Comerica Inc (CMA) 2018 Q1 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 First Quarter 2018 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.

Thanks, Regina.

Good morning, and welcome to Comerica's First Quarter 2018 Earnings Conference Call.

Participating on this call will be: Our Chairman, Ralph Babb; President, Curt Farmer; Chief Financial Officer, Muneera Carr; and Chief Credit Officer, Pete Guilfoile.

During this presentation, we will be referring to slides that provide additional detail.

The presentation slides and our press release are available on SEC's website as well as in the Investor Relations section of our website, comerica.com.

This conference call contains forward-looking statements.

And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations.

Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statement.

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

Also this conference call will reference non-GAAP measures.

And in that regard, I direct you to the reconciliation of these measures within this presentation.

Now I'll turn the call over to Ralph, who will begin on Slide 3.

Good morning, and thank you for joining our call.

Today, we reported first quarter earnings of $281 million or $1.59 per share.

Adjusted net income was $271 million or $1.54 per share after excluding restructuring charges, tax benefits from employee stock transactions and a small deferred tax adjustment.

Earnings per share on an adjusted basis increased 20% over the fourth quarter.

Relative to the first quarter of last year, our earnings per share increased significantly and pretax income is up 25%.

This is primarily due to higher interest rates as well as continued successful execution of our GEAR Up initiatives.

Note that in the first quarter, we adopted a new accounting standard for revenue recognition, which nets certain expenses against the related fee income.

This change in presentation has no impact on net income.

The adjusted noninterest income and expense figures are reflected on the slide for comparability.

On Slide 4, consistent with the previous quarter, we are outlining adjustments related to certain items, including restructuring, impacts from the new tax law and the tax benefit related to employee stock transactions.

The adjusted return on assets was 1.56% and adjusted return on equity was 13.85%.

Turning to Slide 5 and an overview of our first quarter results.

As a result of typical seasonality in Mortgage Banker Finance as well as a decrease in Corporate Banking, average loans for the first quarter declined.

Apart from these 2 business lines, average loans increased $327 million or nearly 1%.

As far as deposits, we saw the normal seasonal decline in noninterest-bearing deposits following strong growth in the fourth quarter.

We continue to closely monitor our deposit base and recently adjusted standard pricing for certain products in conjunction with the Fed's rate increase last month.

Starting mid-quarter, we began seeing the rebound in loan and deposit balances, which is consistent with trends in prior years.

Net interest income increased $4 million.

The net benefit from increased interest rates was $27 million as we continue to prudently manage loan and deposit pricing.

This was partly offset by 2 less days in the quarter and lower loan balances.

Our provision for credit losses declined $5 million in conjunction with decreases in non-accruals and criticized loans.

Net charge-offs of 23 basis points remained below our historical norm.

On an adjusted basis, noninterest income decreased $7 million.

This included a $4 million decrease in commercial lending fees due to the decline in syndication fees following a strong fourth quarter and relatively weak first quarter market activity.

On an adjusted basis, noninterest expenses decreased $1 million.

An increase in salaries and benefits expenses in conjunction with annual stock compensation was more than offset by decreases in outside processing and advertising as well as business tax refunds.

During the first quarter, employee stock activity added 1.2 million shares and resulted in a credit to our income tax provision of $19 million.

We continued to actively manage our capital and repurchased $149 million or 1.6 million shares.

As you know, we have submitted our annual CCAR plan and expect to receive a response from our regulator toward the end of the second quarter.

We are encouraged by the progress that's being made on the regulatory front, including recent bipartisan legislation and the Fed's proposal to simplify capital requirements.

And now I will turn the call over to Muneera, who will go over the quarter in more detail.

Thanks, Ralph.

Good morning, everyone.

Turning to Slide 6. Loan growth across the industry was weak in the first quarter and typical seasonality further hampered our loan growth.

Average mortgage banker loans declined over $400 million with the normal winter slowdown in home sales.

However, balances began to rebound mid quarter and are expected to continue to grow as spring/summer home sales pick up.

Following a strong fourth quarter, Corporate Banking declined about $400 million partly due to seasonality as well as the repayment of a relatively large bridge facility and planned exits.

Average Energy loans declined as a result of capital markets activity due to firmer commodity prices.

Partly offsetting these declines was a seasonal increase in Dealer Floor Plan loans as well as growth in general Middle Market.

We also had smaller increases across many of our specialty and national business lines, including Technology and Life Sciences, Environmental Services, Commercial Real Estate as well as Entertainment.

Total period-end loans were stable and well above the average for the quarter, illustrating the positive trend in the back half of the quarter.

In addition, line utilization has increased and our loan pipeline is up significantly.

Overall, customer sentiment has remained confident.

Our loan yields increased 22 basis points, primarily due to the increase in 30-day LIBOR.

Recall the bulk of our LIBOR-based loans reprice at the beginning of the month, so the impact of the most recent rise in short-term rates has not been fully captured yet.

This was partly offset by other portfolio dynamics, primarily a decrease in loan fees as well as decline in nonaccrual interest recoveries to a more normal level.

Seasonality also impacted deposits in the first quarter, as you can see on Slide 7. Average deposits declined $1.6 billion following strong deposit growth of $1.1 billion in the fourth quarter.

However, the decline in deposits this year has been less than we have seen in the past 2 years.

Also indicating a positive trend, period-end deposits of $57.6 billion was well above the average.

Our deposit rates increased 6 basis points.

We rely on our relationship model to stay close to our customers and help ensure they're often competitive and appropriately priced products.

As Ralph mentioned, in conjunction with the Fed's action in March, we adjusted our standard rates for certain products.

Our primary objective is to retain and attract deposits while managing our total cost.

Our securities book remains at about $12 billion as shown on Slide 8. The portfolio's unrealized loss positions of $270 million had a minor impact on the carrying value.

The yield on the portfolio continues to trend up modestly.

Recent securities purchases have been in the low 3s, which was above the average rate of 2.25% on the $450 million decline in paydowns we receive each quarter.

The estimated duration of our portfolio remains short at about 3.3 years, and the expected duration under a 200 basis points rate shock extends it modestly to 3.9 years.

Turning to Slide 9. Net interest income increased $4 million and the net interest margin was up 14 basis points.

Our loan portfolio added $11 million and 17 basis points to the margin.

The increase in interest rates provided $32 million or 20 basis points benefit to the margin.

This was partly offset by 2 less days in the quarter and lower loan balances.

As a reminder in recent quarters, we have benefited from higher loan fees, which we include in other portfolio dynamics, as well as elevated nonaccrual interest recoveries.

Both returned to more typical levels in the first quarter.

Balances at the Fed contributed $1 million and 3 basis points to the margin.

On the funding side, deposit costs were up $3 million, primarily due to increased pay rates on certain products.

Also wholesale funding cost increased $5 million as a result of the increase in 6-month LIBOR, along with some FHLB funding that was added at attractive rates.

In summary, the net impact from increased rates contributed $27 million or 17 basis points to the margin.

This included the full quarter benefit of the December rate rise, the faster pace of LIBOR increasing during the quarter and the March Fed rate rise.

Turning to credit quality on Slide 10.

Total criticized loans declined $111 million and now represent less than 4.3% of total loans at quarter-end.

This includes a $76 million decrease in nonaccrual loans, which comprise only 70 basis points of our total loans.

Net charge-offs was 23 basis points or $28 million.

As far as Energy loans, total balances, criticized and nonaccrual loans all decreased.

While credit quality remains strong, we remain vigilant and continue to look for signs of stress.

At this point, we are not seeing any concerning trends.

However, we are maintaining a conservative stance regarding trade, economic and market conditions.

Turning to Slide 11.

As Ralph mentioned, noninterest income and expense included the effect of a new accounting presentation, whereby certain expenses are netted against the corresponding income, mainly in card fees.

The blue bars provide the comparative figures excluding this change.

On this adjusted basis, noninterest income decreased $7 million with a $4 million decline in commercial loan syndication fees and a $3 million decrease in bank-owned life insurance.

Both are difficult to predict and are well below the typical levels.

Customer derivatives declined $2 million from the higher run rate we had in the second half of last year.

This was partly offset with increases in fiduciary and brokerage income.

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

To highlight our progress, you can see the growth we've achieved on a year-over-year basis in card, fiduciary and brokerage.

Adjusted expenses decreased $1 million as shown on Slide 12.

This excludes the change in presentation, a $3 million increase in restructuring charges and the $5 million onetime employee bonus we paid in the fourth quarter.

Outside processing decreased $4 million after adjusting for the accounting change and advertising expense decreased $3 million.

In addition, we received business tax refunds of $5 million, which are not expected to be repeated.

An increase in salaries and benefits resulted from annual stock compensation, which was partly offset by the $5 million onetime tax bonus paid in the fourth quarter as well as fewer days in the first quarter.

Of note, we have adopted a new accounting rule that requires a portion of pension cost to be included in miscellaneous expense and prior periods have been adjusted.

More detail can be found in the appendix.

Expenses remain well controlled.

With help from higher interest rates and careful management of loan and deposit pricing as well as continued achievement of our GEAR Up initiative, our efficiency ratio has declined to 56%.

In the fourth quarter, we repurchased $149 million or 1.6 million shares under our equity repurchase program as you can see on Slide 13.

Together with dividends, we returned over $200 million to shareholders.

Also during the first quarter, employee stock activity added about 1.2 million shares.

This activity resulted in a credit to our income tax provision of $19 million or $0.11 per share.

Slide 14 outlines the positive impact of higher rates.

As we have previously indicated, the full year 2018 benefit of the 2017 rate increases is expected to be $125 million.

In addition, as a result of LIBOR moving up at an accelerated pace in the first quarter, we have added $20 million to our full year expectation.

This is reflected in our first quarter run rate.

Furthermore, we have increased our estimates for the March Fed action to $60 million to $70 million, which now include a sustained higher LIBOR tempered somewhat by an expected higher deposit beta.

In total, we believe the full year benefit from higher rates to be $205 million to $215 million over our full year 2017.

Recall that we realized a $27 million benefit in the first quarter from rising rates.

Of this benefit, $5 million relates to the March action.

The ultimate outcome depends on a variety of factors such as the pace at which LIBOR moves, deposit betas and balance sheet movements.

Our balance sheet continues to be well positioned to benefit from increase in rates.

Approximately 90% of our loans are floating rate with the majority tied to 30-day LIBOR.

Also the bulk of our deposits are noninterest-bearing and the majority of our interest-bearing deposits are retail.

This benefit of our asset-sensitive balance sheet is illustrated by our cumulative loan and deposit betas, which is the increase in our loan yields or deposit cost expressed as a percentage of the increase in the federal funds rate since the beginning of the rate cycle in the third quarter of 2015.

Our cumulative loan beta was 84% while our cumulative deposit beta was only 8%.

We have not added hedges to change our asset sensitivity.

Our asset liability committee continues to assess our position to determine the appropriate path, given balance sheet movements and our outlook for rate.

Now I will turn the call back to Ralph to provide an update for our outlook for 2018.

Thank you, Muneera.

We have increased our outlook for 2018 by incorporating the March rate increase into our expectations for net interest income.

Our outlook for all other categories is unchanged.

As usual, we are assuming a continuation of the current economic and interest rate environment.

We continue to expect total average loans to increase in line with GDP.

We believe we can drive growth in most businesses, somewhat muted by Energy and Corporate Banking, which should be stable.

We expect to see the typical second quarter seasonal rebound in most areas, particularly mortgage banker, as home sales pick up in the spring.

Overall, customer sentiment is positive and activity is picking up.

As Muneera indicated, we expect net benefit of $205 million to $215 million for the full year from the 2017 rate increases, combined with the recent rise in short-term rates.

As far as the second quarter, we expect an increase from the full quarter benefit of the March short-term rate increases partly offset by somewhat higher deposit cost, along with the return of loan growth.

And while not included in this outlook, we are well positioned to benefit from any further rate increases.

We continue to expect the provision to be between 15 and 25 basis points as credit quality remains strong.

Following a relatively low provision in the first quarter, second quarter provision is expected to be higher.

With the contribution from our GEAR Up initiatives, we continue to expect 4% growth in noninterest income, excluding changes in deferred comp and a 1% increase in expenses, excluding restructuring charges.

Fee income in the second quarter is typically stronger with seasonally higher card and fiduciary income.

Second quarter expenses should decline modestly from the first quarter primarily due to lower compensation expense.

We've adjusted the 2017 base for the effect of the new accounting presentation, which was discussed earlier.

Finally, we expect our effective tax rate to be approximately 23%, excluding any impact from employee stock transactions, which are difficult to predict.

In closing, our relationship banking strategy is serving us well.

It is helping us prudently manage loan and deposit pricing as interest rates have increased as well as maintaining strong credit metrics.

The result has been a significant increase in our returns and helped drive our efficiency ratio to 56%.

The year is off to a good start.

Our pipeline is strong, and we expect loan growth to return with typical seasonality in the second quarter.

We believe the continued achievement of our GEAR Up initiatives will assist in growing fees and controlling expenses.

Furthermore, we are well positioned to benefit from additional rate increases, favorable changes in regulation and economic growth.

Now we will be happy to take any of your questions.

(Operator Instructions) Our first question will come from the line of Ken Usdin with Jefferies.

Just a couple of questions on the net interest income side.

First of all, you've given us that solid 4.26% loan yield outlook in February and then it ended about the same.

And I just want to understand, can you help us just understand the way that the variable rates have moved through the quarter and then how you would expect that March hike to move through as you look forward?

Muneera?

All right.

As far as the loan yields are concerned at 4.26%, I talked about fees that were elevated in the fourth quarter in nonaccrual recovery.

A lot of that impact was felt in the month of March and essentially negated some of the benefits that we otherwise would have seen for the month of March.

So on a go-forward basis, as we have said, I mean, the March rate rise will provide a $60 million to $70 million benefit.

And clearly, a substantial portion of that benefit will be in loan yields.

You can see that in the first quarter, we picked up about 20 basis points coming from $32 million as a result of what was happening on the loan side of the equation.

So I would expect that loan yields will benefit nicely.

It should be about, I don't know, about 15 basis points.

Okay.

And then your -- the March hike that you say is going to be 60 to 70 benefit, if we were to get the next one, whether it's June or any other month, would that $60 million to $70 million still hold?

And what would be the offsets that you might be thinking as far as that deposit beta side?

Well, I mean, as you well know, deposit betas are increasing.

And as time passes, we'll have to see what's happening on the competitive front and make sure that we adjust accordingly.

So the $60 million to $70 million, I mean, that should continue to change, depending on what transpires in the environment outside.

Okay.

But you wouldn't have a thought at this...

Well, what I would tell you, Ken, is just remember that we have $42 billion of loans that are variable rate.

And so when rates go up, I mean, the asset side is seriously sensitive.

And the benefit of that will obviously far surpass anything that happens on the deposit side.

Your next question comes from the line of Peter Winter with Wedbush Securities.

I'm just wondering, you maintained the forecast for average loan growth for the year in line with GDP.

And I hear you that the loan pipelines are good, sentiment is good.

But what gives you the confidence that you're going to hit that target of GDP-type loan growth?

Curt, do you want to review that?

Yes.

Thank you, Peter.

The first quarter for us is typically a slower quarter just based on seasonality.

And we certainly saw that in Mortgage Banker Finance for the quarter.

But also seasonality impacts other businesses for us as well, Middle Market, Corporate Banking.

Muneera talked about some of that in her comments.

If you exclude Mortgage Banker Finance and Corporate Banking, as we mentioned already, we really were up about 1% for the quarter as well as up about $500 million on average Q1 '18 versus Q '17.

What I would tell you is that we saw some very encouraging signs in the quarter.

The results were really back-end loaded.

And as the quarter went on, we saw momentum building and pipeline building, which I think bodes well for us heading into the second quarter, which usually is a much stronger quarter for us based on seasonality in Mortgage Banker Finance.

When you look at a number of the businesses across the board, we had growth in dealer financial services, growth in general Middle Market across all 3 of our markets, which we had not seen in a while, growth in Commercial Real Estate, TLS, Environmental Services and Entertainment.

So I feel good about the prospects for growth for the balance of the year.

Obviously, there's still some mixed news out there on the economic front.

And we are yet to see how things translate for us in terms of tax benefit with our clients.

But at least, I think all that is positive.

When we look at some of the signs we had just in terms of the increase in pipeline at the end of the quarter, the fact that period-end loans were above the quarterly average for us and we saw some increase in utilization, I think all that bodes well for us in terms of the ability to meet GDP growth in line -- or growth in line with GDP for the full year.

Okay.

And just on a separate question, with regards to CCAR, can you just talk about how you view dividends versus share buybacks?

Well, we look at the total as what the payout is.

And then dividends, obviously we want to have an order with a sustained ability to pay dividends over a longer period of time and then the difference being on the share buyback.

Do you have a target for a payout ratio?

We do not at this point.

But if you go back in history, we have traditionally been aggressive at returning to our shareholders, whether it be dividends and/or the buyback, which is important to us as we move forward.

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

Ralph, I wanted to start, following up on the expectations for improved loan growth in the second quarter, if you just look at the size of the commercial loan pipeline heading into 2Q, is it a fairly typical seasonal increase on tap?

Or are you seeing more meaningful improvement in the pipeline, given the recent improvement in business confidence?

I think you're seeing more improvement in the pipeline because of confidence.

Curt, do you want to comment on that?

Yes, Steven, I think Ralph said it well.

Obviously, the normal seasonality, which you already alluded to.

But really across a number of our businesses, we do feel like pipelines are healthier.

And traditionally, for the last 2 years or so, most of our conversations with clients had been about borrowing to meet current working capital needs.

And we're starting to have some conversations with clients about CapEx and expansion opportunities.

So I think some of the things that we're feeling from macro and microeconomic perspectives out there are starting to translate some into actual demands from our clients.

So I don't want to give the wrong impression that it's necessarily gangbusters at this point.

But I do feel like that there is a stronger pipeline heading into the second quarter than what we saw, for example, last year.

Okay.

Curt, we used to look at the commitments to commit as a good leading indicator.

Are you seeing a material buildup in the commitments?

We did not quote those in this report, Steven.

We do look at those and we look at pipeline overall and try to look at where the pull-through rate associated with both.

We feel really good about the pipeline heading into the quarter, as I mentioned earlier, and it grew throughout the first quarter really across almost every business line.

I just have one question on the tax spend.

How much do you guys plan to spend on technology this year?

And do you think you can compete at this size in the digital age of banking?

Or do you need to drive to more scale to ramp that spend?

I think one of the things you need to be focused on when you're thinking about that is going back to our GEAR Up, which part of the whole process of GEAR Up was looking at efficiency, but it was also reinvesting and technology being one of the biggest reinvestments both from a product standpoint and an internal standpoint to provide our people with the kind of tools they need to take care of our customers.

So that is very important on top of the normal, if you would see, in investing.

Curt, you might go through a few of the things that have been changed here recently.

Yes, Steven, I think one thing that's changed on the technology front is that a lot of technology today is becoming more ubiquitous.

And we have really worked on moving away from heavy customization and building things ourselves to really leveraging key vendor relationships and leveraging more cloud-based technology.

And that's allowed us to be more agile and move faster to deliver both enhancements to our customer experience but also delivering tools that improve our colleagues' ability to serve our clients and sell new products and services.

So in 2017, we've rolled out an enhancement to our mobile application.

And that's really an ongoing process.

Probably every 6 months or so, we're adding to our consumer mobile platform.

We've rolled out a new consumer loan and mortgage platform, which helps both from the customer and employee standpoint.

We've made a lot of enhancements to our treasury management capabilities, especially the front end sort of digital delivery of treasury management.

And just this year, we're rolling out the Zelle platform in the month of April.

We've done a lot around the commercial lending process.

You've heard us talk previously about the review we've done around the end-to-end credit approval process.

And along with that, we're rolling out a new CRM platform as well as a commercial loan sort of credit processing platform, which again helps both from the customer and employee perspective.

So we have a lot of things in the pipeline.

And we feel like we were able to stay current and again leverage off of some key vendor relationships as well as leveraging off of more cloud and agile-type delivery.

And on top of that, we were rationalizing our applications and making sure that our systems were more efficient at doing the things that Curt was talking about.

Your next question comes from the line of Michael Rose with Raymond James.

Just going back to the capital question.

Have you guys had a chance to study some of the proposals in Washington and potentially how that would impact your capital levels?

It seems like it would free up some capital for return to shareholders.

Any overarching thoughts there?

We are studying those.

And it is very positive that both from a legislative standpoint and from, as you said, a regulatory standpoint, the position that's being taken.

And the most important thing to us in the future will be able to manage our own capital.

And historically, as I mentioned earlier, we have always been aggressive at returning capital to our shareholders as appropriate.

I don't know whether you want to talk about any of the individual pieces of that, Muneera?

Sure, Ralph.

I do believe that notice of proposal, we're making it a step in the right direction.

It's still a proposal, so a lot could change.

And the effective date is out there in the third quarter of next year.

But having said that, some of the proposals that they are suggesting, which include -- not including a rise in risk-weighted assets and including buybacks in a period of stress, seem to be a step in the right direction.

It will allow us, as you say, Ralph, the opportunity to rightsize our capital, which was always our plan.

But we may be able to do it a little bit sooner with the proposal they have out there.

So it looks good.

Just as a follow-up to that, I mean, do you guys have a targeted capital ratio that you guys would ultimately like to be at for CET1?

We have not put out a public statement on the proposed where we are.

And part of that is it will be relooked at as we go through, what Muneera was just talking about, in the regulations as well.

And we have always been traditionally at an appropriate point, we feel, for our institution.

And that has served us well when we have a chance to be able to control what the amounts are.

Okay, that's helpful.

And then maybe just one more on a separate topic.

Energy has been a big drag for you guys in terms of headwind to loan growth.

It looks like nonperformers are still 25% of the book, but oil has been about $60 for nearly a year.

Any sort of commentary on what would cause some upgrades on that portfolio?

And would that actually translate into further reserve releases moving forward?

Pete, do you want to address that?

Yes, Michael, we're pretty optimistic that it's going in the right direction.

We're right in the middle of our redetermination process, about 40% the way through.

And my guess is by the time we get through it, we'll make a substantial dent in that 25%.

All the factors there that we're looking at are positive.

And so we're pretty optimistic.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Can you just talk a little bit about the conversations you guys are having with customers about, let's call it, normal flows out of noninterest-bearing, just given the rising rate environment?

I saw that you mentioned that some of it was driven by normal seasonality.

But I'm actually curious about the other part of it, where you actually have customers explicitly saying they're in search of higher yields.

Curt, do you want to take that?

A lot of the, Ken, funds that we have for our clients, obviously we have a very large commercial-oriented deposit base.

And with those clients, a lot of those funds are used to offset from an ECA perspective and/or general operating account.

Certainly, some of our clients that have excess cash, we are having conversations with them about alternatives in terms of rates.

And we'll make appropriate exceptions where we need to do so.

But I would say thus far, those conversations have continued to be limited.

We continue to watch.

And our goal is to try to be competitive as much as we possibly can as we see rates continue to increase kind of across the board.

But we're managing it right now sort of customer-by-customer primarily.

Okay.

And then the other question is just in terms of the employee stock comp tax benefit that you guys are getting, do you have any outlook in terms of how this might progress over the next year or 2 or 3?

And I guess what I'm trying to know is, was there any part of the benefit that actually was sort of front-end loaded over the last year or so?

I think you did see, I think, what I will call a bit of a catch-up with the strength of the markets and people having the opportunity to execute what they've been given.

Do you want to add to that, Muneera?

Typically, first quarter is the quarter in which employees vest and stock becomes available to them.

And so activity upticks in the first quarter.

In the remaining quarters, it's very difficult to predict.

But generally, it tends to be lower.

And if you compare where we were from first quarter last year to first quarter this year, you can see that some of the activity level is coming down.

And that's sort of where the pent-up demand that's in the employee base is coming down slowly over time as well.

Your next question comes from the line of Scott Siefers with Sandler O'Neill.

Muneera, just wanted to make sure I understand the NII guide correctly.

So it sounds like the only change to the prior guidance is the higher benefit from the margin increase.

Did I hear you correctly say the LIBOR increase is already baked into the first quarter number?

Some portion of the LIBOR increase is baked into the number.

Let me make sure and take it into pieces.

The $60 million to $70 million, of that $60 million to $70 million, $5 million is baked into the first quarter.

So if you annualize that, that's $20-ish million that's in the run rate.

So if you take the midpoint of $60 million to $70 million, which is $65 million, then $20 million is in the run rate and it's about $15 million per quarter as the benefit.

Does that help you, Scott?

Yes, it does.

And then just on that LIBOR increase, I mean, obviously get higher LIBOR generally.

I tend to think of you guys as most sensitive to 1-month whereas most of the -- I guess the most pronounced move was in the 3-month.

Is there any other benefit that you guys get beyond just the simple 1-month LIBOR?

In other words, are there benefits on the asset side to you guys from the move in the 3-month LIBOR as well?

We have a small portion of our loans that are indexed to 60-day LIBOR as well.

You can see that on Slide 14.

So yes, there is a little bit of a lag in some loans that reset at different times.

And then we also have some that have that 60-day indexation.

Your next question comes from the line of Erika Najarian with Bank of America.

I wanted to follow up on Ken's question about noninterest-bearing deposits.

So as we think about it, this has clearly underpinned the net interest margin strength for Comerica in a rising rate environment.

And as we think about the commercial noninterest-bearing deposits, is there a way that we could ballpark what percentage of those balances are attributed to operating accounts versus excess cash as we think about potential mix shift or lack of mix shift going forward?

Muneera?

So Erika, we have said that if you look at our overall noninterest-bearing, 90% of that is commercial.

And of that 90%, about 80% of the balances are utilized towards treasury management products.

That's a pretty high utilization.

So hopefully that gives you a sense for what you're looking for.

No, that's terrific.

And just as a follow-up question, you've gotten a lot of inquiries about capital management as regulations and legislation hopefully change for the better.

I'm wondering if you could give us some insight on what could change in terms of your liquidity management.

You clearly have a lower-yielding securities portfolio, especially relative to peers.

And I'm wondering if the legislation did pass on the SIFI definition, how, if any, differently you would manage your securities book from here.

We would have to see how the rules get laid out.

But the size might be different.

And there could be length of maturity.

But it wouldn't be substantial in my opinion at this point.

Muneera, do you agree with that?

I agree with that, Ralph.

We like the $12 billion size that we have right now.

Where we go with the securities book is going to depend on what happens with loans and growth there, what happens with deposits.

So beyond regulation, we will manage liquidity prudently in line with what happens on that front.

And as things grow and move forward, there will be a time when -- and we've mentioned many times that we look at it regularly as to whether we should be putting on hedges and how we manage where we are in the rate cycle.

As well as longer term in history, we have been very careful and very conservative at managing the risk there, which I think we'll go back to in a point of time when we feel like we're starting to get rates at the normalized level.

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

Regarding the loan growth, I know you mentioned that you saw pickup late in the quarter.

And so is it fair that we can use the end-of-period balances as a base as we grow the loan portfolio here, just given that they came in well above the average balances for loans?

Curt, do you want to take that?

Yes, I give back to you, John, what we said earlier is that our outlook is for growth for the loan portfolio in line with GDP range.

And so when you look at for the full year guidance, we would stay with that.

The balances in the month of March for the period-end balances, I think, are reasonable for the baseline to use from a go-forward perspective.

But remember that we do see some additional seasonality in the balance of the year.

In the third quarter, we see some additional seasonality in our dealer portfolio.

And so it's not necessarily a straight line scenario.

So when we talk about growth in line with GDP average growth for the year, that's for the full year view and not necessarily tied to any 1 quarter.

Okay, all right.

And then separately on the rate side, on Slide 14, I know you mentioned the loan beta that you're running around 84%.

I know peers from our work, looks like they're around 35%, well below the 60% that we've seen in the past.

Are you -- how do you feel about that 84% and your ability to maintain that?

Are you starting to see spread compression?

Because I know that the industry is.

Curt?

Yes, I think it remains at a highly competitive environment.

It's been very competitive really for the last several years or more.

And we work really hard to remain competitive with our client base.

But at the same time, we're very relationship-focused.

We price every individual client relationship sort of one client at a time.

And that's how our pricing models are built, based on the client's overall relationship with us and the risk profile of the customer.

And we're not going to sacrifice our pricing just to chase transactions.

But where we've got an existing relationship or can build a relationship, we want to make sure that we're being competitive.

But I would not say at this point that it feels to me any more or less competitive than it has been.

It's been a very tough environment now for several years and that continues.

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

Wanted to ask about the earnings credit rate and just what you're expecting from that regard and how you see that competitively changing.

Curt, do you want to follow up on that?

Yes.

We look, as you would expect, very hard at the ECA rate.

I would say, in general, that we've made some exceptions there, where appropriate.

But again, remember that our clients are leveraging the ECA rate from an offset standpoint to cover treasury management cost of services.

And so just like we do on the deposit side, we do a lot of surveying at the market to see where ECA rates are.

I would say in general that we have not seen a wholesale lift across the board as it relates to ECA rates.

But we'll continue to watch and monitor on a go-forward basis.

Okay.

And then as a follow-up, you just mentioned that you haven't seen the environment get more or less competitive.

I'm curious, would that be kind of across the board?

Or are there -- or maybe a few industries where you are seeing things get a little more competitive in terms of people being aggressive with pricing?

There are certainly pricing dynamics in our portfolio.

As you know, we are in different markets and we have different industry verticals.

So within those industry verticals and within those markets, at times, different pricing dynamics at play.

But I would not single out a single line of business for us, where we feel like that the environment has changed significantly.

I would just say across the board with all of them, it remains a very competitive environment.

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

Most of my questions have been asked.

But just wanted to touch base on the CCAR exam for 2018, wondering how we should think about the payout ratio for 2018 versus 2017.

Well, we will hear the results of the CCAR process that will come out the last month of this quarter.

And that's when we'll, at that time, know where we are.

So Steve, if you look at our history, you will see that with every subsequent CCAR, we have increased the dollar amount and the percentage of our payout.

That's expense that we hope to continue.

And then Ralph mentioned the fact that we want to focus on the dividend component of that payout.

And so that's sort of what you should expect out of this year's CCAR.

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

You talked about standard deposit pricing increases in response to the Fed rate increase in March.

Can you elaborate a bit on what you've been doing there and how that compares with the action you took after the December rate increase?

Muneera, do you want to take that?

Sure.

So yes, we did talk about some of the standard pricing changes that we made.

They were very strategic and targeted.

There were different changes in different markets.

So too much details to go through here.

But what I would tell you is that we have included the impact of all of those changes in the $60 million to $70 million guidance that we are providing for the benefit of the March rate rise.

Beyond that, I'll tell you that the changes we have made make us feel good about our overall competitive position that we have in each of those markets.

And specifically on the 4Q call, I think you talked about increasing rates on money market deposits, $10 million and over, by 20 basis points and rates on certain of the higher balance retail products by 15 basis points.

Can you give us a sense?

Is it a broader set of products you've increased this time?

Is it the same sort of magnitude of rate increase?

Can you give us a kind of compare and contrast on this December rate increase and the March rate increase?

Yes.

And it's going to typically be a combination of either customers we believe to be rate-sensitive or where we see competition adding a little bit of pressure, if that helps.

I mean, going over specifics will just -- it's going to be too many changes, some of them small, some of them slightly bigger.

But like I said, all folded into the estimate that we are providing.

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

I was going to kind of follow up on the deposit.

But more from a sense of if we're looking at commercial customers, the pressure may be coming from market rates that they can actually utilize.

On the retail side, I was curious if you're seeing most of the pressure coming from community banks.

Or where is that kind of -- so where do you kind of see on commercial and retail side -- who are the biggest pressures to push those deposit bases higher?

Curt?

Yes, Marty, one of the things that make our franchise unique is that we do have a unique set of competitors in almost every market we're in today.

So you have the larger national banks and more regional banks.

And you have all of the community banks.

And so we do benchmark ourselves against a broad basket that is somewhat unique market-by-market.

So when we're doing surveying and shopping, so to speak, of the competitors, we take all that into consideration.

And we try to -- in some markets, you're always going to have an outlier.

But we try to look at more of what's happening kind of across the board from an average perspective.

And I wouldn't say that -- I think the increases we've seen have been really across all 3 buckets.

So you've seen some increases with community banks, some increases with regional banks and some increases with the larger national banks.

And again, what we're trying to do is strike the right sort of medium balance between all of those and do the right thing for our customers, where we think we have some pricing sensitivity.

And then the second question is if you think about liquidity that you've built on the balance sheet through this LCR requirement and all the things that have kind of regulatory-wise held you back incrementally, how do you envision, if we're just growing loans at about the GDP rate, to be able to actually ever kind of call that liquidity and deploy it?

Or is it something that we're probably just going to carry through the next downturn and maybe use in the next expansion?

Yes.

At some point, I mean, when we feel that the long-term rates are appropriate, we might deploy that securities -- I mean, those -- that cash balances into securities as an example.

But clearly, first, we will move liquidity towards loan growth and then beyond that, think about what the best use of that would be.

I just don't know if you had any initiatives or thoughts about incrementally taking advantage of that and doing something with it to get some better yields from it.

I mean, that's just something -- like I said, it depends upon opportunities that present themselves in the future.

Your next question comes from the line of Lana Chan with BMO Capital Markets.

Just a follow-up question on Slide 14 again on the benefit from the rate increases.

I think last couple of quarters, the assumptions on the deposit betas have been the 20% to 40% range.

And I calculate this first quarter, the deposit beta was only 24%.

So could you give us an idea of what you have embedded in the go-forward guidance?

Muneera?

So you're right that historically, I mean, we've talked about where our deposit betas were going to be.

That every single rate rise -- and with every single rate rise, we've actually done better than what we've said.

What I will tell you is when rate rises start coming at a faster frequency with December-March, it becomes really difficult for us to start isolating betas to a specific rate rise and say -- let me use just do the math, and you said 24% and you attributed all of that to December.

And what is December?

What is March?

It sort of starts intermingling.

And so for those reasons and the fact that LIBOR and what happens on the asset side has such a large impact on our numbers, we decided it was just simplistic to put dollars out there instead of putting out deposit betas, talk about the fact that we made standard pricing changes.

We've talked about the fact that we use a relationship approach to retain our deposits.

And so all of that generally will mean the deposit betas are going to start moving up, if that helps you.

Yes, that's helpful.

And then just to clarify on that slide again, the assumption on the estimated net interest income impact benefit, does that include your assumption on loan growth expectations for this year?

Or is that on a static balance sheet from 2017?

That is on a static balance sheet.

Loan growth will actually add more dollars there.

Our final question will come from the line of Brian Klock with Keefe, Bruyette, Woods.

I think everyone has asked questions on loans and deposits.

So I guess I'll ask a combination question on both.

On the loan side first, Curt, it seems to me that you guys, the strength of the franchise is in your Middle Market loan base and customer base, which again brings a lot of those deviated deposits with it.

And it looks like from your segment data that the average balances have been picking up some, obviously in the general Middle Market, and the larger Corporate is still where the average reduction was.

Just remind us with some of the things that you saw during the quarter, it felt like during the quarter, you guys talked about the larger Corporate paydowns are things that were happening early in the quarter.

Maybe those headwinds are abating, but it feels like the general Middle Market and Small Business part of your portfolio is where really the momentum might be picking up.

So maybe you can talk about that dynamic within the loan portfolio by that product type.

Curt?

Yes, Brian.

So I'll talk about Corporate Banking first and then I'll come back to Middle Market, Small Business, as you mentioned at the end of your question there.

On the Corporate side, I think it's important to remember a couple of things.

One, we did have a strong fourth quarter in Corporate Banking.

And then secondly, in the first quarter, we do typically have seasonality in that book of business.

You think about sort of buildup in cash with larger corporations in the fourth quarter and then normal distributions that occur for a number of different reasons in Q1.

So we always expect some seasonality in the first quarter.

And then we pointed to somewhat a unique situation, where we had done some financing for one of our best clients in that business line that was unique in nature.

It was a short-term bridge financing.

About half of the decline was related to that.

And we knew a payoff was coming.

We were anticipating a payoff.

We didn't know whether it would occur in the fourth quarter or in the first quarter.

So that's not a repeatable item.

So when you look at a more normal run rate for Corporate Banking, I would say that we've got growth opportunity in that business line.

Our pipeline remains pretty healthy heading into the second quarter.

I think there were some anomalies in results in Corporate Banking for the first quarter.

And then secondly, when I talked earlier about sort of pipeline strength, utilization and what we were solving towards the end of the quarter heading into Q2, that covered our Middle Market and Small Business segments as well.

And I mentioned earlier that we saw growth from a general Middle Market standpoint, all 3 of our markets' average growth as well as period-end growth for the quarter, which we have not seen in a while, so California, Texas and the Michigan market.

And I think the dynamics of all 3 of those economies bode well, I think, for growth for the balance of the year in those 3 markets.

Great, that's helpful.

And so last question, on the deposit side, there is a seasonality in the first quarter that you guys have talked about.

I think just looking at end of period for the total deposits are still down.

Interest-bearing deposits down about 1% year-over-year and 3% on the noninterest-bearing.

And I know you talked a little bit about that earlier.

I mean, is there anything going on where maybe some of that -- the excess utilization might be still there -- that the (inaudible) are still there?

But maybe there's actually some use of then take down all those deposits before drawing on line.

So is that another reason maybe to feel good about getting that GDP growth as it maybe you're shaking through some of that and some of your customers on the commercial side are pulling down their excess liquidity and then they'll turn to drawing back on the lines later in the year?

Curt?

Yes, Brian, I think that's exactly as you said.

It's a combination of normal seasonality.

And then secondly, we do feel like that we're starting to see with many of our clients, utilization of excess liquidity.

And I think that is a good forerunner of hopefully growth opportunities as clients start thinking about CapEx and other growth related to lending activity.

And so I do think that what we're seeing in the first quarter beyond seasonality is some pull-down of deposits for net investment-type activities in many of our businesses and with many of our customers.

I'll now turn the call back over to Ralph Babb, Chairman and CEO, for any closing remarks.

I would like to thank everyone for joining us on our call today, and appreciate your interest in Comerica.

And I hope you all have a great day.

Thank you very much.

Ladies and gentlemen, this concludes today's call.

Thank you all for joining.

You may now disconnect.