Q4 2024 Comerica Inc Earnings Call

James Herzog

Thanks, Curt, and good morning, everyone. Turning to loans on slide 6, average loans declined less than 1/2 of 1%, attributed largely to expected paydowns in Commercial Real Estate from a higher pace of refinancing or sale projects.
As a reminder, our Commercial Real Estate line of business strategy is geared towards originating construction loans, and we do not generally expect to be a permanent lender in that space. Declines in Corporate Banking were partially attributed to senior housing exits.
And energy grew by winning new and expanding existing relationships. Throughout the quarter, we saw increases across a number of businesses, but period-end loans were flat as that growth was offset by a $500 million reduction in Commercial Real Estate.
Total commitments were relatively flat, as declines in Commercial Real Estate and Corporate Banking were offset by production in Middle Market General, Energy, and Environmental Services. Average loan yields increased 1 basis point, as the impact of BSBY cessation and higher nonaccrual interest offset the impact of a lower-rate environment.
On slide 7, we continue to be encouraged by customer deposit activity. Average deposits decreased $550 million or 0.9%. Excluding the impact of the $1.4 billion decline in brokered TDs, customer deposits grew over $800 million or over 1% in the quarter, with the largest contribution coming from Middle Market General.
Growth continues to be centered in interest-bearing deposits. And although cyclical pressures persisted, noninterest-bearing deposits as a percentage of total remained flat at 38%, continuing to reflect the compelling mix.
Period-end deposits increased $700 million. Adjusting for the timing-related increase in Direct Express deposits and the decline in brokered TDs, period-end customer deposits grew $400 million on a net basis. Lower brokered TDs, coupled with a successful pricing strategy, drove a 40 basis points decline in deposit pricing quarter over quarter.
Going forward, we intend to continue our relationship pricing approach, monitoring the rate and competitive environment, while balancing customers’ objectives with their own funding needs and profitability. Our securities portfolio on slide 8 declined as the shift in the rate curve reduced the valuation, and we saw continued paydowns and maturities.
Later in the fourth quarter, we executed a modest repositioning, selling approximately $800 million of our lower-rate treasuries and reinvesting at a market yield. We expect to accrete the $19 million pretax loss in the net interest income within 2025. Beyond the modest level of purchases to replace treasury maturities, we do not currently project a more meaningful securities reinvestment cadence until late this year.
Turning to slide 9, net interest income increased $41 million to $575 million. Excluding the benefit of BSBY cessation, net interest income would have grown $16 million quarter over quarter. The benefit of maturing swaps and securities, higher customer deposits, strong deposit betas, and nonaccrual interest all contributed to a strong net interest income quarter.
Moving to slide 11, we continue to believe the successful execution of our interest rate strategy allows us to better protect our profitability from rate volatility. Despite the slight benefit the slide shows in a lower-rate environment, we generally consider ourselves to be asset neutral, though we remain cognizant of the impact the rate environment may have on noninterest-bearing deposits.
By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time. We feel credit quality remained a competitive strength as shown on slide 12.
Net charge-offs remained low at 13 basis points and only reflect a slight increase from the prior quarter with lower fourth-quarter recoveries. Persistent inflation and elevated rates continue to pressure customer profitability and drove expected normalization in both criticized and nonperforming loans, largely in our General Middle Market businesses.
Overall, the modest migration observed was expected and already factored into our reserves. And as a result, our allowance for credit losses remained relatively flat at 1.44% of total loans. We feel our proven conservative credit discipline continues to position us well to outperform our peers through the cycle.
On slide 13, fourth-quarter noninterest income decreased $27 million, including the $19 million realized loss from the securities repositioning and a $4 million decline in deferred compensation, which was largely offset with the noninterest expenses. Despite modest pressures observed in the quarter across select categories, we continue to prioritize noninterest income and expect to see customer-related income growth in 2025.
Expenses on slide 14 increased $25 million over the prior quarter, inclusive of seasonally higher costs, which impacted a number of line items, including salaries and benefits. In addition, we saw an increase in legal- and litigation-related expenses. And we made the strategic decision to increase funding to increase the size of our charitable foundation.
These increases more than offset lower operational losses and the gains of real estate, which we — as we continue to optimize our real estate and banking center footprint. Expense discipline remains a key priority as we continue to focus on driving efficiency.
As shown on slide 15, we continue to favor a conservative approach to capital with our estimated CET1 at 11.89%. This remained well above our 10% strategic target. And even if the proposed Basel III removal of the AOCI opt-out was in effect, we would have exceeded regulatory minimums and buffers.
Movement in the forward curve caused unrealized losses in AOCI to shift higher in the quarter, but we expect them to improve over time with maturities and paydowns. Even with volatility in the rate curve, we returned capital to shareholders through $100 million in share repurchases in the fourth quarter and intend to repurchase approximately $50 million of common stock in the first quarter.
As we consider future capital decisions, we intend to be measured in our approach and calibrate the size and frequency of future repurchases with expected loan trends. We will also continue to closely watch the forward curve, our profitability, the economy, and any regulatory updates as they may also influence our strategy.
Our outlook for 2025 is on slide 16. We project full-year average loans to be flat to up 1% in 2025, with expected growth in most businesses largely offset by anticipated paydowns in Commercial Real Estate. In fact, excluding the impact from Commercial Real Estate, we project 2% average loan growth year over year. And in the first quarter, Commercial Real Estate paydowns are expected to fully offset production in most other businesses, resulting in a relatively flat average loans compared to fourth quarter ’24.
As we move throughout the year, we project sequential quarterly loan growth, resulting in an estimated 3% point-to-point increase in total loans by year-end 2025 compared to year-end 2024. We intend to continue our deliberate reduction in brokered time deposits, which is expected to drive a 2% to 3% decline in full-year average deposits in 2025. Excluding brokered TDs, we expect full-year average customer deposits to grow 1%.
Following seasonal declines in the first quarter, we project customer deposit growth throughout the rest of 2025. With the elevated rate environment, we expect most of that growth will continue to be concentrated in interest-bearing balances, but believe our noninterest-bearing deposit mix will remain relatively consistent in the upper 30s.
Also, as a point of clarity, we are not assuming deposit attrition in 2025 for Direct Express within this outlook, based on our current understanding of the transition strategy. We expect full-year 2025 net interest income to increase 6% to 7% compared to 2024 with the benefit of BSBY cessation, maturing and replaced securities and swaps, a more efficient funding mix, and higher loans more than offsetting lower noninterest-bearing balances.
In the first quarter, we expect net interest income to take a slight step down with a 1% to 2% decline from the fourth quarter as the impact of day count, lower noninterest-bearing deposits, and lower nonaccrual interest income offsets the benefit of BSBY cessation and our swap and securities portfolios. From there, we expect to see growth through the rest of the year. And even without the benefit of BSBY cessation, we expect net interest income to be significantly stronger in 2025 than 2024.
With the potential for ongoing inflationary pressures and elevated rates, we expect manageable migration towards more normal credit levels to continue in our portfolio. As a result, we project full-year net charge-offs to be at the lower end of our normal 20 to 40 basis points range in 2025.
We expect 2025 noninterest income to increase 4% over reported 2024 levels, which includes a 2% expected growth in customer income. For the first quarter of 2025, we expect seasonal declines in customer-related noninterest income and then generally expect to see growth in customer fees through the balance of the year.
Full-year noninterest expenses are expected to grow 3% with higher salaries and benefits, lower gains on sale of real estate, and an increase in pension expense. First-quarter 2025 expenses are projected to increase 2% over the fourth quarter of 2024 with normal seasonality and compensation expenses. Expense discipline remains a priority as we seek to self-fund strategic and risk management investments to support our future while improving efficiency.
Moving to capital, we continue to appreciate the importance of a strong capital position and intend to consider a number of variables, including loan growth, the forward curve, and the broader economic environment as we execute our plan for the year. We intend to maintain a CET1 ratio well above our 10% strategic target in 2025. In all, we expect favorable sentiment and trends to drive responsible customer-related growth throughout 2025.
Now I’ll turn the call back to Curt.

Curtis Farmer

Thank you, Jim. As one of the few banks who have celebrated 175 years in business, we understand the importance of strong capital, credit, and liquidity in delivering long-term success. And as discussed, we feel those foundational strengths really shine through in 2024.
On top of that, we saw positive customer deposit trends, successfully managed deposit pricing, returned capital to shareholders through resumption of share repurchases. As we look forward, we feel our model is compelling.
We have a unique geographic strategy that is diversified and focuses on growing markets. Our talent is differentiated and tenured colleagues who have deep expertise to deliver consistency to our customers. We continue to invest in our development program, which creates a consistent pipeline of colleagues or the right mix of sales and credit skills.
Our product suite is strong, tailored to meet the needs of our customers. And we are making strategic investments which will enhance our solution set. Importantly, we feel well positioned to deliver responsible loan growth, supported by higher deposits complemented by increased customer-related fee income. No doubt, there’s always some level of economic uncertainty, but we are managing our business for the long term by making important investments that support existing customers and win new relationships.
Before we go to Q&A, I’d like to take just a moment and acknowledge the individuals and businesses who have navigated the unprecedented flooding in the Southeast late last year and the recent wildfires in California. Our thoughts are with our Comerica colleagues and customers impacted by these tragic events.
And with that, we are happy to take your questions.

Operator

(Operator Instructions) Jon Arfstrom, RBC Capital Markets.

Curtis Farmer

Good morning, Jon.

Jon Arfstrom

Hey, good morning. Can you touch a little bit on your loan growth outlook? You talked a little bit about the pipelines maybe being a little bit better. But I think you’re showing commitment stable as well, but you said better sentiment. Can you talk a little bit about what you’ve seen over the last few months?

Peter Sefzik

Yeah, Jon, it’s Peter. So over the last few months, I think the tone has changed. 90 days ago, we were hearing a lot more about interest rate relief needed per se to stimulate loan growth.
And I think that that is — I don’t want to say totally gone away — but it certainly seems to have subsided with more customer optimism going into the new year. And so I think that that overall customer sentiment is encouraging. We’re starting our — the year off with a better pipeline than we did a year ago. So I think all that together is pretty encouraging.
And it’s pretty broad-based. I mean the only business where we really just don’t feel like there’s a whole lot of activity going on in CRE, as we discussed. So we expect that to be a headwind going into 2025. But across the rest of the book, I think customer sentiment has improved quite a bit over the last 90 days and seems less tied to interest rate outlook than maybe it did when we finished the third quarter.

Jon Arfstrom

Okay. And just a follow-up, Peter. Just the CRE payoff outlook. Is anything — when do you expect that to change? I mean when do you expect some of those headwinds to eventually fade out?

Peter Sefzik

Jon, it’s a good question. I probably should add a disclaimer to what I just said. I think interest rates are probably affecting that business more than any. And so I suspect that we will see payoffs through 2025, possibly into 2026, with sort of the current interest rate outlook that the country has at the moment.
Could that change? Could we see less payoffs if rates were to stay where they are possibly? Could it speed up if rates were to drop? Maybe so. I think rates going up would certainly impact that business, both in just opportunities out there and balance is probably staying on longer.
So a little bit of moving parts. I think our baseline is just expecting sort of quarterly payoffs through the rest of this year and probably into the first or second quarter of ’26.

Jon Arfstrom

Yeah. Okay. All right. I’ll step back. Thank you guys very much.

Peter Sefzik

Thanks, Jon.

Curtis Farmer

Thanks, Jon.

Operator

Manan Gosalia, Morgan Stanley.

Curtis Farmer

Morning, Manan.

Manan Gosalia

Hi, good morning. On brokered deposits, I know those are coming down nicely and you expect to pay down some more as you go through the first half of the year. Can you talk about how much room there is to pay down some of these higher-cost sources of funding as we go through the year, if loan growth remains weak?

James Herzog

Yes. Good morning, Manan. Yeah, we did end the year with just over about $1.1 billion of brokered deposits. And we do see those coming down pretty continuously throughout 2025, probably more so starting in the second and third quarters, but all the way through early fourth quarter.
It’s very feasible that we have no broker deposits — no broker time deposits by the end of 2025. So those are a little bit pricey. We’re paying about 5.4% for those. And it is our goal with strong core customer deposit growth to eliminate most or all of those by the end of 2025.
And that will, of course, depend on loan growth trends and other factors. But overall, we continue to improve the efficiency of our funding mix and quite optimistic about that.

Manan Gosalia

Got it. And in terms of capital, I know you’re managing that reported CET1 to about 10%. But is there a number you’re managing to for CET1 including AOCI?

James Herzog

There is no one number because there are a number of capital ratios, the different constituencies value. So we are considering kind of a smorgasbord of capital ratios. But of course, CET1 is slightly the most important there. With higher levels of AOCI like we had this quarter, we are being a little bit more cautious on capital.
But I think it’s fair to say, regardless of where things go this year, we plan on staying well above 11% CET1. And then as AOCI continues to come down later this year and into ’26, it gives us more options from a capital standpoint. But overall, considering a number of ratios and I think it’s fair to say we’ll be well above 11% for this year.

Manan Gosalia

So is it fair to say that if the long end of the curve goes up more and that CET1 including AOCI comes down, you would just manage your capital levels by flexing buybacks, and you still have enough balance sheet available for customers if loan growth should pick up?

James Herzog

Absolutely. We have a lot of options with capital. Certainly, loan growth is not an issue. Loan growth, as Peter was saying, is going to be a little bit of a wildcard depending on where Commercial Real Estate goes. So first and foremost, we will pay attention to where loan growth trends go in determining what we do with capital. But again, AOCI is probably the number-two factor right behind where loan growth goes.

Manan Gosalia

Great. Thank you.

Operator

John Pancari, Evercore ISI.

Curtis Farmer

Morning, John.

John Pancari

Morning. Just looking at the expense side, you’re running at in the high 60s efficiency ratio currently. As you look at 2025, given your guide, it looks like you may still be in that general range. I mean, what do you view as the appropriate long-term efficiency ratio for Comerica? And what can drive you back down off of that upper 60s levels? Is it primarily going to be a revenue catalyst, or is there an expense opportunity there?

James Herzog

Good morning, John. Yeah, we have seen some elevated efficiency ratios. And we really saw this take place following the regional bank crisis with some of the shifts in deposit mix. So we are working to return back to what we think is an acceptable efficiency ratio, which we believe, ultimately, needs to be in the 50s to hit some of the ROE objectives that we have in the future. So we are working towards that.
It’s always a combination of both revenue and expenses. But we are very committed to making sure that we have very strong revenue. We’re not going to short expenses and investment for the sake of any short-term objectives. The important thing over time is to grow revenue.
But clearly, expenses need to grow at a lower-rate than revenue. We need positive operating leverage on a consistent basis to get there. So a combination of both. But in the long run, I believe it is more of a revenue play with responsible investment and expense decisions and making sure that we have positive operating leverage.

John Pancari

Okay. All right. Thanks. And then, separately, on the deposit side, you had indicated the Direct Express $3.5 billion in average deposit balances. You don’t expect a material change based upon the extension and the way the agreement is right now. Is there anything that could change that, and if you could see potentially a faster decline in those balances than you anticipate at this point?

Peter Sefzik

John, it’s Peter. I think the answer to that question is, no, nothing could change that, that we foresee at the moment. We’re still working on what the transition process looks like. But as the year unfolds, we will certainly communicate that as we can to what the outlook appears to be.
But at the moment, we don’t see anything changing in ’25 and really certainly into ’26 at the moment either. So I think the answer is, we don’t see any real changes to what we’ve communicated in the last several quarters on this. And to the extent that it does, we will do our best to share that. But no changes at the moment.

John Pancari

Okay, great. Thanks for the color.

Peter Sefzik

Thanks, John.

Operator

Bernard Von Gizycki, Deutsche Bank.

Curtis Farmer

Morning, Bernard.

Bernard Von Gizycki

Hey, guys. Good morning. Just a question on expansion efforts. So you talked about expanding in areas like the Southeast and the Mountain West. Are there targets for like number of hires you’re looking to add this year? Is there just a way to think about how much of the expense base is in incremental expense initiatives?

Peter Sefzik

Bernard, it’s Peter. So in the Southeast, I would say that we are certainly looking at opportunistic hiring. We did a lot of hiring in the last couple of years and feel pretty good at sort of the ramp-up that we’ve had so far.
I think we feel like going into 2025, we’re going to see opportunities. And we tend to take advantage of those in the Southeast. But probably not the same ramp-up that we had the last two years, but definitely looking at folks and adding that market, particularly in our Florida market.
In the Mountain West, it’s a little bit more — probably, a little more aggressive in the Mountain West to the extent that we can find talent. We’re certainly looking at opportunities in the Denver market as well as in Phoenix. And so I think that that’s — both of those are markets that we would continue to add folks in.
Now I would remind you, too, though, we have tremendous opportunity to add folks in markets like DFW, in Houston, in Los Angeles, and San Francisco. So we feel fortunate that we are in such great markets where the economy is doing really well. There’s population growth. And we feel like there’s opportunities to continue to add folks in each of those markets on a go-forward basis. So —

Bernard Von Gizycki

Okay. Appreciate that. And then maybe just on M&A, like with an easing in the regulatory environment expected from here, just thoughts on how would you think about potentially doing a whole bank deal or a branch or like portfolio acquisition? Just any areas of those that could be of potential interest.

Curtis Farmer

Thank you, Bernard. The strategy for us has really not changed. We have historically been a very patient acquirer. We’ve only done one deal in the last 20-plus years and are continuing to focus on organic growth.
Peter just talked about the markets that we operate in. We think we’ve got lots of opportunities to continue to grow in those markets and also to continue to add talent selectively where it makes sense for us to do so.
And we feel like we’ve got the right balance of sort of product mix and focus as an organization, especially with our strong commercial focus as the best bank for what we believe businesses in the marketplace, but also a really strong wealth management and retail franchise.
So we’ll continue to be patient and really focus primarily on organic growth. Certainly, there might be some opportunities that come along that in terms of team lift-outs, in terms of product capabilities, et cetera, that we’ll look at periodically, but again, primarily focused on organic growth.

Bernard Von Gizycki

Okay, great. Thanks for taking my questions.

Operator

Anthony Elian, JPMorgan.

Curtis Farmer

Morning, Anthony.

Anthony Elian

Hi, everyone. Does your loan growth outlook for 2025 include any uptick in utilization rates, which looks like have been flat the past couple of quarters?

Peter Sefzik

Anthony, it’s Peter. No, it really doesn’t. I think that you might consider that the alpha probably to all the bank’s loan outlook. I think utilization has been pretty flat for quite a while now. It’s certainly been below historical numbers that people have been in this a long, long time. But we aren’t necessarily factoring that into the outlook that we’re providing.
And to the extent utilization were to pick up, that would be a good thing. Of course, any one of our businesses is going to have utilization sort of moving up and down, depending on what’s going on in that particular industry. But on the whole, what I would tell you is we’ve kind of — we’ve pretty much kept it flat.

Anthony Elian

Thank you. And then my follow-up, can you provide more color on NPAs, maybe for Melissa? I know you called out the impacts from higher rates. But was there anything specific in the fourth quarter that contributed to the increase you saw? Thank you.

Melinda Chausse

Yeah, this is Melinda. The NPA increase was about $58 million quarter over quarter, which on the whole for a portfolio of our size, I would consider that very, very modest. It was centered in around four or five different names, so still very granular.
We did have one Commercial Real Estate loan move into the NPA category, and that was approximately $30 million. So nothing really unusual. Again, the commonality there is pressure from higher interest rates on overall profitability and ability to service debt.
And the other commonality that we’ve seen, not just in NPAs, but really in the charge-offs this quarter, were companies that have an orientation towards serving consumer discretionary products. There’s just still some pressure there from a consumer perspective in terms of what they have available.
But on the whole, the credit portfolio, I think, performed quite well. And the migration that we saw was pretty much expected and very much in line with sort of the normalization trends. And just as one other comment, our absolute levels of NPAs at about 60 basis points is about half of what our long-term average is. So yes, we saw an increase, but still relatively low and consider that pretty manageable from our perspective.

Anthony Elian

Thank you.

Melinda Chausse

Welcome.

Operator

Chris McGratty, KBW.

Curtis Farmer

Good morning, Chris.

Chris McGratty

Hey, good morning. Jim, a question on the modest balance sheet restructuring that you did in the quarter, the bond sale. I mean the earn-back within a year is pretty compelling.
I guess the question, why not be more aggressive either now or the next coming quarters? You’ve got the capital to absorb it and just would, I think, lock that rate and efficiency that you talked about.

James Herzog

Good morning, Chris. When we look at the options for capital return, we still really do favor share repurchase over securities repositioning. Securities repositioning is essentially neutral to tangible book value in the long run. It’s just time geography.
I realize it does move around earnings and maybe from an optics standpoint, spruce things up. But if we have to make choices, we would much rather put it in the share repurchase and other capital return options that we think have a real return to shareholders.

Chris McGratty

Okay. And then I guess my follow-up, just a clarification, Jim, on the guidance or all the guides, NII fees, expenses relative to GAAP reported numbers. Can you confirm that?

James Herzog

Yes. Yeah, yeah. Very relative to GAAP numbers.

Chris McGratty

Thank you.

James Herzog

As all the guidance are.

Operator

Thank you. At this time, there are no additional questions. I will now turn the call back to Mr. Curt Farmer for closing remarks.

Curtis Farmer

Thank you to all of you for joining our call this morning. As always, thank you for your continued interest in Comerica. We hope you have a very good day. Thank you.

Operator

This will conclude today’s conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.