Comerica Inc (CMA) 2017 Q4 法說會逐字稿

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.

(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 statement.

I refer you to the safe harbor statement in today's release, in Slide 2, which I incorporate into this call, as well as our filings with the SEC for factors that could cause actual results to differ.

Also this conference call will reference 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 $112 million or $0.63 per share.

Excluding a deferred tax adjustment related to the new tax law and a onetime 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 $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 rates as we prudently managed loan and deposit pricing.

In addition, successful execution of our GEAR Up initiative helped increased fee income over 5% and lowered expenses 4%.

We continue to navigate the Energy cycle and credit quality remained strong.

Altogether, this drove an 84% increase in pretax 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.

Noninterest-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 the 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 the majority of the growth coming from noninterest-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.

Noninterest 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 benefit to our hard-working team.

We granted 4,500 colleagues a onetime $1,000 bonus and we raised our minimum wage to $15 per hour, which impacted over 700 employees.

We increased our payout to our shareholders as we repurchased $148 million or 1.9 million shares, which we expect to gradually increase our stock buyback as we progress through 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 for the delivery of 2018 models.

In addition, the sector continues to consolidate.

And our customers, which are larger, multi-franchise dealers, tend to be the acquirers.

Corporate Banking 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, continued to grow as private equity and venture capital fund formation remains robust.

Partly offsetting this growth, general Middle Market declined due to a pickup in M&A activity, planned exits, continued deleveraging by customers and tight labor markets impacting customers' growth aspirations.

We've remained 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 the normal winter slowdown on home sales.

Total period-end loans were stable and above the average for the quarter.

Our loan yields increased 6 basis points, excluding nonaccrual 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.

Putting 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 added 2 basis points and included elevated loan fees, which was partly offset by the mixed shift in the portfolio.

Our loan pipeline remained solid in the fourth quarter.

Customer sentiment 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 deposits increased over $1 billion or 2% relative to the third quarter as shown on Slide 8. Noninterest-bearing deposits were up over $700 million and money market accounts increased nearly $600 million.

This was partly offset by a 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 remained low at 85%.

As far as rates, we continue to very closely monitor our deposit base as well as the competition and remain focused on prudently managing deposit pricing.

We do this on a product-to-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 beta 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 to stay close to our customers, understand their needs and offer competitive and appropriately priced products.

Our securities book remains at about $12 billion as shown on Slide 9. Recent securities purchases have been at a slightly higher rate than paydowns, resulting in a modest increase in the yield 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 point rate shock extends it modestly to 3.8 years.

Finally, the portfolio's 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 1 basis point.

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 declined $203 million and represented less than 5% of total loans at quarter-end.

This includes a $42 million decrease in nonaccrual 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 nonaccrual loans as well as charge-offs all decreased in the fourth quarter.

We expect loan balances will remain at approximately this level while redeterminations are nearly complete and borrowing bases have increased slightly mainly due to drilling activity and acquisitions.

Slide 12 outlines noninterest income, which increased $10 million or 4% with growth in almost all categories.

This was led by continued strong growth in card fees.

Service charges on deposit accounts declined $2 million due to 3 fewer business days in the quarter.

We remain on track to achieve our GEAR Up revenue target.

For the full year, noninterest 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, the expenses increased as shown on Slide 13.

Salaries and benefits were up $10 million, reflecting a onetime bonus to approximately 4,500 employees as well as an increase in 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 cost, including software and equipment, decreased.

Expenses remained well-controlled.

On a 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 and advertising expense.

With help from higher rates and careful management of loan-to-deposit pricing, our efficiency ratio was 58% as our GEAR Up initiatives continue to be realized.

Moving to Slide 14.

As Ralph mentioned at 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, employee stock activity in 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 floating rate with the majority tied to 30-day LIBOR.

Also our biggest funding source comes from noninterest-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 have not altered the asset sensitivity of our balance sheet.

Our deposit beta has remained very low, although we currently anticipate it will begin to rise.

Thus, we estimate the 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 hedges as we did regularly in the past.

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'll turn 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, led 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 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 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 to benefit from any further rate increases.

Of note, 2017 nonaccrual 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 noninterest 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.

Noninterest expenses are expected to increase 1%.

Additional savings derived from GEAR Up are expected to be about $50 million.

This is expected to be more than offset with increased outside processing expense, consistent with growing card revenue as well as inflationary pressures on items such as annual merit, staff insurance and marketing.

In addition, technology project expenses will continue to rise as we invest to meet customer demands and 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 noninterest income for certain products totaling approximately $120 million for 2017 will be presented net of cost, effectively lowering our noninterest income and expense.

This change in 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 be 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 banking strategy and prudent management of loan and deposit pricing as interest rates increased.

In addition, credit metrics remained strong.

The successful execution of our GEAR Up initiative helped drive fee income and a reduction in expenses.

This resulted in a significant increase in our returns and helped 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'll be happy to take any questions you might have.

(Operator Instructions) Our first question will come from the line of Peter Winter with Wedbush Securities.

I was just curious.

As your borrowers benefit as well from the tax reform, 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 on how fast the economy picks up.

Curt, you want to add to that?

I think you're right, Ralph.

I think short term, it could 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 certainly for the country at large.

And so we see it as a net positive.

Okay.

And then just a follow-up.

Can you just walk through the analysis that you do when the right time is to add interest rate hedges?

Do you want to take that, Dave?

Peter, we look at that on a weekly basis candidly, particularly given the recent Fed commentaries.

Obviously, we'll monitor that very closely.

We have typically used straight swaps, 4-year swaps if you go back years ago.

We'll be looking to potentially reintroduce that, looking at other strategies as well.

Today, that 4-year swap rate just 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 if in fact you are anticipating 3 rate rises in the coming year, it's not all that attractive to think in terms of locking that in for a 4-year period if you're only going to pick up 70 or 72 or 75 basis points.

But that's how we're looking at it.

Your next question comes from the line of Brett Rabatin with Piper Jaffray.

Wanted to first ask, just thinking about all the regulatory changes that are potentially happening, how does that factor into 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 over time as well as regulatory relief from the SIFI designation.

Okay.

And then just wanted to go back to the -- I know you've, for some time, 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 payoffs continuing to be partially an offset there?

What would change your outlook for loan growth to be better than GDP, aside from the obvious increase in line utilization from clients?

Curt, do you want to take that?

Yes.

Brett, I think as we've said on prior earnings calls, 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're seeing there are new opportunities really sort of matching payoffs in the portfolio.

And so we anticipate that, that portfolio will remain relatively flat for 2018.

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

Ralph, looking at the significant reduction of 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 to 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 and we've been reinvesting a fair amount, especially into technology.

And as we all know, technology changes are rapid especially on the product side.

And we'll continue to do the appropriate thing to stay current there.

Ralph, if you think beyond 2018 and the capacity this gives you, do you step up the pace of investment?

There's 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 again on GEAR Up, have capacity today.

And so that if it were to be used up, we would begin to reinvest in 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.

Okay.

Maybe just one separate question for Dave.

On the deposits, regarding the pricing that you talked about you changed late in the quarter, can you 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 look -- a deep-dive analysis looking at deposit behaviors over the last couple of years, real deep-dive analysis looking at composition by region.

And where we made adjustments were on what I'll call our premium money market, which is our business money market segment.

And for large balances, we define that as over $10 million and over.

And we increased that 20 basis points.

And then on our retail side, again for our larger retail customers, a product that we refer to as Platinum Circle.

And for the larger balances, we define that as $500,000 or more, we increased that 15 basis points.

Your next question comes from the line of Geoffrey Elliott with Autonomous Research.

Maybe back to capital.

The TCE1 ratio ticked up again a little bit this quarter.

You're now at 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 the SIFI designation?

We have not talked about a target for capital.

But I think in 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 the dividend is a little higher on our list at looking forward.

And I think there will be hopefully the ability to become more active in managing these numbers.

And in terms of the sort of total payout that you think you could achieve if you're going to be more active, we've seen a couple of banks go up 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 is that overall, I think you will see paybacks begin to go up so that the institutions, as we were talking about earlier, can effectively manage their capital position.

Your next question comes from the line of Ken Usdin with Jefferies.

Just a follow-up on the rates in deposit side, appreciate that color you gave us on that benefits from rate increases slide.

And I see that for the December hike, you're using a 20%, 40% beta.

And just wondering on your forward model for NII, where you give us the 200 basis point 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 into the core standard model?

Dave, you want to...

If I recall correctly, Ken, I believe that the standard beta that's locked in on that analysis is it varies but focus on 50% beta.

50% as the core, okay.

And on another side, just in terms of deposit growth, you had really good deposit growth still into -- across the platform.

And I knew that you'd mentioned you'd touched up rates a little bit.

But can you talk about the balance between customers still bringing in cash versus that 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 just characterize people's kind of loan-to-deposits amongst your customer base?

As I mentioned in the prepared remarks, we continue to see some customers deleveraging.

We have customers that continually have record levels of liquidity.

And quite frankly, I think until we see some of that -- find some level of equilibrium, I do expect the vast majority of our customers will probably maintain a higher level of cash than they have historically.

But I do think that, that does put a bit of a pressure point in terms of loan growth because that's why we're still not yet seeing that line usage.

I think as confidence grows in the economy, and there are certainly positive signs, continued positive signs, including tax reform, I think -- our hope is that, that will encourage our customers to begin to make those capital commitments, that they have been largely on the sidelines, 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, is there a certain business or geography where you would feel likely the conversations or the tone is getting to that place?

Curt, do you want to comment on that one?

Yes, I'd be glad to, Ralph.

Ken, 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 want to 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 full year 2018, we continue to have growth expectations, as I said earlier, in line with GDP.

And when you look at sort of from a geographic standpoint, we have growth expectations across all 3 of our geographies, our major geographies, really led by Texas and California but expecting growth in the Michigan economy as well.

And that would include sort of core Middle Market and Small Business but also a number of our specialty business lines, Technology and Life Sciences, Environmental Services, dealer or Mortgage Banker Finance, et cetera, given with a caveat being on the latter to the normal seasonality.

Your next question comes from the line of Jennifer Demba with SunTrust.

How does this excess earnings from the tax reform impact your thoughts on M&A near term?

And then maybe longer term, next couple of years, if the SIFI designation goes away, we may see some more M&A of larger banks and maybe the $20 billion to $50 billion asset level.

We always look at alternatives as they come up.

But we're very focused when looking at acquisitions.

In our footprint, especially because we are very happy with the footprint, we have a lot of opportunity to grow.

They are some of the fastest-growing markets in the country.

And we've done 2 acquisitions, I guess, over the last 20 years.

And they were specifically to expand that footprint, both in California and in Texas.

But we would certainly look at any opportunities that came up and make an appropriate judgment as to whether that would accelerate the growth in our markets but also add to and fit right into the culture.

Your next question comes from the line of Steve Moss with B. Riley FBR.

I was wondering what your thoughts are if we get a Fed hike here in March or June or both and what the impact would be to NII.

Dave, do you want to take that?

I think, Steve, if you just kind of look at the slide where we have the projected benefit coming from the residual in '17, I think it's Slide 15, if you use December, we're saying $55 million to $70 million.

Recognize, you already have a couple of weeks' benefit of that.

Interpolate from that, if you want to take a real high-level shot, use [9/12] to that if it comes in March.

If you can assign whatever beta you want to assign, we're seeing 20% to 40% in the December rate rise.

I think we'll have a far better sense the closer we get to March as to whether or not the 20% to 40% remains accurate.

At this point in time, we're not seeing a significant amount of pressure on beta beyond those 2 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 -- it's more seasonal impacts there?

Curt?

Yes, one of the things, Steve, that we did 2 years ago was we entered into a new merchant agreement with a third party.

And so we've been on an upward trajectory in terms of sales activity across all of our business lines.

So that would include traditional business bank clients, small 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 just traditional commercial cards that we do feel like cards has upward trajectory opportunities for us from an NII perspective.

Your next question comes from the line of John Pancari with Evercore ISI.

In terms of the margin, just wanted to get a -- see 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 a 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 in terms of the spread revenue.

How do you -- what's the follow-through from the December hike in terms of the margin?

Dave?

John, we'll continue to see an uptick in the margin from that December rate rise.

And obviously, if there are incremental rate rises throughout the balance of '18, we certainly hope that we'll see that.

Even with a deposit beta that could begin to elevate, it's still going to be a net positive to us overall because of our continued asset sensitivity.

I will point out, albeit not that significant, but 2 items that are embedded in the margin in the fourth quarter is that higher level of interest recoveries and we continue to have an elevated level of overnight funding at the Fed.

And deposits obviously influence that overnight funding, which also has an impact on margin.

As to return on the...

The return, yes, right.

(Operator Instructions) Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Just really quick on the accounting, new accounting standard, I just want to make sure the numbers that we're talking about.

Is it $120 million reduction in both NII and expenses?

Is that the right way to think about it?

Or is that the $120 million, the gross number?

First of all, Ken, that $120 million is the 2017 impact.

We're not saying it's $120 million for '18.

Obviously, if we continue to see fee growth in the particular programs impacted by that revenue recognition accounting standard, we'll see that number increase.

But yes, it's a reduction to both net interest income and net interest expense, 0 impact on pretax, 0 impact on net income.

Got it, okay.

So probably a little bit higher than $120 million is the -- okay, understood.

I believe that's a fair assumption.

Great, okay.

And then just in terms of the beginning of the year, the loan yields.

Obviously, everyone is very concerned about the competing away and banks being 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?

Curt, do you want to take it?

Yes.

Ken, it's always a competitive environment.

And I don't believe that it's any more or less competitive at the moment.

We're going to continue to focus on full client relationships 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 with some of our specialty business lines.

Okay, great.

And then just the last question, in terms of the deposit beta, I know you guys talked about like competition being one aspect of what you look at when you set deposit rates.

But can you maybe just remind us from a qualitative standpoint, like why is your customer base behaving -- presumably behaving so much differently than the rest of the industry?

Because all we hear from other banks is commercial deposits or depositors are demanding more yield, but we're just not seeing that at Comerica.

What's the difference there?

I think the primary difference, Ken, is the fact that we have a very large portion of our commercial base is in noninterest-bearing.

A substantial component of that, 80% roughly, is linked to earnings credit allowance programs.

That utilization remains very high.

And as long as that utilization remains high, there is not a whole lot of pressure to adjust or move those funds into any kind of interest-bearing product or pressure on the overall ECA rate.

So we're benefiting from that mix.

The preponderance of our interest-bearing is retail.

And retail has not seen the type of price competition amongst peers, as you read, relative to the commercial balances.

The next question is from the line of John Pancari with Evercore ISI.

In terms of loan growth, I know you mentioned deleveraging on the borrower side and some M&A that has led to paydowns.

Regarding paydowns, can you give us an idea of what they amounted to at all this quarter versus last quarter?

And then separately, I know you mentioned that line utilization, you saw no real change.

Where is it now?

And where was it, let's say, in the last reflationary type of cycle, so I guess, '04, '05 through '09?

Curt?

Yes, John, 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 referenced.

In terms of just general M&A activity and customers sitting on more liquidity, I'd also say in a couple of our markets that the very sort of tight labor markets are impacting borrowing activity also.

And so if we see some change there, that might free up some capital.

I'd say overall, the words we've used previously around sort of cautiously optimistic continues to be the case.

But I think things like the tax reform changes helped.

From an optimism standpoint, I think we will see that bleed 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.

We don't have that data readily available.

But I'd say in general, it's been in that relative range.

Okay.

And maybe do you have the loan paydowns that impacted loan balances this quarter?

No, I do not.

Your next question comes from the line of Jon Arfstrom with RBC.

A couple of follow-ups maybe for you, Curt.

Just general Middle Market, you're talking about your growth potentially being led in '18 by general Middle Market.

Would you say, it's a simple question, that you're feeling more opportunistic today on general Middle Market than you were a couple of quarters ago?

Yes.

I think I am a little more optimistic.

And that's really based on conversations that we are having with clients and some of the planning that they are doing.

And 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're starting to hear from customers that possibly increased activity.

Okay, good.

Tech and Life Sciences, Dave, you touched on it a bit as a driver of growth.

I don't know, Dave or Curt, who wants to handle it.

But talk a little bit about what's happening there and what your expectations are.

The Technology and Life Sciences growth that we saw in the quarter was really focused in our Equity Fund Services group, where we provide a capital call and 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 really still 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 granular 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 sustainable growth there.

And I would say that in general, we expect growth of Equity Fund Services but maybe a little bit 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, good.

That makes sense.

Dave, maybe for you on the deposit adjustment that you talked about earlier on the call.

Do you expect this is 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 have a number of tools.

We'll monitor that.

We will remain, as I've said right along, we will remain competitive.

So if the competition moves, that will probably be the answer to your question.

Yes, okay.

And then last question on Energy, might be buried in here somewhere.

But can you talk about if you had any ability to release some Energy reserves?

Pete?

Yes, we have been releasing reserves over a number of quarters now.

Remember though that our criticized in Energy, although we've made a lot of progress, is still running at 25%.

So we're holding a healthy amount of reserves against the Energy book.

The good news there is that we do think any charge-offs in Energy, as we resolve some of these more stubborn Energy credits, we'd soon see any negative impact on provision.

Your next question comes from the line of Brian Klock with Keefe, Bruyette, Woods.

So guys, I wasn't sure if you talked about this earlier, and I guess the question is for you, Dave.

With the excess liquidity, you still have about $5 million 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 adding to the securities portfolio.

I will tell you, Brian, I think you kind of answered that with your lead-in.

Given that flat yield curve, we just don't view it as all that attractive to lock in a long-term yield at those very low levels.

And we're looking to maintain an investment portfolio today at around the $12 billion.

And while we're seeing some slight uptick in those yields, they're certainly not all that attractive from a long-term perspective.

Got you.

And it looks like just from an inflection point that, I guess, any of your new purchase money is coming in at higher yields than the portfolio at this point.

So does that seem to make sense going forward as well?

Well, the going-forward is always hard to tell.

But certainly of late, we have been able to put some accretive securities into that portfolio versus the paydowns.

Your next question comes from the line of Marty Mosby with Vining Sparks.

Wanted to ask you about you have a couple of earnings levers.

So one is the asset 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 of 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.

Yes.

Marty, it's an item we look at on a weekly basis.

We are regularly challenging what we think of the forward yield curve, where we are today, what our options are relative to locking in, what the attractiveness of locking in.

As I mentioned earlier, when you look at how flat that forward yield curve is at the moment, we just don't view picking up 70 or 75 basis points and having to lock that in for 4 years as being all that attractive to us.

But at some point, we'd certainly hope -- I mean, for indications actually even in some of the press this morning 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 talk a little bit about what we've done over historical quarters at this point...

Yes.

And again, historically, we tried to dramatically reduce our asset sensitivity and quite frankly maintain relative neutrality.

But lock that in on a 36- to 48-month basis, and at some point, we hope to get back to that again.

And do you see using interest rate swaps?

And do you have kind of a target for rates in the sense of when the yield curve looks strong?

I'm not thinking more strategically than I am tactically, just that you have that vision and you do want to narrow that gap down.

It's really several different factors that you have to look at.

Part of it is that forward yield curve.

Part of it is, quite frankly, what's the messaging coming out of the Fed in terms of whether it's their dot plot or even some of their commentary relative to what they believe are going to be the factors, either holding rates steadier or continue to see rate improvement.

Obviously, as of late, we continue to hear very positive commentary relative to forward rate movements, which again plays well for asset sensitivity.

And on the other side of that, on the more downside, you need to look at what do you think the recession risks are.

And at the moment, we are not anticipating that.

We're 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 and the sense of excess capital or even liquidity that you have on the balance sheet, how do you envision in the sense deploying that?

Would it be, on a scale of 1 to 10, 10 being the most aggressive, "Yes, I want to get all those things pulled in, utilized, being as productive as possible," or, "We want to kind of scale into this over the long run and take strategic advantage when the opportunities kind of come up," like you talked about interest rates?

Quite frankly, we want to be aggressive when it comes to -- we don't want to just focus on managing capital overall.

We clearly want to continue to be very focused on enhancing our returns to shareholders.

Overall performance in terms of return on equity and the deferred Ralph mentioned, increasing focus as we have now accomplished a lot relative to our performance.

Our capital remains strong.

We continue to be very optimistic about our future performance.

That gives us confidence in terms of when we look at capital going forward, pushing on increasing that dividend, pushing potential increasing the overall request in terms of our capital return to shareholders when we do our CCAR submission.

So in terms of where you want to put that on a spectrum, our confidence level certainly is much higher today than it was a year or 2 ago.

I will now turn the call back 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 your 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.