We’ve been in the business for 30 years, we’ve got very experienced colleagues on the line, credit, and our special assets team that is monitoring this portfolio. We have one non-performing asset, we have very strong customers and the majority of the portfolio has recourse. So, I think the — I feel pretty good about what the outcome here is going to be. Although headwinds will continue to be a higher for longer rate environment, there’s a lot of tailwinds for this space, including an aging population. The demographic that this portfolio serves would tend to be a little bit more affluent because it is all private pay. So, again, the senior housing portfolio was the biggest mover in the quarter, everything else is actually performing quite well.
I would call commercial real estate, very stable. In fact, if you look in the slides, there’s some positive trends in commercial real estate, leverage portfolio is very stable, automotive is stable, and TLS always has elevated criticized and losses there have been very manageable. So, I think we’ll continue to see some moderate level of migration, but our reserve levels are very appropriate for where we are in the cycle.
Manan Gosalia: Very helpful. Thank you.
Melinda Chausse: Welcome.
Curt Farmer: Thanks Manan.
Operator: Thank you. The next question is coming from Mike Mayo of Wells Fargo. Please go ahead.
Curt Farmer: Thanks Mike. Good morning.
Mike Mayo: Good morning. I heard you credit is strong or “really good shape”. You had lower charge offs quarter-over-quarter, criticized loans are below historical, loan loss reserves are flat. And you also added on Slide 25, you’ve had no big net charge-offs in commercial real estate since 2014. So, it’s been a decade since anything major. But I’m just trying to reconcile kind of a good environment today based on your comments with the headwinds from external factors possibly in the future. So, specifically multifamily, with about half of your total commercial real estate 60% in California and Texas. And I think some of the issues out there and correct me if I’m wrong, but falling rental rates, higher interest rates, higher cap rates, and impending loan maturity. So, the question is, under what scenarios would Comerica feel the need to build reserves on multifamily or other CRE? Thanks.
Melinda Chausse: Mike, this Melinda. Thanks for the question. So, let’s talk just a little bit about our multifamily portfolio. You’re right, we do have a large portfolio there. We’ve been in this business for many, many decades, it is a product category that we specifically leaned into post Great Recession because of its general resiliency. Our underwriting criteria is very conservative in this space, we are a loan-to-cost lender, so the amount of equity that goes into these projects generally a 35% to 40%. We are having very successful exits when loans are ready to either mature or properties are sold. Appraisals, although they are down from what we underwrote are still well within guidelines, in fact, below guidelines because of the amount of equity that we have on the front end.
So, we are seeing a little bit of softness in rent growth. We underwrite to sensitize rents. So there’s a tremendous amount of leeway within the project. So, we have — as you said, we have no criticized assets, we’ve had no charge-offs, or we have zero delinquencies, where it’s appropriate for exits that the borrower has decided to either sell the property or move it into long-term financing, there is still that opportunity, plenty of equity in the project to make that happen. So, I feel very, very confident. The majority of this portfolio — the vast majority is floating rate. So, it’s already absorbed kind of current rates. I mean, if rates were to continue to go up, if we had an upward trajectory, there would be a little bit more downward pressure.
But I don’t see a scenario, honestly, where we have losses in this portfolio, just given who we do business with how we underwrite and where we stand from a collateral perspective.
Mike Mayo: That’s helpful. So, when you’re saying the appraisals are down from when you underwrote them, how much are the appraisals down and what would be kind of a trigger point that would cause some concern?
Melinda Chausse: Appraisals — recent appraisals, call it in the last 90 days or so are down anywhere from 10% to 20%, which again, most of our loan-to-values are sub 60%. So, we’re still well within reasonable guidelines from a loan-to-value perspective. So, we’re just not seeing — we’re not seeing massive deterioration of value in the multifamily space. There are some headwinds for multifamily. Obviously, there’s a lot of supply coming online, but there’s also tailwind. I mean where our projects are tend to be in areas where employment and population growth is strong, that would be Texas, particularly. And again, because of the conservative underwriting, even with rent growth declining and some amount of small amount of concessions needed to get these projects to stabilization, we just don’t see any credit deterioration.
Mike Mayo: And one last push back again, you have the track record been in the business decades, you’ve had a decade of great performance. But when you say there’s no scenarios where you’d have serious losses there. Is that a little bit — do you want to be a little bit more conservative with that statement because that seems pretty strong? I mean, that’s a high level conviction for sure.
Melinda Chausse: Well, I think if I think about what — if we go into a massive recession, is it possible? Yes, I think we’re pretty confident that the economy is on reasonably good footing and the outlook for a soft landing and certainly what the consensus is. So, even if rates went up, call it 50, 100 basis points, I think this portfolio would still perform. So, yes, I’m pretty confident that we’re in really good footing. Now, with all that said, we do have reserves on this portfolio and we continue to build the reserves on our commercial loan — commercial real estate book, just in case. That’s why the reserves are there. And so again, even if we did have some losses, we’re well-reserved.
