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Comerica Inc (NYSE:CMA)
Q4 2019 Earnings Call
Jan 21, 2020, 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 Fourth Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Darlene Persons, Director of Investor Relations. Ma'am, you may begin.

Darlene Persons -- Director of Investor Relations

Thanks Regina. Good morning and welcome to Comerica's fourth quarter 2019 earnings conference call. Participating on this call will be our President and CEO, Curt Farmer; Interim Chief Financial Officer, Jim Herzog; Chief Credit Officer, Pete Guilfoile; Executive Director, of the 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 are incorporated into this call, as well as our SEC filings for factors that can cause actual results to differ. Also, this conference call may reference non-GAAP measures, 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 -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning everyone. Today, we reported full year 2019 earnings per share of $7.87, a 9% increase over 2018. Highlights for the year included driving strong loan growth, which puts total assets to a record level, while continuing to serve our relationship oriented deposit base.

Also with the benefit of higher fee income, revenue reached an all-time high. This growth along, with careful expense control, resulted in an efficiency ratio of under 52%. In addition, credit quality remained solid, and we meaningfully reduced excess capital. Our book value grew 10%, while we raised our dividend 46%. Also our ROE increased to above 16%.

Slide 4 provides details on our 2019 results. Average loans increased 4%, including strong growth in the first two quarters of the year. Deposit trends picked up significantly in the second half of the year, resulting in relatively stable balances year-over-year. As far as net interest income, the benefit from loan growth and the net impact from higher rates, was offset by an increase in interest bearing deposits, as well as wholesale funding. The provision increased from a very low level in 2018, and reflected continued solid credit quality, where 21 basis points of net charge-offs, were only 4 basis points excluding Energy.

We repurchased 18.6 million shares during the year, reducing our average share count by 11%, and together with an increase in our dividend, returned $1.8 billion to shareholders. In summary, we achieved record earnings per share and continue to enhance shareholder value.

Turning to slide 5; fourth quarter earnings were $269 million or $1.85 per share. These results demonstrate our ability to drive solid returns, with an ROE of nearly 15% and an ROA of 1.5%, despite declines in interest rates. Broad based deposit in non-interest income growth, strong credit quality and continued active capital management, were positive contributors to our performance.

Compared to the third quarter, average loans remain relatively steady, as expected. Mortgage Banker continued to benefit from robust refi activity. Also in Commercial Real Estate, and Environmental Services maintained their growth trends. This was offset by declines in General Middle Market, as well as National Dealer, which was partly due to lower inventory levels.

The tone of recent conversations I've had with customers and colleagues across our markets is optimistic, and we continue to see slow, steady economic expansion. We are focused on employing new customer acquisition, cross-sell and retention strategies that we have launched over the past year, and we continue to make the customer experience a corporate priority, as we seek to raise the expectations of what a bank can be.

While loans were relatively slow, deposit growth was robust, increasing $1.5 billion relative to the third quarter, with almost every business line contributing. The mix of the growth was favorable, with over 40% coming from non-interest bearing deposits. In conjunction with this growth, we have reduced higher cost brokered deposits by nearly $700 million.

Our interest bearing deposit costs declined 7 basis points to 92 basis points in the fourth quarter. We are closely monitoring the competition, and with the recent Fed rate cuts, we have taken action to adjust deposit pricing. By carefully managing our deposit rates, we are attracting and retaining relationships. Our strategy is working, and is clearly demonstrated by our deposit growth.

The increase in relationship deposits allowed us to reduce higher cost wholesale funding, and helped reduce our loan total funding cost to 71 basis points. Also, our loan-to-deposit ratio decreased to 88%. Of note, the U.S. Treasury recently announced that we will continue to be the exclusive financial intermediary for the Direct Express government benefits card program for another five years. The economics of this program include attractive retail deposits, that should continue to grow, and our ability to leverage a third party platform for processing and servicing.

As far as net interest income, over 80% of our loans are floating rate and primarily tied to 30-day LIBOR, which on average declined 39 basis points during the quarter. Lower rates were the primary driver for our net interest income decline to $544 million, resulting in a net interest margin of 3.2%. We added $750 million of swaps in October, and additional $1 billion in early January. Our strategy is to continue to build our hedging program over time, closely monitoring the markets and then taking advantage of opportunities as they arise.

Credit quality remained strong in the fourth quarter, with net charge-offs of only 16 basis points. Charge-offs continue to primarily consist of valuation impairments on select energy credits, as capital markets for this sector remain stalled [Phonetic]. Excluding Energy, net charge-offs were only $2 million.

Non-performing assets declined and were only 43 basis points of total loans, and the provisions decreased to $8 million. A $10 million increase in non-interest income helped offset the more challenging rate environment. We had strong growth in customer derivative income, as well as a gain from the sale of our healthcare savings or HSA business, along with incremental growth in several other categories.

Expenses increased as expected, primarily related to higher compensation outside processing and seasonal occupancy. This is in line with the outlook we provided for full year expenses to remain flat, excluding 2018 restructuring costs.

We maintain our targeted 10% CET1 target. We returned $246 million in capital to shareholders through our dividend, which currently provides almost a 4% return and by repurchasing 2.1 million shares under our share buyback program.

And now, I will turn the call over to Jim.

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

Thanks Curt and good morning everyone. Turning to slide 6; as Curt indicated, average loans were stable in the fourth quarter, with increases in Commercial Real Estate, Mortgage Banker and Environmental Services, offset by decreases in General Middle Market and National Dealer. Relative to the fourth quarter last year, average loans were up $1.7 billion. Total commitments as of quarter-end were stable compared to the third quarter, with growth in Commercial Real Estate, Equity Fund Services, U.S. Banking and General Middle Market, offset by reductions in Energy, Dealer and Technology and Life Sciences. Our pipeline remained solid.

Our loan yields were 4.43%, a decrease of 40 basis points from the third quarter. This was a result of lower interest rates, primarily one month LIBOR, in addition to a $3 million decline in non-accrual interest from an elevated third quarter level.

Slide 7 provides details on deposits; average balances increased $1.5 billion, with growth across all three of our markets. Non-interest-bearing deposits increased over $600 million, while customer interest bearing balances increased $1.45 billion. We've managed our higher cost brokered deposits down about $700 million.

As far as deposit costs, with the decline in interest rates, we adjusted deposit pay rates throughout the quarter. Together with the decline in brokered deposits, we achieved a 7 basis point decrease in our interest bearing deposit costs. This is at the high end of the guidance we had previously provided.

As you can see in slide 8, our MBS portfolio is stable and the yield on the portfolio held steady. Yields on recent purchases have been around 2.4%. We have had a modest increase in prepays in the back half of the year, but this is not had a significant impact on our duration or the unamortized premium, which remains relatively small.

Turning to slide 9, net interest income was $544 million, and the net interest margin was 3.2%. Loans had a negative impact of $55 million or 31 basis points to the margin. The major factor was lower interest rates, which had a $46 million impact and 28 basis points on the margin. Also contributing to the decrease were lower balances of the client and non-accrual interest from elevated levels, and to a lesser extent, other portfolio dynamics, including lower loan fees.

Fed deposits added $3 million, but had a 7 basis point negative impact to the margin. Higher balances added $7 million, that resulted in a 5 basis point drag on the margin. The lower Fed rate had an impact of $4 million or 2 basis points. Lower rates improved deposit costs by $3 million or 2 basis points on the margin, and reduced wholesale funding costs by $7 million, adding 4 basis points to the margin.

In summary, given the nature of our portfolio, our loans repriced very quickly, therefore the net impact of lower rates, including a full quarter impact of the July and September rate cuts, along with October's, was the primary driver of our net interest income in the fourth quarter. Assuming rates remain steady going forward, we believe the bulk of impact from lower rates is behind us.

Credit quality was strong, as shown on slide 10. Our net charge-offs were $21 million or 16 basis points. Excluding Energy, net charge-offs were only $2 million. Total non-performing assets declined to 43 basis points, one of the lowest levels since 2006, and criticized loans comprised only 4% of total loans as of quarter end.

As far as Energy, while charge-offs were lower in the fourth quarter than the previous two quarters, we continue to see impairment of select Energy loans with valuations of a few liquidating Energy assets impacted by volatile oil and gas prices, as well as weak capital markets. Energy non-accrual loans decreased $31 million. However, we have seen a moderate amount of negative migration, as criticized Energy loans increased $146 million. Therefore, we increased our reserve for Energy, which remains at a very healthy level.

Our reserve ratio for total loans held steady at 1.27% and resulted in a provision of $8 million, a decline of $27 million from the third quarter. As far as our adoption of CECL as of January 1, our implementation process has been successful and is virtually complete. Given the relatively short duration of our commercially weighted portfolio and the expectation of a fairly benign economic environment, we expect the change in reserve will be a decrease of 0% to 5%, and therefore will have little impact on our capital ratios.

Non-interest income increased $10 million as shown on slide 11. Customer derivative income increased $7 million, including the rate impact on the Credit Valuation Adjustment. Commercial lending fees increased $2 million, with robust syndication activity. We also had small increases in several other categories, including Investment Banking, brokerage fees and securities trading. This was partly offset by a $5 million decrease in card fees, as a result of the mix shift in the transaction volumes of government cards, as well as two fewer business days in the quarter, impacting corporate and merchant card volumes. Also fiduciary income decreased $1 million, mainly due to tax preparation fees received in the third quarter. During the quarter, we sold our HSA business for a gain of $6 million. Of note, deferred comp asset returns, which are offset in non-interest expenses, were $3 million, the same level as the third quarter.

Turning to expenses on slide 12; salaries and benefits increased $4 million. This was a result of higher incentive compensation and commissions tied to performance, as well as seasonal healthcare expense. In addition, outside processing increased $4 million, due to a better transition fee, and seasonality drove a $2 million increase in occupancy expenses, as well as several other categories. We continue to carefully manage costs as we invest for the future, as evidenced by our efficiency ratio of 55%, which is well below the third quarter peer average.

In the fourth quarter, we repurchased $150 million or 2.1 million shares under our share repurchase program as shown on slide 13. Together with dividends, we returned $246 million to shareholders. Our goal is continue to return excess capital back to shareholders, and maintain our CET1 ratio at approximately 10%.

Turning to the rate environment on slide 14; assuming interest rates remain at the current levels, the net impact from rates is estimated to be $10 million to $15 million on our first quarter net interest, income relative to the fourth quarter. This includes the full quarter effect of the recent Fed cuts, combined with the actions we've taken to lower deposit rates. Of course, actual results will vary, depending on a variety of factors, such as LIBOR movements. As far as the remaining three quarters of 2020, if rates hold steady, we expect to see a relatively smaller residual effect from rates, as longer dated assets and liabilities reprice. In addition, continued hedging activity could have a modest negative impact.

We continue to work to gradually moderate our asset sensitivity. We added $750 million to our hedging portfolio on October, and $1 billion in early January. We currently have about $5.5 billion in interest rate swaps, with an average remaining tenure of about three years and are currently in the money. Overall, we remain positive and constructive on the U.S. economy and we plan to make steady progress in building our hedging portfolio over time.

Slide 15 provides our outlook for 2020, which assumes a continuation of the current rate and economic environment. We expect average loans to grow approximately 2% to 3% in 2020, relative to 2019. We anticipate continued slow, steady economic expansion, yielding growth in most business lines. This is expected to be partly offset by a decline in Mortgage Banker, from elevated levels, as refi volumes normalize, and a modest reduction in National Dealer Services, driven by predicted reduction in auto sales.

As far as the first quarter, we expect loan growth for most business lines will be mostly offset by a decline in Mortgage Banker, due to seasonality, combined with the slowdown in refi activity. We expect average deposit growth of 1% to 2%. We believe we will have the normal seasonality through the year, including the typical first quarter decline. Our goal is continue to attract and retain long-term customer relationships, by offering superior products and services, along with the appropriate pricing.

As I discussed on the previous slide, the rate impact on net interest income is expected to be mostly absorbed in the first quarter, with an additional modest effect for the remainder of the year. Also, the full year expense of higher wholesale funding will have an impact. In addition, we expect a $6 million to $8 million decrease in non-accrual interest recoveries from the elevated level we saw in 2019. Loan growth is expected to provide a partial offset.

We believe our portfolio will continue to perform well, resulting in net charge-offs similar to 2019, in the 15 to 25 basis point range. Given the new CECL accounting standards, which became effective January 1st, and assuming the current economic backdrop, we expect provision should be slightly above net charge-offs, after taking into consideration our loan growth outlook. Note that this new standard may cause greater volatility in our provision.

As far as non-interest income, we expect growth of about 1%, led by card and fiduciary fees. Our expectation includes declines in certain key categories that had strong growth in 2019, such as customer derivative and warrant income. Also deferred comp, which totaled $9 million in 2019, it's hard to predict and is not assumed to repeat. As far as the first quarter, keep in mind that the fourth quarter included the gain on the sale of the HSA business. In addition, we had strong derivative income in syndication fees, as well as deferred comp of $3 million, all of which were dependent on market conditions, and therefore may not continue at these levels.

Expenses are expected to increase approximately 3% year-over-year. We expect to see a rise in outside processing tied to fee income growth, and increase in technology investments, as we execute on revenue and efficiency related projects that are in place [Phonetic].

In addition, we expect inflationary pressures on items such as annual merit, staff insurance and marketing. As a result of lower discount rate, pension expenses increasing about $7 million. Also, recall the first quarter includes elevated salaries and benefits expense, due to share -- annual share compensation and associated higher payroll taxes, which are expected to be mostly offset by seasonally lower marketing and occupancy expenses. Our effective tax rate is expected to be approximately 23%, and as far as capital, we expect to maintain our CET1 target of approximately 10%.

Now, I'll turn the call back to Curt.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thank you, Jim. The outlook we have provided reflects our expectations for continued moderate U.S. expansion through 2020. A cooler world [Phonetic] economy and the strong value of the dollar, remain a headwind for U.S. trade. However, many sources of uncertainty that accumulated through 2019, such as China, Mexico and Canadian trade agreements, have been or may soon be resolved. The interest rate environment looks stable for the year ahead, and the labor market in the U.S. remains strong and will continue to support the consumer sector. We believe this backdrop should benefit us and our customers, as the year progresses.

Over our 170-year history, we have managed through many economic and interest rate cycles. With our efficiency ratio in the mid 50s and an ROE of nearly 15%, we are better positioned to weather changes in the economy or interest rate environment.

We remain focused on controlling the things we can control, to maintain our solid performance. Our 2019 results demonstrate our ability to grow revenue, while maintaining favorable credit metrics and well controlled expenses. Our key strengths provide the foundation to continue to 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 growth of loans, deposits, and fee income.

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'll 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.

Ken Zerbe -- Morgan Stanley -- Analyst

Good morning. I guess why don't we start off; in terms of the NII outlook, I just want to make sure I really understand what you're trying to say here? The way I read it, is that first quarter's obviously down $10 million to $15 million, and then the rate impact is going to be negative on NII. So dollars go lower in each subsequent quarter throughout 2020. But then you have -- presumably you have the asset growth offset to that. Are you trying to say that, NII from a dollar basis is going to be lower than first quarter throughout the year, or like how do you see the net impact of all the different factors affecting NII, after first quarter? Thanks.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Do you want to take it, Jim?

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

Yeah, thanks for the question. We will see progressively lower impact from rates, as we go through the year. I mentioned the $10 million to $15 million in the first quarter. It will be a much smaller amount in the second quarter. As of now it might be, call it the $5 million to $7 million range, then it becomes closer to a negligible number in the third and fourth quarter, even though we will see some impact all the way through the year. And of course I had mentioned, to the extent we had hedges and depending on the rates there, that will obviously have an impact also. We'll obviously pickup the volume as the year goes on and you heard me mention the non-accrual impact, that overall will be an impact on 2020 compared to 2019.

Ken Zerbe -- Morgan Stanley -- Analyst

Sorry, I guess -- because you -- I'm sure you guys do very detailed modeling for the year. Is it right to assume that your NII, if you look at say fourth quarter of '20, is that going to be lower or higher than first quarter of '20?

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

You should see volume overtake rate, once we get beyond the first quarter, to answer your question. So most of that rate impact is felt in the first quarter and then you are right, volume does start to step up and the rate impact starts to decline. So you start to see a crossover, once you get into the second and third quarters.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay, all right, that's helpful. I guess maybe just like a second question, in terms of fee income, you mentioned in -- I guess in your guidance that assumes things essentially no -- what is the right word, no returns on deferred compensation assets, and that's part of the assumptions driving your 1%? Can you just explain that, and is it possible that your fee growth is more than 1%, if you do get returns on those assets?

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

Well obviously, deferred comp is a bit of a wild card, depends on the market and the market returns on deferred comp. So it can actually positive or negative. So I'd be very hesitant to assume there is going to be any kind of return there. In fact, it could go the other direction.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it, understood, OK. And then just if I could sneak one last one in, in terms of your loan growth, obviously 2% to 3%, I think last quarter you talked about something around nominal GDP. And I guess my interpretation of nominal GDP was closer to 4%. Can you just comment, are you seeing weakness or any kind of deterioration? I mean presumably, you are seeing some weakness and your expectation for loan growth this quarter versus last quarter, and what's driving that? Thanks.

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

Ken, this is Peter. I think the 2% to 3% that we had communicated, we feel good about, we have seen a little bit of a slowdown in the fourth quarter and I think we listed the businesses that -- where we've seen that. There have been some sort of interesting timing on what we've had in Dealer and Mortgage. But going into 2020, we feel good about our ability to accomplish the 2% to 3% that we've communicated.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay, all right. Great. Thank you.

Operator

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

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

John, good morning.

John Pancari -- Evercore ISI -- Analyst

Good morning. And then -- also on the NII topic. So I guess this outlook implies probably that we got some incremental compression in the net interest margin in the fourth quarter. And then could you talk about how the margin should progress beyond that? Is it fair to assume stable or some incremental compression from there, as we move through second, third and fourth quarter of 2020? Thanks.

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

Okay. Yeah, happy to answer that. We have a couple of factors that we will be netting against each other. We did note that we have about 5 bps of compression, due to the higher balances plus the excess liquidity that you saw in the fourth quarter. When you bring up the net against that, the $10 million to $15 million guidance that I offered in the first quarter, and progressively smaller amounts after that. And so if you do the simple math on that, it would imply a modest reduction than the current 3.20%.

Having said that, we're always hesitant to provide NIM percentage guidance, just because it is so impacted by excess liquidity, which based on our customer profile, is very hard to predict.

John Pancari -- Evercore ISI -- Analyst

Okay, got it. And then on the expense front, you indicated in your guidance that you -- your expense outlook is impacted in part by higher outside processing expenses related to revenue. And you mentioned in your comments too, it seems like maybe fee revenue. Can you talk about what that is? And then separately, can you talk about what expense levers you may have incrementally, as you look at 2020, given the tougher revenue backdrop? And any consideration for pulling back even harder on the expense side? Thanks.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Okay. Jim, you want to start?

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

Yeah, very specific to the outside processing fees. So we actually do have some good core growth there, a number of line items in 2020. One of those is card income, and of course, we have associated outside processing fees with that. Now some of these strong core line item growth areas that we have, will be offset by some of the items that I mentioned, the very strong year we had in 2019 with syndications, warrants, derivatives and of course the deferred comp item that we talked about earlier. But we do expect a strong card year, and we will have some outside processing fees associated with that.

Regarding your second question on where could we pull back, we are always very focused on expense control. I think we have to keep in mind, that we're starting again from a very strong position, with 55% efficiency ratio. But we do feel it's important to make the proper investments in technology, and make sure that we're pushing forward, in terms of moving the company to where it needs to be. So we are going to continue to invest in technology and don't anticipate pulling back on that at this point in time.

John Pancari -- Evercore ISI -- Analyst

Okay, got it. Thank you.

Operator

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

Steven Alexopoulos -- JP Morgan -- Analyst

Hey, good morning everybody.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Hey Steven.

Steven Alexopoulos -- JP Morgan -- Analyst

To follow-up first on John's question on expenses; so if you look at the 3% expected increase in 2020, is there anything unusual you would call out? I mean pension sounds like it was $7 million, or do you -- do you think that's a good run rate for the company here, as you continue to reinvest?

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

Yeah, pension would be the only real unusual item there. I would say normal inflation, including merits, would be the largest item. So nothing too unique in terms of what makes up that expense base.

Going forward, I'd be hesitant to call that a run rate. What we're really focused on, is really operating leverage going forward. We do have a bit of a transition year at some of the pension expense and some of the strong non-interest income headwinds that we talked about earlier. But we're really more focused on positive operating leverage, and that's where we expect to get in the future.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, that's helpful. And I just was looking for color, you guys put up really strong growth in deposits in the quarter. Do you have more color on why it was so strong?

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

Yeah, it was a very strong quarter. We were very pleased with it. We talked about being up $1.5 billion. But keep in mind, we ran off about $700 million brokered CDs. So the way I look at it is, we actually are up around about $2.2 billion or so on deposits. So we are very pleased there. There is a very concerted effort to go out and deposit gather. We priced appropriately where we needed to. These are relationships that we poured into the Bank, none of these were stand-alone deposits.

Now, I will say that probably at least half of this is seasonal, and it's always hard to tell when this money might bleed out during the first quarter. But approximately half -- maybe a little half from what I can tell is seasonal. But there is a strong component of it that I think is core, and will stick with us through of the year, even if we see a minor decline in the first quarter.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

This is Curt, I might add, Steven, that the relationship component that Jim talked about. We made a deliberate strategy not to chase sort of hot money or transactional deposits, but heavily leveraged our deposit pricing in programs that we've had in place, like our CD program around new client acquisition and acquiring additional deposits from existing customers, which I think is the right strategy for us longer term, and very consistent with our relationship-based approach.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, that's helpful. Maybe just one final one. Curt, your comments recently about Comerica potentially being an acquirer got quite a bit of attention. I'm curious, are you actively having conversations with targets, or is this something you're just thinking of really over the longer term? Thanks.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Yeah Steven. I think maybe first thing I would say is that, if you read the text of anything that has been written on me, there is no change in any of our strategies. There were few headlines that maybe were I think a little bit misleading, and we are very focused on organic growth, as we have been for a long time. We've done two acquisitions in the last 20 years, and what we said and what I've said and Ralph before me, is that -- if there is something that makes sense in Texas and California, that would be a good strategic fit. And one of the major metropolitan areas and major right economics for our company and for our shareholders, we take a look at it. But that lands us fairly narrow, and so sort of day in and day out, we continue to focus on organic growth.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, terrific. Thanks for taking my questions.

Operator

Your next question comes from the line of Jennifer Demba with SunTrust.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning Jennifer.

Jennifer Demba -- SunTrust -- Analyst

Good morning Curt. Question on asset quality, looks like the increase in criticized loans was Energy driven. Just wondering if you guys think charge-offs will be higher in that sector this year or lower? And are you seeing any other underlying weakness in any other sector in your portfolio? Thanks.

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

Yes Jennifer. So we're guiding 75 to 125 basis points in charge-offs and if you take a look at 2019, only 4 basis points of ex-Energy charge-offs. I don't think that's sustainable. So we would expect that ex-Energy, we would see slightly higher charge-offs than what we saw in 2019 and we're hopeful that that could be offset fully or at least partially by lower energy charge-offs. So that remains to be seen, but that's where we get the outlook.

Jennifer Demba -- SunTrust -- Analyst

Okay. Are you seeing any any weakness at all in any other sectors or geography speed at this point?

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

No, we're really not. 4 basis points of ex-Energy charge-offs in 2019, and only $2 million in net charge-offs ex Energy in the fourth quarter. Our non-accrual levels are very low levels, and that includes Energy. So we're seeing a lot of strength, particularly in $48 billion of the portfolio that is ex-Energy

Jennifer Demba -- SunTrust -- Analyst

Okay. One other question, we saw a major transaction announced in Texas recently. Just wondering if you guys are expecting any merger disruption opportunities from that transaction? Thanks.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Jennifer, there's always disruptions that occur in markets when transactions occur. But I would say in general, there is nothing that strategically changes our focus as an organization, and we are in some different segments and some different customer focused, in a number of those transactions that have occurred.

Jennifer Demba -- SunTrust -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Mike Mayo with Wells Fargo Securities.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning, Mike.

Operator

Mike, you may be on mute?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Mike?

Mike Mayo -- Wells Fargo Securities -- Analyst

Can you hear me?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Yes, we can.

Mike Mayo -- Wells Fargo Securities -- Analyst

Sorry about that. So how much was your technology spending last year? How much do you think it will increase, and what are the areas of technology spending focus?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Yes we -- Jim, you want to start on that and then I'll add in around some of the areas of focus?

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

Yeah Mike, we don't quote a specific number of technology spending, simply because it's so difficult and challenging to get an apples and apples, work with other banks and defining exactly what falls under technology budget. But I will say we have a -- as implied in the expense outlook for 2020, we do have a modest increase in technology expense in 2020, over and beyond the strong spend in 2019. So it is something that we continue to invest in.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

And I might just add to that, Mike, that -- we've talked before about the GEAR Up initiative, having positioned us well, from an overall technology spend. We did a lot of work, the last several years to rationalize many of our applications in some of our aging platforms. I think we've been a leader in terms of the cloud migration, especially in non-customer interfacing applications. And there's a lot of the work we have done around that, has helped free up capacity for us for new projects. In the last 12 months, that has included a new -- across the company, loan origination and servicing platform, a new companywide CRM platform, major investments in data analytics to help us in the marketing and servicing of our clients. Major upgrades for our call center technology. And then for 2020, a number of key areas of focus and items that will be coming online, related to upgrades to our ATMs, major upgrades to our banking center infrastructure and technology, including enabling all of our employees in the banking center with tablets to make them more mobile in their selling and servicing efforts, a pretty major upgrade to our onboarding capabilities on the digital side, for our consumer, prospecting customers and then, fairly significant upgrades to our treasury management platform in the payments area, as well as a new portal for our Wealth Management clients.

So we continue to be very focused on things that I would put in a category of colleague and customer enablement. And like most institutions, we have a longer-term roadmap we're working on. But we feel like we are well positioned relative to our competitors and providing a really good experience to our customers.

Mike Mayo -- Wells Fargo Securities -- Analyst

And then one follow-up, I assume you would employ many vendors to help you with this transformation. What took place with the vendor transition costs? I guess, you always have a balance, getting vendors to help you facilitate the transition. On the other hand, there is always the risk of vendor lock in. And during this quarter, you had a vendor transition cost. But can you describe the analysis that goes into selecting vendors? How you prepare against too much vendor lock in, versus the goal of transforming the company faster?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

I am going to take the sort of second part of your question and then I'll turn to Jim for the more specifics around the expense in the quarter. We do have a number of key vendor relationships like most institutions, given the sales organization we are, we try to strike the right balance between proprietary capabilities and leveraging third parties where it makes sense. Those third parties go through the exact same oversight process that we do, as if we were building something or servicing something in-house, including robust [Indecipherable] oversight. And we believe we've gotten really good relationships that we can leverage and we try to get to a good point in terms of balance and trying to help concentration issues with any one single single vendor. So Jim, you maybe want to talk about the specifics around the quarter?

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

Yeah I would say that, other than size, there is actually nothing real unusual about this vendor transition. We're always evaluating our vendors to do the right thing with both ourselves and the customers. It's not unusual for us to have a vendor transition. This one was a little bit larger. But it is something that we're always evolving on, in terms of looking at both quality and cost and capabilities. And I would just say, that this is a one-time cost that's larger than typical. It's not unusual. We have -- had vendor transitions really every year, and sometimes multiple times within a year. So that's -- I think there is probably not a lot more to that other than the size.

Mike Mayo -- Wells Fargo Securities -- Analyst

Okay, thank you.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thank you, Mike.

Operator

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

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning Ken.

Ken Usdin -- Jefferies -- Analyst

Hey, thanks. Good morning. Question on the deposit cost side of things. You mentioned that you saw the 7 basis point decline in costs and just wondering, what happens from here in a stable rates environment? How much do you continue to have of just natural resetting in deposit costs, versus what else from here would have to be more negotiated with across the customer base, as you've talked about in the past? Thanks.

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

Yeah, happy to answer that. We did reprice deposits throughout the fourth quarter, as I've mentioned. So even though we saw the 7 basis points decline in the fourth quarter, I would expect a continued decline in the first quarter, just based off the efforts undertaken thus far.

The change in the first quarter will be a smaller amount, the 7 bps that we saw in the fourth quarter. I'd probably characterize it based on actions taken to date, as being kind of the lower single digits of bps. But we will see where things play out there.

The two things that -- two or three things that would cause a further reduction; one is, we did see some mix shift in the fourth quarter. The actions that we actually took in the fourth quarter, probably would imply a little larger bps reduction, but we did see some of our relationship deposits grow, related to some of the higher priced accounts. So whether or not, some of that mix shift unwinds remains to be seen, so that could be a tailwind.

Then I would say, it really depends on the competition and what happens in the competitive landscape. I've seen a little bit of follow the leader out there in terms of deposit pricing. And I think that in turn for the industry will be driven by loan growth and the demand for funding. That's certainly true, specific to Comerica. But I think larger picture, it affects the entire industry, and we're not immune from that. So we'll continue to watch the competitive landscape and do the right thing for our customers and for our balance sheet.

Ken Usdin -- Jefferies -- Analyst

Got it. And one more question, just on the mix of earning assets, with all this good deposit growth that you have, a lot of it ended up just sitting in cash. And unfortunately, 10-year still at 1.80 million [Phonetic] or so. So how do you sort of think about, if this deposit growth continues or hangs around? Does it just stay in cash, or given not much of an optionality versus securities book? Or do you start to flush it back into the securities book over time?

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

Well, we do expect some of these deposits dilute in Q1, as we mentioned the seasonality factors, both in Q4 and the typical Q1 seasonality. So how much liquidity and excess liquidity we have, remains to be seen. To the extent we do have excess liquidity, I would say, it really depends on the interest rate landscape. In general, we are happy with the size of our securities portfolio, and the curve is flattened out, but there's not a lot of percentage in tying up that liquidity at this point in time. That's something we will continue to monitor. But I would not anticipate growing our securities book in terms of size, at this point in time.

Ken Usdin -- Jefferies -- Analyst

All right, great. Thanks a lot.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thank you, Ken.

Operator

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

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning Erika.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Good morning. I just wanted to follow-up to your response to Steve's earlier question on operating leverage. Obviously in '20, given the poor comparison to '19 NII, that's obviously quite difficult. But is the message that, as we look out into 2021, there is more flexibility for the expense growth to be less than 3%, or at least you have more levers to pull it lower than revenue growth?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

So Erika, this is Curt, I would say that, when you look at the history of our company, especially the last year, we definitely have had a proven expense discipline and you look at the performance metrics, they really are the top of our peer group, and we expect them to be near the top of our peer group, once everybody reports, and especially the efficiency ratio. So we know how to manage expenses. We've done a good job of that in our history. We remain very focused on expense management. There are a few dynamics in play in 2020 that Jim talked about, and we are going to continue to strike the right balance between managing expenses and investing the things that we need to invest in longer term, to help our customers and to serve our customers appropriately and to grow the institution. But you should expect for us longer term, to remain focused on positive operating leverage. And there's always additional levers that we can pull. We don't believe strategically, that sometimes these are the right things to do, and again striking the right balance between investing in technology and things of that nature and -- that's for the overall expense growth numbers.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. And my second question is, you bought back almost $1.4 billion worth of stock, which really helped in a year, when the Fed cut three times. And with the CET1 ratio just 14 basis points above target, how should we think about buyback appetite in 2020?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Jim?

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

Yeah, we -- for us, it's a pretty simple target in terms of -- we're simply calibrating what we need to support our loan growth, support our dividend and then calibrate that against earnings generation. And the goal is simply to come as close to 10% as we can, and we've been in that ballpark the last few quarters, and I would anticipate saying plus or minus to that 10% throughout 2020.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Just as a follow-up question, I think I ask you this every quarter, but can you really just remind us, what is your actual capital binding constraint? Because I'm sure a lot of peer or a lot of investors look at the CET1 and its 150 basis points above the targets of some much larger regional banks. But if you could remind us what your actual binding constraint is on capital?

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

Yeah, there's a couple of ways to look at that. If you look at it from a pure stress testing standpoint, the binding constraint would be Tier 1, we obviously don't have preferred in our stack. But there is another way of looking at it, and that is we're always conscious of our constituents and rating agencies, regulators, customers. And from that standpoint, the CET1 is a very important ratio too. So I'm not sure I could say, there's just one binding constraint. It depends on what perspective you're looking at it from.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Understood. Thank you.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thanks Erika.

Operator

Your next question comes from the line of Michael Rose with Raymond James.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning Michael.

Michael Rose -- Raymond James -- Analyst

Hey, good morning. Just as we think about the efficiency and the technology expense, there has been a lot of talk on this call. Is there any change to kind of the intermediate term profitability ROE, ROA expectations, just given the front-loading, some of the expenses in the revenue environment? Thanks.

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

No, we've enunciated in the past, that we expect to be in the low to mid ROEs. We could drop to the -- more of a low-double digit. I'm sorry, just to clarify, the low-double digit and the double-digit ROE, and we expect to stay in that range in the foreseeable future. Interest rates will be a significant impact and driver there. We'll see where those go. But we feel pretty good about the double-digit ROE going forward at this point still.

Michael Rose -- Raymond James -- Analyst

Okay. And then just one housekeeping question, just, when I look at the NPAs, how much of that is actually Energy versus non-Energy, when I look at the commercial bucket? Thanks.

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

Yeah, Mike, I don't have that breakdown for you. I don't think there is a page. Do you have the breakout?

Darlene Persons -- Director of Investor Relations

22.

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

Page 10. That's on page 10. So...

Michael Rose -- Raymond James -- Analyst

All right.

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

$3 million in Energy, $156 million in ex-Energy.

Michael Rose -- Raymond James -- Analyst

Okay. Sorry, I missed that. All right, thanks for taking my question.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thanks Michael.

Operator

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

Gary Tenner -- DA Davidson -- Analyst

Good morning. I had a couple of questions, one on the Energy book. As you as you gave your guidance for loan growth in 2020, obviously, you highlighted Dealer Services and Mortgage. I'm curious with the pretty significant decline this quarter in E&P and what seems to be still a kind of a challenging outlook for that segment, what the appetite is for new lending in that space in 2020?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Peter?

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

Gary, this is Peter. So, I mean our appetite, is that we are still looking for opportunities that I would tell you that they are more limited in this environment that we're in. We're not seeing a whole lot of deal flow, you're seeing consolidation in the space, not a lot of capital coming into it. But we're continuing to be a very important energy lender in the space. We've got really good relationships. We're going to support our customers and to the extent there is new opportunities that makes sense for us, we're pursuing them.

Gary Tenner -- DA Davidson -- Analyst

Okay, thanks. And then secondly on the HSA business, I assume that there were some associated deposits with that line of business. If so, can you just highlight what the amount was?

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

You know, look its Jim. Those deposits were very negligible. They won't even [Indecipherable] whatsoever. That's a fairly small-scale business for us.

Gary Tenner -- DA Davidson -- Analyst

All right, thank you.

Operator

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

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning Peter.

Peter Winter -- Wedbush Securities -- Analyst

I was just wondering, I was looking at average loan growth. It seemed to have weakened a little bit from the mid-quarter update, and I'm just wondering, what drove that -- what gives you the confidence of the 2% to 3% loan growth in 2020; because first quarter is going to start off, kind of flattish.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thanks Peter. I will let Pete...

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

I would just remind you again, for last year, we had 4% year-over-year loan growth, it felt really good. It was across kind of most of our businesses. In the first part of the year, we really saw good loan growth in Middle Market. And I think as we got into the second half of the year, we saw little bit -- really in California and Michigan, where middle market slowed down a little bit. But nothing that overly conservative. Texas continued to perform really well.

So as we go into next year, we feel like our pipelines in Middle Market and those markets look really good. And we feel good about our specialty businesses. Again, we did see a little bit of a dial back in dealer at the end of the quarter. Our EFS business dialed back a little bit. But we still feel really good about those going into 2020 and we feel like we're going to be able to achieve that 2% to 3% that we've communicated.

Peter Winter -- Wedbush Securities -- Analyst

Okay. And then on a separate note, just one housekeeping. The guidance for net interest income in the first quarter, of down $10 million to $15 million. That does not include one less day count, which I think is about $6 million to $7 million, is that right?

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

That is correct. Yeah. We were simply guiding on the rate impact and we mentioned the $10 million to $15 million. So drastically right, there will be the one day impact.

Peter Winter -- Wedbush Securities -- Analyst

Got it. Okay, thanks very much.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Thanks Peter.

Operator

Your next question comes from the line of Lana Chan with BMO Capital Markets.

Lana Chan -- BMO Capital Markets -- Analyst

Good morning Lana. Good morning. Just couple of cleanup questions, one on the fee income side, the expectations for growth in 2020 from the fiduciary side, it was kind of flat in 2019. What's driving growth expectations in 2020?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Yeah, fiduciary specifically?

Lana Chan -- BMO Capital Markets -- Analyst

Yeah, I think that was one of the drivers of the fee income growth in 2020? Card and fiduciary?

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Yeah, I would say a couple of things related to fiduciary. One, that's a business that we've been in for a long time and a business in which we have scale, both in serving our existing clients, or in the institutional Trust business as well. And then we have a third party trust platform, where we provide trust services for many of the larger broker dealers in the U.S. And so we see growth opportunities kind of across all of those various budgets. Fiduciary is also one of those categories that is impacted by the market. And so, optimistic outlook on the equity and bond markets for 2020. The flattish nature to 2019, nothing unusual there. We did have some repositioning with a number of different customers. But over time, that's a business that we have grown nicely, and we would seek for the normal growth in 2020.

Lana Chan -- BMO Capital Markets -- Analyst

Okay, thank you. And the second question is, can you remind me, do you have a target dividend payout ratio?

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

We do not. Our goal of the dividend is simply to make sure that it is sustainable. That's really where our focus is and obviously, you don't want the dividend payout ratio to get too high, if you have a -- what I'll call a normal income stream, which we consider -- the stream to be somewhat normal right now. So simply sustainable and strong and we're comfortable with where it is right now.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Just so to add to that, obviously the last four or five years, we've had very nice growth in dividend and returned to our shareholders. So we've been very focused on that and you know, you would expect toward the rate of growth for the dividend to start to slow out for the year.

Lana Chan -- BMO Capital Markets -- Analyst

Okay, thank you. Appreciate it.

Operator

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

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Good morning Brock.

Vilas Abraham -- UBS -- Analyst

Hey guys, this is Vilas Abraham for Brock. Just a quick question on CECL, if you guys could just give a little bit more color on the Day Two impact, how you're thinking about that maybe specifically, as it relates to the Energy portfolio? Thanks.

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

Pete?

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

Yeah. So I think the Day two of the impact for -- with regard to Energy, we have to look at a couple of different factors. One is, not just our -- the economic forecast or how the economic forecast would impact energy specifically. And so, we would expect that there would be modest growth in our reserves for Energy, just like it would be under the incurred [Phonetic] model. But we don't expect CECL would impact that to any larger degree, than with what we see under the incurred model.

Vilas Abraham -- UBS -- Analyst

Okay, got it. That's it from me. Thanks.

Operator

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

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

As always, we appreciate your questions. We appreciate your interest in our company and I want to thank you for joining the call today. Have a very good day. Thank you.

Operator

[Operator Closing Remarks].

Duration: 72 minutes

Call participants:

Darlene Persons -- Director of Investor Relations

Curtis C. Farmer -- Chairman and Chief Executive Officer. Comerica Incorporated and Comerica Bank

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

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

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

Ken Zerbe -- Morgan Stanley -- Analyst

John Pancari -- Evercore ISI -- Analyst

Steven Alexopoulos -- JP Morgan -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Ken Usdin -- Jefferies -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Michael Rose -- Raymond James -- Analyst

Gary Tenner -- DA Davidson -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Vilas Abraham -- UBS -- Analyst

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