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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 Fourth Quarter 2017 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 fourth quarter 2017 earnings conference call. Participating on this call will be our Chairman, Ralph Babb; President, Curtis Farmer; Chief Financial Officer, Dave Duprey; 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.
Before we get started, I would like to remind you that 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 fourth quarter earnings of a $112 million or $0.63 per share, excluding a deferred tax adjustment related to the new tax law and a one-time employee bonus, as well as restructuring charges and tax benefits from employee stock transactions. Adjusted net income was $226 million or $1.28 per diluted share. This compares to adjusted third quarter results of a $1.27 per share. Recall that the third quarter included elevated interest recoveries which added $0.06 per share.
Full year 2017 adjusted net income to common increased to $842 million or $4.73 per share compared to 2016 adjusted net income to common of $532 million or $3.02 per share, a 57% increase. On slide 4, we have outlined certain items that impacted our results. The largest item is the $107 million impact of the write-off of net deferred tax assets.
Turning to slide 5 and an overview of our full year results, revenue grew 11% including a 15% increase in net interest income which benefited from higher interest rate as we prudently manage loan and deposit pricing. In addition, successful execution of our Europe initiative helped increase fee income over 5% and lowered expenses 4%. We continue to navigate the energy cycle and credit quality remained strong.
Altogether this drove an84% increase in pre-tax income and substantially higher returns with an adjusted ROE of 11% and an adjusted ROA of 1.2%, and an efficiency ratio of 58%. As far as loan growth excluding cyclical declines in energy and mortgage banker, average loans increased $670 million. The most notable increases were in national dealer services, corporate banking and private banking.
Non-interest bearing deposits grew 4%, however, were more than offset by a decline in interest bearing deposits. The decrease was primarily due to customers using their excess liquidity for working capital needs and acquisitions. Our deliberate approach to relationship pricing as well as strategic actions we took in light of the LCR rules. We repurchased 7.3 million shares in 2017 under our equity repurchase program.
Through the buyback and dividends, we returned $724 million to our shareholders, a 58% increase over 2016. This reflects our strong capital position and solid financial performance.
Slide 6 summarizes our fourth quarter results; average loans for the fourth quarter were $48.9 billion, an increase of $270 million or 1%, compared to third quarter. As expected, seasonality drove an increase in national dealer services and a decline in mortgage banker finance. We also had growth in corporate banking and technology and life sciences.
Average deposits increased $1.1 billion with a majority of the growth coming from non-interest bearing deposits, which is in line with our normal seasonal pattern. We continue to closely monitor our deposit base. In conjunction with the December rate increase and for the first time this cycle, we made minor adjustments to standard rates on select products.
As I mentioned the third quarter included elevated interest recoveries, excluding the $13 million decrease in interest recoveries net interest income increased $12 million primarily due to higher interest rates and loan growth. Credit metrics were strong with 13 basis points of net charge-offs. Non-interest income grew 4% with increases in almost every category reflecting the traction we are gaining with our gear-up initiative.
In conjunction with revenue growth, expenses were up yet remained well controlled. And with the tax reform bill, we are distributing some of the benefits to our hard working team. We granted 4500 colleagues a one-time $1,000 bonus and we raised our minimum wage to $15 per hour, which impacted over 700 employees. We increased our pay after our shareholders as we repurchased a $148 million or 1.9 million shares which expect to gradually increase our stock – we expect to gradually increase our stock buyback as we progress with the remainder of the CCAR year.
And now, we’ll turn the call over to Dave, who will go over the quarter in more detail.
Thanks Ralph. Good morning everyone. Turning to slide 7, fourth quarter average loans increased 270 million compared to the third quarter. Our auto dealer floor plan portfolio increased as dealers rebuild inventory with the delivery of 2018 models. In addition, the sector continues to consolidate and our customers which are larger, multi-franchise dealers tend to be importers. Corporate lending also had a strong quarter with expansion of several large relationships.
We saw growth across many of our key specialty and national business lines. For example, technology and life sciences, specifically equity fund services continue to grow as private equity and venture capital fund formation remains robust. (inaudible) growth, general middle market decline due to a pickup in M&A activity, planned exits, continued to deleveraging by customers and trade labor markets impacting customer’s growth and aspirations.
We remain disciplined with structure and pricing in a highly competitive environment. Average energy loans decreased $2 billion or 4% of our total loans due to an increase in capital markets activity, as a result of firmer commodity prices. Seasonality impacted mortgage banker as expected with a normal winter slow-down of comp sales.
Total period end loans were stable but above the average for the quarter. Our loan yields increased 6 basis points excluding non-accrual interest recoveries. In the third quarter, interest recoveries totaled 17 million, compared to 4 million in the fourth quarter. Typically we recover 1 million to 2 million a quarter, cutting that aside, higher rates added 4 basis points to our yield and we expect to see the full benefit of the December rate increase in the first quarter.
In addition, other dynamics that added 2 basis points included elevated loan fees, which was partly offset by the mix shift in the portfolio. Our loan price volume remained solid in the fourth quarter. Customer sentiments has improved over the past month or so, but as of yet we have not seen signs of a significant increase in line usage.
Average supplies increased over 1 billion or 2% relative to the third quarter as shown on slide 8. Non-interest bearing deposits were up over 700 million and money market accounts increased nearly 600 million. This was partly offset by decline in time deposits and CDs. The growth has been broad based, with increases in nearly every business line and is in line with typical seasonality.
Of note, our loan-to-deposit ratio remains low at 85%. As far as rates, we continue to very closely monitor our deposit base as well as competition and remained focused on prudently managing deposit pricing. We do this on a product and market basis, as Ralph mentioned, late in the fourth quarter we made minor adjustments to our standard rates for certain product classes in each market.
Our (EBITDA) continues to be low. The average deposit rate increased just 3 basis points in the fourth quarter. Our objective is to retain and attract deposits while managing our total cost. We rely on our relationship model and stay close to our customers, understand our needs and offer competitive and appropriately price products. Our securities book remains at about 12 billion as shown on slide 9.
Recent security purchases have been under slightly higher rates and pay downs, resulting in a modest increase in the yields for the total portfolio. The estimated duration of our portfolio remains relatively short at about 3.2 years and the expected duration under a 200 basis points rate shot extends at modestly to 3.8 years. Finally, the portfolios unrealized loss position is 123 million.
Turning to slide 10, net interest income and the net interest margin were stable. As we mentioned the third quarter included elevated interest recoveries. Excluding the $13 million decrease in interest recoveries, net interest income increased $12 million and margin increased 7 basis points. In total, increased rates contributed a net 5 million or 4 basis points to the margin. Loan growth added 3 million and other dynamics added 2 million or one basis points. Finally a lower level of wholesale funding added 2 million or 2 basis points to the margin.
Our overall credit picture remained strong as outlined on slide 11. Total criticized loans decline 203 million and represented less than 5% of total loans at quarter end. This includes a $42 million decrease in non-accrual loans which comprised less than 1% of our total loans. Net charge-offs were 13 basis points or 16 million.
As far as energy loans, total balances, criticized and non-accruals loans as well as charge-offs all decreased in the fourth quarter. We expect loan balances will remain at approximately this level. Fall redeterminations were nearly complete and borrowing bases have increased slightly, mainly due to drilling activity and acquisitions.
Slide 12 outlines non-interest income which increased 10 million or 4% with growth in almost all categories. This was led by a continued strong growth in currencies. Service charges on deposit accounts declined 2 million due to three fewer business days in the quarter.
We remain on track to achieve our GEAR Up revenue charges. For the full year, non-interest income increased 56 million relative to last year including growth in card, treasury management, fiduciary, brokerage and foreign exchange. In conjunction with revenue growth and the tax reform related bonuses that we previously announced, expenses increased as shown on slide 13.
Salaries and benefits rose 10 million reflecting a one-time bonus to approximately 4500 employees, as well as increase of performance related compensation. Also outside processing increased in line with growing card fees.
Finally, restructuring charges were 13 million, which is an increase of 6 million from the third quarter. Partly offsetting this technology costs including software and equipment decreased. Expenses remained well controlled. Ona full year basis, excluding restructuring charges, expenses are down 22 million or over 1% with declines in most categories. Expenses tied to revenue growth have increased including a $30 million increase in outside processing as well as higher incentives in advertising expense.
Results from higher rates and careful management of loan and deposit pricing, our efficiency ratio was 58% as our GEAR Up initiatives continue to be realized.
Moving to slide 14, As Ralph mentioned in the fourth quarter we repurchased 148 million or 1.9 million shares under our equity repurchase program. Together with dividends we returned 200 million to shareholders. Of note, during the fourth quarter employees stock activity and warrant exercises added about 412,000 shares. This activity resulted in a credit to our income tax provision of 4 million or about $0.02 per share.
Our asset sensitive balance sheet continues to be well positioned to benefit from increases in rates, as illustrated on slide 15. Approximately 90% of our loans are fully ready with majority tied to 30 day LIBOR. Also our biggest earnings source comes from non-interest bearing customer deposits, which results in one of the lowest cost of funding among our peers.
Rate increases alone drove a 200 million or 10% increase in our full year 2017 net interest income. We’ve now altered the asset sensitivity of our balance sheet. Our deposit data has remained very well, although we currently anticipate it will begin to rise. Thus we estimate a full year 2018 benefit of the 2017 rate increases to be 110 million to 125 million.
Of course the outcome depends on a variety of factors such as the pace at which LIBOR moves, deposit betas, and balance sheet movements. In addition, at some point we will add wages as we did regularly in the past. Our asset liability committee continues to assess our position to determine the appropriate path given the balance sheet movements in our other (inaudible).
Now I will tur the call back to Ralph to take you through our outlook for 2018.
Thank you Dave. As usual our outlook is based on the current economic and interest rate environment. It also includes the continuation of the execution of our GEAR Up initiative, which is expected to yield $270 million in benefits by year-end 2018. In total, we expect average loans to increase in line with GDP growth. We expect loan growth in most businesses lead by middle market particularly in California and Texas, as well as technology and life sciences, national dealer services and mortgage banker.
We expect to maintain the current size of our energy book. Corporate banking should be stable as it is one of the most competitive segments. We will maintain our relationship focus as well as loan pricing and credit discipline. Overall, our customer sentiment is more positive given the progress Washington has made on tax and regulatory reform, but remains cautious as we closely watch for signs of stronger economic growth.
We expect our net interest income to increase as a result of the full year benefit from the 2017 rate increases which as Dave mentioned , our model indicates is about 110 million I to 125 million. Loan growth is expected to also contribute net of related funding. And while not included in this outlook, we are well positioned, independent from any further rate increases.
Of note, 2017 non-accrual interest recoveries were $28 million and we do not expect this elevated level to be repeated. With continued strong overall performance of our portfolio, we expect a provision between 15 and 25 basis points and net charge-offs to remain low. We expect the pace of growth of non-interest income to continue and result in a 4% increase year-over-year, excluding deferred comp asset returns as they are difficult to predict.
We believe continued execution of our GEAR Up initiatives will help drive revenue growth of $40 million particularly in card, fiduciary, brokerage and treasury management.
Non-interest expenses are expected to increase 1%. Additional savings derived from GEAR Up are expected to be above $50 million. This is expected to be more than offset with increased outside processing expense consistent with growing card revenue as well as inflationary pressure son items such as annual merit, staff insurance and marketing. In addition, technology, project expenses will continue to rise as invest to meet customer demands that continue to optimize our infrastructure.
Restructuring expenses are expected to be approximately $47 million to $57 million in 2018, relative to the $45 million incurred in 2017. Recall the first quarter includes elevated salaries and benefits expense due to annual share compensation and associated higher payroll taxes.
Of note, effective January 1, we adopted a new revenue recognition standard whereby non-interest income of certain products totaling approximately $120 million for 2017 will be presented net of cost, effectively lowering our non-interest income and expense. This change of presentation was not included in this outlook and has no impact on our bottom line. However, it will improve our efficiency ratio by approximately 150 to 200 basis points.
Finally, we expect our effective tax rate under the new tax law to approximately 23%. This is slightly higher than the federal statutory rate as it includes state taxes and reflects the elimination of certain deductions and a reduction in the benefit of our tax credit investments under a lower tax rate.
In closing, Comerica made significant forward progress in 2017. We benefited meaningfully from our relationship and banking strategy and proven advantage from a loan and deposit pricing as interest rates increased. In addition, credit metrics remained strong. The successful execution of our Europe initiative helped drive fee income and a reduction in expenses. This resulted in a significant increase in our returns and help drive our efficiency ratio to 58%.
As we look forward to the year ahead, we remain focused on further enhancing shareholder value by growing relationships, continued implementation of our GEAR Up initiatives, and returning excess capital to our investors. The full year impact of 2017 rate increases should help drive further revenue growth. Also we expect to benefit from the lower tax rate and we are well positioned to take advantage of additional rate increases, favorable changes in regulation and economic growth.
Now we will happy to take any questions you might have.
[Operator Instructions] our first question will come from the line of Peter Winter with WedBush Securities. Please go ahead.
I was just curious, as your borrowers benefit as well from the tax reforms; do you think that the increase in their cash flows would delay the need for bank loans?
I think it will have an effect. We’ll have to see how much and it depends how fast the economy picks up. Curt, you want to add to that.
I think you’re right Ralph, I think short term it should have an impact in terms of lessening the borrowing need. But longer term, I think it’s very positive for the economy and for the businesses that we work with and (inaudible) the country at large and so we see it in the net positive.
Can you just walk through the analysis that you do when the right time, is that interest rate hedges?
Do you want to take that Dave?
Peter we look at that on a weekly basis candidly, specifically given the recent [Feb] commentary. Obviously we’ll monitor that very closely. We have typically used straight slots, four year slots, if we go back years ago. We’ll be looking to potentially reintroduce that looking at other strategies and well. Today that four years slop rate isn’t all that attractive to us, I can’t give you the price exactly today, but I think late last week it was in the 70s. So in fact you are anticipating three rate rises in the coming year. It’s not all that attractive, but then in terms of locking that in for a four year period, if you’re only going to pick up 70 or 72 or 75 basis points, but that’s how we are looking at it.
Your next question comes from the line of Brett Rabatin with Piper Jaffray. Please go ahead.
Wanted to first ask, just thinking about all the regulatory changes that are potentially happening, how does that factor in to your guidance for expenses in 2018 and then can you talk about capital, and just, I know we’re not there yet, but it would seem like you’d have a pretty big opportunity to be more aggressive with capital.
I would say at this point there is not an effect on expenses that we’re expecting. When we look forward at the opportunities that are out there especially at our size of institution, things that would be most important to us is being able to manage our capital position to an appropriate level and based on the earnings growth overtime, as well as regulatory relief from specific designation.
Just wanted to go back to the - I know for some time you talked about loan growth being equivalent to GDP, what factors might change that this year? I know you’re looking for kind of flattish energy, is that a function of pay-offs continuing to be partially and offset there or what would change your outlook for loan growth to be better than GDP aside from the obvious increase in loan utilization from clients.
I think that as we’ve said on prior earnings call, GDP is a good measure for us, kind of when you look at the compilation of all the businesses that we are in, as well as the markets that we serve, that does not mean that we would not have businesses that would potentially grow slightly faster than GDP, but when you look at kind of average across the portfolio, we think that’s a very prudent approach to managing risk and managing appropriate returns to our shareholders.
As far as the energy portfolio is concerned, we continue to like that business and we’re going to take care of our clients, but quite frankly what we are seeing there are new opportunities released for the matching pay-offs in the portfolio. And so we anticipate that that portfolio will remain relatively flat for 2018.
Your next question comes from the line of Steve Alexopoulos with JPMorgan. Please go ahead.
Ralph, looking at the significant reduction in the effective tax rate in 2018, am I looking at the guidance correctly that at least for this year you expect most of that benefit to just fall to the bottom line?
We would expect a great deal of the benefit fall to the bottom line. There will be additional investments, but remember because of going through GEAR Up, and as you know we’re in the midst of that today we’ve been reinvesting with a fair amount especially in the technology. And as we all know technology changes are rapid especially on the product side and we will continue to do the appropriate thing to stay current there.
Ralph if you think beyond 2018 and the capacity of the SKUs, do you step up the pace of investment. There is talk of loan competition getting worse, what’s your view at this point, how you use this longer term?
Longer term I think it will be based on where the economy is, and we as well, and I mentioned to get it on GEAR Up have capacity today, and so that if were to be used up, we would begin to reinvest and basically the tools that we need to continue to be growing at the same time to be and have the kinds of products and services that need to be competitive.
Maybe just one separate question for Dave, on the deposits regarding the pricing there you talked about you changed it late in the quarter. Give us some color on the actions that you took and what should we expect this coming year in terms of an increase for 1Q ’18?
We did a real deep down analysis of looking at the positive (inaudible) over the last couple of years, a real deep down analysis looking at competition by region. And where we made adjustments were on our premium money market with regards to business money market segment, and for large balances we defined that as over 10 million and over, and we increased by 20 basis points. And then on our retail side, again for our larger retail customers a (inaudible) that we prefer to as planned circle. And for the larger balances we define as 500,000 or more which increased at 15 basis points.
Your next question comes from the line of Geoffrey Elliot with Autonomous Research. Please go ahead.
Maybe back to capital, the [CET] 1 ratio ticked up again a little bit this quarter, you are now 11.6%. Can you talk about how you think about the optimal level for capital, is it 11.6, is it lower and how does that change if you lose [specific] designation.
We have not talked about a target for capital, but I think and where you’re going with your question, one of the things that is important to us is being able to manage capital and return the capital to shareholders either through dividends or in the buyback. And today I would say that dividend is a little higher on our list and looking forward and I think there will be hopefully the ability to become more active in managing these numbers.
And in terms of some of the total payout that you think you could achieve if you’re going to be more active, we’ve seen a couple of banks go to the kind of 150% type range is that something that you think in this regulatory environment in this macro environment could be reasonable?
I think depending on growth that’s out there that overall I think you will see paybacks begin to grow, so that the institutions which we were talking about earlier can effectively manage their capital position.
Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead.
Just a follow-up on the rates on the positive side, appreciate that color you gave us on that benefit from rate increases slide. And I see that for the December hike, you’re using the 20%-40% beta. And just wondering on your forward model for NII or you give us the 200 basis points sensitivity, can you help us understand obviously with higher rates you have a higher starting point, but what’s the betas you’re now building in to the core standard model.
If I recall correctly, again I believe that the standard beta that’s wired in on that analysis is a very (inaudible), but focused on 50% beta.
50% as the core. And on another side, just in terms of deposit growth you had really good deposit growth still across the platform and I knew that you did mention you touched up rates a little bit. But can you talk about the balance between customers still bringing in cash versus the prior question about loan growth. What are you just seeing from your customer base in terms of business flows, is it a still wait and see, is it people getting ready to invest, how would you characterize people’s kind of loan to deposits amongst your customer base?
As I mentioned in the prepared remarks, we contingency some customers de-lever payment. We have the confidence and continue to have record levels of liquidity. And quite frankly I think until we see some of that find some level of equilibrium, and I do expect the vast majority of our customers who maintain entire level of cash they may have historically, but I do think that that does put a bit of a pressure point in terms of loan growth because at that point we’re still not yet seeing them (inaudible). I think as confidence grows in the economy and there certainly are positive signs, continued positive signs, including tax reforms. I think our hope is that that will encourage our customers to begin the (inaudible) capital commitments so they can (inaudible) on the side lines to begin to utilize that cash and therefore begin to draw down on those lines of credit.
And Dave last one, if there is a bucket where you would sense that that customer base might start to use as their certain business or geography, where you would feel like the conversation or the tone is getting that place?
Curt do you want to (inaudible) on that?
Yeah, I’ll be glad to Ralph. When you look at 2018, a couple of comments I would make is, first, the first quarter tends to be a little bit softer for us from a loan growth perspective and deposit growth as well. We just would see some natural cyclicality in our business line related to mortgage banker finance, but also just sort of general business cycle with a number of the businesses that we bank. But for the full year of 2018 we continue to have growth expectations, as I said earlier, in line with GDP.
And we look at sort of from a geographic standpoint, we have growth expectations across all three of our geographies, our major geographies really led by Texas and California, but expecting growth in the Michigan economy as well. And would include to a (inaudible) middle market a small business but also a number of our specialty business lines, technology and life sciences, environmental services, dealer or mortgage banker finance etcetera again with the caveat being on the latter to the normal seasonality.
Your next question comes from the line of Jennifer Demba with Suntrust.
How is this excess earnings from the tax reform impacted, thoughts on M&A in near term, and then maybe longer term next couple of years as the SIFI designation goes away we may see some more M&A of larger banks and maybe the $20 billion to $50 billion asset levels.
We always look at alternative as they come up, but we’re very focused when looking at acquisitions. And in our footprint especially because we are very happy with the footprint, we have a lot of opportunity to grow there, some of the fastest growing markets in the country and we’ve done two acquisitions over the last 20 years and they were specifically to expand that footprint both in California and Texas. But we would certainly look at any opportunities that came up and make an appropriate judgement as to whether that would accelerate the growth in our markets, but also add to and fit right in to the culture.
Your next question comes from the line of Steve Moss with B. Riley FBR. Please go ahead.
I was wondering what your thoughts are if we get in to set hike here in March or June or both, and what the impact would be to NII?
I think Steve if you just kind of looked at the slide where we have the projected data that’s coming from the residual in 17 and I think slide 15. If we use December, we’re sending 55 million to 70 million in a recognized (inaudible) have a couple of weeks spend because of that in AAA from that. And if you want to take a real high level shot, use (inaudible) of that if it comes in March, you can assign whatever beta you want to assign, we’re seeing 20 to 40, and as December rate rise, I think we’ll have a far better sense the closer we get to March is to whether or not that 20 to 40 remains at. At this point in time we are not seeing a significant amount of pressure on beta beyond those two adjustments that we’ve made and we’ve talked about.
Okay, that’s helpful. And then second question with regard to card fees, is that sustainable here or is that more of a seasonal impact here?
One of the things Steve that we did two years ago was we entered in to a new merchant agreements with third party and so we’ve been on an upward trajectory in terms of sales activity across all of our business lines and that would include a traditional business bank clients for our business, retail clients as well. And then just looking at some of the other card programs we have in place, with some of the government card programs we’ve got and these traditional commercial cards, so we do feel like cards here have upward trajectory opportunities for us from NII perspective.
Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.
In terms of the margin, just want to get a – assuming if you can give us a little bit of color around your expectation for the margin in coming quarters? Could we see some modest low single digit expansion here on the linked quarter basis through ’18 assuming the rate hike outlook? And then separately, I know you gave the NII benefit of what the past hikes could do to in terms of the spread revenue. What’s the follow-through from the December hike in terms of the margin? Thanks.
(inaudible) in the margin from that December rate rise, (inaudible) there are incremental rate rises throughout the balance of ’18 and we certainly hope that we’ll see that even with a deposit fee that that could begin to elevate is still going to be a net positive to us overall because of our continued (inaudible) sensitivity. I will point out albeit not that significant but two items that are in the margin in the fourth quarter is the higher level of the business recoveries and we continue to have an elevated level of overnight funding as I said. And the positives obviously influence that overnight funding which also has an impact on the margins.
[Operator Instructions] your next question comes from the line of Ken Zerbe with Morgan Stanley. Please go ahead.
Just a quick comment on the new accounting standard, I just want to make sure that the numbers that we’re talking about is it a 120 million reduction in both NII and expenses, is that the right way to think about it or is that --.
120 is a gross number.
First of all Ken 120 is the 2017 impact, we’re not setting (inaudible), obviously where you can just see growth and the particular programs impacted by that (inaudible) accounting standard we’ll see that number increase. But yes, it’s a reduction of both net interest income and net interest expense, zero impact on pre-tax, zero impact on net income.
So probably a little bit higher to 120, okay and understood. And then just in terms of the beginning of the year the loan yield, obviously everyone’s very concerned about the competing way and then seeing more aggressive on loan yields. I know it’s only been a couple of weeks, but have you guys seen any signs at all, whether you guys or other banks are actually reducing your loan yields so far in the year?
Ken it’s always a competitive environment and I don’t believe that it’s any more or less competitive at the moment. Where would I continue to focus on full client relationship and appropriate profitability, take care of our good clients and we are not anticipating a change to our pricing model at this time, but we’ll continue to watch and see what happens from a competitive landscape perspective, but we believe we have a competitive advantage just in terms of the markets we serve and our expertise in some of our specialty business lines.
And then just a last question, in terms of the deposit beta, I know you guys talked about like the competition being the one aspect of what you look out when you set deposit rates. But can you maybe just remind us from a qualitative standpoint, why is your customer base presumably behaving so much differently than the rest of the industry, because all we hear in for other banks is commercial deposits or depositors are demanding more yield, but we’re just not seeing that occur. What’s the difference there?
I think the primary difference Ken is the fact that a very large portion of our commercial base has been on interest bearing. A substantial component of that 80% roughly is linked to earning credit allowance programs. That utilization remains very high, and as long as that utilization remains high, there is a not a whole lot of pressure to adjust or move those funds in to any kind of an interest earned product or pressure on the overall ECM rate. So we’re benefitting from that mix. As to that preponderance, the preponderance of our interest bearing is retail and the retail has not seen the type of great competition amongst peers as you read relative to the commercial balances.
Your next question is from the line of John Pancari with Evercore ISI. Please go ahead.
In terms of loan growth, I know you mentioned deleveraging on the borrower side and from M&A it has led to pay-downs. Regarding pay-downs can you give us an idea of what they amounted to at all this quarter versus last quarter and then separately I know your mentioned that line utilization you saw no real change, where is it now and where was it lets’ say in the last reflationary type of cycle, so I guess ’04-’05 through ’09. Thanks.
John, this is Curt, and maybe to start with the first part of your question just around client activity in general and you mentioned a couple of things that we already reference. In terms of just general M&A activity and customer sitting on more liquidity, I’d also say that a couple of markets and the very sort of type labor markets we’re impacting borrowing activity also and so to speak if we could change there that might free up some capital.
I’d say overall, the words we used previously around for the cost cautiously optimistic continues to be case, but I think (inaudible) wise the tax reform changes, help from optimism standpoint, I think you will see that lead through in terms of activity overall.
From a utilization standpoint, we were at 51% for the quarter. And that tends to track fairly closely in a general range for us in terms of prior quarters. I cannot speak specifically to past economic cycles, I do not have that data readily available. But I’d say in general, it’s been an non-relative range.
Do you have the loan pay-downs that impacted loan balances this quarter?
No. I do not.
Your next question comes from the line of Jon Arfstrom with RBC. Please go ahead.
A couple of follow-ups, maybe for you Curt. Just general middle market you’re talking about your growth potentially been led in ’18 by general and middle market. Would you say the simple question that you’re feeling more optimistic today on general and middle market than you were a couple of quarters ago.
Yes. I think I am being more optimistic and that’s really based on conversations that we were having with clients and some of the planning that they are doing. So I think our customers that have been sitting on the sidelines, maybe borrowing to meet operating cash flow needs but not doing major CapEx expansion. I think that that’s starting to, at least from a planning perspective we are starting to hear from customers that the cost of increased activity.
Tech and life sciences, Dave you touched on it a bit as a driver of growth on a (inaudible) who wants to handle it. But talk a little bit about what’s happening there and what your expectations are?
The technology life sciences growth that we saw in the quarter was really focused in our equity fund services group where we provide a capital, call it subscription lines to venture capital and private equity firms and we’ve seen a lot of continued net creation of capital there in the core business and so we expect that to continue in 2018. The core business has been a little bit flatter for us, we still really like the business. I would say that it’s become very competitive. Some of the venture capital firms we work with are probably being a little bit more selective than they were previously. That’s a business that we do, a lot of very lending, so there’s a lot of $1 million, $2 million, $3 million transactions and so it does require a lot more volume to get a sustainable growth there. And I would say that in general we expect growth of equity fund services, but maybe it will get more flattish growth from traditional core in 2018 just based on what we’ve seen up to this point of what we saw in 2017.
Okay, that makes sense. Dave may be for you on the deposit adjustment that you talked about earlier in the call. Do you expect this as something you’ll have to do with each subsequent rate increase, or is it too difficult to tell at this point?
Well certainly I can’t predict the future, but we will watch the competition very closely. We’ve a number jewels we’ll monitor that. We will remain, as I said a while ago we are remaining competitive. So if the competition moves, that will probably answer your question.
And then last question on energy, it might be buried in here somewhere. But can you talk about have you had any ability to release some energy reserves.
Yes we have releasing reserves over a number of quarters now. Remember though that our criticized and energy although they lack progress it’s still around 25%. So, we’re holding that healthy amount of reserve against the energy book. The good news there is that if we do take any charge-offs in energy (inaudible) more stubborn energy credits, we shouldn’t see any negative impact on provisions.
Your next question comes from the line of Brian Klock with Keefe Bruyette Woods. Please go ahead.
I wasn’t sure if you talked about the (inaudible), the question is for you Dave, with the excess liquidity, you still have about 5 billion of excess liquidity sitting in earning assets. Just talk about what are you thinking about with, I know it’s a flatter curve, but any thoughts about putting some more of that to work if loan growth doesn’t come through and because of securities portfolio.
I will tell you Brian, I think you kind of answered that with what you believe in. Given that that flat yield curve, I believe it’s still [intuitive], all but attractive to large (inaudible) like you know long term yield at those very low levels. And we’re looking to maintain that investment portfolio today at around 12 billion. And while we are seeing some slight uptick in those yields, but certainly not all attractive from a long term perspective.
And that looks like just from an inflexion point that, I guess any of your new purchase money is coming in at higher yields in the portfolio at this point. So does it seem to make sense going forward as well?
Going forward it’s always hard to tell, but certainly off late we have been able put some upgraded securities in to that portfolio versus the beta.
Your next question comes from the line of Marty Mosby with Vinning Sparks. Please go ahead.
Wanted to ask you about, you have couple of earnings levers one is the assets sensitivity that you have. As rates start to go up, given the funding and loan structure that you showed. What are your plans to not leave the vulnerability eventually when rates go back down? Are you going to neutralize this position at one point? Do you have a plan to do that? How do you begin to evolve your position as rates are changing around us?
Dave you mentioned that earlier.
Marty often we look at on a weekly basis. We are regularly challenging what we think of the forward yield curve, where we are at this day, what our options are relative to locking in, what’s the attractiveness of locking in. And as I mentioned earlier, when you look at how flat that forward yield curve is at the moment, it reaches (inaudible) picking out 70 or 75 basis points and again having locked that in for four years is being all that attractive to us.
At some point, and we certainly hope, and the indications are actually even then some of the (inaudible) that we may finally start to see a bit of a steepening in that yield curve, and if that happens we will be opportunistic.
And you might topple the (inaudible) what we’ve been over this far --.
Historically we try to dramatically reduce our asset sensitivity and quite frankly maintain relative neutrality. And you lock that in on a 36 to 40 month basis and at some point we hope to get back to that again.
And do you see using interest swaps and do you have kind of a target for rates in the sense of when the yield curve [list]. You know I am not thinking more strategically than I am tactically, just that you have that vision and you do want to narrow that gap down?
There are really several different factors that you are trying look at. Part of this has four yield curve, part of it quite frankly is, what’s the message coming out of the fed in (inaudible) whether it’s a bad plot or even some of their comment that are irrelative to what they believe are going to be factors in either are holding rates failure as a contingency rates improvement, obviously as of late we continue to hear very positive commentary of relative to forward rate movements which again plays well at its sensitivity.
The other side of that on the more down side you either look at what do you think the (inaudible) are and at the moment we are not anticipating that. We are certainly not hearing any of that commentary coming from the fed. So we don’t see that as a high risk at this point in time. Over time that could change and we’ll obviously adjust accordingly.
And then kind of pulling that with capital in a sense of the excess capital or even liquidity that you have on the balance sheet, how do you envision in a sense to pulling that. Would it be from a scale of 1 to 10, 10 being the more aggressive, yes I want to get all those things pull the end, utilize, being as productive as possible or we want to kind of scale in to this over the long run and take strategic advantage when the opportunity you see come up like you talked about interest rates.
Currently we want to be aggressive when it comes to – if you want to just focus on managing capital overall. We’ve currently want to continue to be very focused and enhancing our return to shareholders. Our overall performance in terms of return on equity and (inaudible) mentioned increasing focus as we have now accomplished a lot of relative to our performance.
Our capital remains strong and we continue to be very optimistic about our future performance. That gives us confidence in terms of when we look at the capita going forward, pushing on increasing that distance, pushing at potentially increasing the overall request in terms of our capital return to shareholders when we do CCAR submission.
So in terms of where do you want to put that on a spectrum, our confidence level certainly is much higher today than it was a year or two ago.
I will now turn the call over to Ralph Babb, Chairman and CEO for any closing remarks.
Well we appreciate very much you taking the time today to join us, and you interest in Comerica. And we hope you have a great day. Thank you very much.
Ladies and gentlemen, this concludes today’s call. Thank you all for joining and you may now disconnect.