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Comerica Inc (NYSE:CMA)
Q3 2020 Earnings Call
Oct 20, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Comerica's Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Darlene Persons, Director of Investor Relations. Please go ahead, ma'am.

Darlene P. Persons -- Director of Investor Relations

Thank you, Regina. Good morning, and welcome to Comerica's third quarter 2020 earnings conference call. Participating on this call will be our President, Chairman and CEO, Curt Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Executive Director of our Commercial 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. In that regard, you should be mindful of the risks and uncertainties that could cause actual results to materially vary from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. Please refer to our 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.

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

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

Good morning, everyone, and thank you for joining our call. Today we reported earnings of $211 million, an increase of 87% over the second quarter. Our customers continue to act prudently, conserving cash and adjusting their operations, driving a reduction in loans and taking deposits to a new record. Lower loan balances along with strong credit metrics and an improving yet uncertain economic path resulted in the allowance for credit losses remaining near 2% and a provision of $5 million.

As far as revenue, the impact from lower interest rates waned, card fees remained robust and other fee income categories began to recover. Expenses are well controlled and included a $4 million increase in charitable contributions. ROE returned to double-digits at nearly 11% and our book value per share grew to $53.78, the seventh consecutive quarterly increase. We remain focused on continuing to enhance shareholder value.

Based on recent conversations I've had with employees and customers, sentiment appears to be modestly better, reflecting cautious optimism and a sense of hope for the future based on our country's overall economic resiliency. We've begun to see some signs of improving conditions. However, it is very difficult to predict the pace of the recovery. This is reflected in our loan portfolio, where overall, we are starting to see some positive trends. Balances begin to grow mid-quarter and increased modestly month-over-month in September.

Also, our pipeline has begun to rebuild, although it remains well below pre-COVID levels. On a full quarter average basis, loans decreased $1.5 billion in the third quarter. The largest contributor was a $910 million drop in average National Dealer loans in conjunction with significant decline in dealer inventory levels in the second quarter, which have yet to recover. This is due to supply backlogs following the manufacturing shutdown combined with the rebound in sales activity. We anticipate loans will rebound next year as auto inventory returns to normal levels.

Deposits continue to show strong broad-based growth with average balances increasing $4.5 billion, including $3.2 billion and non-interest-bearing deposits. Government stimulus programs have provided tremendous liquidity. In addition, as we've seen in other times of economic uncertainty, our relationship-based customers are maintaining a building cash in safety or their Comerica accounts. The resulting increase in liquidity drove our total average assets to a record $84.3 billion.

As expected, net interest income declined $13 million as lower interest rates had a $15 million impact. In this ultra-low rate environment, we continue to carefully manage loan and deposit pricing to attract and maintain customer relationships. Comerica has a strong credit culture with conservative credit underwriting which has served us well in times of economic stress. During the current period of unprecedented disruption, our portfolio has performed well, and we believe this will continue to be a differentiator for us in the industry.

Criticized loans remained stable and non-performing assets are well below historic norms. Also, net charge-offs decreased only 26 basis points. However, given the difficulty in predicting the path of economic recovery, our credit reserve remains at over $1 billion. We are staying close to our customers in addressing their needs. At the current level, we believe our reserves are appropriate and that we are well positioned.

Non-interest income increased as customer activity began to rebound, including continued strong contribution from our card platform. Of note, following robust activity in the second quarter, derivative income declined $10 million. We have continued to maintain our expense discipline. Excluding the impact of deferred comp and an increase in charitable contributions, expenses declined. Our capital remained strong with an estimated CET1 of 10.3%. We remain focused on deploying our capital to support growth, while maintaining our very attractive competitive dividend.

And now, I will turn the call over to Jim to review the quarter in more detail.

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

Thanks, Curt, and good morning, everyone. Turning to Slide 4. Average loans decreased $1.5 billion, which compares favorably to results for the industry as indicated by the H8 data for large banks. As Curt mentioned, National Dealer declined $910 million due to low inventory levels impacting floor plan loans.

As far as corporate banking, you may recall that large companies drew on lines earlier this year to build liquidity buffers in a time of great uncertainty. This resulted in an increase of nearly $800 million in second quarter average balances. Corporate banking line utilization has returned to pre-pandemic levels with average balances down nearly $500 million in the third quarter. General middle market loans declined about $400 million, while deposits increased nearly $2 billion. Customers have been prudently cutting cost as well as reducing working capital and capex requirements to improve their cash flow in this challenging environment. For the portfolio as a whole, line utilization decreased to 47% at period end.

On the other hand, with full quarter effect of PPP, loans grew in business banking and the small business segment captured in retail banking. Also, our Mortgage Banker business, which serves mortgage companies, was at an all time high, increasing over $300 million due to very robust refi and home sale activity. Loan yields were 3.13%, a decrease of 13 basis points from the second quarter. Lower rates were the major driver. One month LIBOR, the rate we are most sensitive to, declined 19 basis points. This was partly offset by pricing actions we are taking, particularly adding LIBOR floors when possible as loans renew. A mix shift in balances, including the full quarter impact of lower yielding PPP loans, also had a negative impact on yields.

Deposits increased 7% or $4.5 billion to a new record of $68.8 billion, as shown on Slide 5. The larger driver continues to be non-interest-bearing deposits and growth has been broad-based with increases in nearly every business line. As Curt mentioned, customers are conserving and maintaining excess cash balances. Period end deposits increased over $700 million. The largest contributor was technology and life sciences as robust fundraising added liquidity and customers reduced cash burn. With strong deposit growth, our loan-to-deposit ratio decreased to 76%.

The average cost of interest-bearing deposits was 17 basis points, a decrease of nine basis points from the second quarter. Our prudent management of relationship pricing in this low rate environment, our large proportion of non-interest-bearing deposits as well as the floating rate nature of our wholesale funding drove our total funding cost only 14 basis points for the quarter.

As you can see on Slide 6, we've put some of our excess liquidity to work by increasing the size of the portfolio. We added $1.75 billion in treasuries and $500 million in mortgage-backed securities. In addition, we continue to reinvest prepays, which remained elevated at around $1 billion for the quarter. Yields on recent purchases have been around 140 basis points. The additional securities combined with lower rates on the replacement of prepays resulted in the yield on the portfolio declining to 2.13%. Of note, we have not seen a significant impact on the portfolio's duration or the unamortized premium, which remains relatively small.

Turning to Slide 7. Net interest income declined $13 million to $458 million and the net interest margin was 2.33%, a decline of 17 basis points relative to the second quarter. The major factors were lower rates, which had a negative impact of $15 million or seven basis points in the margin, and the increase in excess liquidity reduced the margin by nine basis points.

Taking a look at the details. Interest income on loans declined $26 million and reduced the margin 13 basis points. Lower interest rates on loans alone had an impact of $21 million and 11 basis points in the margin. Lower balances had a $14 million impact, and the mix shift in portfolio, including the full quarter of lower yielding PPP loans had a four basis point impact on the margin. Partly offsetting this were higher loan fees in the margin, primarily PPP-related as well as one additional day in the quarter.

As discussed on the previous slide, we had lower yields and higher balances in our securities portfolio, which together had a $2 million and two basis point negative impact. Higher deposits of the Fed added $1 million, but had a negative impact of nine basis points on the margin. Deposit cost declined by $5 million and added three basis points to the margin, primarily a result of a prudent management of deposit pricing, as I previously mentioned.

Finally, with a reduction in balances and lower rates, wholesale funding cost declined by $9 million, adding four basis points to the margin. We received the full quarter benefit of debt repayments we made in the second quarter, and we prepaid $750 million in FHLB advances in July and August. As a reminder, given the nature of our portfolio, our loans reprice very quickly. So the bulk of the impact from lower rates has now been absorbed. Also, we continue to closely monitor the competitive environment and our liquidity position as we manage deposit pricing.

Overall, credit quality was strong, as shown on Slide 8. Net charge-offs were $33 million or 26 basis points, including recoveries of $20 million. Criticized loans remained relatively stable with an increase of only $27 million and comprised 6.5% of the total portfolio. Non-performing loans remained low at 62 basis points, and the bulk of the $54 million increase in the third quarter was attributed to energy loans.

In summary, we are leveraging our experience and expertise working closely with our customers and carefully reviewing their current and projected financial performance. We have adjusted risk ratings as appropriate. We started this cycle from a position of strength with very low non-performing and criticized loans, and migration so far has been manageable.

Turning to Slide 9. The economy began to improve to the quarter. However, the path to full recovery remains uncertain due to the unprecedented impacts of the COVID-19 pandemic. For this reason, our CECL modeling in late third -- in the third quarter did not significantly change and included the recession that we have been experiencing, followed by a slow recovery. More severe assumptions were used to inform the qualitative adjustments made for certain segments. This combined with the reduction in loan balances, resulted in a slight decrease in our allowance for credit losses, which remains above $1 billion.

Our credit reserve ratio was 2.14%, excluding PPP loans. Our credit reserve coverage for NPLs was strong at 3.2 times. Again, we are well positioned with a relatively high credit reserve and low non-performing assets, as illustrated. We believe our disciplined underwriting and diverse portfolio are assisting us in managing through this pandemic recession.

Energy loans are outlined on Slide 10. They decreased $251 million to $1.8 billion at quarter end and represent 3.5% of our total loans. E&P loans make up nearly 80% of the energy portfolio. And energy services, which is considered the riskiest segment, was only $46 million. The allocation of reserves to energy loans remained above 10%. While non-accrual loans increased, criticized loans decreased $102 million and net charge-offs decreased to $9 million. Charge-offs are net of $14 million in recoveries, which are unlikely to repeat in the near-term.

Fall redeterminations are just beginning, and we expect a small increase in the borrowing bases as higher energy prices were offset by lower production inventory. With more than 40 years of serving this industry, we have deep expertise and remain focused on working with our energy customers as they navigate the cycle.

Slide 11 provides detail on segments that we believe pose higher risk in the current environment. Note, we continue to review the portfolio refining our assessment. As a result, we have removed casinos and sports franchises from this group as we no longer see elevated risk. That aside, period end loans in the social distancing segment decreased $145 million or 5%. As expected, criticized loans increased $102 million, yet remained manageable at 10% of the segment and non-accruals remained very low. We believe we are well reserved as we have applied a more severe economic forecast to the segment.

We have deep expertise and a long history of working in the cyclical automotive sector. Production has been ramping back up and auto sales have rebounded. Similar to the social distancing segment, while loans decreased about $250 million, the criticized portion increased, yet non-accruals decreased and remained low. Our leverage loans tend to be with middle market relationship-based customers with sponsors, management teams and industries we know well, and we avoid the covenant-light deals. Balances increased to $85 million and criticized and non-accrual loans were slightly higher. As far as payment deferrals, they provided a cushion as customers adjusted to the environment. Now that they've acclimated, initial deferrals have expired, a new request of a nominal. Total deferrals at September 30 dropped only 70 basis points of total loans.

Non-interest income increased $5 million, as outlined on Slide 12. Improved economic conditions had a positive impact on deposit service charges and card fees. Deposit service charges were up $5 million with increased cash management activity. Also, card fees remained very strong and increased $3 million due to higher consumer volumes and merchant activity spurred by the economic stimulus as well as changes in customer behavior related to COVID. Commercial lending fees grew with increased syndication activity and unutilized line fees. As expected, customer derivative income declined following very robust activity in the second quarter, which related to the rapid decline in interest rates and volatile energy prices that have since stabilized.

Derivative income also included a $6 million unfavorable credit valuation adjustment compared to an unfavorable adjustment of $3 million in the second quarter. Securities trading income decreased $2 million, but remained at an elevated level and reflects fair market adjustments for investments we hold related to our technology and life sciences business. Similarly, investment banking fees declined, yet continue to be relatively strong. Deferred comp asset returns were $8 million, a $6 million increase from last quarter, which is offsetting non-interest expenses. Also, bank-owned life insurance increased with the receipt of the annual dividend.

Turning to expenses on Slide 13. Salaries and benefits increased $8 million. This included the increase in deferred comp of $6 million that I just mentioned as well as seasonally higher staff insurance. A catch up on maintenance projects, which we expect to continue in the fourth quarter as well as seasonal taxes resulted in an increase in occupancy costs. As previously announced, we increased our charitable contributions to assist businesses and communities impacted by the pandemic.

Since early March, Comerica, together with Comerica Charitable Foundation, has distributed over $9 million to over 150 non-profit and other community service organizations. Outside processing decreased $4 million, primarily related to lower PPP loan initiation volumes. In addition, operational losses and legal-related costs declined $3 million. Our expense discipline is well ingrained in our company and is assisting us in navigating this low rate environment as we invest for the future.

Our capital levels remained strong, increasing to an estimated CET1 of 10.26%, as shown on Slide 14. We were focused on maintaining our attractive dividend and deploying our capital to drive growth, while we maintain strong capital levels with the CET1 target of 10%. In addition, the dividend is supported by strong holding company cash.

Slide 15 provides for our outlook for the fourth quarter relative to the third quarter. We are assuming a continued gradual improvement in GDP and unemployment. Also, while we do expect to see some modest forgiveness in PPP loans by the end of the year, there is a great deal of uncertainty. Therefore, we exclude any impact from forgiveness on loans, net interest income and expenses from this outlook.

Starting with loans, we expect National Dealer balances to increase as auto inventory levels begin to rebuild. Mortgage Banker is expected to decline somewhat from its record high with seasonally lower purchase and refi volumes. In addition, we believe the recent stabilization of balances that we've seen in certain business lines, such as the middle market, large corporate and energy, should continue. However, on a quarter-over-quarter basis, average balances in these businesses are expected to be lower.

We expect average deposits to remain strong and stable as customers continue to carefully manage their liquidity. This expectation includes -- excludes the benefit from any further government stimulus programs. Overall, net interest income is expected to be relatively stable. As we've already absorbed the bulk of the effect from the decline in rates, we estimate the net effect of lower rates alone will be $5 million or less.

The impact from reduced loan balances, lower interest rates on loans and lower yields on securities is expected to be mostly offset by additional rate floors on loans, a decrease in deposit rates to an average of 14 basis points, as well as the full quarter benefit of third quarter actions to increase our securities portfolio and reduced wholesale borrowings. Again, this outlook excludes any benefit from PPP loan forgiveness. Credit quality is expected to be solid with net charge-offs increasing from the low third quarter level, which did include strong recoveries. Although the pace of the economic recovery remains uncertain, with our credit reserve at about 2% of loans in the third quarter, we believe we are well positioned to manage through it.

We expect non-interest income to decline as we do not expect the third quarter levels of deferred comp, securities trading income or BOLI to repeat. We believe several customer-driven fee categories should grow with improving economic conditions. But this is expected to be offset by card volume decreasing as recent elevated activity receipts. As far as expenses, we expect a rise in technology costs as we catch up on initiatives that were delayed due to COVID. We are committed to investing in our futures that we are well positioned coming out of the pandemic.

In addition, we expect an increase related to seasonal staff insurance. Mostly offsetting these increases, charitable giving should revert to a normal level, and we do not expect the level of deferred comp to repeat. We continue to focus on controlling expenses as we closely manage discretionary spending. Finally, our capital levels are healthy, and we remain focused on managing our capital with the goal of providing an attractive return to our shareholders.

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

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

I will close with Slide 16. Over our 170-year history, Comerica has successfully managed through many challenging times. Using our experience and expertise to help our customers and communities navigate stressful situations and achieve long-term success is at the heart of Comerica's relationship banking strategy. The unwavering dedication of our team to assist our customers as well as support each other and our communities continues to be a source of pride. Our long-standing corporate mission is to attain balanced growth and profitability by providing a higher level of banking.

Fundamental to our success in accomplishing this mission is our key strengths, which are outlined here. We have long-tenured employees who have deep expertise in the industries they serve. We have a strong presence in the major metropolitan areas of Texas, California and Michigan, and these markets provide significant growth opportunities along with customer diversity. There are abundant collaboration opportunities among our three divisions; Commercial Banking, Retail Banking and Wealth Management.

Our robust leading-edge cash management suite continues to evolve to meet the ever-changing needs of our customers. We have a strong credit culture. Our consistent conservative underwriting approach and prudent customer selection resulted in superior credit performance through the last recession. It also -- it is also assisting us in weathering the current environment, as evidenced by our strong credit metrics this quarter. We are committed to maintaining our expense discipline while investing for the future. Finally, our capital position is strong. And our first priority is to use it to support growth, while providing an attractive return to our shareholders.

Now we'd be happy to take questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from the line of Peter Winter with Wedbush Securities.

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

Hi, Peter.

Peter Winter -- Wedbush Securities -- Analyst

Good morning. You guys had a -- you guys called out net interest income to roughly stabilize in the fourth quarter. Do you think we're at the bottom for net interest income, especially with rates really can't go much lower and you've got to the high percentage of the loans tied to one month LIBOR?

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

Yeah. Good morning, Peter. Yeah, we are pretty much at the low given the balance sheet mix that we have right now. So the $5 million or less that I mentioned for the fourth quarter should continue kind of in the short to medium term. I do expect to see a little bit of balance sheet shift movement or mix movement as we move into the second half of '21 and beyond as some of our fixed rate assets start to turnover, that would be some of the treasury securities as well as the hedges that we have in the appendix of the presentation here. But I would view the $5 million or less as kind of our base level of rate impact for the foreseeable future, pending any maturity of some of the fixed rate assets as they turn over in the future.

Peter Winter -- Wedbush Securities -- Analyst

Got it. And then just on the loan growth, it's challenging for you guys, challenging for the industry. Curt, in your prepared remarks, you said you're starting to see some positive trends. I'm just wondering if you can talk about some of the trends you're seeing? And a little bit of color on the auto floor plan into next year and maybe middle market and small business?

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Yeah. Peter, this is Peter Sefzik. So the positive trends that we would see, you start to look at things like the pipeline starts to include more new to new opportunities than just new to existing. The activity level of our relationship managers has picked up a little bit. Across all of our different geographies, you just -- you certainly feel more activity than you did 90 days ago, but it is not at all near pre-COVID levels. So I would just say that our overall observations of what we're seeing with customers and prospects is improving, but I can't say it's robust.

You asked about dealer and floor plan. This has been a challenging year for that business, but there are some good indicators. The SAAR rate is sort of double what it was back in April right now on an annualized basis. So we're encouraged by that. What Jim and Curt described, what we typically see in the fourth quarter is a little bit of lift from a year ago. We saw a drop in the fourth quarter, but I think this year we'll kind of see our typical pattern that we have seen in dealer. So we're encouraged by that and we think that will continue into 2021.

Middle market and small business, again, a little bit of two different stories. I think the middle market space is maybe a little more active than what you would see in small business that has been more hit through this COVID crisis. But both of those segments are conserving cash and managing their loans and being really, really responsible, and I think that's translated to the nice credit performance that we have seen so far. And again, depending on the geography and what's going on with COVID sort of defines how active each of those segments is at the moment. But we are encouraged by what we're seeing in both of them, probably more in middle market than maybe in business banking and small business just yet, but that would be how I'd answer that.

Peter Winter -- Wedbush Securities -- Analyst

That's great. Thanks for the color.

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Yeah.

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

Thank you, Peter.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

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

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Thanks. Good morning. Just actually want to kind of follow on Peter's question a little bit. You mentioned that the NII is going to, let's say, be relatively stable for the foreseeable future. I think a lot of the market concern or question is what happens a little bit longer. And you mentioned the treasury securities and the hedges are going to drive sort of balance sheet mix, I suppose in the back half of 2021. How much does those hedges and other items actually add to NII today that will be going away in the future? Like where does NII bottom out if rates actually stay where they are when we think about like late '21 or maybe 2022?

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

Okay. Good morning, Ken. I deposited [Phonetic] for you when we talked about the $5 million of rate impact kind of in short to medium term. As you get some of that treasury churn and you get some of the hedges rolling off, I would expect the rate impact to start hedging up little bit, but I don't see it going past the $15 million that we saw in the third quarter. So you can box it in using that range.

Ultimately, if you go to the total hedge portfolio that we have, you can do the math yourself, you'll see it adds up to about $100 million annually. But those go out in number of years, and obviously there is a number of things that could happen in the economy and a lot of uncertainty in terms of where rates might go over the next few years. But the way I would frame it up for you is $5 million in the short to medium term. And then as things start to churn through, it will hover somewhere between $5 million and $15 million for the couple of years after that. But I don't see it's really getting to the $15 million number that we saw in the third quarter.

Ken Zerbe -- Morgan Stanley -- Analyst

And sorry, just to be clear. When you say $5 million or $15 million, are you talking like a $5 million reduction per quarter? Is that what you mean?

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

That's right. $5 million or less.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. So over the next say one year, if it's $5 million per quarter, that's $20 million for the year, something like -- on a run rate basis?

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

That's right. $20 million or less in that math.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Okay, I understand. And then -- sorry, my follow-up question. On Slide 10, you talked about your energy portfolio, which you guys always do and we appreciate. But do you actually believe that there is outsized risk in energy lending today versus some of the other at-risk categories that you highlight?

Melinda A. Chausse -- Executive Vice President and Chief Credit Officer

Yeah. Ken, this is Melinda. I mean, clearly the energy portfolio is where we have seen the most stress really over the last 18 months. I would say that kind of given the current environment and where oil and gas are today, that has certainly helped stabilize our credit deterioration. But in order for this segment to really start to improve, prices are going to need to strengthen. I expect that we'll continue to see some lumpiness and additional charge-offs in the energy line of business. If you look at where our non-accruals are, they are still concentrated in our energy book. And the non-accrual levels for the other at-risk portfolios are very, very minimal at this point. That's not to say that we won't see some additional migration in some of those other at-risk categories, but for now, I think our biggest risk probably continues to be in the energy line of business.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thank you.

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

Thank you, Ken.

Operator

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

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

Good morning, Steve.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, everybody. So just to start on the provision, which was very modest this quarter. If loan balances remain under pressure, which you're guiding to in the fourth quarter and the economic model doesn't change much, right, if oil prices remained steady, should we expect another quarter of very modest provision in the fourth quarter similar to this quarter?

Melinda A. Chausse -- Executive Vice President and Chief Credit Officer

Yeah. As it relates to the CECL reserve, I mean, obviously, you all know, that's a highly complex process that we go through each quarter and look at a lot of the variables that you already mentioned; kind of the economic forecast, the level of the portfolio and how our portfolio is responding. As the economy begins to recover, even though we'll see losses occurring, reserve levels theoretically should start to come down. That's how CECL is designed to work.

Predicting exactly when that would occur, whether we would need to add to reserves or release, is going to really materialize over the next couple of quarters. We would expect that we'll continue to see some additional migration over the next two to three quarters, including into non-accruals and some charge -- resulting charge-offs from that. And assuming no other negative changes to the macroeconomic outlook, reserve levels again should begin to normalize.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Okay. And how did the change in economic forecast impact this quarter's reserve?

Melinda A. Chausse -- Executive Vice President and Chief Credit Officer

It was more -- it was probably an equal weighting between the economic forecast being stable. Again, Q2 versus Q3, we use consensus as well as remember our portfolio declined about $1.5 billion, so that obviously had an impact. And then we added qualitative reserves to those at-risk portfolios to make sure that we had adequate coverage for those at-risk portfolios, which again, we do expect to continue to see some migration and some losses, but we believe that it's going to be very manageable and well covered with our $1 billion of reserves.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Okay, that's helpful. And then finally for Curt. So I think the guidance for 4Q '20, it looks like pre-tax pre-provision income growth will remain a bit of a headwind. From a big picture view, assuming short-term rates remain anchored near zero, can you talk about your ability or maybe even a game plan to drive pre-tax pre-provision income growth over the next year? Any new fee income initiatives, expense initiatives, anything to talk about there? Thanks.

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

Yeah. Steve, obviously we are very focused on the return to our shareholders and delivering an appropriate growth in ROE. And obviously, despite some of the current challenges, we do feel good about our long-term financial outlook and we continue to think we have a very attractive franchise that we operate in some great higher growth markets, which we believe as we start to come out of the COVID situation now, the recovery, that those market should perform better than many areas of the country.

In addition, I think that we've got a number of comparative strengths that we will continue to leverage. Credit is certainly one of those areas. And I think we'll be in focus for the remainder of 2021 and maybe beyond that. And we believe that based on our historical performance that we can perform very well there relative to our peer group.

You mentioned fee income. It's an area we're very focused on. And most notably, I might mention, treasury management continues to be an area of distinction for us and continues to be an area that we're investing in and adding additional capabilities. I think you know, we've got a very strong card and merchant platform. We continue to feel like we've got upside opportunity there. And then we've got really broad wealth management expertise and talent, and we're very focused on the intersection between our Wealth Management business, the Commercial Bank and our Retail Bank in terms of driving new revenue.

And then just on the balance sheet side, Peter talked a little bit about what we're seeing there, but we continue to have a lot of depth in middle market and business banking as well as a number of unique niche businesses that we think position us well versus the competitors, especially as we come out of the situation. And the only sort of niche business we have that maybe had some downward pressure on it would be energy. And then we're going to stay focused on expenses from a long-term perspective, and we're continuing to look at opportunities that we might have to be careful on the expense side. Obviously, did a really good job coming out of our GEAR Up initiative and have run a very efficient organization relative to our peer group.

And having said all that, what we're not going to do is sort of sacrifice the long-term view. And my perspective when I said this on our last earnings call is that when you look at our company 170, now 171 years old, we've managed through lots of different cycles, lots of different economic challenges. And so we remain focused on the long-term and the quality of our assets, our overall long-term earnings power and investing in the franchise longer term, and we're going to focus on the things that we can manage in what is a very challenging environment.

I do think there is obviously a lot of uncertainty, both with COVID and more recently the election coming up. So there is a lot that's unpredictable, but we think we're well positioned to sort of manage whatever direction the economy may go in, and again focusing on the long-term and doing that at the same time and focusing how we can improve revenue in 2021.

Steve Alexopoulos -- J.P. Morgan -- Analyst

Great. Thanks for all that color, Curt, and thanks for taking my questions.

Operator

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

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

Hello John.

Rahul Patil -- Evercore -- Analyst

Hey. This is Rahul Patil on behalf of John. So I was just -- had one question on NIM. Could you talk about some of the opportunities you have on the funding costs to mitigate some of the NIM pressure amid this low rate environment?

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

Yeah. Good morning. That's something we are looking at and considering taking action on. We're not ready to declare that quite yet. We obviously led some more expensive funding mature in June and did some prepays both in the second quarter and the third quarter. What we have left now really consists of a lot of parent company funding, which of course, we're not going to prepay because we -- value the cash that we have at the parent company. We have some sub-debt, which provides capital values, so we're not going to prepay that.

We're really down to a very limited amount of bank senior debt, which provides some pretty good FDIC benefit. And frankly, the economics aren't great if you went through a tender process. So that pretty much leaves some FHLB funding, of which we really left the most efficient form of. We're paying in the very low 20 bps range. And it would be difficult to obtain that level of funding again in terms of its efficiency. So we're considering doing something, but we're not quite ready to do that yet. So I'd say there is some limited opportunity that we may or may not be pulling the trigger on.

Rahul Patil -- Evercore -- Analyst

Okay. And then just shifting to a different topic. In your outlook, I think you mentioned expenses tied to technology catch-up. Could you just give us a sense for where you stand in terms of the tech spend, which you consider as absolutely necessary versus something that can wait? And then maybe what sort of incremental spend are you planning for over the next year or so in terms of tech?

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

Yeah. This is Curt. I'll take that question. What I would say on the front-end is that we did a lot of work through GEAR Up to position our spend and really try to migrate the spend less around legacy platform and more around things that we would consider customer and colleague enabling. So we went through a lot of process around rationalizing a lot of our agent platforms and applications. We've done a lot to migrate applications to the cloud and just overall free up capacity.

So we've got a lot of things in flight right now. We continue to work on loan origination capabilities, especially online lending capabilities. We've rolled out a companywide CRM platform and continue to make enhancements there. We're continuing to invest in our data analytics capabilities and how we use predictive analytics in the sales process and serving our customers. We've got a new digital online platform for originating new customer relationships, especially in the Retail Bank, which is proving valuable to us in acquiring new relationships and we've talked about treasury management earlier, and the list kind of goes on.

And what I would say is that when you look at sort of our spend today, we definitely have freed up a lot of capacity for colleague and customer enabling type capabilities. And we believe that we are staying very abreast of sort of where the industry is headed and increasingly are seeing more digital adoption of technologies across all of our forms, not just the Retail Bank, but Wealth Management and Commercial Banking as well.

Rahul Patil -- Evercore -- Analyst

Awesome. Thank you.

Operator

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

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

Good morning, Erika.

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

Good morning. A couple of follow-up questions on the NII line of questioning. First, you're continuing to carry a significant level of cash relative to history. And I'm wondering as we think about your guidance that you talked about $5 million base impact on quarterly net interest income that perhaps widens to a higher number that's less than $15 million due to the impact of fixed rate repricing and the hedges rolling off. What does that contemplate in terms of cash redeployment?

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

Good morning, Erika. As we mentioned, we did deploy the $2.25 billion throughout the third quarter into some treasuries and MBS securities. At this point in time, we are not contemplating in that outlook that we gave additional actions in terms of either purchase funds, prepayment or securities investment, growth of the securities portfolio. Now both of those are possibilities. But as I mentioned, the funding we have is pretty efficient. And of course, as you know, the yields out there aren't especially enticing for redeploying cash into securities. We were willing to do a certain amount of that in the third quarter given some of the uncertainties that were there, as well as our own asset sensitivity position, and we could consider doing it in the future too. But given some of the marginal benefit that's available, at this point, we're not contemplating that and that is not baked into that outlook.

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

Got it. And consensus, I'm looking at 4Q '21 just because I'm thinking that could be a clean number for consensus, excluding PPP pay downs. And right now the consensus has net interest income of $451 million for the fourth quarter of '21 and a net interest margin of 2.38%. If we're interpreting your comments right, unless we get much better loan growth and much better opportunity for cash redeployment that seems like that has to be readjusted lower for now?

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

We'll see. We're not ready to comment on 2021 yet. Keep in mind, I did say $5 million or less. So I mean, it could be a little more than 0, it could be a little less than $5 million, but it's going to be in the low-single-digit millions. And then loan volume will be a key obviously, that's a big driver and that's a bit of a wildcard. And then finally, floors, which are a part of that rate outlook, we haven't having had some success with, as you can see in one of the slides. And that could be a driver also to help mitigate some of those pressures. So not quite ready to comment on 2021 yet, but we do see some opportunity to mitigate some of these headwinds.

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

Got it. And just one last one, and maybe this is for Curt. A lot of -- there's been a lot of discussion on what normalized returns could be for banks. And as I think about the recovery loan growth rates at Comerica following the financial crisis, robust 2012 through 2015 and much lower growth in '16 through '18 and then up 3% in 2019. As we think about what Comerica can earn sort of post-COVID world, do you see that the growth opportunity for this bank is really more of a GDP-plus? That seems like a softball question, but the historical averages would suggest that it might be slower than that?

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

Hey, Erika. What I think maybe to keep in perspective is historically we have grown more in line with GDP. And I do think growth in line on a relative basis with GDP make sense, but also recognize that every market we operate in has a little bit different dynamics and may be being impacted differently by either a recession or a recovery and then we've got some national businesses that can swing those numbers from time to time based on dynamics that are in play, whether it's Mortgage Banker, commercial real estate, dealer, energy, etc.

What I do think is important to remember during that period of time between 2015 and 2018 is that we essentially managed down close to $2 billion of energy outstandings, and that was very deliberate on our part. That was a very deliberate strategy to bring our exposure down from a number that was in the high-single-digits down to where it is today, and we are comfortable with the portfolio based on the size it is today. But we were derisking our portfolio and trying to derisk some of the volatility in the portfolio. And so we were managing that down significantly.

So while we are seeing growth in the rest of the core portfolio, it was really being masked by that impact there. But we do believe we've got a lot of growth opportunity. We are -- have been actively redeploying some of our FTE to some of our higher growth businesses in some of our higher growth geographies. And we also are seeing some disruption right now with some of our other competitors. And so we've added some outside talent to the organization as well along the way. And we are keenly focused on new customer acquisition right now, not only serving our existing customers, but acquiring new customers in many of our business lines in many of our geographies. So I think your statement is an accurate one. And I do believe that the 2015 to 2018 was a little bit of a aberration based on some unique circumstances that we were managing through.

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

Thank you. Very helpful.

Operator

Your next question will come from the line of Scott Siefers with Piper Sandler.

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

Good morning, Scott.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Hey, thanks for taking the question. I just wanted to return to the loan growth discussion for a quick second. I think early in your prepared remarks you guys have said that loans grew modestly quarter-over-quarter for the first time in September. Where specifically was that? Was that like -- is National Dealer finally sort of catching up or where did that net growth come from?

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Yeah. Scott, this is Peter. So I think it's a little bit of moving parts in there. And if you look at that Slide 4, the conversation that we've talked a little bit about with what we've seen in dealer and what we're -- what we think this transition into Q4 is, as you described, a little bit of stabilization in dealer. We do continue to see pay downs in the large corporate space. We've seen some nice activity in our equity fund services business. And we think we've kind of maybe seen 47% utilization, I think is about as low of utilization as we've really ever seen in a really, really long time.

And so our belief is that that's kind of bottomed out, if you will. I don't know that I would say it's on any sort of upward trajectory. Mortgage clearly had a really good September, a good third quarter overall and our period end balances in mortgage for September were high. So I don't know that I would take away from that that we are on some sort of uptick going into Q4. The outlook we've described is what we think we'll see. But we do feel like the end of the quarter was a little better than what we were seeing in the beginning.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. That's good color. I appreciate that. And then I think you began to touch on what my follow-up was going to be, which was on that line utilization number on Slide 4, the 47%. So it sounds like, if I'm interpreting it correctly, you guys think that has kind of bottomed. So is that sort of an accurate interpretation? And is that indeed still above pre-COVID levels, because one or two other banks have actually seen utilization dip below pre-COVID levels. Just want to get a sense for your thoughts there.

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

Yeah. I would -- this is Jim. Pre-COVID, of course, we were a little bit higher than 47%. So clearly the 47% reflects some of the lack of loan demand in this kind of COVID environment.

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Yeah, Scott. And again, that 47% depending on what line of business and what geography you're talking, it actually is less in some and higher in others. So my hope would be that we're kind of reaching the bottom, but -- or have reached the bottom. But to Jim's point, pre-COVID levels for us I think would be higher in utilization than what you've got here.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. Thank you guys very much for the color.

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

Yeah.

Operator

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

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

Good morning, Ken.

Ken Usdin -- Jefferies & Co. -- Analyst

Hey, thanks. Good morning, everyone. Hey, question on capital return. So I guess the good news with the low provision is that the earnings coverage of the dividend is looking better, as we look out. You guys aren't stress tested. But just wondering how you think about the potential of getting back into buyback activity? And how much you have to evaluate where the dividend is in terms of its size and payout at the point you get ready to or potentially get back into buybacks? Thanks.

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

Okay. Good morning, Ken. Yeah, we -- as you've heard in past calls, we continue to be confident about the dividend, and I don't anticipate a change there at this point in time. Regarding buyback, I'd like to say that we're cautiously confident in terms of what we can see in front of us. We're not quite ready to turn the buyback on just yet because there is always the thought of what can’t we see in front of us. There are still a lot of uncertainties in this environment. And we would like for there to be just a little more certainty in terms of the risks out there before we turn that buyback back on. But I also mentioned that some of the uncertainty isn't all negative. Some of it is potentially positive in the form of risk-weighted asset growth or loan growth.

We've had a decrease in loans, as you know, ex-PPP for a few quarters here. And to the extent the economy bounces back and we get some loan growth, that could eat into some of that capital too and we price that capital and value it for providing capital to fund customer loan growth also. So we just want to get a little bit more certainty in the environment before we are ready to declare the buyback turn back on.

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

And Jim, just to add. I mean, our first objective is always to take care of our customers. And so we would first and foremost like to deploy capital into assets in terms of the lending side. But to the degree that doesn't happen, we will continue to evaluate buyback.

Ken Usdin -- Jefferies & Co. -- Analyst

Understood. And a follow-up on the PPP side. Understanding that your guidance doesn't bake in any forgiveness, can you tell us just generally, how you are expecting and thinking about forgiveness to play through in terms of timeframe and whether or not you've made any changes to the fee schedule given the change between two year and five year average durations? Thank you very much.

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

Yeah. There is a lot of uncertainty, obviously, with the forgiveness process. So we're not ready to make any predictions there yet, which is why we excluded it from the outlook. We have not made any changes in terms if we handle the fee amortization. So we're still on a two year basis and comfortable with where we're at from an accounting standpoint on there, and we'll just continue to monitor the environment and see where it goes. We're prepared to go though if and when Congress and the treasury are ready to go.

Ken Usdin -- Jefferies & Co. -- Analyst

Have customers -- do you have an idea of how many customers have already applied for forgiveness? Just give us a sense of like whether or not you would expect it to be active or not? Thanks, guys. I appreciate it.

Melinda A. Chausse -- Executive Vice President and Chief Credit Officer

Yeah. This is Melinda. Let me just talk for a minute about our forgiveness process. We are actually starting our open invitation to clients starting today and we'll do that on a tiered basis. We did pilot our technology platform for the forgiveness. So we've accepted about 60 applications. As you know, the SBA was pretty slow to get their portal open and actually processing forgiveness applications. So invitations will start going out today and that will be tiered based on loan size and we would expect to see those application start coming in over the next 30 to 60 days. It's difficult to predict what the volume would be, but we're going to concentrate on the larger customers first, because we are still hopeful quite frankly that we get additional relief for the smallest borrowers in terms of simplifying the application. We did get simplification on $50,000. It was helpful, but not as helpful as we had hoped. And we're still hopeful that we will get forgiveness simplification for loans less than $150,000. And so those will tend to be more at the back half of the processing over the next quarter or so.

Ken Usdin -- Jefferies & Co. -- Analyst

Thanks very much.

Operator

Your next question will come from the line of Terry McEvoy with Stephens.

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

Good morning, Terry.

Terry McEvoy -- Stephens Co. -- Analyst

Hi. Thanks for taking my questions. Within National Dealer Services, do you expect a more pronounced step up here in the fourth quarter relative to what you saw in say '16, '17 and '18 where just eyeballing Slide 23, it looks like there was typically a $300 million increase in average balances?

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Terry, it's Peter. Yeah, so I think what I would say is that when you look at that Slide 23, I would compare '16, '17 and '18 where you saw an uptick to what we think we're going to see this quarter versus a year ago where we saw the drop-off in '19. That historically you would have seen that business uptick in the fourth quarter. I don't know that it will be $300 million, like you described in '16. We do think it will be up. But we don't -- we think a year ago is not where we're going to see where we saw a drop off of $200 million.

Terry McEvoy -- Stephens Co. -- Analyst

Okay. And then just as a follow-up question. Maybe the Mortgage Banker Finance book with period end loans $4.5 billion and given the average in the third quarter, is your view today that on an average basis Mortgage Banker Finance is still higher in the fourth quarter and that really in the first quarter of next year is when you see the headwinds?

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Terry, the answer to that is, no, we don't think so. We think it's actually going to drop off here. If you kind of look at Page 21, the MBA originations forecast is down. We think it will be sort of down to flat, flat to down as we go into the fourth quarter and really continue into 2021, a lot along the lines of the forecast you see on the bottom right of Page 21.

Terry McEvoy -- Stephens Co. -- Analyst

Great. Thank you.

Operator

I will now turn the conference back over to Curt Farmer, Chairman and CEO, for any closing remarks.

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

So let me just say that I continue to be very proud of our Comerica colleagues and how we are managing through collectively a very challenging environment and making sure that our customers are taken care of and also making sure that we're doing a good job of serving the communities that we operate in. We are always thankful for your interest in Comerica. And we continue to hope for a good health and safety for all of you and your families. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Darlene P. Persons -- Director of Investor Relations

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

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

Peter L. Sefzik -- Executive Vice President, Executive Director, Commercial Bank

Melinda A. Chausse -- Executive Vice President and Chief Credit Officer

Peter Winter -- Wedbush Securities -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Steve Alexopoulos -- J.P. Morgan -- Analyst

Rahul Patil -- Evercore -- Analyst

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

Scott Siefers -- Piper Sandler -- Analyst

Ken Usdin -- Jefferies & Co. -- Analyst

Terry McEvoy -- Stephens Co. -- Analyst

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