Comerica - Q2 2023
July 21, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to the 2023 Q2 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you have a question at any time, please press one, then zero. If you should require assistance at any time, please press star, then zero. I would now like to turn the conference over to your host, Director of Investor Relations, Kelly Gage. Please go ahead.
Kelly Gage (Director of Investor Relations)
Thanks, Greg. Good morning, welcome to Comerica's Q2 2023 earnings conference call. Participating on this call will be our President, Chairman, and CEO, Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit Officer, Melinda Chausse, and Chief Banking Officer, Peter Sefzik. During this presentation, we will be referring to slides which provide additional details. The presentation slides and our press release are available on the SEC's website, as well as in the investor relations section of our website, comerica.com. This conference call contains forward-looking statements. In that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation, we undertake no obligation to update any forward-looking statements.
Please refer to the safe harbor statement in today's earnings release on slide two, which is incorporated into this call, as well as our SEC filings for factors that can cause actual results to differ. This conference call will reference non-GAAP measures, and in that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on the website, comerica.com. I'll turn the call over to Curt, who will begin on slide three.
Curt Farmer (President, Chairman, and CEO)
Good morning, everyone. Thanks for joining our call. Today, we reported Q2 earnings of $273 million, or $2.01 per share. Average loans grew to $55.4 billion. A continued focus on fee income helped drive our second highest non-interest income quarter in our history. Expenses declined. Our disciplined approach to credit produced a third consecutive quarter of net recovery. Beyond our compelling financial results, we have launched a transformational expansion and support for small businesses. In the Q2, we introduced tailored products designed to improve access to capital and enhance cash management capabilities for these important customers, while also providing access to valuable business insights and resources. Coupled with our recognized SBA achievements, we believe we are well-positioned to be a leading bank for small business, providing the tools they need to achieve their goals.
Our emphasis on supporting small business is an important part of our overall commitment to communities. You can read more about our other community and sustainability efforts in our 2022 Corporate Responsibility Report that was recently published on comerica.com. Our Southeast and Mountain West expansionary investments continue to perform well as our bankers were active in the market, adding new relationships and building pipeline. Strong relative economic trends in these regions, coupled with the prevalence of our target customer base, could create opportunity for continued growth over time. Moving to a summary of our results on slide four, average loans grew $1.9 billion. Average deposits decreased $3.5 billion due to customer diversification efforts related to industry disruption in the Q1 and the ongoing impact of Fed monetary actions.
We saw increased stabilization in both interest-bearing and non-interest-bearing deposits to the second half of the quarter, and we believe diversification efforts are largely behind us. As we expected, net interest income declined as we saw the full impact of Q1deposit flows and funding activity. Credit quality outperformed with another quarter of net recovery, and our criticized loan percentage remained below our historical average. Non-interest income was near record levels and expenses declined. Profitability improved and our already solid capital position, as we generated an estimated CET1 ratio of 10.31% above our strategic target. It was a strong quarter for Comerica. I will now turn the call over to Jim, who will review our results in more detail.
Jim Herzog (CFO)
Thanks, Curt, and good morning, everyone. Turning to slide five. Loan growth came in just above expectations as average balances increased 4% from the Q1. Increased selectivity 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 multifamily and industrial projects originated over the last two years, in addition to the slower pace of payoffs. Recent 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, while floor plan inventories continued to grow, they remained below pre-pandemic levels. Typical Q2 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 six provides an overview of our deposit activity for the quarter. Average deposit balances declined 5% in line with expectations. Conversations pivoted away from the 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, we observed relatively stable trends since mid-May. Industry funding pressures drove deposit competition, 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 non-interest-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 seven, our strong liquidity position provided flexibility. We maintained excess cash, repaid maturing FHLB advances, and our remaining liquidity capacity increased. Our quarter-end loan-to-deposit ratio was 84%, still below our 15-year average, and strategic actions announced in the Q2 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. 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 eight declined to almost $900 million, with paydowns, maturities, and a $212 million negative mark-to-market adjustment. Our security strategy remains unchanged as we stopped reinvesting in the Q3 of 2022. 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 2025 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 nine. Net interest income decreased $87 million to $621 million, in line with expectations, as the benefit of loan volume and 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 Q1, 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 in 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 over time. Our proven discipline 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. Nonaccrual loans declined, and inflows to nonaccruals remained low at $17 million.
Migration, loan growth, and a continuing weak economic outlook drove the $33 million provision expense, and the allowance for credit losses increased to 1.31%. Given the environment, we increased oversight in 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. Non-interest income on slide 12 continued to outperform, growing $21 billion from an already strong Q1. Non-customer income contributed to results with increases in FHLB dividends and BOLI, 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 Q1 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 can be hard to predict, we expect our strategic investments in products and services to drive further growth in 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 Q1 items that did not recur, netting $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 and other non-interest expenses were partially offset by increased outside processing, FDIC insurance, and software costs.
Modernization efforts were put on track as we incurred a total of $7 million in expenses, advancing our wealth management, corporate facilities, technology, and retail strategies. We continued 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 target 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 increased 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 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 Q3. Our projected full year average deposit decline of 14%-15% is attributable to quantitative tightening that began last year and the impact of the Q1 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%-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 20-40 basis points range.
Non-interest income exceeded expectations for the first half of the year. We expect full year to grow 7%-9% over 2022. Benefits from non-customer income related to FHLB dividends and risk management income are expected to continue, but are 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 to date. Even with potential headwinds in the second half of the year relative to the first half, the overall non-interest income run rate remains compelling. Non-interest expenses are expected to increase approximately 9% year-over-year. 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 Q3, the cost of filling open positions and other expenses pressures should largely 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 balance 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'll turn the call back to Curt.
Curt Farmer (President, Chairman, and CEO)
Thank you, Jim. Slide 16 summarizes our competitive advantage. With the local delivery of sophisticated, comprehensive products and industry expertise by tenured bankers, we feel we encapsulate the best features of the largest and smallest competitors. Diversification remains an important tenet of our core strategy, and exporting our business model to expansion markets has further enhanced our attractive geographic profile. By accelerating certain investments already underway, such as payments, small business, wealth management, and capital markets, we are elevating the products and capabilities tailored to meet our customers' needs while enhancing our funding profile, revenue mix, and overall return on capital. Optimizing our portfolio through the strategic exit of Mortgage Banker Finance and increasing selectivity across the rest of our business lines prioritizes capital and funding for our target customers.
Throughout our 174-year history, we have successfully navigated a number of economic events, and once again, our business model was tested and proved to be sound. As a leading bank for business with strong retail and wealth management capabilities, we play a unique role supporting our customers as a trusted, long-term banking partner.
Thank you for your time this morning, and now we'd be happy to take some questions.
Operator (participant)
Ladies and gentlemen, if you'd like to ask a question, please press one then zero on your telephone keypad. You may withdraw your question at any time by repeating the one zero command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press one then zero at this time. One moment, please, for your first question. Your first question comes from the line of John Pancari from Evercore. Please go ahead.
Jim Herzog (CFO)
Morning, John.
John Pancari (Senior Managing Director and Senior Research Analyst)
Morning.
Jim Herzog (CFO)
Morning.
John Pancari (Senior Managing Director and Senior Research Analyst)
On the deposit growth outlook, I know you lowered your deposit growth expectation, you know, despite the end of period deposits actually increasing and coming in a little bit better than expected. I know you indicated you expect only a modest deposit decline in the back half. Can you maybe just give us some of the color around the rationale for the lowered growth expectation and what type of trends that you expect to develop in the, as you look at the back half? Thanks.
Jim Herzog (CFO)
Yeah. Good morning, John. It's Jim. Thanks for the question. Yeah, the relatively stable or modest decrease was relative to the Q2 average of $64 billion. You know, we do expect to stay very close to that on average through the end of the year. You know, there are some dynamics, you know, churning on below that. You know, core deposits will probably take a small step down from the average of Q2, just because in the first half of the Q2, we did have just some very modest runoff. We added some broker deposits also that should roughly offset that during the quarter, that on an average basis will carry through. We do think by the end of the year, we'll still be hovering around that $63 billion-$64 billion number.
We were a little bit elevated on 6/30, as you see in the bar on the right. I would not expect all those balances to stick around. We had $800 million of card that was elevated relative to the typical average. We did have some elevated customer balances on 6/30 that I would not expect to stick around either. That is a little bit of an inflated number. I would maybe stick more to the average guidance of gravitating down to $63 billion-$64 billion by the end of the year on average.
John Pancari (Senior Managing Director and Senior Research Analyst)
Okay, great. Thanks for that color. Separately, also on the deposit front, in terms of the non-interest bearing mix, I know it's 48% current. You know, where do you see that bottoming? Already, I think you're at your pre-pandemic level. You were running at around 48% of total deposits. Where do you think that could bottom? Separately, sorry if I missed it, but if you can give us your updated through cycle deposit beta expectation. I believe you were thinking mid-50s, and you're currently at 47 now. Thanks.
Jim Herzog (CFO)
Yes, we, you know, we are, on average as well as June 30th, hovering in that, you know, 47%-48% area. You know, it's consistent with what I said earlier in June in a major investor conference. We still think we are going to dip just slightly below 45, so think about maybe 44%-45%. The average ratio was a little bit elevated because it doesn't consider a little bit of the runoff that occurred early in the Q2. The June 30th ratio, 47%, is a little elevated due to the elevated non-interest-bearing balances that I referred to before. I kind of think of us being on a kind of a spot basis, if you ignore the elevated balances.
I really think of us today as being 45%-46%. I see that dipping down to maybe 44%-45% by the end of the year. Keep in mind that there are a number of variables involved here. You know, non-interest bearing flows will be the most important variable, but to the extent we're successful in bringing back interest-bearing deposits, you know, that could push that ratio down too. We would, of course, welcome back those interest-bearing deposits. In terms of the beta question, yeah, we still think we're going to end up on an accumulative basis in the mid-50s. I mean, right now, I have 56% implied in the guidance, pretty consistent with what we've been saying for the last few months. We're still right around that mid-50 area.
John Pancari (Senior Managing Director and Senior Research Analyst)
Great. Thanks so much, Jim.
Jim Herzog (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Steven Alexopoulos from JPMorgan. Please go ahead.
Jim Herzog (CFO)
Morning, Steve.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Everyone. Jim, I just want to drill down on your answer to John's question. The stability or modest decline in deposits for the rest of the year, you're saying that's coming from outflows slowing. It's not, you know, because you had strong outflows this quarter, but you plugged the hole with broker deposits. You're not saying you need to use broker for the second half to remain fairly stable down a bit, it's outflows are slowing, correct?
Jim Herzog (CFO)
That's right. To be clear, we have really no plans to add broker deposits between now and the end of the year. I think we're at a pretty good resting spot. We do think the customer, you know, core deposits have very much stabilized. You know, we do see whether you define it by where we were in the Q2 average, or if you look at June 30th, which put some elevated balances, and you normalize for that number, for those elevated balances. From there, we see just some very modest decline between now and the end of the year. We've not really factored in a material amount of seasonal deposits, which in the past have come in. Seasonal patterns have gone out the window over the last year.
We're not exactly sure what to expect there, so there could be some opportunity there. Overall, you know, if you adjust that $66 billion on June 30th for card, it may be a modest amount of elevated balances. You know, we would see just a modest decline from that level on, assuming we don't get a large inflow of seasonal deposits.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Outflow, non-interest bearing, right? Replacing those with basically time deposits. That's really pressured the NIM. If that holds the ninth inning, are we at a bottom for the NIM right now?
Jim Herzog (CFO)
You know, if you look at our guidance, Steven, we do have just a little bit more pressure to go there. You know, you see the net interest income guidance that we implied. You do see a small step down in Q3, and then a smaller step down in Q4. Now, as a partial offset to that, I never like to talk about NIM percentage because our NIM percentage can bounce around for reasons that don't correlate with income, you know, whether it be the level of securities, whether it be the level of cash that we carry and the reasons for carrying that cash.
If we do see cash balances go down because that is putting a bit of a drag on the NIM, if they go down to normal levels, I would see the NIM being very close to where it's at now. You know, you might see another 3 or 4 bps downward pressure in the NIM as the deposit mix is roughly offset by the smaller balance sheet as we deflate for that excess cash. If we don't reduce cash balances, and my forecast assumes we do, but if we hold at these cash levels that we're currently at, you know, you could see another, you know, 9, 10 bps in NIM. Again, I'm not expecting that at this point. I'm more focused on getting the cash down as things continue to stabilize.
We're very near the bottom, just maybe a few bps, depending on what we do with our cash position.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
There may be a final question. I know we're going to get the new capital rules fairly soon, but you guys are $91 billion of assets. Curt, how do you think about crossing that $100 billion assets threshold organically? I know this is not a great environment to be considering M&A transactions, but when you think about just the capital burden and the cost burden, potentially, does it make sense to cross that organically?
Curt Farmer (President, Chairman, and CEO)
Yeah, Steve, this is Curt. I'll take that question. you're right, we are, you know, within a certain range of that $100 billion mark at around $91 billion in assets. you know, assuming that just through organic growth, that we would eventually cross that number, we've been planning now for the last two years, and have a little bit more work to do just to be prepared for whatever regulatory increased oversight, going back into the stress test, capital planning, et cetera, if we became a Category IV bank. we think just through organic growth, you know, that would probably be a few years out.
Our view has continued to be that, you know, we're going to focus on doing the right thing for the shareholders, growing the company, growing the assets of the company as we have over a 174-year history. If that means crossing that $100 billion mark, it would mean crossing that $100 billion mark. We think that we're trying to think about it from a long-term perspective, and, you know, just trying to be prepared for whatever costs or regulatory oversight might be associated with that, if it is crossing it from an organic perspective.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Thanks for all the color.
Curt Farmer (President, Chairman, and CEO)
Thanks, Steve.
Operator (participant)
Your next question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead.
Curt Farmer (President, Chairman, and CEO)
Good morning, Ebrahim.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Hey, good morning. I guess just following up on Steve's last question on these capital changes. Even if you don't cross $100 billion, what are the changes you expect to make in terms of just balance sheet management, either loan-to-deposit ratio, liquidity, et cetera, once these rules are out?
Curt Farmer (President, Chairman, and CEO)
You know, the rules, this is Curt, Ebrahim. The most anticipated ruling is really around the treatment of AOCI in regulatory ratios. While all the conversation thus far has been focused on banks north of $100 billion, we do anticipate that there might be some eventual phase-in below $100 billion. Nothing official on that right now, we're just trying to be prepared if that comes to pass. If you look at sort of where we are from a CET1 perspective at 10.31%, if you factor in AOCI, we would be slightly south of 7%, like 6.93%.
We would have a little bit of work to do to raise capital, but we believe it would be phased in. Just through normal earnings of the company, we could get back to an appropriate CET1 level. We do not believe that we'd have to go to the external market to raise capital to get back to that level. We think we're well positioned with whatever ruling might come out. Again, given that we're below the $100 billion mark, we think we would have some more time if it got applied to banks below that level.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Just in terms of liquidity, with the loan-to-deposit ratio in the 80s still seems like the likeliest to be?
Jim Herzog (CFO)
I believe, Ebrahim, you were asking about the stabilization of the loan-to-deposit ratio.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Yep.
Jim Herzog (CFO)
Yeah, we do expect to stay in the mid-80s. We do think it was, again, just slightly elevated on June 30th. You know, we do have a plan to stay in the mid-80s, and certainly some of the asset optimization things we're doing will help ensure that. We're right around that area that we're comfortable in.
Curt Farmer (President, Chairman, and CEO)
Also, it's, you know, below our sort of historical averages as well, where we've normally operated.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Understood. Just one separate question, if I may. Given your customer base, give us a sense of your outlook in terms of credit, health of the customer. There's not a lot of, like, corporate bonds that have yet to be priced to the higher rates over the last 12 months. What's your expectation in terms of the next year and the likelihood of a recession, soft landing, et cetera?
Melinda Chausse (Chief Credit Officer)
Ebrahim, this is Melinda Chausse. Obviously, the credit performance continues to be really strong. It was a really nice quarter for us. Obviously, Q3 of net recovery is kind of unprecedented. Non-performing assets, again, modest decline and very low inflow, we did see an increase in the criticized category, which is exactly what we've been expecting to see over the last couple of quarters. You know, the preponderance of the increase that we saw is in our, what I call, core middle market CNI portfolio, which would include a number of leveraged loans in that automotive supplier sector. Again, we have expected that we would begin to see normalization. It's taken a couple of extra quarters to actually get there. We've been bouncing around the bottom for a long time.
Our current economic forecast that we use in our CECL process does call for a mild recession, and I think, you know, whether it's a mild recession or we, you know, end up with a soft landing, I think we're prepared for a mild recession as it relates to the reserve build. The reserve build this quarter really reflects kind of the portfolio growth, as Jim said, as well as that migration. As of now, you know, we don't, we don't see a lot of lost content. As Jim guided, you know, we think that for the remainder of this year, we'll be below that average that we've typically guided.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Okay. Thank you.
Melinda Chausse (Chief Credit Officer)
Welcome.
Operator (participant)
Your next question comes from the line of Jon Arfstrom from RBC Capital Markets. Please go ahead.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Hey, good morning, everyone.
Curt Farmer (President, Chairman, and CEO)
Hey, Jon.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Hey, good morning. Melinda, just to follow up on that one, do you expect more normalization, and how do you generally expect those numbers to progress on criticized?
Melinda Chausse (Chief Credit Officer)
Yeah, I mean, I think we expect that we'll continue to have some migration in the portfolio. You know, there's no doubt that the customer base has been incredibly resilient. Obviously, came into the last couple of years, challenges, very low levered, lots of liquidity, lots of availability. You know, inflationary pressures over the last 18 months are starting to show up in the portfolio in terms of pressure around growth and net margin. Cash flows, you know, are a little more stretched, and I would expect that we'll continue to see some additional migration. I think we're very well reserved, and all of that is taken into sort of the process that we go through each quarter.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Okay. Maybe this somewhat ties into it, but maybe if you repeat. You talked about increased selectivity in lending. Can you talk a little bit more about that, kind of, you know, where you're being a little bit more cautious? Then the CRE number, it sounds like that was more construction projects funding up. I think you said things are slowing there, but can you just confirm that?
Peter Sefzik (Chief Banking Officer)
Jon, it's Peter. I think when we talk about it's really around, quite candidly, pricing expectations across the loan portfolio. We continue to be really selective about it. I've said in the past, we're more focused on sort of credit than we are, maybe trying to earn business on pricing over time. Right now, between those two options, we want to make sure that we're earning for the company. So our selectivity and expectations on pricing, and I think you're seeing that across the industry, just as capital is kind of being contained here. You know, that we're being very careful about where we deploy it. We're taking care of existing customers. Our expectations on profitability are higher, relationship are higher. That's kind of across the portfolio.
I think in commercial real estate specifically, you know, we'd actually kind of started, dialing back a little bit on that, even beginning of this year, maybe end of last year, just starting to be very careful and taking care of our existing sponsors. We've got great sponsors. We feel really good about the portfolio, very limited office exposure, watching what's happening in multifamily. We expect, though, our projects to kind of carry commercial real estate balances really into next year. So we're feel good about it, where we are. We feel good about it from a credit standpoint, our sponsor standpoint, but our expectations on pricing have definitely gone up this year.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Okay, good. Thank you for that. Just one for you, Ralph. It may be kind of an odd question, you know, you've dealt with COVID, you've dealt with the funding crisis as CEO, so it's been, you know, a hell of a run for you. Do you feel like it's largely business as usual for Comerica right now? Are you still fighting some of these questions from depositors and, you know, this funding crisis that's happened over the last four months?
Curt Farmer (President, Chairman, and CEO)
Well, Jon, first of all, I'm honored that you referred to me as Ralph, because I know we're thinking.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Did I say that? I apologize.
Curt Farmer (President, Chairman, and CEO)
Yeah. Our long-term chairman, Ralph Babb, just had lunch with Ralph.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
I'm under my desk right now.
Curt Farmer (President, Chairman, and CEO)
He's doing great and remains very engaged.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
All right.
Curt Farmer (President, Chairman, and CEO)
in the community here.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
I was asking you.
Curt Farmer (President, Chairman, and CEO)
Just a minute about the comments or question that you asked me. The last 30, 60 days, a number of us have been out in the markets visiting with both employees and town hall formats, but also with customers in, you know, Michigan, California, the Carolinas, Texas, Florida, et cetera. I would say the conversations really have shifted, for the most part, back to more business as usual, as you would refer to it. When customers are asking us about things, what customers normally ask us about: the economy, about interest rates, about availability to capital and credit, you know, what we're seeing in terms of M&A activity in various industries, et cetera, industry outlooks.
I feel like that, things have definitely stabilized in terms of, customer communication, customer conversations, and we're focused, as Peter said, on taking care of our existing customers. That's something that I think we do very well. We've got really great long-standing relationships. I might just remind you and the other listeners, that really throughout the crisis, we did not lose customers. We saw some customers diversify deposits, and we hope over time and seeing some signs, early signs of that, the customers will bring some of those back deposits back, where some moved out. As you alluded to earlier, it has been an interesting time.
I became the CEO in April of 2019. You know, all the events that have occurred since then. I think our company is so resilient to manage through 174 years of all the disruptions that have occurred in the economy and the world during that time. We just do, I think, a great job of rallying together. It really pretty much is business as usual. I referred to in my comments earlier, a lot of things that we're focused on, and we remain focused on those beyond just taking care of our employees and our customers, expanding into new markets, focusing on product capabilities, focusing on small business, growing the commercial bank, growing wealth management, growing the retail bank. We feel like the future for us remains very bright as an organization.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Well, Curt, I've never had so many emails in response to a question, some supportive, some not so much. I know, you're doing a great job. Thank you, Curt.
Curt Farmer (President, Chairman, and CEO)
Thank you.
Jon Arfstrom (Managing Director and Senior Equity Research Analyst)
Yeah.
Operator (participant)
Your next question comes from the line of Brody Preston from UBS. Please go ahead.
Curt Farmer (President, Chairman, and CEO)
Hello, Brody. Good morning.
Brody Preston (Equity Research Analyst)
Good morning, everyone. Hey, I just wanted to ask on the tech and life sciences deposits. I noticed that those continued to move down a little bit, but it looked like the rate of change kind of slowed there. I was wondering kind of what drove that decline. Is it kind of back to, you know, normal cash burn for those clients? Kind of, you know, I guess, is there a growth outlook kind of for that business line now that, you know, there's been this disruption with the largest competitor there, no longer, you know, are wholesaling, you know?
Peter Sefzik (Chief Banking Officer)
Yeah, Brody, this is Peter. Yeah, the decline in deposits in TLS, we really started actually seeing that back middle of last year. I think that cash started being consumed in that space, with all the things that you've kind of seen happening with tech. I think what happened earlier this year probably accelerated that a little bit further. As far as where we go from here, we're being very cautious about our relationships. You know, we're watching what's going on in the VC community, raising capital, newcos that are being formed. We've been in that business a long, long time. We plan to stay in it. We're looking at, you know, we're very careful about where we're adding people, where we're adding relationships. You know, I think that we will be in the business.
I think it's probably at some point, you're going to, you'll start to see cash build again, across the industry and certainly at Comerica. I don't know that it's necessarily in the next six months. I think we've probably got a little more cash burn going on in this space. That said, you know, we are bringing on new relationships. As I said, we're adding people. We feel really good about the industry and the opportunity over the long term. We've probably got some time to go here of cash burn, and I think a number of these companies are going to need to raise some capital, and we'll see what happens in the industry going forward.
Brody Preston (Equity Research Analyst)
Got it. Then I was hoping just within the AOCI, you know, walk, if you could give us some indication as to, you know, what the conditional prepayment rate you're assuming within your effective duration calculation is?
Jim Herzog (CFO)
Yeah, Brody, it's Jim. I mean, that prepayment rate varies somewhat widely, depending on the type of security. Of course, we have some bullets in there on the commercial side that generally don't have much in the way of prepayment. We have a number of various tranches of MBS securities that have some variance to them. I don't think there's any one number that would likely answer your question, but we certainly have prepayment rates factored into that.
Brody Preston (Equity Research Analyst)
Got it. Is it reflective of kind of what the market is bearing on a quarter-to-quarter basis, Jim?
Jim Herzog (CFO)
Yeah, absolutely. That's something we, you know, prudently do every quarter is, you know, monitor the market prepayment rate, so very much in line with the market.
Brody Preston (Equity Research Analyst)
Got it. Great. Then I wanted to ask just on the fixed rate loan portfolio, you know, the portion of the portfolio that's fixed rate, more purely fixed rate, not so much the swap portion. I wanted to get a sense for kind of what the quarterly repricing cadence looks like on that and kind of, you know, what the existing yield on that book is.
Jim Herzog (CFO)
That book's a relatively small part of our portfolio, you know, less than 8% of our loans. It does yield, you know, well below our current portfolio. You know, we haven't disclosed the exact rate, but I would say it is materially below, which isn't surprising given how fast interest rates have gone up.
You know, contractual life on that is about eight years, so remaining life would be about four years. We do see it amortizing along a pretty straight line path amongst that four-year remaining life. You know, we see the, you know, I would say that fixed rate portfolio price is up probably, you know, 15 basis points a quarter. If you kind of parlay that along, its percentage of the overall loan book, you know, you're looking at maybe a basis point a quarter of loan yields going up because of their pricing the fixed rate book. That will be a very small tailwind for us. You know, it just depends on where the curve goes, where they're repriced at, and how prepayment patterns kind of follow through there.
Curt Farmer (President, Chairman, and CEO)
It's really one of the strengths of our model is the floating rate. Most of our loans are floating rate across our portfolio. You know, we're able to benefit, on the actual loan book, you know, when the interest rates are going up like this, to your question there, Brody.
Jim Herzog (CFO)
That's right. It gives us a little more control, too, because we can, you know, more synthetically manage our asset liability position, as opposed to being at the mercy of prepayment rates.
Brody Preston (Equity Research Analyst)
Got it. Then last one for me. I just was hoping for a reminder. On the swaps, the, you know, the yields that you disclosed, the 2.38% for this year, the 2.50% for next year, are those just the received fixed rate, or is that a net rate? If, if it is just the received fixed, do you happen to have a sense for what, you know, the current kind of pay floating rate is on those swaps?
Jim Herzog (CFO)
Yeah, the, these are fixed received rates, the pay floating is pretty much aligned with, you know, LIBOR, you know, 30-day LIBOR previously, as before it progressed, as well as a combination of monthly SOFR and the BSBY. LIBOR is behind us now, but pretty much aligned with monthly SOFR and monthly BSBY. That obviously is, you know, changing as the Federal Reserve makes its changes and so on.
Brody Preston (Equity Research Analyst)
Got it. Is there any spread there over that rate?
Jim Herzog (CFO)
Yeah, I mean, we, you know that, you know, BSBY, you know, SOFR, you know, depending on where we're at with the FOMC increase, coming up here, you know, obviously you're looking at kind of a, pay rate in the five, you know, five and a quarter range. You know, that would give you the spread relative to this, yield that you see here, the received pay, received rate.
Brody Preston (Equity Research Analyst)
Thank you very much for taking the questions. I appreciate it.
Curt Farmer (President, Chairman, and CEO)
Thanks, Brody.
Operator (participant)
Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.
Curt Farmer (President, Chairman, and CEO)
Manan, good morning.
Manan Gosalia (Equity Research Analyst)
Hey, good morning. I just wanted to follow up on the earlier line of questioning on deposit balances. You noted that deposits have stabilized, and if I look at your last update at our conference in June, to the end of the quarter, NIB has actually improved quite nicely, even if I strip out the card-related deposits that you mentioned. Can you talk about what drove that and what made June just such a strong month? You know, I know you said the conversations have moved back to business as usual, but maybe you can expand on what changed in those conversations in the last three weeks of June for deposit customers specifically.
Jim Herzog (CFO)
Yeah, I would say, Manan, it's Jim. Really, nothing changed. We're very much on the trajectory that we had forecasted. As I mentioned, beyond card, we did have some elevated customer balances on the non-interest bearing side, really in the last few days of the month, that are no longer with us. You know, depending on how you think about how often those types of balances come back, you know, we're anywhere from another $0.5 billion-$1 billion elevated at the end of the month. Again, we often get these types of deposits too, so I don't want to fully discount them. It is important to understand we were a little bit elevated on June thirtieth.
Curt Farmer (President, Chairman, and CEO)
Yeah, I might just. This is Curt. Manan, just add what I said earlier or expound on what I said earlier. I think just as things have settled down, the understanding that the concerns were maybe overplayed for the whole industry and customers are back just to more business as usual. You know, they're talking to us about credit and fee income products and services, and how we can take advantage or support them from an advisory standpoint. I think just getting the banking crisis out of the media and just the noise that was associated with those first couple of months dying down has really, I think, shifted the conversation quite a bit.
Manan Gosalia (Equity Research Analyst)
Got it. That's helpful. Then just separately, I realize the FDIC special assessment hasn't been finalized, but I was wondering if you know, once it's finalized, does that come out all in one quarter where there's a reserve, or does it come out over the course of the two years as the proposal suggests?
Jim Herzog (CFO)
Well, we're still waiting, of course, for the rule to be finalized. There's been a lot of input provided there, so we really don't know where it's going to end up. I mean, I think the best speculation is, you know, from a cash basis, we would probably pay it, you know, once the rule is established. It would be recognized on an expense basis, and therefore, its impact to capital over a couple of years. There are, you know, a number of variables, you know, at play there in terms of all the input being provided. I think we just have to wait and see what the final rule has in it.
Manan Gosalia (Equity Research Analyst)
Got it. Thank you.
Jim Herzog (CFO)
Yeah, it would be a one-time hit to capital, though, you know, once it is recognized, the rule is.
Operator (participant)
Your next question comes from the line of Peter Winter from D.A. Davidson. Please go ahead.
Curt Farmer (President, Chairman, and CEO)
Good morning, Peter.
Peter Winter (Managing Director and Senior Research Analyst)
Good morning. Good morning. I was wondering, with deposits closer to stabilization or the outflow slowing, net interest margin nearing a bottom, do you think net interest income could stabilize in 2024 relative to the Q4?
Jim Herzog (CFO)
We think it's getting very close, with the betas. You know, based on where the curve was on June 30th, we think betas will probably stop rising once you get to around December, January. Of course, you'd have the full quarter effect of that, probably dipping a little bit into 2024. We're bringing loan balances down throughout the year. Most of that loan balance drop will occur in the Q4, so you could get a full quarter average of that, kind of, tripping into the Q1 of 2024 also. Just because of those quarter-to-quarter bleed-ins, I don't know that it'll be 100% stabilized in Q1 of next year, but I do think it'll stabilize, if not Q1, you know, probably in Q2.
You know, there are some other variables going on in terms of how pricing plays out in the industry. That could be a potential tailwind. Yeah, I think as we cross over the year, you're very close to a bottom there, and I would say by Q2, probably at an inflection point.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. That's helpful. Then, obviously, there's a lot going on on the expense side that's non-recurring between the pension, the modernization. Can you just remind us what a normal expense growth rate is, and is that more likely next year?
Jim Herzog (CFO)
We typically, you know, putting aside some abnormal ebbs and flows, like those things relating to pension, I mean, we typically think of expenses as being in the, you know, 5% range in terms of what we shoot for. That's gonna vary from year to year, depending on what pressures are on us. Things like FDIC can make a difference, as that, you know, can be elevated for a year or two at a time. Again, pension can be a big factor. I don't think any one year is ever gonna exactly be the average, but over the cycle, I kind of think about it as probably 4.5%-5%.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thanks a lot.
Jim Herzog (CFO)
Thank you. Inflation obviously being a huge factor also.
Operator (participant)
Your next question comes from the line of Chris McGratty from KBW. Please go ahead.
Curt Farmer (President, Chairman, and CEO)
Morning, Chris.
Jim Herzog (CFO)
Hi, Chris.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Hey, good morning, Jim. Quick question on the rate outlook. Obviously, the market expects one next week. If we stay in a higher for longer for the rest of the year, next year you get the forward curve, you get a couple cuts, could you talk about how you think your balance sheet will respond in terms of margin performance, given all the hedges you've put on? Thanks.
Jim Herzog (CFO)
Yeah, we're pretty neutral right now, Chris, in terms of our interest rate positioning. We don't think it would be an impact regardless of what the Fed does. You know, we are just the slightest bit to the downside for both an up and down rate scenario. You know, I would say the longer the Fed holds rates at a high level, I do think that's probably puts a little more pressure or less pressure on our projections, because I do think you have the potential for a very, very slow bleed if they're kept high for a very extended period of time in terms of betas and deposit flows. I don't think it's material, I don't think it's necessarily helpful to have them elevated for an extended period of time.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Great. My follow-up on capital. I'm interested in your thoughts on what would need to happen to return to a buyback? Obviously, we know that the regulatory is an aspect. What is it specifically that would be the moment where you would turn it back on?
Jim Herzog (CFO)
Yeah, I would say two things, Chris. One, obviously, stabilization in the overall banking industry. I think we're doing most of it, but, you know, I think that we're not 100% as an industry out of the woods yet, even though things are very stable at Comerica. Certainly stability there would be good. Obviously, once we understand, receive and understand the new capital rules, as soon as we can get comfortable, and we are comfortable right now, but we'll wait and see, you know, how comfortable we are once the rules come out. Once we have some degree of certainty that, you know, we can hit our targets based on the new rules, I think that would put us in a position to really start thinking about share buyback.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Good. Thank you.
Jim Herzog (CFO)
Thank you.
Operator (participant)
At this time, there are no further questions. I'd like to turn the call back to Curt Farmer, President, Chairman, and Chief Executive Officer.
Curt Farmer (President, Chairman, and CEO)
Well, thank you so much, everyone, for dialing in and listening to the call today. As always, we appreciate your interest in our company and hope you have a good day. Thank you.
Operator (participant)
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.