James J. Herzog
Senior Executive Vice President and Chief Financial Officer at Comerica
Well, thanks, Curt, and good morning, everyone.
Turning to Slide 5. Impact. Impacts from intentional balance sheet management efforts in 2023 carried over into the first quarter and when coupled with soft demand, drove downward pressure on average loan balances. Lower utilization was a trend in both Middle Market, where customers use deposits to repay debt and invest in their business and Equity Fund Services, where we observe continued softness in private equity activity. Conversely, Commercial Real Estate utilization continued to trend higher, as we funded multi-family and industrial construction projects while managing commitments lower. As we look month-to-month throughout the quarter, we saw balances decreased only modestly and a steadily increasing pipeline, which together support our expectation for growth.
Slide 6 highlights the stability of our deposit base. Average deposit balances declined $700 million, but almost $600 million was attributed to lowering brokered time deposits. Otherwise, declines in Technology and Life Sciences, Equity Fund Services and Commercial Real Estate were largely offset by increases in general Middle Market, Entertainment and retail. In fact, retail balances are nearing pre-March 2023 levels, with growth in both small business and consumer. Our mix of noninterest-bearing balances remained a competitive advantage, averaging 40% for the quarter as both interest-bearing and noninterest-bearing deposits exceeded expectations. As anticipated, elevated rates continued to drive deposit pricing higher to 328 basis points, an accumulative beta of 62%. However, the pace of increase continued to flatten, as it has for the past four quarters. Our deposit profile remains a competitive strength, and we were encouraged by this quarter's results.
As shown on Slide 7, we normalized our liquidity position. And in this quarter alone, we're able to repay over $5 billion in wholesale funding while retaining significant capacity. Over the last year, our liquidity strategy proved effective as we added liquidity to navigate volatility and then methodically normalized our position as the market stabilized. We were incredibly proud of our $1 billion debt issuance in late January, a record issuance for Comerica. Investor interest was high and the execution was effective, which to us signaled progress towards more normal market activity and interest in our value proposition.
At 80%, our loan-to-deposit ratio remained below or 85% medium-term target, positioning us to prioritize high-return loan growth going forward. Period-end balances in our securities portfolio on Slide 8 declined, with continued paydowns in maturities, in addition to a $268 million negative mark-to-market adjustment from a higher forward curve. We expect continued decline in this portfolio over the coming quarters.
Turning to Slide 8. Net interest income decreased $36 million to $548 million, driven by lower loan balances and higher deposit pricing, partially offset by Fed deposits and lower wholesale funding. While lower noninterest-bearing balances also contributed to the quarter-over-quarter decrease, deposits overall outperformed expectations. With favorable deposit trends, lower FHLB advances, a moderating deposit beta and a $3 million non-cash BSBY accretion, net interest income exceeded guidance.
As shown on Slide 10, successful execution of our interest rate strategy and the composition of our balance sheet positions us favorably for a gradual 100 basis points, or 50 basis points on average decline in interest rates. By strategically managing our swap and securities portfolio while considering balance sheet dynamics, we intend to maintain our insulated position over time. As a reminder, BSBY cessation does not impact the ongoing cash flow associated with the swap notionals listed on the slide. While we took non-cash losses in the fourth and first quarters, we will accrete them back, with a majority coming back into net interest income in 2025 and 2026. Now that we have fully re-designated the remaining impact swaps, we have included quarterly BSBY-related debt interest income projections in the appendix for your modeling.
Moving to Slide 11. We expect the attrition of our swap and securities portfolio to create positive earnings momentum. Scheduled swap maturities outpace the remaining forward starting swaps in 2024. By the end of 2025, we expect lower overall notional balances and a 14 basis point increase in swap yields, creating a tailwind for net interest income. Within our securities portfolio, we expect approximately $4 billion in repayments and maturities by the end of 2025. Although some of this may be partially offset by reinvestments in the portfolio, we expect to redeploy that liquidity at substantially higher rates. Altogether, we expect these portfolio trends to benefit our earnings trajectory.
Credit quality remains strong as highlighted on Slide 12. Net charge-offs of 10 basis points declined from the fourth quarter, which were already below our normal range. Elevated interest rates continued to pressure customer profitability and debt ratio service -- debt service ratios, which drove migration in general Middle Market and senior housing. Our senior housing exposure is limited by design and with a geographically diverse new construction orientation recourse and potential for favorable macroeconomic and demographic tailwinds, we feel the risk is very manageable. Total portfolio normalization trends resulted in an increase in the allowance for credit losses to 1.43% of total loans. Non-performing assets also increased, but still remain well below historical averages. Overall, our trends remained in line with expectations and while we continue to monitor the portfolio very closely, we believe ongoing migration will remain manageable.
On Slide 13, first quarter non-interest income of $236 million included a $39 million non-cash loss related to the BSBY loan hedges, not yet re-designated. This compared to a $91 million BSBY impact in the fourth quarter. And since we have now fully re-designated the remaining impacted swaps, we do not expect additional mark-to-market volatility related to BSBY cessation.
Fiduciary income was impacted by accrual adjustments in trust and accounting changes associated with our Ameriprise transition. Initial feedback on Ameriprise has been positive, and we continue to think this partnership can drive meaningful revenue growth over time. First quarter capital markets income was seasonally light, as higher syndication fees were offset by declines in interest rate and energy derivative products. We had a $5 million miscellaneous item in the first quarter related to a vendor contract, but we would not expect that benefit to repeat.
Expenses on Slide 14 included an estimated $16 million additional special FDIC assessment incremental to the $109 million charge taken in the fourth quarter. Excluding this assessment and deferred compensation, expenses performed in line with expectations for the quarter. Generally, we saw seasonal declines across most expense categories, with lower severance and temporary labor, offset partially by stock compensation. Further, we saw the benefit of lower pension expense, which will be consistent throughout the year. Expense recalibration actions announced last quarter are underway, and we expect the majority of identified colleague separations and banking center closures to occur in the second quarter. We remain keenly focused on ongoing expense management to support investments and enhance overall earnings.
Slide 15 highlights our conservative capital position as our estimated CET1 grew to 11.47%. Although we are below $80 billion in assets, our estimated CET1, adjusting for the AOCI opt-out, was already above the required regulatory minimums and buffers. Despite higher unrealized AOCI losses due to the rate movement, tangible common equity increased to 6.36%. We expect unrealized losses to burn down over time as securities repay and swaps mature, but the rate curve continued to create near-term volatility. As I mentioned on our last earnings call, we favor a conservative approach to capital management and plan to monitor ongoing AOCI movement and regulations as they evolve.
Our outlook for 2024 is on Slide 16. We project full-year average loans to decline 3%, largely due to optimization efforts in 2023. Despite soft first quarter demand and the higher rate curve, we still see constructive signs in customer sentiment and pipeline, supporting our projected 4% to 5% point-to-point growth. With average loans expected to be flat to down 1% in the second quarter, we still anticipate broad-based growth in the second half of the year.
Full-year average deposits are expected to be down 2% to 3% from 2023, or down 1% to 2% point to point. This assumes our new lower level of brokered time deposits remains flat from March 31st, and represents an improved average customer deposit outlook for the year. Excluding brokered time deposits, we expect year-end 2024 deposits to exceed year-end 2023.
Our year-over-year net interest income outlook, down 11%, remains unchanged, despite movement in the rate curve. Strong deposit performance as well as moderating deposit betas largely offset the reduction in the number of rate cuts.
As a point of clarity, we used the April 10 forward curve to reflect the most recently published CPI number and market consensus, reflecting two rate cuts in the second half of the year. As I mentioned at a conference last month, movement in the rate curve since 12/31 does push our projected net interest income trough into the second quarter. But as you can see in our guide, we do not expect the quarter-over-quarter decline to be significant.
Credit quality remains strong, and we expect continued migration to be manageable. We forecast full-year net charge-offs to move into the lower half of our normal 20 basis point to 40 basis point range. We expect non-interest income to grow 1% to 2% on a reported basis, which will be down 1% year-to-year when adjusting for BSBY and Ameriprise as detailed on Slide 39. With the higher forward curve, risk management income is expected to remain strong and we project growth in most customer related fee income categories in the second quarter and throughout the year.
Full-year non-interest expenses are expected to decline 3% on a reported basis, but grow 3% after adjusting for special FDIC assessments, expense recalibration and Ameriprise. As always, this assumes deferred compensation of $0 for the remaining quarters. Projected second quarter expenses should come down from the first quarter, due in part to seasonal compensation, and we expect to see the benefit of savings related to our recalibration efforts throughout the year.
Continued strategic investment remains a priority, and the bar for regulatory compliance and risk management framework continues to rise. So, we are working to offset and self-fund these increasing pressures. We saw a discrete tax benefit in the first quarter. But excluding discrete items, we project a 24% tax rate for the full year. Even with projected loan trends, we expect to maintain capital well in excess of our 10% target. We will continue to monitor AOCI volatility and the evolving regulatory environment as we continue to take a conservative approach to share repurchases. Overall, favorable deposit trends put us on a great path to start the year and we feel very good about the earnings trajectory of our business.
Now, I'll turn the call back to Curt.
