Comerica Incorporated (CMA) Q4 2022 Earnings Call Transcript

Comerica Incorporated (NYSE:CMA) Q4 2022 Earnings Conference Call January 19, 2023 8:00 AM ET

Company Participants

Kelly Gage – Director, Investor Relations

Curtis Farmer – Chairman, President and Chief Executive Officer

Jim Herzog – Chief Financial Officer

Melinda Chausse – Chief Credit Officer

Conference Call Participants

Manan Gosalia – Morgan Stanley

Steven Alexopoulos – J.P. Morgan

Jon Arfstrom – RBC Capital Markets

Operator

Hello, and thank you for standing by, and welcome to the Comerica Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Kelly Gage, Director of Investor Relations. Please go ahead.

Kelly Gage

Thanks, Greg. Good morning, and welcome to Comerica’s fourth 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 coamerica.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 our call over to Curt, who will begin on Slide 3.

Curtis Farmer

Thank you, Kelly. Good morning, everyone and thank you for joining our call. In 2022, we generated another year of record earnings. And in many ways it has been an inflection point for our company. Colleagues return the office reinvigorated, ready to support our customers and reimaging the way we work, and we delivered results. Strong broad-based loan growth and [management of loan] [ph] and deposit pricing and rising rate environment drove revenue to an all-time high of 3.5 billion.

Prudent expense discipline generated an efficiency ratio of 56% and earnings per share increased to $8.47. Our strategic investments and balance sheet management helped produce superior returns and position us to maintain a high level of performance. Our refreshed logo and core values reinforce our commitment to being a leading bank for business complemented by strong retail and wealth management solutions.

Investments in more collaborative workspace, digital tools, enhanced products, and streamlined processes better enable our colleagues to put our customers first, and create a more elevated experience. Striving to be a force for good in our communities, we have achieved approximately 85% of our three-year goal to provide 5 billion in small business loans and deployed unique solutions such as our Comerica BusinessHQ, which provides collateral space in the southern sector of Dallas.

Publishing our inaugural TCFD report was an important milestone in our corporate responsibility journey and highlights our long-term commitment to sustainable business. The report outlines our climate strategy, including supporting our customers, integrating climate issues into our business and reduction of our environmental footprint. As of year-end, green loans were 2.7 billion, a [60%] [ph] increase over 2021, assisted by our renewable energy business, which has already exceeded expectations with almost 350 million in loss.

Our commitment to corporate responsibility was once again recognized as we were recruited for a fourth consecutive year in Newsweek’s 2023 list of America’s Most Responsible Companies and also included as one of the greatest workplaces for diversity. [Volunteerism] [ph] remains a priority and I’m incredibly proud of the over 66,000 hours, our colleagues committed to positively impacting their communities.

Slide 4 provides further detail on our full-year results. Relative to 2021, average loans increased 1.4 billion or 3% over 50 billion. Putting aside PPP activity, loans were up 4 billion or 8% our highest organic growth rate in well over a decade with contributions from most businesses. Following growth of almost 13 billion in 2021, driven by Government stimulus, deposits decreased 2.2 billion in 2022, as customers utilize the excess cash and we executed strategic pricing actions.

Revenue increased 19% driven by higher interest rates and strong loan growth. Non-interest expenses reflect strategic investments, higher compensation in conjunction with favorable performance, and modernization initiatives totaling 38 million. Credit metrics were excellent as driven by net charge-offs of only 3 basis points and profitable assets remained well below our historical norm.

In summary, a strong performance with an ROE of 18.6% and an ROA of 1.32%. In the fourth quarter, we generated earnings of 350 million or $2.58 per share is outlined on Slide 5. Our financial results were excellent with all-time high revenues of over $1 billion, up 4% over the third quarter. Average loans grew almost 1.3 billion, which includes a 329 million decrease in mortgage banker where volume has been impacted by higher rates.

Average deposits declined 2.6 billion. However, balance has stabilized at quarter-end and we began to see some positive trends. Credit quality was exceptional with net recoveries and our percentage of criticized loans remains well below our historical average. We built reserves in conjunction with growth and a slightly more negative economic outlook. Expenses reflected investments in our business and support our revenue generating activities.

It was a record quarter and a record year. We are excited about the investments we are making and [I want to] [ph] support our colleagues and customers, but also to sustain our strong performance as we move forward.

And now, I’ll turn the call over to Jim to review the quarter in more detail.

Jim Herzog

Thanks, Curt, and good morning, everyone. Turning to Slide 6, broad-based loan growth continued and exceeded expectations with average balances increasing $1.3 billion or 2.5%. Commitments, which can be a good indicator of future loan growth increased 5% with contributions from both businesses. Utilization remained stable at 45% and remained below historical averages as commitment growth outperformed the increase in borrowings.

Loans in our commercial real estate business increased nearly $880 million as the pace of pay-offs slowed and we fund the construction projects already in the pipeline. Consistent with our selected strategy, nearly all the growth was in Class A multi-family or industrial projects built by large developers that we know well, providing significant equity contributions typically averaging between 35% and 40% of costs.

Credit quality in this portfolio continues to be excellent. Criticized loans remain extremely low and we see no meaningful signs of negative migration. With our bankers that average 20 years of experience, a proven operational process, stringent underwriting, and consistent credit monitoring, we believe our approach results in a conservative portfolio appropriately positioned to navigate the current environment.

National dealer services loans grew over $300 million as a result of new relationships and continued M&A activity by our customers. We continue to see a slow rebound in inventory levels and with consumer auto demand dampening and supply chain improving, the industry anticipates inventory levels to continue increasing throughout 2023. Corporate banking, wealth management, and entertainment also exited significantly to our strong loan growth.

Elevated interest rates, lack of housing inventory, and normal seasonality, continued to pressure mortgage banker as average loans declined $329 million for the quarter. MBA forecast showed volumes remaining at depressed levels through the first quarter before potentially increasing. Loan yields increased 81 basis points to 5.45%, primarily reflecting the benefit from higher rates.

On Slide 7, average deposits declined as customers continued to utilize funds in their business and seek higher yield. However, balances under the quarter better than we expected as we adjusted pricing in conjunction with aggressive Fed rate hikes. The strategy work as the period end interest bearing deposits increased to $31.5 billion. While we did see a modest uptick in non-interest bearing deposits spike in the year, we attributed largely to traditional seasonality with elevated business activities such as customers preparing to make tax payments and distributions in the first quarter.

We continue to believe future FLMC monetary actions are key to the timing of deposit stabilization. Our overall mix remained favorable with 56% of average non-interest bearing deposits, largely in operational accounts reflecting our commercial orientation. Our liquidity position was strong with a loan to deposit ratio of 75% below our historical average. Beyond deposits, we have significant capacity to support loan growth, including repayments in our securities portfolio and efficient borrowing channels such for [over deposits] [ph] and federal home loan bank lines.

Interest bearing deposit costs averaged 97 basis points and reflected the pricing actions taken in the fourth quarter. Our dynamic pricing strategy will continue to balance our funding needs with customers’ objectives and the rate environment. Average balances in our securities portfolio on Slide 8 declined $1.4 billion, primarily reflecting the full quarter effect to the third quarter’s mark-to-market adjustments.

In addition, we are not reinvesting paydowns and are instead repurposing those funds for loan growth. Relatively stable long-term rates resulted in a positive mark-to-market adjustment of $73 million at period-end. Our total net unrealized pretax loss of $3.0 billion affects our book value, but not our regulatory capital ratios. While we maintain the portfolio as available for sale, mostly for reporting purposes, we typically hold these securities to maturity in which case the unrealized losses should not impact income.

Despite a reduction in the overall portfolio size, securities income remained relatively stable due to higher yielding MBS purchases in the third quarter, replacing the pay down of lower yielding securities.

Turning to Slide 9, net interest income increased $35 million to a record 742 million and the net interest margin increased 24 basis points. The benefit from higher rates lifted loan income $102 million and added 52 basis points to the margin. Loan growth added $19 million and 3 basis points. Other portfolio dynamics added $1 million or 1 basis point, and while the market remains competitive, we have successfully maintained our pricing discipline.

As I mentioned, securities income was relatively stable. As far as deposits of the Fed, higher rates partly offset by lower balances added $5 million and 11 basis points to the margin. Adjustments to deposit pricing reduced income by $63 million, while lower balances added 1 basis point. Higher rates on our floating rate wholesale debt in addition to our August subordinated debt offering had a $29 million impact. Altogether, the rising rates provided a net benefit of [$53 million] [ph] to net interest income.

Credit quality remained excellent as outlined on Slide 10 with $4 million of net recoveries, along with a reduction in our already low criticized and non-accrual loans. In fact, inflows to non-accrual loans were only $16 million, one of the lowest levels in recent history. Loan growth and the weakening economic forecast drove the provision expense up to $33 million and the allowance for credit losses increased modestly to 1.24%.

With our consistent disciplined approach, as well as our relationship model and diverse customer base, we believe we are well-positioned to manage to a recessionary environment. Non-interest income on Slide 11 was robust at $278 million and was impacted by volatility in the rate environment and equity markets. Deferred comp, which is offset in expenses, increased $9 million, generating a $6 million return for the quarter.

Higher rates earned on funds associated with settling our internal derivative portfolio drove risk management income up $8 million. The quarterly [variance] [ph] in the Visa Class B total return swap along with the increase in car and brokerage all contributed positively to the quarter. As expected, customer derivative volumes slowed from recent strong activity and there was a $1 million favorable CBA adjustment, which is a $4 million reduction from the third quarter.

Deposit service charges reflected positive momentum in treasury management, but they were more than offset by higher earnings credit and lower fees associated with deposit balances. Fiduciary income was negatively impacted by fees related to equity returns and BOLI had a seasonal decline of $2 million. Despite this quarter’s fluctuations, we have a solid core product set delivering a strong level of non-capital consuming fee income with promising growth potential.

Turning to expenses on Slide 12. We made significant progress towards our modernization objectives consolidating banking centers, enhancing corporate facilities, and achieving an important milestone and migrating our technology. In all, we incurred $18 million in expenses for the quarter, which is below the estimate we previously provided due to better than expected severance and asset write-downs.

Excluding modernization and deferred compensation, which is fully offset, non-interest expenses increased $19 million. In support of our growth initiatives, we successfully attracted talent and continue to invest in products, further elevating our customer experience. Increases in T&E, legal and marketing were correlated with the strong business activity in the fourth quarter and driving future revenue with initiatives such as retail reimagined.

Foundational investments in our infrastructure enhanced controls and compliance in this evolving landscape, as well as making us more nimble with regards to technology development. We have some inflationary pressures, including salaries for new staff and recent merit increases and saw seasonal increases in occupancy, marketing, and other related expenses. Overall, we successfully balanced investments and other pressures with accelerated revenue growth, resulting in a solid efficiency ratio of 53%.

Slide 13 provides details on capital management. With record earnings, our strong capital generation outpaced capital needed for loan growth, increasing our CET1 ratio to an estimated 10.02%. As always, our priorities to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders. We closely monitor loan growth, profitability, and credit trends as we balance maintaining our CET1 target of approximately 10% with our dividend and share repurchase strategy.

Our common equity increased 2% benefiting from strong profitability and the impact from OCI losses was minor. Excluding the AOCI losses, our common equity per share increased over 3%. Also note that our tangible common equity ratio was 4.89%. However, excluding AOCI, it increased to 9.30%. Our outlook for 2023 is on Slide 14 and assumes no significant change in economic environment.

We expect loan momentum to continue and produce another year of strong growth across all of our business lines, resulting in average loans increasing 7% to 8%. The pace of growth should be relatively consistent at 1% to 2% each quarter. We expect average deposits to decline 7% to 8% as customers continue deploying operational deposits or seek higher yielding options.

We anticipate a seasonal decline in the first quarter followed by a partial rebound and then stabilization as we move through the year. Comparing fourth quarter [or] [ph] year-over-year, deposits are projected to be down only 1% to 2%. As previously mentioned, we continue to believe the timing and scale of deposit activity will be influenced by our [indiscernible] monetary policy and economic activity.

With this uncertainty, forecasting deposit levels is very challenging. As we look at mix, we project an interest-bearing growth driven by strategic pricing actions. By year-end, we expect to be closer to our historical 50/50 deposit mix still very favorable. As far as pricing, we expect the first quarter to reflect the full quarter impact from rate actions we took in the fourth quarter. And after that, [indiscernible] should be more modest as we continue to focus on customer relationships, competitive dynamics, and our funding needs.

We project strong net interest income, up 17% to 20% over our record 2022 level, which reflects the full-year benefit from higher rates, and we are assuming rates follow the 12/30 forward curve. First quarter will be impacted by two fewer days seasonal deposit outflows and continued deposit pricing actions. We expect net interest income to increase through the year as we continue to benefit from rising rates and loan growth in conjunction with expanding relationships and acquiring new customers.

Credit quality has been excellent and we expect it to remain strong. Therefore, we forecast net charge-offs at the lower-end of our normal range 20 basis points to 40 basis points. Assuming the economy performs in-line with our expectations, we expect a gradual normalization in credit metrics and our reserve level. We expect non-interest income to grow 5%. Customer related income is projected to increase particularly in card due to our payment strategy and fiduciary income, which benefits from investments in our wealth management platform.

Also, we forecast an increase in risk management income related to our internal hedging position. Note, this income will vary over time as rates move. Deferred comp was an $18 million drag in 2022, which we assume will not repeat. On the other hand, elevated volumes of customer derivatives that we saw in 2022 are not expected to continue. However, we believe they have stabilized at a strong level and are poised to grow over time.

A reduction in our deposit service charges is expected due to an increase in commercial account ECA rates and adjustments to our retail NSF fees. We also assume [Boeing] [ph] returns to a historical run rate of approximately $9 million to $10 million a quarter and the $7 million CBA benefit does not repeat. First quarter is expected to be impacted by seasonality and syndication fees and we assume deferred comp of $6 million in the fourth quarter will not repeat.

The second half of the year is expected to be stronger than the first as loan syndication activity, hard fees, derivatives, and other products trend up. Our 2023 expenses are expected to grow 7% or 4% on an adjusted basis, excluding the $64 million increase in pension, a $19 million reduction in modernization charges and assuming the $18 million in deferred comp benefit does not repeat.

Drivers of the 4% include the annual merit increase and other inflationary pressures, as well as additional growth in cost tied to revenue generating activity such as higher staff levels and outside processing related to card. Further, we estimate a $15 million increase in FDIC expenses and higher software costs. We expect these headwinds to be partly offset by resetting performance comp to normal levels.

First quarter expenses are expected to be lower with the decline in performance comp, seasonal declines in advertising and staff insurance, as well as other items that are expected to decline from an elevated fourth quarter level such as modernization expenses, deferred comp, and legal costs. Annual stock compensation is expected to partly offset these reductions.

Remaining modernization expenses are expected to be weighted more towards the second half of 2023. We remain committed to prudent expense management, including investments we are making to increase revenue and enhance efficiency, evidenced by the efficiency ratio forecasted below 55% for 2023.

In summary, we drove robust loan growth and fee generation in 2022. In addition, we benefited from higher rates while executing our hedging strategy and managed deposits, credit, and expenses. We generated record revenue and EPS, reduced our efficiency ratio, and delivered strong returns. Our fourth quarter has positioned us well for a strong 2023.

Now, I’ll turn the call back to Curt.

Curtis Farmer

Thank you, Jim. By leveraging our more predictable earnings stream, we are better able to strategically invest in our business and Slide 15 illustrates our roadmap. Along with our long-term strategies, these initiatives enhanced our ability to continue to exceed our customers’ expectations. Modernizing our operations and further securing our foundation creates a stable, but agile platform enabling us to better address evolving needs.

Enhancing our capabilities based on the voice of our customers allows us to invest efficiently driving fee income, retention, and new acquisition. Selectively exporting our business model to high growth markets capitalizing on our expertise and relationships to broaden our reach as we strive to grow at a faster pace in the economy. The calibration of our products, markets, and delivery is critical to sustaining our legacy while achieving our vision for the future.

Slide 16 highlights our compelling story. Our business demonstrated ability to deliver broad based revenue growth and our pipeline, commitments, and product innovation creates growth momentum. As a leading bank for business, complemented by strong retail wealth management capabilities, we’ve got our five business mix and market strategy to create a unique relationship banking model. Tenure of our colleagues and customer relationship is evident in the success of that strategy.

Credit expertise allows us to not only minimize risk, but also serve as a customer acquisition tool demonstrating our understanding of the business and needs. Looking into 2023, we expect another year of exceptional results. While we continue to make critical investments, which project positive operating leverage, maintaining strong profitability metrics, we’ve got our unique position in growth markets with a proven reputation for credit, expense, and interest rate management combined to create a powerful investment thesis for our shareholders.

Thank you for your time. And now, we’d be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.

Curtis Farmer

Manan, good morning.

Manan Gosalia

Hi, good morning. Thanks for taking my questions. I was just wondering for 2023, can you help us with how you expect your funding mix to evolve through the year? And as you mentioned, I mean it’s difficult to forecast deposit growth given the Fed actions in the overall environment. So, if you can help us with any updated thoughts on where you might be okay with your loan-to-deposit ratio going and how much flexibility you have there? Thanks.

Jim Herzog

Good morning, Manan. It’s Jim. I’ll answer that question. Starting with the funding mix, it’s really important to us to stay diversified, so we’re using a variety of efficient funding mechanisms while keeping some dry powder for future loan growth. And so, when we look at what we plan to do in 2023, first and foremost, we are funding much of the loan growth and to the extent we have deposit run-off, we’re funding that with securities that we are allowing to mature. That includes both MBS securities that mature at a somewhat predictable rate, as well as some lumpy treasury maturities that we have.

Beyond that, we are getting a little bit more competitive with our deposit pricing, both in terms of retaining deposits and attracting deposits that might not be currently on our balance sheet. And then beyond that, we do have efficient lines of the FHLB, which we plan on using to some extent. We do plan on adding some broker deposits, not a lot, but we will add a modest amount likely at some point during the year. And so, we will use a variety of sources.

We will keep a lot of dry powder on the sidelines to make sure that we can fund ourselves very efficiently going forward. In terms of loan-to-deposit ratio, it is currently well below historical levels at 75%. We expect it to continue to be below historical levels as we look out in the future, certainly for 2023. So, no concerns from that standpoint. And we feel really solid in terms of our ability to fund this loan growth and fund any deposits that might run-off.

Manan Gosalia

That’s really helpful. So, for the securities paydowns, I know you mentioned it’s about a billion – a little bit over a billion for next quarter, can you help us with how that evolves through the year? Are there any other [bond maturities] [ph] coming through in the second half?

Jim Herzog

Yes, we would expect the MBS securities to continue to mature at a rate of about $450 million a quarter. We do have $700 million of treasuries that mature in the first quarter. And then we have another $300 million in the second quarter of this year. And then we have a very small tranche, I believe, in December, that won’t be a big factor for 2023, but we should get somewhat of a boost from those maturing securities as they occur through the year.

Manan Gosalia

Great. Thanks very much.

Jim Herzog

Thank you.

Operator

[Operator Instructions] Next, we’ll go to the line of Steven Alexopoulos from J.P. Morgan. Please go ahead.

Curtis Farmer

Good morning, Steve.

Steven Alexopoulos

Good morning. I want to start, so the guidance applies NIM expansion on [indiscernible] again for the first quarter, and we know it’s a very fluid situation, but from a big picture view, as we sit here today, how do you guys see the NIM trending beyond the first quarter?

Jim Herzog

Good morning, Steve, it’s Jim. As you know, we typically don’t like to focus on NIM just because of our business model, and it does tend to be a little bit more lumpy than other banks. We like to focus on net interest income. But to answer your question, we do expect NIM to be relatively stable in the range that it was in the fourth quarter. It may tick up by a few bps as we see securities run-off with those lower-yielding securities, but I think where we’re at right now in the fourth quarter is, kind of the area that we will likely hover in.

Steven Alexopoulos

Okay. That’s helpful. And Jim, what’s the deposit beta you’re assuming in this guidance by year-end 2023?

Jim Herzog

Yes, deposit beta is moving, as well as, of course, the overall rate environment. We were about a 26% beta in the fourth quarter. Rates did continue to move through the fourth quarter. So, I would say, we were approaching 30% beta by the time you got to the month of December. We do think in the first quarter, we will start moving and eventually reach about a 35% beta. And for the full quarter average in the first quarter, I do think it will be in that low to mid-30s, pushing up to 35%.

And then as we move through the second quarter, I do have us moving into the upper 30s, that does include going after some higher-price deposits to make sure that we can fund our loan growth in an efficient way. And then once we get through the second quarter, as we hover in that upper 30s, if we had some broker deposits, it could push towards about 40, I would then expect it to, kind of hold there, and that’s about the time that rates peak also. So, that’s kind of the trajectory we’re assuming and that I see for deposit betas.

Steven Alexopoulos

Okay. That’s very helpful. And then maybe for my final question. Just diving a bit deeper into the decline in non-interest bearing, you guys are citing customers investing in their business, but I’m curious how much is your customers chasing higher rate alternatives? And along those lines, up until this quarter, what we had heard from many of the regional banks was that treasuries were the key competitor, but what’s coming up this quarter is that the regional banks themselves are really stepping up competition for deposits. So, how much are your customers chasing and can you talk about the competitive environment right now, particularly from peer regionals? Thanks.

Jim Herzog

Yes. I mean – if I understood the question, you’re dipping a little bit out in terms of volume there, but our customers, when they do look at the higher-yielding options, they are looking at off-balance sheet money market funds. And we are increasingly becoming competitive to make sure we can compete from that standpoint. And we think that’s an efficient way to go. It’s certainly better than wholesale borrowings for us.

In terms of where the leakage is occurring, we do some surge deposits still in the DDA. And as we talk to customers and look at what’s happening in the flows, it does seem like probably 40% of them – to the extent, 40% of the deposits that have gotten off the balance sheet are due to rate and then the remainder is, kind of due to funding CapEx, operations, and maybe a variety of other things.

So, certainly a mixture. We do think, to the extent customers are using deposits to fund their operations. We view that as a very positive sign. It is consistent with the loan story. When you look at the strong loan growth that we’ve seen and we forecasted, but we are increasingly becoming competitive with money market funds where we feel we need to.

Steven Alexopoulos

Okay. Great. Thanks for all the color.

Curtis Farmer

Thanks, Steve.

Operator

Your next question comes from the line of Jon Arfstrom from RBC Capital Markets. Please go ahead.

Curtis Farmer

Good morning, Jon.

Jon Arfstrom

Good morning, everyone. Just kind of a follow-up there, Jim. Are you seeing any cresting in deposit pricing pressures? Is it decelerating at all?

Jim Herzog

I wouldn’t say it’s decelerating. I wouldn’t say it’s accelerating either. It kind of feels like it hit a certain pace in November-December, and the more price-sensitive customers have already asked to be repriced. So, from that standpoint, you could see the pressure start to step back a little bit. And some of these things – some of these are discussions that go on for several weeks. So, it’s really hard to pinpoint exactly when it’s [cresting] [ph], but it’s certainly not accelerating, but I do see that momentum continuing probably through the first quarter in terms of exception pricing.

In terms of what we need to do with standard pricing, it does feel like that maybe is abating a little bit, but there are always those exception customers that are out there, and I don’t expect those to take a big step back over the next quarter. And we’ll likely get more competitive intentionally so in terms of just going after customers that perhaps have moved their balances off balance sheet over the course of the last nine months.

Jon Arfstrom

Okay. I know you just said you don’t like to talk about the NIM, but I’ll ask you about it in anyway. You’re up 170 basis points year-over-year, and you’re talking about stability, what kind of threats do you see to that NIM level? I know you’ve done a lot of hedging, but do you feel like that’s a sustainable NIM level in, kind of varying up and down rate environments?

Jim Herzog

I think the key to that is going to be DDA. That is really the wildcard, and it really has the ability to move net interest income a lot. You think about just $1 billion of DDA movement could create a $55 million drag in this forward curve environment.

So, that is going to be the wildcard. So, we think we can hover kind of in the upper 3s, call it the low to upper 3s – or I’m sorry, mid to upper 3s, but more weighted towards the upper 3s, but I do think that DDA is going to be the key to that assumption and that outcome.

Jon Arfstrom

Okay. Good. And then just one quick one to Melinda. Expected reserve build, how would you like us to think about that? It seems like credit is very clean. And obviously, you’re talking about the lower-end of charge-offs. So, how do you want us to think about the reserve build?

Melinda Chausse

Yes, Jon, good morning. I would say that consistent with what we said last time, that if the economic forecast stays relatively stable, you’re going to see continued loan – or reserve build that’s really consistent with our loan growth. So, the reserve right now, we feel is conservatively positioned.

We feel really good about it, and assuming no material deterioration in the economic forecast, I think that reserve build will approximate what we have going on from a balance sheet growth perspective. And the current assumptions on the reserve build is for – our baseline is a mild recession. So, I think we’ve adequately factored in what this current economic forecast looks like.

Jon Arfstrom

Okay. That’s helpful. Thank you very much.

Operator

And at this time, there are no further questions. I would now like to turn the conference back to Curtis Farmer, President, Chairman, and Chief Executive Officer.

Curtis Farmer

Well, we again say that I’m very, very proud of our record quarter. Thank you to all my colleagues for all they do every day. They take care of our customers and help our company grow. And thank you always for your interest in Comerica. I hope you have a good day. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you all for participating. You may now disconnect.