James J. Herzog
Senior Executive Vice President and Chief Financial Officer at Comerica
Thanks, Curt, and good morning, everyone.
Turning to Slide 5. trailing effects of rationalization efforts, coupled with soft demand at the start of the year impacted average loan balances in the second quarter. Low utilization trends persisted in equity fund services although balances rebounded in June and elevated rates continued to impact wealth management loans. Commercial real estate utilization trended higher. However, period-end balances remained flat to the first quarter. We have been purposefully managing commitments and originations in this space for several quarters, and we expect to begin to see growth subside in this business.
Total loan balances grew consistently throughout the quarter with period-end loans up over $1 billion. National dealer services contributed to quarter end growth with elevated balances due in part to the cyberattack that impacted dealerships nationwide in June. But we also saw increases across most business lines. Our pipeline remains strong and supports our expectation for continued growth.
Moving to Slide 6. Average deposit balances declined $2.3 billion, but almost 70% of the decrease was attributed to lower brokered time deposits. Pressure on noninterest bearing balances increased relative to trends we observed in the latter half of the first quarter as customers utilized funds to support ongoing business activity or reduce borrowings. Tax-related seasonality impacted select businesses such as municipalities. While we saw some deposit remixing at the customer level, it did not appear to be the biggest driver.
Even with noninterest-bearing balance trends and ongoing success in winning new interest-bearing deposit relationships, we believe our noninterest-bearing mix remain peer-leading, averaging 40% for the quarter. Interest-bearing deposit costs improved 5 basis points, driven by lower brokered time deposits and increases in customer deposit pricing continued to flatten. As rates decline, we expect to see an inflection point in deposit balances, mix and costs. In the meantime, we remain encouraged by our success in growing interest-bearing deposits and continue pricing discipline.
Period-end balances in our securities portfolio, on Slide 7, declined with continued paydowns and maturities as the mark-to-market adjustment remained relatively flat. We expect continued decline in balances through at least the end of the year.
Turning to Slide 8. Net interest income decreased $15 million to $533 million, driven by lower Fed deposits and loan balances, partially offset by decline in wholesale funding. Impacts from the BSBY cessation drove $6 million of the decline as we recognized a $3 million non-cash loss in the second quarter compared to a $3 million increase in the first quarter. As a reminder, you can find the expected future BSBY impacts in the appendix to the slides. Normalization of our cash position drove an increase in net interest margin for the quarter.
As shown on Slide 9, successful execution of our interest rates 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 portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time.
Credit quality remained strong, as highlighted on Slide 10. Net charge-offs of 9 bps declined for the second consecutive quarter and remain well below our normal range. Although customers continued to navigate high borrowing costs and inflation, we saw an improvement in criticized loans concentrated in our core middle market businesses. Nonaccrual loans ticked up slightly, but still remained below historical averages. We did not observe any new emerging pressures, and metrics within our incrementally monitored portfolios remained relatively consistent. With a reduction in the allowance for credit losses to 1.38% of total loans, we continue to believe ongoing migration will remain manageable.
On Slide 11, second quarter noninterest income of $291 million increased $55 million. Although a majority of the increase was related to the impact of BSBY cessation in the first quarter, we were encouraged to see growth across most customer-related categories. Capital markets' income grew in each product including M&A advisory services as a result of the new team we put in place last year. Fiduciary income saw seasonal tax-related increases and brokerage income benefited from investments in our new platform for Comerica Financial Advisors. We were pleased to see successful revenue growth associated with our strategic focus on noninterest income and continue to prioritize these key investments.
Expenses, on Slide 12, improved $48 million over the prior quarter. Salaries and benefits declined $25 million with seasonally lower stock-based compensation as the biggest driver. FDIC expense came down due to the large special assessment in the first quarter. Other expenses declined, including consulting, operational losses and asset impairment costs associated with real estate rationalization, partially offset by seasonally higher advertising. Overall, expense management remains a high priority as we continue to seek opportunities to drive positive operating leverage and efficiency.
As shown on Slide 13, higher profitability coupled with conservative capital management drove increases across all of our key capital ratios. Our estimated CET1 grew to 11.55% and adjusting for the AOCI opt-out, our estimated CET1 remained above required regulatory minimums and buffers. Despite volatility throughout the quarter, at quarter end, AOCI remained relatively flat. As we think about ongoing capital management, we need to continue to monitor AOCI movement, our loan outlook and regulations as they evolve.
Before moving to the outlook, as indicated on Slide 14, we recently received preliminary notification from the fiscal service that Comerica Bank was not selected to continue serving as the financial agent for the Direct Express prepaid debit card program following the expiration of our contract early next year. This process remains fluid as contract negotiations are not yet final, but at this time, we do not expect that Comerica Bank will retain the business long-term.
As detailed on the slide, we recognize noninterest income and card fees, but that is generally offset by expenses associated with managing the program. The financial value has been in the noninterest-bearing deposit balances related to monthly benefits funded on the cards, which have grown over time and averaged $3.3 billion in the second quarter. As we have discussed in the past, there are various potential scenarios with regards to the timing and mechanics of the deposit transition, and we expect more detail in the coming quarters as terms become final. However, our experience for this program leads us to believe this transition may be longer than shorter, and we do not currently anticipate an impact to 2024 deposit balances, noninterest income or expenses.
While we have been honored to manage this important program, we see this as an opportunity to refocus and reprioritize resources towards targeted deposit strategies, more aligned with our core relationship operating model. Several of these key initiatives are listed on slide 15 and leverage proven expertise, coupled with strategic investments with the goal of driving core deposit growth and consistent funding over time.
As an example, we have been leaning into our competitive position as the leading bank for business to expand our focus within small business. Expected growth in this space should enhance the granularity and consistency of our deposit profile and we were encouraged to see our investments drive favorable customer trends for the quarter. Select talent acquisition and business optimization activities and treasury management and payments have been designed to further capitalize on our strong core product set and should allow us to deliver more comprehensive liquidity solutions to our customers. Through our experience with Direct Express, we have developed competitive card capabilities that we are already leveraging to win new relationships. Online enhancements within retail are intended to further improve the user experience while expanding our customer reach.
Finally, we see opportunities to leverage our existing delivery model, strong product set and industry knowledge to further target deposit-rich customers, which should help drive stable funding opportunities. In short, we are very excited about the deposit initiatives we are executing on and look forward to continuing to prioritize deposit growth as a key strategic focus.
Our outlook for 2024 is on Slide 16. We project full year average loans decline 4% or grow 2% point to point from year end 2023 to 2024. Trailing effects from our strategic optimization efforts and muted demand across the industry dampened our outlook slightly. However, our strong pipeline and momentum still supports broad-based growth expectations in the second half of the year. Full year average deposits are projected to be down 3% from 2023 or down 2% point to point. We expect average brokered time deposits to be relatively consistent from full year 2023 to full year 2024. Although we anticipate some level of continued cyclical pressure on noninterest-bearing balances and ongoing success in winning new interest-bearing deposits, we expect to maintain a favorable deposit mix in the upper 30s.
The combination of noninterest-bearing deposit trends and lower average loans impacts our net interest income outlook as we now project a 14% decline year-over-year. On a quarterly basis, we expect those same deposit and loan pressures and the negative impact from BSBY cessation to drive a 2% to 3% decline in net interest income. Adjusting for BSBY, third quarter net interest income is only expected to decline a modest 1% as we believe we were at a cyclical low point. We also believe deposit costs will continue to increase slightly until rates begin to decline. Credit quality remains strong and successful recoveries helped drive lower net charge-offs this quarter. With persistent elevated rates and inflationary pressures, we believe modest migration is possible. However, we expect it to remain manageable.
Given our strong results to date, we forecast full year net charge-offs to approach but remain below the lower end of our normal 20 to 40 basis points range. We expect noninterest income to grow approximately 1% to 2% on a reported basis, which would be down 1% year-over-year when adjusting for BSBY and the impact of the Ameriprise transition as detailed in the appendix.
Third quarter noninterest income is expected to decline 3% to 4%, driven largely by lower projected noncustomer income. Within the second quarter, we recognized a $6 million gain due to our derivative related to the Visa Class B exchange program and benefited from smaller valuation adjustments accounted for in other income.
We project lower FHLB dividends consistent with lower wholesale funding, and we expect risk management income to decline based on the forward curve and our hedge position. Despite these non customer trends, we remain very encouraged about our customer-related momentum and investments to grow fee income over time.
Full year noninterest expenses are expected to decline 2% to 3% on a reported basis, to grow 4% after adjusting for special FDIC assessments, expense recalibration, modernization and the accounting impact from the Ameriprise transition. Third quarter noninterest expenses are expected to increase 3% to 4% over the relatively lower second quarter levels as we intend to reinvest savings from our expense calibration efforts into headcount aligned with our risk management and strategic priorities.
We also expect to see elevated occupancy expense associated with transitioning our corporate facilities and seasonally higher taxes, maintenance and repair. With an ongoing focus on expense discipline, we continue to seek opportunities to offset or self-fund emerging pressures. Even with strong projected loan growth in the second half of the year, we expect our CET1 ratio to remain well above our 10% strategic target through year end. We will continue to monitor AOCI and the regulatory environment as we take a conservative approach to share repurchases in 2024. Despite some near-term cyclical pressures, we expect continued momentum in the second half of the year to position us well for 2025.
Now I'll turn the call back to Curt.
