James J. Herzog
Senior Executive Vice President, Chief Financial Officer at Comerica
Thanks, Curt, and good morning, everyone. Slide 5 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 of non-interest expenses related to the onetime special FDIC assessment. This was unchanged from indications provided in our December update. Next was the accounting impact from the pending cessation of Bisbee since approximately $7 billion of our swap portfolio was designated to Bisbee 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 time recognition of earnings. These recognized losses will accrete 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 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've 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 creative 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 relatively small impact in late 2023, we noted here because we expect a larger impact in 2024.
Slide 6 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 the quarterly results in more detail.
Turning to Slide 7. Our intentional balance sheet management reduced average loans and commitments in the fourth quarter. The exit of mortgage banker finance contributed 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 multi-family and industrial construction projects continued to drive higher commercial real estate utilization, while 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 declined to 6.38% in the fourth quarter.
Slide 8 highlights the stability of our deposit base. Average deposit balances remained relatively flat in 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 growth 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 9, we continue to normalize our liquidity position, using excess cash to repay host 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 of 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 to $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 enhanced margin.
As shown on 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, although Bisbee cessation did not impact the ongoing cash flow associated with swaps listed on the slide. While we took a loss in the fourth quarter, we will accrete 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 remained below our normal range. And a few we had were more concentrated on 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 was $198 million, included $93 million of 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 within 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 key 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 of maturities in our securities portfolio reduced losses within AOCI and increased tangible common equity to 6.3%. Based on the December 31 forward curve, we expect our unrealized losses to reduce by one-third 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% to 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% to 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 a 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, and to a lesser extent, less income from Bisbee 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 busy 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 remained 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-basis point to 40-basis point range. We expect non-interest income to grow 6% on a reported basis, which should be relatively flat year-to-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, a growth of 3% after adjusting for notable items. Through successful execution of our expense re-calibration 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.
