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DATE
Friday, July 18, 2025 at 8 a.m. ET
CALL PARTICIPANTS
Chairman, President, and Chief Executive Officer — Curt Farmer
Executive Vice President and Chief Financial Officer — James J. Herzog
Senior Executive Vice President and Chief Banking Officer — Peter Sefzik
Executive Vice President and Chief Credit Officer — Melinda Chausse
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RISKS
Efficiency Ratio: Chair Curt Farmer acknowledged that "efficiency is going the wrong direction," and the year-to-date efficiency ratio remains at 68%.
Net Interest Income Outlook: Executive Vice President James J. Herzog stated, we expect these factors to contribute to a slight decline in Q3 net interest income relative to Q2, which may push our full-year 2025 results to the lower end of our 5% to 7% range.
Criticized Loans: Melinda Chausse specified a "moderate increase" in criticized loans within the core middle market book, citing that it was "concentrated in three credits" with consumer-end exposure and pressured by the "higher for longer interest rates and the inflationary pressures."
TAKEAWAYS
Earnings Per Share: Reported GAAP earnings per share of $1.42 for Q2 2025, This represents an almost 14% increase over the prior quarter.
Average Loans: Rose nearly 1%, while period-end loans increased by approximately 3%.
Net Interest Income: Stable at $575 million for the third consecutive quarter.
Non-Interest Income: Increased by $20 million sequentially, with capital markets income up $11 million.
Non-Interest Expenses: Decreased by $23 million sequentially, attributed primarily to lower litigation costs and reduced salaries and benefits.
Efficiency Ratio: Improved, with expenses were favorably impacted by net litigation benefits and gain on sale of assets; however, management noted this included non-recurring items.
Deposit Performance: Average deposits declined just over 1%, driven by decreases in retail, corporate banking, technology, and life sciences.
Deposit Mix: Non-interest-bearing deposits remained stable at 38% of total deposits for the fourth consecutive quarter.
Deposit Pricing: Increased four basis points sequentially, with Executive Vice President Herzog indicating that Third quarter pay rates "will likely step up to at least twice the increase of the four bps that you saw in Q2 2025,"
CET1 Ratio: Estimated CET1 ratio at 11.94%, above the 10% strategic target, after returning $193 million to common shareholders.
Loan Pipeline: Described as "strong even after closing new opportunities," with management expecting continued positive momentum.
Net Charge-Offs: Registered at 22 basis points, which management states is "at the low end of our normal range and effectively flat compared to last quarter."
AOCI: Lower unrealized losses contributed to a 22 basis point improvement in the tangible common equity ratio.
Share Repurchases: Increased to $100 million.
Preferred Stock Redemption: Occurred to avoid "a more punitive coupon reset" producing a short-term "negative drag to EPS"
2025 Loan Outlook: Full-year average loans projected to be "flat to down 1%" which is an improvement from prior guidance.
2025 Deposit Outlook: Full-year average deposits expected to decline by 2%-3%, with a planned reduction in brokered CDs and stable customer deposits.
2025 Net Interest Income Guidance: Comerica projects net interest income growth of 5%-7%; however, the company expects "potentially at the lower end" of the 5% to 7% net interest income growth range due to deposit trends and rate dynamics.
Non-Interest Income Guidance: Comerica forecasts non-interest income to increase by 2% for the full year.
Expense Outlook: Full-year non-interest expenses projected to grow 2% year over year, with management noting some cost increases in the second half are due to reversal of prior period notable items and investment spending.
Share Buyback Plan: The company intends to repurchase about $100 million of common stock in Q3 2025.
Deposit Strategy: Two new real-time payment solutions were launched to enhance deposit capabilities.
SUMMARY
Comerica Incorporated (CMA 3.94%) reported quarter-over-quarter loan growth, an increase in earnings per share, and stable net interest income amid sequential deposit declines and rising deposit pricing pressures. Management confirmed ongoing investment in payment solutions and real-time deposit enhancements, while reiterating a conservative capital position with an estimated CET1 ratio of 11.94%, far above the stated 10% target, even after meaningful share repurchases and a recent preferred stock redemption. Elevated criticized loans were concentrated in a small number of middle market credits with consumer exposure, and guidance anticipates the full-year net interest income result may fall at the lower end of the previously stated 5%-7% target as a result of higher funding costs and typical third-quarter headwinds. Expense performance benefited from favorable but non-recurring items that are unlikely to persist as the year progresses, and full-year expense guidance now projects restraint despite inflation and strategic investment. Deposit mix stability remains a management focus, as does flexibility to calibrate additional share repurchases and capital allocation strategies as lending and funding conditions evolve.
Management signaled confidence in loan growth for the balance of 2025, supported by sustained expansion in loan pipelines and new loan production, but projected muted growth in commercial real estate.
Non-interest-bearing deposits are expected to remain in the upper 30% range for the full year, with continued success in customer deposit gathering viewed as a competitive advantage but facing heightened pricing pressures in the near term.
Chairman Farmer reiterated that potential acquisition activity would be governed by strategic fit rather than regulatory thresholds and that the primary focus remains on organic growth in core markets.
Technology investments and payment platform enhancements were highlighted as major elements of the ongoing strategy to drive long-term deposit and fee growth, while Management acknowledged competitive risks in deposit gathering.
The company intends to keep its CET1 ratio well above the 10% target throughout the year, balancing share repurchases with ongoing monitoring of economic conditions, profitability trends, and regulatory developments.
INDUSTRY GLOSSARY
CVA (Credit Valuation Adjustment): An adjustment to the valuation of derivative instruments reflecting the counterparty credit risk inherent in the transaction.
AOCI (Accumulated Other Comprehensive Income): A component of equity capturing unrealized gains and losses, primarily those arising from securities and certain pension adjustments.
CET1 (Common Equity Tier 1 Ratio): A regulatory capital ratio representing core equity capital relative to risk-weighted assets, measuring a bank’s solvency and ability to absorb losses.
Beta (Deposit Beta): The rate at which changes in market interest rates are passed through to deposit rates paid to customers.
Criticized Loans: Loans classified by management as having some degree of credit weakness, making them susceptible to potential loss or increased monitoring.
Full Conference Call Transcript
Curt Farmer: Thank you, Kelly. Good morning, everyone, and thank you for joining our call. We are incredibly proud of this quarter's results. We saw an inflection in loans as balances grew consistently throughout the quarter across most of our businesses. Our deposits came down modestly, favorable loan fee income and excess trends drove a sizable increase in both net income and PPNR. Capitalization remained a strength with an estimated CET1 of 11.94%, well above our 10% strategic target, even after a compelling dividend and higher share repurchases. Sentiment improved as we saw signs of customers beginning to make measured investments in their businesses.
Economic and geopolitical uncertainty persists, but customers appear more confident in their ability to navigate the environment and make adjustments where necessary. Beyond our financial results, this was an exciting quarter for payments and deposits as we announced new capabilities and product enhancements for our customers. We believe the milestones we achieved demonstrate the successful execution of our strategy and we feel ongoing efforts in this space position us well for future growth. Moving to a summary of the second quarter on slide four. We reported earnings per share of $1.42, representing an almost 14% increase over the prior quarter. Loans grew throughout the quarter and offset deposit pressures as net interest income remained flat.
Credit quality continued to perform well and both non-interest income and non-interest expense improved, resulting in a lower efficiency ratio. Despite higher profitability, tax expense came down with the benefit of discrete items. In all, we saw an impressive increase in profitability and returned $193 million to common shareholders through share repurchases and dividends, while keeping capitalization strong. We continue to feel well-positioned to support our customers and drive growth in our business. Now I'll turn the call over to Jim to go into more details.
Jim Herzog: Thanks, Curt. Good morning, everyone. Beginning with loans on slide five, we saw strong growth in the quarter, with average loans up almost 1% and period-end loans up approximately 3%. Importantly, loans in most businesses increased, driven by new loan production for new and existing customers. Although average loans and equity fund services declined, period-end trends were up with an improved outlook for private equity and venture capital, in both deal activity as well as fundraising. Total commitments increased by $400 million with increases in environmental services and commercial real estate, offsetting decreases in equity fund services, and total utilization remained relatively unchanged. Pipeline activity was strong even after closing new opportunities, reflecting continued positive momentum.
Average loan yields came down three basis points as the smaller benefit from Bisbee cessation more than offset the tailwind of our maturing swap portfolio. On slide six, average deposits declined just over 1% with the largest decreases in retail, corporate banking, technology, and life sciences. In select businesses, we continue to see seasonality related to the timing of tax payments and in others, we saw customers use their funds for working capital or project-related purposes. Non-interest-bearing deposits as a percentage of total deposits remained flat at 38% for the fourth consecutive quarter, demonstrating stability in our compelling funding mix.
Deposit pricing increased four basis points as we signaled previously we expected to see some give back in pricing and this was in line with our expectations. In fact, with a cumulative beta of 67% since the third quarter of last year, we've still outperformed the betas that we saw on the way up. We intend to remain diligent and agile with our pricing strategy as we monitor the competitive environment and balance our customers' objectives with our funding needs. Our deposit portfolio has long been a key strength of our franchise and we are continuing to make strategic investments to further enhance this competitive funding source.
Just this quarter, we delivered two new real-time payment solutions providing additional flexibility for our customers. We feel these success stories are strong proof points of the effectiveness of our strategy and we look forward to sharing more in the future. Our securities portfolio on Slide seven declined with paydowns and maturities, offsetting lower unrealized losses. We continue to expect AOCI improvement over time with the benefit of ongoing paydowns and maturities. Beyond periodic purchases to replace attrition, we are not currently expecting more meaningful securities reinvestments until late this year. Turning to Slide eight, net interest income remained stable at $575 million for the third consecutive quarter as higher loans offset the impact of deposits.
The lower benefit from Bisbee cessation was effectively offset by one more day in the quarter. Robust loan growth was supported by a seasonally more expensive liability mix which contributed to a modest two basis point reduction in net interest margin. We continue to see promising trends for net interest income over time given the structural tailwinds associated with our swap and securities portfolios coupled with the objective of balance sheet growth. Credit quality shown on Slide nine remained relatively stable. Net charge-offs of 22 basis points were at the low end of our normal range and effectively flat compared to last quarter.
Persistent inflation and elevated rates continue to pressure customer profitability in certain businesses, driving an expected normalization in criticized loans, largely concentrated in middle market this quarter. Non-performing loans declined to the lowest level and remain well below our long-term average. Our trade policy developments impacted the economic forecast but our coverage ratio remained unchanged at 1.44% since we accounted for a similar level of risk and uncertainty in our qualitative reserve set last quarter. We believe our proven credit discipline, coupled with our relationship model, positions us well to support our customers.
On slide ten, second quarter non-interest income increased $20 million with growth across most customer line items as we saw higher loan volumes, less economic uncertainty, and some seasonal benefits. Capital markets income improved $11 million with higher syndication fees and derivative income which included increased interest rate hedging and foreign exchange activity, in addition to the quarter-over-quarter benefit in CVA. Income related to deferred compensation increased was offset in higher expenses. And Food and Other share income did increase seasonally. Overall, we are pleased with the improvement in customer-related fee income and look to sustain this momentum in the future quarters.
Expenses on slide eleven decreased $23 million over the prior quarter, largely due to lower litigation-related expenses and salaries and benefits. Seasonal declines related to incentive compensation more than offset higher deferred compensation and merit increases. We saw a $3 million reduction in expenses from changes in the special assessment and conversely saw $3 million increases in both outside processing and advertising expenses. Notable items favorably impacted expenses in the quarter including net litigation benefits, gain on sale of assets, and an interest recovery for a state tax matter. Recognizing that we may not see the same benefit from notable items in future quarters, we remain disciplined in our focus to drive improved efficiency over time.
As shown on slide twelve, we continue to favor a conservative approach to capital producing an estimated CET1 of 11.94% well above our strategic target even after returning capital to shareholders. Our strong capital position afforded us the opportunity to redeem preferred stock avoiding a more punitive coupon reset but also resulting in a slight negative drag to EPS this quarter from costs related to the preferred stock redemption. We went in the forward curve reduced unrealized losses in AOCI contributing to a 22 basis point improvement in our tangible common equity ratio. Even with the dynamic market, robust loan growth, and the reduction of our preferred stock, we increased our share repurchases to $100 million in the second quarter.
Our outlook for 2025 is on Slide thirteen. We now project full-year 2025 average loans to be flat to down 1% representing an improvement from prior guidance. Although economic uncertainty persists, customers appear to be navigating the environment and beginning to invest in their businesses. Second quarter results exceeded expectations and pipelines and activity levels remained strong supporting our outlook for consistent growth in the third and fourth quarters. We expect to see the second half growth across most of our businesses excluding commercial real estate. Our deposit forecast remains unchanged as we expect full-year average deposits down 2% to 3% in 2025 with relatively flat customer deposits, and a deliberate reduction in brokered CDs.
We see positive momentum driving a moderate increase in the third quarter balance with a bigger uptick in the fourth quarter. Although we anticipate continued success in winning interest-bearing balances, we believe our non-interest-bearing deposit mix will remain in the upper 30% range. Based on our current understanding of the transition strategy, we still do not assume direct express deposit attrition within our 2025 outlook. We still project net interest income growth of 5% to 7% in 2025. Loan trends have outperformed expectations. And we expect that to contribute favorably to our outlook. However, we believe deposit trends may offset that benefit as we have seen slightly lower non-interest-bearing balances with a continued high rate environment.
Further, we expect upward pressure on deposit price as we fund robust loan growth and successfully execute on our strategic deposit growth initiatives. Lastly, while the redemption of preferred stock will be accretive to EPS, it does create a slight drag on net interest income as we lose the benefit of the cash used for redemption. Although we expect these factors contribute to a slight decline in third quarter net interest income relative to the second quarter, which may push our full-year results to the lower end of our 5% to 7% range. We continue to expect full-year 2025 non-interest income to grow 2%.
We saw favorable trends this quarter and we anticipate continued momentum in customer-related fees in the second half of the year. Given the second quarter benefits of deferred compensation and CBA within capital markets, we expect third quarter to be relatively flat but that still assumes customer-related growth quarter over quarter. Our outlook for full-year 2025 non-interest expenses improved as we now project only 2% growth year over year with the benefit of strong expense performance year to date. As we look at the second half of 2025, we expect to see an increase in the third quarter driven largely by the impact of second quarter notable items, seasonality, inflationary pressures, and our ongoing strategic focus to drive revenue.
We believe the fourth quarter will be relatively flat to the third quarter and we remain committed to driving efficiency as we balance longer-term growth and return objectives with prudent expense control. We continue to expect full-year net charge-offs to be in the lower end of our normal 20 to 40 basis point range. Looking at taxes, we saw an improvement in our anticipated 2025 tax rate now down to approximately 22% excluding discrete items. Moving to capital, we appreciate the flexibility that our conservative capital position affords us. We intend to maintain a CET1 ratio well above our 10% strategic target throughout 2025.
With an estimated CET1 at just under 12%, we feel we have ample capacity to continue share repurchases and we intend to repurchase approximately $100 million common stock in the third quarter. We consider future capital decisions, we intend to continue our measured approach calibrating the size and frequency of future repurchases with expected loan trends. Also plan to monitor the economic environment, our profitability in the regulatory landscape as these factors may also influence your strategy. Overall, we expect continued momentum to drive which together position us to drive favorable returns over time. I'll turn the call back to Curt.
Curt Farmer: Thank you, Jim. As I mentioned in my opening remarks, we are incredibly proud of this quarter's results. We feel our conservative capital, credit, and liquidity management provide us a solid foundation to consistently support our customers. Further, with our orientation towards growth markets, proven commercial model, and long-tenure customer relationships, we feel well-positioned to grow alongside the economy as customer demand continues to increase. We saw evidence of that this quarter. We expect to benefit from maturities of our swaps and securities portfolios, which create a structural tailwind to net interest income over the next several years. On top of that, we are continuing to invest strategically in our business to drive responsible growth aligned with our strategy.
Earlier this year, we shared tangible examples of investments in small business, middle market, business banking, and payments. And we outlined what we see as potential growth opportunities stemming from those investments. We've already driven successful outcomes from our efforts, with a few examples highlighted just this quarter. And we look forward to demonstrating the additional growth potential we see in our business in the coming quarters. Before we go to Q&A, I would like to take just a moment to acknowledge the immense loss of life related to the catastrophic flooding that occurred in Central Texas earlier this month. Our thoughts are with the families and communities devastated by this tragic event.
With that, we'd be happy to take your questions.
Operator: Thank you. Ladies and gentlemen, we will now be conducting our question and answer session. Our first question is coming from the line of Manan Gosalia with Morgan Stanley. I wanted to start on the NII trajectory. It seems like you're implying that NII is down in 3Q and then up in the fourth quarter. So I was wondering if you could give us some more color on that.
Jim Herzog: Yes. Good morning, Manan. It's Jim. Happy to go through some of those primary drivers. You know, as you said, we do expect a slight decrease in Q3 before continuing our upward trajectory in Q4, which, of course, we will continue to see go upward, I think, as we move through 2026. But we do have some particular events occurring in the third quarter that maybe I can just cover at a high level. Number one, I think it's important to understand the tailwinds that continue to have in Q3 and beyond. You know, the first is loan growth, which we expect to be strong in the foreseeable future.
And that's not just in the results, but we see that in the pipeline also. You know, the second is we do expect to benefit from stronger deposits, both in the third quarter and beyond. And that's important because that will help fund our loan growth. And the third is just the continued maturity of our swaps and securities and that will continue for many quarters to come. So those are positives that we'll see both in the third quarter and will continue. But we do have some headwinds in the third quarter. And we think they may more than offset the tailwinds. But importantly, we think these are just for the third quarter.
We think the tailwinds take back over the fourth quarter. The first of these is the redemption of our preferred stock. And as I mentioned in the comments, we do think this is a prudent move and it does benefit EPS. But that benefit is below the net income line. So net interest income will be missing the cash that we use for that redemption. The second is pay rates on deposits. You know, we are expecting deposits to fund very strong loan growth, and we want to make sure we're prepared for that. But we do expect pay rates to take a larger step up in the third quarter compared to the second.
And I'll maybe break that into two components. About half of that pay rate increase is an increase in selected consumer pay rates that we made towards the end of the second quarter. Which is really just us staying dialed into the market and calibrating strategy with the rate curve, which has been pushed out. As well as considering our loan growth that we expect and other factors. The other half of the increase is we do expect to be very successful in attaining new customers and deposits in both third and fourth quarters. But in some cases, these deposits were likely to look more like an index type rate.
And while they are more expensive than our traditional deposits, we do welcome them. So correct way to fund what we think will be very robust loan growth in the future. But out of all this is that pay rates will likely step up in the third quarter to at least twice the increase of the four bps that you saw in Q2, and that's assuming a flat rate environment. Now regarding beta, it's totally independent of these increases I just talked about. You know, we do expect to have maybe a little bit less than our standard beta for the first FOMC reduction. And just a reminder, we do use the forward curve as of quarter end.
And then I might just refer you back to my opening comments for maybe some smaller drivers. But again, I'd reinforce once we get past the third quarter, we do expect net interest income to be on an upward trajectory. As we continue to grow both loans and deposits. And we would expect deposit pay rates to settle down and betas to return back to normal once we get in the fourth quarter. That's really some of the mechanics. Peter, I don't know if there's any color that you want to add there.
Peter Sefzik: Well, I might just add, Manan, that we're having really good success growing deposits, and a lot of those as of late, tend to be interest-bearing opportunities. With some of the work that we've been doing in our businesses. And I think the third quarter is probably a little bit of an inflection point. We feel good about what we look like on the other side of it, and we think it's more important to bring on deposits and fund our loan growth than to be necessarily worrying too much about whether or not those are interest-bearing or non-interest-bearing, and that's a little bit of where the timing is right now.
So I mean, we view it as a positive outlook about how things are growing for the company.
Jim Herzog: And really, I'm just getting ready for 2026 and beyond. Just having that good granular deposit base, this is really a good long-term move, you think.
Manan Gosalia: Yep. Got it. Okay. That's very thorough. I appreciate that. Maybe if I can ask the same question on the expense side. The guidance implies, I think, if I'm calculating correctly, a $600 million expense number roughly for 3Q and 4Q. And that's a meaningful step up versus 2Q even if you adjust for some of those one-timers in there. I was wondering if you could help us with how you're thinking about the expense side as well.
Jim Herzog: Yeah. It's Jim again. Yeah. Your math is essentially correct. Let's keep in mind that we did have an incredible second quarter on expenses, you know, beating our outlook and consensus significantly. And some of that, as you say, and I mentioned earlier, was due to the notable items we outlined on the expense slide. I would say there were some project expenses that were deferred from the second quarter to the second half of the year. And so as I look at the increase in the second quarter to the third, you know, notable items assumed not to repeat is the largest component of that. As we outlined in the slide.
But we also do have some seasonality as we typically do in the third quarter. And some inflation. And then we do continue to step up our investments for revenue, some of which were simply deferred from the second quarter to the second half of the year. So, hopefully, that gives you a little bit of feel for why we're stepping up and really not out of sync with what we saw for the entire year. Actually, some nice decreases that will pocket for the second quarter. But we still want to continue with the same projects and investment that we'd always originally anticipated.
Manan Gosalia: That's great. Thanks so much, Jim.
Operator: Thank you. Our next question is coming from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Jon Arfstrom: Good morning. Curt or Jim or Peter, you referenced it, but can you give us a little bit more on the pipelines and activity? It sounds like things are a lot better, but is there a way to quantify it? And, you know, how should we think about longer-term loan growth potential beyond maybe a quarter or two?
Peter Sefzik: Jon, it's Peter. Quantifying it is probably a little harder to do, but I would say that from the last quarter, it definitely seems like we've seen improvements. So our manager surveys came in more positive, which we thought they would. In our I articulated at the conference earlier this quarter. So pretty much across the board, we saw some really good uptick in loan growth. Our pipelines grew, and we're feeling pretty good about the second half of the year. So, despite a lot of the things that you feel like you're hearing across the country, there certainly seems to be noise.
But I think our average middle market customer base is progressing forward and figuring out how to navigate. I'm a little hesitant to talk about 2026. We're not putting out any sort of outlooks for 2026, but, you know, I would say that it feels like momentum is picking up across the board for us. So I think that we'll continue to see good loan growth throughout the year. And again, I feel like we benefit from being in some great markets. We've got a great diverse geographic base. You have seen some of the impacts in Michigan to the economy to the auto space, I don't know that's been a terribly strong headwind for us.
So, really across the board, I think we feel pretty good about it. If I were to try to quantify it, Jon, I would say, you know, we're still not back to kind of pre-SVB pipeline numbers. But we are going in that direction. And I would say it probably feels better than it has in a while as far as the activity level. Since the SVB situation. And so hopefully that continues absent, you know, some sort of major event in the economy that we don't see at the moment.
Jon Arfstrom: Okay. Good. That's helpful. And then, Jim, back on net interest income, some of your comments, your prepared comments. And the preferred redemption, you pointed us to the lower end of the 5% to 7% range. How do you get off that 5%? What needs to happen to generate NII growth that's maybe midpoint or higher in the range? Thank you.
Jim Herzog: You know, Jon, if you're talking shorter term, you know, this outlook doesn't necessarily contemplate a preferred issuance. We're being very patient there. But I continue to say in this rate environment, you know, probably in these short term, I think that non-interest-bearing deposits is still very much an x factor. So I would say seeing some stability in an inflection point in non-discretionary deposits, which is something we, and from what I can tell this quarter, the whole industry is still kind of waiting for. I think that would be probably the biggest x factor out there.
Jon Arfstrom: Okay. Alright. Thank you very much.
Jim Herzog: Thanks, Jon.
Operator: Thank you. The next question is coming from the line of David George with Baird. Please proceed with your question.
David George: Good morning, David. Hey, guys. Hey, guys. Good morning. Hey, question for Curt. You know, I agree, Curt, with a lot of things you said about Comerica as it relates to your reputation in the market. You've got experienced bankers, you didn't need to raise capital during the GFC. So a lot of great things about your company. And it's funny. I was going through my file this morning, just looking at your quarter, and I found my initiation report, about my last firm. It was October sixth of 2000, obviously, a long time ago. Stock hit sixty was sixty-one dollars that day. And today, twenty-five years later, we're at sixty-two.
And then if I look at kind of where you were in 2018, 2019, the stock is down. Thirty percent twenty-five, thirty percent. Revenues are down, and expenses are up. So I just want to kind of understand from you or what your plan is and what the board's plan is to improve the performance of the company. And, obviously, there's a market today, obviously, with Huntington doing a deal. In Texas, there's a pretty substantial private market for banks in your backyard. So just kind of how you're thinking about longer-term improvement of performance and enhancing shareholder value. Thanks.
Curt Farmer: Hey, David. There was a lot of information in that question, but let me try to address it for you. First of all, if you go back to 2018, 2019, those were good years for our company and stock performance. And if you look sort of forward from there, I think everyone's aware of the hurdles that the whole world faced and certainly the regional banks faced and we faced as well between COVID and then the significant buildup that we saw in quantitative easing and just the governmental programs that were driving deposits, which was really a peak for us and we've sort of saw record performance. In 2022 heading into 2023. And we had the regional bank crisis.
And we, along with others, saw some rationalization in assets as deposits came down. And then we exited a business line, mortgage banker finance did some rationalization across the rest of our portfolio. So we've been in a bit of a rebuilding phase since that time. And as we pointed out on the call already, we're seeing nice loan growth, good fee income quarter as well. Feel really good about sort of our deposit position and ability to fund our lending activity going forward. We're very excited about the structural tailwinds that we've got on and from a Ford Curt, I'm sorry to interrupt. Your loans have been flat. For a decade.
David, again, I would go back to what I said earlier. That if you look at the last five years, which I think is what you were pointing out, I can't speak as much to the ten-year prior period of time, but we did do some rationalization in the portfolio which brought down long growth. And I can't go back sort of recast that. It was what we needed to do at the moment. But you are seeing nice growth in the portfolio now, and I think that's what we're going to lean into.
And some of the expenses that you're seeing for us is really a fact that we are trying to invest the business for growth longer term, including our expansion into some new markets, investment in, our investment in payments and treasury management, wealth management. So And we believe that if you look at the efficiency ratio, it improved for the quarter. We generated an ISROE for the quarter, and we're going to lean into those things. On a go-forward basis. Again, efficiency is going the wrong direction. Okay. And you're happy with the performance and so forth and the board is as well?
David, I'm always focused on improving and performance across the company, and we are always focused on how we can make sure that we're generating positive operating leverage and improving overall of our overall all of our performance metrics across the company. Okay. Sounds great.
Operator: Thank you. Our next question is coming from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed with your question.
Bernard Von Gizycki: Hey, guys. Good morning. So just on if the $100 billion asset threshold on cap four is moved based on inflation and gets to, say, $130 billion, gets moved to $250 billion. How would either one of these ranges impact your willingness and timeline to pursue a whole bank acquisition if that's in play?
Curt Farmer: Thank you, Bernard. Just would say that and I've said this consistently the last couple of years, the $100 billion threshold for us is not a governor as to whether we would look at a transaction or not. We believe that the right thing for our shareholders is to continue to grow the company and we've been focused on organic growth and feel like we're seeing good organic opportunities across the enterprise. We've been a patient acquirer. Something which still has to make a lot of strategic sense for us. Be aligned with one of our primary geographies, be a good cultural fit, etcetera. So we're aware of the landscape and we'll continue to be aware of the landscape.
We believe that we've got good growth dynamics based on organic as our primary focus.
Bernard Von Gizycki: Okay. And just as a follow-up, you noted some seasonality in deposits during the quarter, and I think you've pointed out the customer utilization of funds for funding capital investments. Do you expect to see clients utilize deposit funds like, kind of in the second half? Like, what are you hearing or expecting on this front?
Jim Herzog: You know, Bernard, I think you may see a little bit of that still in this higher rate environment. But when I look at both some of the initiatives we have going on for deposit gathering, as well as seasonality, I do think that some of that use of funds will probably get kind of drowned out in the noise. So I don't expect it to be a significant factor going forward. You know, we'll continue to monitor that, but we did have an inflection point in the second quarter. I will point out that June was higher than May. So the seasonality did as well as the use of funds getting against some of that.
You know, did continue maybe a little later than I would have hoped for, but, again, we saw an inflection point halfway through the quarter and just feels like we have some really good trajectory and I'll just say even as I look at the first half of July, that seems to continue. So I think we've kind of moved past a lot of it, and I think some of these positive tailwinds with deposits will probably drown out any use of funds going forward is what I'm kind of seeing here.
Bernard Von Gizycki: Okay. Great. Thanks for taking my question.
Jim Herzog: Thank you.
Operator: Thank you. The next question is coming from the line of Mike Mayo with Wells Fargo.
Mike Mayo: The short question is on the first quarter call, Curt, you repeated as you've done several times that Comerica has to earn its right to be independent every day. That makes sense. So under what conditions would you say that Comerica has not earned the right to remain independent every day? And this is part of the whole industry debate of skill versus scale and you know, I guess you've had a hundred thirty-five years at Comerica, and, the question is at what point do you say, you know what? We need to scale this up.
The longer version of this question is, as you know, I think you were in the room, Curt, when I came to the annual meeting. A decade ago, and there are, like, five to ten other institutional investors in the room, and I asked the same question. And I recognize your comments today that you know, you're rebuilding. You get some tailwinds quarter over quarter. EPS is up when growth is up. Period end loans are up. But when you just look at the data objectively, you say your efficiency ratio is still worst in class, 68% year to date. That's where it was when I was came to the meeting a decade ago.
The returns are about worse too fast, only better than Citigroup, which coincidentally, I recommend, still, so it's not always the death now. But the stock performance as was brought up earlier has also underperformed, and I always stack rank the I've done this for twenty-five years. I stack rank the CEO stock performance versus the BTX, and unfortunately, for your the bottom by a big margin since you arrived. The stock's down 21%. The BKX up 43%. S&P is up a lot more. So maybe the market's really missing a story here. Maybe you're about to have a hockey stick improvement.
So if you could just educate me on you why, you know, decade later, Comerica has continued to earn the right to remain independent. Thank you.
Curt Farmer: Mike, that's a lot as well in your question there, but I'll try to respond to it here. I go back to what I said earlier and you echoed, which is that we are always aware of the need to perform at an acceptable level and relative to our peer group and relative to the market. Overall. And certainly, the regional bank space as well as the bank space across the board has had some volatility in equity performance this year, but we've seen a nice rebound in the last sixty days or so as the KBW and the KRE has as well.
We have done a lot, I think, over the last number of years take some of the volatility out of our performance relative to interest rates since now we are starting to benefit, I think, from some of what we put in place well as we got through the structural tailwinds that I've talked about earlier that we believe will continue to position us well from a performance standpoint, NII, etcetera. The next couple of years. We continue to see nice growth across the portfolio on the side, and we're going to lean into that in the second half of the year.
Again, I can't go back and sort of, you know, replay past performance, but what I am charged with doing is protecting the company overall serving our clients, making sure that we have the appropriate risk profile, the right capital, the right credit metrics, and credit expertise that we bring through the day in and day out. Protecting our franchise, the markets that we serve, and doing a good job for our customers, our employees, and our shareholders longer term, I think we're well-positioned from that perspective. And you mentioned a hundred and thirty-five years is actually a hundred and seventy-five years.
But, you know, having said all that, you know, we are aware of the landscape and we are always going to do the right thing by our shareholders. We understand sort of our fiduciary responsibility, so does our management team and so does our board, and we take return to our shareholders very, very seriously.
Mike Mayo: I appreciate that. I think also last quarter, you did you said you did not expect a lot of mergers in the next twelve to eighteen months if they're started to be mergers, would that kind of change your thought process and to what degree and why don't you expect many mergers in the twelve, eighteen months or maybe that's changed in the last three months?
Curt Farmer: Yeah. Mike, I may have overstated that when I that's a question. I was asked about the industry overall at the end of or at the first quarter call. And you might recall at that time, well, you certainly recall, lots of volatility, whether it's geopolitical or the trade policy. And the uncertainty related to it, and it just felt like that might, sometimes when you're heading into uncertainty or possibly a credit cycle, etcetera, across the industry, that can tend to dampen M&A. But since then, we've seen a couple of deals happen. It feels like that maybe there's a more favorable regulatory environment around M&A. And as the noise settles down some around economic certainty, geopolitical certainty, etcetera.
I think it is likely that you're probably going to see a bit more M&A than we've seen previously. It just continues to factor into what we think about overall, whether we'd be an acquirer or continue to pursue our organic growth or whether we'd ever entertain something from a third party.
Mike Mayo: Alright. Well, we'll watch that volatility and your rebuilding and the tailwinds. Thank you.
Curt Farmer: Thanks, Mike.
Operator: Thank you. Our next question is coming from the line of Anthony Elian with JPMorgan. Please proceed with your question.
Anthony Elian: Yes. Hi, everyone. On the 4Q NII guide of up versus 3Q, Jim, you called out earlier some of the deposit pricing headwinds you expect in the third quarter. Pay rates will likely be twice the level we just saw. But I'm curious, why would those headwinds ease in 4Q, particularly if you expect both strong customer deposit growth in 4Q and the momentum in loan growth is expected to persist.
Jim Herzog: Yeah. Good morning, Tony. You know, I really look at what we did towards the end of the second quarter with consumer pricing. It's kind of a reset recognizing that the forward curve has been pushed out. So I kind of think of that as, you know, a one-time reset, you know, we would expect to kind of track the market, you know, once we get into any kind of fourth-quarter environment, whether that be the FOMC cut, or just the general, you know, competitive environment. We probably to be said, we see any increase in deposit pay rates in the fourth quarter.
I think it would be accompanied by higher deposits, which that net would be a benefit for the bank. But, again, it kind of used what's going on in the third quarter. It's a little bit of a one-time reset here. Again, we're not going to be sending out $400 million preferred cash every quarter either. So there are just some unique events that are occurring as we move from the second quarter to the third quarter.
Anthony Elian: Okay. And then if I look at the bottom of slide three, you're calling out payments products such as real-time solutions, embedded finance. You know, we had the house pass the Stablecoin bill last night. I'm just thinking about the additional opportunities that could exist with Stablecoins complementing everything you're doing on payments and the role that banks could play. Is this a technology you guys are considering leveraging down the road, or is it still too early? Thank you.
Peter Sefzik: Tony, it's Peter. I think I would probably say it's a little too early to know necessarily. We do feel positioned to be involved in it. You know, we're a member of the clearinghouse. We do feel like we have the right talent, both in our technology side as well as our product side. And we do think we're making really good investment in payments to be involved. Now, what this looks like though, I think it's still a little bit to be determined, and I think that we are monitoring the situation. We're going to stay really close to it. We've got the right products, talent, and awareness.
And so but I think the answer to your question is, at least from our perspective, it's a little still too early to tell how this is going to play out, really, for the industry and for us.
Anthony Elian: Thank you.
Operator: Thank you. The next question is coming from the line of Chris McGratty with KBW. Please proceed with your question.
Chris McGratty: Good morning, Chris.
Andrew Leishcher: Hey. How's it going? This is Andrew Leishcher on for Chris McGratty. In your prepared remarks, I know you mentioned this here, but it looks like as deposit pricing is getting a little more difficult and competition is picking up. I know you've outperformed your beta from the way up. Can you provide an update on, you know, what you're seeing here in terms of your pricing and expectations for any repricing opportunities going forward? Thanks.
Jim Herzog: I'm not sure I heard that question. Like, with deposit price. Is that correct?
Andrew Leishcher: Yeah. Just an update on what you're seeing in terms of your near-term expectations for deposit cost through pricing and any opportunities you're seeing going forward?
Jim Herzog: And I would probably refer you back to my answer previously where I kind of sized up where I think the third quarter increases are coming from and what the drivers of those are. It does continue to be a very competitive environment for deposits. I think we saw that with some of the banking releases so far this week. But, yeah, I'm not sure I would add a lot on to what I had mentioned a few minutes ago in terms of just where we see deposit pricing going.
Peter Sefzik: Yeah. And I guess I might just say in general, whether it's loan pricing or deposit pricing, it's extremely competitive in all of the markets. And I think that we stay really focused on doing what we can to grow our customer base and make sure we've got the right products and services available to our customers. That they need. So, you know, managing pricing on either side of the balance sheet is something we pay really close attention to, and I think it is an extremely competitive environment right now on both of them.
Andrew Leishcher: Okay. Great. Thank you. Then just on credit, could you provide a little more color on the increase in criticized loans this quarter? I think in the deck, it looks like the leverage loan criticized has moved up a little higher. Any thoughts there? Thanks.
Melinda Chausse: Chris, this is Melinda. Yeah. The increase in the criticized this quarter, I would call it a moderate increase. As Jim mentioned in his prepared comments, the vast majority of that was in our core middle market book. And honestly, it was concentrated in three credits. And the commonality in those three credits is they all have some kind of a consumer component that the end customer was a consumer, and so there's been some stress there. One, I would call more luxury goods. And the other in two segments that are under pressure already so that we don't liquor industry and then transportation freight and things like that.
So it's but that's really the commonality is the consumer is the end customer, and then all of them are pressured by this longer higher or longer rate environment. Which is obviously putting pressure on profitability. So other than those commonalities, you know, the book has continued to perform quite well. And what you don't really see in the chart is what's cycling in and out of criticize. So, you know, we have credits that migrate from a downward perspective, but we also have a lot of credits that continue to get, you know, better. And are able to move back into that category.
So I'm not really seeing anything that I would call underlying themes other than what we've been really telegraphing all year, which is the higher for longer interest rates and the inflationary pressures.
Andrew Leishcher: Okay. Great. Thank you for setting up the questions.
Operator: Thank you. There are no additional questions at this time. So I'd like to pass the floor back over to Mr. Farmer for closing comments.
Curt Farmer: Thank you very much, and thank you again for joining our call today.
Operator: Ladies and gentlemen, once again, we thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.