Comerica Incorporated (NYSE: CMA) Q2 2022 earnings call dated Jul. 20, 2022
Corporate Participants:
Darlene P. Persons — Director of Investor Relations
Curtis C. Farmer — Chairman, President and Chief Executive Officer
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:
Scott Siefers — Piper Sandler — Analyst
Jon Arfstrom — RBC Capital — Analyst
Steve Alexopoulos — J.P.Morgan — Analyst
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Ken Usdin — Jefferies — Analyst
Christopher McGratty — KBW — Analyst
John Pancari — Evercore ISI — Analyst
Jennifer Demba — Truist Securities — Analyst
Gary Tenner — D.A. Davidson — Analyst
Steve Moss — B. Riley Securities — Analyst
Presentation:
Operator
Hello, and thank you for standing by. Welcome to the Comerica Second Quarter 2022 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Please go ahead.
Darlene P. Persons — Director of Investor Relations
Thanks, Toni. Good morning, everyone, and welcome to Comerica’s second quarter 2022 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 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 should 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 on Slide 2, which is incorporated 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
Thank you, Darlene. And good morning, everyone, and thank you for joining our call. Today, we reported first quarter earnings of $261 million or $1.92 per share, an increase of 40% over the first quarter. Pretax pre-provision net revenue was up 53%, and our ROE increased to 17%. These results reflect the rising rate environment, including prudent actions we have taken to lock in higher rates. In addition, we produced strong loan growth and generated a solid increase in fee income. While the overall economic environment is uncertain, overall our customers are generally optimistic about the future. And while they may be seeing some pressure on their margins, they remain in good shape.
As I discussed on our last earnings call, we kicked off several initiatives related to modernization as we continue to evolve and adapt to meet the changing landscape and move into a new era of banking. We believe that our branded entity should also reflect this change. Therefore, we recently unveiled a refreshed corporate logo that represents our commitment to both our 173-year legacy and our vision for the future. Also last month, we announced actions taken as part of our retail bank transformation, which included adding small business bankers in strategic locations, updating our web and mobile banking platforms and expanding our interactive teller machine network. In addition, we are consolidating ’22, or 5% of our banking centers, which is expected to be completed by the end of the third quarter.
We have continued to work on other initiatives around optimizing our facilities. The goal is to better accommodate flexible work arrangements and reduce our footprint, while maximizing locations that best serve our customers. In addition, as we progress on our cloud journey and decommission data centers, our technology facilities are being consolidated. We are excited about the progress we have made and the path we are laying for our future.
As far as our progress in the ESG area, I encourage you to review our 14th annual corporate responsibility related report, which was recently published. In the second quarter, our green loans and commitments continued to grow and totaled $2 billion at quarter end. Once again, our commitment to corporate responsibility has been recognized with honors from the National Diversity Council as one of the 50 most community-minded companies in the U.S. Also, we appointed a National Hispanic Business Development Manager to further support our commitment to strengthening relationships with Hispanic business leaders, entrepreneurs and communities. And finally, we’ve established Renewable Energy Solutions group.
Turning now to highlights of our second quarter results outlined on Slide 4. Second quarter loan growth was one of the highest in our history, with increases in nearly every business line. The biggest drivers were general middle market, large corporate, equity fund services as well as modest growth in National Dealer Services. In general, customers are rebuilding inventory levels, which has resulted in increasing working capital needs, while caprx spending remains relatively slow.
We are strategically managing deposits and customers are putting their excess liquidity to work, which resulted in a decline. Net interest income benefited from higher rates as well as growth of our loan and hedging portfolios. Credit quality remained excellent, and fee income increased 10%, led by syndication, derivative and warrant activities. Expenses were driven by investments we are making to support growth and performance-related compensation. Higher revenue combined with solid expense management resulted in a significant improvement in our efficiency ratio to 58%. Overall, a strong quarter, and we feel positive about the path we are on as we move through the remainder of the year.
And now I will turn the call over to Jim, who will review the quarter in more detail.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thanks, Curt, and good morning, everyone. Turning to Slide 5. As Curt just mentioned, loan growth was very robust, increasing $1.8 billion, driven by favorable environmental factors as well as our relationship-focused approach. As of quarter end, loan commitments were up $2 billion or 4%, and the line utilization rate held steady at about 46%. National Dealer services loans increased over $400 million. This included a $200 million increase in floor plan loans to $840 million. However, these balances remain well below our typical run rate of about $4 billion. We expect it will take some time for inventory levels to rebuild as supply issues are resolved and pent-up demand is satisfied. General middle-market average loans were up over 3% and large corporate grew 7%.
Borrowing needs are being driven by higher material prices and inventory levels as well as M&A and to a lesser extent, capex. We continue to have great success in our equity fund services business, where we provide capital call and subscription lines to venture capital and private equity firms. Of note, mortgage Banker increased about $125 million. While home sales were seasonally higher, volumes remain depressed due to higher rates, lack of housing inventory and shorter dwell times. We expect third quarter mortgage banker loans to be stable. Commercial real estate loans decreased. However, production remained strong and loan commitments were up. We expect moderate loan growth in commercial real estate as projects fund through the year. Loan yields increased 42 basis points, primarily reflecting the benefit from higher rates.
As shown on Slide 6, on a year-over-year basis, average deposits were up $2.1 billion. Relative to the first quarter, deposits declined as customers continue to put their excess liquidity to work, and we prudently manage pricing as it relates to non-relationship-based deposits in highly rate-sensitive segments. Approximately half of the decrease occurred in our municipalities and financial institutions businesses, which fall under general middle market. Notably, retail and wealth management deposits increased. The average cost of our interest-bearing deposits remained at an all-time low of 5 basis points.
We continue to monetize our asset sensitivity as rates increased by growing our securities portfolio. Average balances increased $1.7 billion, as shown on Slide 7. During the second quarter, we repurchased $3.5 billion in MBS with average yields of 350 basis points, and we had repayments of $650 million. As we continue to execute our balance sheet hedging strategy, we will likely pivot towards swaps given the relative size of our securities book and the desire to maintain adequate cash to fund loan growth.
The larger portfolio, along with the favorable new purchase yields resulted in a $23 million increase in securities income. Holding balances in rate steady at June 30th levels third quarter securities revenue would increase about $16 million. The rise in rates resulted in a mark-to-market impact on our securities portfolio of $850 million, which runs through OCI and affects our book value, but not our regulatory capital ratios. While we maintain the portfolio as available for sale, mostly for liquidity purposes, we typically hold these securities to maturity, in which case the unrealized losses should be recouped.
Net interest income increased $105 million and the net interest margin increased 55 basis points. The benefit from higher rates lifted loan income $52 million and added 26 basis points to the margin. Loan growth added $15 million and 3 basis points. One additional day in the quarter provided $4 million. And as I mentioned, the increase in the size of our securities portfolio at higher yields added $23 million. Higher rates on deposits at the Fed added $29 million, which was partly offset by lower balances and together added 26 basis points to the margin. Higher rates on our floating rate wholesale debt had a $3 million impact. Altogether, the rise in rates provided a net benefit of $82 million to net interest income.
Credit quality remained excellent as outlined on Slide 9, including no net charge-offs. Criticized loans decreased to a record low level and non-accrual loans declined as well. Overall, our customers have continued to perform well, and they maintain strong balance sheets despite supply chain issues, labor constraints and inflationary challenges. Strong credit metrics, loan growth and a somewhat weaker economic forecast resulted in a relatively stable allowance for credit losses at 1.18% of loans and a provision of only $10 million. As always, we are closely monitoring the portfolio for signs of stress. Nevertheless, with our consistent disciplined approach to credit, as well as our relationship-based diverse portfolio, we believe we are well positioned to manage through a recessionary environment.
Non-interest income increased $24 million or 10% as outlined on Slide 10. Syndication activity was strong and increased from a seasonally low first quarter, resulting in an $8 million increase in commercial lending fees. Warrant-related income also increased $8 million. Derivative income increased $7 million, including $5 million of favorable credit valuation adjustments, along with increased interest rate derivative activity. Fiduciary income increased $4 million, mainly due to annual tax-related fees. Deposit service charges increased with a pickup in activity relative to a slow first quarter. Finally, deferred comp, which is offset in expenses, decreased $7 million to a total negative return of $14 million for the quarter. Of note, relative to the second quarter last year, deferred comp decreased $20 million and card fees declined $15 million due to last year’s stimulus-related activity.
Turning to expenses on Slide 11. Our efficiency ratio improved 9 percentage points to 58% as we continue to maintain our expense discipline as revenue generation accelerates and we position for future growth. Salaries and benefits increased $5 million with a number of moving pieces. Performance-based incentives tied to our strong financial results increased $17 million. Annual merit, higher staff insurance and technology-related contract labor each added $4 million. This was partly offset by the resetting of annual stock comp and payroll taxes, which impacted the first quarter.
Finally, as I mentioned on the previous slide, deferred comp asset returns decreased $7 million. Of note, our staff levels were stable as we are successfully retaining and attracting talent in a very competitive market. Certain technology-related costs such as software equipment and consulting increased $8 million. Litigation-related legal costs were higher and the increase in occupancy includes our branch consolidation activity. Operational losses decreased from the elevated first quarter level and we received a $4 million state tax refund. We are experiencing some inflationary pressure, particularly in salaries, travel and entertainment and insurance. By leveraging technology investments to increase productivity, we have been working hard to offset this headwind.
As Curt described, we continue to make progress on certain modernization initiatives which totaled $7 million in the second quarter. This is a journey which includes transformation of our retail banking delivery model, alignment of corporate facilities and technology optimization. The cost savings generated are expected to be reinvested as we continue to evolve.
Slide 12 provides details on capital management. Loans and securities portfolio growth resulted in a decrease in our CET1 ratio to an estimated 9.72%. We continue to closely monitor loan trends and we expect to move closer to the targeted CET1 ratio over the near term through capital generated from strong earnings retention. As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to shareholders. Our common equity declined in the second quarter as a result of the impact of OCI losses from our securities and swap portfolios. Excluding the OCI losses, our common equity per share increased to $1.35.
Slide 13 provides an update on our interest rate sensitivity. The bulk of our loans are floating rate and the majority of our deposits were non-interest-bearing. Therefore, as demonstrated in the second quarter, our balance sheet reacts very quickly to changes in interest rates. In order to provide a more sustainable earnings stream through the rate cycles, we have been adding hedges to lock in market expectations for future short-term rates, while, importantly, reducing the downside impact of a potential decline in short rates overtime.
To provide an outlook for net interest income, we used the forward curve as of June 30th, as well as expectations for loan and deposit activity for the remainder of the year. A slightly steeper curve and added hedges have provided incremental revenue relative to the previous outlook. We now expect 2022 net interest income to increase by approximately 31% relative to 2021, an increase to about 21% in the third quarter relative to the second quarter. Of course, there are many dynamics that may cause results to differ, specifically the pace of changes in short-term rates, deposit betas and loan activity.
Our outlook for 2022 is on Slide 14 and assumes a continuation of the current economic environment. Given the robust broad-based loan growth we’ve generated so far this year, we are increasing our expectation for average loans to grow 6% to 7% year-over-year excluding PPP loans. Relative to the second quarter, we expect average loans to grow 1% to 2% per quarter. In the first half of the year, in certain areas like middle market, for example, we saw increased utilization as customers work to rebuild their inventory. In the second half of the year, we expect that trend to stabilize.
Consistent with customers’ increased borrowing needs, we expect they will continue to draw down deposits. Also, the impact of the Fed’s tightening is expected to be partly offset by our typical fourth quarter seasonality. As far as rates, we are closely monitoring the environment and staying close to our customers. We expect increased deposit rates in the second half of the year and start moving towards our historical beta as interest rates continue to increase. Net interest income expectations were reviewed on the previous slide.
Credit quality is expected to remain strong. Assuming that the macroeconomic challenges continue to remain manageable, we expect criticized and non-accrual loans to remain low and net charge-offs could begin to trend to the lower end of our normal range of 20 basis points to 40 basis points. We believe our reserves are appropriate for the current and expected environment. Non-interest income is expected to decline 6% to 7% on a year-over-year basis. Recall that 2021 was the highest on record and included elevated levels of warrants, derivatives, stimulus-related card fees and deferred compensation. We expect third and fourth quarter levels to be consistent with the second quarter.
Following strong activity in the second quarter, we expect some pressure on commercial lending fees, derivatives and fiduciary. This may be offset by deferred comp, which is difficult to predict, therefore we assume will not repeat. We expect expenses to increase 4% to 5% year-over-year, excluding any notable expenses related to our modernization program. This year-over-year increase is primarily due to higher performance-based compensation, annual merit, technology investments and inflationary pressures.
Relative to the first half of the year, the second half is expected to increase 5% to 6%, excluding modernization-related expenses. The increase is driven by annual merit, higher staff insurance, advertising, business investment and outside processing expense, partly offset by lower performance-based comp and deferred comp. Excluding the $21 million benefit from deferred comp in the first half, which is not expected to repeat, expenses are expected to be up 3% to 4% in the second half of the year. We expect the tax rate to be 22% to 23% excluding discrete items. And finally, as I indicated on the previous slide, we are focused on our CET1 target of 10% as we monitor loan growth trends.
In summary, our outlook for the full year has improved with the benefit of higher rates, including the execution of our hedging strategy, more robust loan and fee income generation, partly offset by higher expenses in conjunction with growing revenue and our strong financial performance.
Now I’ll turn the call back to Curt.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Thank you, Jim. Many business lines continue to show good momentum with very strong loan growth and increases in commitments in our pipeline. Our unique expertise in many areas as well as our geographic footprint offers significant opportunities. Credit quality remains excellent, a testament to our strong credit culture. Our expense discipline was evident as we continue to invest to provide a high-caliber customer and colleague experience. Our balance sheet structure has quickly produced benefits from rising rates and we expect to continue to appropriately add hedges with the goal of providing a more consistent earnings performance through the cycles.
It was a strong quarter, and I am very grateful for the dedication of my colleagues who work hard every day to ensure Comerica’s success. We believe we are well positioned to continue to produce strong results as we move through the remainder of the year.
Thank you for your time, and now we’d be happy to take your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question will come from the line of Scott Siefers with Piper Sandler. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, Scott.
Scott Siefers — Piper Sandler — Analyst
Hey, thank you for the question. Just wanted to discuss the NII trajectory a bit. So I think the guide sort of parsing between the full year and the third quarter would imply it reach a fourth quarter ’22 NII of about $720 million or so. So is that a sustainable level? And I guess, more broadly, the question is, can you just sort of describe in layman’s terms how your NII will react once it reaches its peak and what exactly happens to the margin this time around when rates either stabilize at a higher level or begin to come back down?
James J. Herzog — Executive Vice President and Chief Financial Officer
Great, Scott. Good morning. Thanks for the question. Yeah, your math is correct. It would imply, assuming the June 30th forward curve holds, say, fourth quarter net interest income of $720 million. I think that’s a pretty good jumping off point for 2023. Of course, we’re not offering ’23 guidance at this time, but there are some puts and takes there. We do not realize the full impact of the December and November hikes in the fourth quarter. On the other hand, deposit betas do lag, and you could see some upward pressure there once we get beyond the fourth quarter. And so with that said, I think it’s a pretty good jumping off point in the fourth quarter. Of course, we’ll have loan volume increases and other balance sheet movement, but it does position us very well for 2023.
In terms of how we react to interest rate changes, our goal all along has been to reduce the asset sensitivity to the point where we can produce a very high level of net interest income. And I will note that $720 million, if the forward curve is realized is by far and away the highest net interest income we’ve ever earned for a quarter. So I think we will have achieved our goal — we left enough asset sensitivity to achieve record levels. Yet, at the same time, we’re protecting that net interest income. And to answer your question more directly, our goal once we enter 2023 is to have our asset sensitivity to the downside at a low single-digit percentage. So that would imply that our short-term rates do drop, we should be largely protected. Now overtime, you will have swap securities roll off and rolling back on. So there will be a little bit of up or down depending on what happens to the long end of the curve. But we think we’re very well positioned for 2023.
Scott Siefers — Piper Sandler — Analyst
All right. That’s perfect. Thank you. And then I just wanted to ask on deposit costs, so the 5 basis points of deposit cost is just terrific. You noted betas will start to ramp up in the second half year. Just curious sort of broadly how you balance pressures on costs with a desire to ultimately hold certain balances?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, Scott, we are paying very close attention to deposit costs. We’re staying extremely close to our customers. Those conversations are going on daily. We don’t clearly see those costs rise in the second half of the year. There is a little bit of a lag typically between when those discussions happen and when they’re fully realized. So I’ve heard in some other earnings calls in terms of when the role pivot point is. And frankly, I don’t think you can ever point any one Fed hike when these hikes are so close to each other. But we will certainly start seeing us move towards, not just our standard betas in the third quarter, but by the end of the year, we’ll probably be approaching our standard beta for the accumulated standard beta that we published also. But those conversations will go on and I’ll just stress that it’s a very relationship-based model here. So it’s based on the full relationship with the customer. It’s based on those conversations. And we feel like we’re in very good communication with the customers and feel good about our positioning there.
Scott Siefers — Piper Sandler — Analyst
Perfect. All right. Thank you, guys, very much.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of John Arfstrom with RBC Capital. Please go ahead.
Jon Arfstrom — RBC Capital — Analyst
Thanks, good morning.
James J. Herzog — Executive Vice President and Chief Financial Officer
Good morning, Jon.
Jon Arfstrom — RBC Capital — Analyst
Can you help us understand what you’re seeing and hearing from borrowers in terms of the economic outlook? We’re all on recession watch, and I guess I’d love to hear your views? And maybe for you, Melinda, can you just touch on what kind of an economic outlook, your 118 [Phonetic] reserve level reflects?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Jon, this is Peter. I’ll go first on customers and then, Melinda, you can talk about the economic outlook. But I think recession watch that you used there, that’s not unique to you or all of us. Our customers are probably in the same boat. That said, I think that they are doing really well. Our pipeline is strong. Our activity levels are good. So it’s hard to see sort of immediate concerns. I think a lot of the concerns that we hear are a lot — are further out. They don’t feel like ’22 concerns, but obviously, inflation, interest rates, all the things that we’re dealing with. But the outlook, we said generally optimistic. We still feel that way. We’re encouraged about what we’re seeing. It does depend a little bit on geography, and it does depend a little bit on line of business. But overall, we feel like our sentiment of our customers is still pretty good at this time.
Melinda, do you want to comment on the…
Melinda A. Chausse — Executive Vice President and Chief Credit Officer
Yeah. Jon, thanks for the question. So as you know, we use a variety of third-party forecasts and the Q2 economic forecast, although it was still positive, did show some deterioration from the first quarter with weaker growth, higher likelihood of recession and a higher — much higher degree of uncertainty. So our baseline forecast, I would say, was slightly worse than our Q1 forecast. We also use a severe recessionary scenario stress, certain parts of our portfolio, and this is really used to inform the qualitative component. And those qualitatives continue to comprise a meaningful component of the total reserve. So we feel really good about our reserve levels at this point. We believe that they are appropriately conservative for the economic environment, including kind of the near-term uncertainty.
Jon Arfstrom — RBC Capital — Analyst
Okay. So the general message on provision would be growth plus charge-offs, and that’s generally adequate in your view at this point?
Melinda A. Chausse — Executive Vice President and Chief Credit Officer
Yeah, assuming the economic forecast remains sort of stable and the portfolio metrics don’t change to the downside, the reserve build will tend to tie pretty closely to loan growth. And then obviously, if the economic forecast worsens, then we’ll see reserve builds. But as you know, this is a complex process that we go through each quarter and it would be pretty impossible to guestimate what that would actually be.
Jon Arfstrom — RBC Capital — Analyst
Yeah, okay. All right. Thank you. Its very helpful.
Melinda A. Chausse — Executive Vice President and Chief Credit Officer
Welcome.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thanks, Jon.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Thank you. Our next question comes from the line of Steve Alexopoulos with J.P.Morgan. Please go ahead.
Steve Alexopoulos — J.P.Morgan — Analyst
Hey, good morning, everyone. So first, to drill down on deposits. Historically speaking, companies drawing down on deposits to fund business investment was a good thing, but we also have companies now drawing down to earn a higher yield. Curious, when you guys look at the $42 billion of noninterest-bearing, how much of that do you see that could be a risk of outflows?
James J. Herzog — Executive Vice President and Chief Financial Officer
Hey, Steve. Good morning. If you look at where we were pre-pandemic, our mix of noninterest-bearing deposits was just under 50%. I think it was 48% to 49%. You see that we’re closer to 55% this quarter. I think that might be a good proxy for where we could end up if rates go up to where the fore curve is predicting right now. So it’s going to be a little bit dependent on ECA rates and other levers we pull to either keep customers on or off the balance sheet. But I think that would be a pretty good proxy.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Jim, Steve, I might add. This is Peter. I mean a lot of our deposits that are going to be rate driven that are going to be in our bigger businesses, you might say. So call it, U.S. banking, our business deposit services businesses where they’re moving higher deposits, but we have relationships, but it’s not — we don’t have like all the treasury management. We don’t have all the relationships. So there’re deposits that are going to move for rate, but we can negotiate that if we need to. We can be more aggressive if we need to. But I mean, we feel like we can have conversations and handle that appropriately.
Steve Alexopoulos — J.P.Morgan — Analyst
Okay. Actually to follow up on that. So if we think through this, right, the Fed actions are going to have an outsized impact on deposit markets. How do you see that playing out into the business? And do you think that you might continue to see deposit runoff in 2023, right? Could this just continue through next year?
James J. Herzog — Executive Vice President and Chief Financial Officer
I think we will see the bulk of it likely in that fourth quarter of ’22 to first quarter 23% range, at least that’s our forecast right now. Predicting deposits is always a little bit challenging, not just pricing can lag a little bit, but sometimes customer reaction can lag a little bit too. Having said that, these outsized changes by the Fed do put the antenna up on some customers. So maybe we won’t see quite the same lag we’ve seen in the past. But I do think it’s kind of in that crossover range of fourth quarter to first quarter. But having said that, you’ll recall earlier from my opening comments, we usually get seasonality in the fourth quarter. So may not be apparent when you see the fourth quarter results, it would probably manifest more in the first quarter. But I would expect most of that to shake out by the first quarter of ’23.
Steve Alexopoulos — J.P.Morgan — Analyst
Okay. That’s helpful. If I could squeeze one more and going back to Jon’s question on customer sentiment. When I look at line utilization — not line utilization, but commitments increasing, it could be a sign that customers are more optimistic or it could be a sign that they’re more cautious on recession coming. Are you guys really convinced that what you’re seeing is because of optimism in their business and not just companies historically want to get more credit before a recession comes? Thanks.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Steve, again, it’s Peter. Yeah, I would say that, that is true. We don’t really see this as defensive asks or recession concerns, certainly nothing like what we saw when the pandemic started and we saw tremendous asks for recession lines of credit insurance. That’s not what we’re seeing right now. We’re seeing business reason asks for all those things that Jim and Curt outlined of working capital needs, everything costs more money. There’s good M&A opportunities for some of these companies. Now it’s all pretty legitimate business needs. And at this time, it doesn’t appear to be or we’re not seeing indications of it being recession preparation sort of asks.
Steve Alexopoulos — J.P.Morgan — Analyst
Thanks for all the color. I appreciate it.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Yeah.
Operator
Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
James J. Herzog — Executive Vice President and Chief Financial Officer
Good morning, Ebrahim.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
I guess just one, Jim, to follow up on Scott’s initial question around NII. And just — I want to make sure we understand your comments correctly. In a world where the Fed stops hiking by the end of the year potentially gets to cutting interest rates at some point in ’23, do you expect NII in that backdrop to stabilize compared to, I’m looking back to ’19 when NII peaked the same quarter when the Fed stopped hiking. I’m just wanting to make sure the impact of your swaps essentially implies that, that 720-plus kind of NII will still hold for the foreseeable future until some of the swaps roll off, which is in the out years?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, Ebrahim. We feel we are much, much better positioned. If rates were to drop in ’23 than we were in ’19, we were somewhat exposed there and had not finished the hedging program. We feel much better about holding on to the higher levels of net interest income this time around. And as I mentioned, the goal by the end of the year is to get down to the single-digit percent of net interest income at risk for a gradual 100 bps hike or 50 bps on average. So we should hold on to most of that income as we move into ’23.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Jim, I’ll just add. With some puts and takes around where deposit betas might go and what loan growth does in 2023.
James J. Herzog — Executive Vice President and Chief Financial Officer
That’s right. Yeah, certainly some ins and outs there. As I mentioned, the full impact of November, December hike has been factored into that fourth quarter guidance. Loan volume is not factored in, but deposit betas made lag into the year. So definitely is some moving parts going in different directions. But I mean the whole goal along Ebrahim, as you know, and you’ve heard us say, is to protect ourselves — better protect yourselves from a drop in rates. So that’s what we’ve been working on and we’re largely successful up to this point, and we plan on being done with the overall program by the end of the year.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Sure. And I’m sorry if I missed this. Did you mention, Jim, what’s the deposit beta you’re assuming by the end of the year?
James J. Herzog — Executive Vice President and Chief Financial Officer
Well, we typically think about a 30% standard beta. I do think that we will through the third quarter be approaching that with hikes and probably go a little past for individual hikes by the end of the year. I don’t know that the accumulated standard beta will be fully reflected in the fourth quarter results just because of the lag and the full quarter effect. I mean it could be. But at this point, I think it’s more likely to be early the first quarter of ’23. But we’ll see how market forces react and respond and how we work with our customers.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. And if I could, one on the lending side. I think you mentioned dealer finance close to $840 million versus $4 billion pre-pandemic. I mean; one, I’m assuming inventory build for cars will help that. But do you think that business may have structurally changed where we never get to that $4 billion? Would love to hear your thoughts in terms of what you’re hearing from your clients?
And second, I think the other thing that you mentioned, I think, Curt, was you’re not seeing a high degree of capex spend driving demand. Just give us a sense of what’s holding back customers around capex? We’ve heard some of your peers talk about actually capex contributing to growth. So would love any perspective on both those.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Ebrahim, it’s Peter. So on dealer — the question you asked was about whether or not we’ll ever get back to the $4 billion levels. And that’s a question the industry in general is dealing with. What do days inventory look like on the other side of this cycle that we’re in. And I don’t know that there’s a clear answer to it. As of right now, we still see really low inventory levels on dealer lots. Our floorplan usage is still really, really low compared to historical levels. And whether it gets back to the $4 billion is to be determined. We believe and I think when you talk to a lot of customers that it’s probably somewhere in the middle. I don’t think you’re going to see 90 days of inventory, but I don’t think you’re going to see 10 days either. It’s probably 50 to 60. But at the same time, different OEMs are communicating different things to the dealers and so we’ll just kind of see what that looks like on a go-forward basis.
As far as the capex, I don’t want to suggest to you that there’s no capex going on. I think that most of our customer base, though is being as we have said, recession watch, making sure that they don’t do something that stretches themselves too much. So we are seeing a little bit of capex, but it’s not probably the main driver of the borrowings that we have mentioned. So you do see some of it. I think that it’s all been very prudent and we make sure to talk to our customers about what sort of investments they’re wanting to make and understand those. And so far we’re seeing really good decisions.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. Thanks, Peter, and thanks for taking my questions.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Yeah.
Operator
Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.
James J. Herzog — Executive Vice President and Chief Financial Officer
Hey, good morning, Ken.
Ken Usdin — Jefferies — Analyst
Hey, thanks good morning, guys. Just on the cost side, I know you’re recalibrating in the second half versus the first and that deferred comp is a part of it. But I was just wondering with the inflationary environment, just can you talk through the types of pressures you’re seeing there built into that? And then how you think about that translates as you look further ahead relative to all the points that have been made about the NII strength in terms of operating leverage and how much of that incremental NII falls to the bottom line as we look further out?
James J. Herzog — Executive Vice President and Chief Financial Officer
Hey, good morning, Ken. Thanks for the question. We are seeing some inflationary pressures. We’re seeing it certainly on the salary side in terms of attraction and retention of talent. We think we’re doing a really good job of calibrating that and hitting the right balance. We’re seeing it a little bit — as contracts renew, there’s a bit of a lag effect there. So I think that will probably stick with us over the next year since contracts obviously don’t renew on a frequent basis. T&E, we’re seeing it, as I mentioned. I think anyone that’s even personally traveled have seeing that. Insurance, the insurance market has been hit a little bit hard. That’s probably for factors in addition to inflation. But it is going to put some pressure. I mentioned earlier this year that I thought overall on a full year basis it would perhaps add 1% to the overall expense base. And I think we’re probably looking at least — probably about 1% for the second half of the year alone in terms of pressure and we’ll probably see that continue a little bit next year.
In terms of operating leverage, that’s always our goal to achieve positive operating leverage. We obviously did it this quarter. The goal is to do it going forward now that we’re stabilizing net interest income. Having said that, we’re not prepared to offer guidance on ’23 yet, but that is always the goal to generate positive operating leverage.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
So Jim, I might just add from a bigger picture perspective, I mean, we are managing the business for the long-term and we’re taking advantage of the current rate environment to make sure that we’re appropriately balancing expenses versus revenue growth and find ways to be relevant from a revenue perspective on a go-forward basis. So we’ve had eight consecutive quarters of double-digit ROE, 17% this quarter or 58% efficiency ratio. And so continuing to invest in technology and digital will be relevant there to our customers and to our colleagues. We’ve made some geographic expansions into the Southeast and as well as into the Denver and Fort of Mountain Central region. We’ve been adding some capacity in terms of RMs and advisers in our commercial and wealth management business. We talked about the new renewable energy group. So there’s some things we’re doing to continue to add capacity as we sort of go forward and sort of take advantage of this higher rate environment. But we’ve done a good job historically at managing expenses. Certainly, if the environment changes, we know how to manage expenses appropriately, but sort of balancing the two is really important for us taking the longer term — longer-term view.
Ken Usdin — Jefferies — Analyst
Got it. Appreciate that. And just one follow-up question on the loan side. Almost all of the specialty businesses showed good direction and I think that might have been a little surprising, especially with what’s going on in dealer mortgage, equity fund services. Can you just kind of flesh out, as you expect the loan growth to continue, how do some of those — how do you expect some of those to act on your — are you seeing just better underlying trends in some of the supply constraint related areas? Thanks.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Yeah, Ken, it was a great quarter with all of our businesses kind of moving in the right direction. The only one that we didn’t really see was commercial real estate. But as we mentioned, we booked a ton of business and we expect that to continue. So the outlook for all of them continues to be pretty positive, as I think we’ve said, maybe not in the second half of the year what we’ve seen in the first half, but it does feel positive.
I think mortgage bankers probably going to be flat to maybe down into the fourth quarter. We’re just — we haven’t seen the type of activity as everybody knows, with interest rates, housing inventory, affordability. I think that business will probably stay a little flat. But the rest of the businesses have got really good pipelines, really good outlooks, and we feel good about it. So it was nice for it to all be moving in the same direction this quarter. And we’re encouraged that we would see that again this next quarter.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you, Ken.
Operator
Thank you. Our next question will come from the line of Christopher McGratty with KBW. Please go ahead.
Christopher McGratty — KBW — Analyst
Great. Good morning. I want to start with just the earning asset aspect of the equation. A lot of discussion on deposits. Can you help us with kind of targeted or minimum cash levels given the liquidity that’s being removed from the system? And also, I think you touched upon it in your prepared remarks, backing off the securities purchases and just trying to see — trying to gauge what the asset levels will be for the next few quarters.
James J. Herzog — Executive Vice President and Chief Financial Officer
Hey, Chris, good morning. Yyeah, historically we have always maintained probably a little larger cash buffer than perhaps other regional banks just because of our commercial banking model. So typically we like to hold at least $2 billion to $3 billion in cash and we have a little more than that. It doesn’t necessarily bother us. Obviously, we’re starting to approach those levels. We certainly have very strong and efficient borrowing channels, whether it be broker deposits or FHLB line. So to the extent we start getting down to those minimum cash levels and need to borrow, that’s not necessarily worrisome for us whatsoever. It’s been contemplated and it’s really what we’ve been preparing for. So we feel really good about how we’re managing that. Where earning assets go overall, that’s obviously going to be dependent on loan growth and where deposits goes. So there’s a lot of ins and outs there. We’re not necessarily forecasting earning asset levels themselves, but we feel really comfortable with what we’re mapping out over the next couple of years in terms of managing cash and being able to fund loan growth.
Christopher McGratty — KBW — Analyst
Great. And then if I could, as a follow-up to Steve’s question about the DDA reversion, I guess, mean reversion. If I’m looking at the mix of deposits, you said a couple of years ago it was low — high-40s, now it’s mid-50s. If you look at the dollar difference, it’s pretty meaningful. So I’m just a little interested more interested in how do you get to your target, call it 50% mix. Is it growing others and shrinking? Or is it purely shrinking DDA by multiple billions? Thanks.
James J. Herzog — Executive Vice President and Chief Financial Officer
It’s going to be a combination. We will see overall deposits, of course, go down, and you’ll see some of that from both DDA and interest-bearing. But at the same time, you will see even for balances that stay on the balance sheet you will see for rate-sensitive customers and where we’re price competitive, you will see some of those DDAs moved interest bearing. So I feel like it’s a little bit of a 50-50 mix in terms of how that mix changes. It will be a combination of both overall DDA leaving the balance sheet, but also DDA moving into interest bearing.
Christopher McGratty — KBW — Analyst
Great. Thank you.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of John Pancari with Evercore. Please go ahead.
James J. Herzog — Executive Vice President and Chief Financial Officer
Good morning, John.
John Pancari — Evercore ISI — Analyst
Good morning. Just want to follow up on the loan growth front. I think it was a follow-up to Ken’s question. I know you gave your expectation on the components specifically around the mortgage warehouse indicated stable to down. Can you maybe give us your thoughts on the other buckets, specifically? I believe you said modest growth you expect in commercial real estate, but I want to confirm that. And then maybe if you can talk about equity fund service outlook, corporate banking and middle market. Thanks.
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Yeah, sure, John, it’s Peter. So I guess I’ll try to take those one at a time. The equity fund services outlook is still pretty good. There’s been a lot about private equity funding, fund formation and so forth. Our utilization was actually down in EFS this quarter, but our commitments grew, our outstandings grew despite that and so we’re encouraged by what we’re seeing. We feel like we’re a leader in that business and feel really good about the opportunities, knowing that there is some challenges in the fundraising space, but overall we’ve got a really good pipeline there.
Our corporate business, so U.S. Banking has had really good success. That is probably on our customer sentiment. I think larger companies with more geographic or international, national exposure, that’s where our sentiment probably did drop a little bit more than the rest of our portfolio. That said, we did have a really good quarter and our activity level there continues to be really good. Within U.S. banking, we’ve got some great specialty businesses around our gaming business, around our sports franchise lending business. And so the activity level there continues to be really, really solid.
And then middle market, in general, you asked about is really encouraging. In all of our geographies, we’ve got a great activity level in Texas. Michigan continues to be really strong. California has come back from kind of where it was last year, a little bit behind, although we did see a little bit of drop in sentiment in California versus the other two markets, but our activity level is still really, really strong. And then we’re starting to see really good opportunities out of the Southeast. We have told you all that we’ve invested down there. We’re hiring relationship managers, and we feel really good about the opportunities that we’re starting to see there.
And then on commercial real estate, John, what I said there is we didn’t see maybe as much outstanding loan growth in the second quarter, but we did see a tremendous amount of commitment production. We bank a lot of really great developers where most of the business we’re doing there is with existing customers. So it’s not like we’re reaching with new customers. And the opportunities for those customers have been really, really good. And so we expect to see outstandings increase from here with commercial real estate, just with the amount of activity that we have closed so far. So I hope that gives you a little bit more, John, on each of the businesses that you were asking about.
John Pancari — Evercore ISI — Analyst
No, that does. That’s helpful. And then my follow-up is just around the around loan growth overall. I know you’re looking at 6% to 7% growth ex-PPP for 2022, which is pretty solid and I know you’re formally out there with 2023 expectations, but I wanted to see if you can maybe help us think about the trajectory of that growth rate as you look at 2023, particularly with the expectation of potential economic slowing. Is it fair to assume a growth rate somewhere below that level? Or could you see it hold in that mid-to-high single-digit range?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
John, it’s Peter. I’ll comment first, and I don’t know what Jim wants to add. But we’re going to continue to do everything we can to keep that growth rate, as we have said, above GDP. We’re striving to do that in all of our markets. And if you look at the outlook for Texas and California and Michigan, those GDP outlooks are better than national averages. So we’re going to continue to try to achieve that. Whether or not that looks like 6% to 7% in ’23 versus the overall economy, I don’t know. But we do believe that our company can perform at a level better than what you might see on national GDP levels is how I would answer your question.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah. I think that’s good. I think we would be optimistic, but a lot of it is going to depend on the economy and how we move through ’23.
John Pancari — Evercore ISI — Analyst
Got it. Very helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Jennifer Demba with Truist Securities. Please go ahead.
James J. Herzog — Executive Vice President and Chief Financial Officer
Good morning, Jennifer.
Jennifer Demba — Truist Securities — Analyst
Good morning. With the deposit growth slowed down significantly for the industry, just wondering what Comerica is doing in terms of tweaking its strategy there, whether it be employee incentives related to deposit gathering or adding more small business bankers. Can you just give us some details on how you’re thinking about that?
Curtis C. Farmer — Chairman, President and Chief Executive Officer
I might make it. Jenny, this is Curt. I might make a couple of comments and then turn. First of all, I mean, perspective is really important here. We’re at a 68% loan-to-deposit ratio. And we do not chase sort of transactional hot deposits. Everything we do is from a relationship-based focus. And so whether it’s in our commercial bank, in our retail bank, in our wealth management organization, we’ve got the ability to flex up on pricing if we need to, to do that. And so we’re sort of watching, we’re going to do the right things from our customer perspective.
And then we’ve got access to plenty of other funding sources, leveraging our securities portfolio, FHLB, etc. And so on the list of things that I’m concerned about as a CEO, this is way down that list. And you look at sort of where we were post-pandemic, we were in the 90% plus range on loan-to-deposit perspective and so we still got plenty of funding to take care of our customers and appropriately grow the balance sheet. And so we’re just trying to make sure we’re staying focused on the relationship side of this, leveraging treasury management services. And so maybe you want to talk about that?
Peter L. Sefzik — Executive Vice President, Executive Director, Commercial Bank
Yeah, Jennifer, this is Peter. I was just going to add to Curt’s comments that we are investing a lot in looking at our digital experience on the commercial side and making sure that we’re a leader in that space and making it as easy as we possibly can for our customers to interact with us digitally and providing all those products and services. So that’s where we’re leaning in on this issue when it comes to gathering deposits into the future, particularly as you mentioned, I think you’ll see more talk from us about the small business space, which is a great deposit business. But we’re focused on that investment as it relates to products and services. I think the digital customer experience for commercial customers is one that we can lean into heavily and that we can lead in.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, and I would just say, along with digital deposits, I’d love the emphasis we’re putting on treasury management investment. And I love treasury management, we love treasury management, not just for the noninterest income, but the deposits that come with it. So I would certainly lean on that as part of the mix also.
Jennifer Demba — Truist Securities — Analyst
Thanks so much.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah. Thanks, Jennifer.
Operator
Thank you. Our next question comes from the line of Gary Tenner with D.A. Davidson. Please go ahead.
James J. Herzog — Executive Vice President and Chief Financial Officer
Hey, Gary.
Gary Tenner — D.A. Davidson — Analyst
Thanks, good morning. My questions were largely answered. So I just thought I’d ask in terms of capital. I don’t believe you were active in the buyback this quarter with your CET1 under 10%. As you think about kind of building that back up over 10% late this year or, say, early in 2023, if that comes to pass. Given the kind of uncertainty in terms of the economy and growth, would you [Indecipherable] maybe being more constrained on the buyback even in that scenario where you’re back over 10% over the next several quarters, let’s say?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, thanks, Gary. We do think we will, at least in our baseline forecast, likely get back to 10% by the end of the year. I think we can accrete capital at 10 bps to 15 bps per quarter, maybe closer to 15 bps. I think once we get there, we’ll do an assessment of where we stand, where the economy is. On one hand, I am really excited about the fact that we will stabilize net interest income, stabilize a lot of earnings that makes it a little easier to activate things like the share buyback. On the other hand, we are very aware of the volatility of CECL, what that can do to capital ratios and we would certainly give that a fair amount of consideration as we start reaching 10% going above. We would look at the credit environment and that would certainly weigh on how quickly we weigh back into a share repurchase program.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Certainly, coupled with loan demand.
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, loan demand and all the other variables, of course, also.
Gary Tenner — D.A. Davidson — Analyst
Sure. Thank you.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Steve Moss with B. Riley Securities. Please go ahead.
James J. Herzog — Executive Vice President and Chief Financial Officer
Good morning, Steve.
Steve Moss — B. Riley Securities — Analyst
Good morning. Just following up on your asset sensitivity here. You guys talked about next year wanting to be in the, I guess, single-digit range for downside to NII in the event of rate cut. I just want to confirm. I see on the deck that it looks like no more swaps are needed for the loan book or maybe how much more do you guys need to add to get to that level?
James J. Herzog — Executive Vice President and Chief Financial Officer
Yeah, thanks, Steve. Yeah, I think we have on the slide that we will likely need up to $10 billion of hedges to get to the low-single-digit percent. That is likely to be more of a swap strategy as opposed to a security strategy at this point given our cash levels. But I will emphasize up to. It is going to be dependent upon how the balance sheet shifts, deposit levels will probably be the most important variable there. So it could end up being far less than 10, but I would just say up to $10 billion and it could be far less than $10 billion depending on how the balance sheet shapes up.
Steve Moss — B. Riley Securities — Analyst
Okay, great. Thank you very much.
James J. Herzog — Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. That was our last question in the queue. I will now turn the call back over to President, Chairman and Chief Executive Officer, Curt Farmer, for closing remarks.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
I just would say again, it was a very good quarter. Thank you to all my colleagues for all that they do every day to take care of our customers and help us grow the company. Thank you, as always, for your interest in Comerica, and I hope you have a very good day.
Operator
[Operator Closing Remarks]