Comerica Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2022

Key Takeaways

  • Record earnings in 2021 with EPS of $8.35, 19% deposit growth, and a total shareholder return of 62%, driven by strong fee income and disciplined operations.
  • Excluding PPP loans, average loans grew over $600 million in Q4 led by middle market and corporate banking, with a robust pipeline supporting mid-single digit loan growth guidance for 2022.
  • Credit quality remains exceptional with net recoveries of $4 million in Q4, a 1.26% CECL allowance ratio, and continued reserve releases despite potential headwinds from omicron, supply chain and inflation risks.
  • Interest rate sensitivity modelling shows a $205 million annual net interest income increase per 100 bp rise in rates, and management plans to gradually deploy excess liquidity into securities and swaps.
  • Noninterest expenses rose due to technology investments, deferred compensation and mid-cycle pay increases, with 2022 expenses expected to grow in the low single digits despite efficiency efforts and a performance comp reset.
AI Generated. May Contain Errors.
Earnings Conference Call
Comerica Q4 2021
00:00 / 00:00

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Operator

Good day, and thank you for standing by. Welcome to the Comerica fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. To withdraw your question, press the pound sign. I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Please go ahead.

Darlene Persons
Darlene Persons
Director of Investor Relations at Comerica

Thank you, Regina. Good morning, and welcome to Comerica's fourth quarter 2021 earnings conference call. Participating on this call will be our President, Chairman, and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda Chausse, and Executive Director of our Commercial Bank, Peter Sefzik. During this presentation, we'll 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.

Darlene Persons
Darlene Persons
Director of Investor Relations at Comerica

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 two, which is incorporated into this call, as well as our SEC filings for factors that can cause actual results to differ. Now I'll turn the call over to Curt, who will begin on slide three.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Good morning, everyone, and thank you for joining our call. 2021 was another extraordinary year which provided unique challenges and opportunities to meet the needs of our customers, colleagues, and communities. I'm incredibly proud of the commitment of our team. We continue to persevere through the challenges of the pandemic while providing a high level of service and achieving many accomplishments along the way. PPP loans were again a lifeline for many of our customers, and we were there to navigate them through the process. We funded over $1 billion in the second round of PPP loans, supporting more than 6,000 customers. As of year-end, 91% of these loans have been repaid, mostly through the forgiveness process. Also, to further demonstrate our commitment to our communities, we made a pledge to lend $5 billion to small businesses over a three-year period.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Our annual employee engagement survey was conducted, and among our top strengths, Comerica's values stood out, with 84% of our respondents providing favorable marks. In addition, 94% of our colleagues agreed our response to the COVID-19 pandemic was excellent. We listened to what matters to our colleagues and rolled out additional benefits as well as a hybrid work arrangement for many of our team members who can split their time between the office and home. This provides flexibility for our colleagues while maintaining our relationship-based strategy. We have the tools and the strong culture to attract and retain the best talent even in the tight labor market, which has been a strength for us throughout our history. Recently, we established an Office of Corporate Responsibility to bring key environmental, social, and governance elements together under one umbrella.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

The office reports directly to me and it underscores our dedication to protecting and preserving the environment, diversity, equity, and inclusion, as well as serving and strengthening our communities. Also, our ESG council defined the most significant ESG issues for our company, specifically those that are most impactful for our customers and colleagues and in which we feel we can make a meaningful difference. In addition, we have started our preliminary analysis to develop a framework to measure climate risk in our commercial lending portfolio. Once again, our commitment to corporate responsibility has been recognized. We were recently included in Newsweek's 2021 listing of America's Most Responsible Companies and Forbes' 2021 Best Employer for Women. We provide high customer satisfaction by delivering our expertise and experience in the areas we serve.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

In addition, more than ever, technology plays a major role in delivering the services our customers and colleagues require. Currently, we are in the process of modernizing our core platforms to drive greater operational excellence and empower our colleagues to serve our customers better. For example, we are refreshing our banking center teller platform and have kicked off the project to upgrade our commercial loan servicing systems. Also, we are leveraging digitization tools to reimagine and reengineer critical customer journeys that make it easier for our customers to do business with us. Comerica has a rich history of helping our customers, communities, and colleagues thrive. This focus is essential and foundational to effectively executing our relationship banking strategy. Turning to our 2021 financial results. Slide four provides a few highlights. We produced record earnings per share of $8.35.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Average deposits grew 19% and supported solid loan performance in a number of businesses while providing significant excess liquidity to fund future growth. As a result, total average assets increased to $90 billion, an all-time high. Credit quality was excellent and we released reserves. Our book value per share increased over $57. With strong market appreciation and our attractive dividend, we generated a total shareholder return of 62%, one of the highest among our peers. Slide five provides further details. Relative to 2020, we had average loan growth in several of our specialty areas, specifically Equity Fund Services, Environmental Services, entertainment, and commercial real estate. Also, excluding PPP, we had positive trends in middle market throughout the year, including a strong finish.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

The growth was more than offset by a large decline in National Dealer Services due to supply constraints as well as energy as the sector recovered and reduced leverage. Revenue increased to $3 billion. While net interest income was challenged by the ultra-low rate environment, non-interest income growth was broad-based, increasing 12% to a new record. Non-interest expenses reflected higher compensation in conjunction with favorable performance and operating costs tied to greater revenue generation. Credit metrics were excellent, as evidenced by net recoveries for the year, reflection of our careful customer selection, diverse portfolio, and a conservative underwriting culture. As a result of strong capital generation, we returned $1.1 billion to common shareholders through dividends and the repurchase of 9.5 million or 7% of total shares.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

In summary, a strong performance with an ROE of over 15% and an ROA of 1.3%. Our fourth quarter results are outlined on slide six. We generated earnings of $1.66 per share. Excluding PPP, average loans grew over $600 million, led by middle market and corporate banking. PPP balances declined nearly $1 billion as the forgiveness process progressed. Also, Mortgage Banker declined about $300 million due to seasonal and cyclical factors. Average deposits increased over $5 billion. Excluding PPP, revenue increased as a result of loan growth and robust fee income. Credit quality was exceptional, and we released reserves. Expenses reflected investments in our people and technology to support our revenue-generating activities. Also, we repurchased $50 million in common shares and maintained an attractive dividend yield. We expect economic metrics to remain relatively strong this year.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Our chief economist forecasts real GDP to increase over 4% in 2022. We believe each of our primary markets, California, Texas, and Michigan, should perform at or above that level. Our customers and colleagues have successfully navigated the challenges of the past 2 years and today stand stronger and more confident about the future. Now I'll turn the call over to Jim to review the quarter in more detail.

Jim Herzog
Jim Herzog
CFO at Comerica

Thanks, Curt, and good morning, everyone. Turning to slide seven, as Kurt just mentioned, excluding the decline in PPP loans, we had solid loan growth in several businesses. The largest driver, once again, was general middle market, which was up over $500 million on average relative to the third quarter. In addition, large corporate increased over $400 million or 10%, and national dealer was up nearly $200 million. Partly offsetting this growth were declines in mortgage banker and commercial real estate. Historically, we have seen strong seasonal loan growth in December, and this year was no exception. Average loans increased nearly $900 million in December relative to November. This helped drive period-end loans up $1.1 billion relative to the end of the third quarter, despite a $561 million decrease in PPP loans.

Jim Herzog
Jim Herzog
CFO at Comerica

This essentially reflected the same drivers that we saw in the average balances. I'll take a moment now to provide detail on the major pieces. We continue to see positive trends in general middle market and corporate banking. Higher commodity prices and rebuilding of inventory levels are in part resulting in an increasing working capital needs. M&A and dividend or equity distributions are also drivers. However, there are some headwinds mainly related to supply chain disruptions and, in some cases, excess liquidity, which can temper borrowing. Overall, our customers remain optimistic, and that is reflected in our pipeline and growing loan commitment levels. The increase in National Dealer Services loans included a small increase in floor plan loans, which remain extraordinarily low relative to the typical historical run rate of about $4 billion.

Jim Herzog
Jim Herzog
CFO at Comerica

We expect inventory levels will slowly rebuild over the next 1-2 years as supply issues are resolved and pent-up demand is satisfied. Mortgage Banker declined as a result of cyclical as well as seasonal factors. Loans have slowly decreased from the wind down of the refi boom after reaching record levels at the end of 2020. However, purchase activity has remained strong, and therefore, we should fare better than others in this space, given that 70% of our mix is purchase-related, while the industry average is 47%. Commercial real estate was impacted by significant pay downs. However, loan production remained strong, and our pipeline and line commitments increased in the fourth quarter. Loan commitments for the portfolio as a whole increased $400 million, led by corporate banking and middle market, partly offset by a decline in Mortgage Banker.

Jim Herzog
Jim Herzog
CFO at Comerica

The line utilization rate held steady at 47%. Loan yields decreased 13 basis points, including 8 basis points from the impact of PPP loans, 4 basis points from swap maturities and lower average rates on loans with floors, as well as other portfolio dynamics such as a mix shift in the portfolio. As shown on slide eight, average deposits again set a record, increasing $5.4 billion, with nearly three-quarters of the growth derived from non-interest-bearing accounts. This growth was due to fourth quarter seasonality, along with continuing trends we've seen related to our customers' solid profitability, capital markets activity, and various fiscal and monetary actions. The average cost of interest-bearing deposits hit an all-time low of 5 basis points, and our total funding costs held steady at only 6 basis points. Slide nine provides details on our securities portfolio.

Jim Herzog
Jim Herzog
CFO at Comerica

We continued to deploy some of our excess liquidity by increasing the size of the securities portfolio. This mitigated the risk of the rate headwind, resulting in a slight increase in securities income quarter-over-quarter. MBS purchases in the fourth quarter had average durations of about 6 years and yields of about 190 basis points. With securities rolling off with rates over 200 basis points, the total portfolio yield declined to 1.71%. Our goal is to prudently reduce our asset sensitivity at a measured pace. In part, this can be achieved through gradually deploying excess liquidity by opportunistically growing the securities book. This has had the added benefit of helping to offset any pressure on revenue from lower reinvestment yields and maturing swaps. Turning to slide 10, net interest income decreased $14 million.

Jim Herzog
Jim Herzog
CFO at Comerica

Excluding a $18 million drop in PPP income, net interest income increased $4 million. The net interest margin declined 19 basis points, mainly due to a large increase in excess liquidity, which had an 11 basis point impact, as well as the decrease in PPP income, which had a six basis point impact. As far as the details, putting aside the decline in PPP income, interest income on loans was stable. Growth in non-PPP loans offset the impact from lower rates on loan floors and a swap maturity, as well as other dynamics, such as a mix shift in the portfolio. As I mentioned, the increase in the size of the securities portfolio essentially offset the impact of lower yields.

Jim Herzog
Jim Herzog
CFO at Comerica

A $4.7 billion increase in average balances at the Fed added $2 million and had an 11 basis point negative impact on the margin. Fed deposits were extraordinarily high at nearly $25 billion and weighed heavily on the margin, with a gross impact of 73 basis points. As far as credit, which is outlined on slide 11, our metrics remained excellent, including net recoveries of $4 million, as well as another quarter of declines in criticized and non-accrual loans. Our provision was a credit of $25 million. Positive portfolio migration, growing economic confidence, and sustained favorable economic forecasts, although layered with some degree of uncertainty, resulted in a reduction in our allowance for credit losses to 1.26% of loans. However, coverage of non-performing assets increased to 2.3x.

Jim Herzog
Jim Herzog
CFO at Comerica

Through the cycles, our credit performance relative to the industry has been a key differentiator, and we believe we will continue to outperform. We remain vigilant given potential stress on our customers from the Omicron virus, supply chain disruptions, labor constraints, and inflation. Non-interest income increased $9 million, as outlined on slide 12. Derivative income grew $7 million and was broad-based, with increased activity in interest rate hedges, foreign exchange trading, and energy derivatives. Deferred comp, which is offset in expenses, increased $5 million from almost zero in the third quarter. Fiduciary income increased $2 million, returning to the second quarter's record level, with growth in our trust business and continued strong equity market performance. Following strong third quarter syndication fees, which were at an all-time high, commercial lending fees declined $3 million. As expected, government card activity declined as state benefit programs waned.

Jim Herzog
Jim Herzog
CFO at Comerica

However, this was mostly offset by increases in merchant and commercial card activity. Also, BOLI income decreased, primarily due to the receipt of the annual dividend in the third quarter. In summary, we are pleased with another very strong quarter which capped off a record year for fee income. As shown on slide 13, expenses were up $21 million in the quarter. In short, this included the increase in deferred comp, which is offset in non-interest income, and higher tech labor, as well as seasonal staff insurance and occupancy. As far as the specifics, salaries and benefits increased $10 million. As expected, technology-related labor costs increased, as they typically do at year-end, as we completed a number of projects. I just mentioned the impact from deferred comp and staff insurance.

Jim Herzog
Jim Herzog
CFO at Comerica

Also, we incurred $3 million in additional expenses that related to mid-cycle hire increases, retention bonuses, and severance costs as we work to ensure we have the best talent for our future needs in a very tight and competitive labor market. This was partly offset by lower performance-based incentives following elevated third quarter levels. In addition, occupancy was seasonally higher. Also, we had increases in legal expenses of $4 million, primarily related to strong year-end loan closing activity, as well as operational losses, asset disposition losses, and T&E, which are all captured in other expenses. We continue to maintain our expense discipline as we position for future growth by investing in technology and our people, which are key to our relationship banking strategy. Slide 14 provides details on capital management.

Jim Herzog
Jim Herzog
CFO at Comerica

Loan growth, combined with share repurchases, resulted in a decrease in our CET1 ratio to an estimated 10.15%. We continue to closely monitor loan trends and capital generation as we focus on our 10% CET1 target. In addition, we have maintained a competitive dividend yield. As always, our priority is to use our capital to support our customers and drive growth while providing an attractive return to our shareholders. Before we turn to the outlook, slide 15 provides an overview of our interest rate sensitivity models, which forecast the benefit of rising rates to net interest income. The standard model assumes a non-parallel rise in rates with a dynamic balance sheet.

Jim Herzog
Jim Herzog
CFO at Comerica

At the end of the fourth quarter, we estimated a $205 million or 12% increase in annual net interest income over 12 months as rates gradually rise 100 basis points, and the benefit will be slightly greater in year 2. Our asset sensitivity moved higher in the fourth quarter, primarily due to the extraordinary deposit growth. Our goal is to gradually reduce our asset sensitivity over time as market conditions allow. As rates rise, we would likely pick up the pace. However, as you see in the various alternative scenarios we have provided, in all cases, our asset-sensitive balance sheet remains very well positioned for rising rates. Our outlook for 2022 is on slide 16 and assumes no change in interest rates and a strong economy with gradual improvement of supply chain and labor challenges.

Jim Herzog
Jim Herzog
CFO at Comerica

We expect average loan growth on a year-over-year basis in the mid-single digit range, excluding the decline in PPP loans. Increases in nearly every business, ex PPP, are expected to be partly offset by a decline in Mortgage Banker from continued normalization of refi volumes and lower National Dealer due to a slow rebound as a result of the supply chain issues. This belief is supported by our robust pipeline, positive momentum in several businesses, and our outlook for continued economic growth. As far as the first quarter relative to the fourth quarter, we expect average loans to be stable, with growth in middle market, large corporate and commercial real estate offset by lower Mortgage Banker and dealer. We believe average deposits will remain elevated for the near future. Due to seasonality, we do expect deposits to decline modestly in the first quarter.

Jim Herzog
Jim Herzog
CFO at Comerica

As far as net interest income, the major driver is expected to be loan dynamics. PPP-related income was $111 million in 2021 and will not be repeated. Putting that aside, the benefit from loan growth is expected to be partly offset by lower loan yields, driven by lower rate floors on loans, competitive pressures, and a mix shift in the portfolio. The first quarter will be impacted by lower PPP income and two fewer days. For simplicity, this outlook does not assume any rate changes. However, as I discussed on the previous slide, we are highly sensitive to rate movements. Therefore, rates are a key driver for our net interest income in 2022. Furthermore, as rates rise, a larger than planned increase in our securities portfolio or adding swaps presents additional opportunity.

Jim Herzog
Jim Herzog
CFO at Comerica

Credit quality is expected to remain strong. Net charge-offs are expected to begin to trend to the lower end of our normal range of 20 basis points-40 basis points. Assuming the economy continues on the current path and the impacts of supply chain issues, labor constraints, as well as inflation remain muted, we expect the allowance ratio to continue declining modestly. As far as non-interest income, 2021 was the highest on record and included very strong performance in nearly every category. Some levels are unlikely to repeat in 2022, such as warrant-related activity, derivative income, including favorable CVA, stimulus-related card fees, and deferred compensation. These line items may also be a headwind in the first quarter. However, we expect continued solid performance in several customer-driven fee categories, such as fiduciary, deposit service charges, and brokerage.

Jim Herzog
Jim Herzog
CFO at Comerica

We expect expenses to increase in the low single digits. This includes inflationary pressures which could impact a number of line items, such as salaries, T&E, and insurance. We are focused on product and market development as well as driving efficiency, which means continued investment in technology. We expect these headwinds to be partly offset by resetting performance compensation to normal levels. Of note, our pension expense will improve by $7 million for the year. First quarter expenses are expected to be lower, with annual stock compensation more than offset by the decline in performance comp, seasonal declines in items such as advertising and staff insurance, and other items that are expected to decline from elevated levels in the fourth quarter, such as deferred comp, legal, and severance costs. We expect the tax rate to be 22%-23%, excluding discrete items.

Jim Herzog
Jim Herzog
CFO at Comerica

Finally, as I indicated on the previous slide, we are focused on our CET1 target of 10% as we monitor loan growth trends. Now I'll turn the call back to Curt.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Thank you, Jim. As I said in my opening remarks, 2021 was an extraordinary year, and we produced strong results. Many business lines have shown good momentum with increases in loans, commitments, and pipeline. Also, we produced record fee income and deposit growth as well as excellent credit quality. Revenue was up and our efficiency ratio held steady, resulting in strong returns. I'm honored to work along such a talented, committed, and hardworking team. With our expertise and experience, we are building long-term relationships.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

We are focused on delivering a more diversified and balanced revenue stream with an emphasis on fee generation, which was evident this past year. Also, our unique geographic footprint provides us significant growth opportunities, including the expansion of our Southeast presence. We will continue to carefully manage expenses as we invest in our products and services and make progress on our ongoing digital journey. Finally, our disciplined credit culture and strong capital base continue to serve us well. These key strengths provide the foundation for creating long-term shareholder value. We are well-positioned as we move forward in 2022. Thank you for your time, and now we'd be happy to take some questions.

Operator

At this time, if you'd like to ask a question, simply press star one on your telephone keypad. Our first question will come from the line of Chris McGratty with KBW.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Morning, Chris.

Chris McGratty
Chris McGratty
Managing Director and Head of U.S. Bank Research at KBW

Hey, good morning. Thanks for the question. I'm hoping we can start on the loan growth outlook. You know, I understand that the fourth quarter's seasonal, but could you speak to the pipelines at the end of the year? I noticed the end of period loan growth was notably stronger than average. Thanks.

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Chris, this is Peter. Yeah, the fourth quarter is normally a good quarter for us, although I think this quarter was exceptionally good from years that we've had in the past. It does feel really good about jumping off for 2022. Our period end was really strong. The pipeline continues to be above pre-pandemic levels. I will say it came down a little bit just with closures through the second half of the year, but still really good compared to history. You know, as we said in our outlook, we feel really good about where we stand at this point in the year.

Chris McGratty
Chris McGratty
Managing Director and Head of U.S. Bank Research at KBW

Maybe a follow-up. Understanding the deposits are continuing to surprise to the upside. You mentioned a couple times in your prepared remarks the likelihood to grow the investment book to take down rate sensitivity. I'm interested kind of in the pace of securities purchases, if you kind of layer in the Fed, you know, the futures curve? Thanks.

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah, Chris, it's Jim. Happy to take that question, and good morning.

Jim Herzog
Jim Herzog
CFO at Comerica

You know what? There are a number of different ways this could go. We've seen quite a bit of rate movement just in the last, you know, couple days. Take your pick as to where rates may go. In the outlook, we do assume just modest increases in our securities portfolio. As you may have observed, we've been increasing them by about $500 million on average per quarter. We're actually assuming something just slightly less than that in this baseline outlook that we have. Again, that's got the potential to really take a step up, whether we choose to do it with securities, with cash products, or maybe choose to do it with swaps off balance sheet. Those are somewhat interchangeable to an extent.

Jim Herzog
Jim Herzog
CFO at Comerica

You know, that will be driven by what we see in terms of the rate outlook, and certainly be willing to step that up, and we'll want to step that up as rates go increasingly higher. It really comes down to monitoring the environment and responding to it.

Chris McGratty
Chris McGratty
Managing Director and Head of U.S. Bank Research at KBW

Is there a max of which the size of the investment portfolio you'd like to manage in this environment?

Jim Herzog
Jim Herzog
CFO at Comerica

You know, that's going to be highly dependent, and we are observing on, you know, what goes on with liquidity in the economy, both short term and long term. You know, there's a little bit of flux right now in terms of what the Fed might do with its balance sheet longer term, and so we're going to observe that and make our call off of that. We think in the short term, you know, there is some room to grow it. How much room there is to grow it remains to be seen, again, based on just where we see overall liquidity and deposits in the system going. But it's not really a concern of ours because if we do hit some type of limit, and we will hit that limit at some point, we don't wanna grow the securities book inappropriately or indefinitely.

Jim Herzog
Jim Herzog
CFO at Comerica

We always have the option to put on a tremendous amount of swaps in terms of the capacity we have for that. Again, it'll be interchangeable between those two instruments, and we'll just monitor overall liquidity and market conditions.

Chris McGratty
Chris McGratty
Managing Director and Head of U.S. Bank Research at KBW

Great. Thanks for taking the question.

Operator

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

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Morning, John.

John Pancari
John Pancari
Senior Managing Director at Evercore

Morning. On the loan growth, again, to the end of period, how much of that growth that you saw in end of period commercial balances represent any type of pull forward on LIBOR-based loans given the change to SOFR in the beginning of this year? Did you see any of that out of your commercial borrowers?

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Hey, Jon, it's Peter. I think the short answer to your question is no. I don't think the shift from LIBOR to SOFR is necessarily causing any increase in loan demand or changes there. I think the borrowing community, you know, is continuing to make their decisions for their businesses and sort of navigating that shift and use of LIBOR to SOFR separately.

John Pancari
John Pancari
Senior Managing Director at Evercore

Okay. All right. Thank you.

John Pancari
John Pancari
Senior Managing Director at Evercore

Separately, can you, regarding rate sensitivity, I get a fair amount of questions from investors around your rationale for driving your asset sensitivity lower or, in another way, maybe pulling forward some of that asset sensitivity, particularly now that we have relatively high certainty regarding the timing and magnitude of expected Fed hikes. You know, if you could just walk through that again in terms of the rationale of pulling forward or driving lower your asset sensitivity given that?

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah, John, it's Jim. Happy to do that. I will say in talking to both investors and analysts, I see a variety of opinions, and it's interesting. I hear some saying you should hold off, and I see some saying, why aren't you taking advantage of this and moving faster? To me, those opinions are equally divided. Our answer is that we want to be measured and methodical in terms of how we do this. You know, to the extent you hold off for higher rates and look to hit that home run someday, there's obviously opportunity costs or carry costs, carrying costs that you're imposing upon shareholders over that short to medium term. That's something we're very cognitive of.

Jim Herzog
Jim Herzog
CFO at Comerica

We also know from the last decade plus, there's no guarantee that rates will go perpetually up, and they can turn at any time with the black swan events that we've seen and so on over the last several years. We are going to move very methodically, but we're not gonna move all at once either because we are cognitive of the fact that rates could go higher and higher. We think steady and consistent progress makes sense. You know, we've been moving on this, but again, we're moving at a pretty measured pace to your point. We are leaving some there in the kind of out quarters to make sure we take advantage of what could be a persistent rise in rates, but we're not gonna sit on the sidelines and wait for that home run someday either.

Jim Herzog
Jim Herzog
CFO at Comerica

We feel really good about being in the middle of the road and just making consistent measured progress.

John Pancari
John Pancari
Senior Managing Director at Evercore

Got it. Thanks, Jim. If I could ask just one more, sorry if I missed this earlier. Can you just give us your thoughts on how you think your betas will trajectory as we get these hikes through the year? Thanks.

Jim Herzog
Jim Herzog
CFO at Comerica

You know, we have those sensitivities on the interest rate sensitivity slide. I think it's fair to say that we have a pretty good chance of staying at or below that 10% beta alternative that you see there. You know, that would be consistent with what we saw during the last rate cycle when rates started going up. Actually there's more liquidity in the system right now. I would actually be surprised if we don't replicate that performance. I think betas will be very well behaved for the first few hikes, and we'll monitor it from there.

John Pancari
John Pancari
Senior Managing Director at Evercore

Got it. Okay, great. Thanks, Jim.

Jim Herzog
Jim Herzog
CFO at Comerica

Thank you.

Operator

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

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Good morning, Ebrahim.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director and Head of North American Banks Research at Bank of America

Hey, good morning. I guess just sticking with loan growth, two questions there. One, I was wondering if you can comment around what you're seeing across the different markets, California versus Texas versus Midwest. Also, how much of the growth outlook depends on supply chains easing at least to some extent? Or do you feel like there is growth x any of that happening that should emerge this year provided we don't have any big disruptions from any additional disruption from COVID?

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Abraham, it's Peter. I'll take the second one first. I don't think that we're necessarily expecting resolution one way or another around supply chain on our outlook. You know, we feel good about the outlook regardless. Although I think you're seeing as much as we are that there is some positive indicators of what's going on in supply chain, particularly in the second half of the year. I don't know that it's a part of what we're communicating to you on outlook. As far as the markets go, you know, it feels really good in all three markets. Michigan and Texas had really great years sort of all year. California came on really, really strong the second half of the year and especially in the fourth quarter.

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

You know, I think all three markets are positioned very well going into 2022. The customer sentiment is positive, I think, in each of those.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director and Head of North American Banks Research at Bank of America

Got it. I guess just one follow-up, maybe more strategic. As you look through your peer set, right, a lot of them have gone through large M&A over the recent years and have doubled or tripled their asset sizes. When you think about just relative positioning, just talk to us in terms of competitive disadvantages of scale that you have, your appetite to engage in M&A that could increase size and market penetration. Just how are you thinking about all of that?

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Yeah, this is Curt. I'll take that question. Nothing really has changed for us there. You know, our model has forever been built really on relationship banking and organic growth. We are in some very attractive markets, some very fast growing markets, especially Texas and California. We've had opportunities to expand our franchise, for example, our entry into North Carolina and the Southeast, and we'll continue to look for opportunities to do that more on an organic basis. We think our size where we're operating today, you know, makes us nimble, so to speak. We've got the right sort of scale. We've got the right talent in place in great markets.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

We've invested in technology, I think, to meet our customer needs and really feel like we'll be patient around any M&A activity if it makes sense for us to do so. We really feel like we've got great opportunities just to continue to grow organically. We will look for and we have looked for in the past, you know, possibly some small fee income tuck-in opportunities along the way if it really helps us expand or enhance capabilities. We'll do that in a very strategic manner.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director and Head of North American Banks Research at Bank of America

Got it. Thanks, Curt.

Operator

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

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Morning, Steve.

Anthony Elian
Anthony Elian
Equity Research Analyst at JPMorgan

Morning, this is Anthony Elian on for Steve. My first question on loan growth, general middle market up about $525 million this quarter.

Anthony Elian
Anthony Elian
Equity Research Analyst at JPMorgan

Did you see these middle-market borrowers draw down on their deposit balances before using their credit lines, or are they drawing on their credit lines while still holding elevated cash?

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Anthony, it's Peter. The second or the latter part of your statement there. I think we're seeing good growth in middle market borrowings, and we're still seeing pretty good deposit growth in middle market in general. I've said in the past, I think your average middle-market company continues to be optimistic, but making sure they've got access to capital, both on their borrowing side and maintaining good liquidity. This has been something we've seen now several quarters, and I know all of us are kind of wondering, is there gonna be a shift in that strategy? So far, we have not seen that. Both continue to be occurring.

Anthony Elian
Anthony Elian
Equity Research Analyst at JPMorgan

Okay. My follow-up, on slide three, you outlined some of the technology investments you made last year, including in data centers and modernization. Are these similar areas that you expect to invest in, this year or anything new you're targeting for investments? Thank you.

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah, Anthony, it's Jim. You know, we'll certainly see some of those trends continue. In addition, you know, we do see ourselves maybe shifting the emphasis a little bit more towards customer product. We're there already. You see Treasury, for instance, listed there. I do think we'll see more and more higher proportion of our investment in technology go to customer product sets, especially those that we wanna be the best in as the leading bank for business.

Jim Herzog
Jim Herzog
CFO at Comerica

As I mentioned in my script too, we're also focused on technology in the back room operations, making sure the application systems are up to speed and making sure that our employees are efficient. You'll see some of these same trends continue, but again, I would probably add that you'll see some additional shift into kind of leading-edge digital customer products.

Anthony Elian
Anthony Elian
Equity Research Analyst at JPMorgan

Thank you.

Operator

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

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Morning, Gary.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Thanks. Good morning. Jim, in your prepared remarks, I think you mentioned that first quarter average loan balances are expected to be flat to the fourth quarter. Does that represent a decent amount of just kind of pull forward temporary balances, whether in middle market or in large corporate at year-end that would kind of get paid off early in the new year?

Jim Herzog
Jim Herzog
CFO at Comerica

You know, Gary, I would say it's actually more typical of just what I'll call general seasonality of our customers. Now, those things you mentioned could be a piece of it, but they're the types of things we see every year. You know, I think if you went back 10 years, you generally see the first quarter not as strong as the fourth quarter. It's got an element of a lot of things, you know, really just inherent of our customers' you know, overall business models and their capital needs and funding needs in the first quarter. Really a number of things, but just overall seasonality, I would say.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Okay. That's even with the kind of greater than usual strength in the fourth quarter?

Jim Herzog
Jim Herzog
CFO at Comerica

That's right.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Okay. Just follow up on the comments around technology. You know, we've seen you know, a decent flow of announcements in terms of banks adopting you know, different kind of payment networks around kind of digital and blockchain technology. Are you seeing any kind of pull from your customers on that? Really, is that any part of the other kind of maybe newer products that you were referencing, again, going to 2022?

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Yeah, Gary, I think the short answer is no, not really on the blockchain technology part of it. You know, our focus when we talk about digital is really around customer experience and making it as easy as possible for our customers to do business. I suspect things will be. Over time, how things unfold with blockchain and so forth will be interesting to see. We're watching that, but it's not what we're talking about on the investments that Jim mentioned.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Peter, I might add, though, and Gary, that we are early adopters of payments technology. We were the early adopters of the Zelle platform and have had good success with that with our clients. We are adopters or have real-time payments capabilities in place both for sending and receiving. There's not a lot of demand for that yet in the industry, but we're positioned to leverage that to make sure our customers are taken care of.

Gary Tenner
Gary Tenner
Managing Director and Senior Research Analyst at D.A. Davidson

Great. Thank you.

Operator

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

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Good morning, Bill.

Bill Carcache
Bill Carcache
Senior Equity Research Analyst at Wolfe Research

Hi. Good morning. Curt, I wanted to follow up with a high-level question on your comments on around investing in your platforms and digital tools to make it easier for customers to do business with you. Do you have any interest in getting to the point where you can leverage technology to expand your footprint through digital channels without the need for traditional M&A? Is that something that, you know, you'd have any interest in pursuing?

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Yeah. The way I think about technology, certainly we need to be digitally enabled, and we need to have the right products and services that our customers are wanting and demanding, both commercial and consumer customers. When you think about our model with a heavy focus on commercial banking, that is still very much an advisory-based business. It's a relationship-based business.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Where we're bringing a lot of credit expertise and overall banking expertise to client conversations. Digital help enables some of the things that we do, but it's you know, it's challenging to acquire you know, a large company, let's say, that has $500 million in top line revenue using some sort of digital application. We need to support the relationship, treasury management, other services with digital. Really our model is still driven pretty heavily on the human capital side and the talent and skill and expertise of the bankers that we have in place. It's part of what allows us to grow as an institution. For example, our expansion into North Carolina doesn't have to be based as much on brick and mortar as it does on having the right people in the right places.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Many of our national industries or industry verticals. We operate nationally today in many different markets, New York, Boston, Chicago, D.C., Seattle, Washington, et cetera.

Bill Carcache
Bill Carcache
Senior Equity Research Analyst at Wolfe Research

That's very helpful. Thank you. Separately, Jim, I wanted to follow up on your comments regarding higher salaries and comp expenses. Can you parse out for us how much of the increase is simply related to performance versus how much of the increases are inflationary? And do you think that low single digit growth in the expense outlook is a sustainable level even as rates rise?

Jim Herzog
Jim Herzog
CFO at Comerica

Good morning, Bill. You know, it's really been a strange couple of years, as I mentioned in the last earnings call. It's been a while since we've had a so-called normal expense year, and really, just really for all the major line items. You know, I don't think you know, we are forecasting low single-digit expense growth for 2022. I do think that if the inflationary trends continue, that would actually be challenging to maintain. We'd probably see something a tad higher, but we'll see where wage inflation goes and competition for employees.

Jim Herzog
Jim Herzog
CFO at Comerica

You know, one of the things that allows us to keep to the low single digits next year, not just for expenses, but for salaries and benefits too, is the fact that we are resetting performance comp. You know, we would probably be a tad higher than low single digits if not for setting the performance comp. Where things go beyond 2022, it is going to depend in large part where wage inflation and competition for talent goes.

Bill Carcache
Bill Carcache
Senior Equity Research Analyst at Wolfe Research

Got it. Thank you. Lastly, if I could squeeze in, one last one following up on your deposit beta commentary. There seems to be a pretty broad consensus that deposit betas are likely to remain just as low as we saw in the last rate hiking cycle. One of the variables that seems to be a bit more pronounced this time around is the risk of Fed balance sheet runoff happening a little bit sooner. Can you frame how you guys are thinking about that?

Jim Herzog
Jim Herzog
CFO at Comerica

You know, I see that more as an opportunity than a risk because even though the Fed may unwind its balance sheet a little quicker than they did the last time, keep in mind it's starting from a much higher spot. Even if they do that, I do believe that deposits will likely stay a little higher than they were pre-pandemic level. You know, I don't know that they were going to unwind the entire balance sheet. You know, if they do, it's going to take probably 2-3 years. They did go a little shorter this time in terms of how they built it up. I see a worst case scenario as they unwind it back to where their balance sheet was before the pandemic started.

Jim Herzog
Jim Herzog
CFO at Comerica

Worst case, you might get back the liquidity in the system to where we started, but they're probably not going to go quite that far. In addition, we do see fiscal spending likely staying at some elevated level. You know, BBB did fail, but some form of it is probably going to pass. You know, from what we've seen in the past, it's really a combination of monetary policy, the Fed balance sheet, and the multiplier effect of money, meaning, you know, activity in the economy, which is highly linked to fiscal spending, and that's probably going to continue.

Jim Herzog
Jim Herzog
CFO at Comerica

Overall, I do expect deposits to stay at least, if not higher than what they were pre-pandemic levels. I don't see it as a risk, and I actually see it as an opportunity that they don't actually unwind quite as far as some people might think.

Bill Carcache
Bill Carcache
Senior Equity Research Analyst at Wolfe Research

That's very helpful. Thank you for taking my questions.

Jim Herzog
Jim Herzog
CFO at Comerica

You're welcome.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Morning, John.

Jon Arfstrom
Jon Arfstrom
Managing Director of Financial Services Equity Research at RBC Capital Markets

Hey, good morning, everyone. Maybe start with a question for Jim and maybe Melinda. How do you want us to think about the provision, you know, to kind of set the bar for that? It seems like credit is very, very clean, but just curious if you can give us any help on that.

Melinda Chausse
Melinda Chausse
Chief Credit Officer at Comerica

Yeah, this is Melinda. Thanks for the question. Obviously, we've had sort of unprecedented credit performance this last year. You know, as Jim mentioned in his comments, I think we do expect that we'll continue to see the reserve level come down modestly over the next couple of quarters. At some point, obviously, given the fact that we are projecting some nice loan growth, you know, we would expect that we'll start to see that trend reverse a little bit and we'll start to see a little bit of reserve build.

Melinda Chausse
Melinda Chausse
Chief Credit Officer at Comerica

It's really impossible to predict what the CECL coverage ratio is going to be and what the reserve level is going to be because the accounting exercise that we go through each quarter is very specific to what the portfolio looks like, what the credit metrics are at that time, and what the economic forecast is. Our general thought is we'll continue to see that coverage ratio decline a little bit, and then that will start to level off and we'll be adding at some point for loan growth, which would be a positive.

Jon Arfstrom
Jon Arfstrom
Managing Director of Financial Services Equity Research at RBC Capital Markets

Yeah. You're just not seeing anything in terms of inflows, really, in terms of problem credits?

Melinda Chausse
Melinda Chausse
Chief Credit Officer at Comerica

The credit quality of the portfolio continues to be very strong. All of the indicators, at least at this point, are that we would expect credit to remain very, very strong. You know, this quarter we did, however, use some of the qualitative process in that reserve calculation to account for any uncertainty just because of the current Omicron inflationary pressure, wage pressure, et cetera. Again, no signs right now on any of the segments of the portfolio that would give us any level of material concern. Again, we still have very high reserve levels to handle whatever comes at us.

Jon Arfstrom
Jon Arfstrom
Managing Director of Financial Services Equity Research at RBC Capital Markets

Okay. Thank you for that. Jim, on slide 15, on the rate sensitivity slide, just so we understand it, the standard model, you're assuming four hikes throughout the year, just kind of ratable hikes in terms of that modeling. Is that right?

Jim Herzog
Jim Herzog
CFO at Comerica

That's right. That would be, you know, you could look at it that way. It's 100 basis points on average, so you could think of it as four hikes, you know, 25 basis point hikes evenly spaced.

Jon Arfstrom
Jon Arfstrom
Managing Director of Financial Services Equity Research at RBC Capital Markets

Okay. So if we think that's the case, and we think deposit betas will be lower, would you pull us back at all if I think it's a 10% deposit beta, is there anything in there you'd pull us back on if I just said, well, gosh, you know, maybe the current guidance is a little bit lower net interest income, but if I think we get 4 rate hikes, it's another $230 million in NII? Is there anything in that guidance that makes you nervous and you'd say, don't do that, Jon?

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah, I'll give you one put and one take, and they both have the potential to be very significant. The takeaway is keep in mind the fourth quarter interest rate sensitivity was really enhanced by the deposits towards the end of the year. To the extent those take a step back, as we think they probably will, you know, you could end up with a sensitivity closer to what we saw in the third quarter. We'll just see where those seasonal deposits go. That would be the takeaway.

Jim Herzog
Jim Herzog
CFO at Comerica

The add would be, you know, to the extent to the earlier question from John, you know, to the extent we pull some of this forward and put swaps on the books, grow the securities portfolio a little larger than we think, you know, at least within the first year or two, you have the potential to pull some of that forward and actually add more net interest income. Those are a couple, you know, one put, one take, and you can layer that on as you wish to the standard model.

Jon Arfstrom
Jon Arfstrom
Managing Director of Financial Services Equity Research at RBC Capital Markets

Okay. Just one last one. You talked a little bit about seasonality and deposits in Q1. How are you thinking about overall balance sheet growth, balance sheet size in 2022? Is it more of a mix shift or do you expect to grow the balance sheet?

Jim Herzog
Jim Herzog
CFO at Comerica

Well, deposits have been driving the balance sheet. It's all about deposits since loans are obviously far less than our deposits right now. It's really a question of where the deposits go, and that's gonna be highly dependent, I think, on Fed actions. You know, there are two primary things that will affect it. One will be rates, because we know as rates go up, we'll see some of these deposits slip off balance sheet, off balance sheet money markets. I don't think that'll happen in the first couple hikes. It looks like money market rates are gonna trail for a little while here. You know, as rates progressively go up, you will see the deposits start to slip off. Then what the Fed does with the balance sheet refers to the earlier conversation. All that's gonna take time.

Jim Herzog
Jim Herzog
CFO at Comerica

I, you know, other than a little bit of a seasonal drop in the first quarter, you know, I would say the first half of the year, you're not gonna see the balance sheet change much. You know, deposits will stay strong. Then towards the second half of the year, maybe more, you know, partway through the third quarter and the fourth quarter, you'll start to see deposits come down if the Fed moves as we think they will. But it's gonna be a strong deposit level no matter what. Funding is not a concern and, you know, we think it's gonna be a very healthy balance sheet going forward.

Jon Arfstrom
Jon Arfstrom
Managing Director of Financial Services Equity Research at RBC Capital Markets

Okay. All right. Thank you.

Operator

Your next question comes from the line of Peter Winter with Wedbush Securities.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Hello, Peter.

Peter Winter
Analyst at Wedbush Securities

Good morning. Morning, Curt. I wanted to ask about capital. In the past, you've talked about that you wanted to reduce some of the asset sensitivity before you would consider lowering the CET1 target. Can you just ballpark how much lower you would need to lower it before maybe you consider lowering the capital target? Then secondly, just as you near the capital target today of 10% and a better outlook for loan growth, just what you're thinking about in terms of share buybacks?

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah. To the longer term question of targeted capital ratios, that's really yet to be determined. You know, we know that we have, you know, almost 100 basis points of preferred capacity to fill the stack with. I don't think that means we would necessarily one for one lower our CET1 target by that same amount. But, you know, there would be a little bit of room there. That discussion is really a couple years away, until we, you know, smooth out the asset sensitivities I've talked about in the past. Obviously an internal discussion and a discussion with the board and just the overall environment and the status of some of our constituents and their views. More to come on that.

Jim Herzog
Jim Herzog
CFO at Comerica

We do think there is that potential, as we've mentioned in the past, to take CET1 lower once that interest income stream is smoothed out. In terms of the more near term, you know, ending at an estimated 10.15%, there's always a plus or minus 15 basis points to where you end up with the capital ratio. I really consider us to be about there. I will say we are gonna be cautious in the near term about share repurchase. We're very hopeful. We feel good about loan growth over the next several quarters. We think capital generation, meaning net income, is going to be very good, especially if we get rate rises.

Jim Herzog
Jim Herzog
CFO at Comerica

That's not a guarantee. It hasn't happened yet. Yet we do think the loan growth is going to come. We're gonna be a little cautious on share buyback, and I think you'll see us hang a little over 10% as opposed to a little under 10% going forward. We'll continue to monitor the environment for both, you know, capital generation and where the loan growth might be headed over the next several quarters.

Peter Winter
Analyst at Wedbush Securities

That's great. Just one follow-up question. Just the deposit growth and middle market lending has been really strong last few quarters. I'm just wondering, could you just talk about how much maybe is coming from new customers and if you're doing anything differently to attract new business?

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

Yeah, Peter, it's Peter Sefzik. You know, a portion of that is coming from new customers. I'd say it's probably 50/50 in middle market. I don't know that we're necessarily doing anything new. I do think our model is proving itself out, though, in an environment with a lot of disruption. You have seen some acquisitions of banks in our markets. The reality is that we're benefiting from that, both with customers and with talent. You know, I think that all of those things are kind of coming together and working really, really well in our favor and proving out the model nicely for Comerica.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Peter, I might add that we would say the same thing about our other business lines in Wealth Management and in our Retail Bank, that it's probably even split between existing customers and acquiring some new relationships for some of the same reasons that Peter talked about. The key for that, what I'm saying there, though, is that word relationship. We do not chase deposits, you know, from a pricing standpoint. We really try to leverage relationship-based pricing and relationships overall in terms of deposit growth. These are customers that we either have or customers that we're acquiring in terms of deposits which is part of why we've done a good job of maintaining performing well from a beta standpoint when you see a rising rate environment, is this is not hot money. These are really, you know, relationship-based deposits across all three of our businesses.

Peter Winter
Analyst at Wedbush Securities

Got it. Thanks for taking the questions.

Operator

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

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Morning, Steve.

Peter Sefzik
Peter Sefzik
Executive Director of Commercial Bank at Comerica

[crosstalk]

Steve Moss
Steve Moss
Senior Research Analyst and SVP at B. Riley Securities

Just following up on rate sensitivity. With the $14.9 billion in floors you have, just kind of curious as to, you know, how in the money those floors are. Just, you know, 25 basis points, 50 basis points, get some color around that.

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah, Steve, it's Jim. Happy to take that. You know, we do have the $14 billion of floors at an average rate of 67 basis points. So you know how far they're in the money, you can just, you know, subtract monthly LIBOR from that. You know, most of our loans are on monthly LIBOR. So hanging around, you know, call it 11 basis points, you'd be at 56 basis points, you know, in the money. But of course, you know, that's going to be dynamic as we go through the coming rate environment. You know, I mentioned floors as a bit of a headwind, in terms of some of the basis points received as well as the absolute amount being realized on those floors.

Jim Herzog
Jim Herzog
CFO at Comerica

I think everyone understands out there that to the extent the Fed raises rates, it really renders the floor issue a bit of a moot issue, since eventually LIBOR will likely be equal to this level of floor that we're getting. We think this is a challenge that may end up not being a challenge at all if the Fed moves as everyone's expecting over the next couple quarters.

Steve Moss
Steve Moss
Senior Research Analyst and SVP at B. Riley Securities

Right. Okay, that's helpful. Just in terms of investment securities, just kind of curious, you know, what you're seeking to purchase these days in terms of new money yields?

Jim Herzog
Jim Herzog
CFO at Comerica

Yeah, we're going to stick to our philosophy of, you know, buying high-quality securities, where we understand, you know, the prepayments ability, characteristics, favorable capital treatment, no credit risk. We're not going to change from the philosophy we have. You know, in terms of what those are yielding, it's really changed a lot even in the last week, so we'll see what the future brings. You know, you saw that in the fourth quarter, we were making purchases at $1.90. You know, we saw that take a step up just a week ago, and we saw it take a much further step up just in the last day or two. We're monitoring that very closely, but it's certainly got the potential to create some nice opportunities for us in the coming months and quarters.

Steve Moss
Steve Moss
Senior Research Analyst and SVP at B. Riley Securities

All right. Thank you very much.

Operator

I'll now hand the conference back over to Curt Farmer, President and CEO, for closing remarks.

Curt Farmer
Curt Farmer
President, Chairman, and CEO at Comerica

Well, let me close by again saying a word of thank you to our employees for a really strong performance in 2021. As always, thank you to each of you for your interest in our company. Have a great day.

Operator

Thank you all for joining today's meeting. You may now disconnect.

Executives
    • Curt Farmer
      Curt Farmer
      President, Chairman, and CEO
    • Darlene Persons
      Darlene Persons
      Director of Investor Relations
    • Jim Herzog
      Jim Herzog
      CFO
    • Melinda Chausse
      Melinda Chausse
      Chief Credit Officer
    • Peter Sefzik
      Peter Sefzik
      Executive Director of Commercial Bank
Analysts
    • Anthony Elian
      Equity Research Analyst at JPMorgan
    • Bill Carcache
      Senior Equity Research Analyst at Wolfe Research
    • Chris McGratty
      Managing Director and Head of U.S. Bank Research at KBW
    • Ebrahim Poonawala
      Managing Director and Head of North American Banks Research at Bank of America
    • Gary Tenner
      Managing Director and Senior Research Analyst at D.A. Davidson
    • John Pancari
      Senior Managing Director at Evercore
    • Jon Arfstrom
      Managing Director of Financial Services Equity Research at RBC Capital Markets
    • Peter Winter
      Analyst at Wedbush Securities
    • Steve Moss
      Senior Research Analyst and SVP at B. Riley Securities
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