James Herzog
CFO & Senior EVP at Comerica
Thanks, Curt, and good morning, everyone. Turning to Slide 6.
Broad-based loan growth exceeded expectations as average balances increased 2%. Commitments grew across most business lines, up 2% from the fourth quarter of 2022. Utilization increased modestly to 46%, but remained below historical averages. Growth in our commercial real estate business of over $640 million continue to be driven largely by construction of multifamily and industrial projects originated over the last two years in addition to the slower pace of payoffs. Our commercial real estate strategy remains highly selective with a focus on Class A projects, and our office exposure is limited. National Dealer Services loans grew over $360 million as a result of new relationships and continued customer M&A. Both management and middle market also contributed to our strong loan growth. Elevated interest rates, lack of housing inventory and normal seasonality continue to pressure mortgage banker as average loans declined $184 million for the quarter. The MBA forecast expects higher volumes in the second and third quarters, consistent with the normal spring and summer buying season.
Slide 7 provides an overview of our deposit activity. Quarter-to-date deposits through the first week of March trended in line with guidance as customers continue to deploy funds into their business and we experienced expected seasonality. Following the March industry events, excess balance diversification efforts by our customers further impacted deposits. We saw our peak impact in the days immediately following, concentrated in certain customers with balances well in excess of their operational needs. Outflows moderated and in the last two weeks of March, we saw a return to a more normal pattern, and that trend has continued. The greatest outflows were localized in select portfolios with a muted impact across the rest of our businesses. Despite on-boarding new customers in TOS, balances decline as this disruptive sector diversified deposits.
Portfolios with larger-than-average deposit relationships, such as corporate banking and select customers in Middle Market California, also saw diversification within a portion of their excess balances. These three business lines saw disproportionately high deposit growth through quantitative easing and much of the decline offset that increase. Utilization of an FDIC reciprocal deposit product was an effective strategy. And through quarter end, our customers placed $2 billion in balances in that solution. Deposit diversification efforts were concentrated in more price-sensitive customers, and the increase in deposit pricing to 152 basis points was driven by the cumulative impact of previous pricing changes. Our strategic relationship focus was proven successful as we retained and in fact grew our total number of core deposit relationships.
Slide 8 highlights the strength of our core deposit franchise. It is important to note how elevated deposit levels have been since 2020. With that context, our current position is much stronger than prior to the pandemic as we have higher overall deposits, a better loan to deposit ratio and a lower percentage of uninsured deposits. Some look to uninsured deposits as the primary metric to detect risk of elevated outflows. However, we believe a more comprehensive view is appropriate. As a commercial bank, it is natural to have a higher relative percentage of uninsured deposits, the majority of which are non-interest bearing, which we view as a key strength and a proxy for operating accounts.
With 95% of our commercial noninterest-bearing deposits utilizing treasury management services and an average of more than seven treasury management products for a middle market customer, we are integrated with our customers' daily operations. We feel our market and business diversification, favorable deposit mix, commercial orientation and connectivity into our customers' operations combined to create greater relative stability in our deposit base. We see opportunities to even further improve the resiliency of our deposits, including strategic investments underway to enhance payments, digital customer transformation and wealth management. In addition to our national small business banking strategy, which should drive granular deposit growth over time. Ultimately, our deposit base has always been and continues to be a differentiating strength and we expect even more stability with a more favorable level of uninsured and a high percentage of operating deposits.
Successful execution of our liquidity strategy proved effective as shown on Slide 9. Following the industry events in March, we conservatively increased our cash position and our abundant liquidity allowed uninterrupted support of our customers and business as usual operations. Our quarter end loan to deposit ratio was 85% remaining below our 15 year average, and very light unsecured funding maturities create flexibility to manage funding needs in cash levels over time.
Period-end balances in our securities portfolio on Slide 10 declined over $700 million as paid down some maturities offset the positive mark to market adjustment of $309 million. The total unrealized loss after tax of $2.1 billion affects our book value but not our regulatory capital ratios. Our security strategy remains unchanged, as we start reinvesting in the third quarter of 2022. From that peak through the end of 2024, we expect natural portfolio attrition of approximately $4 billion and a 40% improvement in unrealized securities losses. We maintain our entire portfolio is available for sale, providing full transparency and management capability. As our portfolio is pledged to enhance our liquidity position, we do not foresee any need to sell our portfolio and therefore unrealized losses should not impact income.
Turning to Slide 11. Net interest income decreased $34 million to $708 million, as the benefit of higher rates in loan volume were offset by the impact of lower deposit balances, deposit pricing and fewer days. We still saw a net positive impact due to rising rates and net interest income remained incredibly strong relative to our historical results.
Slide 12 demonstrates our desirable interest rate sensitivity profile. Successful execution of our strategy and the current composition of our balance sheet favorably position us with minimal negative exposure to a gradual 100 basis points or 50 basis points on average decline in interest rates. As intended, our strong net interest income stream is now more insulated from rate reductions.
Credit quality continues to be a strength of our franchise and remained excellent, as outlined on Slide 13, with $2 million in net recoveries. Non-accrual loans declined and inflows to non-accruals remained low at $9 million. Loan growth and the weakening economic outlook drove the $30 million provision and the allowance for credit losses to increase modestly to 1.26%. Criticized loans increased but remained well below historical levels, as we saw expected credit normalization and portfolios prone to pressure from the elevated rate environment. Office is not part of our primary strategy, only making up 7% of our total commercial real estate line of business. Of this limited office exposure, a majority of suburban with strong contractual financial support from sponsors. Within the overall commercial real estate portfolio, pressure from the elevated rate environment contributed to a modest increase in criticized loans, and we expect continued manageable migration in the coming quarters.
Robust fee generation increased non-interest income by $4 million relative to a seasonally high fourth quarter 2022, as shown on Slide 14. Capital markets income grew $5 million and as now distinguished in our reporting to reflect the investment and opportunity in that business. Derivative income in investment banking offset the seasonal lighter quarter for syndication fees. Brokerage benefited from the rate environment and strategic private wealth investments contributed to growth in fiduciary income. Continued expansion of our noncapital consuming fee income remains a priority. And with growth in nearly every customer category, we are excited to see the results from this emphasis.
Turning to expenses on Slide 15, we had a number of notable expenses in the quarter, including $16 million related to modernization initiatives, $9 million of which were attributable to the Ameriprise transition. While litigation-related expenses and operating losses were elevated, the largest drivers related to isolated events. Quarter-over-quarter, non-salary pension expense increased $17 million, as expected. Salaries and benefits increased $8 million, driven by higher stock-based compensation with first quarter grants, inflationary pressures and attracting talent. FDIC insurance increased $6 million, driven by the higher statutory assessment rate and the impact of funding late in the quarter. Occupancy came down $12 million with a reduction in lease termination fees, lower rental expense and a seasonal change in property tax rates. Both consulting and advertising declined in the seasonally high fourth quarter. With a track record of proven discipline, we are committed to carefully managing expenses, balancing necessary investments for the future and overall earnings power in order to maintain a solid efficiency ratio over time.
Slide 16 provides details on capital management. Strong profitability continued to generate significant capital to support loan growth. Our CET1 is estimated at 10.09%, above our target, and we were excited to announce a 4% increase in our quarterly dividend for common stock paid April 1. Our conservative excess cash position impacted our tangible common equity ratio, adjusting for our cash increase we've increased over the fourth quarter in AOCI. Our first quarter TCE ratio would have increased to 9.47%. Expected loan growth, profitability and any potential regulatory changes will continue to be carefully considered as we manage our capital strategy.
Our outlook for 2023 is on Slide 17 and assumes no significant changes in the economic environment. We expect momentum, especially in our commercial real estate and national dealer services business to drive average 2023 loan growth of 8% to 9%. We continue to expect growth in most businesses, but plan to be appropriately selective supporting opportunities most aligned with our target credit, pricing and relationship strategy. Our estimated average year-over-year deposit decline of 12% to 14% assumes continued stabilization and reflects the impact from Fed monetary actions that began last year in addition to the first quarter industry events.
Despite the impact of funding, we still project net interest income to be at an all-time high, growing 6% to 7% over a record 2022 performance. Through effective execution of our balance sheet strategy and based on our current composition, we delivered on our objective to limit rate exposure and protect a high level of net interest income. Credit quality has been excellent, and we expect it to remain strong. We continue to forecast net charge-offs at the lower end of our normal 20 to 40 basis points range and expect a gradual normalization and credit metrics.
We expect strong non-interest income performance to drive 6% to 7% growth over 2022. Customer-related income is projected to increase particularly in card due to our payment strategy and fiduciary income, which benefits from rates and investments in wealth management. Risk management income related to our internal hedging position is forecasted to increase relative to 2022, but will vary over time as rates move. FHLB dividends created a new tailwind in this quarter. Since we do not expect to repeat the elevated derivative volumes from 2022, we expect the year-over-year derivative delta to offset positive momentum in other capital markets categories.
A reduction in our deposit service charges is expected due to an increase in commercial account ECA rates and adjustments to our retail NSF fees, more than offsetting growth in core treasury management income. With robust overall non-interest income performance in the first quarter exceeding seasonally high fourth quarter results, we feel very good about our momentum. Despite elevated expense pressures in the first quarter, we maintained our 7% guidance for 2023 expense growth, considering expected adjustments to select discretionary expenses. Even after including the expenses related to the Ameriprise transition, we still expect modernization to be lower in 2023 compared to 2022. We acknowledge the dynamic nature of the current environment and plan to assess the longer-term implications of the March disruption. With a culture of prudent management, we expect to manage expenses as appropriate based on the new environment.
In summary, we expect strong overall financial performance and forecast record net interest income for 2023.
Now, I'll turn the call back to Curt.
