Q3 2021 Comerica Inc Earnings Call
Good day and thank you for standing by welcome to the Comerica quarterly earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you.
Press Star one on your telephone if you require any further assistance press star Zero I would now like to hand, the conference over to Darlene persons.
Director of Investor Relations. Thank you. Please go ahead.
Thank you Stephanie.
And most of America third quarter 2021 earnings conference call participating.
You'll need to put the call will be our president chairman and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda Toffee, and executive director of a commercial bank Peter subject.
During this presentation, we will be referring to slides, which provide additional detail the presentation slides and our press release are available on the SEC's website as well as an.
Waiting on relations section of our website American Dot 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.
We invested over statement in today's earnings release, and slide two which I incorporate into this call as well as our SEC filings 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.
We generated earnings of $1.
<unk> per share and an ROE of 13, 3% in the third quarter.
Our results included solid loan growth in a number of business lines, which was overshadowed by headwinds from Triple P loan forgiveness reduced auto dealer loans due to supply constraints.
We continue to drive strong deposit growth.
<unk> robust fee income and excellent credit quality.
Revenue increased quarter over quarter and year over year, despite the low rate environment.
Our focus remains on managing expenses, while supporting our revenue generating activities.
Also during the quarter, we repurchased over 3 million shares reducing our share count.
By over 2%.
We expect economic metrics remain relatively strong over the next year, which bodes well for growth.
Our corporate mission is to create shareholder value by providing a higher level of banking that nurtures long lasting relationships.
Key to achieving this mission is our dedication to our customers.
<unk> employees and communities.
Our green loans and commitments continued to increase and totaled $1 5 billion at quarter end.
Recently, we launched a national Asian, and Pacific Islanders Resource group.
We now have 10 employee resource groups covering all of our markets.
These groups support our diverse team.
To strengthen our relationships in our communities.
I encourage you to review our diversity equity and inclusion report as well as our 13th annual corporate responsibility related report, which were recently published.
These reports include updates on our strategies and progress in these important areas.
Turning to our third quarter.
Members of performance on slide four.
<unk> progress was made on triple peaks forgiveness, reducing these loans about $1 8 billion or 64% on a period end basis.
Supply constraints continue to impact auto dealer floor plan loans, which average only $600 million relative to the historical run rate of about four.
For <unk>.
Putting triple P and dealer side, the average loans in the remainder of our portfolio grew about 600 million or nearly one 5% over the second quarter, including a 3% increase in general middle market.
Our pipeline is strong and long commitments continue to increase.
Average deposits.
<unk> increased 5% or $3 6 billion to another all time high.
This is due to our customer solid profitability and capital markets activity as well as the liquidity injected into the economy through physical and monetary actions.
Net interest income increased $10 million benefiting from an additional day in the quarter.
<unk> zero loan fees and deployment of excess liquidity, partly offset by lower rates.
Credit quality was excellent with net charge offs of only one basis points in criticized loans have declined to well below our long term average.
As a result, our reserve declined again, and we had a negative provision reserve.
<unk> ratio of 133% reflects the positive outlook for the economy and our portfolio.
Fee generating activity remained robust.
Third quarter noninterest income was up 11% on a year over year basis.
On a quarter over quarter basis record warrant income in commercial lending fees.
Hi set by decline in card fees from elevated levels due to lower levels of government stimulus.
Our efficiency ratio held steady at 62%.
We continue to focus on supporting revenue generating activity.
This includes our technology investments, which help us attract and retain customers and colleagues.
These were on their overall experience and efficiency.
We remain focused on our digital transformation by enabling our business with products and services.
Modernizing our platform and building our digital future with the right talent skills and strategy.
As we stated earlier, we continue to manage our capital levels, keeping a close eye on.
Enhancing returns and capital generation.
Using our capital to support our customers and drive growth remains our top priority, while providing an attractive return to our shareholders.
We along with our customers and colleagues across our markets remain optimistic about the future.
We expect economic metrics remain relatively strong over the next year.
<unk>, our chief economist forecast real GDP increased four 5% in 2022.
With each of our three primary markets of California, Texas, and Michigan above that level, which bodes well for growth.
And now I will turn the call over to Jim.
Thanks, Kirk and good morning, everyone.
Turning to slide.
Here.
Triple P loans decreased $1 $8 billion to end the quarter at $1 billion is the forgiveness process accelerated.
Excluding the decline in Triple P loans, we have good momentum in several business lines.
Specifically, we've driven consistent growth in general Middle market equity Fund services environmental services.
<unk> and entertainment.
This growth was partially offset by decreases in national dealer services and mortgage banker.
Industry data shows that auto and dealer inventory levels are at a 20% to 25 day supply versus the typical 60 to 70 days due to challenges, resulting from chip shortages labor constraints.
<unk> and foreign nameplates shipping issues.
We believe our dealer floor plan balances are very close to the bottom and inventory levels should start to slowly rebuild.
Mortgage banker loans also declined of note our mixes beneficial was 71% of our loans tied to purchase activity.
The expectation is that.
That refi volume should continue to fall as rates increase however purchase activity should remain relatively strong.
As far as line commitments, we posted another strong quarter with an increase of over $800 million in growth in most business lines.
Usage also grew resulting in the line utilization rate holdings.
<unk> steady at 47%.
Loan yields increased 14 basis points, including 14 basis points from the net impact of Triple P loans and three basis points from higher non triple P fees.
This was partly offset by a three basis point impact from lower rates, which included swap maturities.
Causes continue to grow in nearly every business line hitting a new record as shown on slide six.
The majority of our deposits are noninterest bearing and the average cost of interest bearing deposits remained at an all time low just below six basis points.
Our total funding costs held steady at seven basis points.
With strong deposits.
Deposit growth our loan to deposit ratio decreased to 59%.
Slide seven provides details on our securities portfolio we.
We deployed some of our excess liquidity by increasing the size of the securities portfolio by $1 billion or $566 million on average.
This allowed.
US to mitigate the rate headwind, resulting in approximately the same level of securities income quarter over quarter.
MBS purchases in the third quarter had average durations of around six years in yields of about 170 basis points.
With securities Rolling off with rates over 200 basis points, the total portfolio yield declined.
<unk> to 176%.
Our goal is to continue to offset any pressure from lower reinvestment yields by gradually and opportunistically, increasing the portfolio size.
Turning to slide eight net interest income grew $10 million, primarily due to an increase in the contribution from loans.
However, the net interest margin declined six basis points due to the large increase in excess liquidity.
As far as the details of interest income on loans increased $7 million and added six basis points to the net interest margin.
This was driven by one additional day in the quarter, which added $4 million.
Higher loan fees and balances.
<unk> on non Triple P loans, together added $5 million and the impact of Triple P with higher fees netted against more balances added $2 million.
This was partly offset by lower LIBOR and swap maturity, which together had a $4 million unfavorable impact.
As I mentioned, we neutralize the drag from lower secure.
<unk> yields on interest income by increasing the portfolio size.
A $4 $5 billion increase in average balances of the fed combined with a five basis point increase in the rate paid on these balances added $3 million and had a 10 basis point negative impact on the margin.
Fed deposits remained extraordinarily high.
At over $20 billion and weighed heavily on the margin, but the gross impact of approximately 65 basis points.
Given our asset sensitive balance sheet. The recent steepening of the yield curve is a positive sign for the future.
Our models estimate an 11% increase in annual net interest income in the first year when rates gradually.
We raised 100 basis points and of course, the incremental income in year, two compared to the year, one increase would be get higher.
Credit quality was excellent as shown on slide nine net charge offs were only $2 million and included $16 million and net recoveries from our energy business line.
Non performing assets decreased and remained low at 62 basis points of loans.
Also criticized loans declined to nearly every business line and are now below 4% of total loans.
With help from the rise in oil and gas prices the energy portfolio had significant decreases in both non accrual and criticized loans.
Strong credit metrics combined with our growing confidence in sustainable economic growth resulted in a decrease in our allowance for credit losses.
Our total reserve ratio remains healthy at 133%.
Overall, our customers quickly adapted and navigated a very challenging environment.
However, we remain vigilant given.
Given the potential stress on our customers from supply chain disruptions labor constraints and inflation.
Noninterest income declined modestly to $250 million following a very strong second quarter as outlined on slide 10.
Warrant related income increased $7 million to an all time high.
Due to the robust IPO and M&A activity.
Similarly, commercial lending fees were also a record driven by a large increase in syndication fees.
Deposit service charges grew $3 million as a result of an acceleration in customer activity.
Also bully income increased primarily due to the receipt of the annual dividend.
As expected government card activity declined as stimulus related volume waned. However, this was partly offset by increases in merchant consumer and commercial card activity.
Deferred comp asset returns, which is offset in noninterest expenses for less than $1 million compared to $6 million in the second quarter.
Also.
So derivative income declined $2 million due to reduced customer appetite for interest rate hedges, partly offset by robust energy derivative transactions with oil and gas prices hitting multiyear highs.
Fiduciary income decrease from a record level in the second quarter as continued strong equity market performance was more than offset by the absence of annual.
Tax service fees.
In summary, we are pleased with another very strong quarter for fee income.
As shown on slide 11 expenses were up $2 million in the quarter.
Salaries and benefits increased $5 million, mainly due to an increase in performance based incentives, which was partly offset by a decline in deferred comp.
Also we had higher software and consulting costs as we progressed on our digital transformation journey and occupancy expense was seasonally higher.
In line with lower card fee income outside processing decreased $96 million.
Litigation costs decreased following the elevated second quarter levels and finally.
Finally, FDIC insurance declined due to strong credit quality and higher capital ratios at the bank level.
Yeah.
Our stable efficiency ratio is consistent with our commitment to maintaining our strong expense discipline as we invest for the future.
Slide 12 provides details on capital management, our CET one ratio.
Increased to an estimated $10 two 1%.
We repurchased 3 million shares in the third quarter under our share repurchase program.
We continue to closely monitor our loan growth trends and capital generation as we manage our way towards our 10% CET one target and.
In addition, we have maintained a very competitive dividend yield.
Slide 13 provides our outlook for the fourth quarter relative to the third quarter.
Excluding triple P loans, we expect loan growth in several businesses, including general middle market and large corporate.
Partly offsetting this growth we expect continued decline in mortgage banker due to lower refi volumes and seasonality.
Of note.
So deeply auto dealer floor plan loans were close to a bottom.
Triple P. Forgiveness is expected to continue in the bulk should be repaid by year end.
As we look forward to next year, we believe loan growth from year end 'twenty one to year end 'twenty two should be relatively strong supported by our robust pipeline and expectations that the economy will.
<unk> strong.
We expect average deposits to remain elevated as customers continue to generate and maintain excess balances.
We expect net interest income in the fourth quarter to be impacted by a decrease in triple P related income from $34 million in the third quarter to be $10 million to $15 million.
We'll remain fourth quarter.
Ex Triple P. We expect net interest income to be relatively stable.
Lower fees from elevated third quarter levels and to a lesser extent maturing swaps are expected to be mostly offset the benefit from non triple P loan growth.
As far as next year, putting aside the headwind from the decline in Triple P.
Income, we expect to benefit from loan growth.
As I discussed earlier, we are highly sensitive to rate movements. So assumptions for rates are a key determinant for net interest income expectations, including the impact of maturing loan floors and swaps.
Credit quality is expected to remain strong assuming.
Assuming the economy remains on the current path. We believe the allowance should continue to move towards our pre pandemic, Dave one seasonal reserve of one 3%.
As far as fourth quarter noninterest income, we expect continued solid performance in several customer driven fee categories, such as deposit service charges card.
<unk> and derivatives, particularly foreign exchange.
More than offsetting this growth, we expect a decrease from record levels of warrant and commercial loan fees as well as elevated bully.
We expect 2021 noninterest income will be one of the highest we've ever recorded.
Certain line items, such as card warrants.
<unk>.
Perimeters, including CVA may be difficult to repeat as we look into next year.
And we assume deferred comp, which is offset in noninterest expense will not repeat.
However, we expect strength in growth across many other fee income categories.
We expect expenses in the fourth quarter to be relatively stable as we continue to invest.
For the future technology investments are expected to rise as they typically do as we approach year end.
In addition, we expect seasonally higher occupancy advertising and travel or travel and entertainment expenses.
This is expected to be offset by a reduction from the third quarter elevated performance based incentives.
Our planning process.
For next year's underway Big.
Big picture, we expect compensation to normalize in 2022, however, inflationary pressures could impact a number of line items, including salaries.
Also we are focused on product and market development as well as driving efficiency, which means continued investment in technology.
This is particularly important to ensure we continue to be well positioned to assist customers and colleagues given the prospect of strong economic growth for the foreseeable future.
We expect the tax rate to be 22% to 23% excluding discrete items.
Finally, as I indicated on the previous slide we plan to continue managing.
Your CET, one target as we monitor loan trends.
Now I'll turn the call back to Kurt.
Thank you Jim.
Overall, we are pleased with our results many business lines showed good momentum with increases in loans commitments and pipeline.
Also fee income was robust.
Deposit growth was strong and credit quality was excellent.
This resulted in revenue growth and a steady efficiency ratio in spite of the low rate environment.
We continue to feel good about how well we are positioned for the future, particularly our ability to support our customers in this extraordinary environment.
With our expertise and experience we are building long term relationships our unique geographic footprint provides significant growth opportunities.
We are located in seven of the top 10 fastest growing metropolitan areas, including the expansion of our southeast presence earlier this year.
We are focused on delivering a more diversified and balanced revenue stream.
Is this on fee generation.
<unk> continued 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 continued to serve us well.
These key strengths provide the foundation for creating long term shareholder value.
Within our banking and now we'd be happy to take your questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one to ask a question.
Our first question comes from the line of John Armstrong with RBC capital.
Good morning, John good.
Hey, good morning.
Wanted to ask you about some of the loan growth expectations.
On slide five you showed that $106 million in average loan growth for the quarter without PPP.
Is the message that.
2022.
Q4 in 2022, we're going to see numbers greater than that $106 million on a net growth basis ex PPP I guess getting to how optimistic are you on 2022, because it seems like maybe we're just getting started in terms of the commercial loan growth cycle.
Yes, John this is Peter I'll take that.
I think we're very encouraged about what we see for 2000 to 2022 as.
As we sit today our pipelines.
Really good I've said in the past that we're above pre pandemic levels.
We've seen now a couple of quarters of really good growth in our general businesses in.
We expect that to continue.
For sure we feel really good about what that looks like for the fourth quarter and going into 2022 absent any major further disruptions you might see with COVID-19 or so on I think we're very encouraged about what we're seeing across our businesses and across and across most of the.
The geographies in.
So I would say the answer is we feel pretty good about what that outlook looks like.
Okay. So so basic messages take out PPP, we're going to see growth in the fourth quarter.
And it just builds from there in 2022, that's what you are seeing yes, John I think that's fair the Triple P.
Adjustment is one you've got a you've got to navigate.
Okay.
Jim maybe one for you also on slide six the loan yield piece of it I think if you take out the PPP impact that you flagged it seems like relatively stable loan yields can you talk a little bit about some of the puts and takes on that.
Yes, John and good morning team, yes, they're relatively stable we did have some elevated fees in the third quarter as I mentioned that probably gave us about four bps more than we would typically have during the quarter and.
And we did get some pressure likewise going the other direction from a little bit lower LIBOR.
And the expiring swap that we had at the end of June that carried through the third quarter.
Probably put about three types of pressure on the yields in the third quarter as we look to the fourth quarter.
We will continue to have a little bit of pressure from LIBOR, continuing to saying it's not significant.
And we do have a swap maturing in early October sites.
I expect between the swap and lower LIBOR to get about three bps of pressure in the fourth quarter and then of course, we're going to have.
Lower loan fees going the other direction. The four bps that were elevated going down a little bit. So those are really the big drivers outside of Triple T, which obviously has the biggest impact that you would have to.
Back out.
Okay alright, thank you.
Thank you John.
Your next question comes from the line of Chris Mcgratty with K B W.
Chris.
Hey, good morning, everyone.
I'm wondering if you could provide some color on the deposit growth.
Quite strong and the outlook remains.
Good I guess, what are you seeing with your customers in terms of sustainability.
Yes, I'll take that and then Peter can add any color that I might miss.
Overall, we're pretty bullish on deposits, we continue to see some growth and being a kind of a middle market commercial bank. They are lumpy at times, but.
But having said that beyond any lumpy deposits, we might get we are seeing it pretty broad based across all businesses. So in general it's just very solid growth.
I'm not surprised by that I mentioned I think previously at conferences for earnings.
And the Federal reserve continues to inject liquidity into the economy and to the extent we continue to have some physical.
Fiscal spending that my opinion pushes the velocity and some of the money supply I think we will continue to see growth in deposits.
It will continue to be strong and even though the federal reserve may begin tapering later this year they are still going to be injecting liquidity into the economy.
Short term rates will stay low probably.
For the next few months at least so I don't see any of this escaping off balance sheet into money markets and so on so my message would be it's going to stress stayed relatively strong over the next few quarters.
And then if I could add a follow up given the investments in the bond portfolio and rates moving up.
Should we be thinking about.
This remix from from cash into investment securities the pace of growth.
Yes, certainly liquidity is not an issue with over $20 billion of excess reserves at the fed and again I don't expect deposits to go anywhere in the near future liquidity is certainly not a binding constraint it's really more.
We're about pacing ourselves and being opportunistic as it relates to rates and I think we've been pretty steady slow, but steady in that regard we're up almost $2 billion over the last year and the securities portfolio. So that's about $500 million a quarter that's been pretty consistent.
I think as you see rates continue.
<unk> to tick up assuming they do we could ramp that up a little bit more and be a little bit more opportunistic over time.
But our main theme has been we don't want to step into this too quickly given the potential for higher rates, but again, we're not necessarily satisfied with standing Pat either so slow steady progress center mantra and we've been pretty.
Consistent there and we'll just monitor rates over the next quarter or two and see where they go and we'll be opportunistic as appropriate there.
Great. Thank you.
Thank you Chris.
Your next question comes from the line of Scott <unk> with Piper Sandler.
Morning, Scott Good morning, guys.
Hey, Thank you for taking the question.
Just wanted to go back to that the loan growth outlook for just a moment as we look to sort of that strong outlooks for next year, maybe what kind of thoughts you have on where you see utilization trending I think you're now pretty stable at that 47% range and then I was hoping you could speak to maybe if there is any.
And utilization rates and sort of your.
$12 billion of general middle market versus what you're what you might be seeing from some of the larger corporate customers.
Yes, Scott it's Peter good. Thanks for that question I think we'll probably see utilization rates start to creep up a little bit we saw a little bit.
The difference in general middle market and call it business banking.
This quarter compared to a number of our other businesses and I think that will probably continue I think back to this deposit question, though the one we get a lot is.
Which of these is going to happen first deposits come down utilization go up and I think our message.
Growth in use to be a little bit of both.
One thing about the deposit growth as we were adding new customers and so not all of those customers are borrowing a lot of money right now, but we are capturing deposits and treasury management and other business with that customer acquisition and believe that eventually.
<unk> can be their borrowings will pick up on on their facilities. So I think Scott to answer your question I think utilization rates will creep up I don't think theyre going to go up quickly.
Because they do we do think those deposits and liquidity will stay on the balance sheet and I do think youll see it faster in kind.
<unk> market Slash business banking before you will per se in large corporate who continues to access the capital markets and handle their balance sheets, a little differently.
Yes that makes sense definitely I appreciate that I appreciate the thoughts.
Thanks, Scott Thanks, Scott.
Your next question is from the line of John <unk> with Evercore.
Good morning, John.
Morning.
Back to the to the loan growth comment again.
Or is this discussion as you look into 2022, given that you expect steady improvement in line utilization.
How should we think.
But a reasonable pace of loan growth in 2022 as draw Downs really pick up I mean is it is growth likely to approximate GDP could could even exceed that just how should we think about it as we're modeling out next year. Thanks.
Yes, John I would think about it probably.
About on the whole is GDP.
I think we feel like we're in markets that are going to grow better than that and I would tell you that the results we've seen out of our Michigan and Texas Middle market groups have been really good. This year, California has been good it has not been as maybe robust.
The Michigan, and Texas, but we think that will pick up next year. So.
I think it's fair to say that we feel like we're in economies and markets that are doing better than GDP and I also think that.
We're gonna be losing some of the major headwinds we've had the last few years of energy.
The dealer story I think you guys are pretty familiar.
And so yes, I would say that look into GDP, and knowing where our geographies are maybe compared to others is the way I'd be analyzing that.
Look can you maybe help us size up how you're thinking about the impact of wage inflation on year over year expense growth I know a couple of your peers have had.
Kind of sized it up in the low single digit impact to expense expectations as they as they complete their budgets how are you thinking about that.
Yes good.
Good morning, John we are still in the process of putting the plan together.
We're seeing a little bit of inflation already start to get into the run rate, even though I wouldn't call it raw material.
But anecdotally it does feel like it's going to keep ramping up and as we do our planning we do think that it has the potential to add perhaps another.
You're out in percent of what might be normal.
Expense levels, but thats still bouncing around a little bit and yet to be determined as we finish our 'twenty two planning, but I certainly think it is going to be a factor I think it is going to be something that's noticeable as opposed to underneath the covers and we'll get more clarity on that over the next few months.
Okay. Thank you very much appreciate taking my questions.
Thank you. Thank you.
Your next question comes from the line of Bill Kirk cash with Wolfe Research.
Good morning. Good morning, Good morning, I wanted to follow up on your interest rate sensitivity commentary to the extent that the fed proceeds with tapering asset.
It has come to an end by the middle of next year, and we start to get some hikes, but the short end of the curve rises faster than the long end such that we get some flattening is that scenario consistent with the non parallel shift in rates that you highlight on slide 18, I just wanted to I wanted to confirm confirm that.
Yes, if we look at our modeling and it.
Purchasing parallel shift and we.
We do have long rates going up they're not going up nearly at the same rate as short term rates, but they are up so in our scenario and baked into our interest sensitivity metrics that we quote in the deck you do have a modest increase in long term rates, but most of the shift in terms of.
It isn't a million dollar impact of course is tied to the short end.
Understood. That's very helpful and I wanted to separately on the topic of asset sensitivity, but perhaps scenario that doesn't get as much focus on the fee income side I wanted to ask about the credits that youre business customers earn on the deposits that they hold with you and are able to use.
<unk>.
To offset fees can you give some color around how much those fees are suppressing fee income today and what the potential benefit could be as we look ahead to higher rates.
Higher rates 10.
Have a detrimental effect on the fees to the extent that ECA goes up.
So I don't necessarily see that as an opportunity of course, we're going to more than make that up on the net interest net interest income side.
It's right now it's not a real material number just because rates are so low, but you would get a little bit of pressure on the noninterest income line item to the extent rates go up and that earnings credit goes up.
Got you, Okay, and then I guess, maybe lastly, if I could squeeze in one last one is there any color you can offer on the extent to which you expect.
P P customers that were new to comerica.
Yes.
To the extent they are continuing to engage.
With you and other areas in the future.
So that's that's.
That's an area that could drive some incremental revenue going forward.
Yeah, Bill it's Peter.
We actually kept our triple P program very focused on existing customers and so I think our opportunity.
<unk> seen as it relates to Triple P is really.
Work.
To the extent with customers in the past, who had been sort of deposit only and I would say that's very much in the kind of small business retail space and so.
It's certainly been a chance to.
Engage in that relationship and build from there.
Great. Thank you for taking my questions. Thanks Bill.
Working our next question comes from the line of Abraham pulling Waller with Bank of America.
Good morning, Ebrahim Hi, good morning, Good morning, I guess, just going back I think Jim you talked about supply chain labor constraints and inflation is the fact that I think when you were talking about credit, but just talk to us.
From a loan growth perspective, when you think about these three issues.
Just the level of visibility you have in terms of.
Our supply chain and labor constraint issues getting resolved and how much of that loan growth optimism is built on that occurring because I think we've discussed a lot of that over the last few months and would appreciate any kind of clarity.
Do you see that you might have talking to your customers on those on those fronts.
Yeah Ebrahim that's it.
Great question.
I think it's sort of one that we're all looking at and evaluating every day.
What I would tell you is that we just continue to be really impressed with our customer base and how.
Even obligating each one of those challenges so to the extent that any of those speed up or are delayed as we get into the fourth quarter and into next year that probably will impact I think on the whole obviously, how the economy performs but.
We feel like our.
They are an admiral base continues to be really really strong.
Make good decisions through all of this it's a little bit.
Looking at 2020, when we all sort of had to take a step back and evaluate choices that we're going to be made by customers through COVID-19 and many of them came through that very strong matter of fact a number.
Number of them sort of better results than they've ever had and I think as we move forward. Each one of those issues with supply constraints labor et cetera are going to continue to be challenges and not necessarily new ones labor has been a challenge I think for a while now.
And the general middle market space So yes.
I can't I can't tell.
Our cost any more than I think you guys are seeing in the press just like we are but what I can tell you that our customer base.
Is optimistic they're figuring out ways to navigate all of those issues, whether it's being more productive through technology, just like all the rest of us are finding different ways to navigate the supply constraints.
Tell you anything.
We're seeing really really good performance.
I think that will continue.
That's helpful and just as a follow up.
Obviously oil prices oil and gas prices are pretty strong just talk to us in terms of what youre seeing.
How are you going to see if prices stay where they are you're going to see some more demand.
Strange going back into the energy sector or.
Or do you think just.
Impact from the last few years, just so harsh where it's going to take a lot longer before you see energy loan demand pick up.
Okay.
The answer to both of your questions is yes, I think it's going to take a little longer for loan demand to pick.
In the energy space, but I do think youre going to see some capital flow.
No that youre going to see an enormous amount of let's call it private equity capital flow or public market capital market flow.
So it'll be it'll be slow I think as it relates to that but we have started to see.
<unk>, a little bit of loan demand.
We're being very selective about the choices, we make there and.
I think that the commodity price run up is is not necessarily one that's going to just draw a whole bunch of capital to the space or new players per se I think sort of the existing population.
C b the ones that are sort of navigating this this price spike right now.
Got it thanks for taking my questions.
Thanks Ebrahim.
Your next question comes from the line of Steven Alexopoulos with Jpmorgan.
Good morning, Good morning, everyone. Good morning I.
That is going to first follow up on the expense commentary here with all of the expense initiatives you guys have had over the past several years, although the impact of pension plan costs in 2021, I actually can't remember the last year that you had a quote unquote normal year of expense growth.
We put the inflation impact on salaries aside.
Wonder if you'd consider a normally like a normal growth rate for expenses, putting the inflation side.
Yes, Stephen it's Jim and your comment is right on point.
I've been asking myself. The same question what is the last normal year, we and the industry has had and certainly not the last couple of there have been an incredible amount.
What are you and takes over the last couple of years. So I typically like to go back to at least 19 to set a baseline, but having said that our goal is to be at or below the rate of inflation, that's kind of what we use for our governor.
You probably have to go back to kind of a 2019 starting point in CAGR it from there.
See how you measure up to that from that standpoint, we feel pretty good about it we are making some investments in areas that I think we're going to pay off and we feel really good about and of course, we'll be in a position to talk more about that at the <unk>.
<unk> conference calls, we kind of lay out expectations for 2022, but.
We are keeping an eye on expenses.
There just arent trying to self fund to the extent, we can but we're very committed to making the right investments in the people and the systems.
As I mentioned in my comments at the opening we feel really good about the economy and we feel like now is the time to be there for the customers and take advantage of what might be some really good growth over the next two or three years.
As we go to Rob I would just add this is kurt that our expense discipline around how we manage our resources and head count has not change that's been ingrained in our company for a long time and we have continued to.
To gradually become more efficient in terms of head count and reduce head count overtime, a lot of that leveraging technology.
Ours were changing dynamics and how customers utilize banking services with more customers utilizing mobile banking for online transactions et cetera has helped us continue to be very efficient there at the same time, we've done a very good job in Peter's area. As an example of that of reallocating head count where we feel like we have a higher.
Higher growth opportunity in certain business lines. So that remains a key area of focus for us I do think when you get longer term, we're not the industries out there we're not there yet either but with a lot of companies, including us offering more flexibility and work schedules.
There will be a point, where we can start really thinking more about.
And what we've done good work there already but we're continuing to evaluate sort of what is our real estate footprint need to look like I don't think thats, a near term or even necessarily a 2022 initiatives that will be another area that we can look at and are looking at in terms of the next couple of years.
Okay.
And if the goal is.
And our AD cancellation rate or lower does that imply I assume you mean, the long term inflation rate not current inflation does that imply sort of 2% or lower does that thought.
We will see where that goes it's really hard to say Steven.
We're in such unchartered territories in terms of where the inflation rate might go but.
<unk> I think you are kind of in the ballpark there okay.
And then.
Go ahead.
As always we will provide more guidance as we get through the planning process in the January conference call for Q1.
Yep Yep.
Secondly, given that general middle market customers I mean, you've said.
Well times already are sitting on elevated deposit balances I'm curious are you seeing elevated loan paydowns today and do you think there's a risk I know youre bullish on loan growth for next year, but that at some point. These customers use these balances to pay down their loans just given how much liquidity they are sitting on.
<unk>.
Multiple.
Steven It's Peter.
Good question I don't I don't we aren't seeing that so far is there a risk of that occurring possibly I think that as we get through the end of the year, we kind of get through some of the.
Tax determinations for customer.
<unk> do they make some different choices about what their balance sheets look like I mean, maybe so as we get into 'twenty, two but I think the reality is that.
They're going to want to continue to maintain.
I just call it kind of insurance.
Just so many things that seem to be happening.
Economy that they need to be prepared for it so they want to have access to capital.
So havent availability in the 50% range is probably good for them and having liquidity on their balance sheet. I think is good for them and it gives them a lot of.
A lot of ability to go pick up struggling competitors.
Acquired.
And the talent as needed et cetera. So I don't think that we're going to see that happen it could be proven wrong, there, but is it a risk of course it is but it's not one we're seeing right now.
Hey.
I appreciate all the color. Thanks.
Your next question comes from the line of Ken.
Ocean with Jefferies.
Morning, Ken.
Hey, good morning, I just wanted to ask you.
Comment on the rate sensitivity in the swaps and floors strategy last quarter, you said that.
Adding swaps at this point didn't make that much sense and Im just wondering you know you've got a little bit rolling off now.
As you look forward.
What do you look to you to change that view in terms of adding swaps either getting out the NII or bringing a little bit forward into the income statement.
Versus just waiting for that great loan growth that youre talking about thanks.
Alright, Ken Thanks for the question and that is something that is on our mind.
As I look at the current environment and our.
One balance sheet, we still have a lot of liquidity, we still see a very large differential between swap rates and what might be available versus what might be available on the security side.
We still see a pretty lopsided value in terms of.
Adding securities.
In lieu of maybe adding <unk>.
<unk> at this point in time, having said that as you point out we do have some swaps maturing we have seen the swap rates edge up a little bit and so I could see us moving over the next quarter or two potentially into a little bit of a dual strategy. There there are a little bit of different dynamics and advantages that each of those classes offers but.
Part I think we will be putting the preponderance of our spending of asset sensitivity into securities, but I do feel like we're getting a little closer to the point, where we could start adding some swaps.
Have a little bit of a dual strategy going there.
Okay and on the floor side, just I guess as it relates to just pricing.
And the market can you just talk a little bit about what spreads are looking like out there in.
Across the portfolios and how your strategy with floors plays into new production. Thanks.
Hey, Ken it's Peter.
I don't typically talk about what spreads are looking like on the call I will just.
For the <unk> to tell you that pricing is very competitive.
Floors, we are still getting some floors.
Getting a little lower floor rate than we were.
90 days ago, certainly six months ago.
But the pricing in general is very very competitive out there and we stick to.
Yeah.
Our belief that we provide.
Really good value to our customers and we're very disciplined about pricing.
<unk>.
We're not going to may be given to pricing declines across the board, we're going to do the right thing for our customers and we're going to try to capture market share but.
It is it.
Very competitive pricing environment in Florida, as a part of that Formula.
We look at it on every single deal trying to get one and sometimes we are able to accomplish what we want to there and sometimes we're not.
Understood. Okay. Thank you.
Ken.
Your next.
Comes from the line of Steve Moss with B Riley Securities.
Good morning, Steve Good morning.
Just following up on rate sensitivity here, Jim I think you said in your prepared remarks that the.
Securities purchased this quarter had a duration of six years.
Kind of curious in terms of what is the overall duration of the securities portfolio.
Next question should we expect you to purchase more longer duration securities going forward here.
Yes, Steve Thanks for the question.
We think our duration is pretty manageable right now it stands at four <unk> years, which is pretty consistent with the industry.
We did have a little.
Our duration, perhaps compared to others. If you go back a year or so so we felt like from that standpoint, we could afford to add more duration.
In addition, we just have an incredible amount of asset sensitivity. So.
I would even be comfortable as rates continue to go up.
Perhaps even seen that go up by.
Couple of tenths of a year.
Sure I'll, just because we do the asset sensitivity and if rates go up we're going to be sharing like crazy.
Even though some of the securities might not carry the same value at that point in time, So I do see us from a value standpoint, when I look at some of the yield differentials and supply demand dynamics were.
Okay right now with the six year point in terms of incremental.
And again Thats.
Mainly driven by the fact that we have so much assets asset sensitivity I think more than any of our peers.
It's just something we can afford to do at this point in time.
Okay, Great and then maybe just one more on end of period deposits were about $3 billion above the average.
Mental and I'm curious if that was just more window dressing at quarter end or should we think about that as being a better run rate for the fourth quarter average balance.
A little bit of both we did have a little bit of a spike up towards quarter end and that's not unusual but the overall, what I'll call medium term trend through the quarter.
Kind of way through the last month, we did see deposits rising so a fair portion of that will stick with us.
Alright, great. Thank you very much.
Your next question comes from the line of Ken Zerbe with Morgan Stanley.
Good morning, Hi, great. Thanks, good morning.
But.
I guess my first question I think it was.
Jim You mentioned that you are reinvesting into securities to help keep basically the offset lower reinvestment yields.
If I heard you correctly and I certainly understand the desire to keep income fairly steady over time, and I know I understand why.
Okay.
But shouldn't really be separate decisions.
I guess im asking like would you still invest in six year duration securities at these levels. If you werent trying to keep income stable. Thanks.
Yes, Ken Thats, a fair comment.
How youre doing I will kind of characterized.
My comments earlier, it's more of a convenience.
It is nice that.
The asset duration that were interested in right now once it definitely does allow us to keep securities income consistent quarter to quarter, but I think your point is very well taken and it probably bears some clarification.
Comment we're comfortable with our strategy right now we're comfortable with the duration. We think it's the right way to go given our asset sensitivity.
We think it makes sense to walk into a.
In a slow since the larger securities portfolio and I'll jump in too fast in.
It's really kind of a convergence of <unk>.
<unk> desirable outcomes.
Stepping into the right duration and the right sized securities book.
Coincidentally allows securities income constant quarter to quarter. So you are right there are different kind.
Kind of considerations, but they really converged nicely for us right now.
Good afternoon.
Yeah. This is Kurt maybe just a comment.
About longer term I mean, I think all of US two years ago would have been surprised to have had the opportunity to build the securities portfolio as large as we have but we've also had never seen this level of liquidity.
And the economy in the system and so.
Pre pandemic when we were.
Loan deposit ratios in 90.
<unk> percent range versus in the <unk> today.
A significant swing in so sort of first and foremost for us is always leveraging liquidity as well as capital.
To lend to our customers, but short of that we're going to be prudent and sort of how we allocate.
The excess liquidity, we have and try to.
Plus generate earning assets for our for our shareholders and I think we can balance both of those and over time the right size of the portfolio was Florida.
Sort of an equilibrium based on normal growth in the portfolio and where deposits grew over time, and we can sort of flex that portfolio, either up or down really based on.
Maturities occur and really what the dynamics look like as we get six months a year two years out.
No short of what normal what normal looks like because nothing has been normal in the last 18 months.
I hear you there.
Second question, how much of the positive loan growth commentary that you have for 2000.
Two is premised on national dealer rebounding and then what would loan growth it looks like potentially if national dealer did not rebound.
Hey, Ken it's Peter.
I think that when we're thinking about loan growth for next year I'm really thinking about dealer is.
I don't want to say.
Contributing to that but being a slower contributor to it it certainly feels like the floor plan.
And the return to normal in that space is kind of moving into the lower for longer.
Approach, if you will and what the timing on that come back. We continue to believe is into the second half of next year.
Not as we alluded to in the comments, we think we're at the bottom I mean $600 million in Floorplan balances is about us.
That is small as we can get.
I suspect the fourth quarter will come down a little bit more.
But what what the outlook for dealer is as it is very difficult to determine in this environment customers give you.
Your bag that they believe that eventually we will we will be and what we've seen in the past and the amount of inventory thats on dealer lots, but today.
Go buy a dealership there are no cars out there and I think thats, probably going to continue further into next year than maybe many of us.
Have thought but from a balance standpoint.
We think we're at the bottom.
It would be nice to have some uplift next year, we feel really good about the rest of the portfolio. If you will.
And are encouraged by that outlook and so it will be interesting to see what does happen in dealer.
Okay.
Okay, and then just one silly little question I'm on slide five.
The deck says that average loans grew $106 million, but then you list six different items that are all positive and they add up to one 6 billion of growth.
Some of those clients be negative.
Yeah, Ken there was a re filing of the slide earlier. This morning. So you might have the original accomplishment, but national dealer and mortgage banker are both negative so.
Okay.
Perfect all right, sorry, alright, great. Thank you thanks, Ken.
Your next question comes from the line of.
Mike Mayo with Wells Fargo.
Good morning, Mike.
Hi, This is actually Eric from Mike's team.
Hey, so I have a web page.
So two part question for you guys. Firstly, it's regarding your total tech spend for the firm. So just wanted to get a sense of what that was this year and what you.
Our expectations are for the growth trajectory for that spend over the next couple of years.
And then secondly, as it relates to the real time payments that you guys recently rolled out so kind of wanted to get a sense there of what the uptake has been therefore for that as well.
How you guys kind of expect that to impact revenue and expenses.
Over the next couple of years.
Okay, maybe I'll take the first part of the question in terms of the tech spend and.
Uh huh.
Early pilots just because in my opinion, you get a little bit of apples and oranges in terms of our companies define that in some of the tech spend is often sitting in the business units, depending on let's say the.
Greater considering to be tech.
But when we have looked at it I will say that our percentage of tech spend as we view it as a percentage of expenses is very much in line with the industry.
The shift that we've seen at Comerica and our new leaders and the service company have done a great job of this as we've seen a little bit of a shift.
Between what we call run the bank versus build the bank. So we are starting to put more of our tech spend and the project development many of those customer systems digital initiatives.
And just business basic business infrastructure.
And so the build the bank portion of it is growing and it will grow again in 2022.
So we feel good about the direction there and then in terms of real time payments and what Thats done for our certainly thats been.
Well received by the customers.
Feel like we're a little bit in the front end of that compared to some other banks out there. It's a key part of our Treasury management offering.
It's just something that.
We're happy to offer I don't know if you'd add anything else, Eric I would just use it as an opportunity to tell you that we're very very focused on.
Being a leader in the Treasury management space when it comes to digital and making sure that we are the leading bank for businesses and that offering and it's a big focus right now for us.
And one that we're going to continue to hopefully deliver new ideas and products and over the next couple of years.
That's that's helpful. Thanks, and then just.
Following up on the.
The run versus build the bank. So what does that allocation now for you guys.
Growing in the low the bank portion but.
What is that now and just kind of get a higher level sensor that yes that is something we've not publicly disclosed perhaps we will at some point in time, but I will just say it's been a nice shift for us over the last couple of years and continues to trend in the right direction.
It's going to be OK. Thank you.
Thanks, Eric.
Your next question comes from the line of Gary Tenner with D. A Davidson.
Thanks, Good morning, I just had another follow up on rate sensitivity slide.
Of the $15 billion of LIBOR loans with floors it looks.
That's about half of the LIBOR based loans.
Can you segment out how how far the money those are is there any.
Are we talking about $25 50 et cetera in terms of moves in LIBOR that would get through those floors.
Yes, those carrier.
Gross.
<unk> hundred 71.
Depth, which if you net that against the 8% to 9% LIBOR. It's got an average carry positive carry of about 62 to 63 depths.
Yes.
In terms of trends, we have if you look at the various sub.
Slides with published externally at earnings in conferences and so on.
<unk> seen the amount of floors continue to grow but.
<unk>.
Thats received or the best before starting to slow down a little bit of it is shrinking a little bit each quarter.
So now that's been a bit of a wash in the last few months or the last quarter or so.
It's something we're monitoring very carefully we do have more maturities coming up related to floors in the next year and so thats something we have.
Our ion and is that kind of implied in my opening comments it could be a bit of a headwind next year, but having said that we do have loans coming up for renewals that never had the opportunity to get a floor. So we view that as an opportunity and of course, we have new customer activity, where theres an opportunity also so depending on where all of that nets out we'll likely.
Likely tell us where the net impact on the net positive carry a floor is going but.
I would say during 2022, it's more likely to be a modest headwind as opposed to a tailwind going forward.
Okay. Thank you and then.
Following on your prior comments on.
Maybe some incremental interest.
In adding swaps versus where you were previously.
Previously.
In terms of the $1 8 billion.
Scheduled to mature in 2022 is there any particular any particular lumpiness within the year.
In terms of that they might not be looking to replace.
That's actually pretty.
Throughout the year and I think some previous decks that we publish actually had it by quarter.
But if you assume that smooth throughout the year you'd be almost spot on in terms of the overall impact in 2022.
Yes.
Thank you.
The one I will say the one in the fourth quarter as I think.
<unk> earlier that one is very early October so that'll be a full quarter impact.
Your next question comes from the line of Terry Mcevoy with Stephens.
Good morning, Hey, good morning, Hey, good morning.
Question can you play more offense.
In your markets given some of the M&A activity I think of California, where a large legacy name is going to go away and even in Texas. You went from a four letter bank to a three letter bank. So to speak and then just as a follow up as you think about your budget for next year are you willing to invest in any of these opportunities.
Terry.
I am Peter the short answer is yes, we think so.
And I think that the.
The longevity of our company and our people.
Is proving really really good in markets like California, and Texas that were going on 2030 years and now in the sort of disruption.
<unk> bodes well for us with.
With customers prospects.
And and talent.
So we are looking really hard at it and we're going to be.
We're going to be opportunistic I think is the word I would use.
And see what we can do I don't I don't know that were going to be.
<unk> you said go on offense.
Maybe that's the right terminology, but I think I would say opportunistic and be selective and we really feel like there's going to be some great opportunities for us with this disruption.
State that question.
Great. Thank you thanks Terry.
I think you would now like to turn the conference back over to Curt Farmer, President and CEO.
Thank you as always we do appreciate your interest in Comerica and hope you have a very good day. Thank you.
Thank you. This concludes today's conference call you may now disconnect.
Okay.
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Yes.
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