Comerica CEO won’t rule out acquisitions
Curt Farmer knows he has big shoes to fill as chairman and CEO of Comerica.
His predecessor, Ralph Babb, had run the bank for nearly two decades and was responsible for accelerating its expansion in Texas and California and relocating its headquarters from Detroit to Dallas. Babb was also notorious for being the first Comerica executive to arrive in the office in the morning — often as early as 5 a.m. — and the last to leave.
“You can’t outwork him,” said Farmer, who replaced Babb as CEO in April and added the chairman’s title this week, when Babb stepped down after 17 years in the role.
Farmer, 57, joined Comerica from Wachovia Bank in 2008 to run the wealth management unit and has been steadily climbing the ranks since.
Now in his first full year as the head of the $73 billion-asset bank, the largest headquartered in Texas, Farmer said management is primarily focused on growth after spending several years cutting costs and improving efficiency. Comerica has been a long-rumored takeover target, but Farmer indicated that the bank could potentially be open to making an acquisition of its own if the right deal comes along.
In a recent interview with American Banker, Farmer also discussed the outlook for energy lending, the limitations of the Community Reinvestment Act and how the asset-sensitive Comerica is navigating the interest rate climate. The following interview has been edited for clarity and length.
Comerica had long been rumored as a takeover target or potential merger partner with a bank of the same size. How are you approaching M&A next year?
CURT FARMER: We have built the company primarily through organic growth. We have been patient on the acquisition side. We’ve done two in the last 20 years. We think of ourselves operating day in and day out focused on organic growth. These are the markets that a lot of other banks want to be in.
For us [to do a deal], it would have to be something in California or Texas that we would be interested in. The opportunities are relatively small. If something came along we would certainly take a look at that.
Are you not interested in a merger of equals?
We are always focused on earning our independence. Having said that, we are always going to do the right thing for the shareholder if it maximizes long-term value. We believe we have a great history as an independent organization. Those mergers were done for various reasons, but ultimately they have to make strategic sense.
Do you think there could be a rush of M&A in Texas in general?
I personally don’t believe the floodgates are going to open. There will still be the occasional deal, but deals still have to make sense from an economic standpoint. I would be surprised if we see a flood of mergers occurring, but I do think there will be a steady dribble that would continue.
Looking ahead, what is the biggest challenge facing the bank next year?
We’re in an interest rate environment right now that is not favorable to the bank, but I don’t view this as an elongated situation.
It is favorable for our company that the Fed decided to pause [on cutting interest rates]. We’ve been doing what we can to soften the asset sensitivity of our company by adding hedges to our portfolio. Our anticipation is that we would do that over time.
I don’t really believe there is a huge risk of a recession in the next 12, 18, 24 months. I still see a lot of positive signs in the U.S. economy, especially in the markets we serve in Michigan, California and Texas.
Is there a lot of uncertainty out there?
The phrase we use that we borrowed from [Comerica Chief Economist] Robert Dye is "high anxiety about high uncertainty." I feel that when I’m out with customers. That translates more in holding back in terms of expansion and major capital expenditures, especially from our major corporate clients. To some degree that’s been the case now for several years. The story changes a little bit as to what the uncertainty might be, whether it’s trade or Brexit or concerns about a potential recession or, this year, some uncertainty with the [presidential] election. Uncertainty creates hesitation.
Do you see any long-term problems in energy?
We’ve had now a couple of quarters where we have seen an increase in provision for energy [loans]. The overall energy portfolio and the overall energy industry is relatively healthy. The issues we’ve seen have been confined to a subset of credit that usually goes back to exploration and production companies that had problems during the 2014 and 2015 crisis. It takes a long time for them to work through bankruptcy.
Valuations [of energy firms] have come down because there is not a lot of private equity money; there’s not a lot of access to capital markets right now. If you don’t have that coming back into the industry, we have to take a mark-to-market on these companies and these properties every quarter. We do believe it will work itself out over the course of the next couple of quarters. We feel good about energy overall.
Do you think provisions [for energy loans] will start to come down in the next couple of quarters?
It will be at this level for a while.
The OCC and the FDIC have proposed changes to the Community Reinvestment Act. You’re regulated primarily by the Federal Reserve, which has not signed on to their proposal. Do you see any potential problems with the way this is being done?
I’d love to see interagency cooperation on issues of this nature. It does feel like it would be a little awkward to have two different sets of rules.
We are comfortable operating under the guidelines we have today. I do think there are banks that believe in some cases they are probably not getting credit for all they are doing. The major issue I see is that sometimes your physical location doesn’t always match up with where your customer base is.
It’s a long process to get it through. There is conflicting information about whether the Fed will be a part of it or not. I don’t think it creates any advantage or disadvantage for us. We’re focused on supporting local agencies that are making a difference in the market, direct investment, direct lending to all areas of our communities.