Comerica Incorporated

Greetings and welcome to Comerica first quarter 2025 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like to register a question you may press star 1 on your telephone keypad at this time. If anyone requires operator assistance during the conference please press star 0 on your telephone keypad. As a reminder this conference is being recorded It is now my pleasure to introduce your host, Kelly Gates, Director of Investor Relations. Thank you. Please go ahead.

Thanks, Donna. Good morning and welcome to Comerica's first quarter 2025 earnings conference call. Participating on this call will be our President, Chairman, and CEO, Kurt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda Chausse, and Chief Banking Officer, Peter Sebsic. 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. The presentation and this conference call contain forward-looking statements. In that regard, you should be mindful of the risks and uncertainties that can cause actual results to differ 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 earnings presentation on slide two. Also, the presentation and this conference call will reference non-GAAP measures. In that regard, I direct you to the reconciliation of these measures and the earnings materials that are available on our website, Comerica.com. Now, I'll turn the call over to Kurt, who will begin on slide three.

Well, good morning, everyone, and thank you for joining our call. This was a strong quarter for Comerica. We exceeded expectations across a number of categories resulting in higher profitability over the prior quarter. Although we saw seasonal deposit outflows, non-interest bearing balances performed well and contributed to net interest income outperforming guidance. Movement in the rate curve benefited our tangible common equity ratio and drove an increase in our book value at quarter end. Conservative capital management remained a priority. and we grew our estimated CET1 ratio while returning $143 million to common shareholders through share repurchases and dividends. Beyond our financial results, customer sentiment took a step back as the market saw an increase in macroeconomic uncertainty. As our customers await further clarity, we plan to continue confidently executing our relationship model striving to provide customers with the consistency and support they need to adapt and succeed. Comerica's legacy is built on successfully managing through cycles. We fill our unique model positions as well to navigate a dynamic environment. Credit is a competitive differentiator with net charge-offs that have historically outperformed peers. We are regarded for our underwriting discipline. It's in our DNA, and it's a crucial part of our culture. We benefit from a diversified, commercially-oriented business mix and have limited consumer exposure. We enjoy long-tenured customer relationships with seasoned leadership teams who in many cases have successfully weathered downturns before. Our capital position provides us flexibility with an estimated CET1 ratio well above our strategic target. We have robust liquidity with a strong multi-deposit ratio and have demonstrated our ability to quickly access additional liquidity as needed. We took deliberate steps to minimize our exposure to rate volatility. In fact, if rates decline, we expect to benefit, and in the last downed rate cycle, we saw outsized deposit growth relative to our peers. There are still a number of unknowns, and we, along with the market, will continue to monitor developments closely. Regardless of the direction of the economy, we feel confident in our playbook and track record to perform competitively. Moving back to a summary of the first quarter on slide four, we reported earnings of $172 million, or $1.25 per share. Muted loan demand, coupled with declines in national dealer services and commercial real estate, drove a modest reduction in average loan balances in the quarter. Good deposit trends, The impact of BISB cessation and the structural benefit of our swap and securities portfolios all set the negative impact of lower loans, keeping net interest income flat. These factors also drove a 12 basis point expansion of our net interest margin. Our credit portfolio remained resilient, and despite inflationary pressures continuing to impact customers, our credit and rent metrics remain historically low. Although net charge-offs increased over the very low level seen post-COVID, they remained at the low end of the normal 20 to 40 basis point range. Non-interest income grew, but we saw CBA, non-customer related, and seasonal pressures across several line items. Non-interest expenses declined as we prioritized efficiency, but also saw but also saw some slowdown in business activity. Capital remained at strength with an estimated CET1 ratio of 12.05%, comfortably above our strategic target, again providing us flexibility to navigate the economic environment. In all, we felt great about the quarter and feel we are positioned to support our customers while delivering results. Now I'd like to turn the call over to Jim for further details.

Thanks, Kurt, and good morning, everyone. Turning to loans on slide five. Average loans declined less than 1% with lower floor plan balances in national dealer services and pay downs in commercial real estate, offsetting modest increases across several businesses. Dealers' inventory levels came down from a year-end peak, and at the end of the quarter, they saw an uptick in car sales. Total commitments declined largely due to commercial real estate trends. Although commitment utilization increased slightly, this was partially due to dealer and the nature of floor plan facilities. Excluding dealer, utilization would have been relatively flat quarter to quarter. Average loan yields came down 12 basis points as lower rates and non-accrual interest more than offset the benefit of the swap portfolio and BISB cessation. On slide six, average deposits outperformed guidance in the first quarter. Lower broker time deposits and seasonal outflows contributed to the $1.4 billion decrease in average balances from the fourth quarter. While seasonality can be challenging to predict and other macroeconomic factors may influence balances, our strong deposit focus and offerings have helped us to mitigate some of the seasonality we've seen thus far. Non-trust-bearing deposits as a percentage of total remain flat at 38%, continuing to reflect a compelling funding mix. Period-end deposits decreased $2.3 billion. Adjusting for the timing-related impact from direct express disbursements, the period-end decline would have been $1.2 billion, concentrated almost entirely in interest-bearing balances. The proactive execution of our pricing strategy drove a 26 basis points decline in deposit pricing in the first quarter. Our deposit portfolio has long been a key strength of our franchise, and we are continuing to make investments in products, processes, and talent to further enhance this competitive funding source. We have already seen results from this strategic focus, including efficient pricing, new products, and deposit acquisition, and we are encouraged by what we see as the potential for future success. Our securities portfolio in slide seven increased slightly as the benefit of lower unrealized losses at quarter end more than offset pay downs and maturities. We expect future repayments and maturities to continue to benefit AOCI over time. Beyond periodic purchases to replace treasury maturities, we are not currently expecting more meaningful securities reinvestments to begin until late this year. Turning to slide eight, net interest income remains stable quarter over quarter at $575 Stronger than expected non-interest-bearing deposits and successful deposit pricing strategies helped offset the negative impact of muted loans. We also saw the benefit of our modest fourth quarter securities repositioning. With the structural tailwinds associated with our swap and securities portfolios, as shown in slide 9, we continue to see promising trends for continued net interest income growth. Moving to slide 10, we continue to believe the successful execution of our interest rate strategy allows us to better protect our profitability from rate volatility. If we do see a reduction in rates, as the forward curve predicts, our modeling shows a slight benefit to income. That said, we generally consider ourselves to be asset neutral, and by strategically managing our swap and securities portfolios while considering the balance sheet dynamics, we intend to maintain our insulated position over time. Our credit portfolio, shown on slide 11, performed as expected. Net charge-offs increased to 21 basis points, but were at the low end of our normal range. Consistent with prior quarters, persistent inflation and elevated rates pressured customer profitability, driving continued but expected normalization and criticized loans, and notably, they remained well below historical levels. Non-performing loans remained well controlled and below our long-term average. The allowance for credit losses was down slightly due to lower loan balances, stable credit metrics, and a relatively benign economic forecast at quarter end. Given the elevated risks and uncertainty at the time, we increased our qualitative reserves, which resulted in maintaining our 1.44% coverage ratio. With the benefit of our relationship model, we plan to stay close to our customers as they better understand potential supply chain implications on their businesses and formulate their action plans. We feel confident in our highly regarded approach to credit and have a proven track record of navigating cycles over many years. On slide 12, first quarter non-interest income increased $4 million, largely due to the $19 million fourth quarter loss from securities repositioning, which did not repeat in the first quarter. Setting aside that benefit, the largest decline was in the CBA, which reduced $5 million due to rate and commodity price movement. We also saw non-customer and seasonal declines across several other line items. Despite pressures observed in the quarter, we continue to prioritize non-interest income and expect to drive positive momentum in customer-related fees. Expenses on slide 13 decreased $3 million over the prior quarter. Seasonally higher salaries and benefits and an increase in the FDIC special assessment were more than offset by the benefit of lower litigation-related expenses, charitable contributions, and consulting fees. We also incurred lower outside processing expenses correlated with lower business activity and products like CARB. While we did not see the level of gains related to real estate that we saw in the fourth quarter, we did recognize a sizable gain on the sale of a leasing asset. Expense discipline remains a key priority as we continue to focus on driving efficiency. As shown on slide 14, we continue to favor a conservative approach to capital and value the flexibility our position provides us. With an estimated CET1 at 12.05%, we are above our strategic target even after returning capital to shareholders through repurchases and dividends in the quarter. Movement in the forward curve reduced unrealized losses in ALCI, contributing to an 82 basis point improvement in our tangible common equity ratio and growing book value. Our outlook for 2025 is on slide 15. Given increased economic uncertainty, we see potential for a wide range of outcomes if market trends differ from our economic assumptions. By way of context, our outlook assumes uncertainty begins to abate And while we are not assuming a recession, we do assume slower GDP growth in 2025 than in 2024. We project full-year 2025 average loans to be down 1% to 2%. Although pipelines and activity levels remain strong, we expect customers to await better visibility before seeing a stronger uptick in loan demand. Recognizing that may not be immediate, we think the second quarter average loans will continue to move down slightly relative to the first quarter. From there, we expect to see loan growth resume in the second half of the year. Our deposit forecast remains unchanged, as we expect lower brokered CDs to drive full-year average deposits down two to three percent in 2025. We believe the second quarter average deposits will be relatively flat to the first quarter, as core deposit growth is offset by a small decline in average broker time deposits. Although we anticipate continued success in winning interest-bearing balances, we believe our non-interest-bearing deposit mix will remain relatively consistent in the upper 30% range. Based on our current understanding of the transition strategy, we are still not assuming direct express deposit attrition within our 2025 outlook. We expect full-year 2025 net interest income to increase 5% to 7%, with the benefit of BISB cessation, maturing and replaced securities and swaps, and a more efficient funding mix, all more than offsetting lower average non-interest-bearing balances and loans year to year. We expect the second quarter to be relatively unchanged from the first quarter, as the lower benefit of BISB cessation is offset by the impact of day count. You can find details on the BISB cessation in the appendix, and excluding BISB, we expect to see growth in net interest income quarter to quarter throughout 2025. We expect four-year 2025 non-interest income to increase approximately 2%, considering the negative pressure we saw in the first quarter, including the credit valuation adjustment and deferred compensation. We expect the second quarter to be stronger than the first, and project growth in customer-related fee income through the balance of the year. Four-year 2025 non-interest expenses are expected to grow 2% to 3% with the objective of managing within this range, subject to the revenue trajectory as we progress through the year. We expect second quarter expenses to tick up slightly from the first quarter as we continue to balance strategic and risk management investments with a drive towards efficiency. Considering our strong credit metrics, proving underwriting approach, and consistent portfolio monitoring, we expect four-year net charge-offs to be in the lower end of our normal 20 to 40 basis point range. Moving to capital, we continue to appreciate the importance of a strong capital position, and we intend to maintain a CET1 ratio well above our 10% strategic target throughout 2025. With an estimated CET1 at over 12%, We feel we have ample capacity in our position to continue repurchases in the second quarter, perhaps even as much as we repurchased in the fourth quarter of 2024. Given the volatility in the market and the movement in the forward curve, we are not committing to a targeted amount today. Instead, we intend to closely monitor market conditions and execute opportunistically with consideration to economic developments throughout the quarter. Stepping back, as we in the market await more clarity, we will continue to stay close to our customers, prioritize responsible loan growth where it makes sense, and focus on our deposit gathering efforts while conservatively managing capital, expenses, and credit. Now I'll turn the call back to Kirk.

Thank you, Jim. In times of uncertainty, we understand what is important to our customers. They seek stability. They prioritize consistent access to capital and a value-added partner who is patient and understands how to help them overcome obstacles. We have a proven track record of doing just that for over 175 years. With the foundation of conservative capital, credit, and liquidity management, we have demonstrated resiliency. We understand there is uncertainty in the marketplace, and we see this as an opportunity to stay close with our customers. History would tell us that these are the times where CoAmerica's relationship model and strategy tends to shine. We have a geographically diverse model, tenured colleagues, an experienced leadership team, a conservative approach to underwriting, and a blue-chip customer base, which all together position us well to outperform through cycles. We had a great quarter, and we plan to continue investing in responsible growth for the long term while benefiting from the structural tailwinds embedded in our SWAP and securities portfolios. And so with that, I'd be happy, we'd be happy to take your questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star 1 to register a question at this time. Our first question is coming from John Arfstrom of RBC Capital Markets. Please go ahead.

Thanks. Good morning. Good morning, John. Thank you.

Yep. Maybe for you, Peter, I guess. On the loan growth outlook, I think we all understand it. You guys are really a proxy for commercial lending. But can you talk a little bit about what you're hearing right now from your lenders and borrowers, maybe some of the very near-term conversations? And then maybe talk a little bit more about the longer-term outlook. It sounds like you're still thinking the pipelines are there and the growth outlook could get better as the year progresses. But maybe very near-term stuff and then confidence in the longer term.

Yeah, John. So I think I would say near term, if I had to describe the whole portfolio, I would say that what you're hearing from customers is that they're not putting the brakes on, but they're taking their foot off the accelerator. And you're seeing that around the country and around our businesses, maybe different speeds, if you will, to that approach. I think in markets like Michigan, we've probably seen More concern there than we have per se in Texas, just quite candidly, is when you talk about middle market. We've seen a little bit more of a pullback in our equity fund services businesses versus our environmental services business that is still pretty robust. So it really kind of depends on the business. It depends on the type of services they do, geographically where they are. But I think in the near term, and I think that's sort of where we're going with our outlook for the second quarter, is that There's a lot of folks that are pulling their foot off the accelerator, but they're not necessarily putting the brakes on. Now, all that said, we continue to hear really good long-term outlook, and we do continue to see our pipeline creep up. It's a little bit interesting to see the pipeline go up, but not necessarily feel like we're going to see outstandings in the next quarter per se. But throughout the year, as it goes on, we feel like it's going to, I guess you might say, get better with loan demand. And again, we're not projecting a recession. We don't feel that way. We feel like the economy is going to grow this year. And we feel like we're in the right markets and lines of business to benefit from that growth, even if it's not, you know, what we've seen over the last year or two. Okay. Okay.

Got it. We talked about this maybe in past quarters. Can you talk a little bit more about commercial real estate and what you're seeing there? It seems like there's still some headwinds, and I'm curious if there's any hope for stabilizing that category.

Candidly, I think there is some hope for stabilizing it. Part of our outlook actually includes commercial real estate not coming down as much as we thought it would 90 days ago. We still foresee it being a a headwind, but I don't think it's maybe blowing as hard as it was 60, 90 days ago. We've seen deal flow pick up in commercial real estate. I was really glad last year, we weren't one of the first banks to kind of get back to doing deals second quarter of last year. And I think that's benefited us. So, you know, we're seeing some opportunities and the extent that our borrowers need us, you know, we're putting out commitments in commercial real estate. So, I do think as we go into next year, we'll probably continue, again, to see it level off. We'll see what interest rates do to that business. But as of right now, you know, it's a headwind, but maybe not as strong, actually, as it was 60 days ago. Okay. All right. Thank you very much. Thanks, John.

Thank you. The next question is coming from Scott Cyphers of Piper Sandler. Please go ahead.

Good morning, Scott.

Good morning, everybody. Thanks for taking the question. Let's see. Jim, could you maybe walk through sort of the progression on both the fee and the expense guides? I know in the past you've discussed the full year puts and takes on the fee side, but I guess just looking at it, I think you'd need to average much higher quarterly base to get to the updated guide. So maybe sort of how do you do so? And then by contrast, on the expense side, looks like the guidance would suggest that the second half expense base will be lower than what you experienced in the first half. So maybe just sort of some color on how the flow works to your thinking.

Yes, good morning, Scott. You know, looking at non-interest income, we did have some non-customer trends that appeared in the first quarter, probably put $6 to $7 million of pressure on the overall guidance that we provided back in January. And some of those will probably continue to some extent maybe not to the same pace that we had in the first quarter, but we do expect a little more pressure from non-interest income. Relative to expenses, I really think that we're going to have to monitor that as the year goes on and see how PPNR progresses. Certainly there's a piece of that that's in the bag. Certainly the sale of equipment and the gain we had there will be pocketed and won't be going away. But we had some other expenses related to maybe timing, maybe challenging of projects and expenses that we'll have to make decisions on as we move through the year and try to calibrate to how revenue progresses through the year also. So we do have a little bit more control, obviously, on the expenses than we do on the non-interest income. We do see non-interest income for the customer categories getting largely back to plan or back to consensus and outlook that we had back in January. And so we do think we're going to get some bounce back there, but we did have a weaker customer quarter in the first quarter. We did have a weaker non-customer quarter, and some of those non-customer trends may continue to a very small degree. So we'll let the overall revenue pace inform both our expense control and as we continue to monitor the non-interest income flows.

Chip, I might add, Scott, this is obviously an environment which is somewhat difficult to accurately forecast go-forward trends. But depending upon how things play out, depending upon if we do or do not see long-demand return and sort of stabilization from the economy, depending on whether or not we have recession, again, we are seeing that probability a little bit lower. We really calibrate how we think about expenses going forward. We are very committed to the things that we have in flight, the expansion of many of our businesses, product development, technology, expansion into new markets that we've talked about previously. But the pace upon which we are doing some of those things could be calibrated if we really do see a more elongated disruption to the market or certainly if we saw a recession. Got it. Perfect. All right, Curt and Jim, thank you very much. Thanks, Scott.

Thank you. The next question is coming from Ken Oosten of Autonomous Research. Please go ahead.

Good morning, Ken. Thanks.

Good morning, guys. You're doing a great job reducing deposit costs and continue to show really fast data on the downside. I'm just wondering how much more room do you have into either remix deposits further, take down brokered CDs within that, And then I'll ask a follow-up. Thanks.

All right, Ken. Good morning. It's Jim. Yeah, we have had great success with deposit pricing, a little better than we'd actually expected in the first quarter. So far, as I look at our deposit betas, if I go back to when the Fed started cutting rates in the third quarter of last year, we were running about a 71% beta through the first quarter. So that's obviously higher than the 60% or so that we long-term think we'll get back to. We were well above that 71% obviously in the first quarter. So we are having great success. As I mentioned, I think at the January earnings call and certainly at the conference that we attended in March, we do expect to see that slow up a little bit. In fact, we may give how proactively we moved. We may actually in some small pockets have to give a little bit back to customers But having said that, as rates continue to move down, we do expect to still achieve on an incremental go-forward basis, probably a 40% to 50% beta going forward. So we certainly have room to continue to react as rates continue to go down. But we will have probably some pockets of pressure upward. Now, you mentioned broker deposits. Yes, we do expect to run off really that remaining about $1 billion of broker deposits by the end of the year. You know, we are paying in the low to mid 5% range on those, so that will certainly be a big benefit, too, as those roll off. But we expect to get even a nice beta on the non-broker deposits, the core deposits, too, as rates continue to move down. So overall, a really good story. Probably won't continue at the same pace that we've seen, but certainly can continue to adjust as the FOMC continues to lower rates. So that's one that we also have to monitor overall market trends and I have mentioned in the past, too, we do plan on being fairly proactive in gathering more interest-bearing deposits. In some cases, we may pay up for those. We're happy to do that if we can garner them. We still make money on those. They're still a preferred funding source versus purchased funds. Overall, I just feel really good about the deposit story, both the volume as well as the success we've had with pay rates thus far.

Got it. Great. And the second question just relates to deposits as well. You mentioned very clearly that the Direct Express, there's no changes in the 25 outlook. I believe you had said it really wouldn't be in play until the out years. Can you give us an update on how you're thinking about that? And if deposit growth continues to be strong, do you think about starting to get ahead of some of that mix shifting at some point? Thanks, guys.

Yeah, Ken, it's Peter. Yeah, there's no real change to our outlook on what we see with Direct Express. We think that balances really aren't going to be impacted at all in 25, and we haven't provided, obviously, outlook for next year, but we continue to believe that the transition here is quite long. And so what I would tell you is that as far as running the rest of the company, we're very focused on deposits in all the other businesses that we have. whether that be in small business and what we do in some of our corporate businesses that are deposit gathering, and really even what we do on the consumer side. I think there's a tremendous opportunity there for us to increase our deposit base through those channels. So we are looking at that pretty regularly. I'd say that's kind of a constant conversation that we have and But at the moment, there's no real updates about what the transition plan for DirectXpress. I think our messaging is consistent at the current time. Okay. Thanks very much. Yep. Thanks, Kim.

Thank you. The next question is coming from Manan Ghaslia of Morgan Stanley. Please go ahead.

Good morning, Manan. Hey, good morning. Can you expand on how you're thinking about the trajectory of NII from here and the jumping off point for 2026? As you noted, the BISB benefits fade, which might be masking some nice growth in core NII. So can you talk about the factors driving that increase as we go through the year?

Sure. Good morning, Manan. Yeah, excluding the BISB impact, which, you know, we do have that schedule in the appendix, as we always do, you know, we are expecting steady growth in net interest income, both dollars and a little tick up each quarter in NIM percentage also most likely. A number of drivers there. We are expecting deposits to continue to grow as we move through the rest of 2025. So deposits will certainly be a key contributor. Non-interest bearing could be just a very small drag in the second quarter because we were higher than we expected in the first quarter. But then in the second half of the year, we do see the potential for some small increases in non-interest-bearing. But most of those deposit increases will be on the interest-bearing side, all contributing to increasing net interest income. Of course, the loan growth that we expect to happen in the second half of the year will be a key contributor also. And then if you look at our maturity schedule for swaps and securities, we do expect to get a few million dollars. It ranges anywhere from $2 million to $6 million, if you do the math, each quarter. benefit on maturing swaps and securities. So that will be a contributor too. And that's obviously more of a known factor. I don't expect that to bounce around very much. So a lot of tailwinds contributing to, you know, kind of consistent, you know, small to moderate increases each quarter. And overall, we just feel good about the overall trajectory of net interest income.

That's helpful. Appreciate it. Maybe just to switch over to credit. Are there any early signs of stress you're seeing among your client base at all, whether it's in CNI or CRE, small business, anywhere that you're particularly focused on?

Manon, this is Melinda. I would say overall the credit environment remains strong and stable. You can see that by the metrics that are shown on our slide. I mean, criticized balances were up ever so slightly. That was really driven by the commercial real estate line of business. So as Peter mentioned, you know, the payoff pace we think is going to be a little bit slower than what we had originally anticipated sort of coming into the year. And that's really driven by the fact that rates have remained somewhat elevated. Obviously, there's a lot of uncertainty. And some of the leasing times on some of the construction projects are elongated. And so that's where we're seeing a little bit of migration into the non-pass space. The absolute levels of non-pass and commercial real estate remain very manageable, and we're still seeing resolution every single quarter on non-pass credit. So we have some migrating in, some migrating out. As it relates to CNI, I would call this quarter very stable. If you bifurcated charge-offs this quarter, they were very stable from a CNI perspective. We did see two charge-offs in commercial real estate, which is really what drove the the increase between the fourth quarter and the first quarter in terms of the basis points. So not really seeing anything yet, but the reality is there's an enormous amount of uncertainty right now and risk in the economy. Supply chain disruption is bound to happen. We don't know exactly where that's going to land and what that's going to look like, but we have very good visibility into our customers. We have excellent portfolio management. proven track record of managing through economic cycles. And so I'm really confident that the portfolio as a whole is going to perform. We're just going to have to wait and see, you know, some of this uncertainty to sort of abate and folks to have a little bit more clarity on how they're going to manage supply chains going forward.

That's good, Carla. Thank you so much. You're welcome.

Thank you. The next question is coming from Bernard Vongazike of Deutsche Bank. Please go ahead.

Good morning, Bernard. Hey, guys. Good morning. Just on the first question, just on share repurchases, I know you did the $50 million during the quarter, and you noted it's going to depend on market conditions and economic developments. Any thoughts on how you're going to think about 2Q or any expectations you could share?

Yes. Good morning, Bernard. Yeah, as I mentioned, we do see the potential, and we certainly have the capacity to do additional share purchases. We've done $100 million in the fourth quarter. We dialed that down to $50 million in the first quarter. Then I mentioned I see the potential to do up to maybe the same $100 million that we did in the fourth quarter. Now, we are keeping our eye on a number of factors there. We've seen the 10-year really ping-pong around the last few weeks and the last few months. So where long-term rates go and what the curve does to AOCI is something we continue to keep our eye on. Credit, while very stable and performing very well, as Melinda was saying, in this environment, it's prudent to keep an eye on that also. And then loan demand, of course, is a factor also. We want to make sure that we're there should this uncertainty abate. We see the potential for loan demand may be surprised to the higher side if, again, the uncertainty abates. So we're keeping our eye on a number of factors, but having said that, we recognize that 12.05% is a very healthy CET1 ratio, so I think you can expect this to likely be active on the share repurchase side, but we are gonna keep our eye on this week to week as we move through the second quarter, which is why we're not committing to a very specific amount with certainty at this point in time.

Okay, and then just one modeling question. Jim, I know you mentioned there was a slight benefit from the 4Q securities repositioning and net interest income. I might have missed it, but could you just size that benefit in the quarter and then just what the remaining benefit could be for the rest of the year?

Yeah, you know, if you look at our net interest income slide, you see that securities income overall was up $9 million quarter to quarter. You know, I would say, you know, just a little over half of that was due to the securities repositioning. the rest of it due to other factors such as just the normal maturities on a quarter-to-quarter basis. And so we have recognized, I think, most of that benefit going forward. You see it in the run rate right now. And we will certainly have some additional securities just naturally mature as we move through the rest of the year here. Okay, great. Thanks for taking my question.

Thank you. The next question is coming from John Pancari of Evercore ISI. Please go ahead.

Morning, John. Morning.

On the expense front, you had a pretty good, pretty solid operating expense order. You know, given this uncertain revenue backdrop, can you maybe discuss the degree of expense flexibility you have if revenue pressure persists longer than you had expected and then Also, you know, can you maybe give your thoughts on your ability to achieve positive operating leverage in 2025 and the degree of what you think could be reasonable? Thanks.

Yeah, good morning, John. You know, as we indicated, I see the range of expense growth for us, you know, for 2025 to be in that 2% to 3% range that we mentioned. We are going to keep our eye on revenue trends and try to calibrate accordingly. But we do have, you know, a certain degree of flexibility there. And I think that in this environment with all the uncertainty where it's very hard to predict where the year is going to go, I think we do have to be prepared to continue to take expense reduction steps if the revenue doesn't come. I will say at the same time, we are pretty committed to a lot of the investments we're making also. So we're certainly not going to turn down or turn off key investments that we're in the middle of making right now on the product side, the risk management side. you know, getting ready for Category 4. But as Curt and I said earlier, we just plan on trying to calibrate as best we can to the overall PP&R stream that we see.

Great. Thanks, Jim. And then, separately, on the M&A front, I know you tried yourselves on your independence, and that said, there's clearly a need for scale that's developing and intensifying in the in the regional bank space and the regulatory backdrop might actually be improving to M&A. Is there anything that you look at that would lead to Comerica considering either being a buyer and pursuing a transaction on the whole bank side more actively than you may have in the past, or conversely, consider partnering with a larger acquirer? Thanks.

John, I would say that we continue to be focused on our independence, and we know we have to earn that right every day, and certainly a long history as an institution. We've been a very patient acquirer, and certainly right now I think the M&A environment is a little bit murky from a go-forward standpoint, but we would certainly consider opportunities as they came along. that made sense for us, that were aligned with our strategic direction or focus as an organization would be complimentary to our businesses, our geography, et cetera. That said, the number of institutions that sort of fit that category is fairly small. And so I think what we can focus on, what we can control, is what we've historically done, which is organic growth. We've done a good job of that, including expansion into some new markets like the Southeast, but also expansion into our existing markets. As you know, we operate in some of the largest MSAs in the U.S., and just great opportunities for us in markets like Dallas and L.A. and Houston and other markets that we operate in. And then maybe from the broader perspective, there's always noise about M&A in the industry. I've been doing this for over 40 years, and it ebbs and flows. I don't think personally that you're going to see a lot of M&A in the next 12 to 18 months in the industry. And I go back to what I said earlier, we are focused really on our independence and believe we've got the right model to be successful going forward with the geographic balance we have, with the product line balance we have, with our commercial orientation, with the strategic investments that we've made, and then all the financial underpinnings, our strong capital positions, strong liquidity, and the bank that historically has managed well through credit cycles, especially if we end up facing a credit cycle in the next 12, 18, 24 months.

Got it. Thank you so much. Appreciate it.

Thank you. The next question is coming from Chris McGrady of KBW. Please go ahead.

Oh, great morning. On the balance sheet, I think in your prepared remarks, you talked about, you know, waiting for the back half of the year to really step up the reinvestment of the securities portfolio. I guess Maybe a little bit inside of that view, what's driving that view, and then what could make you change your view of either stepping up the pace or restructuring the securities book like you did a little bit in the fourth quarter?

Yeah, good morning, Chris. You know, in terms of how we size our balance sheet and securities positioning, you know, we do keep an eye on our liquidity metrics and just the overall composition of the balance sheet. We do think we're a little high right now relative to the overall size of the securities portfolio, given where the balance sheet is. So we're obviously in the very high teens right now. Historically, we've been kind of in that mid-to-upper teen range, and I would actually expect this going forward to be, again, more in the upper teens, not just quite as high as we are today. So we do want to see it come down just a little bit more before we start reinvesting in the MBS. It's probably going to be in the fourth quarter of this year, but that's always dependent upon just the overall size of the balance sheet, liquidity needs, characteristics of our deposits. We have a pretty robust way of looking at that. In terms of securities repositioning, that is not something that we are a big fan of in terms of doing it in a big way. We did do a little hygiene in the fourth quarter. But we do think a better use of capital is to put it towards share repurchase, both in the second quarter and then hopefully throughout the remainder of the year also. We think that actually returns a higher return to shareholders more so than securities repositioning, where, again, it's just time geography. You still end up with the same TBV at the end of the day, whereas we think we can increase and improve tangible book value over time with share repurchase. So, That's where our focus is going to be. It's going to be more share repurchase and loan growth and supporting that loan growth as opposed to doing any kind of securities repositioning. Having said that, we may choose to do a little bit here and there. Again, it's just normal hygiene and smoothing out maturity schedules and so on, but it's not anything that we expect to do in a real big way.

Okay. Great. Thank you. And then my follow-up on your slides where you highlight the higher risk portfolios and those portfolios haven't changed. Are there additional portfolios, and maybe this was touched upon earlier, that you're looking at more closely given the tariff situation, given your CNI book? Maybe within CNI, where could we be surprised if we are going to be surprised?

Yeah, Chris. Obviously, our leveraged portfolio and automotive, which are considered higher risk, we have great visibility and really good monitoring and tenured teams monitoring those portfolios. The other ones that are on high alert at this point would be anything related to manufacturing whose inputs are steel and aluminum, wholesale and retail trade, and consumer discretionary. We're watching all of those.

Great. Thank you.

You're welcome. Thank you. The next question is coming from Anthony Ilion of JP Morgan. Please go ahead. Good morning, Toni.

Hi, everyone. On your outlook slide and for fee income specifically, does it assume an uptake in capital markets income ex-CVA? And more broadly, what are you seeing in that business now?

Yeah, Tony, it's Peter. So in our capital markets business, it does assume a little bit of an uptake throughout the year. And if you think about what our business is made up of, it's our syndications business. what we do in some of our risk products for our customers, so interest rate, FX, and energy. And then what we also do, we've started an M&A business that is pretty much in its second year of starting to generate positive fee income, so we're very excited about what's happening there. And then we do some work in our capital markets where we participate in bonds and securities offerings, which actually had a really good first quarter. So When we add it all together, we feel like 2025 is going to be an uptick year for our capital markets business. And so I think between activity levels, what we see out in the market opportunity-wise, that's something that we feel like is going to be a growth business through the year.

Thank you. And then my follow-up, in the national dealer portfolio, you saw a decline in 1Q of about a couple hundred million dollars. What are you hearing from that segment on potential supply chain impacts and the impacts from tariffs? Thank you.

Yeah, Tony, it's Peter again. I think what we're hearing is a little bit of to be determined. I think that what our customers would say is they've had a great practice run at supply chain with COVID, and that was a period where the dealers actually performed really, really well. So it'll be interesting to see How many cars get sold this year? I mean, I think the outlook is still over 15 million cars to be sold, so it'll be interesting to see what that ultimately looks like. How much do prices get pushed on to consumers? What sort of car manufacturing looks like through the year? But as far as our dealer customers go, I think that they are very prepared to weather this, particularly, again, with what they've been through the last few years. So right now, there's still a little bit of wait and see, and as I was describing earlier, I think a lot of our dealer customers are probably, they've definitely taken their foot off of the accelerator and are just kind of cruising to find out how things are going to play out here. Thank you. Yep.

Thank you. The next question is coming from Brian Foran of Truist. Please go ahead.

Good morning, Brian. Good morning. I wanted to ask one follow-up on your M&A and then one on loans. So on the M&A, I mean, I think we can all appreciate things are uncertain and murky, I think was the word you used. But just on this comment that you don't think there will be a lot of deal activity in the industry, I think you said for 12 to 18 months, you know, is the murkiness regulatory rules, the economy, interest rates, and the marks, all of the above, maybe just kind of what's underneath the hood that you think is going to hold up deals for the next year or so?

Well, first of all, this is just my opinion, so no one knows for sure, but I think it's all of the above that you just mentioned.

Okay. And then on loan growth, what do you think the leading indicators are most likely to be over the next three to four months on whether this is a pause or kind of builds on itself? Are there, you know, is it commitment, utilization, certain sub-portfolios you think will move first? Just any thoughts like that. if we're sitting here three months from now, what'll be kind of the two or three metrics that'll either be showing activity coming back or the pause building on itself?

Gosh, Brian, I, I mean, I think it, it probably is a little bit of even the factors that we've talked about throughout the call. I mean, I do think what interest rates do and what the outlook there is for the rest of 25 will be a factor. I think, I think the, If we continue to stay out of a recession, which we project that we will, you know, I think our outlook, we feel really, really good about it. So, you know, to the extent that macroeconomy continues to move in the direction it's moving, I think that's going to be a real positive for us across our geographies. And, you know, I think, too, when I look at all of our businesses, I think – I think probably as Melinda discussed a little bit earlier, we're watching Michigan middle market, the auto situation there more than any. And that's probably where we've seen, at least in our middle market businesses, the slowdown has occurred mostly in Michigan versus what we've seen in the Southeast, Texas and California. So, you know, I think if we are sitting here next quarter and a number of the factors that we've got going on in the economy continue to level out, then I think that the outlook we have, we feel really good about. And as Jim said, there may be some upside to that if things continue. If things were to go the other direction and you started to see the economy pull back stronger, you started to see unemployment take up, you started to see interest rates going up instead of down, I think all of those are going to be a real headwind to loan demand IN THE SECOND HALF OF THE YEAR AND REALLY INTO 26. SO THOSE ARE PROBABLY THE BIG VARIABLES THAT WE'RE WATCHING. I APPRECIATE THAT. THANK YOU. THANKS, BRIAN.

THANK YOU. THE NEXT QUESTION IS COMING FROM BEN GERLINGER OF CITY. PLEASE GO AHEAD.

GOOD MORNING, BEN. GOOD MORNING. WHEN YOU THINK ABOUT JUST KIND OF COMMENTARY AND THEN YOU KIND OF GIVE AN EQUIGRAPHIC REPRESENTATION OF LIKE MICHIGAN But when you think about the growth itself, some of your competition has grown a little bit. I'm sure some of it is just market share gain. But when you look at pricing or covenants, are you seeing anything in the market that would kind of lead an indicator on kind of their growth? Not to say name names or anything, but just kind of trying to think of the competitive market itself. Are people trying to lead with a rate in order to

Ben, it's a little hard to hear you, but did you hear the question?

I can hear it, yeah. Ben, we're having a little trouble hearing you, but I think that you're asking about the competitive environment and whether or not rates or credit are impacting the competition. I think that's your question, or at least that's what I'm going to answer based on what we thought you say. And I guess I would say that it is extremely competitive right now, and I think that across all of our geographies, we compete in our businesses. We compete with lots of different institutions. I continue to feel like we want to stay really, really focused on being responsible on credit. I will tell you, I think pricing in the industry has probably gotten a little more aggressive than it was 90 days ago. And again, I think each, you know, each customer and each relationship warrants different decisions that you have to make at any one time. And, I feel very confident in our ability to win on pricing, and I think that the value we provide to our customers ends up helping us win the business. So, you know, I also do think that the banks in general continue to be pretty responsible, quite candidly, across the board in a lot of these businesses when it comes to credit. So pricing is probably a bigger factor today than per se credit statistics that you see being put out. So that's what we think you asked, Ben.

Okay. Thank you, Ben.

Thank you. We'll move on to the next question. Our next question is coming from Terry McEvoy of Stevens. Please go ahead.

Morning, Terry. Hi. Good morning. Just one question left on my list. If I look at average loan growth in the other markets, it increased from $8.5 to $8.9 billion. Can you maybe update us on the progress in the southeast and the Mountain West region where you've been making investments? And And maybe I'm assuming that growth was within those two regions.

Yeah, when we say other markets, it could actually also include some of our businesses that we have. We have offices in New York. We have offices in Boston, up in Washington, so sort of around the country. But I'll answer your question in general about the southeast. It's a great story for us. We expect loan growth this year down there to be just fantastic, north of 50%. We continue to add really, really good relationships. We're continuing to add bankers in the market all the way from Florida to North Carolina. And so that is very exciting for us. When we talk about the Mountain West, we're also very excited there. We've hired some new leadership to lead that whole region. We've hired new leadership in our Phoenix market. And we're trying to add bankers in both Denver and Phoenix. And so we're very excited about what those opportunities are as well. But when we say other markets, too, it could be a lot of our – we are a national bank, even though we get described often as a regional bank. But we play around the entire country. We have customers in many, many states and cities. And so those could be some of the other markets that are included there as well.

Great. Thanks for that.

Yep. Thanks, Terry.

Thank you. The next question is coming from Nick Holoco of UBS. Please go ahead.

Morning, Nick. Morning. Thanks for taking my question. Maybe just first one on expenses. You know, I know last quarter and the past you've talked about working towards getting to that high 50s efficiency ratio over time in terms of reaching your ROTC targets over the next couple of years. Just looking at the expense outlook and pairing that with the revenues, seems like it's still pointing to an upper 60 efficiency ratio type range in the second half. So how should we think about the timeline of improving that efficiency ratio and when you think you can get back to that high 50s type range?

Yeah, good morning, Nick. It's Jim. Yeah, we are expecting ourselves to move back into the 50% range at some point. That won't be real near term. I will say with all this uncertainty, I think it's hard to make any kind of commitment right now until things become a little more clear in terms of where the economy is headed. But we do think that the key to achieving that ratio and moving into the 50s, we think first and foremost, it's going to be driven by revenue. And as you kind of model this out, it's really hard to expense save yourself into the 50s. I mean, you can do that for any one year or two and make a little bit of progress. But if you start compounding that backwards, you really start starving the bank of the investments it needs to make. You get diminishing returns at some point. Conversely, we like what we have going in terms of revenue initiatives. We talked about some of those at the big investor conference in March. We do think that revenue has the potential to compound itself in an upward fashion over time. And so we are very much focused on a number of revenue initiatives, which, again, we laid out at that investor conference. We'll be talking more about some of those revenue initiatives as time goes on. Having said that, expenses are part of the equation, so we do need to be diligent in terms of how we manage expenses. We want to make sure that where we're spending money, it's for investment and revenue-oriented activities and making sure that we're managing those as tight as we can, especially the discretionary expenses. We have our eyes on both sides of the equation. really revenue over the next two, three, four years, that's really what we think is going to start moving our efficiency ratio in the right direction.

Understood. Thank you. And then maybe just one last one on the loan growth outlook. You know, obviously the backdrop kind of is what it is, but you highlighted the environmental services as being relatively more robust. Can you just remind us what sort of drives the strength in that business and how long you think it can continue to sort of outperform here in this softer growth backdrop? Thank you.

Yeah, Nick, in the appendix on slide 37 is a breakout of that business, and I think we really talk about two verticals there, our waste management business, which, you know, continues to just grow with the economy, with population. I mean, it's a fantastic growth business for us. And then we've also started our renewables energy business that we show on the environmental services slide, which continues to be a real growth opportunity for us as well. So, you know, I think when you look at that on an outlook quarter by quarter basis, I think we're going to continue to see just nice, steady growth and really both of those verticals. And we are really excited about continuing to add people and customers in that space.

Got it. Thank you very much.

Thanks, Nick.

Thank you. The next question is coming from Bill Carcacci of Wolf Research. Please go ahead.

Morning, Bill. Good morning. Just a quick follow-up on your comments around not interest-bearing deposit growth. potentially accelerating in the second half of the year. I believe you said you'd be willing to pay up for those. Would that be through earnings credits? If you could just unpack that a little bit, it would be helpful.

Yeah, Bill, let me clarify that. When I talked about being willing to pay up for deposits, that was interest-bearing deposits. So we do expect to see a small tick up in non-interest-bearing as we move through the latter part of the year. But the greater proportion of our deposit growth that we're projecting will be interest-bearing deposits. Now, broker deposits will continue to come down, so we still think that non-interest-bearing percentage will stay in the upper 30s. But in terms of our core deposits, I believe we'll see more growth on the interest-bearing side as we have a number of initiatives in place. And in many cases, we'll actually garner those deposits at pay rates similar to what we have today. But in some cases, we may be willing to pay up for those deposits. And again, happy to do so to the extent we can be successful in gathering deposits. So, Hopefully that helps clarify it.

Yeah, and Bill, just to emphasize there, that's not a strategy of ours to pay up for interest-bearing deposits, but it's more just what we think the market might give us as the year sort of plays out and things sort of settle down. Now, if we sort of go through a recession, et cetera, that may be a different story. We typically have seen deposits grow for us, especially in the non-interest-bearing category.

Understood. That's very helpful. Thank you for the clarification. If I may, since we're on the topic, could you elaborate a little bit on how you're thinking about the longer-term trajectory of your non-interest-bearing deposit growth under different macro scenarios? It's been an important part of the Comerica story historically, and as we look to a more normalized environment in the years ahead, how do you envision you know, that part of the business would be helpful.

Yeah, Bill, non-sparing deposits are a very key part of our business model, as you point out. It's probably the biggest X factor, especially in this rate environment for 2025 that we have. So we are watching those very closely. We do think in this higher rate environment, customers are a little more sensitized to their mixed deposits. And so that has put some pressure on non-sparing deposits. We do think that if and when rates start to lower a little bit, we'll actually see that as a positive tailwind to growing non-transparent deposits as customers become a little less sensitive to how they store their mix of deposits. We also expect, to the extent we have some inflation, which it looks like we may continue to have some inflationary environment with us, You know, that does result ultimately in overall working capital levels needing to be larger for our customers. So we would expect as the nominal economy grows that we would see non-transparent deposits grow proportionally to that. And, of course, we're doing a lot on the product side with our treasury management services, which are key to garnering additional non-transparent deposits. So very much a focus of ours from a product development standpoint. And we also think just economic trends will also be beneficial to non-sparing deposits. So it's been a little bit of a tough go on non-sparing deposits the last couple years, but we do see some tailwinds going forward in the future.

That's very helpful. Thank you for taking my questions. Thank you, Bill.

Thank you. At this time, I'd like to turn the floor back over to Kurt Farmer, President, Chairman, and Chief Executive Officer for closing comments.

Well, as always, thank you for your ongoing interest in Comerica and for joining our call today. I hope you have a nice day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.