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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Comerica Quarterly Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [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. 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 in Slide 2, which are 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'll 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 and a number of business lines which was overshadowed by the headwinds from PPP loan forgiveness and reduced auto dealer loans due to supplier constraints. We continue 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 continue 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 in 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 continue to impact auto dealer floor plan loans, which average only $600 million relative to the historical run rate of about $4 billion. Putting PPP and dealer side, the average loans and the remainder of our portfolio grew about $600 million or nearly 1.5% over the second quarter, including a 3% increase in general and 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 customer solid profitability and capital markets activity, as well as the liquidity injected into the economy through physical and monetary actions.
Net interest income increased $10 million, benefiting from an additional day in the quarter, higher loan fees and deployment of excess liquidity partly offset by lower rates. Credit quality was excellent with net charge-offs of only 1 basis points 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. Reserve ratio of 1.33% reflects the positive outlook for the economy in our portfolio.
Fee generating activity remained robust. Third quarter non-interest income was up 11% on a year-over-year basis. On a quarter-over-quarter basis, record warrant income and commercial lending fees were all set by decline in card fees from elevated levels due to lower levels of government stimulus.
Our efficiency ratio held steady at 62%, as we continue 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 said it earlier, we continue 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 remain relatively strong over the next year.
Our chief economist forecasts real GDP to increase 4.5% in 2022 with each of our three primary markets of California, Texas and Michigan above that level which bodes well for growth.
And now I will turn the call over to Jim.
Thanks, Curt, and good morning, everyone.
Turning to Slide 5, PPP loans decreased $1.8 billion and the quarter at $1 billion as the forgiveness process accelerated. Excluding the decline in PPP loans, we had good momentum in several business lines. Specifically, we've 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, 25 day supply versus the typical 60 to 70 days due to challenges resulting from chip shortages, labor constraints and foreign nameplates shipping issues. We believe our dealer for plan balances are very close to the bottom and inventory level 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 continue to grow in nearly every business line, hitting a new record as shown on Slide 6. The majority of our deposits are non-interest-bearing, and the average cost of interest-bearing deposits remained at an all-time low, just below 6 basis points. Our total funding cost 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 six years and yields of about 170 basis points. With securities rolling off with 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 one 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 more balances added $2 million. This was partly offset by lower LIBOR and a swap maturity, which together had a $4 million This was probably offset by a 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 remain extraordinarily high at over $20 billion and weighed heavily on the margin with the gross impact of approximately 65 basis points.
Given our asset sensitive balance sheet, the recent steepening of the yield curve is a positive sign for the future. Our models estimate an 11% increase in annual net interest income in the first year, when rates gradually rise 100 basis points. And of course, the incremental income in year two compared to the year one 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. Non-performing assets decreased and remained low at 62 basis points of loans. Also criticized loans declined to nearly every business line and are now below 4% of total loans with help from the rise in oil and gas prices, the energy portfolio had significant decreases in both non-accrual and criticized loans. Strong credit metrics, combined with our growing confidence and 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.
Non-interest income declined modestly to $280 million following a very strong second quarter, as outlined on Slide 10. Warrant related income increased $ 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, bullying income increased primarily due to the receipt of the annual dividend.
As expected, government card activity declined a 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 non-interest expenses for 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 multi-year 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 decrease 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 and capital managements. 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 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 2021 to year-end 2022 should be relatively strong, supported by a 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 be mostly offset to 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 were highly sensitive to rate movements, so assumptions for rates are a key determinant for net interest income expectations, including the impact of maturing loan force 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 pre-pandemic day one CECL reserve of 1.23%.
As far as fourth quarter non-interest 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 bully.
We expect 2021 non-interest income will be one of the highest we've ever recorded. Certain line items, such as card, warrants and derivatives including CBA may be difficult to repeat as we look in the next year. And we assume deferred comp, which is offset in non-interest expense will not repeat.
However, we expect strength in growth across many other fee income categories. We expect expenses in the fourth quarter to be relatively stable as we continue to invest for the future, technology investments are expected to rise as they typically do as we approach year end. In addition, we expect seasonally higher occupancy, advertising and travel 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 a 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. Where their expertise and experience we are building long-term relationships.
Our unique geographic footprint provide 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 continue 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 2022 - Q4 in 2022 we’re going to see numbers greater than that $106 million on a net growth basis ex-PPP I guess getting to how optimistic are you on 2022 because it seems like maybe we're just getting started in terms of the commercial loan growth cycle.
Yes, John. This is Peter. I'll take that. I think we're very encouraged about what we see for 2022. As we sit today, our pipelines feel really good. I've 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. Yes, Jon. I think that's fair. The PPP adjustment is one you got to navigate.
Jim, maybe one for you, the - also on Slide 6, the long yield piece of it. I think if you take out the PPP impact that you flagged, it seems like relatively stable loan yields, can you talk a little bit about some of the puts and takes on that?
Yes, John, and good morning to you. Yes, there - 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.
If you 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 the LIBOR to get about 3 bps of pressure in the fourth quarter and then, of course, we're going to have the more loan fees going to another direction, the 4 bps that were elevated are 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.
Wondering 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 a 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 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 stress stayed relatively strong over the next few quarters.
And then if I could add a follow up, given the investments in the bond portfolio and rates moving up, 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 at the Fed and again, I don't expect deposits to go anywhere in the near future. Liquidity is certainly not a binding constraint. It's really more 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 is central mantra and we've been pretty consistent there and we'll just monitor rates over the next quarter or two and see where they go and we'll be opportunistic as appropriate there.
Your next question comes from the line of Scott Siefers with Piper Sandler.
Thank you for taking the question. I just want to go back to that the loan growth outlook for just a moment as we look to some 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 that was something you could speak to, maybe if there's any difference in utilization rates and sort of your $12 billion of general middle market versus what your - what you might be seeing from some of the larger corporate customers?
Yes, Scott, it's Peter. Good, thanks for that question. I think we'll probably see utilization rates start to creep up a little bit. We saw a little bit 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'll 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, 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 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? Thanks.
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, couple of your peers have kind of size it up in the low-single-digit impact to expense expectations as they - as they complete their budgets. How are you thinking about that?
Yes. Good morning, John. We are still in the process of putting the plan together, we're seeing a little bit of inflation already start to get into the run rate, even though I wouldn't call it raw material. But anecdotally, it does feel like it's going to keep ramping up. And as we do our planning, we do think that it has the potential to add perhaps another 1% to what might be normal expense levels, but that's still bouncing around a little bit and yet to be determined as we finish our 2022 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 non-parallel shift in rates that you highlight on Slide 18? I just wanted to confirm that.
Yes. If we look at our modeling it, 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. We 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 earnings.
Understood. That's very helpful. And I wanted to separately on the topic of asset sensitivity, but perhaps scenario that doesn't get as much focus on the fee income side. I wanted to ask about the credits that 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 non-interest income line item to the extent rates go up and that earnings credit goes up.
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? That 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, some incremental revenue going forward?
Yes, Bill, it's Peter, right. 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 had been sort of deposit only. And then 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 has affected, I think when you were talking about credit. But you just talk to us even from a loan growth perspective. When you think about these three 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 on those fronts?
Yes, Ebrahim, 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 we're 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 of 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 yes, 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.
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 you 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, capital market flow. So it'll 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 here with all of the expense initiatives you guys have had over the past several years, although the impact of the 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 year - 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 2019 to set a baseline. But having said that, our goal is to be at or below the rate of inflation, that's kind of what we use for 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 as we kind of lay out expectations for 2022, but we are keeping an eye on expenses. We are trying to self-fund to the extent we can, but we're very committed to making the right investments in the people and the systems.
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 really good growth over the next two or three years.
Jim, I might just add this is Curt that, our expense discipline around how we manage the 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 reduce headcount over time. A lot of that leveraging technology and really changing dynamics and how customers utilize banking services with more customers utilizing mobile banking for online transactions, et cetera, has helped us continue to be very efficient there.
At the same time, we've done a very good job 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 a sort of key area of focus for us. I do think when you get longer term, we're not - the industry's not there and we're not there yet either, but with a lot of companies, including us offering more flexibility and work schedules, there will be a point where we can start really thinking more about real estate.
We've done good work there already, but we're continuing to evaluate sort of what is our real estate footprint need to look like? I don't think that's a near-term or even a necessarily a 2022 initiative, but that will be another area that we can look at and are looking at in terms of the next couple of years.
And if the goal is sub - inflate - 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. And then …
And as always …
Yes, go ahead.
I just say, as always, we'll provide more guidance as we get through the planning process and on the January conference call for Q4.
Yes, 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 pay downs 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. Thanks.
Steven, it's Peter. I - 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 determinations for customers, do they make some different choices about what their balance sheets look like, I mean, maybe so as we get into 2022, 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 in the economy that they need 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 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 in the swaps and floor strategy, last quarter you said that adding swaps at this point 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 getting 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. Thanks.
All right, Ken. Yes. Thanks for the question. And that is something that is on our mind. You know 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 assets sensitivity into securities. But I do feel like we're getting a little closer to the point where we could 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 threads are looking like out there across the portfolios and how your strategy with flaws plays into new production? Thanks.
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 six 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 into pricing declines across the board. We're going to do the right thing for our customers and we're going to try to capture market share. But it is - it is a very competitive pricing environment and for us as a part of that formula, we look at it on every single deal trying to get one, and sometimes we are able to accomplish what we want to there and sometimes we're not.
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 purchased this quarter had a duration of six 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 questions. We think our duration is pretty manageable right now 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 not standpoint, we could afford to add more duration. In addition, we just have an incredible amount of asset sensitivity.
So, I would even be comfortable as rates continue to go up, perhaps even seeing that go up by, a couple of tenths of a year, just because we do have that 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 of that point in time.
So I do see us, from a value standpoint, when I look at some of the yield differentials and supply demand dynamics, we're actually okay right now with the six year point in terms of incremental ads, 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, we're about $3 billion above the average. Kind of curious if that was just more window dressing at quarter-end or is that - should we think that that has been a better run rate for the fourth quarter average balance?
A little bit of both. We did a little bit of a spike up towards quarter end and it's not unusual. But the overall what I'll call medium-term trends 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 Zabi with Morgan Stanley.
I guess my first question, I think, as Jim, you mentioned that you're investing in 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 six year duration securities at these levels if you weren't trying to keep income stable? Thanks.
Yes, Ken, that’s a fair comment, and I will kind of characterize my comments earlier, it’s more of a convenience. It is nice that, the asset duration that we're interested in right now was it definitely does allow us to keep securities income consistent quarter to quarter.
But I think your point is very well taken, and it probably bears some clarification. 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 assets sensitivity.
We think it makes sense to walk into a - in a slow sense, the larger securities portfolio and I jump in too fast. And it's really kind of a convergence of two desirable outcomes. It's stepping into the right direction and the right size securities book, which kind of coincidentally allows us to keep the securities income consent quarter-to-quarter. So, you are right, there, there are different kind of considerations, but they really converge nicely for us right now.
This is Curt. Maybe just a comment about longer term, I mean I think all of us two years ago would have been surprised to have had the opportunity to build the securities portfolio as large as we have. But we've also never seen this level of liquidity in the economy and in the system. And so, for the pre-pandemic when we were loan deposit ratios and then 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 earning assets for our - for our shareholders.
I think we can balance both of those and over time, the right size of the portfolio will sort of it'll seek sort of an equilibrium based on normal growth in the portfolio where deposits grow 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, six months a year or two years out. And we really know sort of what normal, what normal looks like because nothing's been normal in the last 18 months.
I hear you there. Second question, how much of the positive loan growth commentary that you have for 2022? Is it 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 is 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 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 and floor plan balances is about as bad 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 if they believe that, eventually we will be in and what we've seen in the past and the amount of inventory that's on dealer lots. But today, if you go buy 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 balance 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.
And then just want one silly little question. On Slide 5, you hear you on the deck he says the average loans grew $106 million. But then you list six different items that are all positive and they add up to $1.6 billion of growth. Is it just some of those lines be negative?
Yes, Ken there was a re-filing of the slide earlier this morning. So you might have the original establishment but national dealer and mortgage banker are both negative. So that would that’s me, yes.
Your next question comes from the line of Mike Mayo with Wells Fargo.
This is actually Eric, from Mike's team. Hey so I have a - so two part question for you guys. Firstly, it's regarding your total tax benefit for the firm. So I 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 thought you guys recently wrote 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, I'll maybe, I'll take the first part of the question in terms of the tax 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 tax burden is often sitting in the business units, depending on what shade of grey you’re considering to be tech.
But when we have looked at it, I will say that our percentage of tax 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, as 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 in the project development, many of those customer systems, digital initiatives and just business, basic business infrastructure, and so that 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, certainly that's been well received by the customers. We feel like we're a little bit in the front end of that compared to some other banks out there. It's a key part of our Treasury management offering and, it's just something that we're happy to offer. And I don't know if you see 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 manager's 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.
And then just, following up on the, the one versus both the bank. So what is that allocation now for you guys? You know - and I know it's going to be growing in the both bank portion, but what is out 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 liberal loans with floors. It looks like that's about half of the LIBOR base loans. Can you segment out how far in the money those are? Is there any - as - are we talking about $25 billion, $50 billion et cetera in terms of moves and LIBOR that would get through those carry?
Yes, those carry a gross for 71 bps, which if you net that against the 8 to 9 bps LIBORs. It's got an average carry - positive carry of about 62 bps to 63 bps. You know, in terms of trends we have, if you look at the various slides we’ve published externally at earnings and conferences and so on you know, we have seen the amount of force continue to grow.
But the bps received or bps of course is starting to slow down a little bit and is shrinking a little bit each quarter. Up till 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 force in the next year and so that's something we have our eye on. And this is that kind of implied in my opening comments. It could be a bit of a headwind next year.
But having said that, you know, 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 net sales will likely tell us where the net impact and the net positive carry for us is going. But you know, I would say during 2022, it's more likely to be a modest headwind as opposed to a tailwind going forward.
And then following on - on your prior comments on maybe some incremental interest in adding swap versus where you were previously in terms of the $1.8 billion that it's going to mature in 2022, is there any particular - any particular lumpiness within the year in terms of that they might be looking to replace?
You know, that's actually pretty smooth throughout the year. And I think some previous decks that we publish actually had it by quarter. But if you assume that smooth throughout the year, you'd be almost spot on in terms of the overall impact in 2022.
Thank you.
The one - I will say, the one in the fourth quarter is, I think I implied it earlier, that one is very early October, so that'll be a full quarter impact.
Your next question comes from the line of Terry McEvoy with Stephens.
Question can you play more offense in your markets given some of the M&A activity? I think of California, where a large legacy name is going to go away and even in Texas, you went from a - a four letter bank to a three letter bank, so to speak. And then just as a follow up, as you think about your budget for next year, are you willing to invest in, 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 and 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 - 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're - you said, go on offense, maybe that's a 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. 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.