Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Comerica Inc (NYSE:CMA)
Q3 2019 Earnings Call
Oct 16, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 2019 Earnings Conference call. [Operator Instructions] I would now like to turn the call over to Darlene Persons, Director of Investor Relations. Ma'am, you may begin.

Darlene P. Persons -- Director of Investor Relations

Thank you, Regina. Good morning, and welcome to Comerica's Third Quarter 2019 Earnings Conference Call. Participating on this call will be our President and CEO, Curt Farmer, Interim CFO, Jim Herzog; Chief Credit Officer, Pete Guilfoile; and Executive Director of our Business Bank, Peter Sefzik.

During this presentation, we will be referring to slides, which provide additional details. The presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website comerica.com.

This conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to 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 refer 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 can 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 the presentation.

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

Curtis C. Farmer -- President & Chief Executive Officer

Good morning, everyone. Today, we reported third quarter earnings of $292 million or $1.96 per share. Our third quarter results demonstrated our ability to drive strong returns with an ROE of 16% and our ROA of 1.6%, despite declines in interest rates.

Relative to the second quarter, Broad-based fee income growth, solid credit quality, the benefit of discrete tax items and continued active capital management were positive contributors to our performance. In addition, our careful cost control helped to keep our efficiency ratio at under 52%. Historically, loans in the third quarter are seasonally weak. This year, average loans were stable compared to the second quarter.

Mortgage Banker benefited from robust refi activity along with a normal increase due to summer home sale activity. However, this was offset by the seasonal decline in national dealer as our customer's reduced inventory in anticipation of delivery of 2020 model as well as the difficult summer slowdown in middle market.

Overall customer sentiment remains positive and our pipeline is solid. We are also seeing the benefit of a number of initiatives we have undertaken over the past year or so. This includes a new enterprisewide customer relationship management tool, enhanced marketing analytics, and greater efficiency, resulting from our credit process redesign.

Average deposits grew over $700 million relative to the second quarter, including $850 million increase in customer money market balances and CDs. We have a favorable deposit mix as nearly half are non-interest bearing and we believe we will continue to have the lowest component of non-interest bearing deposits among our peers.

As we have throughout the cycle, we are carefully managing deposit rates in order to attract and retain relationships. We are closely monitoring the competitive environment and expect to continue to modestly lag competition in adjusting our rates. Our strategy is working. The growth in relationship deposits allowed us to reduce higher power wholesale funding and help reduce our long-term [Phonetic] funding costs to 78 basis points.

Also, our loan to deposit ratio decreased to 91%. As far as net interest income, over 80% of our loans are floating rates and primarily tied to 30-day LIBOR, which declined 37 basis points during the quarter. This impact combined with the growth in interest bearing deposits resulted in net interest income of $586 million and a net interest margin of 3.52%.

We were able to add $1 billion of swaps in September at relatively attractive rates. Our strategy is to build our hedging program over time, closely monitoring the markets, and taking advantage of market opportunities as they arise.

Credit quality remains solid with net charge-offs of 33 basis points. Similar to the second quarter, charge-offs primarily consist of evaluation impairments on select energy credits as capital markets for this sector remains solid.

Non-performing assets declined and were only 44 basis points of total loans and the provision decreased to $35 million. Our broad-based increase of $6 million in fee income helped offset the more challenging rate environment.

We had good growth in commercial lending, card, and fiduciary income. As expected, increases in salaries and benefits along with higher occupancy and technology costs resulted in $11 million increase in expenses. This is in line with the outlook we have provided for full year expenses to remain flat, excluding 2018 restructuring costs.

We reached our 10% CET1 target at the end of the third quarter. We returned $467 million in capital to shareholders through our dividend, which currently provides over a 4% return and are repurchasing 5.7 million shares under our share buyback program.

Relative to the third quarter of last year, our results reflect our ability to generate solid loan growth of nearly 5%, drive fee income growth and maintain our expense discipline.

Last year, very strong credit quality resulted in no provision. While this quarter, our provision was more in line with our historical norm. Through active capital management, we have reduced our share count by 13%. Altogether, earnings per share increased 5% year-over-year.

And now, I will turn the call over to Jim Herzog who assumed the role of Interim CFO last month. Our search process to identify a permanent CFO is under way. Jim has the wealth of knowledge with over 35 years' experience at Comerica and has been our Treasurer for the past eight years. Jim?

James J. Herzog -- Executive Vice President and Interim Chief Financial Officer

Thanks, Curt, and good morning, everyone. Turning to Slide 4, as Curt indicated, average loans were stable in the third quarter with seasonal decreases in national dealer services and general middle market, offset by an increase in mortgage banker, which also benefited from strong refi volumes. In addition, we had growth in commercial real estate, with the largest contribution coming from multi-family activity in California.

Total period end loans were also stable, essentially reflecting the same activity we saw in average balances. On a year-over-year basis, we have grown loans $2.3 billion with increases in general middle market in all three of our markets, as well as in many of our specialty areas such as mortgage banker, energy, national dealer services, commercial real estate and environmental services.

Our loan yields were 4.83%, a decrease of 17 basis points for the second quarter. This was the result of lower interest rates primarily one month LIBOR, partly offset by an increase in loan fees and the lease residual adjustment we took in the second quarter and that was not repeated. Of note, non-accrual interest recovery remains slightly elevated in the quarter, contributing $4 million.

Slide 5 provides details on deposits. Average balances increased over $700 million with growth across the majority of business lines and in all three of our markets. Non-interest bearing deposits were stable while customer interest-bearing balances increased over $800 million.

The growth in balances and mix shift to higher yielding products drove a 5 basis point increase in our interest bearing deposit costs. This is at the lower end of the guidance we previously provided. With the decline in interest rates, we've begun to take action to adjust deposit rates, which I will discuss further in a moment.

As you can see on Slide 6, our MBS portfolio is stable. The yield on the portfolio held steady. The full quarter benefit of higher-yielding securities reinvested throughout the second quarter was offset by $600 million we reinvested in the third quarter at yields that were mostly below the portfolio average.

Yields on recent purchases have been in the 2.40 range [Phonetic]. The current rate environment has not had a significant impact in our duration or the unamortized premium, which remains relatively small.

Turning to Slide 7; net interest income was $586 million and the net interest margins was 3.52%. Loans had a negative impact of $16 million or 13 basis points to the margin. The major factor was lower interest rates, which had a $26 million impact and 15 basis points on the margin. This was partially offset by one additional day in the quarter as well as other factors which I've previously outlined.

Higher balances at the Fed added $2 million but were offset by the lower yields and combined we got a 2 basis point impact on the margin. Growth in interest bearing deposits, particularly in higher yielding products increased cost by $6 million or 3 basis points on the margin.

Lower rates reduced wholesale funding cost by $5 million and added 3 basis points to the margin. In the summary, the net impact from rates along with higher interest bearing deposit balances was partially offset by one additional day in the quarter.

Credit quality remained solid, as shown on Slide 8. Our net charge-offs were $42 million or 33 basis points, which is well within our historical norm of 20 basis points to 40 basis points. Excluding Energy, net charge-offs for the remainder of the portfolio were only 6 basis points. This included strong [Phonetic] recoveries of $19 million.

While total charge-offs were higher. We do not believe this is a trend. The increase in charge-offs were primarily due to the impairment of select energy loans. As we indicated last quarter, valuations of a few liquidating energy assets have been impacted by volatile oil and gas prices and weak capital markets.

Non-accrual loans remained low at $220 million or 43 basis points of our total loans. Criticized loans represent less than 4% of total loans as of quarter end. As far as Energy, non-accrual loans decreased $10 million while criticized loans increased $10 million. We increased our reserve for Energy, which remains at a very healthy level.

Our reserve ratio held steady at 1.27% and resulted in a provision of $35 million, a decline of $9 million from the second quarter. As far as our adoption of CECL in the first quarter of next year, we are running parallel tests and remain on track for a successful implementation. Given the relatively short duration of our commercially weighted portfolio and expectation of a fairly benign economic environment, we expect the change in reserves will be plus or minus 5%, and therefore a little impact on our capital ratios.

Turn to Slide 9, in non-interest income, which increased $6 million. Our continued focus on growing card fees resulted in a $2 million increase. Commercial lending fees also increased $2 million, primarily due to strong syndication income. Fiduciary income increased $1 million, mainly due to tax preparation fees and higher asset values. We also had small increases in several other categories including letters of credit and foreign exchange. Derivative income declined $1 million due to the impact of lower rates on the credit valuation adjustment.

Deferred comp asset returns, which were offset in non-interest expenses, were $3 million compared to $0 million in the second quarter. Expenses were well controlled and our efficiency ratio remained low at 52% as shown on Slide 10.

Salaries and benefits increased to $8 million as a result of the increase in deferred comp that I previously mentioned, as well as seasonally higher healthcare expense and one additional day in the quarter. Also technology initiatives drove a $2 million increase in software expense. Occupancy expense increased $2 million, mainly due to seasonality.

Turning to Slide 11; in the third quarter, we repurchased 5.7 million shares under our share repurchase program, which is nearly 4% of our total shares. On a year-over-year basis, our share count is down 13%. Together with dividends, we returned $467 million to shareholders in the third quarter. Our goal is to provide an attractive return to our shareholders by way of the buyback, as well as a healthy dividend, which currently has a yield of over 4%.

Turning to Slide 12, on the rate environment, we expect lower rates and high inflation to have a $35 million impact to fourth quarter net interest income. This includes the full quarter impact of lower rates in the third quarter as well as an anticipated December Fed rate cut, which is consistent with our economist's view. Swaps we've added should provide a $1 million to $2 million benefit. Also, we are expecting interest-bearing deposit cost to decrease 3 basis points to 5 basis points with minimal deposit mix shift.

While recent economic data has been mixed, the markets are expecting the Fed to cut rates again. We'll run our standard model with a 25 basis point reduction in rates and a few different deposit beta scenarios, as deposit rates are a major variable and will depend on competition and our need for funding. This made an impact on net interest income under these scenarios, ranges from $65 million to $95 million over a 12-month period.

The ultimate outcome for our net interest income depends on a variety of factors such as the pace at which LIBOR moves, balance sheet movements, and the competitive environment. As Curt mentioned, we added $1 billion of interest rate swaps in September. Together with the $2.8 billion in swaps we put on in the first half of the year, the average remaining term of the swap book now sits at 3.3 years, with an average received fixed rate of 204 basis points. We continue to closely monitor the market. As we previously shared, our strategy is to make steady progress in building our hedging program over time.

Slide 13 provides our outlook for the fourth quarter. We expect the average loans to remain stable on a quarter-over-quarter basis. Seasonality in the fourth quarter typically drives an increase in national dealer services in general middle market and a decrease in mortgage banker.

While still -- nearly 70% of mortgage banker volume is tied to purchase activity, we expect that a slowing down of refi volumes will further reduce mortgage banker loans. Otherwise, we anticipate growth in several businesses and a small decrease in Energy.

Given the strong loan performance so far this year, we anticipate reaching the upper end of our previous projection of 3% to 4% growth in full-year average loans relative to 2018. We also expect deposit levels to be stable. We remain focused on attracting and retaining relationship deposits and our strategies are working.

As core relationship deposits grow, we plan to manage down brokered deposits. As I discussed a moment ago, lower rates are expected to have about a $35 million net impact on net interest income. In addition, we believe the strong third quarter loan fees and non-accrual interest recoveries are unlikely to repeat. As far as credit, we expect the provision to be between $25 million and $45 million, which include some potential additional days of migration in the energy book.

We believe we will continue to have strong performance in the remainder of the portfolio. Excluding deferred comp income of $3 million, which is offset in expenses and is difficult to predict, our non-interest income is expected to be relatively stable. We expect modest growth in number of customer driven categories, which will likely be more than offset by a reduction in syndication fees and fiduciary income from elevated third quarter levels.

With the benefit of a strong third quarter fee income growth, we expect to exceed our previous outlook for non-interest income to grow 1% to 2% on a full year-over-year basis. Expenses are forecasted to increase modestly. We expect to see higher technology costs primarily related to investments in our retail bank and higher outside processing expenses tied to revenue-generating activities.

In addition, seasonal inflationary pressures impact certain expenses such as occupancy, employee benefits, and marketing.

On a full year basis, we expect to continue this year expenses to remain stable, excluding the restructuring charges we incurred last year. Finally, we are targeting our CET1 ratio to remain about 10%. As we determine the pace of the share buybacks, we carefully consider our expected earnings generation, capital needs to fund future loan growth, and market conditions.

Now, I'll turn the call back to Curt to provide some closing remarks.

Curtis C. Farmer -- President & Chief Executive Officer

Thank you, Jim. Over our 170-year history, we have managed through many different economic, credit and interest rate cycles. The tone of recent conversations I've had -- I have had with customers and colleagues across our markets is optimistic and we continue to see slow and steady economic expansion.

With this backdrop, we expect to see loan growth in line with or slightly better than GDP next year as well as a modest core deposit growth and continued solid credit quality. Yet, with much uncertainty on several fronts, the market is currently pricing in rate cuts. The impact from a possible reduction in interest rates on our net interest income and pension expense combined with inflationary pressures and continued investment in technology provides headwinds, but we believe they are manageable.

In addition, our share repurchase program has allowed us to return excess capital and lower our share count, providing a meaningful benefit to our EPS. With our efficiency ratio in the low '50s and an ROE of 16%, we are better positioned to weather changes in the economy or interest rate environment. We remain focused on controlling the things we can control and maintaining our strong performance. We plan to provide a more detailed outlook for 2020 on our next earnings call in January.

In closing, we believe our key strengths provide the foundation to drive profitable growth and enhance long-term shareholder value. Specifically, our geographic footprint, which includes faster growing diverse markets combined with our relationship banking strategy, is expected to result in very good loans, deposits and fee income over time.

We continue to maintain our prudent expense discipline as we invest for the future. Also, our conservative, consistent approach to banking including credit and capital management has positioned us well.

Now, we would be happy to take your questions.

Questions and Answers:

Operator

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

Curtis C. Farmer -- President & Chief Executive Officer

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Good morning, everyone. I guess my first question, just in terms of Slide 12, you provided a $35 million NII impact for a December rate cuts. You know, I just checked this morning; it looks like the futures curve is building in a 78% probability of an October rate cut. Can you just provide us the sensitivity, if we do get the October cut instead of December, what does that imply for your NII in fourth quarter?

Curtis C. Farmer -- President & Chief Executive Officer

Do you want to take?

James J. Herzog -- Executive Vice President and Interim Chief Financial Officer

Yeah, thanks, Ken and good morning. We do feel it is highly probable, we will get a rate cut before the end of the year. It is a little less certain that we will get one in October and the path of LIBOR that would correlate that is also a little less certain and so we'd like to go with our economists forecast of a December rate cut.

I would point you to Slide 12 in terms of some of the sensitivities and an October cut should be somewhat proportional to that. But at this point, we're not providing specific guidance on the October cut, just due to the uncertain path of LIBOR.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you, OK. I understand. I guess I was just thinking because the futures curve like the probability of a rate cut is actually very high. It might make sense to do that, but I appreciate your answer. I guess maybe different question, just -- in the same slide, the interest-bearing deposit costs going down 3 basis points to 5 basis points. Can you just comment like, what are you seeing in terms of deposit cost competition. I know you're going to lag peers, but is -- are peers from -- so far what you see in fourth quarter, are they only down in the high single digits or like how far you lag. I'm just curious on overall deposit competition?

Curtis C. Farmer -- President & Chief Executive Officer

Ken, this is Curt, I'll take that question. We talked about before that on the way up, we lagged in increasing our deposit cost and as we've said, we believe we will lag a little bit on the downside. We do believe that we probably have reached some inflection point and that's why we gave the guidance that we believe deposit costs will come down some in the fourth quarter. Still remains a fairly competitive environment. We have seen some reduction in CD pricing and we've taken actions on reductions in CD pricing as well and we're probably starting to see a little bit of reduction in standard prices as well. We'll continue to evaluate.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay, great. And if I can squeeze in one last one. Just in terms of the energy portfolio. Obviously higher charge-offs this quarter. Can you just talk about where the stress points are? I mean it sounds like your provision guidance does include the probability of additional sizable energy charge-offs next quarter. Can you just talk about where are the stress points? Where are you seeing, is there a reason to be concerned, more broadly, about energy? Thanks.

Curtis C. Farmer -- President & Chief Executive Officer

Pete?

Peter W. Guilfoile -- Executive Vice President and Chief Credit Officer

Sure. So our provision forecast assumes that Energy charge-offs remain a little bit elevated for the next quarter or two and that we would see some migration in the Energy portfolio. But right at this point we're not expecting any widespread migration in the Energy portfolio. There is some impact, obviously, from the weak Capital Markets on the credits that are in our workout area. We expect some of that to result in additional migration in other weaker credits in the portfolio. But overall, we are not expecting this to be a very significant change in credit quality.

Ken Zerbe -- Morgan Stanley -- Analyst

All right, thank you very much.

Curtis C. Farmer -- President & Chief Executive Officer

Thank you, Ken.

Operator

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

Curtis C. Farmer -- President & Chief Executive Officer

Good morning Brett.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, good morning. Wanted to, just go back to energy for a second and just talk about the additional weakness that you're anticipating. Is that a function of redetermination season? Did the SNC review have any impact on the portfolio? And then I know some lenders are changing their reserve base lending test, does that have a factor in what you're seeing in terms of 4Q as well?

Curtis C. Farmer -- President & Chief Executive Officer

Yeah. Well, first of all, the SNC example did not have any impact there. What we're seeing is there are certain credits that are, from a liquidation standpoint a very weak market for. We -- because of that weak market, these assets are selling at very deep discounts. We felt the need to take some additional charges to bring the book value of those assets in line with what we expect the asset sales to actually realize in -- probably in early in 2020. And so, just like last quarter, we took some additional charges there.

Again we're expecting to see a lot of migration here. Most of our E&P portfolio, they are very strong credits. We have very strong balance sheets, low leverage, good liquidity. And generally speaking, those credits are less reliant on the capital markets. So it's really the credits that are more dependent upon the capital markets that we're seeing migration from here.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. I appreciate the color there. And then, the other thing I just wanted to ask about was expenses. You're looking at this year versus 2020. I know you haven't given guidance for 2020, but given the rate pressures on the margin, it would seem like your expense focus would be the same or heightened possibly in 2020. Can you give us any high-level thoughts on how you're going to react to margin pressure and does that mean expenses in 2020 if we're just thinking about operationally, you kind of keep things pretty tight and try and manage expenses flattish again or can you give us any additional color on an outlook there?

Curtis C. Farmer -- President & Chief Executive Officer

Brett, you're correct in the fact that we will not be giving a more formal guidance on expenses until we get to the end of the year in the fourth quarter earnings call in January. But what I did say in my prepared remarks is that there are a few headwinds that we're aware of in 2020 that primarily would be interest rate related, and so just from a pension accounting standpoint, we'll have some pressure on the pension expense side of things and then you'd have sort of the normal inflationary items there in occupancy etc.

But as I've said on prior calls, we remain very focused on the expense side of the house and we will continue to employ the strong expense discipline that we've demonstrated the last several years. So that remains a high priority for us and the GEAR Up work that we did I think proved our focus on expenses and I think that positions us well even in a declining rate environment and even we have made some normal expense pressures that we can manage well even in an environment that we might experience in 2020.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay, great. Thanks for the color.

Operator

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

John Pancari -- Evercore ISI -- Analyst

Good morning.

Good morning, John.

On the loan growth outlook, I know, Curt, you had indicated for 2020 that loan growth could be in the -- in-line or somewhat better than GDP. So if we're -- if GDP is in that 2% range, does that imply that you're expecting some potential moderation in loan growth when you look at 2020 versus the 4% level that you're looking at for 2019?

Curtis C. Farmer -- President & Chief Executive Officer

I'm going to turn in just a moment to Peter Sefzik to give some more specific commentary, but what I would say is that we saw very strong growth in the first half of the year and in the third quarter, we alluded to the fact that mortgage banker finance volume coupled with refi activity there helped for a stable growth in the third quarter. But at some point, we are sort of anticipating, if there is going to be a recession or a slowdown, then that might start translating some into loan growth overall and sort of hits the slightly more moderate forecast we're giving for 2020. We'll revise that again at the end of the year when we give a more formal outlook for 2020, if I wanted to give you a little sense of where we think things are headed right now, Peter I would let if you've got anything to add to that.

Peter L. Sefzik -- Executive Vice President, Business Bank

I think I would just add, you referenced GEAR Up and I think that some of the work that we've done in the last few years on the efficiencies for our business has helped us with the loan growth you've seen in the last several quarters here and we're encouraged that that would continue. We feel like the pipeline is still solid across most of our lines of business and we feel real good about how things are for the fourth quarter. And I think along the lines of what Curt said for 2020, we're encouraged we'll be able to continue that growth.

John Pancari -- Evercore ISI -- Analyst

Okay, all right. Thank you. That's helpful. And then separately on the expense side, I appreciate the color you gave in terms of your efforts to remain disciplined on that front in light of the revenue backdrop, can you help us in terms of how to think about either operating leverage for when you look at 2020 versus generally where you are coming in for 2019, or more specifically, the efficiency ratio, how we can think about that trend through 2020 versus what you saw for '19? Thanks.

Curtis C. Farmer -- President & Chief Executive Officer

Yeah, what I would say is, we haven't given any guidance around efficiency ratio or operating leverage for 2020 yet. What we did say at our last conference is that we still believe that overall, given the work that we've done that we can perform well on a relative basis to our peers, both in efficiency ratio, ROE, ROA etc., given the positioning we did relative to GEAR Up. But certainly, continued rate decline would have an impact on efficiency ratio and on overall returns for the company. But we do believe that we can perform well on a relative basis.

John Pancari -- Evercore ISI -- Analyst

Okay, thank you. And then lastly, do you have the Energy loan loss reserve, where it stands?

Curtis C. Farmer -- President & Chief Executive Officer

Pete?

Peter W. Guilfoile -- Executive Vice President and Chief Credit Officer

Yeah. You know we didn't disclose anything on the Energy. Our allocation in Energy, I can say -- I can tell you though that we have among the strongest reserves in the industry. And when you consider, John, that we don't really have any issues in the portfolio, ex-Energy, I would say that all those reserves are available to address whatever issues we have in Energy.

But I could tell you that we do have a healthy amount of those reserves allocate to energy at this time and we probably would have seen a much larger reserve release this quarter, except for the fact we did allocate a fair amount of reserves to Energy in this quarter.

John Pancari -- Evercore ISI -- Analyst

Got it, all right, thank you.

Curtis C. Farmer -- President & Chief Executive Officer

Thanks John.

Operator

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

Curtis C. Farmer -- President & Chief Executive Officer

Hi Peter.

Peter Winter -- Wedbush Securities -- Analyst

Curt, I was looking at Slide 12, just going back to that. With the addition of $1 billion in swaps, when I look at the impact to estimated net interest income, it's a little bit worse than the second quarter. So I was just wondering, can you just talk about the impact from the swaps and a little bit more details about the plans to reduce asset sensitivity?

Curtis C. Farmer -- President & Chief Executive Officer

I might talk a little bit first about the plan to reduce asset sensitivity and then I'm going to turn it to Jim to talk more specifically about the impact of the swaps that we added in the quarter. I mean, what we have said really on all calls this year is that we are working toward getting to a larger swap or hedge position over time and that is going to take a very programmatic and measured approach to get there.

There is a real impact to current earnings for adding swaps at these levels or adding hedges at these levels, and so we have to be careful how we do that and trying to recognize a trade-off between forward forecast on either rate declines or potential rate increases in the future years.

But our objective is to get to a larger portfolio. And so we have a couple of days there where trading was favorable and we were able to move in a larger fashion and add $1 billion worth of swaps. We will not necessarily add that level every quarter. We'll be in sort of measure it as we go along, but over time, we only get programmatically back to a larger position. And nothing has changed there and Jim, I'll turn it to you about the quarter specifically.

James J. Herzog -- Executive Vice President and Interim Chief Financial Officer

Yes, we did add $1 billion in swaps. That will take for a 25 bp shock, about $2 million off of asset sensitivities. As you know, we did have an increase over the second quarter reported sensitivities. And that was largely driven by the fact that we had an increase, a significant increase in deposits, for customers' deposits, which does add to our asset sensitivity. So the net of those did improve result in a $5 million increase to that 10% deposit beta scenario that you see there.

Peter Winter -- Wedbush Securities -- Analyst

Got it. And then just separately, this quarter, you hit your target on the CET1 ratio, and I'm just wondering any updated thoughts on maybe issuing preferred stock, and then using those proceeds to buy back your stock?

Curtis C. Farmer -- President & Chief Executive Officer

The preferred continues to be an option that we would consider and it's certainly something that it's not only our decision but a discussion, we would have with the Board. But at this time, we are not issuing any preferred stock and we continue to stay focused on the capital stack that we have.

We have said all along that we are going to managed down to -- sort of the guidance we've given is to manage down to a 10% level. We came in slightly below that. It's hard to kind of get to the exact number at quarter end, given a number of moving variables and we'll continue to evaluate sort of the right capital level going forward and we'll share targets on the fourth quarter earnings call.

As we've said previously, there are a number of constituents that we take into consideration. Obviously, our shareholders and we want to return capital in a meaningful way to our shareholders, rating agencies, regulators, etc., but also just making sure that we've got appropriate capital for growth in the company, especially on the lending side, and we continue to be bullish on loan growth opportunities.

Peter Winter -- Wedbush Securities -- Analyst

Okay, thanks, Curt.

Operator

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

Steven Alexopoulos -- JPMorgan -- Analyst

Hey. Good morning, everybody.

Curtis C. Farmer -- President & Chief Executive Officer

Hey, Steven.

Steven Alexopoulos -- JPMorgan -- Analyst

Curt, I wanted to start, so as NIM continues to drift lower, ROE and revenue both on under sustained pressure here and even once the Fed funds rates stabilizes, it could be years before rates move higher again and you start to get paid on your deposit base. From a big picture view, how do you think about driving shareholder value in this prolonged environment of low rates?

Curtis C. Farmer -- President & Chief Executive Officer

Steve, I'm not positive that we're going to have a prolonged environment -- low rate environment. And so I think we did the base sort of the forward look there. I do remain very positive on the US economy overall and what we're hearing both from consumers and businesses. Even though there is some caution out there. And so Matt, sort of perspective on this may differ a little bit from here from a longer-term perspective.

But having said that, what we have said previously and I'll reinforce is that we do not anticipate any change to our strategy. We've been, as I've said in my comments around for 170 years, and we've managed through a lot of different cycles over time, both on the credit interest rate and economic perspective, we did some really good work with GEAR Up that I think have positioned us well and has allowed us to perform well on a relative basis to our peers.

And I believe that we can continue to perform well on a relative basis to our peers since that we're focused on the things that we can control. Part of that would be continued focus on organic growth that we're in some great markets and some great lines of business. We've been very focused on new customer acquisitions and continue to be to driving loan growth, deposit growth and fee income sort of job one.

And then secondly, it's just, as I've said earlier, we will continue to work to manage expenses appropriately and keep our expense discipline in place. Pete talked earlier about our credit position and we believe that we continue to have a very conservative approach to credit, and that has served us well through lots of cycles that if we do hit a recession, we believe we can perform well on a relative basis and maintain strong credit discipline and credit performance.

And then I think we've got a very good job in managing our capital and that remains a top priority in both using our capital to fund growth but offset a return appropriately to our shareholders. And then the things we talked about earlier, we'll continue to make progress on the hedging front, which I think will help over time and, as you alluded to, at some point, we do believe that that we're kind of on the verge of that, where we automated down our deposit costs and sort of reach an inflection point there. So there is these things that we can control and the things that we're focused on as a company.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay, that's helpful. Curt, in terms of the CFO search now under way, it's still not clear to many of us, me included, why Muneera left the company. Is there any color you could share on this?

Curtis C. Farmer -- President & Chief Executive Officer

Yes, I think as we shared in the filings that we did you know obviously, Muneera has been longer with us. She didn't make a lot of very valuable contributions to our company, both -- and the CFO role and I think you know the prior to CFO, she was our Chief Accounting Officer for a number of years.

I am in the process, as you would expect, as a new CEO, establishing my leadership team. We're very fortunate to have Jim Herzog who has a lot of experience with our company in the interim CFO role and we have launched a national search for a new CFO.

And the last thing I would say on Muneera; just would reemphasize what we said in our filing that there is nothing related to Muneera's approach or that was any issue -- no concerns or disagreement with our company, nothing, that she'd put in the financial, operational policy violation, nothing of that nature, whatsoever. And so we wish her well and remain very appreciative for her service to the bank.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. Thanks for taking my questions.

Operator

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

Erika Najarian -- Bank of America -- Analyst

Hi, good morning.

Curtis C. Farmer -- President & Chief Executive Officer

Good morning, Erika.

Erika Najarian -- Bank of America -- Analyst

With your CET1 now at your -- at your floor and you noted that you want to -- you want to work with your current capital stack at this time. How should we think about buyback power from here relative to what you've repurchased in the past?

Curtis C. Farmer -- President & Chief Executive Officer

Jim?

James J. Herzog -- Executive Vice President and Interim Chief Financial Officer

Yes, we are pleased with -- that we did hit the 10% target at the end of the third quarter. And from this point forward, our share buyback is really going to be driven purely by a function of supporting the dividend, the capital needed to support loan growth and our earnings capabilities. And if you put all those to the model, I think you can back into what our share repurchase are going to be. We are at kind of a steady state right now on CET1, so it does make our share repurchase activity a little more predictable. But it's simply a function of those three factors I just mentioned going forward.

Erika Najarian -- Bank of America -- Analyst

Got it. And as a follow-up to that, is there a way that you could give us guardrails in terms of, if rates go down, what the impact is to the pension expenses and is that just -- is that the long end of the curve that we have to be more sensitive to?

Curtis C. Farmer -- President & Chief Executive Officer

Yes, it is the long end of the curve and we do peg it to a AA-rated bonds. There is a little bit of credit spread in there. And of course, at the end of the year we remeasure, so even though interest rates are the biggest factor, there are other factors that go into it, such as various actuarial assumptions, assumptions on asset returns, how the equity markets performed during the last year. But interest rates are by far and away the biggest determinant. And I think if you look at our published financials from January in the K, we state that there is about a $7 million impact for every 25 basis points of yield movement or discount rate movement.

And if you look at the 10 year, that's a pretty good proxy. The duration of our liabilities are a little longer than 10 years and there is a little credit spread in there, but the 10 years is a pretty good proxy for that. And you'll note, we are down almost 100 bps since the last remeasurement date last December 31st. So we'll remeasure at the end of this year and we'll put all those factors under consideration and we'll have our new pension expense come January 1st. But until then, there's still a lot of movement that can occur with all those different variables.

Erika Najarian -- Bank of America -- Analyst

I see. And just if I could slip a last one in here, Curt, I thought Steve asked the question that all your shareholders have been asking us and I'm sure you too, in terms of what you're doing to offset the cyclicality? And I'm wondering if I took away the right theme. So, loan growth in your vibrant markets, continued efficiency gains, if you will, that have been a result of GEAR Up and I'm wondering if that's -- all of what you mentioned is enough to keep earnings stable, because obviously part of the underperformance is that the expectation for earnings in 2020 is that earnings are going to be down, mostly due to cyclicality and nothing to do with how you're running your business. And I'm wondering if there -- the response is, is there enough in the tail to offset that cyclicality in 2020?

Curtis C. Farmer -- President & Chief Executive Officer

Sure. We will give more formal guidance in the January fourth quarter earnings call. But I'll go back and just reemphasize the themes that we mentioned previously. This is not the first time that we have managed through an interest rate cycle or even an economic slowdown and we do have to take into consideration lots of factors, including the value of our franchise, the markets that we operate in, our long-term growth perspectives, balancing sort of expense reductions, coupled with investing in the franchise longer term and sort of the technology evolution that's occurring across the industry.

And we also have taken considerations with a strong credit management. And so all those things will be things that we continue to weigh and factor in, but you know as an institution that we are asset sensitive. And so, certainly downward rate environment puts more pressure on us from a topline revenue perspective and then it is our goal to manage around the expense side, the credit side, other factors that we can control. And certainly, we remain very focused on the topline revenue growth.

Erika Najarian -- Bank of America -- Analyst

Got it. Thank you.

Operator

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

Curtis C. Farmer -- President & Chief Executive Officer

Good morning, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning, everyone. Question for you, I guess maybe it's for Pete as well, but just to talk about the general middle market outlook. You talked a little bit about a slowdown in the prepared comments and I guess overall view is -- has it changed at all, since what you saw in the summer. Do you feel like that's getting better or do you still feel like it's pretty cautious environment?

Curtis C. Farmer -- President & Chief Executive Officer

Actually, I'm going to let Peter answer that. Peter Sefzik, but Peter if you don't mind.

Peter L. Sefzik -- Executive Vice President, Business Bank

Yes, I think that it still feels pretty good. The sense that have been out there is maybe still positive, but maybe not as positive as it was 90 days ago, but our pipeline is still look really good. Our year-over-year growth for middle market has been solid and we did see in the third quarter, like we typically see some seasonality, but maybe not as much as we have historically and we're encouraged with what we see going forward. But there are a lot of macro things going on in the world, the customer's ask questions about that when you talk to the general middle market company, they're busy and we continue to see opportunities.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. And then, Curt you used the phrase optimistic conversations, maybe help us understand that a little bit as well.

Curtis C. Farmer -- President & Chief Executive Officer

Yes, I think it's really a mirror what Peter just said that in general when I'm out in the market or any of us are out in the markets with our customers; they're, as Peter said, busy, and I think businesses in general are going well, and many of the markets and business lines that we serve, a lot of borrowing is still to meet current working capital, we have been seeing a lot of capex spending. Well, we haven't seen a lot of capex spending for the last several years, so nothing really has changed there.

There is more probably conversations that are occurring about sort of where things are going from a macro perspective, whether it's trade related fear of recession or just global political issues. But in terms of sort of day-to-day operating most of our customers are very busy, in fact, some of them are having challenges. For example, right now around labor, and just having enough staff to meet the current demands and not a lot of change there, but maybe a little bit more foreshadowing of concerns about the future, which quite a lot we reflected in answer to my comments about 2020 growth.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes. Okay, that's helpful. And then just one quick one, when you were talking about expenses, you've talked, you flagged investments in the retail bank. And could you maybe just talk about the magnitude of the expenses there and some of the key areas where you're spending? Thanks.

Curtis C. Farmer -- President & Chief Executive Officer

Yes. We -- as we've said previously, a lot of our GEAR Up initiatives allowed us, on the technology front, to reorient and reallocate where we were spending money and spend less on sort of core platforms as we jettisoned some of our aging technology and more on toward new customer and colleague enablement and we have a very strong retail banking franchise today and we have certainly a lot of strong digital capabilities in terms of mobile banking.

We were in the early banks to adopt the Zelle platform that's going very well, but there are some things that we're doing on the retail front to just continue to make sure that we are relevant to our customers and that we can be focused on new customer acquisition. On the digital side, you will see us roll out a new on-boarding platform that will be easier for clients to sign up for capabilities of Comerica across a lot of different fronts and sort of speed to revenue and customer onboarding sort of space. So that's forthcoming.

We've done a lot of work around our call center and some new technology there that supports primarily our retail bank, but not exclusively. And then just within the retail center as well, we continue to adopt new digital capabilities. For example, we are rolling out tablet capability for all the bankers in the retail bank to make them more mobile in interfacing with our clients and just sort of easier interface within the banking center itself.

All of these are things that we've had on the roadmap and we are working hard to manage within sort of that overall current run rate on technology, but some of those do creative a little bit of pressure for us, but they're the right things for us to do longer-term to make sure we remain relevant and competitive for our customers.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right, thank you.

Operator

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

Gary Tenner -- D.A. Davidson -- Analyst

Thanks, good morning.

Curtis C. Farmer -- President & Chief Executive Officer

Good morning, Gary.

Gary Tenner -- D.A. Davidson -- Analyst

Hey, just had a kind of question on your CECL disclosures on Slide 15. I'm curious on the commercial side, where you're forecasting kind of flat to down 5% on the reserve, how much volatility is there in that number from the Energy portfolio, particularly if you were to think about the commercial portfolio ex Energy, where do you think that kind of CECL adjustment would shake out?

Curtis C. Farmer -- President & Chief Executive Officer

Yes. So, couple of things, first of all, from a -- the CECL is very dependent upon credit quality and the makeup of the portfolio as well as the economic forecast. Energy is just one segment of that and it's a relatively small segment of the entire loan portfolio. So it would be a factor, but overwhelmingly, it would be the remainder of the portfolio, the almost $50 billion of other loans that we have that would drive both from an economic forecasts and from a credit quality, but Energy would have some impact on this one.

Gary Tenner -- D.A. Davidson -- Analyst

Got it, thank you.

Operator

I will now turn the call back over to Curt Farmer, President and Chief Executive Officer for closing remarks.

Curtis C. Farmer -- President & Chief Executive Officer

We appreciate everyone's interest in Comerica. Thank you for joining our call today. Have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Darlene P. Persons -- Director of Investor Relations

Curtis C. Farmer -- President & Chief Executive Officer

James J. Herzog -- Executive Vice President and Interim Chief Financial Officer

Peter W. Guilfoile -- Executive Vice President and Chief Credit Officer

Peter L. Sefzik -- Executive Vice President, Business Bank

Ken Zerbe -- Morgan Stanley -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

John Pancari -- Evercore ISI -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Steven Alexopoulos -- JPMorgan -- Analyst

Erika Najarian -- Bank of America -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

More CMA analysis

All earnings call transcripts

AlphaStreet Logo