Dallas-based Comerica is exiting the mortgage warehouse business, reducing its exposure to a volatile industry that executives say doesn't provide much help as it seeks to bolster its deposits.
The warehouse sector — where the bank provides lines of credit to mortgage banking companies — has been a "good business for us," Comerica CEO Curtis Farmer said Tuesday at an industry conference.
Still, Comerica decided to wind down the unit's operations after disruptions in the banking industry in March prompted
The deposit outflows have since normalized, Farmer said, but the turmoil prompted Comerica to consider whether parts of its loan portfolio needed rethinking. The mortgage warehouse sector was "not as deposit-friendly," he said.
The unit is also "a little isolated from the rest of our organization," providing fewer opportunities for the bank to cross-sell clients on other services such as wealth management, Farmer said.
The cyclicality of the warehouse business also played a big role, he said, noting that there's less activity in some parts of the year due to reduced home buying and even more volatility when interest rates change.
"It can really swing loan balances for us and create probably sometimes the wrong pressure on funding, so to speak," Farmer said at a Morgan Stanley conference.
Comerica's mortgage banking finance group had $1.6 billion in loans on average in 2022, down sharply from $2.8 billion in 2021 — when ultra-low mortgage rates prompted record home financing activity. The mortgage warehouse division makes up a relatively small chunk of the bank's more than $91 billion of assets.
Comerica is opting against selling the business and will instead wind it down as loans mature.
That decision "allows for an exit at full value rather than what might happen in the wildcard of a sale," Piper Sandler analyst Scott Siefers wrote in a note to clients.
The exit from warehouse lending will dampen Comerica's loan growth a bit, company executives said. The bank now expects 8% growth this year, down from its prior guidance of 8% to 9%.
Though Comerica's deposits have stabilized in recent weeks, the bank expects the Federal Reserve's ongoing quantitative tightening program to lead to continued deposit declines throughout the year.
A competitive deposit environment, exacerbated by three recent high-profile bank failures, has helped drive up deposit costs at Comerica and across the industry. Comerica's net interest income is now expected to decline by about 13% when second-quarter results come out next month, Siefers wrote.
"The lower guide will be painful," he wrote, though he added that it gives a clearer picture for investors.
Also on Tuesday, Comerica's CEO pushed back against a recent American Banker
Comerica's Direct Express program, which has been the subject of fraud concerns over the years, provides prepaid cards to millions of unbanked Americans receiving federal benefits.
Internal company documents showed that customer data was handled at a vendor office in Pakistan — an apparent violation of Treasury Department rules on keeping such data in the United States.
Farmer, who wrote
"Most of the issues that were brought up are issues that we have resolved already, working with the Fiscal Service, with Treasury, with our third-party service provider and our institution to bring closure to those items," Farmer said. "And we feel really good about the platform and what we deliver every day. We've been in that business now for 15 years."
The government has also "been pleased with the service that we provide" and renewed its contract, which currently runs through early 2025, Farmer said.
If the bank were unsuccessful in a future bid for the program, or chose not to participate again, Treasury's switch to a new vendor would not be quick, Farmer said.
"It's not easy to transition that many clients with a platform like that," he said, describing the transition as a "multiyear" scenario with complexities that include sending out new cards to every customer.
