Q4 2021 Comerica Inc Earnings Call
As we are in 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 <unk> 5 billion to small businesses over a three year period.
Our annual employee engagement survey was conducted among our top strengths America's values shut out with 84% of respondents providing favorable marks.
In addition, 94% of our colleagues agreed a response to the COVID-19 pandemic was excellent.
We listened to what matters to our colleagues and rollout additional benefits as well as our hybrid work arrangement for many of our team members can 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 I noticed 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.
We have started our preliminary analysis to develop a framework to measure climate risks 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 Forbes 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 required.
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 have 11, leveraging digitization tools to re imagine and reengineer critical customer journeys that make it easier for our customers to do business with us.
Comerica has a rich history of helping our customers communities and colleagues thrive.
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 and environmental services Entertainment and commercial real estate.
Also excluding triple team, we had positive trends in middle market throughout the year, including a strong finish.
The growth was more than offset by a large decline in national dealer services due to supply constraints as well as energy as a sector recovered and reduced leverage.
Revenue increased to $3 billion.
While net interest income was challenged by the ultra low rate environment.
Noninterest income growth was broad base, increasing 12% to a new record.
Noninterest expenses reflected higher compensation in conjunction with favorable performance and operating cost tied to greater revenue generation.
<unk> metrics were excellent as evidenced by net recoveries for the year 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 one $9 5 million or 7% of total shares.
In summary, a strong performance with no Roe of over 15% and an ROA of one 3%.
Our fourth quarter results are outlined on slide six.
We generated earnings of $1 66 per share.
Excluding triple P average loans grew over $600 million led by middle market and corporate banking.
Triple T 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 triple P 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 maintained an attractive dividend yield.
We expect economic metrics remained relatively strong this year our.
Our chief economist forecast 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 of the past two years.
Today stands stronger and more confident about the future.
And now I will turn the call over to Jim who will review the quarter in more detail.
Thanks, Curt and good morning, everyone turning.
Turning to slide seven as purchase mentioned, excluding the decline in Triple P loans, we had solid loan 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 and.
In addition, large corporate increased over $400 million or 10% and national dealer was up nearly $200 million.
Partly offsetting this growth were 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 triple P 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 continued to see positive trends in general middle market and corporate banking.
Higher commodity prices and rebuilding of the inventory levels are in part, resulting in an increasing working capital needs.
M&A and dividend our equity distributions were also drivers Ali.
However, there are some headwinds mainly related to supply change 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 loans included a small increase in floor plan loans, which remain 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 is satisfied.
Mortgage banker declined as a result of cyclical as well as seasonal factors loans.
Loans have slowly decrease 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 mixes purchase related while the industry average is 47%.
Commercial real estate was impacted by significant paydowns.
However, loan production remained strong and our pipeline and line 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 decline in mortgage banker.
The line utilization rate held steady at 47%.
Loan yields decreased 13 basis points, including eight basis points from the impact of Triple T loans four basis points from swap maturities and lower average rates on loans with floors as well as other portfolio dynamics, such as a mix shift in the portfolio.
As shown on slide eight average deposits again set a record increasing five $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 customer solid profitability capital markets activity and various fiscal and monetary actions.
The average cost of interest bearing deposits had an all time low of five basis points and our total funding costs held steady at only six basis points.
Slide nine 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 risks that 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 six years in yields of about 190 basis points.
With securities Rolling off with rates over 200 basis points of 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 million, excluding an $18 million drop in Triple T income net interest income increased $4 million.
The net interest margin declined 19 basis points, mainly due to a large increase in excess liquidity, which had an 11 basis point impact as well as the decrease in Triple P income, which had a six basis point impact.
As far as the details putting aside the decline in Triple P income interest income on loans was stable.
Growth in non Triple P loans, offset the impact from lower rates on loan floors, and a swap maturity as well as other dynamics such as the 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 the 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 in criticized and non accrual loans.
Our provision was a credit of $25 million.
Positive portfolio migration growing economic confidence in sustained favorable economic forecast, although layered with some degree of uncertainty resulted in a reduction in our allowance for credit losses to one 6% of loans.
However, our coverage of nonperforming assets increased to two three times.
Through 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.
Noninterest income increased $9 million as outlined on slide 12.
Derivative income grew $7 million and was broad based with increased activity and interest rate hedges foreign exchange trading and energy derivatives.
Deferred comp, which is offset in expenses increased $5 million from almost zero in the 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 a strong third quarter syndication fees, which were at an all time high commercial lending fees declined $3 million.
As expected government card activity declined to state benefit programs waned. However, this was mostly offset by increases in merchant and commercial card activity.
Also boldly 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 is offset in noninterest income and higher tech labor as well as seasonal staff insurance and occupancy.
As far as the specific salaries and benefits increased $10 million as expected technology related labor cost increased as they typically do at year end as we completed a number of projects.
I'll just mention the impact from deferred comp and staff insurance.
We incurred $3 million in additional expenses that related to mid cycle increases retention bonuses and severance costs as we work to ensure 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 occupancy was seasonally higher.
Also we had increases in legal expenses of $4 million, primarily related to strong year end loan closing activity as well as operational losses asset disposition losses in <unk>, which are all captured in 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 one ratio to an estimated 10, 5%.
We continue to closely monitor loan trends and capital generation as we focus on our 10% CET one target.
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 of our interest rate sensitivity models, which forecast the benefit of rising rates to net interest income.
The standard model assumes and non parallel ryzen 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 the 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 Triple P loans.
Increases in nearly every business ex triple P 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 in 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 lower mortgage banker and dealer.
We believe average deposits will remain elevated for the near future.
Due to seasonality, we do expect deposits declined modestly in the first quarter.
And as far as net interest income the major driver is expected to be loan dynamics.
Triple T related income was $111 billion 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 Triple P income and two fewer days.
For simplicity this outlook does not assume any rate changes however, as I discussed on the previous slide we are highly sensitive to rate movements. Therefore, our rates are a key driver for our net interest income in 2022.
Furthermore, as rates rise or larger than planned increase in our securities portfolio or adding swaps presents additional opportunity.
Credit quality is expected to remain strong net 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 remained muted we expect the allowance ratio to continue declining modestly.
As far as noninterest 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 warrant related activity derivative income, including favorable CVA.
Nameless 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 could impact a number of line items, such as salaries T&D 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 discrete items.
Finally, as I indicated on the previous slide our focus on our CET, one target of 10% as we monitor loan growth trends.
Now I'll turn the call back to Kurt.
Thank you Jim.
As I said in my opening remarks, 2021 was an extraordinary year and we produced strong results.
Many business lines are showing 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 am honored to work along with such a talented committed and hardworking team.
Where 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, a strong capital base continued 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'd be happy to take some questions.
At this time, if you'd like to ask a question simply press star one on your telephone keypad. Our first question will come from the line of Chris Mcgratty with K B W.
Good morning, Chris.
Hey, good morning, Thanks for the question.
We can start on the loan growth outlook.
I understand the fourth quarter seasonal but could you speak to the to the pipelines at the end of the year.
And I noticed at the end of period loan growth was notably stronger than the average.
Chris This is Peter.
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.
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 of times in your prepared remarks.
The likelihood to grow the investment book to take down rates sensitivity.
Interested kind of in the pace of securities purchases, if you kind of layer in the.
The futures curve.
Yes, Chris its Jim happy to take that question and good morning.
There are a number of different ways. This could go we've seen quite a bit of rate movement. Just in the last couple of days so thank.
Take your take 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 have been increasing them by about half a billion dollars 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 would 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 is there a maximum 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 is 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 and appropriately 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 will just monitor overall liquidity and market conditions.
Great. Thanks for taking the questions.
Your next question will come from the line of John <unk> with Evercore.
Good morning, John .
Good morning.
On the on the loan growth again.
In the period.
How much of that growth that you saw in the period commercial balances represent any type of pull forward.
On LIBOR based loans, given the change to sofa.
At the beginning of this year or did you see any of that out of your commercial borrowers.
Hey, John its Peter I think the short answer to your question is no I don't think the shift from LIBOR to so for us necessarily causing any increase in.
Loan demand or changes there I think I think the borrowing community.
Continuing to make their decisions for their businesses and sort of navigating that.
That shift in use of LIBOR to sofa separately.
Okay.
Alright, Thank you and then some.
Thank you regarding rate sensitivity.
Sensitivity.
I'm getting a fair amount of questions from investors around your rationale for.
Driving your asset sensitivity lower or no.
Another way of maybe pulling forward some of that asset sensitivity.
Particularly now that we have relatively high certainty regarding the timing and magnitude of the expected fed hikes. So.
If you could just walk through that again in terms of the rationale on 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 IC 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 move them 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.
To the extent you hold off for higher rates and look to hit that home run someday. There is obviously opportunity costs were carried cost carrying cost that you're imposing upon shareholders over that short to medium term. So that's something we're very cognitive of we also know from the last decade, plus theres no guarantee that rates will go perpetually up and they can turn to 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 and we've been moving on this but again, we're moving at a pretty measured pace to your point.
We are leaving some there and 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 home run 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 if I could ask just one more sorry, if I missed this earlier, but can you just give us your thoughts on how you think your betas will will traject as we get these these hikes through through the year.
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 race.
<unk> cycle and rates started going up and actually theres more liquidity in the system right now so I would actually be surprised we don't replicate that performance. So I think betas will be very well behaved for the first few hikes in.
We will monitor it from there.
Got it okay, great. Thanks, John .
Thank you. Your next question will come from the line of Ebrahim <unk> with Bank of America.
Good morning Abraham.
Hey, good morning, I guess, just sticking with loan growth.
Two questions. One I was wondering if you can comment around what you're seeing across the different markets, California versus Texas versus made vast and also how much of the growth outlook depends on supply chains easing at least to some extent how do you feel like that is growth ex any of that happening.
Emerge this year provided we don't have any big disruptions.
Any additional disruptions 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 are seeing as much as we are that 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 communicating to you on outlook as far as the markets go.
<unk> is really good in all three markets Mitch.
Michigan, and Texas had really great year sort of all year, California came on really really strong the second half of the year and especially in the fourth quarter. So.
I think all three markets are positioned very well going into 'twenty two.
And the customer sentiment is positive I think in each of those so.
Got it and I guess, just one follow up maybe more strategic.
As you look to <unk> a lot of them have gone to large M&A over the recent years and then doubled or tripled you had asset sizes. When you think about just that is just positioning just talk to us in terms of.
Competitive disadvantages of scale that you have your appetite to engage in.
Many that could increase increased size and market penetration just how are you thinking about that.
This is Kurt I'll take that question nothing really has changed nothing has really changed for US. There are model has forever been built really own.
Relationship banking inorganic growth we are in.
Some very attractive markets, some very fast growing markets, especially Texas.
<unk>, yes.
And we've had opportunities to expand our franchise for example, our entry into North Carolina, and the South East and we will continue to look for opportunities to do that more on an organic.
Basis, and we think our size, where we're operating today.
This nimble so to speak we have got the right sort of scale, we've got the right talent in place in great markets.
It and technology I think to meet our customer needs and really feel like we.
We are not.
We will 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 if it really helps us expand or enhance capabilities.
But we will do that at a very strategic manner.
Got it thanks Scott.
Your next question comes from the line of Steven Alexopoulos with Jpmorgan.
Good morning.
Good morning, This is Anthony Elian on for Steve.
My first question on loan growth, So general middle market up about $525 million this quarter did.
Did you see these middle market borrowers draw down on their deposit balances before using their credit lines or are 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.
It 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 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 centers and modernization.
These similar areas do you expect to invest in this year or anything new you're targeting for investments. Thank you.
Yeah, Anthony its 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 they're already you see treasury for instance listed there but.
But I do think we will see more and more.
The proportion of our investment in technology go to custom.
Customer product sets, especially those that we want to be the best in us.
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 were up to speed and making sure that our employees are efficient.
So youll see some of these same trends continue but again I would probably add that youll 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 to the fourth quarter.
Does that represent a decent amount of just kind of pull forward of temporary balances whether in middle market or a large corporate debt at year end that would kind of get get paid off early in the new year.
Gary I would say, it's actually more typical but just what I'll call general seasonality of our customers now those things you mentioned could be a piece of it but there are the types of things. We see every year I think if you went back 10 years, we generally see first quarter not as strong as the fourth quarter. So it's got an element of a lot of things.
<unk> really just inherent of our customers.
The overall business models and their capital needs and funding needs in the first quarter.
A number of things, but just overall seasonality I would say.
Okay, and thats, even with the kind of greater than usual strength in the fourth quarter.
That's right.
Okay.
And then just to follow up on the comments around technology.
Scene.
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.
Really use that.
Is that any part of the other kind of maybe newer products that you were referencing again I'm going to sign something too.
Yeah, 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 side I suspect things will be.
Over time, how things unfold with blockchain and so forth will be will be interesting to see.
Watching that but it's not what we're talking about on the investments that Jim mentioned.
Peter I might add.
Gary that we are early adopters of <unk>.
Payments technology, so we.
We're one of the early adopters of the Zelle platform and have had good success with that with our <unk>.
Clients and we are adopters are have real time payments capabilities in place both for sending and receiving and theres 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 Kirk <unk> with Wolfe Research.
Hi, good morning.
I wanted to follow up with a high level question on your comments.
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 would have any interest in pursuing.
Okay.
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.
Warning and demanding both commercial and consumer customers, but when you think about our model with a heavy focus on commercial banking that is still a very much an advisory based business is relationship based business.
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.
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 and other services with 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 is 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 or is it does not having the right people in the right places and many of our.
National industries, our industry verticals, we operate nationally today in many different markets, New York Boston Chicago.
D C Seattle, Washington et cetera.
Okay. 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.
It's really been a strange couple of years as I mentioned in the last earnings call. It's been a while since we've had a so called normal.
Expense here and 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 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 in competition for employees and one of the things that allows us to <unk>.
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 we would 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.
<unk> 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 what are 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 theyre going to unwind the entire balance sheet.
But if they do it's going to take probably two to three years. They did go a little shorter this time in terms of how they built it up.
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 to where we started but theyre probably not going to go quite that far. In addition, we do see fiscal spending likely stain at some elevated level triple B did fail, but some form of it's probably.
I'm going to pass and you know from.
From 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 thats probably going to continue. So overall I do expect deposits to stay at least if not higher than what they were pre pandemic levels. So I don't see it as a risk in it.
We 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 from the line of Jon <unk> with RBC capital markets.
Good morning, John .
Good morning, everyone.
Maybe start with a question for Jim and maybe Melinda how do you want us to think about the provision.
Kind of set the bar for that.
It seems like credit is very very clean, but just curious if you could give 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 will 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 and we'll start to see a little bit of reserve build.
It's really impossible to predict what the seasonal coverage ratio is going to be and what the reserve level is going to be because the.
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.
Our general thought is we will continue to see that coverage ratio.
<unk> been a little bit and then it will start to level off and we will be adding at some point for loan growth, which would be a positive.
Yep Yep.
Youre, just not seeing anything in terms of inflows really.
Terms of problem credits.
The credit quality of the portfolio continues to be very strong all of the indicators at least at this point or that we would expect credit to remain very very strong.
This quarter, we did however, some.
Some of the qualitative process in 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.
Handle whatever comes at us.
Okay. Okay. Thank.
Thank you for that Jim on on Slide 15 on the rate sensitivity slide just just so we understand it.
The standard model Youre, 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 could look at it that way. It's a 100 bps on average so you could think of it as 425% of hikes evenly spaced.
Okay.
And if so if we think thats the case, and we think deposit betas will be lower.
Would you pull us back at all from.
If I think that's a 10% deposit beta is there anything in there you would pull us back on.
Oh gosh.
Maybe the current guidance is a little bit lower net interest income, but so I think we would get four rate hikes, it's another $230 million in NII.
Anything in that guidance that makes you nervous and you don't do that John .
Yeah, I'll give you one I'll give you one put in 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 those seasonal deposits go on so that would be the takeaway.
The AD would be to the extent to the earlier question from John .
To the extent, we pull some of this forward and put swaps on the books.
So the securities portfolio and a larger than we think at least within the first year or two you had the potential to pull some of that forward and actually add more net interest income.
Those are a couple <unk> taken you can layer that honestly wish to the standard model.
Okay and then just.
One last one you talked a little bit about seasonality in deposits in Q1, how are you thinking about overall balance sheet growth balance sheet signs in 'twenty. Two is it more of a mix shift or do you expect to grow the balance sheet.
While deposits have been driving the balance sheet, it's all about deposits and loans are.
Obviously far less in our deposits right now so it's really a question of words deposits go and Thats youre 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.
Deposit slip off balance sheet off balance sheet money markets I don't think that will happen in the first couple of heights. It looks like the money market rates are going to trail for a little while here but.
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 broader conversation, but all of that's going to take time, So I mean other than a little bit of a seasonal drop in the first quarter I would say the first half of the year youre not going to see the balance sheet changed much deposits will stay strong.
Then towards the second half of the year or maybe more.
Partway through the third quarter and the fourth quarter Youll 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.
We think it's going to be a very healthy balance sheet going forward.
Okay alright, thank you.
Your next question comes from the line of Peter Winter with Wedbush Securities.
Hello, Good morning, good morning, Kurt.
I wanted to ask about capital.
<unk>.
In the past you've talked about that you wanted to reduce some of the asset sensitivity before you would consider lowering.
The CET one target. So can you just ballpark how much lower.
You would need to lower before maybe you considered 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 youre thinking about in terms of share buybacks.
Yes to the longer term question of targeted capital ratios, that's really yet to be determined.
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 our CET one target by that same amount.
But there would be a little bit of room, there, but that discussion is really a couple of years away until we smooth out the asset sensitivities I've talked about in the past and obviously an internal discussion in 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.
We've mentioned in the past it takes 81 lower once that interest income stream is smoothed out in terms of the more near term.
Ending at an estimated $10, one 5% theres always a plus or minus 15 bps to where you ended 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.
Capital generation, meaning net income is going to be very good, especially if we get rate rises, but thats not a guarantee it hasnt 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 youll see us hanging a little over 10% as opposed to a little under 10% going forward and we will 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 just one follow up question just.
Deposit growth in 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 youre doing anything differently to attract new business.
Yes, Peter it's Peter septic.
Right.
A portion of that is coming from new customers.
Say, its probably 50 50.
In middle market and I don't know that were necessarily doing anything new I do think our model is proving itself out so in an environment with a lot of disruption.
<unk> seen some acquisitions of banks in our markets.
Reality is that we're benefiting from that both with customers and with talent. So I.
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 and wealth management and in our retail bank that it's probably an even split between existing customers in and acquiring some new relationship for some of the same reasons that Peter talked about the key for that.
What I am saying, there, though is that word relationship.
We do not chase deposits.
From a pricing standpoint, we really tried to leverage relationship based pricing relationships overall in terms of deposit growth. These were customers that we either have or customers that were acquiring.
In terms of deposits, which is part of why we've done a good job of maintaining the <unk>.
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 and four as you have just kind of curious as to how.
In the money.
<unk> 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 theyre in the money you can just subtract monthly LIBOR from that most of our loans around monthly LIBOR.
Hanging around call it 11 bps you'd be at 50.
<unk> 56 steps 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 <unk> received as well as the absolute amount being realized on those floors.
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 I was just kind of curious.
What you are seeking the purchases you made in terms of new money yields.
Yes, we're going to stick to our philosophy of buying high quality securities, where we understand the prepayments ability 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 weeks, we will see what the future brings.
You saw that in the fourth quarter, we are making purchases at 190 <unk>.
Saw that take a step up.
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.
Alright, Thank you very much.
I'll now hand, the conference back over to Curt Farmer, President and CEO for closing remarks.
Sure.
Well, let me close by again, saying a word a 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.
Okay.
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Good day, and thank you for standing by welcome to the Comerica fourth quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone to withdraw your question press the pound sign.
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 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, when would a chassis and executive director of our commercial Bank. Peter says it. 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 website as well as in the Investor Relations section of our website Comerica 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 presence.
Patients 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 is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ now I'll 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 a 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, but achieving many accomplishments along the way.
Triple P loans, where 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 Triple P loans supporting more than 6000 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 land $5 billion to small businesses over a three year period.
Our annual employee engagement survey was conducted among our top strengths America's values stood out with 84% FRE respond as 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 rollout additional benefits as well as our hybrid work arrangements for many of our team members because they're time between the office at 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 I noticed 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 to find 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 risks 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 Forbes 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 required.
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 have 11, leveraging digitization tools to re imagine and reengineer critical customer journeys that make it easier for our customers to do business with us.
Comerica has a rich history of helping our customers communities and colleagues thrive.
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 and environmental services Entertainment and commercial real estate.
Also excluding triple team, we had positive trends in middle market throughout the year, including a strong finish.
The growth was more than offset by a large decline in national dealer services due to supply constraints as well as energy as a sector recovered and reduced leverage.
Revenue increased to $3 billion.
While net interest income was challenged by the ultra low rate environment.
Noninterest income growth was broad base, increasing 12% to a new record.
Noninterest expenses reflected higher compensation in conjunction with favorable performance and operating cost tied to greater revenue generation.
<unk> metrics were excellent as evidenced by net recoveries for the year 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 one $9 5 million or 7% of total shares.
In summary, a strong performance with no Roe of over 15% and an ROA of one 3%.
Our fourth quarter results are outlined on slide six.
We generated earnings of $1 66 per share.
Excluding triple P average loans grew over $600 million led by middle market and corporate banking.
Triple P 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.
Including Triple P 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 remained relatively strong this year our.
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 of the past two years and today stands stronger and more confident about the future.
And now I will 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 purchase mentioned, excluding the decline in Triple P loans, we had solid loan 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 and.
In addition, large corporate increased over 400 billion or 10% and national dealer was up nearly $200 million.
Partly offsetting this growth were 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 triple P 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 the inventory levels are in part, resulting in an increasing working capital needs.
M&A and dividend our equity distributions were also drivers.
There are some headwinds mainly related to supply change 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 loans included a small increase in floor plan loans, which remain 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 is satisfied.
Mortgage banker declined as a result of cyclical as well as seasonal factors.
Loans have slowly decrease 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 mixes purchase related while the industry average is 47%.
Commercial real estate was impacted by significant Paydowns, However, loan production remains strong and our pipeline and line 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 a decline in mortgage banker.
The line utilization rate held steady at 47%.
Loan yields decreased 13 basis points, including eight basis points from the impact of Triple T 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 have seen related to our customer solid profitability capital markets activity and various fiscal and monetary actions.
The average cost of interest bearing deposits had an all time low of five basis points and our total funding costs held steady at only six basis points.
Slide nine 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 that 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 six years in yields of about 190 basis points.
With securities Rolling off with rates over 200 basis points and 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 million, excluding an $18 million drop in Triple T income net interest income increased $4 million.
The net interest margin declined 19 basis points, mainly due to a large increase in excess.