Comerica Incorporated (CMA) Earnings Call Transcript & Summary

Good afternoon, and welcome back. Next up we have Comerica. I'm delighted to introduce Jim Herzog, Chief Financial Officer. Jim was named CFO in February 2020, I guess just before the pandemic hit and has been with the bank, and I just confirmed this before the call started, with Comerica since 1984. So Jim, thank you very much for joining us. Delighted to have you.

Well, thanks, Ebrahim, and good afternoon, everyone. It's a pleasure to be here. Before we get started, today's discussion may contain forward-looking statements. Therefore, I refer you to Slide 2 of our investor deck for our safe harbor statement as well as our filings with the SEC for factors that could cause actual results to differ 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 statement. And with that, I'll be happy to take your questions, Ebrahim.

Maybe just -- you have a pretty diverse footprint in the Midwest, Texas, the West Coast. Jim, if you could just start with getting an update on terms of the macro outlook. As you look through these 3 different markets, are you seeing any divergence as things -- as economies emerge from the pandemic?

Yes. I would say that our customers mood across all 3 markets is one of cautious optimism. And I say cautious optimism because weighing on them are pockets of labor shortages, wage pressures, supply chain disruptions and some transportation challenges from both the supply standpoint and a cost standpoint. But I would say that, so far, customers are managing through it successfully. They are having some success passing on price increases. And in general, loan pipelines in all 3 markets are strong. U.S. for the economy, overall, we're constructive on the U.S. economy in its entirety. We are forecasting just under 5% real GDP for both the fourth quarter and 2022. So it's more over the next year in our 3 major markets, we do expect the state-level economy to outperform the national picture. Just touching briefly on all 3 markets in Texas, things are going quite well. We do sense strong confidence in the part of the customer base here. I think this is driven by an inflow of both consumers and businesses into the state as well as just the general favorable business climate. It also helps that we have strong energy price support in Texas. Oil is hovering just over $80 a barrel, strong gas prices. This is all helpful to Texas. And we are seeing some more drilling and an increase in rig count. But beyond energy, I would say Texas has become quite diversified over the last decade or 2. And in general, it's just benefiting from the strong economic backdrop. It's notable to me that in the second quarter, Texas had a GDP or GSP that was actually above prepandemic levels. So it does feel like Texas has moved beyond the pandemic at this point. Our third quarter Texas indicator that our Chief Economist publishes took a step up in August. So we think third quarter GDP is likely to be that much higher. So overall, things are feeling quite good in Texas. Michigan is another state has done a nice job of diversifying itself from its legacy industry, which is the automotive. And heading into the pandemic, we had a really nice resurgence in the city of Detroit. I do think the pieces are in place for a nice takeoff in that market. The pipeline is solid, but it's also working through a tight labor market and some supply chain disruptions in the automotive industry. This is putting what feels like a temporary damper on growth, but I would say it's just a point in time pause. We do see our customers looking forward to looking through and past these temporary challenges with a sense of optimism in Michigan. And then finally, in California, very similar to Texas. They now have a GDP that's above pre-pandemic levels. We're seeing higher levels of import export activity. We're seeing some of the pandemic restrictions lifted. So things feel like they've really moved on in California, too. So overall, things are looking quite strong in all 3 markets. And we're real excited with how we're positioned there.

And sticking with that, Jim, I'm sorry if we're going off script, but you have -- in California and Texas. And there's a lot being talked about in the media around the move from California into Texas. Tesla, obviously, being a [indiscernible] child for that. Given your presence in both the markets, are you sensing that within your customers, that there's some movement from California to Texas? And are you able to sort of capitalize on it given your presence in both markets?

Yes. I mean we -- number one, we haven't sensed a real customer loss in California. So there's really nothing too negative going on there. But we certainly have some inflow into Texas, and we do make it a point to try to connect with some of those businesses through various channels. So certainly, the whole inflow into Texas has been quite a tailwind for us, and we see a lot of potential to capitalize off of that. And I'll say there's some indirect benefits too. So -- besides the direct businesses that are being relocated here. It just helps the overall Texas economy. So there are indirect benefits, too, I would say.

That's fair. And maybe if we can just drill down a little into loan growth? I think your messaging during the third quarter call was very, very bullish around loan growth outlook. I think you talked about even '22 during the call. Just give us a sense of, one, I think what drives that confidence? And secondly, when you actually look at your lower portfolios, what do you think are going to be the top 1, 2 or 3 drivers of loan growth as we look out into next year?

We're a collection of different businesses. So it kind of helps to look at the various businesses individually in terms of what's driving them. And by the way, we're not going to update our guidance from the third quarter earnings call, but I think I can amplify some of the caliber from that call. In general, though, I'll see that we expect to see nice growth from a variety of businesses in the fourth quarter and next year. And that's outside of PPP, of course. And we will see some of that partially offset by mortgage banker. But in terms of some of the drivers across the board, we do see pent-up demand. We see inflation, which can be a positive for loan growth. We see the overall improving economy more than offsetting the supply chain bottlenecks. And in general, I think there's just that sense of optimism out there. And it's really the pipelines that give us the higher sense of confidence. Just touching base briefly on some of the individual business lines. Middle market, which is kind of our bread and butter. In all 3 markets, what gives us some confidence is the trend line. We've had 6 consecutive months of growth through the third quarter, and we do expect middle market to continue to perform well. The pipeline continues to be very strong. Commitments were up $390 million in the third quarter. So it's just a matter of those commitments being utilized. And we do expect to see that as we move over the next couple of quarters. And we do expect commitments to continue to grow, too, with the pipeline. And what we're hearing from our customers are, there are some favorable tailwinds. They're borrowing for working capital, which is driven, in part, by the higher commodity prices. They're trying to rebuild inventory. There is M&A going on and there are some dividend recapitalizations going on. Now there are some headwinds, too, mainly in the form of the supply chain disruptions and some of them do have excess liquidity, which might temper some borrowing. But overall, just from the conversations and the pipeline, we feel quite bullish on middle market. National Dealer is another one that bears pointing out. It's at a low right now, and we think it has mostly bottomed out, sitting with $600 million of floor plan loans. And that's versus a more normal level of $4 billion. So you can see the real potential to grow dealer over the next several quarters. Dealers are optimistic we're going to get there over the next few quarters. No one knows exactly when. But we are adding dealers to the mix here. We continuously add customers with some of the consolidation that goes on in the industry. I would say we may not be there fully backed by next year, but we will be most of the way back by the end of next year. And certainly, sometime in 2023, we would expect to get there. I will say, in the meanwhile, our customers are very profitable at the moment. Yes, the lots are empty, but tremendous profitability being driven by the fact that they have pricing power. They have their servicing model for their cars. And so I think they're going to come out of this stronger than ever. And we're looking forward to those floor plan loans being rebuilt. Mortgage Banker is going to be one of the headwinds over the next several quarters. Keep in mind, it's coming off record levels. And even with $2.8 billion of loans in the third quarter, it's still above prepandemic levels. Refi is obviously the headwind there, with interest rates ticking up. But it's important to keep in mind that we are 71% purchase versus -- the industry is at about 46% purchase versus refi. So the rate environment is not as impactful to Comerica. And we have been adding relationships in this space really ever since the pandemic started, and we're continuing to build a pipeline there. So we think we're going to do better than the industry when it comes to Mortgage Banker and the overall real estate -- consumer real estate industry. As we indicated in the call, we will be lower in the fourth quarter due to both seasonality and a continued slowdown in refinancing. But to the point about our higher purchase mix, the MBA has forecasted the industry to be down 43% in 2022. We think we'll be down far less just because, again, of our strong purchase mix there. Moving on to a couple of other businesses briefly. Energy loans. We think those have bottomed out. And we are seeing, again, higher commodity prices. We're seeing rig count increase. And so we do think energy loans will gradually grow. They're a little less than 3% of the loan portfolio at this point in time. We don't expect them to materially increase that percentage, but we do expect them to grow somewhat proportionately with the overall loan book. Environmental services, that's a business line commitment -- consistent with our commitment to sustainability. It focuses on recycling, waste management, renewable energy. And that's one where we're seeing some really nice growth and we're feeling really optimistic about. Loans grew $200 million ex-PPP to $1.8 billion in the third quarter. And that was 3 consecutive quarters of growth. And they have a really strong pipeline, too. Equity fund services continuing to grow. As a reminder, that's a business primarily made up of capital call lines for venture capital and private equity firms. The pipeline there is very strong. Manager -- fund manager sentiment is very positive. And we think there's going to be a lot of lending and syndication opportunities there. And finally, commercial real estate. A good pipeline, but we are expecting some paydowns in the fourth quarter. So we likely will be flat through year-end. But we're really excited about the areas of this business that we focus on. Industrial and self-storage is a big part of it, and that's the strongest we've seen really in our history right now. In the inflationary environment, orders are getting bigger budgets, which bodes well for 2022. Multifamily is another area that we have expertise in. Demand here feels solid, and it feels like it's running at the right temperature, not too hot, not too cold. From a credit standpoint, we think we have a really nice niche year as we focus on Class A infill type projects that can be typically leased out even in a downturn. So overall, really good loan pipelines across the board. Mortgage Banker is really the only headwind we're looking at. And we're looking forward to some nice loan growth over the next several quarters.

Sounds very bullish [indiscernible] on this point.

I will try best.

But I guess, just tied to loan growth, talk to us about pricing. I mean, obviously, the entire industry of all banks, I'm assuming, trying to chase the same deals given the lack of line utilization, supply chain issues hitting customers of all the banks. How is loan pricing today in terms of when you look at loan spreads across the C&I book, be it middle market, large corporates, business banking?

It's very competitive out there right now. Of course, it's always competitive, but it feels like it's about as competitive as it's ever been. That's not too surprising given all the liquidity that's out there. So we're seeing some -- from a spread standpoint, we're seeing very minor pressure from a pure spread standpoint. As you might know from our earnings calls, we do talk about the fact that we have around $14 billion of customer LIBOR floors. I think that's where the pressure may come from over the next few quarters as some of those come up for renewal. We may not get the same for -- both from a quantity standpoint and a debt standpoint. So we'll probably get a little bit of pressure there. I think we have a good shot of maintaining the same spreads, but it might just be off a lower base index instead of the LIBOR floor. It might be a lower LIBOR floor or LIBOR itself or [indiscernible] bisbee depending on how we price it. So it is very competitive out there. We are very diligent in terms of our pricing process. Exceptions are reviewed. But nonetheless, we want to be competitive. So we're trying to walk that balance beam.

Got it. I guess maybe that's a good segue into just talking about balance sheet asset sensitivity. Comerica clearly widely viewed as one of the most asset-sensitive banks. You've seen the stock react to higher interest rates even in the last month or 2. Just talk to us, I think if I have my numbers right. 100 basis points gradual increase implies about 11% upside to NII. As we approach sort of a higher rate cycle, how do you plan to manage the balance sheet? Do you want to mitigate some of that sensitivity as we get into closer to a rate cycle or into a Fed hike cycle?

Well, we are certainly very asset-sensitive. And we are just naturally asset sensitive given our abundant amounts of DDA and our large floating rate book. 11% sensitive right now with that 100 bps test, as you say. So that is much more asset-sensitive than we want to be longer term. So I think we're always going to be somewhat asset-sensitive just given the basic business model that we have. But we will spend much of that asset sensitivity as rates start to go up. And we will lock off some longer fixed rate receive rate assets. I would say that we will probably eliminate well over the majority of that asset sensitivity. We won't do it all at once, but we're not going to be too late to the game either. In fact, as you may know, we've been growing our securities book from a cash product standpoint gradually over the last year. I think we'll continue to do that in small steps. We've been going up about $500 million a quarter in terms of average balance. To the extent rates go up, we will probably pick up the pace there. We certainly have the liquidity right now to go in the cash products. And that's our strategy right now given that's where we see the relative value. But at some point, as the security book starts to get to a certain size and we start to look at where liquidity might be going, we'll probably switch over to synthetic hedges off balance sheet. And we'll just step into those gradually again and start to step it up again as rates continue to move up. So I would say that we're not going to stand pat or we're not going to jump in all at once, too. We're moving at a very measured pace. But we do ultimately want to have a much smoother earnings stream, eliminate much of that volatility that's been in net interest income. And it will probably take us -- freights go up at a reasonable measured rate. It will probably take us 2 or 3 years to get there. To the extent rates move up faster, we might do it quicker. But to the extent rates don't go up as quickly as we hope or think, it might take us a little bit longer. But we are going to gradually and measurably just continue to step into this asset sensitivity and smooth the overall cycle.

That's helpful. And you mentioned the excess liquidity cash balances, I think about 24% of your earning assets, 1/4 of the earning asset basis was sitting in overnight cash balances. One, what do you think is the more normal level? Like is it back to pre-pandemic fourth quarter '19 levels? Or are you going to operate with even ex-interest rates on a higher level of liquidity given other banks have talked about expectations that some of this deposit growth might leave the bank as things get back to normal? Just your thoughts on that.

Yes. Some depends on where the Fed goes with rates. To the extent the rates stay low, which is not necessarily our expectation, I think this liquidity is going to largely stick around for quite a while. The Fed has created much of this liquidity through the monetary policy. There's been a lot of fiscal spending also. And so to the extent that rates don't go up, I don't see it escaping off balance sheet to money market funds. We will ultimately, if we don't sense the Fed is going to unwind the balance sheet, which is kind of our base case right now, we'll gradually deploy that liquidity into either loans or securities. Prior to the pandemic, we ran with $2 billion to $3 billion as a targeted minimum amount of liquidity. We sometimes have a little bit more of that. So we're going to have to just feel our way through that and just take a look at where the environment is going, where interest rates might be going. And we think they're going to stay low. And definitely, we're going to be able to spend a lot more of that liquidity through a combination of loans and securities deployment. But to the extent rates go up, I would expect to see some of it escape the balance sheet. It will get sucked out of the system, of course, if the Feds start to unwind the balance sheet. And from an interest rate standpoint, if rates go up, you'll see some of this going off-balance sheet money markets, as we always do during the right cycle. So there's going to be somewhat dependent upon where rates go. But we are going to gradually spend that liquidity also, depending on how much we think it's going to be there. We're going to measure it very carefully and just make sure that we don't overstep in terms of over consuming it.

Understood. And talking about expectations around monetary policy. I think you've talked about like expectations for core NII to continue to grow next year as well. Within that guidance, do you assume any increase in interest rates? Like what are your assumptions around the yield curve or maybe the Fed potentially moving late in 2022?

Yes. When we give our outlook, we do not factor in any rate rises. So of course, we did have abundant amounts of PPP in 2021. Clearly, we're not going to be able to overcome PPP income going away. But if you put PPP to the side, we do expect to benefit from loan growth in 2022. We are going to have some headwinds in the form of expiring swaps and customer LIBOR floors. How we offset that will be largely dependent upon the rate environment. Certainly, just growing the securities book, we can offset much of those headwinds. And to the extent the long end of the rate curve goes up, we can start stepping in more aggressively into swaps. More near term, in the fourth quarter, we did talk about the fact that excluding PPP, we do expect modestly larger loan balances in the fourth quarter. We do think net interest income, excluding PPP, will be relatively flat in the fourth quarter just because we do have an expiring swap in the fourth quarter of '21 and we did have some outsized loan fees. But going forward, I think that loan volume will be the real X factor there. Then of course, the rate environment will be something that just helps us determine to what extent we can offset any headwinds from expiring swaps. And if the rate environment moves up enough, I think swaps could actually be a tailwind as we start to enter into swaps and deploy even more liquidity into securities.

Got it. I guess just last piece to that asset sensitivity. When you look at your deposit book, strong growth over the last year, 1.5 years. How -- what are your expectations in terms of just deposit pricing when the Fed moves? Is the fact that we're going to have a rate hike cycle in relatively close proximity from when the Fed actually moved to 0, which was last year, do you think the client expectations around higher deposit pricing and rates will be higher today than they were back in 2015, '16, where we had 7 years of 0 interface?

Well, just taking a step back, it's important to remember just how well behaved pricing was in the first few hikes during the last cycle. [indiscernible] Comerica, during the first 5 individual hints, each of those have less than a 10% data. And so I think we have a pretty good shot at duplicating that. In fact, if anything, I think we can outperform it just because there's so much liquidity in the environment. Now some of it is going to depend on where loan demand goes because that tends to drive funding needs. But overall, I do expect the betas and deposit pricing to be pretty well-behaved in the first few hikes next year. So I think there's a lot to be gained there from a net interest income standpoint during those early rate hikes.

Got it. I guess maybe shifting gears a little bit around expenses means you're investing in technology, much like most of your peers. Just talk to us in terms of when you think about -- and I understand you're not giving guidance for '22. But talk to us around the puts and takes in what are the drivers of upward pressure on expenses from your -- and where do you think you can still take costs out and make the bank more efficient?

Yes. Well, puts and takes is a phrase that I use often lately. There's been a lot of those over the last couple of years. And I'd like to say it's been a while since we and probably many other banks have had a normal expense year. Expenses are always top of mind for Comerica. We do have a good track record there. Having said that, with the economy taking off and transition occurring in terms of how business is done, it's also important to us that we make the right investments. So I'd like to say that means spending smartly. In that sense, I'll start with investing in digital capabilities, both customer and infrastructure. That is a priority of ours. We're also making investments in terms of the markets that we're in. We're putting 3 offices in the Southeast region that we've talked about recently. We're focused on talent acquisition. Having said that, each of these initiatives, we do look to self-fund as much as possible. We look to either savings ideas or reallocation of resources. And so that's always our goal. We don't always fully succeed in offsetting it, but that's something that we are very diligent about. So investments would be one of those puts and takes. Obviously, inflation, wage inflation and normal merit will be another one. I do expect wage inflation to be, at least, 1% higher in 2022 than it has been in recent years. The third put and take, I'd say, in terms of a headwind would be just headcount and normalizing turnover. I think many companies and many banks have seen some turnover get expedited during the last year as we come out of the pandemic. The labor market has been really disrupted. There's been some early retirements. And so some of the reduction in headcount -- we are about 300 down from a year ago. Some of that's intentional, but some of it is not intentional. And so I do see us moving a little bit back towards the levels of headcount that we were at a year ago sometime in later 2022. Now in terms of tailwinds for inflation and expenses, I do think that some of the performance-based comp that we're experiencing in 2021, that will get reset. In 2022, we've not approved all of our comp programs yet in '22. But no doubt, at least initially, our guidance will take into account the fact that we are resetting performance comp. So there will be some netting going on. There will be some puts and takes going on. In the end, it may end up looking like a more normal expense growth year, but we're not ready to quite give that guidance yet. So that is something that we're taking a look at and talk more about in January.

Got it. And I think you mentioned in there spending on digital capabilities. I think Peter talked about this on the third quarter around just building the bank portion of tech spend in '22, moving up. Just talk to us around like the key areas where the investment dollars are being spent right now as far as digital is concerned. I think treasury management space is something that you all have talked about as well.

Yes. We think the digitization is falling into 2 camps. The first is what we call enabling the business, where we're making investments in our products. And it's really all about focusing on the customer journey and experience. And as you referenced, we are focused on becoming the bank with a premier treasury management offering. That's something Peter talked about in the earnings call. And we think digital has a huge role to play there. Being a leading commercial bank, this is a very high priority for us and it's getting a lot of attention internally. But I would say digital on the product side goes even beyond treasury. And we're investing in a number of areas, especially on the credit side. For instance, we've recently automated parts of our credit approval process by using AI to retest our tax returns. And that would just be a recent example. And then beyond enabling the business, we're also using digital to just do a modernization refresh of the core technology platform that we have in the back office. This includes consolidating aspects of our data center. It means taking the portion of applications that run in the cloud, which are just a little over 60% today and continuing to grow that. We're moving to a new trust platform in the first half of 2022. And we're also doing a complete refresh of our financial systems under a project that we call Digify, which should make all of our colleagues much more efficient. So with that said, even though we're not deploying digital technology in what I would call a mass scale, given that we're a mid- to large-size regional bank, we are picking our spots to try to be best-in-class in digital. And to the extent we're not picking our spot to do deep development, we'll partner where we need to. But we certainly recognize that digital is important, and it's one of our key emphasis in 2022.

Got it. I think one of the other areas of emphasis or focus of management has been fees. You had a very strong year in '21. Just talk to us in terms of some of the initiatives that are underway to grow fee revenue, create a little bit of a better balance in terms of fee revenue as a percentage of total revenues at the bank.

Yes. We are very focused on noninterest income. In general, many of the themes that we have, whether it be digitization, whether it be reallocation of resources, where we put our tech focus, the common theme there is noninterest income. We're very focused on it. We love the fact that it has customer retention attributes, the fact that it's capital free. Fee income often brings deposits and other cross-sell opportunities. So very much a focus of ours. It starts with treasury management. It's probably our number one priority. We're also very focused in the alt space on noninterest income. We're looking at some very opportunistic hires and lift-outs. We're also very open to small tuck-ins, acquisitions like we did earlier in 2021 on a trust advisory business. And so wealth management, trust advisory, treasury management, focusing on cross-sell between the commercial bank, retail and wealth is a high priority of ours and then continuing to leverage off the card platform that we built. That's something that we benefited from greatly in 2021, paid great dividends with the pandemic. We're seeing customer behavior convert more and more to electronic and away from the branches and cash. And so probably something that we will continue to invest in also.

Got it. I guess just shifting gears to credit. Clearly, I think that it's become a much lower priority item for most investors. As you think about credit quality today, anything within the portfolio, Jim, that you think could create some noise around NPLs, NPAs over the coming quarters?

There's nothing that immediately concerns us, but our antenna is always up. And so if we were to try to think of a couple of areas that we'll keep an eye on, one is small business. We're not seeing anything concerning there, but small businesses just naturally don't have the same backstops that large businesses do. And when we look at what's going on in the environment, in terms of supply chain disruptions, wage inflation, labor constraints, that does have the potential to cause some disruption with small businesses. And so we're watching that very closely. And likewise, many of the challenges that I just mentioned are also potentially affecting some of the socially distant businesses and industries that we have. So we don't consider ourselves totally out of the woods yet there. We continue to watch that. The leverage portfolio is something that we're keeping an eye on. But there's nothing really poking its head up right now that has us concerned, which is staying very vigilant and trying to identify any early trends that might be popping up. There is often a delayed effect when you come out of a recession as we just went through. Sometimes, there's a tail that doesn't necessarily manifest itself for several quarters. So again, staying very vigilant but not seeing anything concerning at this point in time.

Understood. And I guess, how does that influence your decision around the level of reserves? I think loan loss reserves were at 1.33% at the end of the third quarter. I think if -- correct me if I'm wrong, but on your day [indiscernible] was about 1.20%, 1.23%. How do you think about what's the right place for the reserve levels to be? And could we actually see the reserve levels fall below the day 1 CECL?

Yes. Well, number one, of course, much of this is prescriptive in the CECL world we live in. And we've never actually been through a complete cycle in CECL. So I think all of the banks were learning a little bit together in terms of where this might end up. Number one, we do think we're very well reserved right now. And I talked about some of the businesses that we're keeping a close eye on over the next few quarters. We are very well-reserved in those businesses. So no concerns there even if something did pop up. As far as going below day 1 levels of CECL reserves, that's certainly a possibility. CECL by nature is a little more volatile. And so to the extent things continue to go in the right direction, there's that potential to have lower reserves than we even had historically. So we are watching it. Again, it's going to be dictated by the economic environment, by the credit metrics. It's not totally in our control by any means. But yes, I think there is potential to see reserve release occur. In the meanwhile, we're comfortable with our level of reserves. We feel like we're well-protected if something unexpected did pop up. To the extent we have some concerns and uncertainty out there with this very unusual environment with all the inflation and supply constraints and so on, we do feel like we're more reserved for any businesses that might be impacted by that.

Understood. And in terms of losses, like when do you think losses begin to normalize? And when I say normalize, let's look at the period from 2015 through '18 and what net charge-offs were back then. Do you think we get there in '22? Or is it going to take a few years, just given how much liquidity both businesses and consumers have in order for us to get to even normal levels of loss rates?

Yes. The liquidity is a big factor in that, and it is a big plus in the credit environment. We saw that with PPP in a more microcosm scale with smaller businesses. But I think liquidity in the environment is really a plus for all businesses. And it's going to be a little bit of a buffer against what might be a normal level of charge-offs. I think of charge-offs as having a normal range, a bps as opposed to just a specific number. I do think that sometime in 2022, we could get to that lower end of the normal range. But I also think we have a chance of staying below it too for another year. And so that's something we have to wait and see how things develop. But certainly, by '23, I think we would expect to be in a more normal range and, again, kind of approaching the lower end of that normal range as we move into 2022. And I will say credit challenges are often the things that you didn't see coming. That's why we try to kind of keep our head out of swivel and be in the lookout for what might be coming our way. We think we're doing a pretty good job of that. But I don't want to be too brazen and say that we're going to have another great charge-off year with close to 0 net charge-offs in '22 because you just never know what's coming your direction in the economy when it comes to credit and charge-offs. But for now, it's looking pretty good. And we're certainly going to have a little higher charge-off experience in '22 than we had in '21. Whether or not it gets back to that normal range, I think it could go either direction, so we'll have to wait and see.

Got it. And I guess just one final question -- or final couple of questions. Your CET1 ratio was at 10.2%. I think your target is about 10%. One, tell us why the 10% is the right target level for Comerica? You have larger banks who are looking to operate with a lower level like 9%, 9.5% kind of CET1. Just give us the framework that you used to come up with. What's the right level of CET1 capital for the bank?

Yes. We have a few data points that we try to try and triangulate in between. One is we are very sensitive to credit rating agencies given that we have kind of a middle market commercial book. Those customers are a little more sensitive to credit ratings than maybe consumers are. So we really protect that credit rating with a big sense of dedication. We want to be very careful there and making sure that we're not stepping out of balance as far as the credit rating agencies go. Of course, Roy is in touch with our regulators. But from a business model concept or standpoint, probably the biggest factor is we feel that we need to smooth out our earnings variability or volatility. We're in really good shape there from a credit standpoint. But net interest income, no secret, Comerica has been very asset-sensitive. We've had a lot of volatility in the net interest income. I would like to smooth that out. And I think that's the prudent thing to do. I think that needs to be much more smooth out and much less cyclical before we take our target capital below 10%. I do think we'll get there. I think in the next ready cycle, we will successfully take the edge off that asset sensitivity and get things smooth out. And I think at that point in time, we can take a hard look at establishing a target below 10%. But I do think we have to smooth out that earnings volatility first.

Got it. And just tied to capital, I guess, if you can spend a few minutes talking about M&A. So one, in terms of -- in 2 of your markets, both in California, in Texas, you're pending larger deals, P&C with Compass BBVA. USB just announced their deal to acquire Union Bank. Talk to us about the opportunities that may come up from these transactions. M&A tends to create disruption. Do you look at that as a potential way to gain market share in these markets?

That is often what occurs. We're very focused on our own model. We're focused on our existing customers. We're also focused on attracting new customers. And so we're certainly not specifically targeting customers that might be involved in banks doing these acquisitions. But we are always open to new business. And we are always open to take it on new customers that might not be entirely happy with our current banking organization. So sometimes, there is opportunity there. And again, not specifically targeting anyone, but we're open for business and focused on both new customers as well as the existing customer base.

And how do you -- and just the team think about M&A? You've seen, obviously, a lot of your peers engage in bank-to-bank M&A over the last few years. Thoughts around scale. Like do you think you have the right size to be able to compete effectively? Or do you think an M&A transaction that adds scale would actually add value to the franchise?

Yes. We don't feel as compelled to get in the M&A business as much as other banks. We are based on a strong relationship model. And so I can see why other banks that are more mass market-focused feel like they would need to build scale. Now having said that, scale is fantastic. It's better to have than not to have it. But we don't feel compelled to go chase an M&A model just because we need scale. And so we're going to stay focused on our organic strategy and grow through that. It would really take a perfect storm of opportunities and fit for us to go through a banking acquisition. Having said that, we are open and we have executed on small tuck-ins, again, like the trust advisory business that we did that we bought last January or so. And some of these might not even make a press release or they might not be a public notice. But we are always looking for lookouts, for small tuck-ins to fill in product gaps that we might have. But I don't necessarily see us going after a full bank acquisition. Not to say it can't ever happen, but it's not on the radar. It's not something that we're focused on. We think the better percentage is to focus on our business model. We're in great markets. We think there's still opportunity there, and we think that's a better bet for shareholders.

It's a great message. And on that note, I think we've run out of time. So Jim, thank you so much. And Darlene, thanks for making this happen, and have a great day.

Thank you, Ebrahim.