CMA
#Good morning, everyone
Turning to Slide 6, average loans in the fourth quarter were relatively stable compared to the third quarter
As a result of seasonality, our mortgage banker business decreased almost $200 million due to the fall slowdown in home sales, while our auto dealer floor plan portfolio increased $300 million as dealers took delivery of the 2017 models
We had a reduction of over $150 million in the energy portfolio
We also saw more robust declines in environmental services and general middle market partly due to some customers taking advantage of attractive valuations to monetize their investments
Finally, the strong growth in commercial real estate earlier this year has slowed as we remained focused on well-structured, attractive opportunities with existing customers as well as maintaining the diversity of our total portfolio
Growth in November and December resulted in period end loans above the average for the quarter
As you can see, the quarter ended with loans at $49.1 billion down from the third quarter with mortgage banker contributing the largest decline
As of December 31, commitments decreased $576 million, including a $220 million decline in energy and almost $300 million seasonal decline in mortgage banker
Average line utilization was stable at 51%
Interest earned on loans increased $1 million quarter-over-quarter and our loan yield increased 3 basis points
The increase in interest rates provided a $6 million benefit, which was partially offset by a lease residual valuation adjustment and lower loan balances
Deposit growth was robust again this quarter as you can see on Slide 7, increasing almost 3% over the third quarter
Our deposit costs remained low at 14 basis points as we continue to prudently manage pricing for our relationship-oriented deposits
We have not instituted any standard pricing adjustments in response to the increase in short-term rates
We are closely monitoring our deposit base as well as the market and we believe we are well positioned
We continue to maintain our securities book at about $12.5 billion as shown on Slide 8. The yield on the portfolio was stable
Recently, the increase in yields had allowed us to invest prepays at a higher rate than the portfolio average
For example, in the last couple of weeks, we purchased some mortgage-backed securities in the 230s with only modestly longer duration and extension risk than the portfolio average
Hopefully, this marks the end of the yield erosion we have been experiencing
The recent rise in mortgage rates has not had a significant impact in the pace of prepayments and the estimated duration of our portfolio sits at about 3.5 years and the expected duration under a 200 basis point rate shock extends it modestly to 3.9 years
Finally, the increase in rates resulted in the swing of the portfolio position to a small net loss of $42 million
Turning to Slide 9, net interest income increased $5 million, while the net interest margin decreased 1 basis point
As I discussed earlier, all loan-related impacts netted to $1 million and added 2 basis points to the margin
Wholesale funding costs decreased $1 million as the increase in 6-month LIBOR was more than offset by the benefit from the maturity of $650 million in sub-debt that was repaid in mid-November
Finally, the $1.5 billion increase in average balances at the Fed contributed $2 million, but had a 4 basis point negative impact on the margin
Our overall credit picture remains strong as outlined on Slide 10. Total criticized loans declined over $400 million and are now under $3 billion at quarter end
This includes a $49 million decrease in non-accrual loans, which now represents only 1.2% of our total loans
Net charge-offs were $36 million or 29 basis points, which is at the low end of our normal historical range
Our allowance for credit losses and allowance-to-loan ratio remains stable
Our reserve is built from the bottom-up every quarter and takes into consideration changing economic risk factors that may have an impact, but have not yet been reflected in our risk ratings such as the recent strength of the U.S
dollar
Energy loans now represent less than 5% of total loans
E&P loans make up about 70% of our energy portfolio
Fall re-determinations have resulted in an increase in borrowing basis of about 11% on average as many of our customers have increased reserves through acquisitions, improved production and new drilling as well as slightly higher prices
As criticized and non-accrual energy loans continued to decline and charge-offs remains manageable, the reserve currently allocated for energy loans declined slightly
Slide 11 outlines non-interest income, which fell slightly from very robust levels seen in the third quarter
We had nice growth in card fees as well as fiduciary and foreign exchange income
This was offset by decline in commercial lending fees primarily due to a slowdown in syndication activity
In addition, non-fee categories declined, including a $2 million net securities loss related to an adjustment for our Visa derivative and a decline in deferred compensation plan asset returns
The reduction in expenses, as shown on Slide 12, was a highlight in the quarter
Non-interest expenses decreased $32 million with our GEAR Up initiative contributing more than $25 million to the decline
Salaries and benefits expense declined $28 million, primarily due to the reduction in workforce as well as reduced pension expense as a result of the redesign of our retirement program we announced last quarter
In addition, a decrease in consulting expense and a gain on the early termination of certain leverage lease transactions more than offset the increase in outside processing expense, which is tied primarily to growing card fees
Moving to Slide 13 and capital management, we continue to maintain strong capital ratios while returning excess capital to our shareholders in a meaningful way
As we have previously indicated, our 2016 capital plan includes share repurchases of up to $440 million and the pace of our buyback will be dependent on balance sheet movements, our financial performance and market conditions
In the fourth quarter, we again increased our share buyback
Through the buyback, together with the dividend, we returned $139 million to shareholders or 85% of our fourth quarter net income
Of note, as a result of warrants and employee actions exercised during the quarter, we issued 5.1 million shares
Also, our average diluted share count increased by 1 million shares to 177 million as a result of the rise in our share price during the quarter
Turning to Slide 14, there are a number of potential developments that could enhance our financial performance
On the left side of the slide, we outlined the impact of rising rates
As I mentioned earlier, with our asset sensitive balance sheet, we have benefited from the recent increase in rates
Over 90% of our loans are floating rate
Therefore, as rates move, our loan portfolio re-prices relatively quickly
Assuming our deposit prices move with a 25% beta, our model indicates that the recent Federal Reserve rate increase of 25 basis points, we should gain about $70 million more in net interest income over a 12-month period
Of course, deposit pricing is only one assumption in our interest rate sensitivity modeling
We provided a range of possible outcomes as rates continue to rise based on various assumptions around positive base, pace of deposit decline and the incremental funding dates
Additional scenarios, other key variables and a list of assumptions are in the appendix
In addition, there has been much discussion about the new administration in Washington’s plans to reduce taxes, provide regulatory relief and fiscal stimulus to drive economic growth
While there is no certainty as to what changes may prevail, the table on the right provides a reconciliation of our 2016 income taxes to assist you in your analysis
We believe we are well positioned and can act quickly no matter what changes are enacted
Now I will turn the call back to <UNK>
We don’t really look at it that way
We really focus more on the non-interest bearing, which is predominantly our commercial customers
And while we certainly have a large base of customers that drive a significant balance, there clearly are, I don’t know, a dozen, two dozen customers that carry very significant balances with us, but do tend to move week to week, month to month
But in any event to reemphasize <UNK>’s point, we are not looking to be changing our deposit pricing, but we will be watching as I said in my prepared remarks, we will be watching the market and our competition very, very, very closely, but let me make it clear we won’t be leading the way, but we certainly will be looking to match competition if there is first movers
No, I would echo that <UNK>
The forecast is assuming no incremental rate hikes throughout the balance of 2017. We would be pleased to see them, but they are not embedded in the forecast as the expense side would be absolutely de minimis
Well, <UNK>, you actually did pick up on the biggest piece of it and that is the revenue side, a lot of that big card fees, merchant side activity
As you are well aware of, there is outside processing associated with that
And in fact, the single biggest impact that we expect to see in expense growth next year is in fact that very point
It’s the cost of outside processors
Do keep in mind we do also expect to see the growth in not only fees but growth in loans
Accompanied with that is increased incentive payments as you would expect as we grow that book
We also have the standard merit increases such as due to inflationary pressures, which I know our employee base appreciates
We also have the FDIC surcharge coming through for the full year and then quite frankly, we just have ongoing increases, albeit well controlled, in technology
So on balance, that’s kind of the framework of what we expect to see
I should add remember, we also had $13 million and <UNK> mentioned this in his prepared remarks, $13 million in lease termination gains last year that we do not expect to repeat
Well, our GEAR Up initiatives are completely underway
We will be significantly focused this year on an element of GEAR Up, that being the technology piece
That will be a significant contributor in 2018. So we do, as <UNK> said, we do fully expect to execute on every element of GEAR Up
No, I would agree
Great number <UNK>, we have recently picked up some mortgage back in the 2.30s
And quite frankly remember you are locking into that for a 3-year, 3.5-year period
So if we continue to see rate increases, that could be a challenge in terms of not having locked into that fixed rate
I would much rather see that go into loan growth and as <UNK> said, we will continue to stay with our standard pattern here and until a better picture emerges
I think our confidence level is certainly increasing as it relates to completing the $440 million buyback as our CCAR plan has articulated
The increase in the capital ratios, we did indicate we did have warrant conversions in place, stock option conversions with that a little over 5 million shares has certainly a significant increase to the capital ratio and then quite frankly, our risk-weighted asset calculation also declined so both kind of contributing to that increase
In terms of next year, obviously, we will take a very hard look at that knowing where our capital ratios are, knowing our confidence in our forecast, including the expense saves and revenue enhancements coming from GEAR Up, we will have to coalesce all those thoughts as we work through our CCAR plan for its submission during the few months
I think we are going to stand down, can wait and see of what if anything is actually moving through Congress and what if anything the new President maybe inclined to sign
It’s obviously very difficult to do any kind of real forecasting with taxes other than to use today’s tax regulation to focus on
I think we have been saying for long that we are – part of our strategy here is to manage the level of capital
And as I said earlier, we need to look at all those factors
As we pulled together the CCAR submission here for this year, obviously our confidence level is higher than the impact of GEAR Up, the fact that the economy is improving
We have some positive interest rate movement here in December
You may or not see more increases
It certainly increases our level of confidence and when it comes to making the submission
No, <UNK>, the 33% that we are telegraphing is simply a result of an expectation of a higher level of pre-tax earnings being offset with the same level of expected low income housing tax credits and the current same level of tax exempt income, which in our case has been from life insurance
But if the other discrete items we don’t expect to repeat, which is mainly the lease termination transaction and then do remember there is about a 1% or 1.5% impact from state income tax that’s embedded in that 33%
Well, there is three pieces that – there were four pieces that could impact that
One, what would be the new corporate tax rate? Today, it’s 35%
What does that corporate tax rate move to? The second would be does any congressional action modify the ability for us to fully utilize low income housing tax credits? Don’t know
The third would be bank-owned life insurance
From time to time over the last 20 plus years, Congress has entertained either limiting or eliminating the benefit of that tax exempt income
And then lastly and this would be a one-time adjustment, but remember, we now have a net deferred tax asset and that net deferred tax asset is recorded at 35%
So to the extent corporate tax rates decline, you have to write-down that deferred tax asset to remember the new corporate tax rate would be
That’s a one-time item, but there is significant moving pieces
So you can probably use whatever assumptions you choose to use as you see Congress move on tax legislation and that will give you a good idea of what the impact would be to Comerica?
Yes, all of it
I want to clarify because I am not 100% sure I heard the last statement that <UNK> made correctly, but I want to make sure I am very clear on this corporate tax rate
To the extent there is a reduction in corporate tax rates that drops to our bottom line, we expect that to enhance EPS, but I think <UNK>, I may have misunderstood you, you may have been suggesting that we would trade that away in competition
That was not my intent to answer yes, all of it
Yes, all of it falling to the bottom line to EPS, but I just want to make sure I am clear
I am not sure I heard the last point of your question correctly
Well, clearly, balance sheet growth would be a great use of capital
But at the moment, given where we are with balance sheet growth, we continue to believe stock buyback is an appropriate use of our excess capital, so if we begin to see those dynamics change, we will obviously reevaluate
But given the alternatives, we continue to believe stock buyback is the right action for us to be taking at this time
And we will continue to focus on that dividend and that will be another consideration as we look at next year’s CCAR submission
Well, there is a couple of ways you can approach that
One is with and without restructuring charges
So I will focus on the GAAP component, which will be including restructuring charges
Absent at least one more, if not two more rate increases, I would say that, that would be a high hurdle
But again, our focus remains more on driving that number to or below 60% for 2018.
If all other elements of our forecast fall in place exactly as we would expect, I think we will be extremely close
Another rate increase would make it a lot easier to lay up as opposed to a longer shot
No, I will agree
So far, no pattern has been the same
But keep in mind, only a month into the rate increase and like I said, but we won’t be first mover on standard pricing, but we will watch the competition
Anytime there is a rate increase, we do have, as I said, we have some very, very, very large corporate customers
They tend to reach out to see if they are willing to park some of those funds for an extended duration if we might be willing to be somewhat more competitive in terms of pricing
We tend to be very focused on that
We had a handful of calls last year
We have got handful of calls again this year, but nothing in that pattern has really changed
Most of that it’s really our treasury management
The way we have that rolling in, in 2017, we are just beginning to roll that program out
We did a fair amount of site testing throughout the third and fourth quarters with various markets, with various customers
And if we just we will begin the full ramp up of that here early in ‘17. So I think it’s reasonable to expect some minor component of that in the first quarter, but you could expect the balance of that to really be more second half as opposed to first half
