James J. Herzog
Senior Executive Vice President, Chief Financial Officer at Comerica
Thanks, Curt, and good morning, everyone.
Turning to Slide 5. Loan growth came in just above expectations as average balances increased 4% from the first quarter. Increased [Phonetic] activity drove a slight decline in commitments and utilization increased almost 1%, but remained below historical averages. Growth in our commercial real estate business of over $520 million continued to be driven largely by construction of multi-family and industrial projects originated over the last two years, in addition to the slower pace of pay-offs.
Boosted origination activity and pipeline have significantly declined. Our commercial real estate strategy remains highly selective with a focus on Class A projects and our office exposure is intentionally limited. Large corporate loans grew $447 million as we won new customer relationships and financed acquisitions for existing customers. National Dealer Services benefited from new customer acquisition and while core planned inventories continued to grow, they remain below pre-pandemic levels. Typical second quarter seasonality resulted in a $325 million increase in average mortgage banker finance loans. However, consistent with our strategic exit of that business, we expect most of our Mortgage Banker balances to be paid off by the end of 2023.
Slide 6 provides an overview of our deposit activity for the quarter. Average deposit balances declined 5%, in line with expectations. Conversations pivoted away from banking industry stability as customers refocused on broader macroeconomic issues such as risk of recession and elevated rates. Throughout the quarter, customer deposit balances continued to normalize and we observed relatively stable trends since mid May.
Industry funding pressures drove deposit competition and interest-bearing deposit costs increased to 237 basis points. However, we feel our dynamic pricing strategy and relationship approach allowed us to maintain our forecasted deposit betas and protect balances. While the rate environment further pressured noninterest-bearing deposits, we continue to view our deposit mix as a competitive advantage, providing a more stable and cost-effective funding source than our peers. With strategic investments underway to enhance payments and other treasury management products, in addition to our national Small Business Banking strategy, we see opportunities to further improve our attractive deposit profile over-time.
As shown on Slide 7, our strong liquidity position provides the flexibility. We maintained excess cash, prepaid maturing FHLB advances and our remaining liquidity capacity increased. Our quarter end loan-to-deposit ratio was 84%, still below our 50-year average and strategic actions announced in the second quarter are expected to keep that ratio in the mid 80s at year end 2023. Cash balances of the holding company position us to repay our $850 million debt due this summer and very light remaining unsecured funding maturities create flexibility to manage funding needs and cash levels over-time.
Period-end balances in our securities portfolio on Slide 8, declined almost $900 million with pay-downs, maturities and a $212 million negative mark-to-market adjustment. Our security strategy remains unchanged as we start reinvesting in the third quarter of 2022, and we maintain our entire portfolio as available-for-sale, providing full transparency and management flexibility. Although we have modest treasury maturities through the end-of-the year, larger scheduled repayments in 2024 and '25 are projected to benefit liquidity, profitability and our unrealized losses within AOCI. Altogether, we expect a 34% improvement in unrealized securities losses over the next two years. As our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities, and therefore unrealized losses should not impact income.
Turning to Slide 9. Net interest income decreased $87 million to $621 billion, in line with expectations as the benefit of loan volume in one more day were offset by the impact of wholesale funding, lower deposit balances, a shift in deposit mix and deposit pricing. A significant portion of the funding and deposit activity occurred late in the first quarter. So, results reflect a full-quarter impact of those actions. With our strategic management of our asset sensitivity position, the impact of rates was nominal.
As shown on Slide 10, successful execution of our interest rate 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. By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position overtime.
Our proven disciplined produced another quarter of excellent credit quality as highlighted on Slide 11. Once again, we posted net recoveries, although we do not project this trend to continue. Modest migration drove an increase in criticized loans, however at under 4% of total loans, they remain well below historical averages.
Non-accrual loans declined and inflows to non-accruals remained low at $17 million [Phonetic] Migration loan growth and the continued economic outlook drove the $33 million provision expense and the allowance for credit losses increased to 1.31%. Given the environment, we increased oversight and portfolios with greater relative exposure to elevated rates such as leveraged loans and our commercial real estate business. However, we remain very comfortable with these portfolio metrics and expect continued migration to be manageable.
Noninterest income on Slide 12, continues to outperform, growing $21 billion from an already strong first-quarter. Non-customer income contributed to results with increases in FHLB dividends and [Indecipherable] in addition to customer-related growth in fiduciary and card. Although not shown as a variance to prior quarter, capital markets exceeded expectations as we repeated strong first quarter results.
Risk management income related to our hedging strategy saw a modest decrease and should continue to vary based on the rate environment. While non-customer income to be hard to project, we expect our strategic investments in products and services to drive further growth and capital efficient fee income over time. We remain excited about the results of these efforts to date.
Expenses, on Slide 13, declined $16 million, in line with expectations. Quarter-over-quarter, expenses benefited from several large first quarter items that did not recur, that in $2 million related to the Ameriprise transition, a favorable state tax refund and a real estate asset write-down. Seasonally, lower salaries and benefits expense in other noninterest expenses were partially offset by increased outside processing, FDIC insurance and software costs.
Modernization efforts remain on-track as we incurred a total of $7 million in expenses, advancing our wealth management, corporate facilities, technology and retail strategies. We continue to selectively prioritize strategic investments designed to further enhance our financial results, while remaining committed to prudently managing expenses, commensurate with our earnings power.
Slide 14 highlights our strong capital position. With share buybacks paused, capital generation from profitability outpaced loan growth, driving our estimated CET1 further above our targeted to 10.31%, strategic actions, including the exit of Mortgage Banker Finance and increased selectivity across the rest of the portfolio are expected to elevate capital ratios through the end of this year. Higher rates increase, unrealized losses in our securities and swap portfolios, reducing our tangible common equity ratio to 5.06%.
Adjusting for the impact of AOCI, our tangible common equity ratio would have been 9.22%. Although potential regulatory changes have not yet been proposed considering our size, portfolio and projections, we feel very good about our ability to support our customers and comply with the anticipated capital requirements.
Our outlook for 2023 is on Slide 15, and assumes no significant change in the economic environment. We continue to project full year 2023 average loan growth of 8%. The strategic exit of Mortgage Banker Finance and increased selectivity is expected to keep loan balances relatively flat into the third quarter. Our projected full year average deposit decline of 14% to 15% is attributable to quantitative tightening that began last year and the impact of the first quarter of 2023 industry events. Assuming continued normalization of deposit trends and additional FOMC actions, we expect only a modest deposit decline through the second half of the year. We expect our highest year of net interest income in 2023, growing 1% to 2% over last year's record results. Although we anticipate short-term rates will remain high through the remainder of the year, our asset sensitivity position is designed to protect our strong profitability by minimizing the negative impact of rates when they decline.
Credit quality remained excellent and we expect continued migration to remain manageable. Given the strong performance through the first two quarters, we forecast full year 2023 net charge-offs to remain below our normal 20 to 40 basis points range. Noninterest income exceeded expectations for the first half of the year and we expect full year to grow 7% to 9% over 2022. Benefits from non-customer income related to FHLB dividends and risk management income are expected to continue, but likely at declining rates as we repay maturing advances and rates normalize.
While we expect strong foreign exchange income and derivative income, we anticipate levels to moderate from the incredible performance today. Even with potential headwinds in the second half of the year relative to the first half, the overall noninterest income run rate remains compelling. Noninterest expenses are expected to increase approximately 9% year-over-year and 3% of that growth is the result of higher pension expense for 2023. Talent acquisition, investments benefiting our deposit strategy and the enhanced regulatory and compliance focus given our size and business model are expected to create some expense pressure compared to prior guidance.
As we look into the third quarter, the cost of filling open positions and other expenses pressure should largely offset -- be offset by an expected credit to modernization expense, driven by corporate facilities. Although the precise timing for this type of credit can be challenging to predict. Prudent expense management remains a priority as we balanced expense pressures with the need to invest for the future. Strong profitability is expected to further grow our capital position in excess of our target, and we believe that trend will continue until we resume share repurchases.
Now, I will turn the call back to Curt.
