Executive Summary / Key Takeaways

• Comerica, leveraging its 175-year history of conservative management, is strategically positioned as a commercially-oriented relationship bank with a diversified geographic footprint and specialized business lines, aiming to outperform through economic cycles.
• Recent financial performance shows resilience with stable net interest income and expanding net interest margin in Q1 2025, driven by effective deposit pricing and balance sheet management offsetting muted loan demand and deposit outflows.
• Credit quality remains a competitive differentiator with historically low net charge-offs and manageable criticized asset migration, although macroeconomic uncertainty, particularly in Commercial Real Estate and supply chains, warrants close monitoring.
• The company's outlook for 2025 projects net interest income growth (5-7%), driven by structural tailwinds from swaps and securities and an improving funding mix, despite an expected decline in average loans (down 1-2%) and deposits (down 2-3%).
• A strong capital position (CET1 well above 10% target) provides flexibility for continued share repurchases, while strategic investments in technology and targeted deposit initiatives aim to enhance efficiency and drive future core deposit and fee income growth amidst intense competition.

A Legacy Forged in Cycles: Comerica's Enduring Model

Comerica Incorporated, an institution with a rich history stretching back 175 years to its founding in Detroit in 1849, has built its foundation on conservative capital, credit, and liquidity management. This deep legacy informs its current strategic positioning as a commercially-oriented financial services company. Operating across a diversified geographic footprint that includes key markets in Michigan, Texas, California, Arizona, and Florida, CMA has also been strategically expanding into new regions like the Southeast and Mountain West. This blend of established presence and targeted expansion underscores its approach to mitigating risk while pursuing growth opportunities.

The company's business model is strategically aligned into three major segments: the Commercial Bank, the Retail Bank, and Wealth Management. The Commercial Bank, serving small and middle market businesses, multinational corporations, and governmental entities, is the largest contributor to the franchise. The Retail Bank provides personal financial services and caters to small businesses through its branch network, while Wealth Management focuses on affluent and institutional clients with comprehensive financial services. This diversified structure, coupled with a strong emphasis on relationship banking, is central to Comerica's value proposition and its strategy to navigate dynamic economic environments.

In a competitive landscape characterized by large national banks like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as regional players like PNC Financial Services Group (PNC) and disruptive fintech firms, Comerica differentiates itself through its specialized expertise in niche commercial markets and its deep customer relationships. While larger competitors often possess superior scale and technological resources, CMA focuses on delivering tailored solutions and personalized service, particularly within its middle market and specialty businesses. This approach aims to foster strong customer loyalty and capture market share by leveraging local knowledge and industry-specific expertise.

Comerica is also actively investing in its technological capabilities to enhance efficiency and competitiveness. The company is modernizing its infrastructure, with a goal to manage nearly all applications in the cloud or on a SaaS platform by 2025. These efforts are aimed at improving operational efficiency and enhancing the customer experience, particularly through online enhancements in retail and leveraging competitive card capabilities developed through programs like Direct Express. While specific quantifiable performance metrics for these technological advancements are not detailed, the strategic intent is clearly to bridge potential gaps with more technologically advanced rivals and support future growth initiatives.

Performance Amidst Headwinds and Tailwinds

Comerica's recent financial performance reflects a blend of cyclical pressures and strategic resilience. In the first quarter of 2025, net income rose sequentially to $172 million, up from $170 million in Q4 2024. This improvement was primarily driven by an increase in noninterest income, benefiting from the absence of a $19 million securities repositioning loss recognized in the prior quarter, and a decrease in noninterest expenses. Year-over-year, Q1 2025 net income of $172 million significantly outpaced the $138 million reported in Q1 2024, a result of higher net interest income and lower noninterest expenses, despite an increase in the provision for credit losses.

Net interest income remained stable at $575 million sequentially from Q4 2024 to Q1 2025. However, the net interest margin expanded by 12 basis points to 3.18%. This expansion was the net result of lower rates, a decline in interest-bearing deposits, and reduced deposits held with the Federal Reserve Bank, partially offset by lower loan balances. Compared to Q1 2024, net interest income increased by $27 million, and the net interest margin expanded by 38 basis points. This year-over-year improvement was largely attributable to the net impact of lower rates, including the benefit from BSBY cessation, and declines in higher-cost wholesale funding sources like FHLB advances and brokered deposits, which more than offset decreases in earning assets like loans and investment securities.

Noninterest income in Q1 2025 increased sequentially to $254 million from $250 million, primarily due to the non-recurrence of the Q4 2024 securities loss, partially offset by decreases in capital markets income and card fees. On a year-over-year basis, noninterest income rose by $18 million from $236 million in Q1 2024. This increase was mainly driven by higher risk management hedging income, which benefited from the impact of BSBY cessation in the prior year period, although this was partially offset by lower price alignment income and declines in card fees and other miscellaneous income.

Noninterest expenses saw a sequential decrease of $3 million to $584 million in Q1 2025, driven by lower litigation-related expenses, charitable contributions, consulting fees, and outside processing fees, despite seasonal increases in salaries and benefits and higher FDIC insurance expense. Year-over-year, noninterest expenses declined by $19 million from $603 million in Q1 2024. This reduction was primarily due to lower FDIC insurance expense (influenced by the special assessment in the prior year), consulting fees, and operational losses, partially offset by increases in salaries and benefits and litigation-related expenses.

Average total loans decreased sequentially by $403 million to $50.2 billion in Q1 2025, primarily reflecting declines in National Dealer Services and Commercial Real Estate. Period-end loans also decreased by $627 million to $49.9 billion. Average total deposits decreased by $1.4 billion sequentially to $61.9 billion, driven by decreases in both noninterest-bearing ($742 million) and interest-bearing ($706 million) deposits. Period-end deposits saw a larger decrease of $2.3 billion to $61.5 billion, with a notable $1.3 billion decrease in noninterest-bearing deposits, partially attributed to the timing of disbursements within the Direct Express program.

Liquidity remains a core strength, with available sources including cash on deposit with the FRB, unencumbered investment securities, and significant borrowing capacity through the FHLB ($16.8 billion collateralized capacity at March 31, 2025) and the FRB discount window ($17.1 billion collateralized capacity). Total assets stood at $77.6 billion at March 31, 2025, down from $79.3 billion at December 31, 2024, reflecting decreases in interest-bearing deposits with banks and loans. Total liabilities decreased to $70.6 billion from $72.8 billion, driven by lower deposits and medium- and long-term debt, partially offset by an increase in short-term borrowings. Total shareholders equity increased by $509 million to $7.1 billion, primarily due to a decrease in accumulated unrealized losses on investment securities and cash flow hedges, benefiting from favorable rate curve movements. The estimated CET1 capital ratio improved sequentially to 12.05%, comfortably exceeding the strategic target of approximately 10%.

Credit Resilience and Emerging Risks

Comerica's credit quality metrics continue to demonstrate resilience, a testament to its disciplined underwriting approach. Net loan charge-offs, while increasing sequentially to $26 million (21 basis points of average loans) in Q1 2025 from $16 million (13 basis points) in Q4 2024, remained near the bottom of the historical 20-40 basis point range. This increase was primarily driven by Commercial Real Estate, Entertainment, and Corporate Banking, partially offset by an improvement in general Middle Market. Nonperforming assets decreased sequentially to $301 million in Q1 2025 from $308 million in Q4 2024, remaining below the long-term average. Criticized loan balances, however, saw a slight sequential increase to $2.6 billion (5.2% of total loans) from $2.5 billion (5.0%), reflecting some expected normalization amidst persistent inflation and elevated rates.

The allowance for credit losses (ACL) decreased slightly by $6 million to $719 million in Q1 2025, reflecting changes in loan portfolio composition and relatively stable macroeconomic variables. Despite the decrease in the absolute allowance, the ACL as a percentage of total loans remained flat at 1.44%, as the company incorporated a rise in economic uncertainty into its qualitative reserves. Management's economic forecasts informing the CECL model reflect increased uncertainty, particularly regarding potential tariffs, persistent inflation, and the fiscal deficit. While the base case projects below-trend GDP growth through 2025-2026 and unemployment below 5%, a more severe scenario could result in a significant increase in the quantitative ACL calculation.

Specific portfolio concentrations are closely monitored. Commercial Real Estate represented 36% of total loans, with the developer portfolio focused on multi-family (50%) and industrial (28%), and only 4% in office properties. Criticized real estate construction loans in the developer portfolio increased notably in Q1 2025. Automotive lending, including dealer floor plan ($2.2 billion) and production ($736 million) portfolios, represented 10.7% and 1.5% of total loans, respectively, and showed no nonaccrual loans or net charge-offs in Q1 2025, despite potential risks from production disruptions and supply chain issues. Leveraged loans, representing 6% of total loans, saw some net charge-offs in Q1 2025.

Regulatory risks, particularly the potential impact of the Basel III Endgame proposal, remain a consideration. If adopted as proposed, the inclusion of AOCI in regulatory capital ratios could significantly decrease CET1 (estimated 310 basis point impact as of March 31, 2025). While Comerica's current CET1 is well above the target, this proposal highlights the importance of maintaining strong capital levels and managing AOCI volatility.

Strategic Response and Future Outlook

Comerica's strategic initiatives are designed to leverage its foundational strengths and competitive positioning to drive future growth and enhance efficiency. The company is investing in talent development, including its relationship manager training program, and selectively hiring externally to build capacity, particularly in high-growth markets like the Southeast and Mountain West. Efforts to modernize technology, aiming for cloud/SaaS adoption by 2025, are central to improving operational efficiency and enhancing the customer experience in a competitive digital landscape.

A key strategic focus is on targeted deposit initiatives to enhance core funding, especially in light of the potential long-term transition of the Direct Express program. These initiatives include expanding the focus on small businesses, optimizing treasury management and payments services, leveraging card capabilities, and enhancing online retail banking platforms. The goal is to drive core deposit growth and improve the granularity and consistency of the funding profile, reducing reliance on wholesale funding sources like brokered CDs, which the company aims to significantly reduce or eliminate by the end of 2025.

Management's outlook for 2025 reflects cautious optimism tempered by macroeconomic uncertainty. Average loans are projected to decline by 1% to 2% for the full year, with a slight sequential decrease expected in Q2 2025 before loan growth resumes in the second half of the year. This trajectory is based on the assumption that customer uncertainty will begin to abate, leading to increased business investment, although Commercial Real Estate pay downs are expected to remain a headwind. Average deposits are projected to decrease by 2% to 3% for the full year, primarily driven by the planned runoff of brokered CDs, with average deposits expected to be relatively flat in Q2 2025 before core deposit growth resumes.

Net interest income is projected to increase by 5% to 7% in 2025 compared to 2024. This growth is expected despite lower average loans and non-interest bearing deposits year-over-year, driven by the benefits of BSBY cessation, maturing and replaced securities and swaps providing a structural tailwind, and a more efficient funding mix. NII is expected to be relatively unchanged sequentially in Q2 2025 before growing quarter-to-quarter throughout the remainder of the year (excluding the BSBY impact). Non-interest income is projected to increase by approximately 2% in 2025, with growth in customer-related fees expected to pick up in the second half of the year after a stronger Q2. Non-interest expenses are expected to grow by 2% to 3%, reflecting ongoing investments balanced with a focus on efficiency. Net charge-offs are forecast to remain at the lower end of the normal 20-40 basis point range.

Comerica's strong capital position, with an estimated CET1 ratio well above its 10% target, provides significant flexibility. The company plans to continue share repurchases in Q2 2025, potentially at a pace similar to Q4 2024 ($100 million), executing opportunistically based on market conditions and loan growth trends. This capital deployment strategy, alongside efforts to drive responsible growth and enhance efficiency, underscores the company's commitment to delivering shareholder value.

Conclusion

Comerica enters the current period from a position of strength, underpinned by its conservative management philosophy, diversified business model, and strategic focus on relationship banking. While macroeconomic uncertainty and competitive pressures persist, the company's recent financial performance demonstrates resilience, particularly in net interest income and credit quality. The outlook for 2025, projecting NII growth driven by balance sheet dynamics and an improving funding mix, signals potential for enhanced profitability despite near-term headwinds in loan and deposit growth.

The investment thesis for Comerica hinges on its ability to successfully execute its strategic initiatives, particularly in driving core deposit growth to offset the eventual Direct Express transition and leveraging technological investments to enhance efficiency and competitiveness. Investors should monitor the pace of loan demand recovery, the trajectory of interest rates and their impact on deposit costs and AOCI, and the company's progress in expanding its targeted deposit-gathering capabilities. Comerica's proven track record and disciplined approach position it to navigate the current environment and potentially deliver compelling returns as economic conditions evolve.