result of what was happening on the loan side of the equation. So, I would expect that loan yield will benefit nicely, should be about I don't know 59 basis points.
Okay. And then, the March hike that you say is going to be 60 to 70 benefits. If we were to get the next one whether it's June or any other month. Would that 60 to 70 still hold? And what will be the offsets that you might be thinking as far as the deposit beta side, thanks.
Well I mean as you well know deposit betas are increasing and as time passes, we'll have to see that's happening under competitive tranche. And make sure that we adjust accordingly. So, the $60 million and $70 million and invest continue to change depending on what transpires in the environment outside.
Okay, but you will never thought --
So, what I'll tell you, Ken is, just remember that we have $42 billion of loans that are variable rates. And so, then rates go up and the asset side is seriously sensitive and the benefit of that will obviously far from anything that’s happened on the deposit side.
Your next question comes from the line of Peter Winter with Wedbush Securities. Please go ahead.
Good morning. I'm just wondering you've maintained the forecast for average loan growth for the year in line with GDP. And I hear you that the loan pipelines are good, sentiment is good. But what gives you the confidence that you're going to hit that target of GDP type loan growth?
Yes. Thank you, Peter. In the first quarter for us it's typically a slower quarter just based on seasonality. And we certainly saw that in with respect to finance for the quarter. But also, the seasonality impacts other businesses for us as well middle market, corporate banking. I mean Muneera talked about some of that in her comments. If you exclude mortgage bank finance and corporate banking as we mentioned already, we really were up about 1% for the quarter as well as up about $500 million on average Q for an '18 versus Q'17. What I would say is that we saw some very encouraging signs in the quarter. The results were really backend loaded. And as the quarter went on we saw momentum building and pipeline building which I think bodes well for us setting into the expected quarter which usually is a much stronger quarter for us based on seasonality and mortgage banker finance.
When you look at a number of businesses across the board, we had growth in dealer financial services, growth in general Middle Market across all three of our markets which we have not seen in a while growth in commercial real estate CLS, environmental services and entertainment. So, I feel good about the cross-expert growth for the balance of the year. Obviously, there is still some mixed news out there in the economic front. And we are yet to see helping translate for us in terms of tax benefit with our clients, but at least I think all that is positive. When we look at some of the times we had just in terms of the increase in pipeline at the end of the quarter, the fact that period end loans were above the quarterly average for us and we saw some increase in utilization. I think all of that bodes well for us in terms of the ability to meet a GDP growth in line or growth in line with GDP for the full year.
Just on a separate question. With regards to CCAR. Can you just talk about how you view dividends versus share buybacks?
Well, we look at the total as what the paid out is. And then dividends obviously we want to have in the quarter with a sustained ability to pay dividends over a longer period of time. And then the difference being on the share buyback.
Do you have a target for a payout ratio?
We do not at this point.
Okay. Thank you.
But if you go back in history, we have traditionally been aggressive at returning to our shareholders whether it be dividends, and over the buyback, which is important to us as we move forward.
Your next question comes from the line of Steve Alexopoulos with JPMorgan. Please go ahead.
Ralph, I wanted to start following up on the expectations for improved loan growth in the second quarter. If you just look at the size of the commercial loan pipeline heading into 2Q. Is it a fairly typical seasonal increase on tap? Are you seeing more meaningful improvement in the pipeline given the recent improvement in business confidence?
I think you’re seeing more improvement in the pipeline because of confidence. Curt, do you want to comment on that?
Yes. Steve, I think Ralph said it well. Obviously, the normal seasonality, which you already alluded to that really across a number of our businesses, we do feel like pipelines are healthier. And traditionally, for the last like 2 years or so, most of our conversations with clients have been about borrowing to meet the current working capital needs. And we’re starting to have some conversations with clients about CapEx and expansion opportunities. So, I think, some of the things that we’re feeling from a macro and micro economic perspective out there is starting to expand some into actual demand from our clients. So, I don’t want to give the wrong impression that necessarily we gained investors at this point, but do you feel like that there is a stronger pipeline heading in the second quarter and what we saw for example last year.
Or will you still looking at the commitments to commit as a good leading indicator. Are you see in the material build up in the commitments?
We have not put [indiscernible] this report Steve, we do look at values and we look at pipeline overall and try to look at actually the pull-through rate associated with both. We feel really good about the pipeline heading into the quarter as I mentioned earlier and it grew throughout the first quarter really across on the [indiscernible] business lines.
I just have one question on the tax spend. How much you guys like to spend on technology this year? and do you think you can compete at this size in the digital age of banking? Or do you need the drive to more scale to ramp that spend? Thanks.
One of the things you need to be focused on when you're thinking about that is going back to our GEAR Up, which part of the whole process of Europe was putting efficiency but it was also reinvesting. And technology being one of the biggest reinvestments both from a product standpoint and an internal standpoint to provide our people with the kind of tools they need to take care of our customers. So that is very important on top of the normal if you would see in investing. Curt, you might go through a few of the things that have been changed here recently.
I think one thing that's changed of the technology front is that a lot of technology today is becoming more ubiquitous. And we have really work worked on moving away from heavy customization and building things ourselves to really leveraging keys under relationship and leveraging more cloud-based technology. And that's allowed us to be more agile and move faster to deliver both enhancements through our customer experience and also delivering tools that improve our colleague's ability to serve our clients and fill any products and services.
So, in 2017, we will now an enhancement to our mobile application and basically in ongoing process probably every six months or so we're adding to our consumer mobile platform. We've rolled out a new consumer loan and mortgage platform which helps both from a customer and an employee standpoint. We've made a lot of enhancements to our treasury management capabilities specially to finance sort of digital delivery of treasury management. And just this year, we're rolling out the [indiscernible] platform in the month of April we've done a lot around the commercial lending process, like [indiscernible] about the review we've done around the NDN [ph] and credit approval process. And along with that, we're rolling out a new CRM platform as well as commercial loans for credit processing platform which again helps better from the customer and employee perspective. So, we have a lot of things in the pipeline. We feel like we're able to stay current and again leverage all the key vendor relationships as well as some leveraging off of more cloud and agile type of delivery.
And on top of that we were rationalizing our applications to making sure that our systems were more efficient at building the things that Curt was talking about.
Your next question comes from the line of Michael Rose with Raymond James. Please go ahead.
Hey good morning. Just going back to the capital questions. Have you guys had a chance to study some of the proposals in Washington and potentially how that would impact your capital levels? It seems like it would free up some capital for return to shareholders. Any overall thoughts there, thanks.
We are studying those. And it is very positive that both from a legislative standpoint and from as you said a regulatory standpoint the position that's being taken. And the most important thing to us in the future we'll be able to manage our own capital. And historically as I mentioned earlier, we have always been aggressive at returning capital our shareholders as appropriate. Whether you want to talk about any of the individual pieces of that Muneera?
Sure, Ralph. I do believe that [indiscernible] propose we made is a step in the right direction. It's still a proposal so a not good change. And the effective data is out there in the third quarter of next year. But having said that some of the proposals that they are suggesting which include not including rise in risk weighted assets and including buybacks in a period of stress, seem to be a step in the right direction, it will allow us, as you say, Ralph, the opportunity to right size our capital, which was always our plan, but we’d be able to do a little bit sooner with the proposal that we have out there. So, looks good.
Just as a follow-up to that, I mean do you guys have a targeted capital ratio you guys will ultimately like to be at or proceed if you want?
We have not put out a public statement on the proposed where we are. And part of that is will be relooked at as we go through what Muneera was just talking about the regulations as well. And we have always been traditionally at an appropriate point we feel for our institution. And that has served us well when we have a chance to be able to control what the amounts are.
And maybe just one more on a separate topic. Energy has been a big drag for you guys in terms of headwinds to loan growth. It looks like non-performers are still 25% of the book, the oil has been about 16 for nearly a year. Any sort of commentary on what would cause some upgrades in that portfolio? And would that actually translate into further reserve releases moving forward? Thanks.
Pete, do you want to address that?
Yes. Michael, we’re pretty optimistic that is going in the right direction, we are right in the middle of redetermination process about 40% the way through. And my guess is by the time, we get through it, we’ll make a substantial dent in that 25%. All the factors there that we’re looking are positive and so we’re pretty optimistic.
Your next question comes from the line of Ken Zerbe with Morgan Stanley. Please go ahead.
Can you just talk a little bit about the conversations you guys are having with customers about, let’s call it normal flows out of non-interest-bearing just given the rising rate environment. I saw that you mentioned that some of it was driven by normal seasonality, but I’m actually curious about the other part of it, where you actually have customers explicitly saying they’re in search of higher yields? Thanks.
A lot of the funds that we have for our client obviously, we have a very large commercial oriented deposit based and with those clients, a lot of those funds are used to offset from an ETA perspective and/or general operating accounts totally some of our clients have had excess cash. We are having quite conversations with them about alternatives in terms of raise and we’ll make appropriate exceptions where we need to do so. But I would say thus far, those conversations have continued to be limited, we continue to watch and our goal is to try to be competitive as much as we possible can, as we see rates continue to increase like kind of across the board, but we’re managing it right now for customer-by-customer primarily.
And then the other question is just in terms of the employee stock comp tax benefit that you guys are getting. Do you have any outlook in terms of how this might progress over the next year or two or three? And I guess what trying to know is, were there any part of the benefit that actually were sort of front end loaded over the last year or so?
I think you just see, I think what I will call a bit of a catch up with the strength of the markets. And people having the opportunity to execute what they've been given.
Typically, first quarter is the quarter in which employees [indiscernible] becomes available to them. So [indiscernible] in the first quarter. In the remaining quarters it's pretty difficult to predict, but generally tends to be lower. And if you compare that having from first quarter last year to first quarter this year you can see that some of the activity level is coming down. And that's sort of there that pent-up demand for the employee base is coming down clearly overtime as well.
Your next question comes from the line of Scott Siefers with Sandler O'Neill. Please go ahead.
I just wanted to make sure I understand the NII guide correctly. So, it sounds like the only change to the prior guidance is the higher benefit from the March increase. Did I hear you correctly say that the LIBOR increase is already baked into the first quarter number?
Some portion of the LIBOR increase is based into the -- let me break it in pieces. The $60 million to $70 million, of that $60 million to $70 million, $5 million is baked into the first quarter so as we analyze that $20 million that's in the run-rate. So, if you take the midpoint of 60 to 70 which is 65 and 20 is in the run-rate and about $50 million per quarter is the benefit. Does that help you Scott?
Yeah it does. Thank you. And then just on that LIBOR increase. I mean obviously get higher LIBOR done. I tend to think if you guys are most sensitive to one month, whereas most of the, I guess the most pronounced move was in the 3-months. Are there any other benefits that you guys get beyond just the simple 1-month LIBOR? In another words, are there benefits from the asset side to you guys from the movement in the 3-month LIBOR as well?
We have a small portion of our loans that are indexed at 60-day LIBOR as well. So, you can see that on slide 14. So yeah, there is a little bit of a lag in the reset. Different loans reset at different times and then we also have some of that have that 60-day taxation.
Your next question comes from the lie of Erika Najarian with Bank of America. Please go ahead.
Good morning. I wanted to follow up on Ken's question about non-interest-bearing deposits. So, as we think about this is clearly underpin the net interest margin strength for Comerica in a rising rate environment. And as we think about the commercial non-interest-bearing deposits, is there a way that we could ball park what percentage of those balances are attributed to operating accounts versus excess cash as we think about potential mix shift or lack of mix shift going forward?
So, Erica, we have said that if you look at our overall non-interest bearing, 90% of that is commercial. And of that 90% about 80% of the balances are utilized towards the fee management products that's a pretty high utilization. So hopefully that gives you a sense for what we're looking for?
No, that's terrific. Thank you. And just as a follow up question, you've gotten a lot of inquires of capital management as regulations and legislations hopefully change for the better. I'm wondering, if you could give us some insight on what could change in terms of your liquidity management. You clearly have a lower yielding securities portfolio, especially relative to peers. And I’m wondering, if the legislation did pass on the SIFI definition, how, if any, differently you would manage your securities book from here?
We will have to see how the rules get laid out, but the size might be different. And there could be length of maturity. But it wouldn’t be substantial in my opinion at this point. Muneera do you agree with that?
I agree with that Ralph. We like the 20 billion size that we have right now. Where we go with the securities book is going to depend on what happens with loans and growth there, what happens with deposits. So, beyond regulation, there is managed liquidity prudently in line with what happens on that front.
And as expense grow and move forward, there will be a time when, and we’ve mentioned many times that we look at it regularly as to whether we should be putting on hedges and how do we manage where we are in the rate cycle. As well as longer term, in history, we have been very careful and very conservative at managing the risk there, which I think we’ll go back to a point of time when we feel like we’re starting to get rates at the normalized level.
Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.
Regarding the loan growth, I know you mentioned that you saw pickup late in the quarter. And so, is it fair that we can use the end of period balances as a base as we grow the loan portfolio here just given that they came in well above the average balances for loans?
Yes. I will get back to you, John, what we said earlier is that our outlook is for growth or the loan portfolio in line with the GDP range. And so, when you look at for the full year guidance, we would say with that. The balances in the month of March for the period end balances, I think, are reasonable for the baseline to use from a go forward perspective. But remember that we do see some additional seasonality in the balance of the year in the third quarter. We see some additional seasonality in our dealer portfolio. And so, it’s not necessarily a straight-line scenario. So, when we talk about growth in line with GDP average growth for the year, that’s for the full year view and not necessarily tied to any one quarter.
And then separately on the rate size. On slide 14, I know you mentioned the loan beta that you’re running around 84%. I know peers from our work, looks like they’re around 35%, well below the 50% that we’ve seen in the past. How do you feel about that 84 and your ability to maintain that? Are you starting to see spread compressions? Because I know that the industry is. Thanks.
Yes. I think it remains at highly competitive environment. It’s been very competitive really for the last several years or more. And we work really hard to remain competitive with our client base, but at the same time, we’re very relationship focused. We price every individual client relationship one client at a time and that's our pricing model of deal based on client overall relationship with us and the risk profile of the customer. And we're not want to sacrifice our pricing just to chase transactions, but where we've got existing relationship or can build the relationship we're going to make sure that we are being competitive. But we're not saying at this point that it feels me any more or less competitive that it has been it's been a very tough environment now for several years and that continues.
Your next question comes from the line of Brett Rabatin with Piper Jaffray. Please go ahead.
Hi, good morning. Wanted to ask about the earnings credit rate and just what's you're expecting from that regard and how you see that competitively changing?
Yes, we look as you would expect the very hard at the ECA rate. I would say in general, that we've made some exceptions there where appropriate. But again, remember, that our clients are leveraging the ECA rate from an offset standpoint to cover treasury management calls and services. And so just like we view on deposit side, we do a lot of surveying at the market to see where ECA rates are. I would say in general, that we have not seen a wholesale lift across the board as it relates to ECA rates that we'll continue to watch and monitor on a go-forward basis.
Okay. And then as a follow up you just mentioned that you haven't see any environment more or less competitive. I'm curious will that be kind of across the board or are maybe a few industries where you are seeing things get a little more competitive in terms of people been aggressive with pricing?
No, there are certainly pricing dynamics in our portfolio. And to know, we are in different markets and we have different industry verticals and within those industry verticals and within those markets at times different pricing dynamics at the play. But I would not single out a single line of business for us where we feel like that the environment has changed significantly. I would just say across the board with all of them it remains a very competitive environment.
Okay. Thank you.
Your next question comes from the line of Steve Moss with B. Riley FBR. Please go ahead.
Good morning. Most of my questions have been asked, but just wanted to touch based on the CCAR example for 2018. Wondering how we should think about the payout ratio for 2018 versus 2017?
Well we will hear the results of the CCAR process will come out last month of this quarter. And that's what we will at that time know where we are.
So, Steve, if you look at our history, you will see that with every subsequent CCAR we have increased the dollar amount and the percentage of our payout. That's the sense that we hope to continue. And then as Ralph mentioned the fact that we want to focus on the dividend components of that payout. And so that's sort of what you should expect out of this CCAR.
Your next question comes from the line of Geoffrey Elliot with Autonomous Research. Please go ahead.
Good morning, thanks for taking the question. You talked about standard deposit pricing increases in response to the Fed rates increase in March. Can you elaborate a bit on what you've been doing there and how that compares with the action you took after the December rate increase?
So yes, we did talk about some of the standard pricing changes that we made in a very strategic and targeted with a differentiated in different market. So too much details to go through her. But what I would tell you is that we have included the impact of all of those changes in the 60 million to 70 million guidance that we are providing for the benefit of the March rate rise. Beyond that, I’ll tell you that the changes we have made make us through good about our overall competitive position that we have in each of those markets.
And specifically, on the 4Q call. I think you talked about increasing rates on money market deposits 10 million and over by 20 basis points and rate on certain of the higher balance retail products by 15 basis points. Can you give us a sense? Is it a broader set of products you’ve increased this time? Is it the same sort of magnitude of rate increase? Can you give us kind of compare and contrast on this December rate increase and the March rate increase?
Yes. It’s going to typically be a combination of either customers we believe to be rate-sensitive or where we see competition adding a little bit of pressure if that helps. I mean, it’s going over specific will just, it’s going to be too many changes, some of them small, some of them slightly bigger. But like I said, all folded into the estimate that we have provided.
Your next question comes from the line of Marty Mosby with Vinning Sparks. Please go ahead.
I was going to kind of follow-up on the deposit. But more from a sense of, if we are looking at commercial customers, the pressure may be coming from market rates that they can actually utilize. On the retail side, I was curious, if you’re seeing most of the pressure coming from community banks or where is that kind of -- so where do you kind of sale commercial and retail side, who are the biggest pressures to push those deposit base higher?
Sure. And one of the things that make our franchise unique is that we do have a unique set of competitors in almost every market we’re in today. So, you have the larger national banks and more regional banks and we have all of the community banks. And so, we do benchmark ourselves against a broad basket that is somewhat unique market-by-market. So, when we’re doing surveying and shopping, so to speak the competitors we take all of that into consideration. And we try to, in some markets, you’re always going to have an outlier. But we try and look at more what’s happening kind of across the board from an average perspective. And I wouldn’t say that, I think the increases we’ve seen have been really across all 3 buckets. So, you’ve seen some increases with community banks, some increases with regional banks and some increases with the larger national banks. And again, what we’re trying to do is strike the right sort of medium balance between all of those and do the right thing for our customers, where we think we have some price sensitivity.
And then the second question is, if you think about liquidity that you’ve built on the balance sheet through this LCR requirement and all the things that have kind of regulatory wise held you back incrementally, how do you envision, if we’re just growing loans at about the GDP rate to be able to actually ever kind of call that liquidity and deploy it? Or is it something that we’re probably just going to carry through the next downturn and maybe use that in the next expansion?
At some point, I mean, when we feel that the long-term rates are appropriate, we might deploy that securities, I mean, those, that cash balance into securities as an example. But clearly, first, we’ll move liquidity towards loan growth. And then beyond that think about of the best that would be.
Are there still if you had any initiative or thoughts about incrementally taking advantage of that and doing something with it to get some better yields from it?
I mean that's just something like I said, it depends upon opportunities that present themselves in the future.
Your next question comes from the line of Lana Chan with BMO Capital Markets. Please go ahead.
Hi, good morning. Just a question on slide 14 again on the benefit from the rate increases. I think in the last couple of the quarters, the assumptions, the deposit betas have been in the 20% to 40% range. And I calculate this first quarter, the deposit beta was only 24%. So, could you give us an idea of what you have embedded in the go forward guidance?
So, you're right historically and we've talked about where deposit beta will be going to be with every single rate rise and just every single rate rises we've actually done better than what we've said. What I'll tell you is then rate rises start coming at a faster frequency the December launch it becomes really difficult for us to start isolating betas towards specific rate rise and say, and you can just do the math and you said 24%. And you have to do that till December. And what is December, what is March it's sort of intermingling. And so, for those reasons and the fact that LIBOR and what's happens on the asset side has side has such a large impact on our numbers, we decided it was just simplistic to put dollars out there instead of putting our deposit betas, talked about the fact that we made certain pricing changes. We've talked about the fact that we used a relationship approach to retain our deposits. And so, all of that generally don’t mean that deposit beta is going to start moving up. Is that help you?
Yeah that's helpful. And then just to clarify on that slide again. The assumption on the estimated net interest income impact benefit. Does that include your assumption on loan growth expectations for this year, or is that on a static balance sheet from 2017?
That is on a static balance sheet. Loan growth was actually at low dollars there.
Our final question will come from the line of Brian Klock with Keefe Bruyette Woods. Please go ahead.
I think everyone asked questions on loans and deposits. So, I guess I'll ask a combination question on both. On the loan side first, it seems to me that you guys have strength of the franchise is in your middle market loan based and customer base which again brings a lot of those DDA deposits with it. And it looks like from your segment data that the average balance has been picking up some obviously in the general middle market. And the larger corporate is still where the average reduction was. Can you just remind us say with some of the things you saw during the quarter it felt like during the quarter you guys talked about larger corporate pay downs or things that are happening earlier in the quarter. Maybe those headwinds are abating. But it feels like the general middle market and small business part of your portfolio is where there is really the momentum might be picking up. So maybe you can talk about that dynamic within the loan portfolio by that product type?
Yes Brian. So, I'll talk about corporate banking first and then I'll come back to middle market small business as you mentioned at the end of your question there. On the corporate side, I think it's important to remember couple of things. One, we did have a strong fourth quarter and corporate banking. And then secondly in the first quarter, we do typically have seasonality in that book of business. You think about sort of buildup in cash with larger corporations in the fourth quarter and then normal distributions that occur for a number of different reasons in Q1. So, we always expect some seasonality in the first quarter.
And then we pointed to somewhat a unique situation, where we have done some financing for one of our best clients in that business line, that was unique in nature. It was a short-term bridge financing about half of the declines was related to that. And we knew a payoff was coming. We were anticipating a payoff. We didn’t know whether it would occur in the fourth quarter or in the first quarter. So that’s not a repeatable item. So, when you look at a more normal run rate for corporate banking, I would say that we’ve got we opportunity in that business line. Our pipeline remains pretty healthy heading into the second quarter. I think there were some anomaly in results, in corporate banking for the first quarter.
And then secondly when I talked earlier about sort of pipeline strength, utilization and what we were solving towards the end of the quarter heading into Q2 that covered our new market and small business segments as well. And I mentioned earlier that we saw growth from a general middle market standpoint, all three of our markets average growth as well as period end growth for the quarter, which we have not seen in a while, so California, Texas and the Michigan market. And I think the dynamics of all of three there is economies bode well, I think, for growth for the balance of the year in those three markets.
And I guess my last question, on the deposit side, there is a seasonality in the first quarter that you guys have talked about, I think just looking at end of period for the total deposits or so down. Interest barking deposit down about 1% year-over-year and 3% on the non-interest bearing. I know you talk a little bit about that earlier. Is there anything going on where you maybe some of that the excess utilization might be still there, that the [indiscernible] are still there? But maybe there is actually some use and then take down of those deposits before drawing a line. So, is that another reason maybe to feel good about, getting that GDP growth as it maybe you’re seeking through some of that and some of your customers on the commercial side or point down their excess liquidity and then they’ll turn to drawing back on their lines later in the year?
Yes. Brian, I think that’s exactly as you said. It’s a combination of normal seasonality. And then secondly, we do feel like that we’re starting to see with many of our client's utilization on excess liquidity and I think that is a good forerunner of hopefully growth opportunities as clients start thinking about CapEx and other growth related to lending activity. And so, I do think that what we’re seeing in the first quarter beyond seasonality is some pull down of deposits for net investment type activity in many of our businesses and many of our customers.
I’ll now turn the call back over to Ralph Babb, Chairman and CEO for any closing remarks.
I would like to thank everyone for joining us on our call today. I appreciate your interest in Comerica. And I hope you all have a great day. Thank you very much.
Ladies and gentlemen, this concludes today’s call. Thank you for joining me. You may now disconnect.