Comerica, Inc. (NYSE: CMA) Q1 2021 earnings call dated Apr. 20, 2021
Corporate Participants:
Darlene P. Persons — Director of Investor Relations
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
James J. Herzog — Executive Vice President and Chief Financial Officer
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Melinda A. Chausse — Executive Vice President and Chief Credit Officer
Analysts:
Kenneth Zerbe — Morgan Stanley — Analyst
Terry McEvoy — Stephens Inc. — Analyst
Bill Carcache — Wolfe Research — Analyst
Ken Usdin — Jefferies — Analyst
Steven Alexopoulos — J.P. Morgan — Analyst
Brock Vandervliet — UBS — Analyst
Gary Tenner — D.A. Davidson & Co. — Analyst
Jon Arfstrom — RBC Capital Markets — Analyst
Presentation:
Operator
Good day, and thank you for standing by. Welcome to the Comerica Quarterly Earnings Call. [Operator Instructions]
I would now like to hand the conference over to Darlene Persons, Director of Investor Relations. Please go ahead.
Darlene P. Persons — Director of Investor Relations
Thanks, Regina. Good morning, and welcome to Comerica’s First Quarter 2021 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 Executive Director of our Commercial Bank, Peter Sefzik.
During this presentation, we will be referring to slides, which provide additional details. The presentation slide 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 materially vary from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. Please refer to the Safe Harbor statement in today’s earnings release and Slide 2, which I incorporate into this call, as well as our SEC filings for factors that can cause actual results to differ.
Now, I’ll turn the call over to Curt, who will begin on Slide 3.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, everyone, and thank you for joining our call. The year is off to a good start. In the first quarter, we generated earnings of $2.43 per share, a 59% increase over the fourth quarter, primarily driven by strong credit quality. Our ROE grew to over 18% and our ROA was 1.68%.
I am pleased to report that we are hearing more optimism among our customers and colleagues across our markets. Stimulus payments to individuals and enhanced unemployment benefits, along with PPP loans to small- and medium-sized businesses have provided much needed relief to those that are struggling. Also, the Infrastructure Bill that is being considered is expected to spread spending over many years. This fiscal stimulus and the ramp up in the vaccine distribution, in combination with ample liquidity and low borrowing costs, has the potential to spur substantial activity. The economic metrics are improving quickly and the outlook for the back half of the year is for strong economic growth. As the economy continues to reopen and pre-pandemic conditions return, many businesses are beginning to experience accelerating activity.
I remain very proud of the unwavering commitment of our team to serve our customers, communities and each other. We’ve again stepped up our efforts to support those affected by the pandemic. Last month, Comerica and the Comerica Charitable Foundation pledged approximately $16 million to support small businesses and communities impacted by COVID. This support is in addition to the $11 million committed in 2020. As you know, last year, we funded $3.9 billion in the first round of PPP loans. Also, so far this year, through the hard work of colleagues across the Bank, we further assisted businesses by funding close to $1 billion in the second round of PPP. In addition, in the first quarter, we processed over $600 million in PPP loan repayments, mainly through forgiveness.
Turning to our first quarter financial performance on Slide 4. Compared to the fourth quarter, average loans decreased with seasonally lower home purchase volumes impacting our Mortgage Banker business. Also, total line utilization across nearly all businesses have remained low. However, our loan pipeline has continued to grow. Average deposits increased over $1 billion to another all-time high as customers received additional stimulus payments.
Net interest income was impacted by $17 million in lease residual adjustments in an expiring legacy portfolio. Excluding this impact, pre-tax pre-provision net revenue increased 5% despite the shorter quarter and the decline in loan volume. This increase in PPNR was due to continued robust fee generating activity in our expense discipline.
As far as credit, our conservative culture, diverse portfolio, as well as deep expertise has served us well. Strong credit performance and an improvement in our economic forecast resulted in a negative provision of $182 million. The credit reserve remains healthy at 1.59%.
Net charge-offs were only 3 basis points. Through the cycles, our net charge-offs have typically been at or below our peer group average, including during the past year as we navigated the pandemic.
With more confidence in the economic recovery and an estimated CET1 ratio of 11.09%, we plan to restart share repurchases. In the second quarter, we expect to make significant strides towards our 10% target, giving careful consideration to earnings generation, as well as capital needs to fund future loan growth. Our ongoing goal is to provide an attractive return to our shareholders, which includes a dividend that currently has a yield of about 4%.
And now, I’ll turn the call over to Jim.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thanks, Curt, and good morning, everyone. Turning to Slide 5, average loans decreased approximately $800 million. As Curt mentioned, the biggest driver was Mortgage Banker, which declined from its record high in the fourth quarter due to lower purchase volumes. Energy decreased as higher oil prices are resulting in improved cash flow and capital markets activity. We had expected National Dealer loans would begin to rebound in the first quarter. However, supply chain issues, most notably with computer chips have STIMI [Phonetic] production. In addition, March auto sales were the second highest of all-time for that month, further depleting inventory. Dealer loans were $1.5 billion below the first quarter of 2020. We remain confident in the floor plan balances will eventually rebuild to historical levels. Equity Fund Services was a bright spot, increasing over $200 million with strong fund formation.
Total period end loans reflected decreases of $900 million in Dealer and $700 million in Mortgage Banker. Line utilization for the total portfolio declined to 47%. We feel good about the pipeline, which now sits above pre-pandemic levels. It increased to nearly every business line and loans in the last stage of the pipeline nearly doubled over the fourth quarter. Ultimately, we would expect this to translate into loan growth.
As far as loan yields, there were $17 million in lease residual value adjustments, mostly on aircraft and an expiring legacy portfolio. We have not done business in this segment for many years and no further adjustments are expected. Excluding the 14 basis point impact from the residual adjustment, loan yields increased 3 basis points with the benefit of accelerated fees from PPP forgiveness. Continued pricing actions, particularly adding rate floors when possible as loans renew, offset the decline in LIBOR.
Average deposits increased 2% or $1.1 billion to a new record as shown on Slide 6. Consumer deposits increased nearly $1 billion, primarily due to seasonality and the additional stimulus received in January. Customers continue to conserve and maintain excess cash balances. With strong deposit growth, our loan-to-deposit ratio decreased to 69%. The average cost of interest-bearing deposits reached an all-time low of 8 basis points, a decrease of 3 basis points from the fourth quarter and our total funding cost fell to only 9 basis points.
Slide 7 provides details on our securities portfolio. Period end balances are up modestly as we recently began to gradually deploy some of our excess liquidity by opportunistically increasing the size of the portfolio. Lower rates on the replacement of about $1 billion in payments received during the quarter resulted in the yield on the portfolio declining to 1.89%. Yields on repayments averaged approximately 235 basis points, while recent reinvestments have been in the low-180s. We expect to mostly offset the yield pressure on MBS in the near term with a modestly larger portfolio. However, maturing treasuries will likely be a slight headwind in the back half of the year, depending on the mix of MBS and treasuries we would likely replace them with, as well as market conditions.
Turning to Slide 8, excluding the impact of the lease residual adjustment and two fewer days in the quarter, net interest income was roughly stable and the net interest margin would have increased 2 basis points. As far as the details, interest income on loans decreased $28 million and reduced the net interest margin by 8 basis points. This was primarily due to the $17 million of lease residual adjustments, which had a 9 basis point impact on the margin, as well as two fewer days in the quarter, which had a $7 million impact. Lower loan balances had a $5 million impact and were partially offset by a $3 million increase in fees related to PPP loans. Other portfolio dynamics had a $2 million unfavorable impact and included lower LIBOR, partially offset by pricing actions.
Lower securities yields, as I outlined in the previous slide, had a $2 million or 1 basis point negative impact. Continued prudent management of deposit pricing added $3 million and 1 basis point to the margin and a reduction in wholesale funding added $1 million and 1 basis point.
Average balances of the Fed were relatively steady and remain extraordinarily high at $12.5 billion. This continues to weigh heavily on the margin with the gross impact of approximately 41 basis points.
Credit quality was strong and metrics are moving in the right direction as shown on Slide 9. Net charge-offs were only $3 million or 3 basis points. Non-performing assets decreased $34 million and at 64 basis points of total loans, they are about only half of our 20-year average. Inflows to non-accrual were also very low. Criticized loans declined $366 million and comprised 5% of the total portfolio. Positive migration in the portfolio, combined with growing confidence and improving economic forecast, resulted in a decrease in our allowance for credit losses. Of note, both the social distancing-related segments, as well as the Energy portfolio have performed better-than-expected. However, we continue to apply a more severe economic forecast to these areas. Our total reserve ratio is very healthy at 1.59% or 1.72% excluding PPP loans and remains well above pre-pandemic levels.
Non-interest income increased $5 million as outlined in Slide 10, sustaining the positive trend we’ve seen for the past year. Derivative income increased $11 million as volumes remain robust, particularly for energy hedges, combined with a $10 million benefit from a change in the credit valuation adjustment. Note that we have made a change in reporting, we have combined foreign exchange and customer derivative income, which was previously included in other non-interest income into a combined derivative income line item. Prior periods have been adjusted to reflect this change.
Warrants and investment banking fees moved higher and we had smaller increases in fiduciary and deposit service charges. Partly offsetting this, commercial lending fees decreased $6 million with the seasonal decline in syndication activity. Deferred comp asset returns were $3 million, a $6 million decrease from the fourth quarter and are offset in non-interest expenses. Note, card fees remained elevated. They were over 20% higher than a year ago due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment. All in all, another strong quarter for fee income.
Turning to expenses on Slide 11, which decreased $18 million or 4%. Starting with salaries and benefits, which were up $11 million due to seasonal factors. This increase was driven by annual stock compensation and payroll taxes resetting. Providing a partial offset was a decrease in deferred comp, as well as a reduction due to two fewer days in the quarter and seasonally lower staff insurance costs. All other expenses decreased $29 million. As discussed last quarter, strong investment performance in 2020 has resulted in an $8 million reduction in pension costs, which is included in other non-interest expense. In addition, effective January 1, we adopted a change in the accounting method for our pension plan. Previous quarters have been adjusted, specifically fourth quarter pension expense was reduced by $8 million. This change also decreased AOCI and increased retained earnings at year-end by $104 million, which resulted in a 16 basis point increase to our CET1 ratio.
Finally, we realized seasonal decreases in advertising and occupancy, lower operating losses and FDIC expense, as well as smaller decreases in other categories. Our strong expense discipline is assisting us in navigating this low rate environment as we invest for the future.
Our CET1 ratio increased to an estimated 11.09% as shown on Slide 12. As always, our priority is to use our capital to support our customers and drive growth while providing an attractive return to our shareholders. In this regard, we have maintained a very competitive dividend yield. As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital to shareholders. With more confidence in the path of the economic recovery, we plan to resume share repurchases in the second quarter. We expect to make significant strides towards our CET1 target of 10%.
Slide 13 provides our outlook for the second quarter relative to the first quarter. In addition, we have provided expected trends for the second half of the year relative to the second quarter outlook. In the second quarter, excluding PPP loans, we expect loan volume to be stable. We expect growth in several lines of business led by middle market as a result of increasing M&A, as well as working capital and capex needs. However, this will be offset by continuing headwinds in Mortgage Banker, National Dealer and Energy.
In line with the MBA forecast, Mortgage Banker is expected to decline as refi volumes begin to cool with higher rates. We expect National Dealer to continue to decrease as auto inventory levels are challenged by strong demand combined with supply issues. Also, Energy loans are expected to remain on the current declining trend as higher oil prices are driving improved cash flow and capital markets activity.
As far as PPP loans, it is difficult to predict. However, we believe loan forgiveness will pick up towards the end of the second quarter and the bulk should be repaid by year-end. Excluding PPP loan activity, we believe loans should grow across nearly all business lines in the second half of the year. This is based on our robust pipeline and expectations that the economy will continue to strengthen.
We expect average deposits to remain strong with the second quarter benefiting from the latest federal stimulus. These record levels are expected to wane in the back half of the year as customers start to put cash to work.
As far as net interest income, the $17 million lease residual adjustment we took in the first quarter will not recur. That aside, all other factors, including PPP are expected to offset each other in the second quarter. For example, headwinds from lower reinvestment yields on securities should be offset by a modestly larger portfolio. As we move into the second half of the year, we expect pressure on securities yields and swap maturities to be roughly offset by non-PPP loan growth. In addition, lower PPP loan volume and accelerated fees are expected to be a headwind. Of course, PPP activity is difficult to predict and may result in variability.
Credit quality is expected to remain strong. Assuming the economy remains in the current path, we expect our allowance should move towards pre-pandemic levels. We expect non-interest income in the second quarter to benefit from higher card fees driven by recent stimulus payments, as well as increased syndication fees following lower seasonal activity in the first quarter. Also, we expect growth in fiduciary income reflecting annual tax-related activity and new business generation. This growth is expected to be more than offset by a decline in derivatives and warrants income from elevated levels, as well as deferred comp, which is not assumed to repeat.
As we progress through the year, we believe customer-driven fee categories in general should grow with improving economic conditions. However, card fees are expected to be a headwind as the benefit from growing merchant and corporate volumes could be more than offset by lower government card activity due to the absence of further individual stimulus payments.
We expect expenses to be stable in the second quarter. Salary and benefit expenses are expected to decrease in the second quarter with lower stock comp, as well as lower payroll taxes, partly offset by annual merit and one additional day. Offsetting this decrease, we expect a rise in outside processing tied to growth in card fees, as well as seasonally higher marketing and occupancy expenses.
As far as the second half of the year, by maintaining our focus on expenses, we expect to offset higher tech spend. In addition, we expect increases in certain line items due to seasonality and revenue growth.
Finally, as I indicated on the previous slide, we plan to restart share repurchases in the second quarter.
Now, I’ll turn the call back to Curt.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Thank you, Jim. As I mentioned at the beginning of the call, we are off to a good start and we expect the economy will continue to improve throughout this year. We believe firming manufacturing conditions, increasing business and consumer confidence, as well as pent-up demand will support strong economic growth. It is hard to believe that just over a year ago we drastically changed the ways in which we work and live. We have demonstrated the resilience of our business model as we embraced our core values and rose to the occasion to support our customers, communities and each other. Our success is anchored by our ability to provide our expertise and experience to build and solidify deep, enduring relationships, particularly during challenging times. I’m extremely proud of the work our team has done to ensure we continue to deliver the same high-level of service.
We are focused on delivering a more diversified and balanced revenue base with an emphasis on fee generation, and our progress is demonstrated in our results as non-interest income has increased in each of the past four quarters. Our robust card platform is a great example has helped position us for the recent and likely ongoing changes in customer behavior. Also, our fiduciary business is growing with strong collaboration between Wealth Management, Commercial and Retail Bank divisions. In February, we increased the breadth and scale of our Trust Alliance business through the acquisition of a small group with expertise in this area. In addition, we are committed to maintaining our strong expense discipline. Our technology investments are enhancing the customer and colleague experience, helping to attract and retain customers and improving colleague efficiency.
Finally, our disciplined credit culture and strong capital base continue to serve us well. These key strengths provide the foundation to continue to deliver long-term shareholder value.
Thank you for your time. And now, we’ll be happy to take your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question will come from the line of Ken Zerbe with Morgan Stanley.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Ken.
Kenneth Zerbe — Morgan Stanley — Analyst
Hi, great. Thanks. Good morning. In terms of buybacks, good to hear that you’re starting it sooner rather than later. Are you able to quantify your buyback expectation in 2Q? And also, when do you expect that you might be able to get back to that 10% CE Tier 1?
James J. Herzog — Executive Vice President and Chief Financial Officer
Well, good morning, Ken. Thanks for the question. We would not expect to get right back to 10% in the second quarter. We’re going to be monitoring the environment throughout the second quarter. And one of the things on our mind is that, we are looking at the potential for some pretty good loan growth in the second half of the year, if not, late in the second quarter. And so, it’s important to us to make sure that we have a buffer above 10% just to make sure that we can accommodate our customers and their needs and have the capital to support that growth. So, we do expect to make significant strides towards that 10% level. But we don’t want to throw the needle too tightly there. We think it’s important to leave some type of buffer there for potential loan growth that could pop up late in the quarter or in the couple quarters following the second quarter.
Kenneth Zerbe — Morgan Stanley — Analyst
Got it. So it sounds like it’s more of a — at least a ’22 event, if you’re going to keep the capital to support loan growth in the back half. Okay. And are you [Speech Overlap]
James J. Herzog — Executive Vice President and Chief Financial Officer
We’ll make that assessment as we move through ’21. Certainly, second quarter, we would expect to keep a buffer. And as we go through the last few quarters we’ll make that determination as we go through ’21.
Kenneth Zerbe — Morgan Stanley — Analyst
Got it. Okay. And then just my other question, you mentioned that you are investing some of your excess liquidity into securities. Is your view changing at all on how much of those excess deposits stay on your balance sheet over the long-term?
James J. Herzog — Executive Vice President and Chief Financial Officer
We do expect that some of those deposits will start to wane in the second half of the year in the long-term. But we do feel pretty good about the liquidity position. We’re not expecting the Fed to materially change from its Accommodative Policy at this point. And so, we are comfortable taking measured steps to invest some excess liquidity into securities. Well, that’s again something we’re going to monitor throughout the year. We want to avoid making any real big moves. But we think it is prudent to go ahead invest some of that excess liquidity and then monitor in future quarters what’s going on in the economy, with the Fed and make that assessment as we move into the latter quarters of the year.
Kenneth Zerbe — Morgan Stanley — Analyst
All right. Thank you.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Thank you, Ken.
Operator
Your next question comes from the line of Terry McEvoy with Stephens.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Terry.
Terry McEvoy — Stephens Inc. — Analyst
Hi. Good morning. First question, your expectations around growth in middle-market lending. I know you said pipelines are higher, and I think there were some commentary on M&A. But could you just run through your confidence behind that statement? And any markets or industries that stand out?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Terry, it’s Peter. I — we feel pretty good on the outlook, particularly in the second half of the year as Jim and Curt mentioned. The second quarter will be interesting to see how it unfolds as the economy start to open up. And we feel good about it in just about all of our markets. The major markets of Michigan, Texas and California. The pipeline looks pretty good, activity level looks good. What you just still aren’t seeing is utilization. So, that’s probably the biggest challenge. But we do feel good on our outlook as we’ve mentioned and are encouraged about the optimism that we hear from our customers and their sort of renewed belief that things are turning, if you will.
Terry McEvoy — Stephens Inc. — Analyst
Thanks. And then as a follow-up. There has been a lot of talk about businesses and individuals moving from California to Texas. I’m just curious, what are your thoughts here. Is this a net neutral to Comerica or could you see some outside growth on the Texas side?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Terry, I appreciate the question. I think it’s a positive for us sort of either way. We’ve got great franchise in both markets. If anything, it give us the ability to really support our customers, because to the extent that they are moving and we can help them with that process, I think that puts us at an advantage. So, from the conversations we’ve had with customers, it’s not a uncommon conversation to have that about the move and I think it puts us in a real advantage to be able to support them either way.
Terry McEvoy — Stephens Inc. — Analyst
Thanks. Appreciate it.
Operator
Your next question comes from the line of Bill Carcache with Wolfe Research.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Bill.
Bill Carcache — Wolfe Research — Analyst
Good morning. On the idea that dealer floor plan levels will take longer to return to their historical levels, can you discuss how much of that you think is transitory? And more broadly, how are you thinking about the risk just in general of dealers possibly running with less inventory than they have historically?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Bill, it’s Peter again. The dealer — our dealer groups are doing really, really well in this environment interestingly enough. So, they have got the challenges of inventory, getting cars, but they are performing really well. So, the — obviously, the balances are lower that we see and we think that will come back. I mean, there has been a lot of press about this issue. Matter of fact today there’s an article in the journal about it. Just the supply constraints, getting chips, getting cars produced, it’s not just chips, it’s lots of other supplies, raw materials in general I think are in short supply. So, all of that said, we think it’s probably more like 2022 before dealer starts to see floor plan balances increased. We were encouraged, I think coming into ’21 that that might happen sooner but it’s clearly not happening. The supply constraints are still there. But in the meantime, we’re growing our customer base. Our dealers are performing really well, and we continue to stay very committed to supporting that business.
Bill Carcache — Wolfe Research — Analyst
That’s very helpful. Thank you. And as a follow-up, could you give a bit more color on how you’re thinking about the stickiness of the deposit growth that you guys have experienced? And then, if you could also discuss your front book and back book pricing dynamics and how those look across both your securities and loan portfolios? Just how do new money yields compared to what’s coming off?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah. We are expecting a large portion of the excess liquidity to stick around for some time, which is why we were comfortable investing some of that into the securities portfolio at the end of the quarter. And we’ll certainly consider doing so in upcoming quarters. So much of the excess liquidity is going to be dependent upon what the Federal Reserve does. What happens with economic activity. So it’s really hard to say where it’s going to go. But I do think it’s fair to say that a pretty good portion of that excess liquidity is likely here to stay for some short- to medium-term, and we would expect some of it to be put to use in the back half of the year.
Regarding your securities question, for the remainder of this year, we do expect for the securities to continue to roll off and pay off at rates that are higher than what we’re putting on the books. So, we will have some continued kind of reduction in the loan yield as each quarter progresses. But as you saw on the chart and on the slide, that decrease in yield is getting smaller each quarter as those yield starts to converge on each other. But we don’t expect that crossover point to occur this year. So, we’ll continue to monitor that and make the right opportunistic purchases for the right structure. But we do think for the remainder of the year, we will continue to see yields roll off that are higher than what we’re putting on.
Bill Carcache — Wolfe Research — Analyst
That’s very helpful. Thank you for taking my questions.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Thank you, Bill.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Ken Usdin with Jefferies.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Ken.
Ken Usdin — Jefferies — Analyst
Hey. Good morning. Thanks. Slide 18 you guys talk about go-forward considerations for the swap and bond portfolio. I’m just wondering, with all of your interest rate sensitivity, how are you thinking about potentially adding to that book and laddering in over time vis-a-vis what you’ve mentioned and starting to do in the securities book itself? Thanks.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah. Yeah. Thanks, Ken. Yeah. And interesting that you mentioned hedging, as well as the securities book. In a sense, we are hedging with securities right now, and we feel like we’re in the fortunate position in that we have an alignment of two different objectives, in a sense, by using securities to hedge. We can reduce assets and sensitivity right now moving some earnings into the current period, while maintaining some upside still. But we think we can do so in a way that efficiently uses the excess liquidity to buy securities that are yielding significantly more than synthetic hedges would. Right now, the hedges would carry about 50 bps of positive carry. The securities were buying about 170 bps of positive carry. And frankly, we’re a little agnostic as to what line item or geography we achieve both that earnings accretion and the reduction in asset sensitivity. So, right now, we see a lot of percentage and using excess liquidity on securities and as that excess liquidity begins to wane, you may see us start to transition to more synthetic approaches.
Ken Usdin — Jefferies — Analyst
Okay. Got it. Thank you. And just a follow-up on the cost side. You’ve been pretty stable. Some plus and minuses underneath the — with the payments cards and pension and whatnot. But you’re talking about flattish from here. Can you just talk about just the puts and takes about incremental expense — sorry, investment dollars versus your points that you make about other controls underneath? I guess, flat, a good outlook as we even look longer-term than just the next few quarters. Thanks.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, Ken. Certainly, to be clear, we do expect to be flat in the second quarter, but I did mention that, even though we hope to self-fund some of our technology expenses, we will expect to see the typical seasonal increases, modest increases in the second half of the year. Also, we do think the economy is going to be in pretty good shape in the second half of the year. And so, we want to make sure we’re in a position to support that. So there will be some modest expense increase in the second half of the year as we support that growth. Certainly, as an example, as card starts to take off throughout the year with additional stimulus that’s just coming to the system, we expect outside processing to step in or step up and we do want to make sure we’re there for the customer. So, there will be some modest expense growth as we move through the latter two quarters of the year.
Beyond that, we’ll have to assess 2022 as we move through this year. As always, we’ve done a pretty good job on expenses, they’re always very front of mind and that’s something that we have a bit of a maniacal emphasis on in terms of making sure we’re challenging every — we challenge every expense. We don’t think there are any big wholesale changes that we’re going to make to our expense structure at this point, but we do challenge expenses as we move through the year and we expect to maintain that very modest to — flat to modest expense growth as we move from year-to-year.
Ken Usdin — Jefferies — Analyst
Okay. Thanks for the color.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Thank you.
Operator
Your next question comes from the line of Steven Alexopoulos with J.P. Morgan.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Steve.
Steven Alexopoulos — J.P. Morgan — Analyst
Hey. Good morning, everybody. Good morning. I like to start, it’s nice to hear that your customers are more optimistic. I’m curious, what are you hearing from your commercial customers in terms of what they plan to do with all of the deposits they are sitting on. And do we need to see those get materially reduced before loan growth resumes?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Hey, Steve, it’s Peter. I think the short answer to that is yes. I think that deposits need to come down some before we start to see that utilization. I didn’t feel strongly about that maybe a quarter or two ago, but it certainly feels like the amount of liquidity in the system is just excessive and sort of restricting the need to borrow money. Now that said, I think that there will be a time where companies are going to be — they’re going to want more cushion. So they’re going to borrow money, but they’re going to maintain deposit. So, I think there is a nice level that we will get to, we hope it’s — as we’ve mentioned in the second half of the year, as we maybe see some liquidity kind of move through the system. So, I think it’s a little bit to be determined on that, but it certainly feels like some utilization of those deposits is going to be needed to really see the borrowing pickup.
Steven Alexopoulos — J.P. Morgan — Analyst
Okay. That’s helpful. And then I know it’s tough to provide a full-year outlook this year as there are so many moving parts. But in terms of loan growth, what’s your best guess, what full-year loan growth looks like? I’m trying to get a better sense of how you guys stack up versus your peers? And there’s quite a few pluses and minuses on your outlook slide.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah. Well, certainly — it’s Jim, Steven. I’ll take that first part of the question, then Peter can add on. It’s really been a bit of a roller coaster year-to-year. So it’s very difficult to look at year-to-year comparisons. Each quarter has had its own story. And certainly, we’re going to see several billion dollars of PPP loans paid down as we move through this year. So, I would probably look at it in the context of just the go-forward outlook. And as you heard me say, we do expect them to be stable in the second quarter, ex-PPP. We’ll certainly be down in total due to PPP loans being prepaid as we move through the second half of the year. But as we mentioned, we do expect solid loan growth in the second half of the year with the ex-PPP portfolio.
So, hopefully that helps. And Peter anything you’d add on to that?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
I think Jim you answered it. And, Steve, we’ve got some businesses that move swing pretty big, Mortgage Banker, Dealer and Energy, we’ve talked about those. But when you look at the rest of our general businesses, I think historically, we’ve grown pretty consistently with those economies. And I think being in the markets that we’re in, gives us a real opportunity to grow with those economies as things come back.
Steven Alexopoulos — J.P. Morgan — Analyst
Okay. That’s helpful. If I could squeeze one last one. And I just want to understand the commentary around spread. I know it’s tough to pinpoint NIM, right? Just given all the liquidity we’re talking about. But if you look at the net interest spread of 2.20% [Phonetic] in the quarter. Is the message you’re giving to us today is that, you expect the spread to continue to decline through 2021?
James J. Herzog — Executive Vice President and Chief Financial Officer
Steven, I’m so hesitant to talk about NIM because we are so volatile on our deposits. I really like to look at it in terms of net interest income, since the cash at the Fed really has no capital consuming characteristics. So, we do expect net interest income to be somewhat stable ex PPP. We will see a little bit of decrease as we move late into ’21 just due to the fact that the — once you lose several billion dollars PPP loans that are yielding around 2%, that’s — it’s unavoidable that that’s going to have some negative impact on net interest income. And that’s very hard to make up. So, I would say, relatively stable ex PPP and then PPP will put some downward pressure late in the year. And hopefully as the economy picks up, you start to replace those PPP loans with real traditional loans and customers start investing for the future.
Steven Alexopoulos — J.P. Morgan — Analyst
Okay. Thanks for all the color.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Thank you.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Thanks, Steve.
Operator
Your next question comes from the line of Brock Vandervliet of UBS.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Brock.
Brock Vandervliet — UBS — Analyst
Good morning. Good morning. Just wanted to circle back on your rate sensitivity. Given the expectations here eventually around rate hikes, can you review your hedging profile, particularly the floors that you have in place or may not have in place? Just to give us a sense of, at the point when rates finally lift on the short end, how quickly do you accrue that benefit?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, Brock, it’s Jim. I’m happy to take that question. Even though we have invested in securities over the last two or three quarters fixed-rate securities, we do continue to be very asset sensitive. That’s why one of the reasons we’re comfortable making those investments in longer duration securities. You’ll see in Slide 18 that we’re actually showing more asset sensitivity than we have traditionally. You see the 100 bps linear, non-parallel shift in rates would produce $156 million of income, that’s higher than we would typically see and one of the reasons for that is all of the excess cash that we have on deposit at the Fed.
Now, as the economy continues to progress, you expect two things to happen in coordination with each other, you would expect to see rates rise, which is the genesis of your question. But typically that would be accompanied by improving economic conditions, which will probably result in either of the Fed trying up some of that liquidity or customers putting that cash to use. So, I would expect to see that $156 million sensitivity marker that you see on Page 18 starts to come down a little bit as we invest in more securities, and as excess cash comes down to the Fed. But having said that, there is no doubt that we are going to benefit significantly if rates do go up.
Brock Vandervliet — UBS — Analyst
Okay. And just to put a finer point on that, some of your peers are quick to call out caveats that the benefit wouldn’t immediately accrue. It sounds like this is a different situation here where the benefit is pretty direct drive?
James J. Herzog — Executive Vice President and Chief Financial Officer
Well, the benefit was certainly immediately accrue if rates went up. There is — and probably more so for Comerica than peer banks, just given the very significant asset sensitive book we have and the LIBOR-based characteristics we have. Now, we do have significant loan floors in place and they are given us significant lift but even with that we maintain quite a bit of asset sensitivity. So, we would certainly benefit right away.
Brock Vandervliet — UBS — Analyst
Okay. Great. Thanks for the question.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thanks, Brock.
Operator
Your next question comes from the line of Gary Tenner with D.A. Davidson.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Gary.
Gary Tenner — D.A. Davidson & Co. — Analyst
Thanks. Good morning. My question has largely been asked, but just for kind of modeling purposes. In terms of PPP fees yet to be recognized, could you update where those stand after the second round and the first quarter forgiveness?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah. Gary, the PPPs to be recognized, it remains to be seen how much of them are recognized through typical amortization. The longer these loans stay on the books, the more we’re going to see amortized through time. Obviously, the quicker they’re forgiven, the more we get accelerated fees, likely all one-time. Currently, in terms of fees outstanding, we have — between the two rounds about $76 million of fees on the book right now. In terms of how that might play out, we’re going to recognize a fair amount of that throughout this year is just amortization as part of that 2% that we’re getting on PPP loans. We’ll get obviously some of it next year for those loans to stay on the books.
But just to give you a feel for how this year might progress and what you might see in terms of earnings impact, the accelerated fees, if you look at those just in a vacuum, we had about $12 million of accelerated fees in Q1 and that’s compared to $5 million in Q4 of ’20. So we did have a $7 million increase. It’s very unpredictable as to how this might play out, but in some of the guidance that we’ve offered you in the script, we would expect that $12 million of accelerated fees to be somewhat stable in the second quarter. We would expect it to be higher in the third quarter, it could be 50% higher, it could be double, remains to be seen. And then we would see it kind of come back to the first and second quarter level in the fourth quarter. So those are the types of blips you might see in our net interest income quarter-to-quarter related to accelerated PPP fees.
Now, if you take that and you join it to some gradual rundown of the loans that are on the books right now, essentially, the $3.5 billion that are on the books and you assume that runs down at a typical 2% rate, you put those together and it gives you a feel for what PPP is going to do to net interest income as we move from quarter-to-quarter.
Gary Tenner — D.A. Davidson & Co. — Analyst
Great. I appreciate the color. Just to be clear though, I thought in your prepared remarks, you’ve noted that you expected the bulk, I think, you said the PPP loans to be forgiven by the end of this year. So, most of that — most of those fees should be recognized as revenue this year.
James J. Herzog — Executive Vice President and Chief Financial Officer
That’s right. We would expect 5% to 10%, 5% to 15% to be on the books still at year-end, that remains to be seen. But the vast majority should be gone by the end of the year.
Gary Tenner — D.A. Davidson & Co. — Analyst
Great. Thank you.
Operator
Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Good morning, Jon.
Jon Arfstrom — RBC Capital Markets — Analyst
Thanks. Good morning. Peter, maybe a question for you. You talked about the increasing pipeline. Can you talk about the magnitude of that change in the pipelines and maybe how different it was than a quarter ago?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Yeah, Jon. Sure. So, a quarter ago we were sort of using pre — back to pre-pandemic levels. I think the language that you’re sort of hearing now is that, it’s above pre-pandemic levels. So, we feel like the pipeline is about as good as I can really frankly remember of being in this role for the last few years. And so, it’s encouraging. I would say, it is — has exceeded sort of where we thought we would be at this point. Now, again, seeing all that come to fruition, we still got a lot of work to do, but it certainly feels like we have gone above pre-pandemic levels versus last quarter. I think I was kind of using terminology of being at back to pre-pandemic levels, if that gives you an idea of it, so.
Jon Arfstrom — RBC Capital Markets — Analyst
Yeah. Okay. And then maybe to tie that in to the deposit question we keep asking, but you’re talking about deposits beginning to wane as customers put cash to use and I think all we see from a high level is just the big deposit growth. Are you seeing evidence — maybe early evidence of some clients starting to do that, starting to take their cash balances down for business activity? Or is it — there is — that’s just not the case yet?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Jon, I would say, little evidence. Circumstantial, maybe even. So, I can’t say that we’re seeing hard evidence of that occurring just yet. Now, again, we feel like the activity will lead to that sort of use of cash, but I can’t say that we’re seeing a whole lot of hard evidence that that is occurring.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. And then maybe one, Melinda, on the reserves and you’re talking about eventually heading back to the pre-pandemic levels. Is this — is the message here it’s a glide path to pre-pandemic levels or is the message that if the economy continues to mend, we’re going to — we could get another acute — more acute step down in the reserve levels?
Melinda A. Chausse — Executive Vice President and Chief Credit Officer
Thanks for the question. Yes. I think that, obviously, given the performance of the portfolio, which has been, it really exceeded our expectations and is far better than what I think anybody could have expected kind of coming into the pandemic. Assuming that there is no negative migration, which again, we don’t see anything in the portfolio right now that would lead us to believe that, and then the economic forecast remains positive to improving, we’re going to continue to see reserves come down close to that or around that pre-pandemic level. I mean, CECL is a very complex accounting exercise. So it’s very difficult to peg a percentage or a number that it’s going to get to. But we feel very, very confident that we’ll be moving in the direction of pre-pandemic levels throughout the remainder of this year.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. And I know I accept in respect what you said, it’s complicated, but pre-pandemic levels would be — if we look at 2019, that’s a good baseline for pre-pandemic. It seems like a simple question, but is that the way you think about it?
Melinda A. Chausse — Executive Vice President and Chief Credit Officer
Yeah. Our day one CECL was about 1.26, 1.3. So that would be a good number to sort of have in mind.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. Thank you.
Operator
We have no further questions at this time. I will turn the call back over to Curt Farmer for any closing remarks.
Curtis C. Farmer — Chairman, President and Chief Executive Officer Comerica Incorporated and Comerica Bank
Let me just close by saying again that we are very encouraged by recent health metrics and economic trends and I just remain very proud of our team and how we’ve managed through this challenging environment. As always, we are very appreciative of your ongoing interest in our Company. Have a good day. Thank you.
Operator
[Operator Closing Remarks]