Comerica Inc (CMA) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Comerica quarterly earnings call.

(Operator Instructions)

I would now like to hand the conference over to Darlene Persons, Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Regina.

Good morning, and welcome to Comerica's Fourth Quarter 2020 Earnings Conference Call.

Participating on this call will be our President, Chairman and CEO, Curt Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Executive Director of our Commercial Bank, Peter Sefzik.

During this presentation, we will be referring to slides, which provide additional details.

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.

This conference call contains forward-looking statements.

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

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

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

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

Good morning, everyone, and thank you for joining our call.

As we all know, 2020 was a very trying year, and I could not be more proud of the unwavering commitment of our team to serve our customers, communities and each other during this unprecedented time.

It has been truly remarkable.

When I assumed the role of Chairman in January, the fundamentals of the economy were strong, and I was looking forward to working with our executive team to execute our relationship banking strategy.

Then in March, our focus shifted due to COVID.

Despite the many challenges the pandemic posed, we have proven our resilience and achieved many important accomplishments along the way.

This includes the bank and the Comerica Charitable Foundation together providing $11 million in assistance to local communities and businesses.

We funded $3.9 billion in PPP loans to small and medium-sized companies.

We were able to quickly enable the majority of our employees to work remotely and introduced programs to provide support, such as Promise Pay and dependent care stipends.

As consumers' desire to utilize digital channels increased, we enhanced our online capabilities for deposit accounts as well as loan originations.

Also, we achieved our 2020 environmental goals set in 2012 to meaningfully reduce our water, waste, paper and GHG emissions.

Our commitment to corporate responsibility was recognized, including receiving high marks from Newsweek, Diversity Inc, Civic 50, CDP and Corporate Knights.

The compassion and tireless efforts of our colleagues across the bank has allowed Comerica to persevere and remain in a strong position as we move forward.

Slide 4 provides a review of our 2020 financial results, which included solid loan performance and a record level of deposits.

This growth, combined with prudent management of loan and deposit pricing, and action we took to deploy excess liquidity, helped offset the pressure of rates dropping to ultra-low levels.

In light of the swift deterioration of the economy, we significantly increased our credit reserve and took a large provision in the first quarter.

While we saw some negative credit migration through the year, it has been manageable, and our net charge-offs for the year were 38 basis points or 14 basis points, excluding Energy.

A true testament to our relationship banking strategy and deep credit experience.

Card fees and securities trading income were strong, while other fees, such as deposit service charges and commercial lending fees, were impacted by the slowdown in economic activity.

Expenses remained well controlled and included COVID-related costs.

We maintained our strong capital levels, and our book value grew 7% to over $55 per share.

In summary, a solid performance, particularly considering the difficult environment.

Our fourth quarter performance is outlined on Slide 5. We generated earnings of $215 million or $1.49 per share, a 3% increase over the third quarter, driven by an increase in revenue and strong credit quality.

Compared to the third quarter, loans essentially performed as we expected.

While lower on a quarter-over-quarter basis, average loans increased in December relative to November by nearly $300 million, excluding PPP loan repayments.

Our loan pipeline continued to grow through the year to pre-COVID levels at year-end.

Average deposits increased by nearly $1.5 billion to an all-time high, with 55% of the growth derived from noninterest-bearing accounts.

Customers continue to prudently manage their cash, cutting costs and reducing leverage.

Yet they remain cautiously optimistic that the economy will pick up in the back half of this year.

Net interest income increased $11 million, benefiting from our continued careful management of loan and deposit pricing, combined with the contribution from fees related to PPP loan forgiveness.

This was partly offset by lower loan balances.

In addition, lower yields on our securities portfolio were mostly offset by actions we took in the third quarter to deploy a portion of excess liquidity by increasing the size of the portfolio.

As far as credit, our metrics remained strong, and our provision was a credit of $17 million.

Criticized loans declined, and net charge-offs were only 22 basis points.

Positive portfolio migration and a slight improvement in the economic forecast resulted in a reduction in the credit reserve to just under $1 billion or nearly 3x nonperforming assets.

Through the cycles, our credit performance relative to the industry has been a key differentiator, and I believe we will continue to outperform.

Noninterest income increased $13 million or 5%, as customer activity continued to rebound.

This included strong derivative income and commercial lending fees.

We continue to maintain our expense discipline as we invest for the future.

While expenses were higher in the fourth quarter, this was primarily driven by performance incentives as well as outside processing related to our card platform.

Our capital levels remained strong.

Our CET1 ratio increased to 10.35%, above our target of 10%.

As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.

And now, I will turn the call over to Jim.

Thanks, Curt, and good morning, everyone.

Turning to Slide 6, average loans decreased approximately $600 million or 1%, which compared favorably to the industry H.8 data.

Loans in Corporate Banking and General Middle Market decreased as customers are performing well, prudently managing their business to increase cash flow and reduce debt.

For the fourth consecutive quarter, Energy loans decreased and are at the lowest level since 2011.

The U.S. rig count is less than half of what it was a year ago; however, it has been gradually increasing since late summer, as oil prices began to recover.

Technology and Life Sciences loans declined about $180 million, mainly due to M&A and increased liquidity, driven by fundraising activity and companies reducing cash burn.

Equity Fund Services, which provides capital call lines to investment companies, increased $244 million as activity has picked up with new fund formation.

National Dealer increased $190 million as inventory levels are slowly rebuilding, yet remains $2 billion below fourth quarter 2019.

Mortgage Banker reached a new record with strong activity in both refi and home sales.

Period-end loans were stable and included a decline in PPP balances of $298 million, primarily due to loan forgiveness.

Line utilization at year-end for the total portfolio remained relatively low at 48%.

Loan yields increased 7 basis points with accelerated fees from PPP forgiveness and continued pricing actions, particularly adding LIBOR floors when possible as loans renew.

Average deposits increased 2% or $1.5 billion to a new record of $70.2 billion, as shown on Slide 7. The largest driver continues to be noninterest-bearing deposits and growth has been broad-based with increases in nearly every business line.

Customers continue to conserve and maintain excess cash balances.

Period-end deposits increased over $4.4 billion.

Timing of monthly benefit activity in our government prepaid card business increased balances by $2.2 billion at quarter end.

However, this does not include the latest stimulus payments, which were received in early January.

With strong deposit growth, our loan-to-deposit ratio decreased to 72%.

The average cost of interest-bearing deposits reached an all-time low of 11 basis points, a decrease of 6 basis points from the third quarter, and our total funding costs fell to only 10 basis points.

As you can see on Slide 8, the average balance of the securities portfolio increased.

This was due to the third quarter purchase of $2.25 billion in additional securities, primarily Treasuries, as we took some action to put some of our excess liquidity to work.

The additional securities, combined with lower rates on the replacement of prepays, which totaled about $1 billion, resulted in the yield on the portfolio declining to 1.95%.

We expect repayments of MBS to continue to be about $1 billion per quarter and yields on reinvestments to be in the low-to-mid 100 basis point range.

Turning to Slide 9. Net interest income increased $11 million to $469 million, and the net interest margin was up 3 basis points to 2.36%.

Interest income on loans increased $6 million, adding 4 basis points to the margin.

Higher fees, mostly related to PPP loan forgiveness and continued pricing actions as loans renew, together added $10 million and 4 basis points to the margin.

Other portfolio dynamics, including higher nonaccrual income, added $1 million.

The decrease in loans had a $5 million unfavorable impact.

Lower securities yields had a $6 million or 3 basis point negative impact.

This was mostly offset by the higher balance, which added $5 million.

Average balances at the Fed increased over $500 million, impacting the margin by 1 basis point.

Our extraordinarily high Fed balances of $13 billion continue to weigh heavily on the margin with a gross impact of approximately 43 basis points.

Finally, prudent management of deposit pricing added $5 million and 3 basis points to the margin.

And lower rates on wholesale funding added $1 million.

Given the nature of our portfolio, our loans repriced very quickly as rates dropped earlier last year, so the bulk of the impact from lower rates has been absorbed.

Also, while deposit rates are at record lows, we continue to manage deposit pricing with a close eye on the competitive environment and our liquidity position.

Overall, credit quality was strong, as shown on Slide 10.

Gross charge-offs were only $39 million, a decrease of $14 million from the third quarter.

Net charge-offs were $29 million or 22 basis points.

Nonperforming assets increased $24 million, yet remained below our historic norm at 69 basis points of total loans.

Inflows to nonaccrual were about half of the amount of the third quarter and the lowest level of any quarter since the pandemic began.

Criticized loans declined $459 million and comprised 6% of the total portfolio.

We believe our disciplined underwriting and diverse portfolio are assisting us in managing through the pandemic conditions.

Positive migration in the portfolio, combined with a modestly improved economic outlook, resulted in a small decrease in our allowance for credit losses.

As the path to full economic recovery remains uncertain due to the unprecedented challenges of the COVID-19 pandemic, our reserve ratio remains elevated at 1.90% or 2.03%, excluding PPP loans.

We are well positioned with a relatively high credit reserve and overall improving credit quality.

Slide 11 provides detail on segments that we believe pose higher risk in the current environment.

Period-end loans in the Social Distancing segment declined slightly.

Criticized loans were stable, and nonaccruals remain under 1%.

This segment has performed better than expected, but issues can be lumpy and sudden and resulted in a net charge-offs of $21 million in the fourth quarter.

The new round of PPP will certainly be helpful for customers that are challenged by the current environment.

Energy loans decreased 13% to $1.6 billion at quarter end, representing 3% of our total loans.

Oil prices have increased, and credit quality has improved with reductions in criticized, nonaccruals and net charge-offs.

We have seen a little more capital markets activity and fall redeterminations resulted in only a slight decrease in borrowing bases due to lower reserves.

Additional information can be found in the appendix.

While we are pleased with the performance of these segments, we have applied a more severe economic forecast to them and believe we are well reserved.

Noninterest income increased $13 million, as outlined on Slide 12, continuing the positive trend we have seen since post the shut-down of the economy earlier last year.

Fourth quarter includes increased customer activity in most categories.

Customer derivative income increased $8 million with higher volume due to interest rate swaps and energy hedges, combined with a change in the impact from the Credit Valuation Adjustment.

Specifically, there was an unfavorable adjustment of $6 million in the third quarter and a favorable adjustment of less than $1 million in the fourth quarter.

Commercial lending fees increased $5 million with a seasonal pick up in syndication activity and higher unutilized line fees.

We had smaller increases in fiduciary, foreign exchange and letters of credit.

Also, card fees remained very strong due to Government Card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment.

Securities trading income, which includes fair market adjustments for investments we hold related to our Technology and Life Sciences business, decreased $5 million from elevated levels generated over the last couple of quarters.

Note, deferred comp asset returns were $9 million, a $1 million increase from the third quarter and are offset in noninterest expenses.

All in all, a strong quarter for fee income.

Turning to expenses on Slide 13.

Salaries and benefits increased $14 million, with higher performance-based incentives, severance, staff insurance expense and technology-related labor.

Note that on a full year comparison basis, salary and benefit expense was stable, with a reduction in incentive compensation, offsetting annual merit, higher deferred comp and COVID-related costs.

We realized a $7 million increase in outside processing due to card activity, technology spend as well as PPP program costs.

Occupancy increased $2 million due to a catch-up in maintenance projects that were delayed due to COVID as well as seasonal expenses.

There was also a seasonal increase in advertising expense.

Our strong expense discipline is well ingrained and is assisting us in navigating this low rate environment as we invest for the future.

Our capital levels remain strong, as shown on Slide 14.

Our CET1 ratio increased to an estimated 10.35%, above our target of 10%.

As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.

In this regard, we've maintained a very competitive dividend yield.

As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital generated to shareholders.

As we sit here today, a great deal of uncertainty remains about the ultimate pace of the economic recovery, whether it be faster or slower than economists forecast.

For that reason, we have paused our share repurchases and look forward to restarting the program as soon as we deem it prudent to do so.

Slide 15 provides our outlook for the first quarter relative to the fourth quarter as well as some color on the year ahead.

In the first quarter, we expect average National Dealer loans to continue to increase at a moderate pace as auto inventory rebuilds.

Also, Middle Market is expected to grow as a result of increased economic activity.

However, this will be more than offset by Mortgage Banker declining from its record high, with seasonally lower purchase and refi volumes.

Energy is expected to decrease due to higher oil prices, driving improved cash flow and capital markets activity.

As far as PPP loans, we expect the pace of loan forgiveness could potentially exceed the second round of fundings.

Looking past the first quarter, excluding PPP loan activity and based on improving economic conditions, we expect loans to grow throughout the year.

We expect average deposits to remain strong in the first quarter as customers continue to carefully manage their liquidity.

As far as net interest income, continued management of loan and deposit pricing is expected to be accretive, albeit to a lesser degree than we've seen so far.

We are currently in the process of deploying some excess liquidity by repaying $2.8 billion of FHLB advances over an 8-week period, which will provide a modest lift.

These benefits are expected to be more than offset by reduced loan balances, lower yields on securities, slightly lower LIBOR as well as 2 fewer days in the quarter.

As we move through the year, assuming there's no change from rates that we experienced in the fourth quarter, we expect quarterly pressure on securities yields and swap maturities to be mostly offset by loan growth, excluding PPP impacts.

We expect net charge-offs to increase from the low levels we have seen recently.

However, with our credit reserve at year-end at over 2% of loans, excluding PPP, we believe we are well positioned to manage through this period of economic uncertainty.

We expect noninterest income in the first quarter to benefit from higher deposit service charges, fiduciary and brokerage fees.

As deferred comp is difficult to predict, we assume it will not be repeated.

We expect a seasonal decline in syndication activity.

Also, card, warrants and securities trading income are expected to decline from elevated levels.

As we progress through the year, we believe that customer-driven fee categories, in general, should grow with improving economic conditions.

We expect expenses to be lower in the first quarter.

Our pension expense is expected to decline $9 million in the first quarter to get to the new run rate for 2021.

The decline is primarily due to strong investment performance in 2020.

As I mentioned, we do not forecast deferred comp of $9 million to repeat.

Also, marketing and occupancy expenses are expected to be seasonally lower and there are 2 less days in the quarter.

Partly offsetting all of this, first quarter includes annual stock comp and associated higher payroll taxes.

We remain focused on maintaining our expense discipline while we invest in the future.

Therefore, on a full year basis, we expect higher salary expense related to normal merit and incentive comp as well as higher tech spend will be mostly offset by lower pension and deferred comp returns.

We expect a 22% tax rate, excluding discrete items.

Finally, as mentioned on the previous slide, we remain focused on maintaining our strong capital levels and providing an attractive return to our shareholders.

Now I'll turn the call back to Curt.

Thank you, Jim.

While difficult and uncertain conditions persist, I'm confident that our team will continue to adapt and thrive as we have over the past year.

We expect the economy will improve in 2021.

We believe firming trade and manufacturing conditions, increasing business and consumer confidence, as well as pent-up demand will support solid economic growth, particularly in the back half of the year.

Comerica has a long history of successfully managing through challenging times.

We have demonstrated our resiliency and unwavering dedication to provide a high level of customer service as we navigate the COVID pandemic.

We maintain a culture that drives continuous efficiency improvement.

We believe this will assist us in preserving our cost base as the economy improves, and we continue to invest in our future.

Our disciplined credit culture and strong capital base continues to serve us well.

Utilizing our deep expertise and experience to help our customers navigate these difficult times builds and solidifies long-term relationships.

These key strengths provide the foundation to continue to deliver long-term shareholder value.

This has been demonstrated by our ROE, which increased to over 11% in the fourth quarter, and our book value per share which grew 7% over the past year, as well as the current dividend yield, which remains above 4%.

Thank you for your time, and now we'd be happy to take your questions.

(Operator Instructions) Our first question will come from the line of Terry McEvoy with Stephens.

Maybe start with the outlook for loans.

I believe you said about $300 million of loan growth you experienced or saw in December.

How much of that was within General Middle Market?

And I'm just trying to get behind some of your optimism about growth in that portfolio, at least in the early part and throughout 2021.

Terry, it's Peter.

Thanks for the question.

Yes.

The month of December was -- felt really good.

It actually felt like kind of pre-COVID environment.

I don't know that I would say that it was robust, per se, though, in General Middle Market or our general Business Banking businesses.

Those businesses continue to do really well.

But we saw a little more of our momentum, I think, in some of our specialty businesses than just pure Middle Market.

Now that said, I do feel good about sort of where the pipeline is going into the year.

We're encouraged by what we are seeing in that segment.

And hopefully, the first quarter will be a little bit better than what we've been seeing in this COVID world.

So again, I think that most of our general businesses are still -- have this headwind of -- that you're seeing with COVID across the country, making it a little challenging.

And then as a follow-up, I just saw the severance expenses on Slide 13 were at least higher in the fourth quarter.

Could you just talk -- is there internally a plan to maybe reduce the headcount and focused on expenses?

And I know you talked about the first quarter expense trends.

Any thoughts on full year 2021 core expense growth kind of netting out some of the moving parts that we see quarter-to-quarter?

Yes, Terry.

This is Jim.

Thanks for the question.

Regarding the severance that we had in the fourth quarter, I would say that, that was specifically targeted in certain areas just to restructure and make sure that we had the right staffing both to fit the skill sets that we need in certain areas and also as part of some of the transition we've had with new leaders.

So it's really more optimizing our org structure as opposed to an expense reduction play.

Regarding just core expenses going forward, I'll just say that we clearly had some expenses in the fourth quarter that elevated our run rate.

And I certainly would not look at the fourth quarter as an example of what the run rate will be going forward.

As we look into the full year for 2021, as we mentioned in the opening remarks, I do expect that lower pension expense and deferred comp will mostly offset merit, tech spend and a little bit of a reset of stock comp given the COVID year that we had this year.

So we'd expect expenses just to be slightly up on a year-to-year basis.

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

Question in terms of provision guidance.

Obviously, I see it's reflective of the economy.

I guess my 2 questions on this.

What does your economic model expect to happen that you're building in for your provision?

And if that does play out as you expect, how do you see provision expense trending going forward?

Ken, this is Melinda.

Thanks for the question.

I mean, obviously, the small reserve release that we had this quarter was really reflective of the really strong credit performance of the portfolio and the modestly continuing to improve economic forecast.

We use a variety of forecasts in the CECL provisioning process that go through different scenarios, including recovery as well as some additional stress in the more stress scenarios.

Assuming no material change to the credit profile, which, based on all the factors that we see today, we're not expecting any material credit deterioration and that the macroeconomic outlook stays stable to slightly -- continuing to improve as we go throughout 2021.

And probably most importantly that the current level of uncertainty has started to abate, i.e., we get past the next couple of months of this COVID resurgence, the vaccine rollout accelerates and the efficacy is proven out.

Reserve levels are definitely going to come down.

It's impossible to tell you exactly how that's going to play out.

As you know, CECL is a very complex accounting exercise that we go through each quarter.

But we expect to be moving towards pre-COVID levels over the course of 2021 and perhaps into the early part of 2022.

All right.

No, that's very helpful.

And then just a follow-up question.

In terms of the accelerated PPP fees, can you just clarify again?

How are you accounting for the anticipated accelerated fees in your NII guidance?

Yes, Ken.

We exclude PPP from that guidance since it is unpredictable in terms of where it would go.

When I look at PPP, we noted that we had pretty strong fees in the fourth quarter, the majority of which -- of that increase was PPP.

I would expect in the first quarter that amount of accelerated fees to about double from the increase that we saw in the fourth quarter.

I wouldn't necessarily expect overall PPP income to double in first quarter compared to fourth, just because the rate of loan forgiveness will probably exceed the new round 2 that's coming on board.

Got you.

Okay.

So when you said -- and I think if I heard this correctly, for the full year for NII, I think you were assuming the lower security yields largely offset by loan growth.

So if we assume relatively stable NII, then any accelerated PPP fees would be on top of that.

So it would be technically going from flat to something positive on the NII side.

Is that the right way of thinking about it?

That is the right way of thinking about it.

It will clearly be higher in 2021 because of accelerated PPP fees, but I was excluding that from guidance.

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

I wonder if I could just hop over to your commentary on buybacks, I know you indicated that you plan and remain on the sidelines right now, pending some clarity around the macro backdrop.

But can you give us a little bit more detail there?

Like what exactly are you looking for in terms of data points on the macro backdrop to get you comfortable that you can start to put some of the excess capital to work?

All right, John, thanks.

This is Jim.

When you look at where we're at today, we're actually at the peak of the COVID pandemic.

I think we just had a record in terms of daily deaths in the last week or so.

And so we just think it's prudent to wait and look for a little more clear line of sight in terms of where this thing is going.

We feel like we already returned a fair amount of capital just due to the relatively stronger dividend we have compared to peers.

We are just looking forward to starting the share buyback.

We just think it's prudent to wait to see where things go because we want to make sure we're there for the customers, should things either take off faster than expected.

Or what we're more focused on is what would happen if the economy took a step backwards, and we needed to be there for our customers, and there were some economic ramifications to the step down.

And so we're just being careful and watching for a clearer line of sight, and we'll look forward to starting it at the appropriate time.

Okay.

All right.

And then, separately, on the margin front, I know you don't really give explicit margin guidance, but just wanted to get your thoughts on some of the -- maybe if you can help us how to think about the NIM progression from here, given the PPP benefit.

But also you've got the steeper curve, which is certainly a factor, but also the expectation that short rates remain low.

So I just wanted to see if you can help us with that?

And then, secondarily, if you can maybe give us some color on your new money loan yields by portfolio if you have that?

Yes.

We can answer that in a couple of different ways.

I mean, number one, the PPP income will be a little bit lumpy by quarter.

So as I mentioned earlier, we will exclude that from the guidance.

Overall, we will have more PPP income in 2021 certainly than we did in 2020.

And as we mentioned during the script, I do expect the impact from rates.

Even though the yield curve has deepened, as you point out, we're still adding securities in that low 100 bp range, and so we are adding securities at a lower rate than what we are running off.

And then on top of that, you'll notice in the appendix, we are going to have in the second half of the year some lumpy treasury maturities as well as some hedges that start to mature, not in a big way.

But due to all those factors, we will see a little bit of rate pressure each quarter.

And I do that -- I do see that mostly offsetting or perhaps a little more than offsetting the loan growth benefit that we get.

Now PPP would be totally separate from that.

And again, we will see some significant amounts of accelerated fee income as the year goes on, both due to round 1 as well as round 2. So hopefully, that helps make it a little bit more clear.

Peter, do you want to comment just about maybe what you're seeing in the competitive landscape on the lending side?

Yes, sure, John.

Go ahead, John.

Yes.

No.

I was just asking about the new money loan yields, if you happen to have that by the different types of the different loan categories.

John, as you see from the slide, we've actually been having some pretty good success with our loan yields and the pricing of new business coming on board.

We actually did have a slightly lower LIBOR in the quarter, about 1.5 bps down.

Yet you'll notice that due to pricing actions, we showed an increase of $3 million just due to pricing dynamics overcoming that lower LIBOR.

So you can take away from that, that loan yields are holding up quite well.

In fact, they're accretive right now.

Now we don't expect that to continue at that same rate, as I mentioned, because there are competitive pressures and there is a lot of excess liquidity out there.

But up until now, they've been holding up quite well.

Yes.

John, it's Peter.

I would just add.

I mean, pricing continues to be very competitive out there in the marketplace.

Depending on which line of business you might be talking about it, it's maybe more opportunity for us than others.

It just sort of depends.

But to Jim's point, I think we've done a really good job of maintaining our pricing and producing good yields for the bank.

And so far, we've been able to keep doing that, and I think we'll be able to do it going forward.

Your next question comes from the line of Bill Carcache with Wolfe Research.

So I wanted to ask if we -- assuming that rates stay low at the short end and we get a bit more steepening, could you give a little bit more color on when you would expect the trajectory of net interest income to stop declining?

And then, I guess, within the securities portfolio, if you could discuss what kind of reinvestment rates you're seeing relative to the 1.95% and maybe a little bit more color on what opportunity a steeper curve represents?

That would be great.

Yes, Bill, it's Jim.

Thanks for the question.

We -- it's really the short rates that drive our net interest income here at Comerica.

And so even with a little bit more steepening in the yield curve, we're still going to have some pressure on the securities line.

In fact, the 1.95% you mentioned, right now, we're adding securities in the low 1s.

And so it would take quite a bit of steep things to head off that deterioration that we're seeing.

And in addition, we are seeing some lumpy maturities with treasuries, as you see, again, in the appendix as well as swaps.

And that has quite a delta between what we'd either reinvest those in or if they just fell to cash at the Fed.

So it really would take a change in short-term rates to see any kind of material movement upward in our ongoing net interest income on a quarter-to-quarter basis.

Understood.

That's very helpful.

And I had a follow-up on expenses and efficiency more broadly, if I could.

Can we see a return to positive operating leverage without higher rates, given the dynamics that you were just describing on net interest income?

Bill, this is Curt.

I might just talk a little bit about our sort of income-generating potential and just sort of our outlook from a growth perspective going forward.

And your question was specifically about efficiency ratio, but I might first just comment that the last 2 quarters, we were able to generate double-digit ROE in what has been a pretty challenging environment.

And we continue to feel really good about our long-term financial model and really our long-term financial outlook and our business model.

And as always, we're focused on the things that we can control.

We think we've got a very attractive franchise.

We're in a lot of very high-growth markets that we do believe should perform better than the U.S. as a whole as we come out of the COVID situation and hit the second half of the year.

So we do believe that we'll see higher customer demand, loan activity, et cetera.

And as you know, we've got a lot of depth and expertise in Middle Market, Business Banking, a number of sort of unique businesses.

And beyond just sort of the balance sheet growth opportunity, we continue to maintain a very attractive deposit base.

And most financial institutions are flush with deposits right now.

But we really feel like what we've got is very relationship-oriented deposits, and we've done a very good job of relationship pricing with those deposits.

Credit continues to do very well.

We think we will outperform relative to our peer group in that area, which we think will inure to our overall financial performance.

And then we're very focused on 2 other things I would mention is just fee income and how we can generate more fee income as an institution, especially in the card area, treasury management, wealth management.

We've got strong capabilities there.

We've been doing a lot to continue to invest in those areas.

And we, again, think that will help in terms of our overall financial performance.

And while expenses were up some for the quarter, we do feel like that's not necessarily run rate, but just some unique items that hit us in the fourth quarter.

And our expense discipline is very ingrained in our culture, and we're always looking for opportunities to continue to manage tightly on the expense front.

And then just maybe lastly, as I said in my formal comments, we've managed through lots of different cycles, and this is just another cycle that we're managing through.

And as an institution, we have always struck a good balance between growth and conservative management of our balance sheet and credit.

And we think that will help us manage through whatever happens in the next 3 or 4 months, but position us well longer term, given all the factors that I just outlined.

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

Could you give us a little more detail on what you're seeing in the more at-risk portfolios from more social distancing right now?

The credit obviously continues to outperform peers.

So I'm just curious as to what you're seeing below the surface here.

Jennifer, this is Melinda.

Thanks for the question.

So overall, as you already sort of highlighted and Jim and Curt did in their opening comments, I mean, we're really pleased with the performance of the portfolio as a whole.

And although these are at-risk industries, they have actually held up, I think, better than what we would have expected coming into this.

The segment called social distancing specifically are those companies that are most directly impacted by any social mitigation actions that are taking place.

So obviously, in the near term, given the current coronavirus surging, it's probably the portfolio that we are watching the closest and probably has the most opportunity for some additional migration.

All of these 4 portfolios that are listed on Slide 11, although they have elevated credit metrics, we have not seen a high level of migration into the NPA category, which obviously NPAs would need to increase in order to see significantly increasing losses.

The Energy portfolio, although it has the most stressed credit metrics, actually has stabilized quite nicely, certainly prices at $50 a barrel, supply-demand dynamics have changed.

And that portfolio, I would call, much more stabilized, even though it has elevated credit metrics.

And certainly, charge-offs the last 2 quarters have shown that we may be through the worst of that.

That can change really quickly with Energy, obviously, given the commodity nature.

So we are continuing to work with those borrowers.

So overall, again, we feel pretty good about all these at-risk industries.

We certainly are well reserved with almost $1 billion of reserves and feel like anything that does migrate into that NPA category, we are more than well reserved to handle.

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

Melinda, a question for you, a follow-up to Ken's earlier question on the outlook for reserve levels.

I know you probably hate these questions.

But when we think about pre-COVID reserve levels, and I look at Slide 10, and I see that 1.33% reserve.

And I think the day 1 CECL for you, if I remember correctly, was basically 0 to maybe a positive.

Is that the message you're sending when you say pre-COVID levels that we can head back to those levels by the end of '21 or early '22?

Is that what you said?

Or did I mishear that?

No.

I think that's fair and accurate.

I mean, again, obviously, CECL is a complex accounting exercise.

In every single quarter, we're going to take the most recent economic forecast in the portfolio -- our portfolio and what's happening in our portfolio.

But again, given where the credit metrics are today and the overall improving economic forecast, particularly for the second half of the year, I think that directionally, yes, we expect to be headed in the direction of pre-COVID levels.

I can't tell you what that number is.

I don't think anybody knows what that number is.

I mean we're in new and unchartered territory.

CECL, obviously, is new.

And we've never sort of come out of a recessionary environment, particularly one as severe as what we experienced in the first and second quarter.

So directionally, yes, by the end of 2021, beginning of 2022, and that could either slow or accelerate based on how quickly the second half of the year recovery happens.

Yes.

Okay.

That's all fair.

And then on the charge-off thinking, you're seeing modest increase.

And I guess, is there anything we should be aware of?

I mean, are there any bigger charge-offs coming or bigger problems that you worry about?

Or you just expect maybe some modest increases, which I think we probably all have built into the models?

But is there anything you want to flag for us in terms of the longer-term charge-off outlook?

No.

I think what you said that it's really just some modest increases over the particularly low levels that we've seen in the last couple of quarters.

We've obviously also had some nice recoveries.

Those are lumpy and difficult to predict.

So there is nothing in the portfolio that has me overly concerned from a concentration perspective.

I mean, I think that where we'll continue to see charge-offs, honestly, is going to be in those at-risk portfolios and probably more likely in that social distancing.

Yes.

Okay.

If I can squeeze in one more, maybe for Peter.

The dealer balances and the trends, how long do you think it takes to get back to normal?

And do you think normal is that kind of high $7 billion type balance range?

Yes, Jon, thanks.

I don't know if normal is the $7 billion.

I think the getting back to normal is probably harder to determine than we would like.

It's certainly second half of 2021, hopefully.

It's just hopefully seeing that business kind of get back to its normal inventory levels, which there's a lot of debate about when or if that's going to happen.

We believe it will happen, and we hear from our customers.

They believe that, that will happen as well.

So hopefully, that, that happens in the second part of this year, and we certainly -- we love that space.

We're very comfortable getting back to the numbers you see in prior quarters on Slide 26.

And if that can happen end of this year, into next, then we'd be very excited about that.

Our next question will come from the line of Steven Alexopoulos with JPMorgan.

So Curt, my first question, during this period of low rates and slow growth, we've seen more banks turning to M&A, right, to drive shareholder value.

And it's been quite a while since we've seen Comerica use this tool.

As you think about 2021 priorities, how are you viewing M&A here?

And should we expect to see the company get more active on this front?

Steven, as I have said, through the years on these calls and other forms as well, we believe our model really is built for success on organic growth.

We're in great lines of business where we have deep expertise and scale and in great markets where we still have a lot of room to continue to grow.

And so we're going to be primarily focused on that.

I do think there's a lot of uncertainty around the environment on a go-forward basis and how the credit cycle will play out.

And so I don't have a crystal ball as to what M&A activity looks like in 2021, but really no change for us, focus on organic growth.

We've only done 2 deals in the last 20 years.

We have said repeatedly that if we were going to look at opportunities, we are probably, first and foremost, interested in Texas and California, given the growth dynamics of both of those markets.

And that a deal would have to make great sort of strategic and cultural sense for us.

And so while there have been a number of deals announced last year, that really doesn't change our overall view, and we're going to be a patient acquirer.

It doesn't mean that we wouldn't look at opportunities, but again, first and foremost, focused on organic growth.

We would, as we have been in the past, be interested in things that are non-bank acquisitions.

So if we have a gap in fee income or we see an opportunity there, then those are the types of things we might look at as well, nothing on the immediate horizon.

Okay.

That's helpful.

And for my follow-up, if I could ask you a big picture question.

So one of the impacts that we've talked about has been from the pandemic is this dramatic acceleration, right, the adoption of digital consumers businesses, everybody.

Curt, how has this impacted how you view the historical relationship banking model at the company and how have your investments in technology changed as you're seeing customers adopt digital more frequently?

Well, fortunately, I think not only for us, Steve, but for the whole industry, we've all been on this digital journey in 2020 in many regards and the COVID situation has accelerated that path as we've seen more migration to digital and mobile online channels for consumers as well as businesses.

We believe that we remain in a well position there.

We've got really strong talent on the IT side.

And this past year, we recruited a new Executive Director of Technology and Operations, Megan Crespi, and a new CIO, Bruce Mitchell, and they've been bringing a lot of new thoughts and ideas to us.

And it's always for us sort of focused on 2 areas.

One is the things that we can do to continue to enable our customers and provide attractive products and services for our customers.

And then, secondly, how we use technology to help reduce expenses across the company, things like AI, et cetera.

We've talked before about the fact that we've been on this path of migration to the cloud and are making good progress there.

And we've also talked about the fact that while we don't necessarily have the same scale as many of our larger competitors, we can leverage both a good blend of proprietary capabilities with third parties and really achieve scale, where needed, if we don't necessarily have it in-house.

And there are a number of things that we've got in-flight right now.

We rolled out a new digital onboarding platform last year that will benefit really across all of our business lines in terms of originating new relationships.

The mobile and web channels.

We've rolled out a new loan origination platform for our consumer bank.

We've done a lot around just how we leverage data and push data to our employees in terms of customer information.

We're making a number of enhancements to our treasury management platform.

And then we've been going through some upgrades in our Wealth Management business line, our new Trust platform and a new Wealth Management portal sort of single sign-on portal for our Wealth Management clients.

So I think we remain competitive.

We feel good about our positioning.

I think it's always important to remember that we are, first and foremost, primarily a commercial bank and relationships still really matter in that business.

The intellectual capital we bring, the advice we bring, every deal we do is highly customized.

It's not something that you push out over a sort of a digital channel.

But we've got to have products and services that support the treasury side of the house, the Treasurer, the CFO, et cetera, in that space, and we believe we do.

And then even in the other business lines, Wealth Management, and even in our Retail Bank, we tend to serve a more affluent client relationship, still really important there.

Advice still really important, but again, enabled through digital and mobile and other channels as well.

And we feel like we're well positioned.

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

I wanted to ask about loan growth and the confidence that it picks up in the second quarter.

And the reason I ask is we've heard from other banks that there's so much excess liquidity that borrowers would tap that excess liquidity before drawing down on lines of credit or new loan growth.

I was just wondering if you could talk about that.

Yes.

Peter, this is Peter.

I think you'll probably see both of those things.

I don't know that I would disagree with the idea that we probably see some of the liquidity get used up.

I mean we've got very high deposits right now, like all banks, some of the highest we've seen.

And so I suspect that would be part of the turn and, frankly, a good indicator that loan direction is moving in that -- is moving up, while deposits are coming down.

So regardless of the -- which of those necessarily occurs first, we still feel pretty encouraged that the second half of the year, based on most of the macro indicators that we're seeing so far, would lead us to believe that we're going to see a better second half of the year when it comes to loan growth.

And -- but I don't think you're necessarily wrong or I wouldn't disagree with that idea that you would like to see deposits come down first, and I think those together would directionally be really good for loans.

Okay.

And Jim, if I could follow-up about the reinvestment pressure on the securities portfolio.

Would you continue to shift some of that excess liquidity into securities as maybe as an offset like we saw in the first -- fourth quarter?

Yes.

Peter, thanks for the question.

That is something that we are going to have to examine on an ongoing basis.

We have been and we are taking incremental steps to invest the excess liquidity.

But we're being careful not to jump in all at once and place a big bet at any one time, given that we just don't know where things are headed.

So as you look at where we've been and where we're going, certainly starting in late second quarter of '20, third quarter of '20, we did prepay a material amount of purchase funds.

Midway through third quarter, of course, we bought the $2.25 billion of securities, which had a fourth quarter benefit also.

And then, as I mentioned in the first quarter of this year, we're prepaying $2.8 billion of FHLB funding.

So we are attempting to take steps that show some type of benefit each quarter in terms of doing something with the excess liquidity, but we want to do it in a very measured way.

We don't necessarily want to sit on the sidelines forever, but we don't want to jump in all at once either.

And so you'll see us continue to evaluate this as time goes on and take incremental steps as the quarters go on.

And then when there's more of a line of sight, we may take even a bigger step.

But we do think caution is in order, but totally sitting in the sidelines doesn't make sense either.

So the measured pace is kind of where we're managing ourselves to.

Your next question comes from the line of Gary Tenner with D.A. Davidson.

My questions were just answered.

Appreciate it.

Your next question will come from the line of Brian Foran with Autonomous Research.

I just wanted to ask one guidance clarification and then one follow-up on your macro commentary.

So on the NII guidance, you referenced a lot of puts and takes.

You gave a lot of great detail.

And at one point, it seems like you're indicating relatively stable.

Are you thinking more from the reported 2019 or more from like the annualized run rate we're at now?

That's really looking, Brian, at 2020 fourth quarter.

That's really our anchor point.

Obviously, you're going to get some nuances with days in the quarter and so on, but it's really where we're at right now going forward.

Got it.

And then on the growth, you gave a ton of commentary on loan growth.

So I don't want to ask a question that's redundant, but it did really jump out to me the comment that December felt really good, almost like pre-COVID.

I wonder if you could just give the next level down, was it conversations with clients?

Was it the pipelines where certain activity metrics you're looking at?

What were the things that started to feel like pre-COVID by the time you got to end of December?

Brian, it's Peter.

And the -- one, I know, for sure, is just the amount of deals that we approved and looked at in the month of December that came through the process.

And so that was probably the best indicator that I've had -- that Melinda and I've had together in a while of just what we see at our committees and the amount of activity we've had.

So that was encouraging.

Now end of the year is always busy.

And you're always going to sort of see that, but it certainly felt like a pre-COVID better than we'd certainly seen in the last 60, 90 days.

And one thing I continue to say about the pipeline is that it feels -- and the numbers look good they look pre-COVID.

What is less certain is just the timing of some of this.

And so much of it right now is M&A.

It's dividend recaps.

It's not necessarily core requests that companies have for CapEx or things like that.

So it's a little bit lumpy.

But it does feel better than it did, certainly, 90 days ago.

It's just still a little bit hard to determine when exactly all of that's going to happen.

So hopefully, that gives you a little double-click down, Brian, as to what you were looking for.

Your next question comes from the line of Scott Siefers with Piper Sandler.

I think most of mine have been hit, but I just wanted to ask one question, just on the Mortgage Banker portfolio.

Obviously, it's been kind of swollen by the huge mortgage market we had over the course of the past year or so.

Just I guess, I'm curious where that ends up settling out since there's so much air between where it started and where it is now.

I guess the bull case is that you guys as sort of a strong market share player would retain more of those balances as originations for the industry kind of normalize, but just curious how you guys see that playing out.

Yes, Scott, it's Peter.

Thank you.

Slide 23 in the appendix has our Mortgage Banker outlook for originations in 2021.

And I think we usually use that as an indicator of what we think the year is going to be.

As Jim indicated, it will be a little bit of a headwind on loan balances.

But overall, we think the sort of annual cycle you see in that business continues to lift for us, if you will, a little bit.

We continue to add new names.

We love the space.

We've been in it a long, long time.

We think we're a very important player in it.

And so I think when you look at the outlook for the MBA forecast that, that sort of gives you an idea of what I think we're going to see.

But we also feel like we are increasing our customer count and our opportunities in that space, and we'll continue to do so in the coming quarters and years.

Your next question comes from the line of Brock Vandervliet with UBS.

I just wanted to ask a follow-up to Steve's question regarding technology.

I think an ironic benefit of COVID, if you call it that, is that it does allow kind of a reanalysis, reexamination of the entire delivery structure.

You have seen banks.

Some banks kind of attack their branch structure more aggressively to pay for or fund some of the tech investments.

Is that a direction that you may potentially pursue in the future as your new tech team settles in?

Brock, just a couple of comments around our branch network.

First of all, just from a size standpoint, we have roughly 430, 435 banking centers.

So we don't have the same sort of scale that some players have, and we have less redundancy in markets.

So you're not going to drive down the street and see two Comerica banking centers across the street from each other.

And so we've kind of eliminated any sort of redundancy in the platform and feel pretty good about the network we have overall.

Having said that, just like all financial services firms, we have been selectively continuing to prune that portfolio.

We've been changing the configuration in the banking centers.

We've been leveraging technology more doing away with things like traditional teller lines, having more sort of universal bankers in the banking center that can handle all things for clients, whether it's a loan or deposit need or whatever advisory type capabilities we need to deliver.

And that's allowed us to reduce headcount in the banking centers over time and reduce the FTEs and the banking centers.

And so I do think that, that trend of just sort of continue to slowly decreasing the size of the number of banking centers will continue.

But I don't think you should expect necessarily that we're going to announce some huge restructuring of our banking center platform.

We have other ways, I think, to continue to fund our technology journey, and we've been able to do that within our overall expense base.

Okay.

And more broadly, and I know this is difficult, given the uncertainty of COVID.

But on the back of that, do you have any sense you can give us how we should think about the efficiency ratio and where that could potentially run?

Brock, that's going to be dependent upon, number one, where the economy goes and where interest rates go.

That will be a big driver.

And I think we're in a little bit of unchartered territory here.

But in the meanwhile, we are focused on all those things that we can control.

I would echo Curt's comments in terms of some of the things we're doing on the technology side.

We do focus on efficiencies on an ongoing basis, and we do plan on leveraging technology both in terms of the IA to make departments more efficient as well as the distribution systems, whether that be in the commercial banking side with treasury management systems or the banking centers that you mentioned.

So we'll continue to take steps to refine how we approach the distribution model and the overall expense base.

And the revenue will be somewhat driven over the next 2 or 3 years by the rate environment.

And in the meanwhile we'll keep doing all the good blocking and tackling that we've been doing historically and keep focusing on those things that we can control.

And I will now turn the call back over to Curt Farmer, President, Chairman and CEO, for any closing remarks.

Let me just say that, as always, we appreciate everyone's interest in Comerica.

We continue to hope for good health for all of you and better days ahead for our country in 2021.

Have a great day.

Ladies and gentlemen, that will conclude today's call.

Thank you all for joining.

You may now disconnect.