Comerica - Q4 2023
January 19, 2024
Transcript
Operator (participant)
Hello and welcome to the Comerica fourth quarter 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kelly Gage, Director of Investor Relations. Please go ahead, Kelly.
Kelly Gage (SVP and Director of Investor Relations)
Thanks, Kevin. Good morning, and welcome to Comerica's fourth quarter 2023 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 Chief Banking Officer, Peter Sefzik. During this presentation, we will be referring to slides which will provide additional details. The presentation slides and our press release are available on the SEC's website, as well as 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 earnings presentation on slide two, which is incorporated into this call, as well as the SEC filings for factors that can cause actual results to differ. Also, this conference call will reference non-GAAP measures, and in that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on our website. With that, I'll turn the call to Curt.
Curt Farmer (Chairman, President, and CEO)
Thank you, Kelly, and good morning, everyone. Thank you for joining our call. Although 2023 was challenging for our industry, we felt it was a year of achievement. Following industry disruption, we protected relationships, stabilized deposits, maintained strong credit quality, enhanced our capital, and took steps to position our business for future success. In fact, we delivered record average loans and record net interest income. Despite the marketplace instability, we advanced key strategic initiatives and received impressive recognition for our results. Small business was the highlight as we initiated a national expansion effort, delivered award-winning products, and achieved our three-year lending goal ahead of schedule. Non-interest income remained a priority as we launched targeted initiatives aimed at enhancing our products and increasing our mix of capital-efficient income.
Although the economic environment remains uncertain, we observed a cautiously more optimistic trend in customer sentiment at year-end, as we believe many expect less rate pressure in 2024. We remain committed to supporting our customers and feel we are positioned to grow alongside them as the economy strengthens. Full year financial highlights are on slide four. With 7% growth, we produced our highest level of average annual loans, despite the impact of deliberate optimization efforts in the second half of the year. Deposits remained a targeted focus, and we were pleased to see stabilization following industry events and ongoing quantitative tightening. We delivered record net interest income, aided by higher rates and loan balances. Credit quality remained strong, with net charge-offs well below historical averages. In all, it was a strong quarter for the company, and we ended with a good fourth quarter.
Since there are a number of notable items in this quarter's results, I'm going to hand the call to Jim to discuss those up front and provide context for the remainder of the presentation. Jim?
Jim Herzog (Senior EVP and CFO)
Thanks, Curt, and good morning, everyone. Slide five details the notable items Curt referenced, most of which were furnished in an 8-K earlier this month. As previously announced, we recorded $109 million in non-interest expenses related to the one-time special FDIC assessment. This was unchanged from indications provided in our December update. Next was the accounting impact from the pending cessation of LIBOR, since approximately $7 billion of our swap portfolio was designated to LIBOR loans. The announcement impacted our ability to maintain hedge accounting for that portion of the portfolio and resulted in a net non-cash loss of $88 million. The key message is that cessation does not result in an economic impact, only a change in the timed recognition of earnings.
These recognized losses will creep back, and the normal course pay received cash settlements and earnings recognition on the swaps remain uninterrupted. While the realization of losses flowed through to our regulatory capital ratios, they did not further impact tangible common equity or tangible book value. Also of note, operationally, and from a customer perspective, we feel well prepared for a seamless transition. Third on the list were $25 million in severance charges, which elevated fourth quarter non-interest expenses and were intended to enhance future earnings power and create capacity for investment. We previously signaled such efforts were being considered, and we will discuss them in more detail later in the presentation. The last item does not impact bottom-line results, but created line item geography changes within our income statement.
The finalization of our agreement with Ameriprise to serve as our new investment platform provider caused a decline in non-interest income, offsetting a decline in non-interest expenses. While a relatively small impact in late 2023, we noted here because we expect a larger impact in 2024. Slide six summarizes our fourth quarter results. Overall, the quarter performed in line with expectations, excluding notable items. Considering the impact of those items, I'm going to move to the individual line item slides to discuss quarterly results in more detail. Turning to slide seven, our intentional balance sheet management reduced average loans and commitments in the fourth quarter. The exit of Mortgage Banker Finance contributed to almost half of the reduction in average balances. At year-end, approximately $250 million in loans remained in that business.
Muted customer demand due to elevated rates impacted General Middle Market balances, while increased selectivity, prioritizing full relationships and higher returns, reduced loans and equity fund services and Corporate Banking. Ongoing funding of multifamily and industrial construction projects continued to drive higher commercial real estate utilization, but commitments declined for the second consecutive quarter as we strategically managed pipeline and originations. The floating rate nature of our commercial loan portfolio benefited from higher rates, as loan yields continued to climb to 6.38% in the fourth quarter. Slide eight highlights the stability of our deposit base. Average deposit balances remained relatively flat to the third quarter at $66 billion, even with declines of $564 million in brokered time deposits and $176 million related to the exit of Mortgage Banker Finance.
Growth in General Middle Market and corporate banking reflects seasonal patterns, while retail benefited modestly from promotional campaigns. Declines in National Dealer Services deposits were attributed to operations consistent with inventory and utilization trends observed in that business. Non-interest-bearing balances performed in line with expectations, and the pace of decline continued to flatten. Ongoing success in growing interest-bearing deposits grew, drove a 42% non-interest-bearing deposit mix, which we continue to view as a competitive advantage. Industry competition, the rate environment, and successful promotional campaigns drove deposit costs higher to 312 basis points, resulting in a cumulative beta of 58% in the fourth quarter. Our deposit profile has historically been a strength, and with our favorable mix, operating nature of our accounts, and uninsured trends, we feel it is even more compelling.
As shown on slide nine, we continued to normalize our liquidity position, using excess cash to repay wholesale funding while retaining significant capacity. We absorbed $1.2 billion in maturing FHLB advances and allowed over $500 million in brokered time deposits to mature in the quarter. We expect decisions on future wholesale funding maturities to follow the normal course monitoring of balance sheet dynamics and funding needs. At 78%, our loan-to-deposit ratio remained favorable and positions us to prioritize high return loan growth going forward. Period end balances in our securities portfolio on slide 10 increased approximately $550 million, as pay downs and maturities were more than offset by a $975 million positive mark-to-market adjustment from rate movements late in the quarter.
Treasury maturities and anticipated securities repayments are projected to benefit net interest income and AOCI, and we anticipate a 25% improvement in unrealized securities losses over the next two years. Turning to slide 11, net interest income decreased $17 million-$584 million, driven by higher rates in deposit mix, as volume changes related to loans, deposits, and wholesale funding were largely offset by lower balances at the Fed. Successful execution of our balance sheet optimization strategy has allowed us to reduce wholesale funding and enhance margin. As shown in slide 12, successful execution of our interest rate strategy and the composition of our balance sheet positions us favorably for a gradual 100 basis points or 50 basis points on average decline in interest rates. Of note, LIBOR cessation did not impact the ongoing cash flow associated with our swaps listed on the slide.
While we took a loss in the fourth quarter, we will accrue that loss back, with the majority coming back into net interest income in 2025 and 2026. We expect the impact in 2024 to be relatively muted, although there may be some mark-to-market volatility until we fully redesignate remaining impacted swaps to SOFR. By strategically managing our swap and securities portfolio while considering balance sheet dynamics, we intend to maintain our insulated position over time. Credit quality remains strong, as highlighted on slide 13. Modest net charge-offs of 15 basis points remain below our normal range, and the few we had were more concentrated in relatively higher risk portfolios. We observed some normalization in general middle market and corporate banking as rates pressured customer profitability.
These normalization trends drove a slight increase in the allowance for credit losses to 1.40% of total loans. Non-performing assets increased but still remain historically low. Overall, our portfolio continued to perform as expected, and we believe migration will remain manageable. On slide 14, fourth quarter non-interest income of $198 million included $93 million in notable items. Excluding the impact of these items and an increase in deferred compensation, which is offset in expenses, non-interest income performed in line with guidance. While we continue to expect non-customer income in 2024 to come down from elevated 2023 levels, we remain committed to investments to drive capital-efficient fee growth over time. Expenses on slide 15 included $132 million in notable items.
Beyond those items, increases in salaries and benefits reflected the impact of higher deferred compensation, offset with the non-interest income. Increased consulting expenses are attributed to advancing strategic and risk management initiatives, and a smaller gain on the sale of real estate in the fourth quarter had the net impact of increasing expenses. Moving to slide 16, we previously communicated an intention to address growing expense pressures and the structural impact to industry profitability from 2023 events. In addition to our normal efficiency efforts, this slide details incremental actions to recalibrate expenses in support of investments and enhanced earnings. Through this process, we are prioritizing customers and positioning the business for future success. Complementing efforts already underway to rationalize real estate, we initiated a plan to further reduce our physical footprint, including the closure of 26 banking centers, where we assess nominal customer impact.
In order to enhance colleague efficiency and keep decision-makers close to our customers, we are streamlining our management structure and eliminating select roles. When combined with the impact of banking center closures, these actions eliminated approximately 250 positions. Further, we are optimizing our product offering to enhance capital efficiency and returns, and select contracts are being reviewed for renegotiation. In total, these actions have the effect of reducing expected 2024 expenses by $45 million, growing to an estimated benefit of $55 million in 2025. These decisions are challenging, and we do not take them lightly, but we feel they are necessary to support the sustainable growth of our business. Slide 17 highlights our solid capital position. Even with the impact of notable items, our estimated CET1 grew to 11.09%.
Great movement, coupled with continuous pay downs and maturities in our securities portfolio, reduced losses within AOCI and increased tangible common equity to 6.30%. Based on the December 31st forward curve, we expect our unrealized losses to reduce by 1/3 by the end of 2025. Although the proposed capital changes do not apply to us based on our asset size, we favor a conservative approach to capital management and plan to monitor ongoing AOCI volatility and regulations as they evolve. Our outlook for 2024 is on slide 18. We project full year average loans to decline 1%-2%, impacted by optimization trends late in 2023. While we expect some impact of selectivity to continue into the first quarter, we anticipate 5% loan growth from December to December, with contributions from almost all businesses.
Full year average deposits are expected to be down 1%-2% from 2023, but we project relative stability point to point. Following a seasonal decline in the first quarter, we expect customer deposits to stabilize and rebound in the second half of the year. Based on the 12/31 Forward Curve, we expect full year net interest income to decline 11% from 2023, driven largely by year-over-year deposit mix. We expect deposit seasonality to a lesser extent, less income from BSBY redesignation, slightly higher deposit betas and lower loan balances to impact first quarter net interest income. From there, we expect a small uptick in the second quarter and more pronounced growth in the second half of the year.
As it relates to BSBY hedge accounting, interest rates and timing of redesignation could create volatility, but we expect to eliminate most or all of that potential volatility from transition of indexes by the end of the first quarter. Credit quality remains strong, and we expect continued migration to be manageable. We forecast full year net charge-offs to move into the lower half of our normal 20-40 basis point range. We expect non-interest income to grow 6% on a reported basis, which will be relatively flat year-over-year when adjusting for notable items. As we signaled last quarter, we expect FHLB dividends, price alignment income from hedges and BOLI to decline from elevated levels.
Customer income is expected to increase modestly with growth in fiduciary and capital markets and deposit service charges, partially offset by pressures in card, commercial lending fees, and the assumption that favorable mark-to-market derivative adjustments do not repeat. Full year non-interest expenses are expected to decline 4% on a reported basis, but grow 3% after adjusting for notable items. Through successful execution of our expense recalibration efforts, we believe we have created capacity to prioritize investments designed to further enhance our funding base, revenue mix, and capital efficiency, as well as risk management framework. Even with 5% projected point-to-point loan growth, we expect to maintain capital well in excess of our 10% target. We will continue to monitor AOCI volatility and the evolving regulatory environment as we evaluate the right time to resume share repurchases.
In all, we are proud of our year, and we feel we've taken the right actions to support the future of our business. Now I'll turn the call back to Curt.
Curt Farmer (Chairman, President, and CEO)
Thank you, Jim. Despite the industry volatility in 2023, we think it is important to take a step back and reinforce that our core business remained unchanged, as shown on slide 19. As a leading bank for business with strong Wealth Management and Retail Capabilities, our tenured colleagues deliver value-added expertise to our impressive customer base.
Jim Herzog (Senior EVP and CFO)
Our highly regarded approach to credit continued to perform well and has historically outperformed our peers. Tailored products are designed to meet the needs of our customers, enhancing revenue and retention. Our deposit profile has long been a strength, and investments in products and small business are expected to make this core funding source even more compelling. Actions to recalibrate our expense base are designed to benefit our future. At well over 10% strategic capital target, we believe we have a strong foundation. In August, we will celebrate our 175th anniversary. You do not achieve that kind of longevity without proving time and time again that you can successfully navigate disruptions. In 2023, our model proved resilient. Our colleagues rallied to support our customers through an uncertain time, and we delivered record results.
As we look forward into this milestone anniversary year for our company, I'm confident in our ability to deliver for our customers, colleagues, and shareholders. We appreciate your time this morning, and be happy to take some questions.
Operator (participant)
Thank you. We'll now be conducting your question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment please, while we pull up for questions, and once again, that's star one to be placed in the question queue. Our first question is coming from Peter Winter from D.A. Davidson. Your line is now live.
Jim Herzog (Senior EVP and CFO)
Good morning, Peter.
Peter Winter (Managing Director and Senior Research Analyst)
Good morning. Good morning. So there's been a lot of focus this earnings season on kind of a normalized margin range. I'm just wondering, what you as some of these swaps mature, what the margin could get back to? Do you think it could get back to those pre-COVID levels in the 3.50 range?
Jim Herzog (Senior EVP and CFO)
Yeah, good morning, Peter. You know, as you may know and recall, you know, I don't like to get real specific on margin. I think this quarter is a great example of that, where we actually had a decrease in net interest income, but we had an increase in NIM. So, you know, a bank with our business model, where you have some lumpiness, you can get those correlations that don't match up. But I do see NIM trending in a very good direction. You know, we ticked up this quarter. You know, we will have a little bit of a tick down next quarter, as the first quarter guidance would imply based on the percentage growth that we put in the outlook. But then we see a steady climb from there.
You know, I do see us, by the end of 2024, actually getting above where this past fourth quarter was, and then we continue to project up from there throughout 2025 as we have swaps and securities roll off, and we get into a more normalized environment. So I do see a lot of momentum building for us in the second half of this year, and I see that momentum actually accelerating as we move through 2025. And of course, that's exclusive of the BSBY hedge accounting impact, where we're actually going to have significant income added to 2025 on top of the factors that I just talked about.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thanks, Jim. Then just to follow up, you had really nice growth in the CET1 ratio, and even adjusted for AOCI, you're above the minimum 7% threshold. I'm just wondering, you mentioned in the prepared remarks, you know, looking at AOCI, but what are some of the parameters you're looking for to resume share buybacks? And then how much capital do you accrete on a quarterly basis?
Jim Herzog (Senior EVP and CFO)
Yeah, Peter, number one, I do think we're on a very good track to comply with, you know, all the three endgame rules, should they end up applying to us. But with that said, you know, we do have a little bit of flexibility, based on the fact that we are in pretty good shape there. The number one thing that I continue to keep an eye on is the AOCI. It did come down significantly this quarter. But let's keep in mind, it came down, after a number of quarters being more elevated. And then since then, rates have ticked back up again, so I don't want to declare a victory yet on the AOCI front, for us or the whole industry.
I mean, it looks like things are going in the good direction, and we're certainly going to be in very solid shape to comply with any capital rules. But before we start the share repurchase up again, you know, I would put AOCI at the top of the list that we want to keep our eye on to make sure that doesn't tick the other direction again. You know, a little more line of sight into what the overall economic environment is from an interest rate standpoint and just overall uncertainty standpoint. But it does appear we are going to be in shape at some point to start the share repurchase, but we want to be cautious, and we will be cautious this year. You know, certainly in the first half of the year, we won't be active in share repurchase.
You know, we'll keep our options open in the second half of the year, but I'll say that even there, we will likely be cautious unless we get a better line of sight in terms of interest rates and overall economic stability.
Peter Winter (Managing Director and Senior Research Analyst)
How much capital do you accrete roughly on a quarterly basis?
Jim Herzog (Senior EVP and CFO)
Well, it's going to depend on the quarter and the year, and what's going on in the economy. You know, I can tell you that in 2024, we will likely not accrete a lot of capital, you know, maybe a, a tad bit above where we ended the year. But with 5% point-to-point growth, even though we're going to have, I think, strong earnings next year, I don't think you're going to see us significantly above where we ended the fourth quarter. But I think as you move into 2025, you're going to start seeing some nice accretion from that point on.
Peter Winter (Managing Director and Senior Research Analyst)
Thanks, Jim.
Jim Herzog (Senior EVP and CFO)
Thanks, Peter.
Operator (participant)
Thank you. Our next question today is coming from Manan Gosalia from Morgan Stanley. Your line is now live.
Jim Herzog (Senior EVP and CFO)
Good morning, Manan.
Manan Gosalia (Executive Director and Senior Equity Research Analyst)
Hey, good morning. I wanted to ask on your loan-to-deposit ratio, you know, it ticked down again in the quarter to about 78%. You know, I get that you're looking for 5% loan growth point-to-point next year, and you might be bringing in deposits ahead of that. But I guess if the loan growth is contingent on rates coming down, you know, why pay out for deposits now? You know, why not bring in the deposits later as the loan growth comes in? And, you know, what is the right loan-to-deposit ratio to consider as we look out into the end of 2024?
Curt Farmer (Chairman, President, and CEO)
But I might, this is Curt, I might start and then ask Jim or Peter to add in. But on the deposit front, maybe just to keep the perspective here, is that, you know, we consider deposits part of full relationships with clients. And we have clients for whom we have lending relationships and clients for whom we have deposit relationships and clients for whom we have both. But in the case of growing deposits, we're going to grow deposits sort of in line of taking care of our customers. And having lived through what the whole industry lived through last spring, I don't believe this is an environment where we're going to, you know, turn any deposits away, for lack of a better definition.
We do believe that that loan-to-deposit ratio will go up some, but we should be able to comfortably stay within our target. We believe kind of in the mid-80s, even with the point-to-point growth that we're expecting in 2024.
Jim Herzog (Senior EVP and CFO)
Yeah, two points I would add on to that, Manan. I mean, we love deposits, regardless of loans. I mean, we're making money on these deposits. We're not holding capital on them. We love deposits just for what they represent amongst themselves. But having said that, you know, we certainly don't want to operate in a just-in-time funding capacity for loans. I mean, we want to make sure we're prepared for when that loan comes. You can't necessarily, you know, turn deposits on a dime, but we welcome the deposits. We're not going to turn them away. We're making money on them, and they continue to add to the stability of the overall franchise.
Manan Gosalia (Executive Director and Senior Equity Research Analyst)
Great. And, you know, maybe a follow-up there on, on deposits. As rates start to go down, given your skew to commercial, how should we think about those deposit betas on the way down? You know, if we do get the six rate cuts or even, you know, more than that as we get into 2025, do you think the first few rate cuts are more beneficial given your skew to commercial, or should you start to see more momentum in deposit costs coming down as you get into rate cut numbers, you know, four, five, and six?
Jim Herzog (Senior EVP and CFO)
Yeah, every cycle is different, so it's hard to say for sure, but I think in this particular cycle, we could see a little bit of symmetry or what I might call a LIFO approach, last in, first out. I mean, certainly we saw betas accelerate towards the end of the cycle, and even in the last couple of quarters without Fed hikes, we've seen deposits continue to tick up. And so just as we've seen them, you know, more accelerated in the second half of this cycle, I think those might be the most sensitive deposits that we can take back down early in the falling rate cycle. So I am somewhat cautiously optimistic. You know, we are assuming in the outlook about a 60% beta, with not too big of a lag following the first rate cut.
Having said that, every cycle is different, and I do recall back in 2019, the Fed cut 50 basis points, I believe, in July of 2019, and I didn't see a lot of, you know, falling rates in the, industry overall. You know, that was a very controlled environment where the economy was still relatively strong, and I continue to think that the reason for the Fed cuts is really going to drive that beta. You know, if it's a very orderly, takedown of rates and the economy continues to be very strong, it may, be a little stickier to bring them down. But if the Fed reduces rates because there is a little weakening in the economy, I think it gives banks a little bit more leverage.
So I would just emphasize that every cycle is different, but we do think there is that potential for some significant beta in those first few cuts.
Manan Gosalia (Executive Director and Senior Equity Research Analyst)
Great. And do you have what percentage of your deposits are directly indexed to the Fed fund rate?
Jim Herzog (Senior EVP and CFO)
Most of our deposits are not. You know, we're very much a relationship-based bank, and, you know, many of those are one-on-one conversations with customers. So, you know, we do have some reciprocal deposits that are, you can consider, to be somewhat indexed. Obviously, the broker deposits, their time deposits are somewhat indexed, you can consider, but the vast majority of our deposits are not.
Manan Gosalia (Executive Director and Senior Equity Research Analyst)
Great. Thank you.
Jim Herzog (Senior EVP and CFO)
Thank you.
Operator (participant)
Thank you. Next question is coming from John Pancari from [Evercore] ISI. Your line is now live.
Peter Sefzik (Senior EVP and Chief Banking Officer)
Morning, John.
John Pancari (Senior Managing Director and Senior Research Analyst)
Morning, morning. First question, just around the loan growth expectation, the 5% point-to-point expectation. Can you give us a little bit of color? Where do you see the loan growth drivers coming from, and when do you really see an acceleration there, in overall loan growth, you know, as you look through 2024? Thank you.
Peter Sefzik (Senior EVP and Chief Banking Officer)
John, this is Peter. So, it's actually pretty broad-based. I mean, we mentioned this morning, we still have a little bit of Mortgage Banker Finance at the end of December that will be working against us a little bit through the year. But then across the rest of our businesses, it's pretty broad-based. I do think, I think dealer probably has sort of momentum going into 2024 that'll continue throughout the year. Our EFS business, I think, is a business that, if you kind of look in the, in the appendix, we've shown has dropped a couple of quarters. I think it'll probably drop first quarter, but we think it'll pick up quite a bit going into 2024. But really broad-based across middle market, we feel like we've got some really good momentum.
I would tell you that we feel like customer sentiment changed a little bit in the fourth quarter, in the right direction, and sort of our informal surveys that we do internally with everything seems to indicate that, there's going to be some more demand as we get into what I would really say the second quarter, to answer your question. Probably second and third quarter is where I think we'll start to see that pick up. I don't, as we talk about today, our outlook on first quarter is pretty flat to down a little bit, but I think as we get into the middle of the year, we're getting indications that we'll start to see some, some real good loan growth that results from that 5% point to point.
John Pancari (Senior Managing Director and Senior Research Analyst)
Great. Okay, thank you. That's helpful. And then separately, your, your guidance implies, you know, call it ballpark, about 900 basis points or so of core negative operating leverage, based upon the midpoint of, of the guide. And, you know, I'm just wondering if the revenue picture ends up being more pressured than you currently forecast? Do you have expense flexibility to improve that operating leverage? I know you, you know, you, you set out the $45 million in expense reduction from the recalibration in 2024. Can that recalibration benefit, that $45 million, can that go up if revenue is pressured to a greater degree? Thanks.
Peter Sefzik (Senior EVP and Chief Banking Officer)
Well, John, as Jim said in his prepared remarks, that $45 million becomes $55 million on a run rate basis in 2025. And, you know, this is an interesting period of time. The whole industry's gone through an inflection in 2023 and somewhat of a recalibration, to use your words. We've tried to be thoughtful in terms of balancing the things that we believe are driving revenue for us and will drive revenue for us going forward. That includes sort of the products that we've invested in, especially in treasury management, payments, capital markets, wealth management. It also includes the focus on small business, expansion into new markets, into the Southeast and into the Mountain West Colorado region.
And so we want to stay focused on those because we're trying to really play the long game here, and try to get beyond sort of the immediate environment that we're operating in. And then secondly, I would say, while, you know, we did have some expense initiatives in the quarter, we're always thinking about additional efficiency opportunities. And again, it's all about sort of balancing between those two. And so, my hope is that we would see positive operating leverage, really based on overall revenue growth and a return to a more normalized interest rate environment, and hopefully, a soft landing on the economy and, you know, a lack of further credit deterioration, etc.
If we don't see that, then obviously we'd need to think about what else we can do from an efficiency standpoint.
John Pancari (Senior Managing Director and Senior Research Analyst)
All right, thank you. Just regarding that, when do you expect you could break into more of a positive operating leverage trajectory?
Jim Herzog (Senior EVP and CFO)
Yeah, John, it's Jim. I mean, number one, just to build on Curt's comments, you know, I do think 2024 is a bit of a transition year, not just for us, but for the whole industry. I think you're hearing that from some of the other calls, too. You know, we're in this kind of tweener stage where interest rates continue, or pay rates and deposits continue to edge up a little bit, yet the Fed isn't raising rates. So that makes it a really challenging year. I do think things will start to move in the positive operating leverage direction in 2025.
We don't have a complete line of sight into that yet, but I mentioned how we expect that interest income to really have some great momentum as we enter into 2025. And of course, that's always the goal, to have a positive operating leverage. And, you know, on the topic of expenses, I'll just add that I think that really is a journey, not a destination. We always have to be looking at expenses. I don't think this will be the end of taking a really hard look at what we can do over time. And I think if expense reduction is really, you know, having a purpose for twofold, one is to create capacity for investment, which continues to be critically important, probably more so now than ever. And then secondly, to make sure we get that positive operating leverage.
So, we will continue to kind of keep an eye on not just normal budget hygiene, but actually seeing what more significant steps we can take over time. So as I said, a journey, not a destination. And, I think 2025 should have things moving in the better direction, but again, not a complete line of sight into that.
John Pancari (Senior Managing Director and Senior Research Analyst)
Okay, great. Thanks, Jim.
Jim Herzog (Senior EVP and CFO)
Thank you.
Operator (participant)
Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from John Arfstrom from RBC Capital Markets. Your line is now live.
Jon Arfstrom (Senior Research Analyst)
Hey, thanks. Good morning, everyone. Hey, good morning. Question on your net interest income guide. What kind of rate assumptions do you have in that? In any kind of rate scenario that you think, you know, derails that from what you're thinking today?
Jim Herzog (Senior EVP and CFO)
Yeah. Good morning, John. Yeah, we did assume the 12/31 Forward Curve, which has almost, you know, six rate cuts in it. You'll notice on our asset sensitivity page that, for the first time, that I can recall at least, we became liability sensitive. So I think this is a very fortuitous time, for us to become liability sensitive, with potentially six rate cuts out into the future. You know, we do have the sensitivities there, using a 60% beta. You can see that we do benefit from, a fall in rates, assuming that we can reprice as expected without too much of a lag. So I would say if we get fewer cuts than that, that will put a little pressure on that outlook.
But we are benefiting from the 12/31 Curve if we really do get those six cuts. So that's the assumption, and we'll continue to monitor, and we'll see, you know, where the economy and where the FOMC goes.
Jon Arfstrom (Senior Research Analyst)
Okay. Yeah, A lot going on this morning. I had to rub my eyes when I saw that slide. I guess my one of my follow-up questions, and maybe you answered it, is do you still consider yourself asset sensitive? And I guess the answer is no at this point?
Jim Herzog (Senior EVP and CFO)
That's what our models would say. You never know how customers are going to react, and the competition is going to react, but I would say we're a little more liability sensitive than we are asset sensitive. Now, that liability sensitive could have a little bit more of a leg in it than what we're projecting. We just don't know how customers and competition will react. But over the course of time, it does appear that we are a little more liability sensitive.
Jon Arfstrom (Senior Research Analyst)
Okay. Point of clarification on the expense piece of it. Is it $45 million in 2024 and an incremental $55 million in 2025, or an incremental $10 million in 2025?
Jim Herzog (Senior EVP and CFO)
Incremental $10 million.
Jon Arfstrom (Senior Research Analyst)
Okay. Okay, good. And then one, Melinda, I thought you'd get a pass, but I just wanted to ask one credit question.
Melinda Chausse (SVP and Chief Credit Officer)
Sure.
Jon Arfstrom (Senior Research Analyst)
On slide 13, that bottom right corner, where you show the percent criticized in TLS Leveraged in Auto.
Melinda Chausse (SVP and Chief Credit Officer)
Yeah.
Jon Arfstrom (Senior Research Analyst)
Curious, how elevated is that relative to, you know, normal? I don't know if there is a normal, but how elevated is that, and, and what does it take for those to come back down?
Melinda Chausse (SVP and Chief Credit Officer)
Yeah, thanks for the question. I mean, surprisingly, not surprisingly, but a positive surprise this quarter was that we actually saw improvement in three of the four incremental monitoring portfolios. So we saw balances and criticized assets go down in TLS leverage in Automotive Production. I would say that that leverage portfolio at 10%-12% is about normal. That is an elevated higher risk portfolio by its very design. TLS, again, is going to be elevated above the normal portfolio at 18%. I would say that's still above sort of historical norm, but we are seeing positive momentum in TLS. Certainly, the rate environment, if it cooperates with the Forward Curve, is going to be a real positive for that segment as well as leverage.
You didn't ask about commercial real estate specifically, but we did see that one relatively flat in the fourth quarter. So we've got some assets that are moving into the criticized bucket, but we also have assets that are moving out of the criticized bucket. And they move out when they either pay off or we remargin them and get them back into a conforming state. So I feel really good about all of those portfolios that are listed there on the right and would expect that, you know, we should, again, if the rate environment cooperates and we don't see a downturn in the economy, that we'll continue to see these stable to potentially improving towards the back half of the year.
Jon Arfstrom (Senior Research Analyst)
Okay, good. That's very helpful. Thank you, Melinda.
Melinda Chausse (SVP and Chief Credit Officer)
Mm-hmm, welcome.
Jim Herzog (Senior EVP and CFO)
Thanks, Jon.
Operator (participant)
Thank you. Next question today is coming from Steven Alexopoulos from JP Morgan. Your line is now live.
Jim Herzog (Senior EVP and CFO)
Morning, Steve.
Steven Alexopoulos (Equity Analyst)
Morning. So I want to start by going back to your answer to Peter's question, the first question on NIM. It's funny, for all the years I've covered the company, I think you were the most asset sensitive, and if you look at the historical NIM range, it's literally all over the place. Jim, what you've done now is you've basically restructured the balance sheet, so it's barely neutral. Even if I look at this 100 basis point gradual at 60% beta, it's like 6 BIP or so benefit to NIM. So assuming that we get here, let's say the forward curve plays out, we go to 100 basis points or so of steepness. Does that imply your NIM, the new NIM for Comerica is like 3%, right? Historically, I mean, a year ago, you were 3.74%, comes down a ton.
I'm trying to figure out, like, what the hell does a margin look like at this company with this balance sheet in a normal rate environment that has actual steepness to the curve? Are you basically a 3% margin bank now because you've taken away the asset sensitivity?
Jim Herzog (Senior EVP and CFO)
You know, we have bounced around quite a bit over time, Steven, and we didn't necessarily think that was always a great thing. I do think stability is important. You know, the rate environment is one factor. Again, just the overall construction of the balance sheet and the lumpiness and the amount of cash we're carrying or securities we're carrying is also a factor. And just again, our, you know, business model, you know, creates a little bit more lumpiness in that regard. So we would like a little bit more stability. As I mentioned in the Peter's question, I do see our trajectory going north of, you know, where we ended here, and I think we'll continue to go north, as we move through 2025.
So you know, we're above 3% on a normalized basis, and I think we are going to have a much more stable, NIM and net interest income, earnings capacity going forward. Don't necessarily want to give an, an exact number, but it is north of 3%, for sure.
Steven Alexopoulos (Equity Analyst)
Okay. Okay, it's helpful, but keep in mind, that's why generalists don't put their money in regional banks because the black box and the management teams don't really help shed some light on what expectations are. I want to ask on expenses, too. So you guys are guiding to around 3% operating expense growth in 2024, and that's with the benefit of the new initiatives. Just a big picture view, why is expense growth at the company so much higher than other regionals? I'm sure you look at all the other regionals, it's higher. And then if we think about 2025, if you don't announce another initiative, should we expect the growth rate to lift off of 3%? Thank you.
Jim Herzog (Senior EVP and CFO)
You know, many of the expenses that we have in 2024, a lot of the investment we're making is not ongoing run rate. A lot of it is more one-time effort to get some of these initiatives up and running, whether they're on the revenue side, the product side, or the risk management framework side. So I wouldn't necessarily assume that the expenses that we are incurring in 2024 all carry over to 2025. But we are in an investment mode. I mean, I think we may be underinvested in certain years if you go back historically. So I do think there's a little bit of catch-up going on, but we are committed to make sure that we can compete in the years coming forward.
We do think a certain amount of investment is required there, and, you know, we feel comfortable it's going to pay off.
Steven Alexopoulos (Equity Analyst)
Can you expand on that, Jim? Like, where did you underinvest, and where are you catching up now?
Jim Herzog (Senior EVP and CFO)
Well, I would say, number one, some of it is just moving with the times with the digitization and some of the online capabilities. But I would also say that whether it be, you know, risk management framework or some of the product innovation, I just don't think we necessarily always invested as much as we could have historically. And rather than trailing on that front, we'd rather be leading. So, you know, we think the easier thing to do would be to hunker down and just start the company, and that's not something we want to do. So we feel like we're doing the right thing, and we do feel like it's going to pay off with positive operating leverage as we move forward.
Steven Alexopoulos (Equity Analyst)
Got it.
Curt Farmer (Chairman, President, and CEO)
See, this is Curt. I just would add that, as I said earlier, we are focused on top-line revenue growth. We believe we have opportunities on both the fee income side and with the loan portfolio. But certainly, if we do not see, you know, growth materializing, if the economy does not move in the right direction, if interest rates don't move in the right direction, allowing us to get some relief on deposit betas, etc., then we'll continue to look at expense opportunities. But I'd also add that, you know, part of this, from a risk framework standpoint, is continued investment in preparation of potentially being over $100 billion, or if Basel III requirements step down to banks sub $100 billion, kind of in our category, $86 billion.
Steven Alexopoulos (Equity Analyst)
Got it. Okay, thanks for taking my questions.
Peter Sefzik (Senior EVP and Chief Banking Officer)
Thanks, Steve.
Operator (participant)
Thank you. Next question is coming from Chris McGratty from KBW. Your line is now live.
Jim Herzog (Senior EVP and CFO)
Morning, Chris.
Operator (participant)
You might have your phone is on mute, Chris.
Chris McGratty (Research Analyst)
Sorry about that. Good morning. Sorry about that. On the expenses, Jim, I think you've talked historically about, you know, roughly $50 million for the $100 billion rules as you kind of know of them today. How much, I guess, can you remind us how much you've accrued or is in the guide for 2024 related to that?
Jim Herzog (Senior EVP and CFO)
You know, I would say we have a small portion of that in the guide for 2024. You know, the vast majority of that $50 billion is probably more likely to be in, you know, future years as we get closer to $100 billion. But there are several million dollars in there as we really try to address those things of Category IV that we think have a longer runway to get ready for. You know, so those items that we think would take, you know, say two, three, four years to really be ready, we're getting those things in motion now. You know, the majority of the Category IV requirements we either already have, or if we don't have them, we think we could complete them within 1-2 years, and so we're holding off on that.
So, you know, the majority of the $50 million is still out there in the future, but we do have some of that in the run rate in 2023 and a little bit more in 2024.
Chris McGratty (Research Analyst)
Okay, great. Then maybe one for Curt. I think the Street's got you roughly at a low teens return on tangible common equity in this year and next. Can you maybe elaborate on how you think of the return potential of this company? Obviously, you've got a much more stable margin over time, but you're also balancing some of the investments.
Curt Farmer (Chairman, President, and CEO)
Yeah, I wouldn't maybe give a forecast exactly around returns or even multiples on, on the company. But I, I would say that we believe that, based on the comments we made earlier, certainly 2023 was a disruptive year and a reset for the industry. In 2024, I think it's some recalibration. I, I believe that interest rates are going to come down, and when they do, I think it will have a positive impact on NII for us. And we believe, as we said earlier, that in the latter half or second half of the year, that we will start seeing NII return. We, we think we've got great opportunities on the fee income side, and we, we showed that in, in 2023. And we think we've got good growth opportunities in terms of the loan portfolio.
So, our goal is to get to positive operating leverage and believe that we can, you know, return at a level that's commensurate with the industry overall or better from a longer-term perspective. But 2024 will be somewhat of a continued inflection year.
Chris McGratty (Research Analyst)
Okay, great. Thanks for the color.
Operator (participant)
Thank you. Next question today is coming from Brody Preston from UBS. Your line is now live.
Brody Preston (Equity Research Analyst)
Hey, good morning, everyone.
Peter Sefzik (Senior EVP and Chief Banking Officer)
Morning, Brody.
Brody Preston (Equity Research Analyst)
Jim, I was hoping maybe you could help me nail down the cadence of the you know, kind of BSBY swap amortization, you know, the accretion in the NII. How much of that? I think you said most of it's in 2025 and then into 2026, but how much of it happens in 2024? And then how much happens in 2025 and 2026?
Jim Herzog (Senior EVP and CFO)
Yeah. Good morning, Brody. Yeah, we don't have a 100%, clear line of sight into that, because out of those $7 billion of BSBY hedges or hedges dedicated to BISB loans, a little less than $3 billion of them are not redesignated yet, because we have not generated enough SOFR loans to redesignate those particular hedges. We do expect to have that complete, or at least largely complete, by the end of the first quarter. And I think at that point, we'll actually have a fair amount of certainty as to how it lays out. But in general, the way it looks right now with the forward curve, you know, and this is exclusive of what I offered in the guidance, because again, there's a lot of uncertainty there.
You know, there is likely a very, somewhat mild negative impact in 2024. To the extent there is any kind of negative impact, you just accrete that back in later years. So again, it's not an economic loss. And then we are very likely to get the vast majority of it back in 2025. You know, I, you know, think of it as maybe, you know, north of 80% of that loss accreted back in 2025, and then most of the remaining after that would come in 2026.
Brody Preston (Equity Research Analyst)
Got it. Thank you. That, that's helpful. I guess if I could just ask one fine point, just on the first quarter with the redesignation. Should we see something similar to what we saw this quarter? Maybe not in terms of size, but just directionally, where there's a negative kind of non-operating impact to fee income and maybe a small positive impact to NII?
Jim Herzog (Senior EVP and CFO)
You know, it really depends on the rate curve. That's going to drive it, maybe to a lesser extent, the timing of when we redesignate. Certainly, it's going to be a small fraction of what you saw in the fourth quarter. And again, whatever you do see, will simply accrete back in future quarters. So, I don't think there's. I know there won't be any kind of economic surprise there. But from an accounting and recognition standpoint, there will be a little volatility in the first quarter, and again, we'll accrete that back in later quarters, and likely mostly in 2025. But a little bit of volatility in Q1, but also a large amount, if not complete certainty after Q1 also, and we can lay out that exact guidance and cadence.
Brody Preston (Equity Research Analyst)
Got it. So you don't have the dollar impact for the first quarter, an estimate for the dollar impact to NII for the first quarter yet from this, from the BOLI stuff?
Jim Herzog (Senior EVP and CFO)
We don't. We need for the dust to settle in terms of just getting the rest of these redesignated and, you know, where the rate curves will drive that, and again, you know, we'll be made whole ultimately over the next couple of years.
Brody Preston (Equity Research Analyst)
Got it. Okay. If I could ask, just another one on the NII guide for the year. I think you said it was a 60% beta that you were running through the guidance. Do you happen to have what the non-interest-bearing deposit mix that's underlying the guidances for next year?
Jim Herzog (Senior EVP and CFO)
Yeah, we continue to think that we are going to bottom out in the low 40% or, you know, very near 40%. So we've been pretty consistent on that over the last, you know, two to three quarters. Of course, a big driver of that isn't so much even just non-interest-bearing deposits, but where interest-bearing goes. And, you know, we do plan on having great success with interest-bearing deposits as it relates to customers. On the other hand, at some point, we probably will pay down some of these broker deposits that we have because that's really, you know, a form of wholesale funding that all banks make some degree of use of.
So the overall level of interest bearing will, of course, play some optical games with that percentage, but our base case is to be in the 40% towards, you know, nearing that 40% point.
Brody Preston (Equity Research Analyst)
Okay. And then I did just want to ask on the liability sensitive disclosure. You know, could you maybe help me think about, you know, the moving parts that make you liability sensitive? because, you know, like, if I just simply looked at, you know, you versus a lot of your peers, you know, with 40%, 41%, 42%, whatever it is right now, NIM, and still effectively 60%, I think, floating rate loans, like, both of those items, you know, 60% might be closer to, you know, what I would call regional bank, kind of, average for floating rate loans, but the 40%-42% NIM is still above average. So I would holistically think about you as being mildly asset sensitive. But what are the moving parts elsewhere on the balance sheet that push you towards liability sensitivity?
Jim Herzog (Senior EVP and CFO)
Yeah, that's a good point, and we do stick out in a very good way with our high level of non-interest-bearing deposits in the mix. Where we also stand out, and because we have that higher level of non-interest-bearing deposits, we did put more swaps and securities on the book to manage to a more interest neutral position over the last year. And so that's exactly why we added those hedges, and that's what's offering us the protection in a down rate environment.
Brody Preston (Equity Research Analyst)
Okay. So it's mostly the hedges then, I guess, combined with.
Jim Herzog (Senior EVP and CFO)
It is.
Brody Preston (Equity Research Analyst)
The securities balances.
Jim Herzog (Senior EVP and CFO)
Yeah. I mean, it's the, you know, we always look at it holistically between both the hedges we put on in the form of both swaps and securities. But that's the balancing X factor to your equation there.
Brody Preston (Equity Research Analyst)
Got it. And then last one from you is just around the brokered deposits. I think the guidance assumes flat brokered deposits moving forward. I guess, you know, would you look to use the securities maturities kind of exclusively to pay down borrowings, or is there opportunity to kind of run off brokered deposits next year, even though it's not contemplated in the guide?
Jim Herzog (Senior EVP and CFO)
Yeah, I would say the runoff of securities will, you know, be used for a combination of funding loan growth and reducing wholesale funding. And I think of wholesale funding as both being, you know, some of the debt borrowings, like FHLB, any security maturities we might have, or bond maturities we might have, and brokered deposit maturities. So there'll be some mixture that goes on there in terms of, you know, the overall formula, but I suspect over time, and it's actually a goal of ours, to reduce brokered deposits over time. So at some point, you will see a reduction there, and securities maturities will be, you know, one of the inputs to that equation.
Brody Preston (Equity Research Analyst)
Got it. Thank you very much for taking my questions, everyone. I appreciate it.
Jim Herzog (Senior EVP and CFO)
Thanks, Brody.
Operator (participant)
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to President, Chairman, and Chief Executive Officer, Curt Farmer.
Curt Farmer (Chairman, President, and CEO)
Let me again, thank everyone for joining us, today. As always, thank you for your interest in, our company and Comerica, and I hope you have a nice day.
Operator (participant)
Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day.