James J. Herzog
Executive Vice President and Chief Financial Officer at Comerica
Thanks, Curt, and good morning, everyone. Turning to Slide 7, as Curt 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. 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 increase in working capital needs. M&A and dividend or equity distributions were also drivers. However, there are some headwinds, mainly related to supply chain disruptions, and in some cases, excess liquidity, which can temper borrowing. But overall, our customers remain optimistic. And that is reflected in our pipeline and growing loan commitment levels.
The increase in National Dealer Services loans included a small increase in floor plan loans which remain extraordinarily low relative to the typical historical run rate of about $4 billion. We expect inventory levels will slowly rebuild over the next 1 year to 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 remains strong and our pipeline and line commitments increased in the fourth quarter. Loan commitments for the portfolio as a whole increased $400 million led by corporate banking and middle market partly offset by decline in mortgage banker. 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 8, average deposits again set a record, increasing $5.4 billion with nearly 3 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 had an all-time low of 5 basis points and our total funding cost held steady at only 6 basis points.
Slide 9 provides details on our securities portfolio. We continue to deploy some of our excess liquidity by increasing the size of the securities portfolio. This mitigated the risk with 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. Excluding an $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 6-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 the swap maturities 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. A $4.7 billion increase in average balances of 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 the gross impact of 73 basis points.
As far as credit, which is outlined on Slide 11, our metrics remained excellent including net recoveries of $4 million as well as another quarter of declines in criticized and non-accrual loans. Our provision was a credit of $25 million. Positive portfolio migration, growing economic confidence 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 nonperforming assets increased to 2.3 times. Through the cycles, our credit performance relative to the industry has been a key differentiator. And we believe we will continue to outperform. We remain vigilant given potential stress on our customers from the Omicron virus, supply chain disruptions, labor constraints and inflation.
Non-interest income increased $9 million as outlined on Slide 12. Derivative income grew $7 million and was broad based with increased activity and interest rate hedges, foreign exchange trading and energy derivatives. Deferred comp which is offset in expenses increased $5 million from almost 0 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, 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. Also, we incurred $3 million in additional expenses that related to cycle [Technical Issues] 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 were all captured in other expenses. We continue to maintain our expense discipline as we position for future growth by investing in technology and our people, which are key to our relationship banking strategy.
Slide 14 provides details on capital management. Loan growth combined with share repurchases resulted in a decrease in our 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 rising rates with the dynamic balance sheet. At the end of the fourth quarter, we estimated a $205 million or 12% increase in annual net interest income over 12 months as rates gradually rise 100 basis points and the benefit will be slightly greater in year 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. And as rates rise, we would likely pick up the pace. However, as you see in the various alternative scenarios, we have provided, in all cases, our asset sensitive balance sheet remains very well positioned for rising rates.
Our outlook for 2022 is on Slide 16 and assumes no change in interest rates and a strong economy with gradual improvement of supply chain and labor challenges. We expect average loan growth on a year-over-year basis in the mid-single digit range, excluding the decline in 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. And 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 2 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. 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 to 40 basis points.
Assuming the economy continues on the current path and the impacts of supply chain issues, labor constraints as well as inflation 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.
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. Also, we are focused on product and market development, as well as driving efficiency which means continued investment in technology. We expect these headwinds to be partly offset by resetting performance compensation to normal levels. Of note, our pension expense will improve by $7 million for the year. First quarter expenses are expected to be lower with annual stock compensation more than offset by the decline in performance comp, seasonal declines in items such as advertising and staff insurance and other items that are expected to decline from elevated levels in the fourth quarter, such as deferred comp, legal and severance costs. We expect the tax rate to be 22% to 23% excluding discrete items. Finally, as I indicated on the previous slide, our focus that our CET1 target of 10% as we monitor loan growth trends.
Now I'll turn the call back to Curt.