Comerica Inc (CMA) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Comerica's quarterly earnings call.

(Operator Instructions)I would now like to hand the conference over to Darlene Persons, Director of Investor Relations. Thank you. Please go ahead.

Thank you, Stephanie. Good morning, and welcome to Comerica's Third Quarter 2021 Earnings Conference Call. Participating on this call will be our President, Chairman and CEO, Curt Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Executive Director of our Commercial Bank, Peter Sefzik.

During this presentation, we will be referring to slides, which provide additional details. The presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website, comerica.com. This conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. Please refer to the safe harbor statement in today's earnings release and Slide 2 and which I incorporate 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 3.

Good morning, everyone, and thank you for joining our call. We generated earnings of $1.90 per share and an ROE of 13.53% in the third quarter. Our results included solid loan growth in a number of business lines, which was overshadowed by headwinds from PPP loan forgiveness and reduced auto dealer loans due to supply constraints. We continued to drive strong deposit growth, 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 to 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, 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 members and strengthen 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 financial performance on Slide 4. Significant progress was made on PPP forgiveness, reducing these loans by $1.8 billion or 64% on a period-end basis. Supply constraints continued to impact auto dealer floor plan loans, which averaged only $600 million relative to the historical run rate of about $4 billion. Putting PPP and dealer aside, the average loans in the remainder of our portfolio grew about $600 million or nearly 1.5% over the second quarter, including a 3% increase in general middle market. Our pipeline is strong and loan commitments continue to increase.

Average deposits increased 5% or $3.6 billion to another all-time high. This is due to our customers' solid profitability and capital markets activity, as well as the liquidity injected into the economy through fiscal and monetary actions. Net interest income increased $10 million, benefiting from an additional day in the quarter, higher loan fees and the deployment of excess liquidity, partially offset by lower rates. Credit quality was excellent with net charge-offs of only 1 basis point and criticized loans have declined to well below our long-term average. As a result, our reserve declined again, and we had a negative provision. The reserve ratio of 1.33% 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 and commercial lending fees were offset by a decline in card fees from elevated levels due to lower levels of government stimulus. Our efficiency ratio held steady at 62% as we continued to focus on supporting revenue-generating activity. This includes our technology investments, which help us attract and retain customers and colleagues by enhancing 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 continued to manage our capital levels, keeping a close eye on loan trends 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 to remain relatively strong over the next year. Our chief economist forecast real GDP to increase 4.5% in 2022, with each of our 3 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, Curt, and good morning, everyone. Turning to Slide 5. PPP loans decreased $1.8 billion to end the quarter at $1 billion as the forgiveness process accelerated. Excluding the decline in PPP loans, we have good momentum in several business lines. Specifically, we have driven consistent growth in general middle market, equity fund services, environmental services 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 and foreign nameplate 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 mix is beneficial with 71% of our loans tied to purchase activity. The expectation is 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 and growth in most business lines. Usage also grew, resulting in the line utilization rate holding steady at 47%. Loan yields increased 14 basis points, including 14 basis points from the net impact of PPP loans and 3 basis points from higher non-PPP fees. This was partly offset by a 3 basis point impact from lower rates, which included swap maturities.

Deposits continued to grow in nearly every business line hitting a new record as shown on Slide 6. The majority of our deposits are noninterest-bearing and the average cost of interest-bearing deposits remained at an all-time low, just below 6 basis points. Our total funding costs held steady at 7 basis points. With strong deposit growth, our loan-to-deposit ratio decreased to 59%.

Slide 7 provides details on our securities portfolio. 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 6 years and yields of about 170 basis points. With securities rolling off of rates over 200 basis points, the total portfolio yield declined to 1.76%. Our goal is to continue to offset any pressure from lower reinvestment yields by gradually and opportunistically increasing the portfolio size.

Turning to Slide 8. Net interest income grew $10 million primarily due to an increase in the contribution from loans. However, the net interest margin declined 6 basis points due to the large increase in excess liquidity. As far as the details, interest income on loans increased $7 million and added 6 basis points to the net interest margin. This was driven by 1 additional day in the quarter, which added $4 million, higher loan fees and balances on non-PPP loans together added $5 million and the impact of PPP with higher fees netted against lower 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 neutralized the drag from lower securities yields on interest income by increasing the portfolio size. A $4.5 billion increase in average balances at the Fed combined with a 5 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 with a 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 rise 100 basis points and of course, the incremental income in year 2 compared to the year 1 increase would be yet higher.

Credit quality was excellent, as shown on Slide 9. Net charge-offs were only $2 million and included $16 million in net recoveries from our Energy business line. Nonperforming assets decreased and remain low at 62 basis points of loans. Also, criticized loans declined in 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 nonaccrual 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 1.33%. Overall, our customers quickly adapted and navigated a very challenging environment. However, we remain vigilant given the potential stress on our customers from supply chain disruptions, labor constraints and inflation.

Noninterest income declined modestly to $280 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 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 BOLI 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 were less than $1 million compared to $6 million in the second quarter.

Also, 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 decreased 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 $6 million. Litigation costs decreased following the elevated second quarter levels. And finally, FDIC insurance declined due to strong credit quality and higher capital ratios at the bank level. 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 CET1 ratio decreased to an estimated 10.21%. We repurchased 3 million shares in the third quarter under our share repurchase program. We continue to closely monitor loan growth trends and capital generation as we manage our way towards our 10% CET1 target. 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 PPP 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, we believe auto dealer floor plan loans are close to a bottom. PPP forgiveness is expected to continue and the bulk should be repaid by year-end. As we look forward to next year, we believe loan growth from year-end '21 to year-end '22 should be relatively strong supported by our robust pipeline and expectations that the economy will remain 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 PPP related income from $34 million in the third quarter to be $10 million to $15 million in the fourth quarter. Ex PPP, 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 mostly offset the benefit from non-PPP loan growth. As far as next year, putting aside the headwind from the decline in PPP 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 the economy remains on the current path, we believe the allowance should continue to move towards our prepandemic day 1 CECL reserve of 1.23%. As far as fourth quarter noninterest income, we expect continued solid performance in several customer-driven fee categories, such as deposit service charges, card 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 BOLI.

We expect 2021 noninterest income will be one of the highest we've ever recorded. Certain line items such as card, warrants and derivatives, 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 and 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 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 is underway. 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. And finally, as I indicated on the previous slide, we plan to continue managing towards our CET1 target as we monitor loan trends.

Now I'll turn the call back to Curt.

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 7 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 with an emphasis on fee generation. We will continue to carefully manage expenses as we invest in our products and services, and make progress on our ongoing digital journey.

Finally, our disciplined credit culture and strong capital base continues to serve us well. These key strengths provide the foundation for creating long-term shareholder value.

Thank you, and now we'd be happy to take your questions.

(Operator Instructions) Your first question comes from the line of Jon Arfstrom with RBC Capital.

I wanted to ask you about some of the loan growth expectations. On Slide 5, you show that $106 million in average loan growth for the quarter without PPP. Is the message that Q4 and 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, Jon, this is Peter. I'll take that. I think we're very encouraged about what we see for 2022. As we sit today, our pipelines feel really good. I have said in the past that we're above pre-pandemic levels. And we've seen now a couple of quarters of really good growth in our general businesses, and 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 or so on. I think we're very encouraged about what we're seeing across our businesses and across most of the geographies and so I'd say the answer is we feel pretty good about what that outlook looks like.

Okay. So basic message is 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're saying?

Yes, Jon, I think that's fair. The PPP adjustment is one you got to navigate.

Yes. Okay. Jim, maybe one for you. Also on Slide 6, 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, Jon. Yes, they're relatively stable. We did have some elevated fees in the third quarter as I mentioned. It probably gave us about 4 bps more than we would typically have during the quarter. 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 and that probably put about 3 bps 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 sink. It's not significant. And we do have a swap maturing in early October. So I expect between the swap and lower LIBOR to get about 3 bps of pressure in the fourth quarter.

And then, of course, we're going to have the lower loan fees going to other direction, the 4 bps that were elevated going down a little bit. So those are really the big drivers outside of PPP, which obviously has the biggest impact that you would have to back out.

Your next question comes from the line of Chris McGratty with KBW.

I wonder if you could provide some color on the deposit growth, quite strong and the outlook remains pretty 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 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 or earnings that to the extent the Federal Reserve continues to inject liquidity into the economy and to the extent we continue to have some fiscal spending that in my opinion, pushes the velocity of some of the money supply, I think we'll continue to see growth in deposits.

So it will continue to be strong and even, though, the Federal Reserve may begin tapering later this year. They're still going to be injecting liquidity into the economy. Short-term rates will of course stay low probably for the next few months at least. So I don't see any of this escaping off balance sheet in the money markets and so on. So my message would be it's going to stay relatively strong over the next few quarters.

And if I could add a follow-up. Given the investments in the bond portfolio and rates moving up, how should we be thinking about this remix from cash into investment securities, the pace of growth?

Yes, certainly, liquidity is not an issue with over $20 billion of excess reserves to 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 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 in the securities portfolio. So that's about $500 million a quarter. That's been pretty consistent. I think as you see rates continue 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 in the mantra and we've been pretty consistent there. And we'll just monitor rates over the next quarter or 2 and see where they go, and we'll be opportunistic as appropriate there.

Your next question comes from the line of Scott Siefers with Piper Sandler.

Just wanted to go back to the loan growth outlook for just a moment. As we look to sort of that strong outlook for next year, maybe what kind of thoughts do 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's any difference in utilization rates in sort of your $12 billion of general middle market versus what you might be seeing from some of the larger corporate customers.

Yes, Scott, it's Peter. Thanks for that question. I think we'll probably see utilization rates start to creep up a little bit. We saw a little bit of growth 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 continues to be a little bit of both.

One thing about the deposit growth is we're adding new customers and so not all 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 their borrowings will pick up on their facilities. So I think, Scott, to answer your question, I think utilization rates will creep up. I don't think they're 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 you'll see it faster in kind of middle market/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.

Your next question is from the line of John Pancari with Evercore.

Back to the loan growth comment again this discussion as you look into 2022, given that you expect that steady improvement in line utilization, how should we think about a reasonable pace of loan growth in 2022 as drawdowns really pick up? I mean is it -- is growth likely to approximate GDP? Could it exceed that? Just how should we think about it as we're modeling out next year?

Yes, John, I would think about it probably on the whole is GDP. And 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's not been as maybe robust as 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 going to 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 with and so yes, I would say that looking to GDP and knowing where our geographies are, maybe compared to others is the way I'd be analyzing that.

Got it. Okay. That's helpful. And then I know you mentioned wage inflation, inflationary pressures in your -- in the end of your outlook. 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 kind of sized it up in the low single-digit impact to expense expectations as they complete their budgets. How are you thinking about that?

Yes, 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 real 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 1% of what might be normal expense levels, but that's still bouncing around a little bit and yet to be determined as we finish our '22 planning. But I certainly think it's going to be a factor. I think it's 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.

Your next question comes from the line of Bill Carcache with Wolfe Research.

I wanted to follow up on your interest rate sensitivity commentary. To the extent that the Fed proceeds with tapering asset purchases 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 nonparallel shift in rates that you highlight on Slide 18? I just wanted to confirm that.

Yes. If we look at our modeling, it is an unparalleled shift and 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 bps and 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 an area that doesn't get as much focus on the fee income side. I wanted to ask about the credits that your business customers earn on the deposits that they hold with you and are able to use to offset fees. Can you give some color around how much those fees are suppressing fee income today and what the potential fee income benefit could be as we look ahead to higher rates?

Higher rates tend would 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 income side. But 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 PPP customers that were new to Comerica to the extent they're continuing to engage with you in other areas in the future and to the extent that, that's an area that could drive some incremental revenue going forward?

Yes, Bill, it's Peter. We actually kept our PPP program very focused on existing customers. And so I think our opportunity that we've seen as it relates to PPP is really working with customers in the past, who have 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.

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

I guess just going back, I think, Jim, you talked about supply chain, labor constraints and inflation as a factor, I think, when you were talking about credit, but -- just talk to us even from a loan growth perspective, when you think about these 3 issues just the level of visibility you have in terms of 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 that you might have talking to your customers on those fronts.

Yes, Ebrahim, that's -- that's a great question. I think it's sort of one that we're all looking at and evaluating every day. And what I would tell you is that we just continue to be really impressed with our customer base and how they're navigating 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 customer base continues to be really, really strong, make good decisions through all of this. It's a little bit like looking at 2020 when we all sort of had to take a step back and evaluate choices that were going to be made by customers through COVID and many of them came through that very strong.

Matter of fact, a number of them sort of better results than they've ever had and I think as we move forward, each one of those issues, 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 in the general middle market space. So I can't tell you any more than I think you guys are seeing in the press just like we are, but what I can tell you is 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 or finding different ways to navigate the supply constraints, we're seeing really, really good performance and 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 you are seeing. Are we going to see -- if prices stay where they are, are you going to see some more demand and investment going back into the energy sector? Or do you think just the impact from the last few years is so harsh where it's going to take a lot longer before you see energy loan demand pick up?

I think the answer to both of your questions is yes. I think that it's going to take a little longer for loan demand to pick up in the energy space, but I do think you're going to see some capital flow. I don't know that you're going to see an enormous amount of, let's call it, private equity capital flow or public market and capital market flow. So it will be slow, I think, as it relates to that, but we have started to see 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 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 is going to be the ones that are sort of navigating this price spike right now.

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

I wanted to first follow up on the expense commentary. Curt, with all of the expense initiatives you guys have had over the past several years with all the impact of pension plan costs in 2021, I actually can't remember the last year that you had a "normal" year of expense growth. If we put the inflation impact on salaries aside, what do you consider a normal -- like a normal growth rate for expenses, putting the inflation aside?

Yes, Steven, 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 it's certainly not the last couple, there have been an incredible amount of puts 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 as a governor. You probably have to go back to kind of a 2019 starting point in CAGR from there, just to 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 are 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 January conference call. So we kind of lay out expectations for 2022, but we are keeping our eye on expenses. We are trying to self-fund to the extent we can. We're very committed to making the right investments in the people and the systems and 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 2 or 3 years.

Jim, I might just add, this is Curt, that our expense discipline around how we manage our resources and headcount has not changed. That's been ingrained in our company for a long time and we have continued to gradually become more efficient in terms of headcount and reduced headcount over time. A lot of leveraging technology and really changing dynamics in 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 and Peter's area is an example of that of reallocating headcount where we feel like we have a higher growth opportunity in certain business lines. So that remains sort of a key area of focus for us. I do think when you get longer term, we're not -- the industry is not there and we're not there yet either, but with a lot of companies including us is offering more flexibility and work schedules, there will be a point where we can start really thinking more about real estate. We've done good work there already, but we're continuing to evaluate sort of what is our real estate footprint look like I don't think that's a near term or even necessarily a 2022 initiative. That would 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 sub or at the inflation 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? Is that the thought?

We'll 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 I think you're kind of in the ballpark there.

Okay. Then -- go ahead.

I'd just say that always we'll provide more guidance as we get through the planning process and on the January conference call for Q4.

Yes. And then secondly, given that general middle market customers, I mean, you've said it multiple 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 you're 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're sitting on?

Steven, it's Peter. Good question. 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, the determinations for customers, do they make some different choices about what their balance sheets look like, I mean maybe so as we get into '22. But I think the reality is that they're going to want to continue to maintain, I just call it kind of insurance. I mean there's just so many things that seem to be happening that they needed to be prepared for. So they want to have access to capital.

So having 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, acquire talent as needed, et cetera. So I don't think that we're going to see that happen. I could be proven wrong there, but is it a risk? Of course, it is. But it's not one we're seeing right now.

Your next question comes from the line of Ken Usdin with Jefferies.

I just want to ask you to comment on the rate sensitivity and the swaps and floors strategy. Last quarter, you said that adding swaps at this point that didn't make that much sense. And I'm just wondering, you've got a little bit rolling off now. just as you look forward, what do you look to change that view in terms of adding swaps, either deadening out the NII or bringing a little bit forward into the income statement versus just waiting for that great loan growth that you're talking about?

All right, Ken. Yes, thanks for the question. And that is something that is on our mind. As I look at the current environment and our own 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. So we still see a pretty lopsided value in terms of adding securities in lieu of maybe adding swaps 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 to potentially into a little bit of a dual strategy there. There are a little bit different dynamics and advantages that each of those classes offers. But for the most part, I think we'll 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 can start adding some swaps and 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 in the market, can you just talk a little bit about what the spreads are looking like out there and across the portfolios and how your strategy with floors plays into new production?

Ken, it's Peter. I don't typically talk about what spreads are looking like on the call. I will just tell you that pricing is very competitive. Floors, we are still getting some floors. We're probably getting a little lower floor rate than we were 90 days ago, certainly 6 months ago. But the pricing in general is very, very competitive out there. And we stick to our belief that we provide really good value to our customers and we're very disciplined about pricing. And so we're not going to maybe give in 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 a very competitive pricing environment and Floors is 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.

Your next question comes from the line of Steve Moss with B. Riley Securities.

Just following up on rate sensitivity here. Jim, I think you said in your prepared remarks that the securities purchase this quarter had a duration of 6 years. Kind of curious in terms of what is the overall duration of securities portfolio? And 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 4.0 years, which is pretty consistent with the industry. We did have a little shorter duration perhaps compared to others, if you go back a year or so. So we felt like from that standpoint, we got a forward 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 a couple of tenths a year. Just because we do have asset sensitivity and if rates go up, we're going to be cheering 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 differential on supply-demand dynamics, we're actually okay right now with the 6-year point in terms of incremental adds. And again, that's mainly driven by the fact that we have so much asset sensitivity, I think more than any of our peers and I think 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. Kind of 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 all the way through the last month, we did see deposits rising. So a fair portion of that will stick with us.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

I guess my first question, I think it was Jim, you mentioned that you're reinvesting into securities to help keep -- basically to 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 you're doing it, but shouldn't those really be separate decisions. I mean, I guess I'm asking like would you still invest in 6-year duration securities at these levels if you weren't trying to keep income stable.

Yes, Ken. That's a fair comment, and I will kind of characterize my comments earlier is more of a convenience. It is nice that the asset duration that we're interested in right now coincidentally does allow us to keep securities income consistent quarter-to-quarter. But I think your point is very well taken, and it will probably bears some clarification. 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 in a slow sense, the larger securities portfolio, not jump in too fast and it's really kind of a convergence of 2 desirable outcomes.

It's stepping into the right duration and the right sized securities book, which kind of coincidentally allows us to keep the securities income constant quarter-to-quarter, so you are right. There are different kind of considerations, but they really converge nicely for us right now.

I think I can take this further. This is Curt. Maybe just a comment about longer term, I mean, I think all of us 2 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 never seen this level of liquidity in the economy and in the system and so sort of pre-pandemic when we were -- loan deposit ratios in the 90-plus percent range versus in the 60s today. That's a significant swing. And 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 in sort of how we allocate the excess liquidity we have and try to generate earnings assets for our shareholders.

And I think we can balance both of those. And over time, the right size of the portfolio will sort of it will see sort of an equilibrium based on normal growth in the portfolio and where deposits go over time and we can sort of flex that portfolio either up or down, really based on as maturities occur and really what the dynamics look like as we get 6 months, a year or 2 years out. And we really know sort of 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 had for 2022 is premised on National Dealer rebounding? And then what would loan growth look like potentially if National Dealer did not rebound?

Ken, it's Peter. I think that when we're thinking about loan growth for next year, I'm really thinking about Dealer as, I don't want to say, not 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 as we alluded to in the comments. We think we're at the bottom. I mean, $600 million in floor plan balances is about as small as we can get. I suspect the fourth quarter will come down a little bit more.

But what the outlook for dealer is, it is very difficult to determine in this environment. Customers give you feedback that they believe that eventually, we will be in what we've seen in the past and the amount of inventory that's on dealer lots. But today, if you go by a dealership, there are no cars out there. And I think that's probably going to continue further into next year than maybe many of us have thought. But from a balances standpoint, we think we're at the bottom. It'd 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.

Got it. Okay. And then just one silly little question. On Slide 5, you had you on the deck, it says that average loans grew $106 million, but then you list 6 different items that are all positive, and they add up to $1.6 billion of growth. Should some of those lines be negative?

Yes, Ken. There was a refiling of the slide earlier this morning, so you might have the original publishing, but National Dealer and Mortgage Banker are both negative. So that was the...

Your next question comes from the line of Mike Mayo with Wells Fargo.

This is actually Eric from Mike's team. So, I have -- so a 2-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 your 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 there for that as well? And how you guys kind of expect that to impact revenue and expenses over the next couple of years?

Okay. Yes, maybe I'll take the first part of the question in terms of the tech spend, and that is something we have not externally published just because, in my opinion, you get a little bit of apples and oranges in terms of how companies define that and some of that tech spend is often sitting in the business units, depending on what shade of gray you are 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 in the service company have done a great job of this is we've seen a little bit of a shift between what we call run the bank versus build the bank. And so we are starting to put more of our tech spend into 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 that's done for us, certainly, that's been well received by the customers. We feel like we're a little bit on the front end to that compared to some other banks out there. It's a key part of our treasury management offering. And it's just something that we're happy to offer. I don't know if you'd say anything else, Peter?

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 in 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 in -- over the next couple of years.

That's helpful. And then just following up on the run versus build the bank. So what is that allocation now for you guys, and I know it's going to be growing in the -- both the bank portion, but what is that now? And just kind of get a higher level sense of that.

Yes. That is something we've not publicly disclosed. Perhaps we will at some point in time. But I'll just say it's been a nice shift for us over the last couple of years and continues to trend in the right direction.

Your next question comes from the line of Gary Tenner with D.A. Davidson.

I just had another follow-up on rate sensitivity slide. Of the $15 billion of LIBOR loans with floors, it looks like that's about half of the LIBOR based loans. Can you segment out how far in 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 carry a gross floor of 71 bps, which if you net that against the 8 to 9 bps LIBOR, it's got an average carry -- positive carry of about 62 to 63 bps. In terms of trends, we have -- if you look at the various slides we published externally at earnings and conferences and so on, we have seen the amount of floors continue to grow, but the bps received or the bps of floor is starting to slow down a little bit and is shrinking a little bit each quarter. Up until now, that's been a bit of a wash in the last few months or the last quarter or so. That's something we're monitoring very carefully. We do have more maturities coming up related to floors in the next year and so that's something we have our eye on. And as I 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, but never had the opportunity to get a floor. And so we view that as an opportunity. And of course, we have new customer activity where there's an opportunity also. So depending on where all that nets out, will likely tell us where the net impact and the net positive carrier floors 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. And then following on your prior comments on maybe some incremental interest in adding swaps versus where you were previously. In terms of the $1.8 billion that is scheduled to mature in 2022, is there any particular lumpiness within the year in terms of that you might be looking to replace?

That's actually pretty smooth throughout the year. And I think some previous decks that we published actually had it by quarter. But if you assume that's moved throughout the year, you'd be almost spot on in terms of the overall impact in 2022.

I will say the one in the fourth quarter, as I think I implied earlier, that one is very early October. So that will be a full fourth quarter impact.

Your next question comes from the line of Terry McAvoy with Stephens.

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 a 4-letter bank to a 3-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, it's Peter. The short answer is, yes, we think so. And I think that the longevity of our company and our people is proving really, really good in markets like California and Texas that we're going on 20, 30 years in now. And the sort of disruption bodes well for us with customers, prospects and talent. So we are looking really hard at it, and we're going to be opportunistic, I think, is the word I would use, and see what we can do.

I don't know that we're going to be -- I think you said go on offense, but maybe that's the right terminology, but I think I'd say opportunistic and be selective, and we really feel like there's going to be some great opportunities for us with this disruption. I appreciate that question.

I 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.