Comerica Inc
NYSE:CMA
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Comerica Inc
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Good day and thank you for standing by. Welcome to the Comerica's Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Please go ahead.
Thank you, Regina. Good morning, and welcome to Comerica's fourth quarter 2021 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 provide additional details. The presentation slides and our press release are available on the SEC's Web site, as well as in the Investor Relations section of our Web site, comerica.com.
This conference call contains forward-looking statements, and 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. Please refer to the Safe Harbor statement in today's earnings release and slide two, which are incorporated into this call as well as our filings with the SEC for factors that can cause actual results to differ.
Now, I will turn the call over to Curt, who will begin on slide three.
Good morning, everyone, and thank you for joining our call. 2021 was another extraordinary year, which provided unique challenges and opportunities to meet the needs of our customers, colleagues, and communities. I'm incredibly proud of the commitment of our team. We continue to persevere through the challenges of the pandemic, while providing a high-level of service, and achieving many accomplishments along the way.
PPP loans were again a lifeline for many of our customers, and we were there to navigate them through the process. We funded over $1 billion in the second round of PPP loans, supporting more than 6,000 customers. As of year-end, 91% of these loans have been repaid, mostly through the forgiveness process. Also, to further demonstrate our commitment to our communities, we made a pledge to lend $5 billion to small businesses over a three-year period.
Our annual employee engagement survey was conducted, and among our top strengths Comerica's values stood out, with 84% of our respondents providing favorable marks. In addition, 94% of our colleagues agreed our response to the COVID-19 pandemic was excellent. We listened to what matters to our colleagues, and rolled out additional benefits, as well as a hybrid work arrangement for many of our team members who could split their time between the office and home. This provides flexibility for our colleagues while maintaining our relationship-based strategy. We have the tools and the strong culture to attract and retain the best talent even in the tight labor market, which has been a strength for us throughout our history.
Recently, we established an Office of Corporate Responsibility to bring key environmental, social, and governance elements together under one umbrella. The office reports directly to me, and underscores our dedication to protecting and preserving the environment, diversity, equity, and inclusion, as well as serving and strengthening our communities. Also, our ESG council defined the most significant ESG issues for our company, specifically those that are most impactful for our customers and colleagues, and in which we feel we can make a meaningful difference. In addition, we have started our preliminary analysis to develop a framework to measure climate risk in our commercial lending portfolio. Once again, our commitment to corporate responsibility has been recognized.
We were recently included in Newsweek's 2021 listing of America's Most Responsible Companies, and Forbs' 2021 Best Employer for Women. We provide high customer satisfaction by levering our expertise and experience in the areas we serve. In addition, more than ever, technology plays a major role in delivering the services our customers and colleagues require. Currently, we are in the process of modernizing our core platforms to drive greater operational excellence and empower our colleagues to serve our customers better. For example, we are refreshing our banking center teller platform, and have kicked off the project to upgrade our commercial loan servicing systems.
Also, we are leveraging digitization tools to re-imagine and reengineer critical customer journeys to make it easier for our customers to do business with us. Comerica has a rich history of helping our customers, communities, and colleagues throughout. This focus is essential and foundational to effectively executing our relationship banking strategy.
Turning to our 2021 financial results, slide four provides a few highlights. We produced record earnings per share, of $8.35. Average deposits grew 19%, and supported solid loan performance in a number of businesses, while providing significant excess liquidity to fund future growth. As a result, total average assets increased to $90 billion, an all-time high. Credit quality was excellent, and we released reserves. Our book value per share increased over $57. With strong market appreciation and our attractive dividend, we generated a total shareholder return of 62%, one of the highest among our peers.
Slide five provides further details. Relative to 2020, we had average loan growth in several of our specialty areas, specifically equity fund services, environmental services, entertainment, and commercial real estate. Also, excluding PPP, we had positive trends in middle market throughout the year, including a strong finish. The growth was most than offset by a large decline in national dealer services due to supply constraints, as well as energy as the sector recovered and reduced leverage. Revenue increased to $3 billion. While net interest income was challenged by the ultra-low rate environment, non-interest income growth was broad-based, increasing 12% to a new record.
Non-interest expenses reflected a higher compensation in conjunction with favorable performance and operating cost tied to greater revenue generation. Credit metrics were excellent as evidenced by net recoveries for the year, a reflection of our careful customer selection, diverse portfolio, and a conservative underwriting culture. As a result of strong capital generation, we returned $1.1 billion to common shareholders through dividends and the repurchase of what 9.5 million or 7% of total shares; in summary, a strong performance, an ROE of over 15% and an ROA of 1.3%.
Our fourth quarter results are outlined on slide six. We generated earnings of $1.66 per share. Excluding PPP, average loans grew over $600 million led by middle market and corporate banking. PPP balances declined nearly $1 billion as the forgiveness process progressed. Also mortgage banker declined about $300 million due to seasonal and cyclical factors. Average deposits increased over $5 billion. Excluding PPP, revenue increased as a result of loan growth and robust fee income.
Credit quality was exceptional and we released reserves. Expenses reflected investments in our people and technology to support our revenue generating activities. Also we repurchased 50 million in common shares and maintain an attractive dividend yield. We expect economic metrics to remain relatively strong this year. Our Chief Economist forecasts real GDP to increase over 4% in 2022. We believe each of our primary markets California, Texas and Michigan should perform at or above that level. Our customers and colleagues have successfully navigated the challenges over the past two years, and today stand stronger and more confident about the future.
And now I'll turn the call over to Jim, who will review the quarter in more detail.
Thanks, Curt, and good morning, everyone. Turning to slide seven, as Curt just mentioned, excluding the decline in PPP loans, we had solid long growth in several businesses. The largest driver once again was general middle market, which was up over $500 million on average relative to the third quarter. In addition, large corporate increased over $400 million or 10%, and national dealer was up nearly $200 million.
Partly offsetting this growth was declines in mortgage banker and commercial real estate. Historically, we have seen strong seasonal loan growth in December and this year was no exception. Average loans increased nearly $900 million in December relative to November. This helped drive period end loans up $1.1 billion relative to the end of the third quarter, despite a $561 million decrease in PPP loans. This essentially reflected the same drivers that we saw in the average balances.
I'll take a moment now to provide detail on the major pieces. We continue to see positive trends in general middle market and corporate banking. Higher commodity prices and rebuilding of inventory levels are in part resulting in increasing working capital needs. M&A dividends or equity distributions are also drivers. However, there are some headwinds mainly related to supply chain disruptions and in some cases, excess liquidity which can temper borrowing. But overall, our customers remain optimistic and that is reflected in our pipeline and growing loan commitment levels.
The increase in national dealer services volumes included a small increase in floorplan loans, which remained extraordinarily low relative to the typical historical run rate of about $4 billion. We expect inventory levels will slowly rebuild over the next one to two years as supply issues are resolved and pent up demand satisfied. Mortgage banker declined as a result of cyclical as well as seasonal factors. Loans have slowly decreased from the wind down of the refi boom after reaching record levels at the end of 2020.
However, purchase activity has remained strong and therefore we should fare better than others in this space given that 70% of our mix is purchase related while the industry average is 47%. Commercial real estate was impacted by significant pay downs. However, loan production remained strong and our pipeline and loan commitments increased in the fourth quarter.
Loan commitments for the portfolio as a whole increased $400 million led by corporate banking and middle market partly offset by the client and mortgage banker. The line utilization rate held steady at 47%. Loan yields decreased 13 basis points including eight basis points from the impact of PPP loans, four basis points from swap maturities and lower average rates on loans with floors as well as other portfolio dynamics such as the mix shift in the portfolio.
As shown on slide eight, average deposits again set a record increasing $5.4 billion with nearly three quarters of the growth derived from non-interest-bearing accounts. This growth was due to fourth quarter seasonality, along with continuing trends we've seen related to our customers' solid profitability, capital markets activity, and various monetary actions. The average cost of interest-bearing deposits hit an all-time low of 5 basis points, and our total funding costs held steady at only 6 basis points.
Slide 9 provides details on our securities portfolio. We continue to deploy some of our excess liquidity by increasing the size of the securities portfolio. This mitigated the risk of the rate headwind resulting in a slight increase in securities income quarter-over-quarter.
MBS purchases in the fourth quarter had average durations of about 6 years and yields of about 190 basis points. With securities rolling off with rates over 200 basis points, total portfolio yield declined to 1.71%. Our goal is to prudently reduce our asset sensitivity at a measured pace. In part, this can be achieved through gradually deploying excess liquidity by opportunistically growing the securities book. This has had the added benefit of helping to offset any pressure on revenue from lower reinvestment yields and maturing swaps.
Turning to slide 10, net interest income decreased $14 billion, excluding an $18 million drop in PPP income, interest income increased $4 million. The net interest margin declined 19 basis points mainly due to a large increase in excess liquidity, which had 11 basis point impact as well as a decrease in PPP income, which had a 6 basis point impact. As far as the details, putting aside the decline in PPP income, interest income on loans was stable, growth in non-PPP loans offset the impact from lower rates and loan floors and a swap maturity as well as other dynamics such as a mix shift in the portfolio.
As I mentioned, the increase in the size of the securities portfolio essentially offset the impact of lower yields, a $4.7 billion increase in average balances at the Fed added $2 million and had an 11 basis point negative impact on the margin, that deposits were extraordinarily high at nearly $25 billion and weighed heavily on the margin with a gross impact of 73 basis points.
As far as credit, which is outlined on slide 11; our metrics remained excellent, including net recoveries of $4 million as well as another quarter of declines and criticize in non-accrual loans. Our provision was a credit of $25 million. Positive portfolio migration, growing economic competence and sustained favorable economic forecasts, although layered with some degree of uncertainty resulted in a reduction in our allowance for credit losses to 1.26% of loans.
However, coverage of non-performing assets increased to 2.3 times. During the cycles, our credit performance relative to the industry has been a key differentiator and we believe we will continue to outperform. We remain vigilant given potential stress on our customers from the omicron virus, supply chain disruptions, labor constraints and inflation.
Non-interest income increased $9 million as outlined on slide 12. Derivative income grew $7 billion and was broad base with increased activity and interest rate hedges, foreign exchange trading and energy derivatives. Deferred comp, which is offset and expenses increased $5 million from almost zero in third quarter.
Fiduciary income increased $2 million returning to the second quarter's record level with growth in our trust business and continued strong equity market performance. Following strong third quarter syndication fees, which were at an all-time high, commercial lending fees declined $3 million. As expected government card activity declined the state benefit programs waned. However, this was most of that by increases in merchant and commercial productivity. Also total income decreased primarily due to the receipt of the annual dividend in the third quarter. In summary, we are pleased with another very strong quarter, which capped off a record year for fee income.
As shown on slide 13, expenses were up $21 million in the quarter. In short, this included the increase in deferred comp, which was offset in non-interest income and higher tech labor as well as seasonal staff insurance and occupancy. As far as the specifics, salaries and benefits increased $10 million. As expected technology related labor costs increased as they typically do at year-end as we completed a number of projects. I just mentioned the impact of deferred comp and staff insurance. Also, we incurred $3 million in additional expenses that are related to mid-cycle fare increases, retention bonuses, and severance costs, as we work to ensure that we have the best talent for our future needs in a very tight and competitive labor market. This was partly offset by lower performance-based incentives, following elevated third quarter levels.
In addition, I can see the seasonally higher, also weight increases in legal expenses of $4 million, primarily related to strong year-end loan closing activity, as well as operational losses, asset disposition losses, and T&E, which are all captured and other expenses. We continue to maintain our expense discipline as we position for future growth by investing in technology and our people, which are key to our relationship banking strategy.
Slide 14 provides details on capital management. Loan growth combined with share repurchases resulted in a decrease in our CET 1 ratio to an estimate of 10.15%. We continue to closely monitor loan trends and capital generation as we focus on our 10% CET 1 targets. In addition, we have maintained a competitive dividend yield. As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
Before we turn to the outlook, slide 15 provides an overview over interest rate sensitivity models, which forecast the benefit of rising rates to net interest income. The standard model assumes that nonparallel rising rates with a dynamic balance sheet. At the end of the fourth quarter, we estimated a $205 million or 12% increase in annual net interest income over 12 months, as rates gradually rise 100 basis points, and the benefit will be slightly greater in year two. Our asset sensitivity moved higher in the fourth quarter, primarily due to extraordinary deposit growth. Our goal is to gradually reduce our asset sensitivity over time as market conditions allow. And as rates rise, we would likely pick-up the pace. However, as you see in the various alternative scenarios, we have provided in all cases our asset-sensitive balance sheet remains very well-positioned for rising rates.
Our outlook for 2022 is on slide 16 and assumes no change in interest rates and a strong economy with gradual improvement of supply chain and labor challenges. We expect average loan growth on a year-over-year basis in the mid-single digit range, excluding the decline in PPP loans. Increases in nearly every business ex PPP are expected to be partly offset by a decline in mortgage banker from continued normalization of refi volumes and lower national dealer due to a slow rebound as a result of the supply chain issues. This belief is supported by a robust pipeline, positive momentum and several businesses and our outlook for continued economic growth.
As far as the first quarter relative to the fourth quarter, we expect average loans to be stable with growth in middle market, large corporate and commercial real estate offset by a lower mortgage banker and dealer. We believe average deposits will remain elevated for the near future. Due to seasonality we do expect the positive to climb modestly in the first quarter. And as far as net interest income, the major driver is expected to be loan dynamics.
PPP related income was $111 billion dollars in 2021 and will not be repeated. Putting that aside the benefit from loan growth is expected to be partly offset by lower loan yields driven by lower rate floors on loans, competitive pressures and a mix shift in the portfolio. The first quarter will be impacted by lower PPP income in two fewer days. For simplicity, this Outlook does not assume any rate changes. However, as I discussed in the previous slide, we are highly sensitive to rate movements. Therefore, rates are a key driver for a net interest income in 2022. Furthermore, as rates rise, a larger-than-planned increase in our securities portfolio or adding swaps presents additional opportunity.
Credit quality is expected to remain strong. That charge offs are expected to begin to trend to the lower end of our normal range of 20 to 40 basis points. Assuming the economy continues on the current path, and the impacts of supply chain issues labor constraints, as well as inflation remain muted, we expect the allowance ratio to continue declining modestly.
As far as non-interest income 2021 was the highest on record and included very strong performance in nearly every category. Some levels are unlikely to repeat in 2022 such as weren't related activity, derivative income including favorable CVA, stimulus related card fees and deferred compensation. These line items may also be a headwind in the first quarter. However, we expect continued solid performance in several customer-driven fee categories, such as fiduciary, deposit service charges, and brokerage.
We expect expenses to increase in the low single digits; this includes inflationary pressures which impact a number of line items such as salaries, T&E, and insurance. Also, we are focused on product and market development, as well as driving efficiency, which means continued investment in technology. We expect these headwinds to be partly offset by resetting performance compensation to normal levels. Of note, our pension expense will improve by $7 million for the year. First quarter expenses are expected to be lower, with annual stock compensation more than offset by the decline in performance comp, seasonal declines in items such as advertising and staff insurance, and other items that are expected to decline from elevated levels in the fourth quarter, such as deferred comp, legal, and severance costs.
We expect the tax rate to be 22% to 23% excluding discreet items. Finally, as I indicated on the previous slide, we are focused on our CET1 target of 10% as we monitor loan growth trends.
Now, I'll turn the call to Curt.
Thank you, Jim. As I said in my opening remarks, 2021 was an extraordinary year, and we produced strong results. Many business lines have shown good momentum, with increases in loans, commitments, and pipeline. Also, we produced record fee income and deposit growth, as well as excellent credit quality. Revenue was up, and our efficiency ratio held steady, resulting in strong returns. I'm honored to work along such a talented, committed, and hardworking team. With their expertise and experience, we are building long-term relationships. We are focused on delivering a more diversified and balanced revenue stream, with an emphasis on fee generation, which was evident this past year.
Also, our unique geographic footprint provides us significant growth opportunities, including the expansion of our Southeast presence. We will continue to carefully manage expenses as we invest in our products and services, and make progress on our ongoing digital journey. Finally, our disciplined credit culture and strong capital base continue to serve us well. These key strengths provide the foundation for creating long-term shareholder value. We are well-positioned as we move forward in 2022.
Thank you for your time. And now, we'll be happy to take some questions.
[Operator Instructions] Our first question will come from the line of Chris McGratty with KBW.
Morning, Chris.
Hey, good morning. Thanks for the question. I'm hoping we can start on the loan growth outlook. I understand that the fourth quarter is seasonal, but could you speak to the pipelines at the end of the year? And I noticed the end-of-period loan growth was notably stronger than average. Thanks.
Chris, this is Peter. Yes, the fourth quarter is normally a good quarter for us, although I think this quarter was exceptionally good from years that we've had in the past. And it does feel really good about jumping off for 2022, our period-end was really strong. The pipeline continues to be above pre-pandemic levels. I will say it came down a little bit just with closures through the second-half of the year, but still really good compared to history. And so, as we said in our outlook, we feel really good about where we stand at this point in the year.
And maybe a follow-up, understanding the deposits are continuing to surprise to the upside, you mentioned a couple times in your prepared remarks the likelihood to grow the investment book to take down rate sensitivity. I'm interested in the pace of securities purchases, if you kind of layers in the futures curve?
Yes, Chris, it's Jim; happy to take that question, and good morning.
Morning.
You know what; there are a number of different ways this could go. We've seen quite a bit of rate movement just in the last couple days. So, take your pick as to where rates may go. In the outlook, we do assume just modest increases in our securities portfolio. As you may have observed, we've been increasing them by about $500 million, on average, per quarter. We're actually assuming something just slightly less than that in this baseline outlook that we have. But again, that's got the potential to really take a step up, whether we choose to do it with securities, with cash products, or maybe choose to do it with swaps off balance sheet, those are somewhat interchangeable to an extent. That will be driven by what we see in terms of the rate outlook. And certainly, we'll be willing to step that up, and we'll want to step that up as rates go increasingly higher. So, it really comes down to monitoring the environment and responding to it.
And then is there a max of which the size of the investment portfolio you'd like to manage in this environment?
That's going to be highly dependent. And we are observing on what goes on with liquidity in the economy, both short-term and long-term. There's a little bit of flux right now in terms of what the fed might do with its balance sheet longer-term. And so, we're going to observe that and make our call off of that. We think, in the short-term, there is some room to grow it. How much room there is to grow it remains to be seen, again, based on just where we see overall liquidity and deposits in the system going. But it's not really a concern of ours because if we do hit some type of limit, and we will hit that limit at some point, we don't want to grow the securities book inappropriately or indefinitely. But we always have the option to put on a tremendous amount of swaps in terms of the capacity we have for that. So, again, it'll be interchangeable between those two instruments. And we'll just monitor overall liquidity and market conditions.
Great, thanks for taking the questions.
Your next question will come from the line of John Pancari with Evercore.
Morning, John.
Morning. On the loan growth, again to the end of period, how much of that growth that you saw in end-of-period commercial balances represent any type of pull-forward on LIBOR-based loans, given the change to SOFR in the beginning of this year? Did you see any of that out of your commercial borrowers?
Hey, John, it's Peter. I think the short answer to your question is, no. I don't think the shift from LIBOR to SOFR is necessarily causing any increase in loan demand or changes there. I think the borrowing community is continuing to make their decisions for their businesses, and sort of navigating that shift and use of LIBOR to SOFR separately.
Okay, all right, thank you.
Yes.
And then separately, can you -- regarding rate sensitivity, just I'm getting -- I get a fair amount of questions from investors around your rationale for driving your asset sensitivity lower or, in another way, maybe pulling forward some of that asset sensitivity, particularly now that we have relatively high certainty regarding the timing and magnitude of expected fed hikes. So, if you could just walk through that again in terms of the rationale of pulling forward or driving lower your asset sensitivity given that?
Yes, John, it's Jim, happy to do that. And I will say, in talking to both investors and analysts, I see a variety of opinions. And it's interesting, I hear some saying you should hold off, and I see some saying, "Why aren't you taking advantage of this and moving faster?" And to me, those opinions are equally divided. Our answer is that we want to be measured and methodical in terms of how we do this. To the extent you hold off for higher rates and look to hit that homerun some day, there's obviously opportunity costs or carrying costs that you're imposing upon shareholders over that short, medium-term. So, that's something we're very cognitive of.
We also know from the last decade-plus, there's no guarantee that rates will go perpetually up, and they can turn at any time with the black swan events that we've seen, and so on, over the last several years. And so, we are going to move very methodically, but we're not going to move all at once either, because we are cognitive of the fact that rates could go higher and higher. So, we think steady and consistent progress makes sense. We've been moving on this, but again, we're moving at a pretty measured pace, to your point. We are leaving some there in the kind of out-quarters to make sure we take advantage of what could be a persistent rise in rates. But we're not going to sit on the sidelines and wait for that homerun some day either. So, we feel really good about being in the middle of the road, and just making consistent, measured progress.
Got it. Thanks, Jim. And if I could ask just one more, sorry if I missed this earlier, but could you just give us your thoughts on how you think your betas will traject as we get these hikes through the year? Thanks.
Yes, you know, we have those sensitivities on the interest rate sensitivity slide. And I think it's fair to say that we have a pretty good chance of staying at or below that 10% beta alternative that you see there. That would be consistent with what we saw during the last rate cycle when rate started going up. And actually, there's more liquidity in the system right now. So, I would actually be surprised if we don't replicate that performance. So, I think betas will be very well behaved for the first few hikes, and we'll monitor it from there.
Got it. Okay, great. Thanks, Jim.
Thank you.
Your next question will come from the line of Ebrahim Poonawala with Bank of America.
Good morning, Ebrahim.
Good morning. I guess just sticking with loan growth. Two questions there. One, I was wondering if you can comment around what you're seeing across the different markets, California versus Texas versus Midwest? And also how much of the growth outlook depends on supply chains easing at least to some extent? Or do you feel like there is growth ex any of that happening that should emerge this year provided we don't have any big disruption from any additional disruption from COVID?
Ebrahim, it's Peter, I'll take the second one first. I don't think that we're necessarily expecting resolution one way or another around supply chain on our outlook. So, we feel good about the outlook regardless although I think you're seeing as much as we are there is some positive indicators of what's going on in supply chain, particularly in the second half of the year. But I don't know that it's part of what we're communicating to you on outlook. As far as the markets go, it feels really good in all three markets, Michigan, and Texas had really great year, sort of all year, California came on really, really strong in the second half of the year, and especially in the fourth quarter. So, I think all three markets are positioned very well going into '22. And the customer sentiment is positive, I think in each of those, so…
Got it. And I guess just one follow-up may be more strategic. As you look through your peer set, right, a lot of them have gone through large M&A over the recent years, and have doubled or tripled their asset sizes. When you think about just relative positioning, just talk to us in terms of competitive disadvantages of scale that you have, your appetite to engage in M&A that could increase size and market penetration. Just how are you thinking about all of that?
This is Curt. I'll take that question. Nothing really has changed. Nothing has really changed for us there. Our model has forever been built really on relationship banking and organic growth. We are in some very attractive markets and very fast growing markets, especially Texas and California. And we've had opportunities to expand our franchise for example, our entry into North Carolina and the Southeast. And we'll continue to look for opportunities to do that more on an organic basis. And we think our size, where we're operating today makes us nimble, so to speak, we've got the right sort of scale, we've got the right talent in place in great markets, we've invested in technology, I think to meet our customer needs and really feel like we are not, we'll be patient around any M&A activity if it makes sense for us to do so. But we really feel like we've got great opportunities just to continue to grow organically, we will look for and we have looked for in the past, possibly some small fee income, tuck-in opportunities along the way, it really helps us expand or enhance capabilities. But we'll do that in a very strategic manner.
Got it, thanks Curt.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Good morning, Steve.
Good morning. This is Anthony Elian on for Steve. My first question on loan growth, so, general middle market up above $525 million this quarter, did you see these middle market borrowers draw down on their deposit balances before using their credit lines or they drawing on their credit lines while still holding elevated cash?
Anthony, it's Peter. The second or the latter part of your statement there, I think we're seeing good growth in middle market borrowings and we're still seeing pretty good deposit growth in middle market in general and I've said in the past, I think your average middle market company continues to be optimistic but making sure they've got access to capital both on their borrowing side and maintaining good liquidity. So, this has been something we've seen now several quarters and I know all of us are kind of wondering is there going to be a shift in that strategy and so far we have not seen that. So, both continue to be occurring.
Okay, and then my follow-up on slide three, you outlined some of the technology investments you made last year including in data center as a modernization. Are these similar areas do you expect to invest in this year or anything new you're targeting for investments? Thank you.
Yes, Anthony, it's Jim. We'll certainly see some of those trends continue. But in addition, we do see ourselves maybe shifting the emphasis a little bit more towards customer product, where there already you see treasury, for instance, listed there. But I do think we'll see more and more higher proportion of our investment in technology go to customer product sets, especially those that we want to be the best in as the leading bank for business. But as I mentioned in my script too, we're also focused on technology in the backroom operations, making sure the application systems are up to speed, making sure that our employees are efficient. So, you'll see some of these same trends continue. But again, I would probably add that you'll see some additional shift into kind of leading edge digital customer products.
Thank you.
Your next question comes from the line of Gary Tenner with D.A. Davidson.
Good morning, Gary.
Thanks, good morning. Jim, in your prepared remarks, I think you mentioned that first quarter average loan balances are expected to be flat through the fourth quarter, does that represent a decent amount of just kind of pull forward temporary balances, whether in middle market or large corporate at year-end that would kind of get paid off early in the New Year?
Gary, I would say it's actually more typical of just called general seasonality of our customers. Now, those things you mentioned could be a piece of it, but they're the types of things we see every year. I think if you went back 10 years, you generally see the first quarter, not as strong as the fourth quarter. So, it's got an element of a lot of things, really just inherent of our customers overall business models and their capital needs and funding needs in the first quarter. So, really a number of things, but just overall seasonality, I would say.
Okay, and that's even with the kind of greater than usual strength in the fourth quarter.
That's right.
Okay. And then just follow-up on the comments around technology, we've seen a decent flow of announcements in terms of banks adopting different kind of payment networks around kind of digital and blockchain technology. Are you seeing any kind of pull from your customers on that? And really, is that any part of the other kind of maybe newer products that you were referencing going into 2022?
Yes, Gary I think the short answer is no, not really on the Blockchain technology part of it. Our focus, when we talk about digital is really around customer experience and making it as easy as possible for our customers to do business. I suspect things will be over time, how things unfold with Blockchain and so forth will be interesting to see we're watching that, but it's not what we're talking about on the investments that Jim mentioned.
Peter, I might add, though. Gary, that we are early adopters of payments technology. So, we were one of the early adopters of the Zelle platform. And we've had good success with our clients. And we are adopters or have real time payments capabilities in place, but for sending and receiving and there's not a lot of demand for that yet in the industry. But we're positioned to leverage that to make sure our customers are taken care of.
Great, thank you.
Your next question will come from the line of Bill Carcache with Wolfe Research.
Hi, Bill.
Hi, good morning. Curt, I wanted to follow-up with a high level question on your comments on around investing in your platforms and digital tools to make it easier for customers to do business with you. Do you have any interest in getting to the point where you can leverage technology to expand your footprint through digital channels without the need for traditional M&A? Is that something that you'd have any interest in pursuing?
Yes, the way I think about technology, certainly we need to be digitally enabled and we need to have the right products and services that our customers are wanting and demanding both commercial and consumer customers. When you think about our model with a heavy focus on commercial banking, that is still very much an advisory based business, is relationship based business where we're bringing a lot of credit expertise and overall banking expertise to client conversations and digital help enable some of the things that we do but it's challenging to acquire a large company, let's say that has $500 million in top line revenue using some sort of digital application. We need to support the relationship; treasury management other services it was digital. But really our model is still driven pretty heavily on the human capital side and the talent and skill and expertise of the bankers that we have in place and it's part of what allows us to grow as an institution. For example, our expansion into North Carolina doesn't have to be based as much on brick and mortar as it does on having the right people in the right places. And many of our national industries are industry verticals, we operate nationally today. And many different markets New York, Boston, Chicago, D.C., Seattle, Washington, et cetera.
That's very helpful. Thank you. Separately, Jim, I wanted to follow-up on your comments regarding higher salaries and comp expenses, can you parse out for us how much of the increase is simply related to performance versus how much of the increases are inflationary? And do you think that low single digit growth in the expense outlook is a sustainable level even as rates rise?
Yes, good morning, Bill. Yes, it's really been a strange couple years, as I mentioned in the last earnings call. It's been a while since we've had a so-called normal expense here, really just really for all the major line items. I don't think, we are forecasting low single digit expense growth for 2022. I do think that if the inflationary trends continue, that would actually be challenging to maintain, we probably see something a tad higher, but we'll see where wage inflation goes and competition for employees. And one of the things that allows us to keep to the low single digits next year, not just for expenses, but for salaries and benefits too, is the fact that we are resetting performance comp, so you know, we will probably be a tad higher than low single digits, if not for setting the performance comp and where things go beyond 2022. It is going to depend in large part where wage inflation and competition for talent goes.
Got it. Thank you. Lastly, if I could squeeze in one last one, following up on your deposit beta commentary, there seems to be a pretty broad consensus that deposit betas are likely to remain just as low as we saw in the last rate hiking cycle, but one of the variables that seems to be a bit more pronounced this time around is the risk of Fed balance sheet runoff happening a little bit sooner. Can you frame how you guys are thinking about that?
I see that more as an opportunity than a risk because even though the Fed may unwind its balance sheet a little quicker than they did the last time. Keep in mind it's starting from a much higher spot. So, even if they do that I do believe that deposits will likely stay a little higher than they were pre pandemic level. And I don't know that they were going to unwind the entire balance sheet. But if they do it's going to take probably 2 to 3 years, they did go a little shorter this time in terms of how they built it up.
But I see a worst case scenario as they unwind it back to where their balance sheet was before the pandemic started. So, worst case, you might get back to liquidity in the system where we started, but they're probably not going to go quite that far. In addition, we do see fiscal spending likely staying at some elevated level. PPP did fail, but some form of it's probably going to pass and now what we've seen in the past, it's really a combination of monetary policy, the Fed balance sheet, and the multiplier effect of money meaning, activity in the economy, which is highly linked to fiscal spending, and that's probably going to continue. So, overall, I do set deposits to stay at least if not higher than what they were pre pandemic levels. So, I don't see it as a risk and I actually see it as an opportunity that they don't actually unwind quite as far as some people might think.
That's very helpful. Thank you for taking my questions.
Welcome.
Your next question comes to the line of Jon Arfstrom with RBC Capital Markets.
Good morning, Jon.
Hey, good morning, everyone. Maybe start with a question for Jim and maybe Melinda, how do you want us to think about the provision to kind of set the bar for that it's seems like credits very, very clean, but just curious if you can get us any help on that?
Yes, this is Melinda. Thanks for the question. Obviously, we've had sort of unprecedented credit performance this last year. And as Jim mentioned in his comments, I think we do expect that we'll continue to see the reserve level come down modestly over the next couple of quarters. And at some point, obviously, given the fact that we are projecting some nice loan growth, we would expect that we'll start to see that trend reverse a little bit, you'll start to see a little bit of reserve build, but it's really impossible to predict what the seasonal coverage ratio is going to be and what the reserve levels going to be because they said, the accounting exercise that we go through each quarter is very specific to what the portfolio looks like? What the credit metrics are at that time? And what the economic forecast is? So, our general thought is we'll continue to see that coverage ratio decline a little bit and then it'll start to level off and we'll be adding at some point for loan growth, which would be a positive.
You're just not seeing anything in terms of inflows, really, in terms of problem credits?
The credit quality of the portfolio continues to be very strong. All of the indicators, at least at this point are that we would expect credit to remain very, very strong. This quarter we did, however, use some of the qualitative process and that reserve calculation to account for any uncertainty just because of the current omicron inflationary pressure, wage pressure, et cetera. But again, no, no signs right now on any of the segments of the portfolio that would give us any level of material concern and again, we still have very high reserve levels to handle whatever comes at us.
Thank you for that. Jim, on slide 15, on the rate sensitivity slide, just so we understand it, the standard model, you're assuming four hikes throughout the year, just kind of ratable hikes in terms of that modeling, is that right?
That's right. That would be -- you can look at it that way. It's 100 bps on average. So, you could think of it as for 25 bps hikes evenly spaced.
And so, if we think that's the case, and we think deposit betas will be lower. Would you pull us back at all from if I it's a 10% deposit beta? Is there anything in there you'd pull us back on? If I just said what, gosh, maybe the current guidance is a little bit lower net interest income, but if I think we get four rate hikes, it's another 230 million in NII and so, if anything in that guidance that makes you nervous, and you'd say, don't do that, Jon?
Yes, I'll give you one. I'll give you one put and one take, and they both have the potential to be very significant. The takeaway is keep in mind the fourth quarter interest rate sensitivity was really enhanced by the deposits towards the end of the year. So, to the extent those take a step back as we think they probably will, you could end up with a sensitivity closer to what we saw in the third quarter. So, we'll just see where the seasonal deposits go. So that would be the takeaway. The ad would be to the extent, to -- your question from Jon, to the extent, we pull some of this forward and put swaps on the books, grow the securities portfolio a little larger than we think, at least within the first year or two, you have the potential pull some of that forward and actually add more net interest income. So those are a couple one put, one take and you can layer that on as you wish to the standard model.
Okay. And just one last one, you talked a little bit about seasonality and deposits in Q1. How are you thinking about overall balance sheet growth, balance sheet size in '22? Is it more of a mix shift or do you expect to grow the balance sheet?
Well, deposits have been driving the balance sheet, it's all about deposits and these loans are obviously far less than our deposits right now. So, it's really a question of where the deposits go. And that's going to be highly dependent. I think on Fed actions, there are two primary things that will affect it. One will be rates because we know as rates go up we'll see some of these deposits slip off balance sheet off balance sheet money markets. I don't think that will happen in the first couple hikes. Looks like money market rates are going to trail for a while here. But, as rates progressively go up, you will see the deposits start to slip off and then what the Fed does with the balance sheet to the order conversation, but all that's going to take time. So, rather than a little bit of a seasonal drop in the first quarter, I would say the first half of the year, you're not going to see the balance sheet change much, deposits will stay strong. And then towards the second half of the year, maybe more partway through the third quarter and the fourth quarter, you'll start to see deposits come down if the Fed moves as we think they will. But it's going to be a strong deposit level, no matter what. So funding is not a concern and we think it's going to be a very healthy balance sheet going forward.
Okay, all right. Thank you.
Your next question comes from the line of Peter Winter with Wedbush Securities.
Good morning.
Good morning, Curt. I wanted to ask about capital. In the past, you've talked about that you wanted to reduce some of the asset sensitivity before you would consider lowering the CET1 target. So, can you just ballpark how much lower you would need to lower it before? Maybe you consider lowering the capital target? And then, secondly, just as you near the capital target today of 10% and a better outlook for loan growth, just what you're thinking about in terms of share buybacks?
Yes, to the longer-term question of targeted capital ratios, that's really yet to be determined. We know that we have almost 100 bps of preferred capacity to fill the stack with. I don't think that means we would necessarily one for one lower or CET1 target by that same amount. But there would be a little bit of room there. But that discussion is really a couple years away until we smooth out the asset sensitivities I've talked about in the past and obviously in internal discussion and a discussion with the board and just the overall environment and the status of some of our constituents and their views.
So, more to come on that, but we do think there is that potential, as we've mentioned in the past to take CET1 lower once that interest income stream has smoothed out. In terms of the more near-term, ending at an estimated 10.15%, there's always a plus or minus 15 bps to where you end up with a capital ratio, I really consider us to be about there. And I will say we are going to be cautious in the near-term about share repurchase. We're very hopeful. We feel good about loan growth over the next several quarters. We think capital generation meaning net income is going to be very good, especially if we get rate rises. But that's not a guarantee, it hasn't happened yet. Yes, we do think the loan growth is going to come. So, we're going to be a little cautious on share buyback. And I think you'll see us saying a little over 10% as opposed to a little under 10% going forward. And we'll continue to monitor the environment for both capital generation and where the loan growth might be headed over the next several quarters.
That's great. And then just one follow-up question, just deposit growth and middle market lending has been really strong last few quarters. I'm just wondering, could you just talk about how much maybe is coming from new customers, and if you're doing anything differently to attract new business?
Yes, Peter, it's Peter Sefzik. A portion of that is coming from new customers, I'd say it's probably 50:50 in middle market, and I don't know that we're necessarily doing anything new. I do think our model is proving itself out though in an environment with a lot of disruption. You have seen some acquisitions of banks in our markets and reality is that we're benefiting from that both with customers and with talent. So, I think that all of those things are kind of coming together and working really, really well in our favor and proving out the model nicely for Comerica.
Peter, I might add that we would say the same thing about our other business lines in wealth management and in retail bank that it's probably even split between existing customers and in acquiring some new relationship for some of the same reasons that Peter talked about. The key for that, I mean what I'm saying there, there is that word relationship, we do not chase deposits. From a pricing standpoint, we really tried to leverage relationship based pricing and relationships overall in terms of deposit growth. These are customers that we either have or customers that we're acquiring in terms of deposits, which is part of why we've done a good job of maintaining performing well, from a beta standpoint, when you see a rising rate environment is this is not hot money, these are really relationship based deposits across all three of our businesses.
Got it. Thanks for taking the questions.
Your next question comes from the line of Steve Moss with B. Riley Securities.
Good morning, Steve.
Good morning. Just following-up on rate sensitivity with the $14.9 billion in floors, you have just kind of curious as to how in the money, those floors are 25 basis points, 50 basis point give some color around that?
Yes, Steve, it's Jim; happy to take that. We do have the $14 billion of floors at an average rate of 67 bps, so how far they're in the money, you can just subtract monthly LIBOR from that, most of our loans are on monthly LIBOR. So, hanging around, call it a 11 bps. You'd see 56 bps in the money. But of course, that's going to be dynamic as we go through the coming rate environment. I mentioned floors is a bit of a headwind in terms of some of the bps received as well as the absolute amount being realized on those floors. I think everyone understands out there that to the extent the Fed raises rates, it really renders the floor issue a bit of a moot issue since eventually LIBOR will likely be equal to this level of floor that we're getting. So, we think this is a challenge that may end up not being a challenge at all if the Fed moves as everyone's expecting over the next couple of quarters.
Right, okay, that's helpful. And then just in terms of investment securities, just kind of curious, we know what you're seeking to purchase these days in terms of new money yields?
Yes, we're going to stick to our philosophy of buying high quality securities, where we understand the prepayment stability characteristics, favorable capital treatment, no credit risk. So, we're not going to change from the philosophy we have. In terms of what those are yielding, it's really changed a lot in the last week. So, we'll see what the future brings. You saw that in the fourth quarter, we were making purchases at 190. We saw that take a step up just a week ago, and we saw take a much further step up just in the last day or two. So, we're monitoring that very closely. But it certainly got the potential to create some nice opportunities for us in the coming months and quarters.
All right, thank you very much.
I'll now hand the conference back over to Curt Farmer, President and CEO for closing remarks.
We will close by again, saying a word of thank you to our employees for a really strong performance in 2021. And as always, thank you to each of you for your interest in our company. Have a great day.
Thank you all for joining today's meeting. You may now disconnect.