Comerica Inc (CMA) 2018 Q3 法說會逐字稿

Good morning.

My name is Regina, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Comerica Third Quarter 2018 Earnings Conference Call.

(Operator Instructions)

I would now like to turn the conference over to Darlene Persons, Director of Investor Relations.

Ma'am, you may begin.

Thank you, Regina.

Good morning, and welcome to Comerica's Third Quarter 2018 Earnings Conference Call.

Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Chief Financial Officer, Muneera Carr; and Chief Credit Officer, Pete Guilfoile.

During this presentation, we'll be referring to slides which provide additional detail.

The presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website, comerica.com.

This conference call contains forward-looking statements and, in that regard, you should be mindful of the risks and uncertainties that could cause actual results to vary materially from expectations.

Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statement.

I refer you to the safe harbor statement in today's release and Slide 2, which I incorporate into this call, as well as our SEC filings for factors that could cause actual results to differ.

Also, this conference call will reference non-GAAP measures.

And in that regard, I direct you to the reconciliation of these measures within this presentation.

Now I'll turn the call over to Ralph, who will begin on Slide 3.

Good morning, and thank you for joining our call.

Today, we reported third quarter earnings of $318 million or $1.86 per share.

Excluding $20 million in securities losses, revenue grew 2%.

Our credit metrics remained strong, and expenses were well controlled.

This drove an ROE of over 16% and an ROA of 1.77% for the quarter.

Relative to the third quarter of last year, our earnings per share increased 48% and net income is up 41%.

This increase is due to our management of loan and deposit pricing as interest rates have moved higher, improved credit quality and continued successful execution of our GEAR Up initiatives as well as a lower tax rate.

On Slide 4, we have provided details on the adjustments related to certain items.

We realized $23 million in discrete tax benefits, primarily related to the 2017 tax reform law.

The bulk of the proceeds were used to reposition a portion of our securities portfolio into treasuries which yield about $4 million in additional interest per quarter.

The repositioning resulted in a loss on the securities sold.

We also incurred restructuring charges related to our GEAR Up initiatives.

Turning to Slide 5 and an overview of our third quarter results.

A seasonal decline in National Dealer Services and typical summer slowdown in Middle Market contributed to a $641 million decline in average loans compared to the second quarter.

This was partly offset by a seasonal increase in Mortgage Banker and continued growth in Technology and Life Sciences, specifically Equity Funds Services.

As far as deposits, average balances increased $263 million.

Our deposit rate increased 9 basis points as we remain focused on our relationship approach to manage deposit pricing to attract and retain customers.

Net interest income increased $9 million, with the net benefit from increased interest rates contributing $13 million.

Our net interest margin decreased 2 basis points to 3.60% as the benefit of rates rising was offset by lower nonaccrual interest recoveries and higher excess liquidity.

We continued to have strong credit quality with a decline in problem loans and 13 basis points in net charge-offs.

The charge-offs for the quarter were fully covered by our existing allowance, and as a result, there was no provision for loan losses.

Noninterest income increased $6 million or over 2% excluding the $20 million in losses on securities that I previously mentioned.

We have maintained our expense discipline, and our efficiency ratio dropped to just under 53%.

Now that we are no longer subject to CCAR, our board is able to more efficiently and effectively take capital actions with a focus on reducing our robust capital ratios to a level that is reflective of our business strategy.

In the third quarter, we meaningfully increased our payout to shareholders to a record level.

We repurchased $500 million in shares and increased our dividend 76% to $0.60 per share.

Our estimated CET1 capital ratio decreased 23 basis points to 11.66%.

And now I will turn the call over to Muneera, who will go over the quarter in more detail.

Thanks, Ralph.

Good morning, everyone.

Turning to Slide 6. Third quarter average loans declined $641 million compared to the second quarter primarily due to seasonality.

Our auto dealer portfolio decreased $400 million.

Dealers typically reduce inventory in the third quarter in preparation for delivery of the new models.

In addition, this year, dealer has been impacted by M&A activity with a few of our customers taking the opportunity to sell a portion of their franchises at attractive valuation.

Summer slowdown in Middle Markets resulted in a $225 million decline in average balances.

We had a few large loan payoffs in the second quarter in Private Banking, as I mentioned on our last earnings call.

This has resulted in a $191 million decline in third quarter average loans.

Also, we remain selective in the large Corporate space, maintaining our pricing and underwriting standards in a highly competitive environment.

Partly offsetting these declines, Mortgage Banker grew nearly $180 million with the normal pick-up in summer home sales.

Our portfolio continues to benefit from the fact that it is heavily weighted to home purchases, with 89% purchase versus refi compared to the industry average of 75%.

We continue to have solid growth in Technology and Life Sciences, specifically Equity Funds Services.

Total period-end loans decreased $782 million with seasonal declines in Mortgage Banker and dealer services.

Commitments at period end were up $650 million, driven by increases in most business lines, led by Technology and Life Sciences and general Middle Market.

Overall, the sentiment is positive, reflective of the strong economy, yet customers continue to be cautious given recently imposed tariffs and evolving trade discussions as well as constraints due to available labor.

On a year-over-year basis, we have grown loans in many of our specialty areas, such as Technology and Life Sciences, National Dealer Services, Commercial Real Estate and Environmental Services.

This has been offset by reductions in Energy, which has declined over $300 million; as well as decreases in large Corporate and Private Banking.

Our loan yield increased 11 basis points.

Short-term rates increased at a much slower pace in the third quarter.

For example, average 30-day LIBOR increased 14 basis points compared to 32 basis points in the first 2 quarters of this year.

Therefore, the rate benefit of 15 basis points was muted relative to the second quarter.

Also, higher loan fees in the margin added 2 basis points to our yield.

Finally, nonaccrual interest recoveries, which were elevated in the second quarter, decreased $8 million, reducing the yield by 6 basis points.

As you can see on Slide 7, average deposits were up $263 million in the third quarter, with growth in nearly all business lines, led by increases in interest-bearing deposits in Technology and Life Sciences and Wealth Management.

We expect average deposits to increase in the fourth quarter, consistent with normal seasonal patterns but not at the same magnitude that we have seen in years past.

Period-end deposits were impacted by the timing of monthly federal benefit activity in our government prepaid card business.

Of note, relative to the third quarter 2017, average municipal deposits are down nearly $1 billion.

Deposit pricing for the third quarter increased 9 basis points as we remain focused on our relationship approach to manage deposit pricing to attract and retain customers.

Slide 8 provides detail on our securities portfolio.

As Ralph mentioned, we repositioned $1.3 billion of treasuries at the end of the quarter.

We have enhanced our future earnings as the higher yield on the purchased securities results in an additional $4 million per quarter of net interest income.

The loss taken on the securities sold was offset by the discrete tax benefits which resulted from the new tax laws.

As far as the portfolio's third quarter performance, the yield on the portfolio continued to trend up, and there was no significant change in the duration or the relatively small unrealized loss position.

Yields on recent MBS purchases have been in the 360s, which was well above the average rate of 228 on the $465 million in paydowns we received in the quarter.

Turning to Slide 9. Net interest income increased $9 million while the net interest margin declined 2 basis points.

Our loan portfolio added $13 million and 8 basis points to the margin.

Increased interest rates provided the largest benefit, along with one additional day in the quarter and higher loan fees.

This was partly offset by an expected decline in nonaccrual interest recoveries from an unusually high level in the second quarter as well as lower loan balances.

Deposits at the Fed added $10 million, reflecting the benefit from the higher Fed funds rate as well as an increase in average balances.

The higher level of excess liquidity drove a negative impact of 3 basis points to the margin.

Higher yields on the securities book added $2 million and 1 basis point to the margin.

On the funding side, deposit costs increased $7 million primarily due to increased pay rates.

This had a 4 basis point impact.

Also, we issued $850 million in senior debt at the end of July primarily to fund our share repurchase program and prefund some debt that's maturing in the first half of next year.

The higher debt balances, together with the increase in short-term rates, added $9 million in wholesale funding costs and 5 basis points to the margin.

In summary, the net impact from increased rates contributed $13 million or 8 basis points to the margin.

Credit quality remains strong, as shown on Slide 10.

Our net charge-off ratio was 13 basis points.

Gross charge-offs remained low at $25 million.

Recoveries were $10 million following an unusually high level in the second quarter.

Total criticized loans declined $95 million or 5% and now represent 3.4% of total loans at quarter end.

This included a decrease in nonaccrual loans, which comprise only 47 basis points of our total loans.

Energy criticized and nonaccrual loans continued to decrease.

The positive credit migration resulted in a reserve release and a reserve ratio of 1.35%.

The economy is strong, and our customers are performing well.

At this point, we are not seeing any concerning trends.

Turning to Slide 11.

Excluding the securities losses which I previously discussed, noninterest income grew $6 million or over 2%.

This included good customer activity in both interest rate and Energy derivatives.

Investment banking also increased with a pickup in M&A activity.

Also, we had smaller increases in card and brokerage fees.

This was mostly offset by decreases in syndication fees following robust activity in the second quarter as well as letter of credit fees.

In addition, we had increases in bank-owned life insurance with receipt of the annual dividend as well as deferred comp which is offset in noninterest expenses.

You may recall that in the second quarter, we incurred a charge to increase the reserve for a derivative contract related to Visa Class B shares.

Expenses remain well controlled, and our efficiency ratio dropped below 53%, as shown on Slide 12.

Salaries and benefits increased $4 million as the impact from higher contract labor related to technology projects, deferred comp as well as one additional day in the quarter were partly offset by a reduction in our workforce.

Relative to a year ago, our workforce is down nearly 2% as we have implemented our GEAR Up initiatives, driving increased productivity and efficiency across our organization.

GEAR Up restructuring charges were $12 million, an increase of $1 million from the second quarter.

In the third quarter, we repurchased a record $500 million or 5.1 million shares under our equity repurchase program, as you can see on Slide 13.

In addition, we increased our dividend 76% to $0.60 per share.

Together with dividends, we returned $600 million to shareholders.

We have a target to repurchase up to 500 million in shares in the fourth quarter and expect to facilitate this through an accelerated share repurchase program.

Our estimated CET1 declined 23 basis points to 11.66%.

Our goal is to reach a CET1 ratio of 9.5% to 10% by the end of 2019.

Careful consideration will be given to earnings generation, capital needs and market conditions as we determine the pace of the share buybacks.

Turning to Slide 14.

Our balance sheet is well positioned to benefit from increases in rates.

Approximately 90% of our loans are floating rate, with the bulk tied to 30-day LIBOR.

Also, we have a favorable deposit mix with the majority being noninterest-bearing.

Combine this with careful management of pricing, and we have been able to drive a cumulative loan beta of 89% and a cumulative deposit beta of 21%.

In conjunction with the September Fed rate action, we increased our standard deposit rates on select products.

We believe average deposit costs will increase approximately 12 to 15 basis points in the fourth quarter.

Deposit rates are expected to continue to increase as short-term rates increase, however, with some variability depending on the competitive environment, among other factors.

We are closely monitoring our deposits as well as the market.

In total, we estimate $285 million in additional net interest income in 2018, resulting from the full year impact of the 3 rate hikes last year plus the 3 rate increases so far this year.

We have incorporated the slower pace of recent short-term rate movement as well as our deposit cost estimates in determining the expected net benefit of $15 million from a third quarter rate increase, of which $1 million is already in the run rate.

Of course, the outcome depends on a variety of factors, such as the pace at which LIBOR moves, deposit betas and balance sheet movements.

It's likely that the Fed could raise rates in December as well as continue tightening next year, and we stand to further benefit with our well-positioned balance sheet.

We have not yet added hedges to change our asset sensitivity.

Our asset liability committee continues to assess our position to determine the appropriate path given balance sheet movements and our outlook for rates.

Now I will turn the call back to Ralph to provide an update on our outlook for the fourth quarter.

Thank you, Muneera.

Assuming continuation of the current economic environment, we expect loans to grow through the end of the year.

We believe this rebound will result in average loans being stable relative to the third quarter.

Seasonality in the fourth quarter typically drives an increase in National Dealer Services and a decline in Mortgage Banker.

Supported by increased commitments, we anticipate growth in several businesses such as Middle Market and Technology and Life Sciences, primarily Equity Fund Services.

Also, in large Corporate, we continue to be selective, maintaining our pricing and underwriting discipline.

Regarding net interest income, as Muneera indicated, we expect to continue to see the net benefit of the recent rise in short-term rates.

In addition, the securities portfolio repositioning adds about $4 million.

We expect headwinds in the form of higher debt costs resulting from the full quarter impact of the late July debt issuance as well as lower nonaccrual interest recoveries and loan fees.

We remain well positioned to benefit from future interest rate increases, though this outlook does not include a December rate hike.

We expect continued strong credit quality to result in a $10 million to $20 million provision.

Putting aside the third quarter loss on securities, the BOLI dividend and deferred comp income, which is difficult to predict, our fee income is expected to be relatively stable.

Our GEAR Up initiatives should continue to drive growth in card fees and fiduciary income.

Mostly offsetting this growth is a possible reduction in derivative income and investment banking from strong third quarter levels.

Expenses are expected to increase modestly.

We expect a small increase in technology project costs as well as typical seasonal and inflationary pressures.

We continue to be on track to fully realize our GEAR Up savings.

Finally, we expect our effective tax rate to be approximately 23%.

Altogether, we expect our pretax, pre-provision net revenue to grow while we continue to achieve positive operating leverage and drive our efficiency ratio lower.

In closing, our third quarter results were solid.

We continue to focus on revenue growth as well as maintaining favorable credit metrics and well-controlled expenses.

Through significant increase in our share repurchases and dividend, we were able to meaningfully increase the capital return to our shareholders.

We expect to maintain our robust return of capital while properly managing our capital base to support growth and investment in our businesses.

With a solid pipeline as well as increased loan commitments, along with seasonal factors, we expect loan growth to trend positive into the end of the year.

We remain well positioned to meaningfully benefit from rising rates as we manage loans and deposit pricing.

In addition, we have been executing our GEAR Up initiatives and delivering on the efficiency and revenue opportunities.

Our return on assets, return on equity and efficiency ratios clearly demonstrate our commitment to enhancing shareholder value.

And now we'd be happy to take your questions.

(Operator Instructions) Our first question will come from the line of Ken Zerbe with Morgan Stanley.

Just want to clarify one really quick thing.

I think Muneera said interest-bearing deposit costs are going to be up 12 to 15 basis points next quarter?

Or is that total deposit costs?

Interest-bearing deposit costs, Ken.

Got you, okay.

Perfect that helps.

And then maybe a little more broadly, can you just talk about how you guys view debt or long -- I guess, long-term debt as part of your funding mix from here?

Because presumably, if you do have further reductions in noninterest-bearing, like are you going to be more active in issuing sort of more net debt like ex any kind of sort of prefundings?

Muneera?

All right.

Thank you, Ralph.

Ken, we have -- first of all, our deposits, as you can see, we talked about the fact that, in the fourth quarter, we'll continue to see an increase in line with seasonal patterns.

Beyond that, as far as funding is concerned, we have a lot of attractive sources of funding.

We can raise market index deposits fairly easily.

We have FHLB funding that essentially is at about the 30-day LIBOR rate, more or less.

That's sort of the second source that we can go to.

If necessary, clearly, we can also approach the market.

All of that will mean that loan growth is doing really well, so overall, Comerica should benefit.

Got you, okay.

Sorry, but the debt you issued in July was purely a prefunding of debt that's maturing?

That's right and also for the share repurchases, yes.

Got you, okay.

And then -- and just last question really quick.

The loan yield sort of -- what's called the loan yield beta, I calculate about 48%.

Was that purely due to where average LIBOR was?

Or are you guys seeing any signs at all of spread compression in the market?

Curt?

Yes.

No, I would say that nothing that is unusual on the lending side.

It remains a highly competitive market, and we remain very disciplined and very relationship focused.

We have pricing models that really take into consideration, client by client, overall credit risk and profitability of the client relationship.

Okay.

So is that -- are you saying that the loan yield beta should go back to sort of more the, call it, 80%, 90% range next quarter because LIBOR goes up?

Is that what you're implying?

So if you're looking at our loan yield and the beta -- the cumulative beta that we are picking up, that's an all-in calculation of how our yields are benefiting.

It includes any nonaccrual interest recoveries as an example.

But purely for rates, you can see that our loan yield benefited 15 basis points when LIBOR was moving, on average, 14 basis points.

So the pull-through is there.

There isn't any issues on the spread front.

We are maintaining our pricing discipline.

Thank you.

Your next question comes from the line of Erika Najarian with Bank of America.

This is [Brendan] on, on behalf of Erika.

So similar to Ken's question, just wanted to ask more about the competition within commercial lending.

How much business would you guys estimate you guys losing to alternative lending?

And said another way, how competitive is structure and pricing?

Curt, do you want to take that one?

Yes.

Brandon, it is obviously a competitive environment, and that competition extends not only to traditional banks but the nonbanking or shadow side of things as well.

And we are definitely seeing some deals that are more high leverage and more covenant-light.

Having said that, we've got a great client base.

This past quarter, 40% of our new originations were to new customer opportunities, and we've still been in a net acquiring mode with new customers.

And so it is a competitive environment but we felt like that we really are trying to stick to the markets and lines of business we serve and we still have a lot of opportunities to grow.

Great.

And then my follow-up question is, can you guys tell us what your exposure is to syndicated leveraged lending or sponsor-backed transactions?

Pete?

Yes.

Less than 5% of the portfolio.

Thank you.

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

On -- a question on your interest rate sensitivity on Slide 14.

And I know you talked about it.

So you're indicating to a degree that your asset sensitivity is coming down a bit over time with these modifications to that sensitivity.

How much of that is tied to deposit betas?

And as you dial that into your assumptions and if it is tied to deposit betas, is it all surprising you?

Because we would have assumed that you've got higher betas already assumed in your scenarios.

Muneera?

All right.

If you're specifically talking about our expectations for the September benefit and how we are computing that, I mean, it all depends on a variety of different factors.

How is LIBOR moving?

And LIBOR has been slow in the way it moved in the third quarter, and we're building that same slow pace in the fourth quarter.

And certainly, the other variable is deposit cost.

And for that, I gave a range of 12 to 15.

We sort of picked our most likely scenario of where the deposit costs will turn out.

And all of that is folded together in that $15 million estimate that you see.

A little bit of the decline is also because we did have a debt issuance, and that takes away a little bit of the benefit as well.

Okay.

So there's no real wholesale change in your assumptions tied to your deposit betas.

Is that fair to say?

That is fair to say.

I mean, the deposit -- from a deposit beta standpoint, we have to monitor the competitive environment and make adjustments accordingly.

And I talked about the fact that we made a standard pricing change early in October, and that is part and parcel of those costs that I mentioned.

But I'm assuming you would have expected that you would be making that pricing change.

Exactly, yes.

Okay.

All right.

And then separately, on the expense front, I believe last quarter, on the call, you had indicated a low single-digit outlook approximately for the growth rate in expenses for 2019.

Is that still a fair assumption as we go into '19?

And also, how would you view the efficiency ratio for the full year coming off of the 2018 level?

Muneera, do you want to take that?

Okay.

So the comprehensive update on where we're going on expenses for 2019 will come in our January earnings call, but a little bit of color on what to expect.

Our GEAR Up program will sunset at the end of 2018.

We will continue to benefit from many of its initiatives, and we have the last bit of benefit of about $35 million for next year that will be folded into our overall outlook.

That includes both expenses as well as income benefit.

Beyond that though, we won't incur restructuring charges next year, so that will be a tailwind.

Similarly, FDIC charges should be a tailwind next year as well.

Offsetting this would be our typical increases that you see for merit or inflationary pressures or outside processing that typically goes up with an increase in revenue.

Overall, I would say that we fully expect to generate positive operating leverage, and we expect to continue to drive the efficiency ratio in the right direction.

Your next question comes from the line of Scott Siefers with Sandler O'Neill + Partners.

I was wondering if you could just spend a moment talking about overall loan growth.

Just I know like at the -- back at the beginning of the year, the hope was for it to approximate kind of real GDP growth.

At this point, so it looks like this year will come in a little lighter than that.

But just as you look at, say, the next several quarters, what would it take for loan growth to kind of reaccelerate toward a number that pretty much approximates like the real GDP rate, just in your guys view?

Curt, do you want to take that?

Yes.

Scott, we historically had talked about loan growth more in line with GDP.

And I think as we go on into 2018 in the current environment that we're operating in and you look at things like H8 data across the industry, there seems to be less correlation to GDP.

Right now, a lot of that is, I think, due to many of the factors that I've already spoken to, including the competitive landscape both from a bank and non-bank or shadow banking scenario.

That's why our customers are definitely, I think, more optimistic than they have been.

We still are not seeing a lot of accelerated CapEx spending, and I think some of that hesitancy, as Muneera alluded to, is around just tax reform is a positive, but the customers are sitting on more cash right now and in some cases, they're deleveraging.

And then I think, beyond that, there's some hesitancy on their part around just trade issues, midterm elections, just sort of the unknowns that might be out there.

So we have obviously booked a lot of new business, but we are seeing utilization rates that's from moderate to down overall.

And I think the end -- I think part of that is customers are sitting on a lot of cash.

The third quarter for us is often a down quarter because of the seasonality that Muneera and Ralph both alluded to earlier, and we are optimistic about the fourth quarter.

I'm seeing some growth overall through the end of the year.

Our pipelines are pretty strong, and commitments are up for us about $650 million in the third quarter.

And so we would expect to see growth in Middle Market, Technology and Life Sciences as well as the buildup in dealer that we normally see in the fourth quarter, and some of that would be offset by the normal seasonal decline in Mortgage Banker Finance.

Okay.

All right, perfect.

I appreciate that color.

And then if I could switch sides on the balance sheet for just a second.

Just as we look at the base of noninterest-bearing deposits, I mean, the growth has just been so extraordinary over the last few years.

And it, as a percent of your total deposit base, is just so kind of out of bounds with where it would have been under what you would have called, say, a typical cycle in the past.

Do you guys have a view, even just sort of very top level, as to where that ultimately ends up flushing out?

In other words, will it just structurally be much higher than it's been in, call it, decades past?

Or does it trend back down more meaningfully?

Curt, you want to take this?

Yes.

You are right, we are seeing a lot of growth in noninterest-bearing deposits.

And a lot of that has to do with the nature of our client base, given the heavy commercial orientation to the base.

And so as customers start eventually to utilize some of that cash, you would expect some of that to come down.

And then as we continue to see interest rates increase, there will be some eventual movement of deposits potentially into interest-bearing overall.

Thank you.

Your next question comes from the line of Ken Usdin with Jefferies.

Another question just on the deposit side.

Muneera, you've mentioned that you'd put through the standard October pricing, and it seems like we're kind of on like a every 6 months-ish or so where you put through the standard.

How are you guys monitoring the need and the speed at which you need to put through that standard, right?

Because you had a very fast repricing in the second quarter, then it was slower in the third.

Now you're saying it's faster in the fourth following the October.

So can you get away with doing them every 6 months or so?

Or is the dynamic of the pricing environment changing quicker now than it would have been previously?

Muneera?

All right.

So Ken, you're right, and I think I've been signaling this for a few months now, I've said it's not going to be a linear progression.

It's not going to be, "This is the pay rate and there's some sort of a systematic increase over time." A lot of this depends on what's happening with loan growth, how much funding do you need, what's happening in your markets with competition.

And so we look at what's happening in our own deposit base, what's happening outside of the competition, where is loan growth going, and all of that has been factored into doing what we think we need to do to both attract deposits and retain our customers.

I would say, if you look at our total deposit costs so far and how our deposit base has reacted, that our pricing strategy is working so far.

Yes, I think that's fair.

On the other side of the balance sheet, to your point about watching loan growth in terms of that pricing, obviously, with loan growth being slower than initially expected, you haven't had to -- you haven't seen a lot of growth on the other buckets.

So the cash balances continue to build, and the securities book has been pretty stable, too.

So can you just talk about how you're thinking about your earning asset mix as you go forward?

If we get a little bit of loan growth, do you start to put some of that cash into the loan book?

Do you start to buy securities given that we're finally at a steeper point of the yield curve?

How do you think about usage of that excess cash that's been building up and weighing on the NIM?

So all good points that you're making.

I would say from overall cash, if we look at all the balance sheet movements, loan growth clearly will be our top choice in how we want to put our cash to use.

Beyond that, it is nice to see long-term yields moving up, which allows us potential possibility of investing in securities.

But we are happy with the size of our portfolio right now.

If I look at sort of the fact that we have a debt maturity coming up next year, some of the cash is going to be utilized for that, some of the cash is going to be utilized to grow loans.

So we're not really looking at the present time to change the size of our securities book.

Fair.

And the last thing, could you just tell us about the magnitude of that debt maturity and what it's yielding relative to the portfolio?

The debt maturity is 350.

It's going to be 6 months LIBOR, less, I want to say, about a few basis points, about 4 basis points or so -- 42 basis points, I'm sorry.

6 months plus 40-ish basis points?

Okay.

Yes, yes.

Thank you.

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

Ralph, I wanted to start on the loan growth side.

And given the very strong growth you've had in commitments, which Pete called out over the past 2 quarters, I'm surprised the outlook for the fourth quarter isn't stronger.

Are you just being very conservative with the guidance?

Or are you really not looking for these mid-market companies to draw on the lines they've taken out?

I think it's a combination of the 2. It is the companies are getting prepared for growth, but they're watching very carefully, as Curt was mentioning earlier, what's going on in the markets and from a tariffs standpoint as well as the other competitive parts.

And as it grows, they will -- they're prepared, and that's the positive side to compete.

And the commitments, as you've mentioned and as Pete has talked about, went up in the second quarter and third quarter nicely, and so they are prepared for that growth.

And GDP has been stronger as well.

So I think all of the signals are a little more positive than they had been.

Pete, do you want to add anything to that?

Curt?

Yes.

And Steve, we're definitely not approving commitments that we don't expect to be used.

That's not a very profitable business for us.

So it really is utilization is lower than we normally would expect it to be.

Okay, that's helpful.

Maybe for Muneera, regarding the 12 to 15 basis point increase in deposit rates in 4Q, can you give more color on the standard increase that you're talking about here for October?

Was that to all customers over certain balance size?

Or was it more widespread?

And are you seeing competitors do more widespread increases at this point?

It was select customers in select markets.

The pricing changes were different in each.

I think that this is sort of what we see others doing as well.

And we respond based on what we see in our different markets and how we see our customer base react, depending upon what types of products they're using and what level of balance they have with us.

Okay, that's helpful.

If I could ask you one more.

The decline in the nonaccrual interest took a couple of basis points off NIM this quarter.

It looks like you're calling that out again as a headwind for 4Q.

Can you quantify that headwind still to come?

Yes.

It's about, I would say, normally, we'd say $1 million to $2 million.

So that's what we would expect to pick up every single quarter.

We picked up about 4-ish this time, so I'd say a couple of million dollars, $1 million to $2 million.

Thank you.

Your next question comes from the line of Geoffrey Elliott with Autonomous Research.

Back to the -- this point on noninterest-bearing deposits and mix shift.

Thanks for the comments around expecting some decline and some shift into interest-bearing over time as rates go higher.

But can you help us understand how you think about quantifying that?

I guess the data points that we look at, pre-crisis, that was something like 25% of deposits and it climbed to mid-50s and has started to come down.

I mean, are there reasons why it should not go back to that sort of level over time if rates increase?

Are there reasons why it could go lower, reasons why it should stay higher?

How do you think about quantifying that when you're looking out over the next few years?

Muneera, you want to take that?

Yes, sure.

So I think it's really important for us to make sure that we are clear about what we are seeing in our deposit base.

When we -- when you look at either year-over-year or quarter-over-quarter increases, our interest-bearing balances are going up because we have new money coming in.

There is a little bit of mix shifting, so I don't want to say that, that's not what's happening.

But at least as far as our actual deposit base and the activity that we're seeing, we've seen new money come in, interest-bearing.

And on the noninterest-bearing side, we either see our customers putting their money to work, whether that's M&A or reducing leverage; or in some instances, we see a little bit of -- maybe 1 or 2 customers might attrite.

Nothing systemic over there.

The movement in balances is going to happen as rates continue to increase.

So I don't want to say that, that's not what's transpiring.

It is just very difficult to predict.

Just trying to give you some color of what we are actually seeing in our deposit base.

The number of products the customer has can also affect the amount of deposits they have.

And Ralph makes a good point with that as well.

Understood.

And then, I think you made the comment in the prepared remarks that average deposits should be seasonally higher in the fourth quarter but less of an impact than usual.

What is it about this year that means you're expecting to see a smaller impact?

If you go back and study our sort of deposit base for the last, I don't know, 6, 5 years, fourth quarter is usually a good quarter for us.

People build, window dress their balance sheet.

We see money coming in.

And the magnitude of fourth quarter deposit increases tends to be substantial.

We are expecting a fairly similar seasonal pattern as we approach fourth quarter this year as well.

Thank you.

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

Could you just provide an update on some of the earnings benefits and strategies given that you're no longer subject to LCR?

Do you want to take that, Muneera, on the LCR?

Yes.

On the LCR front, I mean, the one big benefit is that we do have liquidity coming from our securities portfolio that we can then deploy.

If loan growth picks up, it's another added source of liquidity that we have.

We can repurpose some of those dollars and instead of reinvesting them there, move them to loans.

And we don't -- beyond that, we still have to do our own internal liquidity stress testing and make sure that we are carrying appropriate levels of liquidity to take care of our customers.

Okay.

And I guess there's a lot of opportunities then, I guess, as you said, to pay down debt as well.

Not really because the debt that we have that -- you can look at our debt pricing.

It's pretty efficiently priced, so I would say not really.

But it does give us flexibility.

We have the flexibility if we choose to.

Okay.

And then on a separate question, the capital ratio is still high at 11.66%.

And you've given that capital target of 9.5% to 10%.

Could we assume that you're going to continue to do about $500 million share buybacks per quarter next year?

Go ahead, Muneera.

Okay.

So the way I think about it is, for next year, clearly, we've given you a target.

We know where want to go by the time 2019 comes to an end.

We've talked about the fact that we want to do a buyback at a measured pace.

And we are going to look at our earnings generation.

A large part of what we could give back is going to be what we generate in earnings.

And then beyond that, it will be whatever it takes for us to get from our current capital ratios to our target.

So that's how you should think about it.

Your next question comes from the line of Brett Rabatin with Piper Jaffray.

I wanted to, I guess, go back to the margin and just thinking about the excess liquidity.

Should we not expect at least a few basis points of improvement in the margin from a liquidity drainage in the fourth quarter?

Maybe, Muneera, can you talk about the effect of that in 4Q?

And what happens to that position in the current quarter?

Well, in my comments, I've said that we are expecting to grow deposits in the fourth quarter, which generally means that it's good for us in the sense that we will make more net interest income in dollars.

But because the excess liquidity is going to be at the Fed, it means that it's, from a yield standpoint, dilutive to margin.

If that helps you.

Okay.

And then want to go back to deposits.

Obviously, the prepaid card timing was an effect on 3Q.

What else affects seasonality in the fourth quarter in terms of deposits?

Yes.

This is Curt, Brett.

So just the normal buildup that we see with customers building deposits at year-end.

So you see a buildup in the fourth quarter.

And then in the first quarter, a lot of that gets utilized as they pay taxes, distributions to employees for bonuses, things of that nature.

So it's just a normal sort of seasonal flow that we see especially given our heavy core -- commercial orientation as a company.

Okay.

But I mean, if you exclude that from the third quarter, your deposit trends would have been kind of flattish this quarter, and it sounds like you're basically saying that will be a little bit better in the fourth quarter despite customers using excess cash.

Is that a function of you growing your core customers' deposits or new customers?

What -- how do we think about what you're doing in terms of the net flows in deposits?

Yes.

I think it's a combination of both.

In the fourth quarter, again, we see a normal seasonal buildup, but we have been in a net client acquisition mode.

As I alluded to earlier, 40% of our new loan originations in the third quarter were to new customers.

And so with every new customer, we're a relationship bank, we expect deposits and treasury management and other things to come with that.

So even though the customer is utilizing cash and deleveraging, et cetera, or using it for M&A purposes, fourth quarter typically is seasonally higher, and then we continue to be, we believe, in a net client acquisition mode.

Thank you.

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

Just want to start on expenses or go back to expenses here.

In particular on -- tech spending was a little bit of a driver for incremental quarter-over-quarter expenses.

Just wondering how we should think about tech spend into 2019.

Muneera, do you want to take that?

Yes.

Overall, our tech spend or our investments in technology are going to be stable.

And even for this year, they really are stable.

What you're seeing is a little bit of, I would say, push towards getting certain projects completed towards the back end of the year.

It's not really because we are increasing the amount of technology budget, but we have a spend that we have.

We think that it is -- the overall spend is at a good level.

It is -- we are making the right investments and right changes that we need to make and that our customers and colleagues will find useful.

That was a big part of the GEAR Up process as well.

And Ralph is right.

Investing in technology.

Yes.

Whether that was -- yes.

Ralph is absolutely right.

Whether that is in our E2E CRM platform or whether it was moving our applications to the cloud, it was all part and parcel of our GEAR Up initiative as well.

Okay, that's helpful.

And then just on the loan loss reserve here, it's come down slightly.

Perhaps looking for a little bit more of a decline.

Wondering how we think about that reserve over the next 12 months or so.

Pete, do you want to take that?

Yes.

We have 3 reserve releases over the last 3 quarters that total about $60 million.

I think the opportunity to release more reserves would probably be around Energy.

We are still 16% criticized there.

So to the extent that Energy continues to improve, there's a little bit of an opportunity there.

Charge-offs had been very low.

We expect the charge-offs to remain -- continue to remain low.

There's still more opportunity there as well.

I think the rest would be -- ex Energy, the rest of the portfolio is pretty much at record-low levels of criticized.

So we're saying provision in the $10 million to $20 million next quarter from a guidance standpoint, and that would assume that reserves remain fairly level.

Thank you.

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

Just wanted to talk about loan growth for a second.

You talked about the fourth quarter, and obviously, we know you've got some seasonal businesses that drives fluctuations there.

But there wasn't much conversation around the Energy portfolio other than sort of a kind of trailing view of it, so I was just wondering kind of where the appetite is for that business today given the rebound in oil prices.

Curt?

Energy portfolio, okay.

I didn't quite hear you, Gary.

Thank you very much.

I mean, obviously, Energy is a big part of the Texas economy and a business that we've been in for a long time.

And so even though that book of business has managed down for us over time, it's still a business that we want to be in and a business where we want to take care of our customers.

And we feel like it really has started to stabilize for us.

It should be less of a headwind than it's been the last 2 years for us as we've managed down that portfolio.

Today, it's about a $1.8 billion portfolio.

We would see it sort of fluctuating in a relative range around that number.

We are seeing some nice new opportunities, some nice new commitments and some nice new relationships that we have brought in.

Energy price is certainly helping there.

And most of the E&P clients that we're working with are just a lot stronger than they were.

There's more equity and sponsor support out there.

There's a lot of equity in the projects that we're working on.

There's good hedging in place.

And as you know, overall rig count has been up in 2018.

So is the right way to view it then, to your point, that it will not serve as headwind anymore but probably won't be additive materially to growth?

Yes.

I think it would be less of a headwind, and then we'll have some opportunity to grow the portfolio of the company, our own portfolio overall growth.

But I would not expect significant growth from here but more moderate growth.

Thank you.

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

Just a follow-up maybe for you, Pete.

You mentioned a couple of times that 40% of your growth is from new relationships.

Can you talk a little bit about the theme behind that, kind of where and what?

I think that was Curt that mentioned that.

Curt, sorry.

Yes.

We do track that across all of our business lines.

And we continue -- really not a new thing for us.

Almost every quarter, we are very focused on taking care of our existing customers but also focused on growing the franchise overall.

It really is across almost every business and every market that we serve.

And even if utilization is not higher than it is right now, we are booking relationships and booking commitments where we do feel like there will be borrowing against those facilities at some point in the future.

And what it allows us to do is to continue to build our franchise across the board with great sort of relationship-based opportunities where we can sell into the relationship additional products and services that are value-added to the client, so treasury management, hedging product, card services, et cetera.

So we really think of it sort of as the long-term view of sort of building the value of our franchise.

And as you know, we're in great business lines, and we have a lot of depth.

And we're in some really great economies throughout the United States.

Okay.

So broad-based -- broad-based is...

Very broad-based.

Okay, okay.

And then just 30,000-foot type question.

You guys have done well the last few years with a relatively flat balance sheet.

But it feels like some of the rate benefit is fading and some of -- obviously, GEAR Up, you've done well on that.

And so you've really performed.

But I think from here, we all think you need to grow a little bit faster.

And I guess, are you, bigger picture, more optimistic on the growth outlook?

And is this the kind of environment where Comerica can go back to putting up that mid-single-digit type growth?

Curt?

Yes.

I think we are very optimistic.

All the things that you mentioned, a lot of those are now, so to speak, in our rearview mirror.

A lot of the things we went through with GEAR Up were meant to help position us well for a faster-growing environment.

So the rework of our underlying loan origination process that we call end-to-end credit redesign really is all about creating more capacity for our relationship managers to spend more time out of calling all existing customers and prospects.

And then we've added a lot of technology enablement for our relationship managers, a new CRM platform, sort of digitizing the process around loan underwriting and origination for us, a lot of digital transformation for us in terms of treasury manager products and services, really trying to make sure our relationship managers have more mobile approach to everything they do, which we think helps create capacity longer term.

And so we've got good liquidity.

Credit's really not an issue right now.

We're very focused in our calling efforts.

And so as we continue to see some optimism build in the economy, as Ralph mentioned earlier, we continue to strengthen.

We are optimistic about growth possibilities.

Thank you.

Your next question comes from the line of Brock Vandervliet with UBS.

I think all the hot buttons have been asked and answered at this point.

However, just wanted to cover life sciences and Equity Fund Services, the pricing and relative competition you're seeing in those segments.

Curt?

Yes.

I mean, I think that, as we've alluded to not only on this call but the last several quarters, most of the growth that we've seen in Technology and Life Sciences has been in that Equity Fund Services component.

We're providing capital call and subscription lines to VC and private equity firms.

There's been a lot of strong new fund creation, which you obviously have seen, and that feels like that is continuing.

We tend to work with some of the best private equity firms out there in terms of strength and LPs that make up their roster.

And so we feel like it's a relatively low-risk business for us and one where we can be fairly selective.

But we also feel like there's still a lot of growth opportunity.

It's a business that we actually only been in now for 6 or 7 years, so we still feel like we've got a pretty good growth trajectory around the business longer term.

And on the TLS core side, there is some momentum building there after a little bit of softness the last 24 months or so.

We feel like we're getting a lot of new opportunities to look at new transactions, and we've still got some very solid long-term relationships with venture capital providers.

And so that business had been a little bit softer, but we feel good about sort of longer-term prospects there.

With respect to the capital call lines, are you seeing new entrants?

Or is it kind of the same cast of characters?

I think we work with a lot of the same banks and syndicates and bank groups that we have seen previously.

Thank you.

Our final question will come from the line of Michael Schiavone with Keefe, Bruyette, & Woods

This is Brian Klock.

I just had some technical difficulty.

Just want to kind of sneak in here -- I might have missed this earlier, but I think there were some questions that may be different way.

I just want to try to put them together.

Muneera, on the sort of NII walk, when you think about for the fourth quarter -- if we start with third quarter NII, and like you said, I think there was $14 million of the benefit from the Fed hike that would come this quarter, right, out of the -- there's $1 million already in the third quarter run rate.

That's right.

You pick up the $4 million from the share -- the securities repurchasing and then maybe, what, $1 million or so would be the other piece on the nonaccrual interest.

Is that the biggest pieces that we should think about in that walk?

Yes, you've got it all correctly.

Beyond that, I mentioned the growth in deposits in the fourth quarter, which will also bring in at least net interest income dollars.

And then don't forget about the one extra month from the debt issuance that we had in the second quarter.

Got you.

All right, great.

And then one last question maybe for ...

I would just clarify, the issue of the debt is in third quarter, sorry.

Third quarter, right, right, right.

And then my last question, I guess, for Pete.

I know it's -- we've been so focused on the loan growth side of this, but it does feel like the asset quality trends continue to be as good as they've ever been.

And we've all expected there to be this normalization of credit costs going forward.

I guess, when you look out into next year and when you think about charge-off, I guess, what -- I know you're saying $10 million to $20 million is the guidance for the fourth quarter, but that even seems conservative given the run rate and your NPL formation keeps dropping.

So maybe, I guess, thinking about -- is there anything in the portfolio or in trends that you feel like the current level of charge-offs is going to materially change in the next year or so?

Not that we can see, Brian.

I think we feel really good about our book of business.

Commercial Real Estate has been performing very well.

We've remained disciplined in that business.

Leveraged lending, we've been very disciplined in that segment as well.

Curt mentioned we're being highly selective in Energy.

So I think, overall, we don't see anything out there that could cause a problem.

It's hard to look farther than a couple of quarters, but I would say we look -- we feel pretty good about credit quality next year.

All right.

So I mean we're starting to see some of the margin benefits.

As from all of the other commentary, they are becoming -- the second derivative is declining when you think about NIM expansion, but if anything, your risk-adjusted margins continue to be pretty wide here.

Yes.

We agree.

I would agree with that, Brian.

Thanks, Brian.

I will now turn the call back over to Ralph Babb, Chairman and Chief Executive Officer, for any closing remarks.

I would like to thank you all for your interest in Comerica and being on the call today.

And I hope everybody has a great day.

Thanks very much.

Ladies and gentlemen, this concludes today's conference.

Thank you all for joining, and you may now disconnect.