Comerica Incorporated : 2022 Quarterly Earnings Q4 News Release

FULL-YEAR 2022 NET INCOME OF $1.2 BILLION, $8.47 PER SHARE

FOURTH QUARTER 2022 NET INCOME OF $350 MILLION, $2.58 PER SHARE

Record Revenue, Robust Loan Growth and Excellent Credit Quality

Maintained Expense Discipline while Supporting Growth Initiatives

"Today we reported record annual earnings per share of $8.47," said Curtis C. Farmer, Comerica Chairman and Chief Executive Officer. "We generated 8% growth in average loans, excluding PPP loan activity (3% growth with PPP), our highest rate of organic growth in well over a decade, as we expanded relationships and won new customers. Our revenue increased 19% to $3.5 billion, supporting strategic investments in our business while lowering our efficiency ratio to 56%. Credit quality remained excellent. In summary, a successful performance resulting in our ROE increasing to 18.6% and ROA to 1.3%.

"We ended the year strong with fourth quarter net income of $350 million or $2.58 per share. Average loans grew $1.3 billion, or over 2%, and we modestly increased reserves consistent with loan growth and the softening economic outlook. Average deposits decreased; however, we began to see positive trends resulting from pricing actions. Expenses reflected investments in our business that support our revenue-generating activities, and credit quality remained exceptional.

"Moving into 2023, we feel well-positioned to continue to deliver superior financial results with our strong business and geographic profile, loan momentum, reduced interest rate exposure and proven credit discipline. Delivering positive operating leverage remains a priority while we strategically invest to drive growth. Our customers and colleagues have proven their agility, and we remain committed to their success regardless of the economic environment."

(dollar amounts in millions, except per share data)		4th Qtr '22		3rd Qtr '22		2022		2021
FINANCIAL RESULTS
Net interest income	$	742	$	707	$	2,466	$	1,844
Provision for credit losses		33		28		60		(384)
Noninterest income		278		278		1,068		1,123
Noninterest expenses		541		502		1,998		1,861
Pre-tax income		446		455		1,476		1,490
Provision for income taxes		96		104		325		322
Net income	$	350	$	351	$	1,151	$	1,168
Diluted earnings per common share	$	2.58	$	2.60	$	8.47	$	8.35
Average loans		52,375		51,113		50,460		49,083
Average deposits		71,355		73,976		75,481		77,681
Return on average assets		1.65%		1.63%		1.32%		1.30%
Return on average common shareholders' equity		27.92		23.28		18.63		15.15
Net interest margin		3.74		3.50		3.02		2.21
Efficiency ratio (a)		53.00		50.75		56.32		62.42
Common equity Tier 1 capital ratio (b)		10.02		9.93		10.02		10.13
Tier 1 capital ratio (b)		10.52		10.45		10.52		10.70

1. Noninterest expenses as a percentage of the sum of net interest income and noninterest income excluding a derivative contract tied to the conversion rate of Visa Class B shares and changes in the value of shares obtained through monetization of warrants.
2. December 31, 2022 ratios are estimated.

Fourth Quarter 2022 Compared to Third Quarter 2022 Overview

Balance sheet items discussed in terms of average balances unless otherwise noted.

Loans increased $1.3 billion to $52.4 billion.

• Increases of $879 million in Commercial Real Estate, $331 million in National Dealer Services, $193 million in Corporate Banking, $131 million in Wealth Management and $119 million in Entertainment Lending, partially offset by a decrease of $329 million in Mortgage Banker Finance.
• Average yield on loans (including swaps) increased 81 basis points to 5.45%, primarily driven by higher short- term rates.

Securities decreased $1.4 billion to $19.1 billion.

• Decrease driven by the full quarter impact of market valuation adjustments to the mortgage-backed securities portfolio made in the third quarter.
• Period-endunrealized losses on securities, included in accumulated other comprehensive loss, decreased $73 million to $3.0 billion.
• Average yield on securities increased 3 basis points to 2.11% as lower-yielding securities were paid down. Deposits decreased $2.6 billion to $71.4 billion.
• Noninterest-bearingand interest-bearing deposits decreased $1.9 billion and $756 million, respectively, due to strategic deposit management as well as customers utilizing balances to fund business activities.
• The average cost of interest-bearing deposits increased 77 basis points to 97 basis points, reflecting relationship-focused pricing in a rising-rate environment.

Net interest income increased $35 million to $742 million.

• Driven by the benefit of higher short-term rates and loan growth, partially offset by lower deposits held with the Federal Reserve Bank as well as higher short-term borrowings.
• Net interest margin increased 24 basis points to 3.74%, driven by higher rates.

Provision for credit losses increased $5 million to $33 million.

• The allowance for credit losses increased $37 million to $661 million at December 31, 2022, reflecting loan growth and continued strong credit metrics as well as a modest deterioration in economic forecasts. As a percentage of total loans, the allowance for credit losses was 1.24%, an increase of 3 basis points.

Noninterest income of $278 million was stable.

• Increases of $9 million in deferred compensation asset returns (offset in noninterest expenses) and $8 million in risk management hedging income were more than offset by decreases of $12 million in derivative income (energy and interest rate), $3 million in service charges on deposit accounts and $3 million in fiduciary income. The increase in risk management hedging income (included in other noninterest income) related to an increase in price alignment (PA) income received for centrally cleared risk management positions.

Noninterest expenses increased $39 million to $541 million.

• Increases of $13 million in other noninterest expenses, $11 million in salaries and benefits expense, $9 million in occupancy expense and $5 million in advertising expense.
• • Other noninterest expenses included increases of $5 million in consulting fees and $3 million each in legal fees and travel and entertainment expense.
  • Salaries and benefits expense included increases of $9 million in deferred compensation expense (offset in other noninterest income), $8 million in severance related to modernization initiatives as well as $4 million in merit increases and staff additions, partially offset by decreases of $7 million in performance-based compensation and $4 million in contract labor.
  • Expenses for certain modernization initiatives increased $11 million to $18 million. These initiatives related to transformation of the retail banking delivery model, alignment of corporate facilities and optimization of technology platforms, comprised of transitional real estate costs (reported in occupancy expense), severance and contract labor (reported in salaries and benefits expense) and asset impairments (reported in other noninterest expenses).

Common equity Tier 1 capital ratio of 10.02% and a Tier 1 capital ratio of 10.52%.

• Declared dividends of $89 million on common stock and $6 million on preferred stock.

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Full-Year 2022 Compared to Full-Year 2021 Overview

Balance sheet items discussed in terms of average balances unless otherwise noted.

Loans increased $1.4 billion, or 3%, to $50.5 billion.

• Excluding the impact of a $2.2 billion decline in PPP loans, loans increased $3.6 billion, or 8%.
• Increases of $1.1 billion in Corporate Banking, $749 million in general Middle Market, $564 million in Equity Fund Services, $408 million in Environmental Services, $284 million in National Dealer Services, $161 million in Commercial Real Estate and $158 million in Entertainment Lending, partially offset by decreases of $1.3 billion in Mortgage Banker Finance, $476 million in Business Banking and $319 million in Retail Banking.
• Average yield on loans increased 102 basis points to 4.27%, primarily driven by the increase in short-term rates and higher loan balances, partially offset by the net impact of PPP loans.

Securities increased $3.3 billion, or 21%, to $19.0 billion.

• Reflects investment of a portion of excess liquidity into mortgage-backed securities, partly offset by maturities of Treasury securities.
• Period-endunrealized losses on securities, included in accumulated other comprehensive loss, was $3.0 billion, compared to $130 million at the end of the previous year.
• Average yield on securities increased 18 basis points to 1.97% from higher yields on purchases and reinvestments.

Deposits decreased $2.2 billion, or 3%, to $75.5 billion.

• Interest-bearingdeposits decreased $2.8 billion due to strategic deposit management and customers utilizing balances to fund business activities, partially offset by a $577 million increase in noninterest-bearing deposits.
• The average cost of interest-bearing deposits increased 24 basis points to 30 basis points, reflecting relationship-focused pricing in a rising-rate environment.

Net interest income increased $622 million to $2.5 billion.

• Higher short-term rates and growth in loans and securities balances, partly offset the net impact of PPP loans.
• Net interest margin increased 81 basis points to 3.02%, driven by higher rates and a decrease in lower-yielding deposits held with the Federal Reserve Bank.

Provision for credit losses increased to an expense of $60 million from a benefit of $384 million.

• The allowance for credit losses increased $43 million, reflecting loan growth and continued strong credit metrics as well as a modest deterioration in economic forecasts. As a percentage of total loans, the allowance for credit losses decreased 2 basis points.
• Net loan charge-offs were $17 million, or 0.03% of average loans, compared to net recoveries of $10 million during 2021.

Noninterest income decreased $55 million to $1.1 billion.

• Decreases of $56 million in other noninterest income and $25 million in card fees, partially offset by increases of $10 million in derivative income, $7 million in brokerage fees and $5 million in commercial lending fees.

• Other noninterest income included decreases of $32 million in deferred compensation asset returns (offset in noninterest expenses), $30 million in warrant-related income and $7 million in investment banking fees, partially offset by an $8 million increase in risk management hedging income related to an increase in PA income received for centrally cleared risk management positions.

Noninterest expenses increased $137 million to $2.0 billion, which included $38 million in expenses for certain modernization initiatives detailed above.

• Increases of $75 million in salaries and benefits expense, $23 million in operational losses, $14 million in occupancy expense, $10 million in travel and entertainment expense, $9 million each in FDIC insurance expense and consulting fees, as well as smaller increases in other categories, partially offset by decreases of $15 million in outside processing fee expense, $8 million in non-salary pension expense and $7 million in legal- related expenses.

• The increase in salaries and benefits expense included increases of $28 million from annual merit increases, $24 million in performance-based compensation, $18 million in stock-based compensation, $16 million in contract labor and $11 million in severance, partially offset by a decrease of $32 million in deferred compensation expense (offset in other noninterest income).

Returned a total of $391 million to common shareholders.

• Declared dividends of $356 million on common stock and $23 million on preferred stock.

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Net Interest Income

Balance sheet items presented and discussed in terms of average balances.

(dollar amounts in millions)		4th Qtr '22		3rd Qtr '22		2022		2021
Net interest income	$	742	$	707	$	2,466	$	1,844
Net interest margin		3.74%		3.50%		3.02%		2.21%
Selected balances:
Total earning assets	$	75,538	$	77,012	$	79,025	$	83,719
Total loans		52,375		51,113		50,460		49,083
Total investment securities		19,129		20,540		19,015		15,724
Federal Reserve Bank deposits		3,693		4,967		9,036		18,347
Total deposits		71,355		73,976		75,481		77,681
Total noninterest-bearing deposits		39,955		41,820		42,018		41,441
Short-term borrowings		1,583		144		436		2
Medium- and long-term debt		3,020		2,827		2,818		3,035

Net interest income increased $35 million, and net interest margin increased 24 basis points compared to third quarter 2022. Amounts shown in parenthesis represent the impacts to net interest income and net interest margin, respectively.

• Interest income on loans increased $122 million and improved net interest margin by 56 basis points, driven by higher short-term rates (+$102 million, +52 basis points), higher loan balances (+$19 million, +3 basis points) and other portfolio dynamics (+$1 million, +1 basis point).
• Interest income on investment securities decreased $1 million and improved net interest margin by 2 basis points due to ordinary shifts in the mix of the investment portfolio.
• Interest income on short-term investments increased $5 million and improved net interest margin by 11 basis points, reflecting higher short-term rates (+$24 million, +12 basis points), partially offset by a decrease of $1.3 billion in deposits with the Federal Reserve (-$19 million, -1 basis point).
• Interest expense on deposits increased $62 million and reduced net interest margin by 30 basis points, due to higher rates (-$63 million, -31 basis points), partially offset by lower average deposit balances (+$1 million, +1 basis point).
• Interest expense on debt increased $29 million and reduced net interest margin by 15 basis points, driven by higher rates (-$10 million, -5 basis points) and an increase in average debt, primarily from short-term borrowings (-$19million,-10 basis points).

The net impact of higher rates to the fourth quarter 2022 net interest income was an increase of $53 million and 28 basis points to the net interest margin.

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Credit Quality

"Credit quality remained excellent with $4 million in net recoveries in the fourth quarter and only 3 basis points in net charge-offs for the year," said Farmer. "Criticized (including nonaccrual) loans declined, remaining well below historical averages at 3% of total loans, and our coverage ratio increased. Customers continue to mitigate inflationary pressures where possible and remain optimistic about their ability to navigate the environment. A slightly more negative view of the economy increased our allowance for credit losses to 1.24% of total loans. With our relationship model and consistent approach to credit, we feel well-positioned to continue supporting our customers while maintaining a low risk profile."

(dollar amounts in millions)	4th Qtr '22	3rd Qtr '22	4th Qtr '21
Credit-relatedcharge-offs	$	11	$	26	$	20
Recoveries		15		13		24
Net credit-related (recoveries) charge-offs		(4)		13		(4)
Net credit-related (recoveries) charge-offs/Average total loans		(0.03%)		0.10%		(0.03%)
Provision for credit losses	$	33	$	28	$	(25)
Nonperforming loans		244		262		268
Nonperforming assets (NPAs)		244		262		269
NPAs/Total loans and foreclosed property		0.46%		0.51%		0.55%
Loans past due 90 days or more and still accruing	$	23	$	72	$	27
Allowance for loan losses		610		576		588
Allowance for credit losses on lending-related commitments (a)		51		48		30
Total allowance for credit losses		661		624		618
Allowance for credit losses/Period-end total loans		1.24%		1.21%		1.26%
Allowance for credit losses/Nonperforming loans		2.7x		2.4x		2.3x

1. Included in accrued expenses and other liabilities on the Consolidated Balance Sheets.

• The allowance for credit losses increased $37 million to $661 million at December 31, 2022, or 1.24% of total loans, reflecting loan growth and continued strong credit metrics as well as a modest deterioration in economic forecasts.
• Criticized loans decreased $54 million to $1.6 billion, or 3% of total loans. Criticized loans are generally consistent with the Special Mention, Substandard and Doubtful categories defined by regulatory authorities.
• • The decrease in criticized loans was primarily driven by Corporate Banking, Environmental Services, Technology and Life Sciences as well as Energy, partially offset by increases in general Middle Market.
• Nonperforming assets decreased $18 million to $244 million, or 0.46% of total loans and foreclosed property, compared to 0.51% in third quarter 2022.
• Net recoveries totaled $4 million, compared to net charge-offs of $13 million in third quarter 2022.

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