Q3 2020 Comerica Inc Earnings Call
Welcome to Comericas third quarter 2020 earnings call at this time, all participants are in a listen only mode. After the speakers remarks, there will be a question and answer session to ask a question during the session you'll need to price.
One on your telephone I would now like to hand, the conference over to Darlene persons director of Investor Relations. Please go ahead ma'am.
Thank you Regina good morning, and welcome to Comericas third quarter 2020 earnings Conference call.
Just sitting on this call will be our president Chairman and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Marta chassis, and executive director of our commercial Bank Peter Sulick.
During this presentation will be referring to slides, which provide additional details.
The presentation slides in our press release are available on the Fccs website as well the Investor Relations section of our website Comerica Dot com.
This conference call contains forward looking statements in that regard you should be mindful of the risks and uncertainties that could cause actual results to materially vary from expectations.
Forward looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements. Please.
Please refer to our safe Harbor statement in today's release and slide two which incorporate into this call as well as her FCC filings for factors that could cause actual results could differ.
Now I'll turn the call over to Curt who will begin on slide three.
Good morning, everyone. Thank you for joining our call.
Today, we reported earnings of 211 million, an increase of 87% over the second quarter.
Our customers continue to act prudently conserving cash and adjusting their operations dropping a reduction in loans in taking deposits to a new record.
Learn loan balances along with strong credit metrics and an improving yet uncertain economic resulted in the allowance for credit losses remaining near 3% and the provision of $5 million.
As far as revenue yes.
The impact from lower interest rates way and card fees remained robust and other fee income categories began to recover.
Expenses are well controlled and included a 4 million dollar increase in charitable contribution.
Are we returned to double digits nearly 11%.
Value per share grew to $53.78 the seventh consecutive quarterly increase.
We remain focused on continuing to enhance shareholder value.
Based on recent conversations I've had with employees and customers sentiment appears to be modestly better reflecting cautious optimism and a sense of hope for the future based on our country's overall economic resiliency.
We began to see some signs of improving conditions.
However, it is very difficult to predict the pace of the recovery. This.
This is reflected in our loan portfolio overall, we are starting to see some positive trends.
Alex is began to grow mid quarter and increased modestly month over month in September.
Oh through our pipeline has begun to rebuild although it remains well below pre carbon levels or not.
On a full quarter average basis loans decreased 1.5 billion in the third quarter.
The largest contributor was a nonurban 10 million dollar drop in average national dealer loans in conjunction with significant decline in dealer inventory levels in the second quarter, which have yet to recover.
This is due to supply backlogs following the manufacturing shutdown combined with the rebound in sales activity.
We anticipate loans will rebound next year is audio inventory returned to normal levels.
Deposits continued to show strong broad based growth with average balances increased to 4.5 billion, including 3.2 billion in non interest bearing deposits.
Government stimulus programs have provided tremendous liquidity in addition.
In addition, as we've seen in other times of economic uncertainty our relationship based customers are maintaining and building cash and the safety of their comerica count the resulting increase in liquidity drive our total average assets to a record 84.3 billion.
As expected net interest income declined 13 million as lower interest rates had a 15 million dollar impact in this ultra low rate environment, we continue to carefully manage loan to deposit pricing to attract and maintain customer relationships.
Primerica is a strong credit culture with conservative credit underwriting, which has served us well in times of economic stress.
During the current period of unprecedented disruption our portfolio has performed well and we believe this will continue to be a differentiator for us in the industry.
Criticize loans remained stable and nonperforming assets are well below historic norms.
Also net charge offs decreased to only 26 basis points. However.
However, given the difficulty in predicting the path of economic recovery, our credit reserve remains at over $1 billion.
We're staying close to our customers in addressing their needs at the current level. We believe our reserves are appropriate and that we are well position.
Noninterest income increased just customer activity began to rebound, including continued strong contribution from our current platform.
Of note following robust activity in the second quarter derivative income declined $10 billion.
We have continued to maintain our expense discipline.
Excluding the impact of deferred comp and an increase in charitable contributions expenses declined.
Our capital remained strong with an estimated to EG one of 10.3%.
We remain focused on deploying our capital to support growth, while maintaining our very attractive competitive dividend.
And now I will turn the call over to Jim to review the quarter in more detail.
Thanks, Curt and good morning, everyone.
Turning to slide four average loans decreased 1.5 billion, which compares favorably to results for the industry as indicated by the ha data from large banks.
As Curt mentioned national dealer declined $910 million due to low inventory levels impacting floor plan loans.
As far as corporate banking, you may recall that large companies drawn lines earlier this year to build liquidity buffers in a time of great uncertainty.
This resulted in an increase of nearly $800 million in second quarter average balances.
Corporate banking line utilization has returned to pre pandemic levels with average balances down nearly $500 million in the third quarter.
General Middle market loans declined about 400 million, while deposits increased nearly 2 billion.
Customers have been prudently cutting cost as well as reducing working capital and capex requirements to improve their cash flow in this challenging environment.
For the portfolio as a whole line utilization decreased to 47% at period end.
On the other hand with full for full quarter effect of Triple B loans grew and business banking in the small business segment captured in retail banking.
Also our mortgage banker business, which serves mortgage companies was at an all time high increasing over 300 million due to very robust re fi and home sale activity.
Loan yields were 3.13% a decrease of 13 basis points from the second quarter lower rates were the major driver one month LIBOR. The rate we are most sensitive to declined 19 basis points.
This was partly offset by pricing actions, we are taking particularly adding LIBOR floors when possible as long as we knew.
Mix shifting balances, including the full quarter impact of lower yielding triple P. loans also had a negative impact on yields.
Deposits increased 7% or 4.5 billion to a new record of $68.8 billion as shown on slide five.
The larger driver continues to be noninterest bearing deposits and growth has been broad based with increases in nearly every business line.
As Curt mentioned customers are conserving and maintaining excess cash balances.
Period end deposits increased over 700 million the largest contributor was technology and life Sciences as robust fund raising added liquidity and customers reduce cash burn.
The strong deposit growth our loan to deposit ratio decreased to 76%.
The average cost of interest bearing deposits was 17 basis points, a decrease of nine basis points from the second quarter ARPU.
Our prudent management of relationship pricing in this low rate environment, our large proportion of noninterest bearing deposits as well as the floating rate nature of our wholesale funding drover total funding cost only 14 basis points for the quarter.
As you can see on slide six we put some of our excess liquidity to work by increasing the size of the portfolio.
We added 1.75 billion in treasuries and $500 million and mortgage backed securities.
In addition, we continue to reinvest prepays, which remained elevated at around $1 billion for the quarter.
Yields on recent purchases have been around 140 basis points.
The additional securities combined with lower rates on the replacement or Prepays resulted in the yield on the portfolio declining to 2.13%.
Of note, we have not seen a significant impact on the portfolio's duration or the unamortized premium which remains relatively small.
Turning to slide seven debt interest income declined $13 million to 458 million and the net interest margin was 2.33% decline of 17 basis points relative to the second quarter.
The major factors were lower rates, which had a negative impact of $15 million or seven basis points in the margin and the increase in excess liquidity reduced the margin by nine basis points.
Taking a look at the details interest income on loans declined 26 million and reduced the margin 13 basis points.
Lower interest rates on loans alone had an impact of $21 million and 11 basis points in the margin.
Lower balances had a 14 million dollar impact and the mix shift in portfolio, including the full quarter of lower yielding triple P. loans had a four basis point impact on the margin.
Partly offsetting this were higher loan fees and the margin primarily triple play related.
As well as one additional day in the quarter.
As discussed in the previous slide we had lower yields and higher balances in our securities portfolio, which together had a $2 million and two basis point negative impact.
Higher deposits at the fed added $1 billion, but had a negative impact of nine basis points on the margin.
Deposit costs declined by $5 million and added three basis points to the margin primarily result of a prudent management of deposit pricing as I previously mentioned.
Finally with reduction in balances and lower rates wholesale funding costs declined by $9 billion, adding four basis points to the margin.
We received the full quarter benefit of debt repayments, we made in the second quarter, and we prepaid $750 million and FHLB advances in July and August.
As a reminder, given the nature of our portfolio or loans reprice very quickly. So the bulk of the impact from lower rates has now been absorbed.
Also we continue to closely monitor the competitive environment and our liquidity position as we manage deposit pricing.
Overall credit quality was strong as shown on slide eight nuts.
Net charge offs were $33 million or 26 basis points, including recoveries of $20 million.
Criticized loans remained relatively stable with an increase of only $27 million and comprised 6.5% of the total portfolio.
Nonperforming loans remain low as 62 basis points in the bulk of the $54 million increase in the third quarter was attributed to energy loans.
In summary, we are leveraging our experience and expertise working closely with our customers and carefully reviewing their current and projected financial performance we have.
We have adjusted risk ratings as appropriate.
We started the cycle from a position of strength with very low nonperforming and criticized loans and migration. So far has been manageable.
Turning to slide nine the economy began to improve through the quarter. However, the path for recovery remains uncertain due to the unprecedented impacts of the COVID-19 pandemic for this.
For this reason our seasonal modeling in late third in the third quarter did not significantly change and included the recession that we have been experiencing followed by slow recovery.
More severe assumptions were used to inform the qualitative adjustments made for certain segments. This.
This combined with the reduction in loan balances resulted in a slight decrease in our allowance for credit losses, which remains above 1 billion.
Our credit reserve ratio was 2.14%, excluding triple P. loans.
Our credit reserve coverage for Npls was strong at 3.2 times.
Again, we are well positioned with relatively high credit reserve and low nonperforming assets as illustrated.
We believe our disciplined underwriting and diverse portfolio are assisting us in managing through this pandemic recession.
Energy loans are outlined on slide 10.
The decreased 251 million to 1.8 billion at quarter end and represent 3.5% of our total loans.
P. loans make up nearly 80% of the energy portfolio and energy services, which is considered the riskier segment was only 46 million.
The allocation of reserves to energy loans remained above 10%.
While non accrual loans increased criticized loans decreased a 102 million and net charge offs decreased to $9 million.
Charge offs are not a $14 million in recoveries, which are unlikely to repeat in the near term.
Follieri terminations are just beginning and we expect a small increase in the borrowing bases as higher energy prices were offset by lower production inventory with.
With more than 40 years of serving this industry, we have deep expertise and remain focused on working with our energy customers as they navigate the cycle.
Slide 11 provides detail on segments that we believe post higher risk in the current environment.
No we continue to review the portfolio refining our assessment.
As a result, we have removed casinos and sports franchises from this group as we no longer see elevated risk.
That aside period end loans in the social distancing segment decreased to $145 million or 5%.
As expected criticized loans increased a $102 million yet remain manageable at 10% of the segment and non accruals remained very low.
We believe we are well reserved as we have applied a more severe economic forecast to the segment.
We have deep expertise and a long history of working in the cyclical automotive sector for.
Production has been ramping backup and auto sales have rebounded some.
Similar to the social distancing segment, while loans decreased about $250 million. The criticized portion increase yes, non accruals decreasing remain low.
Our leverage loans tend to be with middle market relationship based customers with sponsors management teams and industries, we know well and we avoid the covenant light deals.
Balances increased $85 million and criticized and non accrual loans were slightly higher.
As far as payment deferrals, they provided a cushion as customers adjusted to the environment now that they are.
Now that they have acclimated initial deferrals have expired and new request of a nominal told.
Total deferrals at September Thirtyth dropped only 70 basis points of total loans.
Noninterest income increased $5 million as outlined on slide 12.
Improved economic conditions had a positive impact on deposit service charges and card fees.
Deposit service charges were up $5 million with increased cash management activity.
Also card fees remained very strong and increased $3 million due to higher consumer volumes and merchant activity spurred by the economic stimulus as well as changes in customer behavior related to coated.
Commercial lending fees grew with increased syndication activity and Unutilized line fees.
As expected customer derivative income declined following very robust activity in the second quarter, which related to the rapid decline in interest rates and volatile energy prices that have since stabilized.
Derivative income also included a $6 million unfavorable credit valuation adjustment compared to an unfavorable adjustment of $3 million in the second quarter.
Securities trading income decreased $2 million, but remained at an elevated level and reflects fair market adjustments for investments, we hold related to our technology and life Sciences business.
Similarly investment banking fees decline continued to be relatively strong.
Deferred comp asset returns for $8 million, a $6 million increase from last quarter, which is offset in noninterest expenses also.
Also bank owned life insurance increase with the receipt of the annual dividend.
Turning to expenses on slide 13, salaries and benefits increased $8 million.
This included the increase in deferred comp of 6 million that I, just mentioned as well as seasonally higher staff insurance.
A catch up on maintenance projects, which we expect to continue in the fourth quarter as well as seasonal taxes resulted in an increase in occupancy costs.
As previously announced we increase or charitable contributions to assist businesses and communities impacted by the pandemic.
Since early March Comerica, together with Comerica charitable foundation has distributed over $9 million to over 150 nonprofit and other community service organizations.
Outside processing decreased 4 million, primarily related to lower triple PD Lone initiation volumes. In addition, operational losses and legal related costs declined $3 million.
Our expense discipline as well ingrained in our company and is assisting us in navigating this low rate environment as we invest for the future.
Our capital levels remain strong increasing to an estimated CPT one of 10.26% as shown on slide 14.
We remain focused on maintaining our attractive dividend and deploying our capital to drive growth, while we maintained strong capital levels with a cetone target of 10%.
In addition, the dividend is supported by strong holding company cash.
Slide 15 provides for outlook for the fourth quarter relative to the third quarter.
We are assuming a continued gradual improvement in GDP in unemployment.
Also while we do expect to see some modest forgiveness of triple play loans by the end of the year. There is a great deal of uncertainty.
Therefore, we exclude any impact from forgiveness on loans that interest income and expenses from this outlook.
Starting with loans, we expect national dealer balances to increase as auto inventory levels begin to rebuild.
Mortgage banker is expected to decline somewhat from its record high with seasonally lower purchase and refi volumes in it.
In addition, we believe the recent stabilization of balances that we have seen in certain business lines, such as middle market large corporate and energy should continue.
However, on a quarter over quarter basis average balances in these businesses are expected to be lower.
We expect average deposits remained strong and stable as customers continue to carefully manage their liquidity.
This expense expectation includes excludes the benefit from any further government stimulus programs.
Overall net interest income is expected to be relatively stable.
As we have already absorbed the bulk of the effect from the decline in rates, we estimate the net effect of lower rates alone will be $5 million or less.
The impact from reduced loan balances lower interest rates on loans and lower yields on securities is expected to be mostly offset by additional rate floors on loans a decrease in deposit rates to an average of 14 basis points as well as the full quarter benefit of third quarter actions to increase our securities portfolio and reduce wholesale borrowings.
Again, this outlook excludes any benefit from triple P. loan forgiveness.
Credit quality is expected to be solid with net charge offs, increasing from a low third quarter level, which did include strong recoveries.
Although the pace of economic recovery remains uncertain with our credit reserve at about 2% of loans in the third quarter. We believe we are well positioned to manage through it.
We expect noninterest income to decline as we do not expect to third quarter levels of deferred comp securities trading income or bully to repeat.
We believe several customer driven fee categories should grow with improving economic conditions, but this is expected to be offset by card volume decreasing as recent elevated activity recedes.
As far as expenses, we expect to rise and technology costs as we catch up on initiatives that were delayed due to coated.
We are committed to investing in our futures that we are well positioned coming out of the pandemic and.
In addition, we expect an increase in related to seasonal staff insurance.
Mostly offsetting these increases charitable giving should revert to a normal level and we do not expect the level of deferred comp to repeat.
We continue to focus on controlling expenses as we closely manage discretionary spending.
Finally, our capital levels are healthy and we remain focused on managing our capital with the goal of providing an attractive return to our shareholders now.
Now I'll turn the call back to Kirk.
I will close with slide 16.
Over our 170 year history Comerica has successfully managed through many challenging times.
Using our experience and expertise to help our customers and communities navigate stressful situations and achieve long term success is at the heart of Comericas relationship banking strategy.
The unwavering dedication of our team to assist our customers as well as support each other and our communities continues to be a source of pride.
Our longstanding corporate mission is to attain balance growth and profitability by providing a higher level of banking.
Fundamental to our success in accomplishing this mission is our key strengths, which are outlined here.
We have long tenured employees, who have deep expertise in the industries. They serve we have a strong presence in the major metropolitan areas of Texas, California, and Michigan and these markets provide significant growth opportunities along with customer diversity.
There are abundant collaboration opportunities among our three divisions commercial banking retail banking and wealth management.
Robust leading edge cash management suite continues to evolve to meet the ever changing needs of our customers we were.
We have a strong credit culture.
Consistent conservative underwriting approach and prudent customer selection resulted in superior credit performance through the last recession.
It also it is also assisting us in weathering the current environment as evidenced by our strong credit metrics this quarter.
We are committed to maintaining our expense discipline, while investing for the future.
Finally, our capital position is strong and our first priority is to use it to support growth, while providing an attractive return to our shareholders now we'd be happy to take questions.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Peter Winter with Wedbush Securities.
Good morning, good morning, good morning.
Okay.
You guys called out net interest income roughly stabilize in the fourth quarter.
Do you think we're at the bottom for net interest income, especially with rates really can't go much lower and you've got Super high percentage of the loans tied to one month LIBOR.
Good morning, Peter Yes, we are pretty much at the low given the balance sheet mix that we have right now so the $5 million or less that I mentioned for the four for the fourth quarter should continue.
In the short to medium term I do.
I do expect to see a little bit of balance sheet shift movement or mix movement as we move into the second half of 21 and beyond as some of our fixed rate assets start to turn over that would be some of the treasury securities as well as the hedges that we have in the appendix of the presentation here, but.
But I would view the $5 million or less is kind of our base level of rate impact for the for the foreseeable future pending any maturity of some of the fixed rate assets as they turn over in the future.
Right.
And then just on the loan growth, it's challenging for you guys challenging for the industry.
Kurt in your prepared remarks, you said, you're starting to see some positive trends.
I'm just wondering if you can talk about some of the trends you are seeing.
A little bit of color on the auto floor plan Thats in next year, and maybe middle market and small business.
Yes, Peter this is Peter sub six so.
The positive trends that we would see you start to look at things like the pipeline starts to include more new to new opportunities than just new to existing the activity level of our.
Our relationship managers has picked up a little bit.
Across all of our different geographies aegis, you certainly feel more activity than you did 90 days ago, but but it is it is not at all near pre covance levels. So.
So.
I would just say that our overall observations of what we're seeing with customers and prospects is improving.
But I can't say it's robust.
You asked about the dealer and floor plan. This has been a challenging year for that business.
But there are some good indicators the Saar rate is sort of double what it was back in April right now on an annualized basis. So we're encouraged by that.
What Jim and Curt described what we typically see in the fourth quarter is a little bit of lift.
From a year ago, we saw a drop in the fourth quarter, but I think this year, we'll kind of see our typical pattern that we have seen and dealer. So we're encouraged by that and we think that will continue into into 2021 Middle man.
Middle market and small business again.
A little bit the two different stories I think the middle market space is maybe a little.
A little more active than what you would see in small business that has been more hit through this cobot crisis, but.
Both of those segments are conserving cash and managing their their loans and being.
And really really responsible and I think thats translated to the to the nice credit performance that we have seen so far and again, depending on the geography, and what's going on with Covance sort of defines how active each of those segments is at the moment, but we are we are encouraged by what we're seeing in both of them probably more in middle market.
Market than maybe in business banking and small business just yet but.
That would be hard to answer that.
Great.
Thanks for the color yes.
Thank you Peter.
Next question comes from the line of Ken Zerbe with Morgan Stanley.
Good morning, Thanks, good morning.
Just actually wanted to kind of follow on Peter's question, a little bit.
You mentioned that demand is going to let's say the relatively stable for the foreseeable future, but I think a lot of the market concern or question is what happens a little bit longer and you mentioned the treasury securities of the hedges.
Andrew sort of balance sheet mix I suppose in the back half of 2021.
How much did those hedges and other items actually add to Eni.
Today that will be going away in the future.
Where does he and I bought about if rates actually stay where they are when we think about like Lee 21, or maybe 2022.
Okay. Good morning, Ken.
Boston for you when we talk about $5 million range.
Yeah.
Medium term assets that treasury churn.
And some of the hedges rolling off.
Packs are edging up.
With that I don't see it going past the.
$8 million of solid in the third quarter so often.
Fox it and using that range.
Ultimately if you go to the total hedge portfolio that we have.
You can do the math yourself you see it adds up to about $100 billion annually, but.
But those go out a number of years and obviously there is a number of things that could happen in the economy and a lot of uncertainty in terms where rates might go over the next few years, but.
The way I would frame it up for you is $5 million in the short to medium term and then as things start to turn through will hover somewhere between five and 15 for the couple of years after that but I don't see us really getting to the $15 billion number that we saw in the third quarter.
Im sorry, just to be clear when you say five or $15 million are you talking like a $5 billion reduction per quarter as always thanks, right, that's right 5 million or less.
Got it okay. So over the next say one year or if its $5 million per quarter, that's $20 million for the year something I have run a run rate basis, that's right 20 million or less than that math.
Got it Okay I understand and then sorry my follow one follow up question on Slide 10, you talked about your see energy portfolio, which you guys always do and we appreciate you actually believe that Theres outsized risk in energy lending today versus some of the other at risk categories that you highlight.
Yes, Ken. This is this is melinda I mean, clearly the energy portfolio is is where we have seen the most stress really over the last 18 months.
I'd say that kind of given the current environment and where oil and gas are today that is certainly help stabilize our credit deterioration, but in order for this segment to really start to improve prices are going to need to strengthen.
I expect it will continue to see some lumpiness and additional charge offs in the energy line of business. If you look at where our non accruals are they are still concentrated in our energy book and the non accrual levels for the other at risk portfolios are very very minimal at this point, that's not to say that we won't see.
Some additional migration and some of those other at risk categories, but for now I think our biggest risk probably continues to be in the energy line of business.
Great. Thank you.
Thank you Kevin for Nick Your next question comes from the line of Steven Alexopoulos with JP Morgan Good morning.
Good morning, good morning, everybody. So just to start on the provision which was very modest this quarter.
Loan balances remain under pressure, what you're guiding to in the fourth quarter and the economic model doesn't change much right. If oil prices remain steady should we expect another quarter of very modest provision in the fourth quarter similar to this quarter.
Yes, as it relates to the seasonal reserves I mean, obviously you all know that is a highly complex process that we go through each quarter and look at a lot of the variables that you already mentioned kind of the economic forecast the level of the portfolio and how our portfolio is responding.
As the economy begins to recover even though we'll see losses occurring reserved levels theoretically should start to come down that that's how seasonal is designed to work for us.
Predicting exactly when that would occur whether we would need to add to reserves or release it.
It's been a really materialize over the next couple of quarters. We would expect that we will continue to see some additional migration over the next two to three quarters, including into Nonaccruals.
And some charge, resulting charge offs from that and assuming no other negative changes to the macroeconomic outlook reserved levels again should begin to normalize.
And how did that change in economic forecasts impact this quarter's reserve.
It was more it was probably an equal weighting between the economic forecast being stable again Q2 versus Q3, we use consensus.
As well as remember our portfolio declined about 1 billion five so that obviously had an impact.
And then we added qualitative reserves to those at risk portfolios to make sure that we had adequate coverage for those at risk portfolios, which again, we do expect to continue to see some migration and some losses that we believe that is going to be very manageable and well covered with our billion dollars of reserves.
Okay. That's helpful. And then finally for Kurt So I'd say the guidance for Fourq 220, it looks like pre tax pre provision income growth will remain a bit of a headwind from a big picture view, assuming short term rates remain anchored near zero you talk about your ability or maybe even a game plan to drive pre tax pre provision income growth over the net.
Year, any new fee income initiatives expense initiatives anything to talk about there. Thanks.
Yes, Steve obviously, we are very focused on the return to our shareholders and delivering appropriate growth and are we done.
We did obviously despite some of the current challenges we do feel good about our long term financial outlook and we continue to think we have a very attractive franchise that we operate in some great higher growth markets, which we believe as we start to come out of the current situation now the recovery that those markets should.
Performed better than me.
In many areas of the country. In addition, I think that.
We've got a number of comparative strengths that we will continue to leverage credit is certainly one of those areas and I think we'll be in focus for the remainder of 2021 and maybe beyond that and we believe that based on our historical performance said.
Performance that we can perform very well there relative to our peer group.
You mentioned fee income, it's an area, we're very focused on and most notably I might mention Treasury management cutting.
Continues to be an area of distinction for us and it continues to be an area that we're investing in and adding additional capabilities.
Thank you know we've got a very strong card and merchant platform. We continue to feel like Weve got upside opportunity. There and then we've got really broad wealth management expertise and talent and that we're very focused on the intersection between our wealth management business, the commercial bank and our retail bank in terms of driving new revenue.
And then just on the balance sheet side, Peter talked a little bit about what we're seeing there, but we continue to have a lot of depth and middle market and business banking.
As well as a number of unique niche.
A niche businesses that we think position us well versus the competitors, especially as we come out of this situation to the only sort of niche business. We have that maybe has some downward pressure on it would be would be energy and then we're going to stay focused on expenses from a long term.
Perspective, and we'll continue to look at opportunities that we might have to be careful on the expense side, obviously did a really good job coming out of our gear up initiative and have run a very efficient organization relative to our peer group and having said all that we are not going to do it for the sacrifice the long term view in your mind.
Perspective, and I said this on our last earning call is that when you look at our company.
Hundred 70, now 171 years old we've managed through lots of different cycles lots of different economic challenges and so we remain focused on the long term.
The quality of our assets, our overall long term earnings power and investing in the franchise longer term and we're going to focus on the things that we can manage and what is a very challenging environment I do think theres, obviously a lot of uncertainty.
Both with co bid and more recently the election coming up so there is a lot that sunpower predictable, but we think we're well positioned to sort of manage whatever direction. The economy may go in and again focusing on the long term.
And doing that at the same time to fix and how we can improve revenue in 2021.
Great. Thanks for all the color Kirk and thanks for taking my questions.
Your next question comes from the line of John Pancari with Evercore ISI.
Hello, John.
Hey, this is adopted by Columbia for John.
So I was just one question on NIM could you talk about some of the opportunity.
On the funding costs.
To mitigate some of NIM pressure.
No rate environment.
Yes, good morning, that's.
Thats something we are looking at and considering taking action on we're not ready to click to declare that quite yet we are.
We obviously, let some more expensive funding a mature in June and did some prepays both in the second quarter in the third quarter what.
What we have left now really consists of a lot of parent company funding, which of course, we're not going to prepay.
Prepaid because we.
Value the cash that we have the parent company we have.
We have some sub debt, which provides capital values to we're not going to prepay that were really down to a very limited amount of bank senior debt, which provide some pretty good FDIC benefit and frankly.
And frankly, the economics aren't great. If you went through a tender process so that pre.
So that pretty much leaves some FHLB funding of which we've really left the most efficient form of pain in the very low 20 range and it will be difficult to obtain that level. The funding again in terms of its efficiency. So we're considering doing something but we're not quite ready to do that yet. So I'd say there is some limited opportunity that we may or may not be.
Pulling the trigger on.
Okay.
And then just shifting to a different topic in your outlook I think you mentioned.
Expenses tied to technology catch up.
Okay can you give us a sense for where you stand in terms of the tech spend that you can.
But you consider as actually if you Miss the worst is something that can wait and then maybe what sort of incremental spend are you planning to look over the next year or so in terms of tech.
Yes. This is Curt I'll take that question.
What I would say on the front end is that we did a lot of work through gear up to positioning our spend.
And really try to migrate the spin less around legacy platform and more around things that we would consider a customer and colleague enabling so we went through a lot of process around rationalizing a lot of raging platforms and applications revenue.
We've done a lot to migrate applications to the cloud and just overall free up capacity. So we've got a lot of things in flight right now we continue to work on.
Loan origination capabilities, especially online lending capabilities, we have rolled out a companywide CRM platform to continue to make enhancements there we're continuing to invest in our data analytics capabilities and how we use predictive analytics in the in the sales process and serving.
Our customers.
We've got a new digital online platform for originating.
New customer relationships, especially in the real to retail bank, which is proving valuable to us and acquiring new relationships and we've talked about Treasury management earlier and the list kind of goes on and what I would say is that when you lie.
When you look at sort of our spend today, we definitely have freed up a lot of capacity for colleague and customer enabling type capabilities and we believe that we are staying very abreast of sort of where the industry is headed and in.
And increasingly are seeing more digital adoption of technologies across all of our platforms not just the retail bank wealth management and commercial banking as well.
Okay. Thank you.
Yes.
Your next question comes from the line of Erika Najarian with Bank of America.
Good morning America good morning.
Couple of follow up questions on the.
Yes on the Eni line of questioning.
First you continue to carry a significant level of cash relative to history and I'm wondering as we think about your guidance.
You talked about 5 million base impact on quarterly net interest income and perhaps widens to a higher number that's less than 15 million due to the impact of fixed rate repricing and the hedges rolling off is what does that contemplate in terms of cash redeployment.
Good morning Erika.
As we mentioned, we did deploy the two and a quarter billion throughout the.
Throughout the third quarter into some treasuries and MBS securities.
At this point in time, we are not contemplating in that outlook that we gave additional actions in terms of either purchase funds prepayment or securities investment growth of the securities portfolio.
Both of those are possibilities, but.
But as I mentioned that the funding we have is pretty efficient and of course as you know the yields out there aren't especially enticing for redeploying cash into securities we.
We were willing to do a certain amount of that in the third quarter.
Given some of the uncertainties that were there as well as your own asset sensitivity position and we could consider doing it in the future too.
But given some of the marginal benefit thats available at this point, we're not contemplating that and that is not baked into that outlook.
Got it and and consensus.
Looking at Fourq 21, just because I'm thinking that could be a clean number for consensus excluding PPP pay downs and right now the consensus has net interest income of 451 million for the fourth quarter of 21.
Net interest margin of 238, if we're interpreting your comments right unless we get much better loan growth and.
Much better opportunity for cash redeployment. It seems like that has to be readjusted lower for now.
But we'll see we're not ready to comment in 2021, yet I'll keep in mind, I did say $5 million or less so I mean, its could be a little more than zero could be a little less than five but its going to be in the low single digit millions and then loan volume will be a key obviously, that's a big driver and thats a bit of a wildcard.
And then finally floors, which are part of that rate outlook, we havent.
We havent, having some success with as you can see in one of the slides and that could be a driver also to help mitigate some of those pressures so not quite ready to comment on 2021, yet, but we do see some opportunity to mitigate some of these headwinds.
Got it and just one last one and maybe this is for current.
A lot of there's been.
There's been a lot of discussion on what normalized returns could be for banks and.
And you know as I think about the recovery loan growth rates had comerica following the financial crisis.
But.
2012, sorry, 2015, and much lower growth in 16 through 18, and then now up 3% in 2019, as we think about it.
Comerica can our intercompany note post covert world.
Do you see that the growth opportunity for this bank is really more of a GDP plus.
That seems like a softball question, but you know the historical averages, which would suggest that it might be lower than that.
Erika what I think maybe to keep in perspective is historically, we have grown more in line with GDP and I do think growth in line on a relative basis with GDP makes sense, but also recognize that every market we operate in.
It has a little bit different dynamics and may be being impacted differently by either a recession or recovery and then we've got some national businesses that can swing those numbers from time to time based on dynamics that are in play whether it's mortgage banker commercial real estate dealer energy et cetera.
I do think it's important to remember during that period of time between 2015 and 2018 is that we essentially managed down close to $2 billion of energy Outstandings and that was very deliberate on our part that was a very deliberate strategy to bring our exposure down from a number that was in the high single digits down.
To where it is today and we are comfortable with the portfolio based on the size. It is today, but we were de risking our portfolio and trying to de risk some of the the.
The volatility in the portfolio and so we were managing that down significantly. So while we are seeing growth through the rest of the core portfolio was really being massed by that by that that impact there, but we do believe we've got a lot of growth opportunity. We are have been actively redeploying some of our ft to some of our high.
Yeah, our growth businesses, and some of our higher growth geographies and we.
We also are seeing some disruption right now with some of our other competitors and so we've added some outside talent to the organization is well along the way and we are keenly focused on new customer acquisition right now not only serving our existing customers, but acquiring new customers in many of our business lines in many of our geography. So I think your statement.
He is an accurate one and I do believe that the 2000 fits into 2018 was a little bit of a.
Have a apparition based on some unique circumstances that we were managing through.
Thank you very helpful.
Your next question will come from the line of Scott Siefers with Piper Sandler.
Good morning, guys.
Hey, Thanks for taking the question I just wanted to return to the loan growth discussion for a quick second I think early in your prepared remarks, you guys had said that.
Loans grew modestly.
Quarter over quarter for the first time in September what are specifically was that was that like that is national dealer.
Finally sort of catching up or.
Where did that.
Net growth come from.
You mean.
Scott This is Peter so I think it.
It's a little bit of moving parts in there. If you look at that slide for the comp the conversation that we've talked a little bit about with what we've seen in dealer and what were what we think this transition into Q4 is as you described a little bit of stabilization in dealer. We do continue to see pay downs in the large corporate space we've seen.
Some nice activity in our equity fund services business.
And we think we've kind of maybe seen 47% utilization I think is about as low of utilization as weve really ever seen in a really really long time and so our belief is that thats kind of bottomed out. If you will I don't know that I would say its on any sort of upward trajectory mortgage clear.
We had a really good September a good third quarter third quarter overall in our period end balances in.
Mortgage for September were high so.
I don't know that I would take away from that that we are on some sort of uptick going into Q4. The outlook. We've described as what we think we will see but we we do feel like the end of the quarter was a little better than what we were seeing in in the beginning.
Okay perfect Thats good color.
I appreciate that and then I think you you began to touch on.
My follow up was going to be which was on that line you to.
Line utilization number on slide four the 47% so.
It sounds like I'm interpreting it correctly you guys think that has kind of.
Bottom so is that sort of an accurate interpretation and is that.
Yes.
Indeed still above pre co bid levels, because 101 or two other banks have.
Actually in utilization dipped below pre coded levels, just want to get a sense for your thoughts there.
Yes. This is Jim pre co but of course, we were a little bit higher than 47%. So clearly the 47% reflects some of the lack of loan demand in this kind of cobot environment, yes.
Yes, Guy and I again at 47, depending on what line of business and what geography, you're talking it actually is less in some and higher and others. So my.
My my hope would be that we're kind of reaching the bottom, but or have reached the bottom but to Jim's point pre cobot levels for us I think would be higher.
Utilization than than what you've got here.
Okay perfect. Thank you guys very much for the color.
Yep.
Your next question comes from the line of Ken Usdin with Jefferies. Good morning.
Good morning, Ken Hey, Thanks, Good morning, everyone, Hey, a question on capital return so.
The good news with the low provision is that the earnings coverage of the dividends looking better as we look out you guys aren't stress tested but just wondering how you think about potential.
Getting back into buyback activity and how much you have to evaluate where the dividend is in terms of its size and payout.
At the point, you get ready to potentially get back into buybacks. Thanks.
Okay, well good morning, Ken Yes, we as you've heard in past calls we continue to be confident about the dividend and I don't anticipate a change there at this point in time Rick.
Regarding buyback.
I'd like to say that we're cautiously confident in terms, what we can see in front of us.
We're not quite ready to turn the buyback on just yet because theres always the thought of what can we see in front of US there are still a lot of uncertainties in this environment and we would like for there to be just a little more certainty in terms of the risks out there before we turn that buyback back on but also mentioned that some of the uncertainty isn't all negative some of it is potentially pause.
It is in the form of risk weighted asset growth or loan growth.
We've had a decrease in loans as you know ex Triple P for a few quarters here and to the extent the economy bounces back and we get some loan growth that could eat into some of that capital to and.
We prize that capital in value it for providing cash.
Capital to fund customer loan growth also so we just want to get a little bit more certainty in the environment before we are ready to declare the buyback turned back on.
Just to add I mean, we our first objective is always to take care of our customers and so we would we would first and foremost like to deploy capital into two assets in terms of the lending side, but to the degree that doesn't happen, we will continue to evaluate buyback.
Understood and I'll follow up on the PPP side understood I understanding that your guidance doesn't bake in any forgiveness can you tell us just generally how you are expecting and thinking about forgiveness to play through in terms of timeframe and whether or not you've made any changes to the fee schedule given the change between two year and five year average durations.
Thank you very much.
Yes, Theres a lot of uncertainty obviously with the forgiveness process, we're not ready to make any predictions there yet which is why we excluded it from the outlook we have now.
We have not made any changes in terms of we handle the fee amortization. So we're still on a two year basis and comfortable with where we're at from an accounting standpoint on there and we'll just continue to monitor the environment and see where it goes we're prepared to go though if and when.
Congrats on the treasury or ready to go.
I have customers do you have it.
Do you have an idea of how many customers have already applied for forgiveness, just give us a sense of like whether or not you would expect it to be active or not thanks guys. Appreciate it.
Yes at this moment, let me just talk for a minute about our forgiveness process on we are actually starting our open invitation to clients.
Starting today, and we will do that on a tiered basis, we did pilot our technology platform for the forgiveness of we've accepted about 60 applications.
As you know the FDA was pretty slow to get their portal open and actually processing forgiveness applications.
Invitations will start going out today and that will be tiered based on loan size and we would expect to see those applications start coming in over the next 30 to 60 days, it's difficult to predict what the volume would be but we're going to concentrate on the larger customers first because we are still hopeful quite frankly that we get a dish.
No relief for the smallest borrowers in terms of.
Simplifying the application we did get simplification on 50000, it was helpful, but not as helpful. As we had hoped and we're still hopeful that we will get forgiveness simplification for loans less than 150, and so those will tend to be more at the back half of the processing over the next quarter or so.
Thanks very much.
Your next question will come from the line of Terry Mcevoy with Stephens.
Good morning.
Hi, Thanks for taking my questions within National dealer services do you expect a more pronounced step up here in the fourth quarter relative to what you saw and say 16 17, and 18 were just eyeballing slide 23. It looks like there was typically a 300 million dollar increase in average balances.
Terry its Peter Yes, So I think what I would say is that when you look at that slide 23, I would compare 16, 17, and 18, where you saw an uptick.
So what we think we're going to see this quarter versus a year ago, where we saw the drop off in 19 net that historically you would have seen that business.
The uptick in the fourth quarter I don't know that it will be 300 million like you described in 16, we do think it will be up.
But we don't we don't we think a year ago is not what we're going to see where we saw a drop off of $200 million.
Okay, and then just as a follow up question, maybe the mortgage banker finance book with period end loans 4.5 billion and given the average in the third quarter is your view today that on an average basis mortgage banker finance is still higher in the fourth quarter and that really in the first quarter of next year is is when you see the headwinds.
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Jerry the answer to that is no. We don't think so we think it's actually going to drop off here. If you kind of look at page 21. The EMEA originations forecast is down we think it will be sort of down to flat flat to down as we go into the fourth quarter and really continue into 2021.
A lot of along the lines of the forecast you see on the bottom right of page 21.
Great. Thank you.
I will now turn the conference back over to Curt Farmer, Chairman and CEO for any closing remarks.
So let me just say that.
Continue to be very proud of our comerica colleagues and how we are managing through collectively.
Very challenging environment, and making sure that our customers are taken care of and also making sure that we are doing a good job of serving the communities that we operate in we are always so thankful for your interest in Comerica and we continue to hope for good health and safety for all of you and your families have a good day.
Ladies and gentlemen that will conclude today's call. Thank you all for joining and you may now disconnect.
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