Comerica Incorporated (NYSE: CMA) Q3 2022 earnings call dated Oct. 19, 2022
Corporate Participants:
Kelly Gage — Director of Investor Relations
Curtis Farmer — President and Chief Executive Officer
Jim Herzog — Executive Vice President and Chief Financial Officer
Melinda Chausse — Executive Vice President and Chief Credit Officer
Peter Sefzik — Executive Vice President, Commercial Bank
Analysts:
Jon Arfstrom — RBC Capital Markets — Analyst
Scott Siefers — Piper Sandler — Analyst
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
John Pancari — Evercore ISI — Analyst
Ken Usdin — Jefferies & Co. — Analyst
Jennifer Demba — Truist Securities — Analyst
Bill Carcache — Wolfe Research — Analyst
Steven Alexopoulos — JPMorgan — Analyst
Terry McEvoy — Stephens, Inc — Analyst
Presentation:
Operator
Hello, and thank you for standing by and welcome to the Comerica Third Quarter 2022 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Kelly Gage, Director of Investor Relations. Please go ahead.
Kelly Gage — Director of Investor Relations
Thanks, Brad. Good morning, everyone, and welcome to Comerica’s third quarter 2022 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 Executive Director of our Commercial Bank, 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 in the Investor Relations section of our website, comerica.com.
This conference call contains forward-looking statements. 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.
Also this conference call will reference non-GAAP measures, and in that regard, I direct you to the reconciliation of these measures on our website comerica.com. Please refer to the Safe Harbor statement in today’s earnings release on Slide 2, which is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ.
Now, I’ll turn the call over to Curt, who will begin on Slide 3.
Curtis Farmer — President and Chief Executive Officer
Good morning, everyone. Thank you for joining our call. Today, we reported third quarter 2022 results, including record earnings of $351 million, or $2.60 per share, an increase of 35% over the second quarter. We generated excellent financial results with all-time high revenue of $985 million, up 19%, improved our efficiency ratio to 51% and maintained a strong credit position with our percentage of criticized loans, well below our historical average. We continue to benefit not only from the rising rate environment, but also from investments and strategic management of our business to support long-term success. We produced another quarter of broad-based loan growth and continue to generate solid fee income. While our customers are closely monitoring the recessionary risk and its potential impacts, they remain generally confident in their ability to successfully navigate the changing landscape.
Corporate responsibility remains a priority, as we continue to demonstrate our commitment to supporting economic growth in our local communities. We announced the dedicated business banking team for the southern sector of Dallas County with a mandate to provide capital solutions for underserved entrepreneurs and small businesses. We enhanced our National Community Impact Manager role, responsible for leading our public progress and community impact investments. Our green loans and commitments continued to grow and totaled $2.2 billion at quarter end.
Our recently-announced renewables group is already off to a strong start with over $200 million in new commitments year-to-date and a growing pipeline. We are incredibly proud of our community impact and financial results and we continue to focus our efforts on the future. Through our modernization initiatives, we are making strategic investments to adapt to the changing landscape and move into a new era of banking. We announced an expanded office footprint in Frisco, Texas and Farmington Hills, Michigan, commitments we are excited to make in important markets. These innovation hubs delivered enhanced colleague work experience and assist us in attracting and retaining top talent.
Also, we realigned our organization to create an even more synergistic structure supporting our commercial bank — banking expertise, while adding transformational leadership in payments. We believe this structure will better serve the comprehensive and evolving needs of our customers allowing us to deepen relationships and enhance revenue.
Further, in conjunction with our strategic modernization objectives, we refreshed our company’s core values, driving collaboration, encouraging bold thinking and behaviors and empowering our employees, all remaining simply focus on our customer is critical to achieving continued success.
Let’s review the highlights of our third quarter results on Slide 4. Following second quarter’s significant loan growth, third quarter activity remained strong. Average loans were up $1.1 billion, reflecting increases across a number of businesses, the largest being commercial real estate, national dealer services, environmental services and wealth management.
Commercial real estate benefited from the continued build-out of our projects and the pace of pay-offs normalizing due to the rate environment. We have made selective investments to expand our wealth management business and we’re excited to see the growth and momentum this quarter. Other business lines saw a merger and acquisition activity and continued investment in working capital, albeit at a slower pace in the second quarter. We continue to strategically manage deposits as customers draw down on their operating accounts and seek higher-yielding products for excess balances.
We made significant progress on our hedging strategy, which should help insulate earnings through rate cycles. Yes, we maintained most of the benefit from higher rates, which combined with the growth in our loan and securities portfolios drove record net interest income. Credit quality remained excellent and fee income strong with increased derivative activity. Expenses were driven by performance-based compensation and investments to support growth. Our efficiency ratio further improved to 51% as a result of record revenue and a solid expense management. Retention of earnings drove our CET1 ratio back up to an estimated 9.92%. Overall, an excellent quarter, and we feel very positive about the trajectory of our business as we move through the remainder of the year.
And now, I’ll turn the call over to Jim, who will review the quarter in more detail.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks Curt, and good morning, everyone. Turning to Slide 5. As Curt mentioned, we continue to have broad-based loan growth with balances increasing $1.1 billion. Favorable environmental factors and demonstrated expertise across a number of our specialty businesses drove our outstandings higher. Also loan commitment reduction was very strong, which can be a good indicator of future loan growth. As of quarter end, loan commitments increased almost $2.8 billion, or 5%, which outpaced loan draws resulting in a small decline in line utilization to about 45%.
Loans in our commercial real estate business increased over $350 million, as we funded construction of projects. Nearly all of the growth was in Class A multifamily or industrial projects, built by large developers that we know well, providing significant equity contributions. Credit quality in this business is excellent, criticized loans remained extremely low and we see no meaningful signs of negative migration.
National Dealer Services loans continued a slow rebound and grew over $200 million. This includes a $140 million increase in floor plan loans to $980 million. However, inventory levels remain low and these balances are well below our pre-COVID run rate. We have been benefiting from acquisition activity in this space. We still believe it will take some time for inventory levels to rebuild as supply issues are resolved and pent-up demand is satisfied.
Growth in Environmental Services and Corporate Banking resulted from a combination of new customers, M&A, as well as investment in working capital and capex. Wealth Management had a strong quarter with 3% loan growth in part due to customers’ tax-related activities, such as 1031 exchanges. Average loans in both Equity Fund Services and Mortgage Banker Finance were down. In Equity Fund Services, following very strong growth in the past couple of quarters, we saw it moderate early in the quarter, the momentum resumed and period-end loans and total commitments were up.
Mortgage Banker average loans decreased $62 million and $657 million at quarter end, significantly muting our total period-end balances. Volumes in that business remain depressed due to higher interest rates and lack of housing inventory. Loan yields increased 100 basis points to 4.64% primarily reflecting the benefit from higher rates.
In line with expectations, Slide 6 shows our average deposits continue to decline. Customers put their excess liquidity to work and we prudently manage pricing related to non-relationship based deposits and highly rate-sensitive segments. We continue to see largest decreases in our interest bearing deposits, particularly in financial services, financial institutions and corporate banking businesses. Our strategy through this cycle has been the balance deposit pricing with our liquidity needs, while most importantly retaining our customer relationships. We have taken an agile and customized approach to finding that right balance. Our mix remains favorable at 57% non-interest bearing, reflecting the relationship and operational nature of our deposits.
Our overall liquidity position is strong with a loan-to-deposit ratio at 71% which is well below our historical average. We have significant capacity to support loan growth, including efficient borrowing channels available such as brokered deposits or Federal Home Loan Bank lines, which we began utilizing at the end of the quarter.
Interest-bearing deposit costs remained low at 20 basis points. With the year-to-date beta of only 7%, we do not expect to achieve a cumulative beta of 25% until sometime next year. Of course, the ultimate cumulative beta will depend on FOMC monetary actions in addition to loan and deposit activity.
Our securities portfolio continues to play an important role in achieving our asset sensitivity objectives. Slide 7 demonstrates the significant growth in balances and yield over the past year. Quarter-over quarter, average balances increased $1.5 billion, reflecting the full benefit of our second quarter purchases net of mark-to-market adjustments. Higher rates resulted in a mark-to-market of almost $1.2 billion at period end and this impact runs through OCI and affects our book value, but not our regulatory capital ratios. While we maintain the portfolios available for sale, mostly for liquidity purposes, we typically hold these securities to maturity, in which case the unrealized losses should not impact income.
As another avenue to provide liquidity for loan growth, we see securities purchases partway through the quarter, which contributed to period-end balances declining to $19.5 billion. As the portfolio shrinks, we plan to manage our asset sensitivity through additional swaps as needed. Over the past year, we have concentrated our purchases in agency CMBS with the goal of delivering more consistent cash flows with an average duration of slightly over five years. The larger average portfolio along with the favorable new purchase yields resulted in a $19 million increase in securities income.
Turning to Slide 8, net interest income increased to $146 million to a record $707 million and the net interest margin increased 80 basis points. The benefit from higher rates lifted [Phonetic] loan income $128 million and added 64 basis points to the margin. Although the rate environment has increased the cost of borrowing for our customers, we have not seen a meaningful increase in competitive pressure on spreads. Loan growth added $13 million and 2 basis points, one additional day in the quarter provided $4 million, as I mentioned, the increase in the size of the securities portfolio at higher yields added $19 million. As far as deposits at the Fed, higher rates combined with lower balances added $11 million and 26 basis points to the margin. Higher rates on our floating rate wholesale debt in addition to our subordinated debt offering, had a $15 million impact. Altogether, the rising rates provided a net benefit of $151 million to net interest income.
Credit quality remained excellent as outlined on Slide 9. Net charge-offs were only 10 basis points, well below historical averages. Criticized and non-accrual loans also stayed low. With the heightened economic uncertainty, our allowance for credit losses increased modestly to 1.21% of loans. Our provision increased to $28 million. As always, we are closely monitoring the portfolio for signs of stress and are proactive in our credit management. We have begun to see some signs of normalization in certain portfolios. With our consistent disciplined approach, as well as our relationship model and diverse customer base, we believe we are well positioned to manage through a recessionary environment.
Noninterest income increased $10 million or 4% as outlined on Slide 10. Deferred comp, which is offset in expenses increased $11 million and was still a headwind in absolute terms with a $3 million negative return for the quarter. Overall, fee generation remained strong, led by growth in derivative income of $6 million due to energy and interest rate-related activity, which included a $2 million increase in favorable CVA adjustments.
Brokered service fees grew as a result of increased money market funds revenue. This growth was partially offset by reductions in fiduciary income and card fees. Annual tax fees received in the second quarter and market activity impacted fiduciary income and a decline in volumes affected card fees.
Turning to expenses on Slide 11, our efficiency ratio improved 7 percentage points to 51% as we continue to maintain our expense discipline while revenue generation accelerates and we position for future growth. Salaries and benefits increased $13 million, primarily due to the $11 million change in deferred compensation, which is offset in noninterest income. Beyond deferred compensation, we saw an increase in performance-based incentives tied to our strong financial results. Of note, our staff levels were stable as we successfully retain and attract talent in this competitive market.
Occupancy expense increased $4 million, driven by seasonality and a new lease in our Farmington Hills location. Outside processing for our card programs, largely driven by rate-related pricing, increased $2 million. We made progress on certain modernization initiatives and incurred $7 million in costs, consistent with the second quarter expense. As previously discussed, this is a journey which includes transformation of our retail banking delivery model, alignment of corporate facilities and technology optimization. The cost savings generated are expected to be reinvested as we continue to evolve.
Slide 12 provides details on capital management. With record earnings, our strong capital generation outpaced capital needed to support loan and commitment growth. Thus, our CET1 ratio increased to an estimated 9.92%. As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders. We closely monitor loan and profitability trends as we balance maintaining our CET1 target of approximately 10% with our dividend and share repurchase strategy.
Our common equity declined in the third quarter as a result of the impact of OCI losses from our securities and swap portfolios. Excluding the AOCI losses, our common equity per share increased to $1.98 or over 3%. Also note that our tangible common equity was 4.82%, however, excluding AOCI, it increased to 9.12%.
Slide 13 provides an update on our interest rate sensitivity. Over the past year, we have been working to fulfill our strategy to lock in higher rates and achieve a strong and more predictable earnings stream through the rate cycle by reducing volatility to net interest income. Based on our standard model with a 100 basis point decrease in rates over 12 months, we have achieved our target for a low-single digit percent impact to net interest income and yet maintain some upside should rates continue to rise. We are now focused on smoothing the periods further out to maintain our target level of sensitivity, mainly through the purchase of forward-dated swaps.
Considering expected loan and deposit activity, including some acceleration of our deposit pricing, along with the September 30th forward curve, we forecast net interest income to grow by 4% to 5% in the fourth quarter relative to the third quarter. Full-year 2022 is expected to exceed 2021 by more than 33%. We utilized our model to provide scenarios, including a 100 basis point gradual increase in rates over a 12-month period, which resulted in an approximate $35 million increase in net interest income.
In addition, we modeled a catch-up of a 25% cumulative beta since — when rates began to rise in March on top of the 100 basis point up scenario, which resulted in an estimated $35 million headwind to net interest income. Of course, there are many dynamics which may cause modeled results to differ from actual outcomes. Overall, we believe our predictability of earnings provides us the ability to more consistently invest in our business and thereby grow customers and revenue and provides a more compelling investment thesis for our shareholders.
Our outlook for the fourth quarter and full-year 2022 is on Slide 14 and assumes a continuation of the current economic environment. We are working on our 2023 financial plan and expect to provide our customary full-year guidance during our fourth quarter conference call, but I will offer some color as we go through each line item.
Loan growth has been robust so far this year, and we expect 2022 full-year loan growth to exceed 7%, excluding PPP loans. This includes our expectation for average loan growth of approximately 1% in the fourth quarter. Positive trends are expected in most of our businesses in the fourth quarter, however, at a more moderate pace given the slowdown in economic activity. Mortgage Banker is expected to continue to be a headwind. Assuming economic conditions do not change materially, we expect continued solid growth into next year.
We expect deposit trends to continue as customers draw down on deposits to support their businesses and in some cases seek higher yielding options. Looking into next year, the timing and the scale of deposit activity is expected to be highly influenced by Fed tightening actions and the economic environment.
As discussed in the previous slide, we project strong fourth quarter net interest income, up 4% to 5% over a record third quarter. As we think about 2023, we expect to benefit from higher rates and loan volume. On the other hand, deposit balances and pricing could put pressure on 2023 net interest income relative to the fourth quarter run rate. Regardless, we expect net interest income to be at another all-time high next year.
Credit quality has been excellent and we expect it to remain strong in the fourth quarter. Therefore, we forecast net charge-offs at the lower end of our normal range of 20 basis points to 40 basis points. We believe, we will begin to see gradual normalization, assuming the macroeconomic challenges remain manageable. We expect fourth quarter noninterest income to decline approximately 3% from strong third quarter levels. We expect pressures on derivatives given recent elevated levels, deposit service charges from higher ECA rates, a softening syndication market and equity trends may impact fiduciary revenue. This is expected to be partly offset by positive seasonal trends in areas such as card.
As we look into 2023, we expect noninterest income to grow as we start to see the benefit of our investments. We expect fourth quarter expenses to grow approximately 2% to 3%, including expenses tied to revenue generating related activity, such as outside processing for card. In addition, we expect seasonally higher occupancy, advertising, staff insurance as well as travel and entertainment expenses. This outlook excludes up to $25 million of modernization initiatives that we anticipate in the fourth quarter. We believe these strategic investments in our business will deliver value over time and are essential in meeting the evolving needs of our customers and colleagues.
In 2023, we expect moderately higher staffing levels as the tight labor market exists and we continue to make progress in implementing our revenue strategies. Given the market’s performance, pension expenses likely to move significantly higher. We also anticipate inflationary factors to impact many areas such as salaries and benefits, along with higher FDIC expense.
In summary, based on our expectations for the fourth quarter and our performance to date, we believe we will produce very strong and record revenue results this year. We have driven robust loan growth and strong fee generation. In addition, we’ve benefited from higher rates while executing our hedging strategy and careful management of credit and expenses. We expect to carry our momentum into the fourth quarter and finish the year strong.
Now, I’ll turn the call back to Curt.
Curtis Farmer — President and Chief Executive Officer
Thank you, Jim. Many business lines are showing positive trends with strong loan growth in addition to increases in commitments and a very solid pipeline. Our unique expertise and credit culture provide us a steady foundation and help produce a record level of profitability, while our investments in talent, technology and markets facilitate continued growth to support our future.
Management of our balance sheet allows us to benefit from rising rates, while reducing the impact from lower rates, which we believe will provide a more consistent earnings trajectory through the cycles. It was a record quarter, and I remain grateful for the continued commitment of my colleagues who are dedicated to ensure Comerica’s success. We believe we are well positioned to deliver strong results as we end the year and move into 2023.
Before we take questions, I would like to recognize Darlene Persons who recently announced her retirement. After a 36-year career with our company, 16 years as Director of Investor Relations, one of the longest-serving IR directors in the banking industry, she has steered us through many cycles and her guidance, not only to me and our leadership team, but to our whole company has been invaluable. I’d also like to introduce our new IR Director, Kelly Gage, who’s had an 18-year career with us, deep commercial banking background, most recently as the National Director of Sales and Strategy for the Commercial Bank. Kelly will do a great job in her new role as IR Director, and I know you’ll look forward to getting to know her, right.
So, with that, we’d be happy to take your questions and open up the lines.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.
Curtis Farmer — President and Chief Executive Officer
Good morning, Jon.
Jon Arfstrom — RBC Capital Markets — Analyst
Hey, good morning. Congrats, Darlene. I just want to say congratulations. Just a question for you, Jim, on some of the comments where you talked about — I know you don’t want to go into 2023 too much, but you talked about the potential for 2023 NII pulling back a little bit from Q4. Can you help us understand that a little bit more? And then just remind us of the overall goals of what you’re trying to do in this kind of rate environment in terms of the rate hedging?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes, good morning, Jon, and thank you for the question. I do think the fourth quarter run rate is a great starting point in terms of how to start thinking about 2023. There are reasons we could be a little bit below that. There are reasons we could be a little above it. If deposit betas catch up very quickly on a cumulative basis or exceed 25% and/or deposit runoff continues through 2023, I think we could be below that run rate.
On the other hand, if deposit betas take some time to catch up, say, sometime after the first quarter or through mid-year and deposits start to level off — the runoff starts to level off in the beginning of ’23, then I think there’s a reasonable chance we could be above that run rate. So I think you could go either direction. There’s just some open questions in terms of how deposit pricing will progress and how the runoff will progress over the next several quarters. But again, I would just say that I think the run rate in the fourth quarter is a pretty good place to start and just be aware that there are some factors that could potentially move that down, but there is some upside to that also.
In terms of what we’re trying to accomplish, I think the message has been consistent. I think we’ve met the objectives that we’ve set. We are trying to stabilize net interest income. We feel like we’ve achieved that. We’ve left a little bit to the upside if rates do continue to go up as we approach the peak here. As I mentioned in my comments, I don’t think we’re going to be doing any hedging activity other than replacing securities that run off, that would start in the next 12 months.
If you look at in the appendix, we have a little bit of a maturity curve of our swaps. And from that, you would infer that we’re really going to work on forward starters that might start in later ’24, eventually maybe even ’25, but we feel like we’ve taken care of business in the near term. So we feel really good about the positioning. We’ve essentially achieved by far, in a way, a record level of net interest income, at the same time, largely protected that record level of net interest income. So — and I think we’ve gotten to where we want to be and we’re enjoying the fruits of that right now.
Jon Arfstrom — RBC Capital Markets — Analyst
Yes. That’s fair. I’m surprised by the increase in the margin, so that was nice to see. And I guess one more question. I think I know the answer to it, but I’ve had a couple of e-mails back on my note this morning. Can you touch a little bit on your tangible common equity ratio and how you view that? I know you may not think it’s a big deal, but some people ask about it. So can you just touch on how you think about that level?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes, I continue to believe it’s an optic, but nothing more than that. As I’ve mentioned before, from an economic standpoint, the value of our deposits has gone up significantly, offsetting, if not more than offsetting that loss on securities and swaps. So, economically, we like what we’re seeing. You see that in the results in terms of the earnings. As we stay in touch with various constituents, everyone admits to an optic, but everyone struggles to find really any substantial issue with it. So it’s really not a point of concern for us. And I just think it’s an odd looking optic given the unprecedented run-up in interest rates and really nothing more than that.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay, thank you.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks, Jon.
Curtis Farmer — President and Chief Executive Officer
Thanks, Jon.
Operator
And our next question comes from the line of Scott Siefers. Please go ahead.
Scott Siefers — Piper Sandler — Analyst
Good morning, guys.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, Scott.
Scott Siefers — Piper Sandler — Analyst
Hey, thank you for taking my question. Jim, I wanted to ask about the deposit levels. I think previously, we had sort of been hoping that bulk of deposit runoff would finish in sort of fourth quarter or first quarter. You guys still have a very, very low loan-to-deposit ratio, but I guess, just curious on your thinking on sort of when or where we could see the deposits level out? And at what point would you want to get more aggressive on pricing to protect those balances? In other words, just a little more color on the — sort of the push and pull between volume and rate in your view?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes, Scott, thank you for the question. First of all, I’ll say that I think we’re pretty comfortable with the pricing approach up to this point. We obviously have a low year-to-date beta, low beta for the quarter. But being primarily a commercial bank, we feel like we do have these conversations with our customers. And to the extent we’ve lost deposits, it’s been very knowingly and we certainly haven’t lost any relationships, and we have the ability to ramp up some of that exception pricing if we really need to.
We have raised our standard pricing on the retail side, which touches retail and wealth customers. So we feel really comfortable with the pricing approach. But in terms of where deposit runoff goes, I really think it’s going to be highly dependent on Fed policy. I think the combination of QT as well as the rising rates is — those two factors will drive what happens in 2023. We obviously expect the runoff to continue through the fourth quarter at a similar pace that we’ve seen.
I do want to caveat that we could see some seasonal deposits in the fourth quarter as we often see. Seasonal trends have been rendered a little bit not as reliable over the last odd two or three years. So it is possible we get some seasonal deposits that mute that run off in the fourth quarter. But I think that runoff would then just manifest in the first quarter. I think it would be probably a temporary reprieve if we get those seasonal deposits.
But it’s still our outlook that things start to level off early in 2023. I do think the Fed continues with QT for the next year, year and a half as they planned to, I guess it’s actually two years, you could see some deposits continue to run off even after early 2023. But I’d like to remind people, the Fed never did fully unwind its QE from previous cycles. It seems very plausible to me they won’t fully unwind this cycle. You’ve already seen some literature in various industry magazines that there are some concerns by the regulators and the Fed regarding just some of the deposit runoff at banks.
So, at this point, our house case is still at first to level off in early ’23 and we certainly have plenty of efficient borrowing lines, we have access to broker deposits, we can even get more aggressive in conversations with our customers in terms of where they place their money. So we feel like we have a lot of optionality there.
Scott Siefers — Piper Sandler — Analyst
Okay, wonderful. Thank you for that color. And then I was hoping you could also discuss the higher modernization costs in the fourth quarter. Will that be kind of a high watermark or will they continue much beyond the fourth quarter or sort of end with the end of this calendar year?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes. Thank you for that question. I think that’s an important one. Based on the initiatives that we’ve identified up till now, I think the fourth quarter would be the high watermark and that assumes we set up to $25 million. There’s always a chance some of these lease exits could be delayed until next year. So my answer obviously is caveated based on the timing of when these actually happen. But if they do happen in the fourth quarter of ’22, as we expect, based on the initiatives we’ve identified, this would be the high watermark. Having said that, there could be some additional initiatives that we identify over time. We’re always talking about some of the potentials out there. But this one will be a little bit more of an outsized one and could be the high watermark.
Scott Siefers — Piper Sandler — Analyst
Okay. Perfect. All right. Thank you very much for taking the questions.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks for the questions, Scott.
Operator
And our next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
Jim Herzog — Executive Vice President and Chief Financial Officer
Ebrahim, good morning.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Good morning. I guess, maybe just first question. I know banks are not really seeing anything in terms of credit paying yet. But give us a sense of like the Fed fees and interest rates, obviously, it’s benefiting in loan yields right now. But how are customers kind of absorbing these? Like are you worried about what this may mean as we look out into next year in terms of just the ability of your customer base to live with 4% to 5% Fed funds rate? And just the level of visibility you have there in terms of all of a sudden seeing a big drop off in how customers are able to service their debt?
Jim Herzog — Executive Vice President and Chief Financial Officer
So it sounds like the question is the ability of our customers to withstand the economic pressures of the higher rates from a credit standpoint?
Melinda Chausse — Executive Vice President and Chief Credit Officer
Yes, this is Melinda. I would say that overall we feel really good about our customers’ ability to kind of manage through the current interest rate environment. Every time we do an underwriting, we stress interest rates, whether we’re in a low rate environment or a high rate environment. And we think we do a really nice job of making sure that whatever the debt load is of the customer that they’ve got the ability to manage through that. We also have a relatively low leverage book overall. So the actual leverage portfolio would be the one that we’re watching really closely. Obviously, given their debt levels, they are more sensitive, but we also use strategies like swaps and fixing rates in order to make sure that we protect the cash flow and the company’s ability to kind of repay the debt. So overall, I think we feel really good about our customers’ ability to navigate the environment.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. And how big is that leverage book?
Melinda Chausse — Executive Vice President and Chief Credit Officer
A little over $3 billion.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
$3 billion. And just one follow-up, Jim. On the asset side, we saw about 100 basis points increase quarter-over-quarter. Just talk to us in terms of how you see that asset yields trending going from here in terms of any spread compression that you expect or the 100 basis points relative to the rate hikes we saw in the third quarter that should hold for the next few quarters?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes, I think these metrics will largely hold up. This was struck on $930 million [Phonetic] as a model run. And as deposits run off, you could see a little bit of movement in those calculations, but I think the rule of thumb will hold pretty well.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Do you expect asset yields to behave consistent with third quarter?
Jim Herzog — Executive Vice President and Chief Financial Officer
I’m sorry, expect what?
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Do you expect asset yields, loan yield repricing to be consistent with what we saw in the third quarter?
Jim Herzog — Executive Vice President and Chief Financial Officer
No — yes, loan yields will continue to go up in the fourth quarter over the third quarter.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. And what are the investment yields in the securities book relative to what’s maturing?
Jim Herzog — Executive Vice President and Chief Financial Officer
Oh, yes, I’m sorry. Well, we are not buying securities as I mentioned at this time, we are letting the securities run off. They’re running off kind of in that $2.15 to $2.17 range, just slightly above the overall portfolio average. So I expect securities yields to stay pretty flat. I mean, you could see some very minor yield movement down quarter-to-quarter, but it’s going to be almost a noticeable, I think, given how close the runoff is to the overall portfolio yield.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. Thank you.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Operator
And our next question comes from the line of John Pancari with Evercore. Please go ahead.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, John.
John Pancari — Evercore ISI — Analyst
Good morning. Just wanted to see if I can get a little bit more detail on Slide 13. I know you broke out that you see a $35 million NII benefit under your standard model, but assuming a 25% cumulative beta, you could see a $35 million NII decline, pretty notable delta between the two. And is that — maybe can you walk us through the puts and takes? Is it primarily just the beta assumption or are there others factors there [Indecipherable] a noteworthy swing? Thanks.
Jim Herzog — Executive Vice President and Chief Financial Officer
That is the beta assumption that’s driving that. So if you do the math, the beta, obviously is having a $70 million impact relative to the 100 basis points up. So that’s how you swing from $35 million positive to $35 million negative. We do have that cumulative beta kind of feathering in over the 12 months. So if it came as a shock, it could even be higher. But it is important to note that in our fourth quarter guidance, we actually have a lot of this cumulative beta in there. In fact, we get up to about a 17% cumulative beta by the end of the fourth quarter. So I think you can take some assurance by the fact that our guidance already has about half of this cumulative beta in it already. So you probably — you got the other half of the cumulative beta, you’re probably closer to zero as opposed to this negative $35 million. So just some additional color for you there.
John Pancari — Evercore ISI — Analyst
Got it. Okay. Thanks. And then just a quick follow-up to Ebrahim’s question. You mentioned that you are letting securities run off, but are you — just to clarify, are you reinvesting the cash flows back into the bond book and what are those reinvestment yields?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes. To be clear, we are not reinvesting them into the bond book. We are using this runoff to fund our loan growth, which we expect to continue to stay strong. And so for the — probably for the next — for the foreseeable future at least, we will not be buying securities, we think this is the most efficient way to fund our loan growth.
John Pancari — Evercore ISI — Analyst
Okay. Got it. And if I could just ask one more. Back to the TCE topic, I know that you indicated that it’s more optic from your point of view. So given that, how low are you willing to let that TCE to TA ratio go below that 4.82% level where it’s at now? And does that influence you in any way at all when it comes to buy back interest when it comes to repurchases? Thanks.
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes. I mean, it’s largely out of our control, of course, based on where interest rates go and how low that goes. But I can tell you, there is no magical number that we are focused on. And I would just reiterate that we don’t think it’s a concern, we don’t think it should be a concern of others. And again, I just think it’s an oddity of the times that we’re seeing this type of movement, not just at Comerica, but to some extent, at other banks, too.
John Pancari — Evercore ISI — Analyst
Got it. Thanks Jim.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks, John.
Operator
And our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, Ken.
Ken Usdin — Jefferies & Co. — Analyst
Hey, thanks, good morning. I had a follow-up question on the deposit side. Obviously, we talked about the expected decline from here. One thing that’s been interesting is that the interest-bearing has been declining faster than the noninterest-bearing. It looks like you’re about up to 57% noninterest-bearing. Can you help us understand, how do you expect that mix to traject? Do you think you can actually uphold this better mix of free funding versus maybe what had happened in past cycles or is that just a TBD still as well?
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks for the question, Ken. This is — this was a little bit of a surprise to us, too, for the mix to actually improve towards the higher noninterest-bearing. So we have done a little research into that and talked to customers and just analyzed various customers’ accounts. My conclusion is, number one, we’re just seeing the price sensitivity at this point of the cycle more on the interest-bearing side. I do think it will tip to the noninterest-bearing side eventually. But it feels like customers were forced [Indecipherable] more price sensitive on the interest-bearing side of this.
The other thing that we found kind of confirms the suspicion that we’ve had all along, and that’s — something that’s been very similar to previous cycles when we’ve come out of some stress, we do see the corporate treasurers are carrying higher safety net levels of cash and that explains why they’re maybe going to their interest-bearing accounts first to the extent they have use of funds. So I think those higher safety nets will probably be around for some time.
The other anecdotally interesting thing that I don’t know how large of a factor it is, but it might be a growing factor. We have heard from some corporate treasurers that real-time payments is making it more unpredictable or more difficult to predict cash flows. And so they’re keeping some higher cash levels for that reason also. And that’s something that might grow over time. So those are some of the observations that we’ve made.
We do think it will reverse to some extent eventually. But I had mentioned in the last earnings call that I thought it would get back to the historical 50-50 ratio, if not slightly below where we’ve been historically. I’m not questioning whether or not we really get back there given the higher levels of safety net cash that these corporate treasurers are taking or holding. So I do think it will reverse, but there’s some question now as to whether or not it’s really ever going to get back to that 50-50 mix.
Ken Usdin — Jefferies & Co. — Analyst
Yes. Great color. Thank you. And second question, just on some of the loan buckets, I know you’re talking about 1% growth sequentially average in the fourth quarter, but there’s always a little bit of ups and downs in some of those national businesses. Can you just run us through some of the most important trends that you’re seeing, noting the really big CRE growth this quarter and then your expected decline in mortgage, just kind of the ins and outs of that period end versus average difference as we look ahead? Thanks.
Peter Sefzik — Executive Vice President, Commercial Bank
Yes, Ken, it’s Peter. I think as we get into the fourth quarter, we continue to feel pretty directionally positive about — just about all of our businesses. I think in the comments, we talked about broad-based loan growth and for the first time in a long time all of our businesses are seeing really good loan growth. The only kind of real headwind does continue to be mortgage banking finance going into the fourth quarter, I think, for obvious reasons of challenges in that space with higher interest rates and lower housing inventory. But the rest of our sort of larger businesses, as you mentioned, commercial real estate, we expect Equity Fund Services to have a good quarter. Corporate Banking continues to be on a good trajectory, albeit we also don’t know that the fourth quarter looks like the third quarter, but it is positive trending and going into the end of the year. So we’re pretty excited about sort of what we’re seeing on those larger businesses.
Dealer continues to slightly creep up. We get asked a lot about when that will return. And I don’t know the answer to that. But quarter-over-quarter, you’re starting to see a little bit of floor plan usage and we continue to be a very active lender in that space. And, as mentioned, I have financed some of the M&A activity that you’re seeing in dealers. So it’s nice to see a little bit of usage there as well.
Ken Usdin — Jefferies & Co. — Analyst
Great. Thanks very much.
Operator
And our next question comes from the line of Jennifer Demba with Truist Securities. Please go ahead.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, Jennifer.
Jennifer Demba — Truist Securities — Analyst
Good morning. Thanks for taking my question. Congratulations to Darlene and welcome to Kelly. You mentioned in the monologue you’re starting to see signs of normalization of credit. Could you give us some more color on that? And I believe you saw a slight increase in criticized loans from GLS area. Could you give us some color from that as well?
Melinda Chausse — Executive Vice President and Chief Credit Officer
Jennifer, thanks for the question. This is Melinda. Overall, we’re really pleased with how the — really, the entire portfolio has performed, and we have guided the last couple of quarters that, at some point, there’s going to be some normalization of the credit metrics from these really, really historic low levels. And that’s what we’re starting to see, but very, very modest level of softening of performance in a couple of portfolios. And those portfolios, as I already mentioned, would be leveraged portfolio just given kind of the nature of that book. We watch that very, very closely. It continues to have some modest level of elevated criticized and criticized assets.
We’re also watching the automotive portfolio. That’s not a huge portfolio for us, about $1 billion and they have had obviously a lot of challenges coming out of the pandemic, the chip shortages and then just kind of layer on all the other inflationary pressures. And then technology and life sciences, that business, by its very nature, also has a more elevated level of risk just given the fact that we do early-stage and mid-stage and some late-stage companies and some of those late-stage companies also tend to be leveraged. But we don’t see anything in the portfolio that is giving us a lot of pause or a lot of reason for concern and we have the rest of the portfolio, which, quite frankly, continues to perform extremely well.
So I would say kind of leverage, automotive and TLS are the areas that we’re watching. And, yes, we did see a slight increase in the criticized, but our NPAs and our inflow to NPAs remain very, very well behaved.
Jennifer Demba — Truist Securities — Analyst
Great. Thank you. And my second question is on FDIC premiums, Jim. We know they’re going up next year. Do you have any preliminary thoughts on what we can expect in ’23?
Jim Herzog — Executive Vice President and Chief Financial Officer
We could see an increase in the $15 million — $12 million to $15 million, I’ll call it, $15 million range. So it will be significant, not just for Comerica, but for other banks also, so that will be a pressure point for 2023.
Jennifer Demba — Truist Securities — Analyst
Thanks so much.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks, Jennifer.
Operator
And our next question comes from the line of Bill Carcache with Wolfe Research. Please go ahead.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, Bill.
Bill Carcache — Wolfe Research — Analyst
Hey, good morning. Following up on your credit commentary, could you give a little bit more color on the increase in the reserve rate and where you would expect that to go if unemployment were to increase to say, 5% or 5.5%. Just curious for some of the assumptions underlying the current rate and where it could go under those circumstances? Thanks.
Melinda Chausse — Executive Vice President and Chief Credit Officer
Sure. This is Melinda, again. And as you know, the CECL process happens every single quarter and it’s really highly dependent on the economic forecast at that time as well as the performance of the portfolio. So what we saw this quarter was a forecast, an economic forecast that was slightly deteriorated from where we were at the end of the second quarter, although it was still positive, unemployment about 4% and GDP moderating below 1% for the next 12 months or so. We use that base case scenario as well as a downside case. And in our downside case, we’ve already accounted for much higher unemployment in the range of 6% to 8% as well as negative GDP all the way through 2023. So we believe that we have accurately and adequately captured the risk of a downside scenario and a recession in the reserves and we do that by the use of the qualitative.
So we feel really good about our coverage ratio right now. Again, if you look at our fourth quarter trailing net charge-offs, you look at what our NPA levels are and then the overall strength of the book overall, I think our coverage ratio, right now, is reflective with an adequate amount of conservatism.
Bill Carcache — Wolfe Research — Analyst
So following up on that, could you give a little bit more color on the weightings that you ascribed to each of those scenarios? And perhaps if we did enter into that more greater downside scenario where unemployment goes higher, to what extent you would ascribe a higher weighting to that scenario and the impact that would have on the overall reserve rate?
Melinda Chausse — Executive Vice President and Chief Credit Officer
Yes. We don’t like weight the scenario specifically, we use a baseline scenario and look at the entire portfolio from a quantitative perspective and then we use that downside case on certain portfolios and an overlay to the entire portfolio. So if you looked at the mix between our quantitative and qualitative is about 60-40 and that’s been pretty consistent over the last couple of quarters and it’s very meaningful to the total reserve. So again, I think we feel really confident that we’ve captured the downside risk at least over the life of our portfolio, which is important to remember, that’s a relatively short duration portfolio.
Bill Carcache — Wolfe Research — Analyst
That’s helpful. Thank you. And then separately, following up on the tangible capital questions, your investment securities portfolio is classified as available for sale, which stands, in contrast to many of your peers that have a larger mix of held to maturity, been very clear that you view the OCI marks associated with higher rates is optical. But some investors have expressed concern that we could enter a credit cycle that would exacerbate the rate mark headwinds. Could you speak to that dynamic and whether there’s anything that would lead you to consider using the held-to-maturity designation or perhaps thinking differently about tangible capital?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes, Bill, at this point, I don’t anticipate us making any movements, indicate [Phonetic] if you were inclined to move something that held to maturity, you probably wouldn’t do it at this point in the cycle. So we just continue to be comfortable. I know a lot of the larger banks that don’t have AOCI shielded from capital, do have a lot of HTM, a lot of our peers did not have much in HTM, some have moved, some in recently over time after some of the losses had already occurred. But we continue to be comfortable there and again, I believe it’s an optic that won’t cause any real issue for us.
Bill Carcache — Wolfe Research — Analyst
Okay. Thank you for taking my questions.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks, Bill.
Operator
And our next question comes from the line of Steven Alexopoulos with JPMorgan. Please go ahead.
Steven Alexopoulos — JPMorgan — Analyst
Hey, good morning, everyone.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, Steven.
Steven Alexopoulos — JPMorgan — Analyst
I’d like to start, so if you look at noninterest-bearing deposits, which you’ve seen a very material increase over the past two years. If you dig down to the account level, how much larger are the account balances today? And can you size for us the balance that could be at risk? Jim, I heard your commentary about treasurers carrying more of a safety net above, let’s face it, that could easily go into [Indecipherable] right, it doesn’t need to stay at the bank, so could you size that for us?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes, Steve and good morning. Certainly, when we look at average balance per account, that is the main driver. That’s the largest driver in terms of the higher deposits. That’s not too surprising to me. I think it is consistent with the theme of corporate treasurers carrying higher safety net levels of cash. I do think there could be a tipping point where, once they moved some of the price-sensitive interest-bearing deposits, eventually, we will probably see a little bit of a migration down of the noninterest-bearing deposits. So I think that day will come. But for now, they seem to be more price sensitive on the interest-bearing side.
And I do think there’s a limit to how far they’ll take down their noninterest-bearing. I think they are very comfortable with the levels of noninterest-bearing they have. And I’ll remind you or maybe educate those out there that a lot of our customers have multiple legal entities, sometimes complex structures. It’s not as easy as you might think for them to move cash around these different structures on a hours or days notice. So they do like to keep their various entities well funded with noninterest-bearing DDA. And I think there’s a limit to how far it will come down. But I do think it will come down at some point.
Curtis Farmer — President and Chief Executive Officer
Jim and Steve, I might add too. This is Curt. That just to remind you around the complexity of our deposit book, I mean, we have a heavy concentration of commercial deposits and a heavy concentration of Wealth Management deposits, where we’ve got very close relationships with those customers. We know sort of what they’re doing, they talk to us. There’s frequent communication around deposit flow, treasury management, movement of funds, etc. And so it’s not like a very granular mass market retail portfolio where you really don’t have sort of line of sight in conversations occurring with those customers. So we’re going to continue to do the right thing in terms of pricing and taking care of those relationships, but we are in frequent communication. We’ve got a good sense of sort of what people are planning to do and not do with deposits.
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes. And I will add on. I mean, keep in mind that being a very strong treasury management bank, a lot of our DDAs are tied into ECAs, so customers are getting some degree of value and incentive to keep their noninterest-bearing for that reason, too.
Steven Alexopoulos — JPMorgan — Analyst
If we stay with that theme of having a good line of sight into what customers are thinking or they might eventually do, if we take that and apply it to whatever the fourth quarter NIM is, I know, Jim, you said there’s a lot of variables, right, we know that. But what’s your base case or where we go through 2023 from that 4Q NIM based on this line of sight that you guys have into your customer base?
Jim Herzog — Executive Vice President and Chief Financial Officer
Yes. I never — because of our commercial orientation and variability with cash balances that we’ve seen through the years as well as what we’re doing with our securities book, which affects the mix of the balance sheet, we’ve always been and continue to be very hesitant to provide NIM percentage guidance, if that’s what you’re asking. So I would just maybe revert back to the guidance that we do expect deposits to level off sometime in early 2023 and things to stabilize from that standpoint.
Steven Alexopoulos — JPMorgan — Analyst
Okay. Fair enough. And if I could squeeze one more in. I’m just trying to put together all the commentary around expenses. I know it’s early to think about for giving us guidance for next year, but should we at least be thinking about a similar growth rate of expenses in 2023 versus 2022? Thanks.
Jim Herzog — Executive Vice President and Chief Financial Officer
We will certainly have some expense pressures, as I mentioned. So it’s not a bad starting point. I mean, that’s a very rough answer. There’s a lot of work to be done still, but we certainly will have some degree of expense growth next year.
Steven Alexopoulos — JPMorgan — Analyst
Okay. Thanks for taking my questions.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks, Steve.
Operator
And our next question comes from the line of Terry McEvoy with Stephens. Please go ahead.
Jim Herzog — Executive Vice President and Chief Financial Officer
Good morning, Terry.
Terry McEvoy — Stephens, Inc — Analyst
Thanks. Hey, good morning. Last quarter, you added an EVP from a larger bank to run payments for Comerica. I’m wondering if you could just talk about the investments needed, kind of what the strategy is there and what the revenue opportunities are going forward?
Peter Sefzik — Executive Vice President, Commercial Bank
Hey, Terry, this is Peter. Yes, we’re very excited about our investment in payments. I mean, we continue to believe that we have a real opportunity to be a leading bank in that space, particularly with commercial customers. But across our entire enterprise, we think there’s a lot of opportunities in our treasury management business, what we do in card. Jim talked a little bit about what’s going on in real-time payments. All of those are opportunities that Comerica has to be a leader.
And there’s a lot of ways you can be competitive. You don’t have to be the big banks necessarily at this point to be successful. And we think we’ve got a real agile approach and have the ability to partner with lots of different ways to be successful. So it’s a space that we’re excited about. We did hire some talent there, both on the payment side and in our tech and ops side. We’re also investing there as well. So we’re very excited about what we see on that horizon.
Terry McEvoy — Stephens, Inc — Analyst
Great. Thanks for that. And then as a follow-up, I just want to make sure, have you maintained the relationships with all the dealers over the last two years or said another way, when inventory builds, do you expect to maintain that market share and kind of go back to where it was pre-2000?
Peter Sefzik — Executive Vice President, Commercial Bank
Well, Terry, yes, two questions there. Have we maintained the relationships? Absolutely, we have. So we’re very active in the space, talk to customers a lot, have added customers. I continue to believe that we are going to be on the winning side of the M&A activity because we do focus on sort of the mega dealers. Whether or not inventory levels return, to your question, when those return, I don’t know. If they were to return to historical levels, then we would certainly benefit from it. But I think, as I said, you’re going to continue to just sort of see a slight uptick in floor plan usage over the coming years, and we believe we’ll be there to capitalize on that.
Terry McEvoy — Stephens, Inc — Analyst
Great. Thank you.
Jim Herzog — Executive Vice President and Chief Financial Officer
Thanks, Terry.
Operator
And with no further questions in queue, I’ll now turn it over for closing remarks to Curt Farmer, President, Chairman and Chief Executive Officer. Please go ahead, sir.
Curtis Farmer — President and Chief Executive Officer
Let me just say again that we are very proud of our results for the quarter, really a record quarter for us. I always want to thank our colleagues for all they do every day to take care of our customers and help us grow the company overall for our shareholders. So thank you, as always, for your interest in Comerica. I hope you have a very good day.
Operator
[Operator Closing Remarks]