James J. Herzog
Senior Executive Vice President, Chief Financial Officer at Comerica
Thanks, Curt, and good morning, everyone. Turning to loans on Slide 5. We saw some reversal of the growth signals from the second quarter with loans coming down in August, but we're encouraged to see balances relatively flat in September. Most of the decline in average loans was in National Dealer Services and Corporate Banking. Dealers saw elevated balances in the second quarter related to the cyber-attack that impacted the industry. As we look at dealer trends month-to-month, balances were most pressured early in the quarter, and September saw more positive activity.
Corporate Banking, specifically U.S. banking, saw more relative pressure than other businesses as we focus on maintaining our pricing discipline and return targets. Additionally, soft loan demand across the industry caused some bank group consolidation. U.S. banking saw an improvement late in the quarter and period-end loans were relatively flat to June 30.
Moving to businesses that grew, Commercial Real Estate utilization increased, which is a continuation of the trend we have seen in this elevated rate environment. However, as rates come down, we expect to see an uptick in the pace of payoffs as projects sell or refinance into the permanent market as intended. Growth in Environmental Services was attributed to our renewables focus. In 2022, we formed a new renewables team, and we have seen strong results. Environmental Services overall is a great business for us, and we feel our distinguished talent and unique expertise have allowed us to carve out a leading position in this niche industry. Touching briefly on loan yields, lower nonaccrual interest was the main driver of the 8 bps decline, and we saw only a minor drag from lower short-term rates in the quarter.
On Slide 6, we were encouraged by customer deposit activity. Average deposits increased 1.3%, with growth across most business lines. Average third quarter broker time deposits were higher due to activity late in the second quarter. However, favorable customer deposit trends allowed us to repay almost $900 million in brokered CDs by the end of the third quarter. Despite that deliberate reduction in brokered CDs, we grew total period-end deposits by over $600 million. As we win new and expand existing relationships, we continue to see the elevated rate environment drive customers to bring those deposits into interest-bearing accounts. Despite continued modest cyclical pressure on noninterest-bearing balances, they performed in line with our expectations and remained favorable at 38% of total deposits.
We took steps to adjust pricing as the Fed began to cut rates. We plan to continue monitoring the competitive environment as we manage ongoing deposit pricing alongside additional rate cuts in the future. With our strong relationship model, we feel well positioned to strike the right balance between our customers' objectives with their own funding needs and profitability. Our Securities portfolio on Slide 7 benefited from the shift in the rate curve as we saw a 24% improvement in our valuation adjustment in the quarter. This favorable mark-to-market impact more than offset repayments and maturities and drove a net $130 million increase in the portfolio. We continue to believe the expected repayment and maturities of this portfolio will enhance earnings in the coming quarters, even if we resume investment at some point in 2025.
Turning to Slide 8. Net interest income increased $1 million to $534 million. Excluding the impact of the BSBY cessation, net interest income would have grown $7 million quarter-over-quarter. The shift in the rate curve allowed us to reallocate cash collateral from the CME to the Fed, benefiting net interest income. That, coupled with strong customer deposits, which allowed us to pay down wholesale funding and the benefit of maturing swaps and securities offset pressures from BSBY cessation, lower loans and noninterest-bearing deposit balances.
As shown on Slide 9, successful execution of our interest rate strategy and the composition of our balance sheet has made us slightly liability sensitive and allows us to better protect our profitability from a declining rate environment. By strategically managing our swap and securities portfolio while considering balance sheet dynamics, we intend to maintain our insulated position over time. We feel credit quality remains a competitive strength as our overall trends in the third quarter remained solid and relatively unchanged from the second quarter, as shown on Slide 10. Net charge-offs remained low at 8 bps. Criticized loans were essentially flat, and nonperforming assets remain well below historical averages.
The overall economic outlook was also relatively unchanged by lower average loans, especially in lower risk portfolios, drove an increase in the allowance for credit losses to 1.43% of total loans. Even though our portfolio remains strong, we have potential for even further improvement if lower rates materialize and inflationary pressures at bay [Phonetic]. Regardless, we feel our proven conservative credit discipline continues to position us well to outperform peers through the cycle.
On Slide 11, third quarter noninterest income of $277 million decreased $14 million from the second quarter, primarily due to noncustomer-related income. Changes in the value related to our vis-a-vis derivative drove a negative $11 million variance as we recognized a $5 million loss in the third quarter compared to a $6 million gain in the second quarter. Risk management hedging income declined $10 million as the lower rate curve reduced the amount of required collateral held at the CME. While this resulted in a decline in noninterest income, part of this benefited net interest income. We saw encouraging trends in several customer-related categories with increased syndication fees, derivative income, commercial lending fees and a small increase in commercial service charges.
Fiduciary income was down, but excluding the $3 million seasonal tax-related benefit in the second quarter, it would have been up, consistent with improved market performance. We continue to be encouraged by the progress in targeted initiatives designed to further enhance noninterest income.
Expenses on Slide 12 increased $7 million over the prior quarter. Salaries and benefits were up $12 million, which included a $4 million increase in deferred compensation, which was mostly offset within noninterest income and various other smaller increases. FDIC expenses declined by $8 million, partially due to a $4 million favorable accrual adjustment in the third quarter compared to a $3 million expense in the second quarter, both related to the special assessment. In all, we feel expenses were well controlled, and we continue to prioritize opportunities to drive positive operating leverage and improved efficiency.
As shown on Slide 13, our already strong capital position improved further in the third quarter. Solid profitability, lower loans and conservative capital management drove our estimated CET1 to 11.97%. Adjusting for the AOCI opt out, our estimated CET1 would have been 9.12%, which is well above required regulatory minimums and buffers. Movement in the forward curve, coupled with ongoing repayments and maturities in our securities portfolio resulted in a 32% improvement in AOCI, increasing our tangible common equity ratio by over 150 basis points.
Considering our compelling estimated CET1 well in excess of our strategic target and the favorable movement in the rate curve, we plan to utilize a portion of our excess capital to repurchase $100 million of our common stock shares starting in the fourth quarter.
Allocating capital to support our customers' loan needs always remains our first priority so we intend to be measured in our approach and calibrate the size and frequency of future repurchases with expected loan trends. We will also continue to closely watch the forward curve, our profitability, the broader economic environment, and any regulatory updates as they may also influence our strategy.
Moving to Slide 14. We do not yet have any meaningful update regarding the timing or specifics of the transition of the Direct Express program. As a reminder, our current contract allows fiscal service to utilize up to a three-year extension under our current terms. Fiscal service would need to notify us of their intention to extend no later than early December, so we expect to hear more before the end of the year. However, our expectation of the timing of deposit transition has not changed. Based on the size, complexity and critical nature of this program, our experience leads us to believe this transition may be longer rather than shorter. We do not anticipate an impact to 2024 deposit balances, noninterest income or expenses.
In fact, it is possible we may not see a significant impact to average deposit balances in 2025, although we need more information on the proposed transition plan to confirm. In the meantime, we plan to continue prioritizing targeted deposit strategies aligned with our core relationship operating model to further enhance our funding position and prepare for an eventual transition.
Our outlook for 2024 is on Slide 15. We project 2024 average loans to be 5% lower than 2023. The muted demand, which we feel has been consistent across the industry and our deliberate optimization efforts in the latter half of 2023 are the major drivers for this decline. With some customer optimism following the third quarter rate cuts and normal seasonal patterns, we anticipate modest broad-based growth in the fourth quarter. One of the bigger variables will be our Commercial Real Estate business, as we believe loan balances in this business may have peaked. Depending on the pace and size of further rate cuts, we could see a more rapid reduction in balances than projected in that business.
Full year average deposits are projected to be down 3% to 4% from 2023. This slight reduction relative to last quarter's guidance is driven by the expectation of an approximate $1 billion decline in year-over-year broker time deposits, not customer-related trends. Further reductions in broker time deposits are also driving the projected 2% decline in average deposits in the fourth quarter as fourth quarter customer deposits are projected to remain relatively flat. Although we are projecting some level of modest fourth quarter seasonality, third quarter averages were elevated by large temporary customer deposits, which were distributed by quarter end as expected.
Based on the high interest rate environment, we project deposit growth to continue to be concentrated in interest-bearing accounts, but we still expect to maintain a favorable deposit mix in the upper 30% range. We expect full year 2024 net interest income to decline 13% to 14% compared to 2023. The slight improvement relative to prior guidance is a result of our strong third quarter results.
Fourth quarter net interest income is expected to grow 6% over the third quarter or 1% to 2% adjusting for the impact of this BSBY cessation. We expect noninterest-bearing deposit pressures to be more than offset by benefits from swaps, securities and the forward curve. However, we continue to watch noninterest-bearing balances and overall pricing dynamics as they could impact results.
Credit quality remains strong as we produced another quarter of low net charge-offs. Interest rates remain elevated, and as customers continue to navigate high borrowing costs and inflationary pressures, we believe modest, manageable migration will continue. However, given our strong results to date, we forecast full year net charge-offs to remain well below our normal 20 to 40 basis point range. We expect noninterest income to be flat year-over-year or down 2% to 3% when adjusting for BSBY and the impact of the Ameriprise transition. This reflects a modest reduction in prior guidance due to trends in risk management hedging income. Although the lower forward curve benefited AOCI and net interest income, it does pressure this line item.
Fourth quarter noninterest income is projected to decline 1% to 2% relative to the third quarter, also driven by lower risk management hedging income. Despite this and other noncustomer-related pressures, we continue to be encouraged by customer-related fee income trends. Full year noninterest expenses are expected to decline 2% to 3% on a reported basis and grow 4% after adjusting for special FDIC assessments, expense recalibration, modernization and the impact from the Ameriprise transition. Fourth quarter expenses are projected to increase 3% over our strong third quarter results or 4% on an adjusted basis, as detailed on the slide. Expense discipline remains a priority as we work towards our objective of positive operating leverage.
Even with modest projected loan growth in the fourth quarter and the resumption of share repurchases, we expect our CET1 ratio to remain well above our 10% strategic target through year-end. In all, we expect a solid fourth quarter, which will set us up nicely for a strong start to 2025.
