Comerica Incorporated (NYSE: CMA) Q2 2023 earnings call dated Jul. 21, 2023
Corporate Participants:
Kelly Gage — Senior Vice President & Director of Investor Relations
Curtis C. Farmer — Chairman, President and Chief Executive Officer
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Melinda A. Chausse — Senior Executive Vice President, Chief Credit Officer
Peter Sefzik — Senior EVP & Chief Banking Officer
Analysts:
John Pancari — Evercore — Analyst
Steven Alexopoulos — J.P. Morgan — Analyst
Ebrahim Poonawala — Bank of America — Analyst
Jon Arfstrom — RBC Capital Markets — Analyst
Brody Preston — UBS — Analyst
Manan Gosalia — Morgan Stanley — Analyst
Peter Winter — D.A. Davidson — Analyst
Christopher McGratty — KBW — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing-by. Welcome to the 2023 Second Quarter Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to your host, Director of Investor Relations, Kelly Gage. Please go ahead.
Kelly Gage — Senior Vice President & Director of Investor Relations
Thanks, Craig. Good morning, and welcome to Comerica’s Second Quarter 2023 Earnings Conference Call. Participating on this call will be our President, Chairman and CEO, Curt Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Chief Banking, Peter Sefzik.
During this presentation, we will be referring to slides, which provide additional details. The presentation slides and our press release are available on the SEC’s website, as well as in the Investor Relations section of our website, comerica.com. This conference call contains forward-looking statements. In that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward-looking statements speak only as of the date of this presentation 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. Also, this conference call will reference non-GAAP measures. And in that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on the website, comerica.com.
Now, I will turn the call over to Curt, who will begin on Slide 3.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, everyone, and thank you for joining our call. Today, we reported second quarter earnings of $273 million or $2.1 per share. Average loans grew to $55.4 billion, and continued focus on fee income helped drive our second-highest noninterest income quarter in our history. Expenses declined and our disciplined approach to credit produced a third consecutive quarter of net recoveries.
Beyond our compelling financial results, we have launched a transformational expansion in support for small businesses. In the second quarter, we introduced tailored products designed to improve access to capital and enhanced cash management capabilities for these important customers, while also providing access to valuable business insight and resources. Coupled with our recognized SBA achievement, we believe we are well-positioned to be a leading bank for small business, providing the tool they needed to achieve their goals.
Our emphasis on supporting small business is an important part of our overall commitment to communities. You can read more about our other community extensibility [Phonetic] effort in our 2022 Corporate Responsibility Report that was recently published on comerica.com. Our Southeast and Mountain West expansionary investments continue to perform well, as our bankers were active in the market, adding new relationships and building pipeline. Strong, broad economic trends in these regions, coupled with [Indecipherable] of target customer base could create opportunity for continued growth over-time.
Moving to a summary of our results on Slide 4. Average loans grew $1.9 billion. Average deposits decreased $3.5 billion due to customer diversification efforts related to industry disruption in the first quarter and the ongoing impact with Fed monetary actions. We saw — we saw increased stabilization in both interest-bearing and noninterest-bearing deposits to the second half of the quarter. And we believe diversification efforts are largely behind us.
As we expected, net interest income declined as we saw the full impact of first quarter deposit flows and funding activity. Credit quality outperformed with another quarter of net recoveries and our criticized loan percentage remains below our historical average. Noninterest income was near record levels and expenses declined. Profitability improved in an already stronger capital position, as we generated an estimated CET1 ratio of 10.3% above our strategic target. It was a strong quarter for Comerica.
And I will now turn the call over to Jim, who will review our results in more detail.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Thanks, Curt, and good morning, everyone.
Turning to Slide 5. Loan growth came in just above expectations as average balances increased 4% from the first quarter. Increased [Phonetic] activity drove a slight decline in commitments and utilization increased almost 1%, but remained below historical averages. Growth in our commercial real estate business of over $520 million continued to be driven largely by construction of multi-family and industrial projects originated over the last two years, in addition to the slower pace of pay-offs.
Boosted origination activity and pipeline have significantly declined. Our commercial real estate strategy remains highly selective with a focus on Class A projects and our office exposure is intentionally limited. Large corporate loans grew $447 million as we won new customer relationships and financed acquisitions for existing customers. National Dealer Services benefited from new customer acquisition and while core planned inventories continued to grow, they remain below pre-pandemic levels. Typical second quarter seasonality resulted in a $325 million increase in average mortgage banker finance loans. However, consistent with our strategic exit of that business, we expect most of our Mortgage Banker balances to be paid off by the end of 2023.
Slide 6 provides an overview of our deposit activity for the quarter. Average deposit balances declined 5%, in line with expectations. Conversations pivoted away from banking industry stability as customers refocused on broader macroeconomic issues such as risk of recession and elevated rates. Throughout the quarter, customer deposit balances continued to normalize and we observed relatively stable trends since mid May.
Industry funding pressures drove deposit competition and interest-bearing deposit costs increased to 237 basis points. However, we feel our dynamic pricing strategy and relationship approach allowed us to maintain our forecasted deposit betas and protect balances. While the rate environment further pressured noninterest-bearing deposits, we continue to view our deposit mix as a competitive advantage, providing a more stable and cost-effective funding source than our peers. With strategic investments underway to enhance payments and other treasury management products, in addition to our national Small Business Banking strategy, we see opportunities to further improve our attractive deposit profile over-time.
As shown on Slide 7, our strong liquidity position provides the flexibility. We maintained excess cash, prepaid maturing FHLB advances and our remaining liquidity capacity increased. Our quarter end loan-to-deposit ratio was 84%, still below our 50-year average and strategic actions announced in the second quarter are expected to keep that ratio in the mid 80s at year end 2023. Cash balances of the holding company position us to repay our $850 million debt due this summer and very light remaining unsecured funding maturities create flexibility to manage funding needs and cash levels over-time.
Period-end balances in our securities portfolio on Slide 8, declined almost $900 million with pay-downs, maturities and a $212 million negative mark-to-market adjustment. Our security strategy remains unchanged as we start reinvesting in the third quarter of 2022, and we maintain our entire portfolio as available-for-sale, providing full transparency and management flexibility. Although we have modest treasury maturities through the end-of-the year, larger scheduled repayments in 2024 and ’25 are projected to benefit liquidity, profitability and our unrealized losses within AOCI. Altogether, we expect a 34% improvement in unrealized securities losses over the next two years. As our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities, and therefore unrealized losses should not impact income.
Turning to Slide 9. Net interest income decreased $87 million to $621 billion, in line with expectations as the benefit of loan volume in one more day were offset by the impact of wholesale funding, lower deposit balances, a shift in deposit mix and deposit pricing. A significant portion of the funding and deposit activity occurred late in the first quarter. So, results reflect a full-quarter impact of those actions. With our strategic management of our asset sensitivity position, the impact of rates was nominal.
As shown on Slide 10, successful execution of our interest rate strategy and the current composition of our balance sheet favorably position us with minimal negative exposure to a gradual 100 basis points or 50 basis points on average decline in interest rates. By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position overtime.
Our proven disciplined produced another quarter of excellent credit quality as highlighted on Slide 11. Once again, we posted net recoveries, although we do not project this trend to continue. Modest migration drove an increase in criticized loans, however at under 4% of total loans, they remain well below historical averages.
Non-accrual loans declined and inflows to non-accruals remained low at $17 million [Phonetic] Migration loan growth and the continued economic outlook drove the $33 million provision expense and the allowance for credit losses increased to 1.31%. Given the environment, we increased oversight and portfolios with greater relative exposure to elevated rates such as leveraged loans and our commercial real estate business. However, we remain very comfortable with these portfolio metrics and expect continued migration to be manageable.
Noninterest income on Slide 12, continues to outperform, growing $21 billion from an already strong first-quarter. Non-customer income contributed to results with increases in FHLB dividends and [Indecipherable] in addition to customer-related growth in fiduciary and card. Although not shown as a variance to prior quarter, capital markets exceeded expectations as we repeated strong first quarter results.
Risk management income related to our hedging strategy saw a modest decrease and should continue to vary based on the rate environment. While non-customer income to be hard to project, we expect our strategic investments in products and services to drive further growth and capital efficient fee income over time. We remain excited about the results of these efforts to date.
Expenses, on Slide 13, declined $16 million, in line with expectations. Quarter-over-quarter, expenses benefited from several large first quarter items that did not recur, that in $2 million related to the Ameriprise transition, a favorable state tax refund and a real estate asset write-down. Seasonally, lower salaries and benefits expense in other noninterest expenses were partially offset by increased outside processing, FDIC insurance and software costs.
Modernization efforts remain on-track as we incurred a total of $7 million in expenses, advancing our wealth management, corporate facilities, technology and retail strategies. We continue to selectively prioritize strategic investments designed to further enhance our financial results, while remaining committed to prudently managing expenses, commensurate with our earnings power.
Slide 14 highlights our strong capital position. With share buybacks paused, capital generation from profitability outpaced loan growth, driving our estimated CET1 further above our targeted to 10.31%, strategic actions, including the exit of Mortgage Banker Finance and increased selectivity across the rest of the portfolio are expected to elevate capital ratios through the end of this year. Higher rates increase, unrealized losses in our securities and swap portfolios, reducing our tangible common equity ratio to 5.06%.
Adjusting for the impact of AOCI, our tangible common equity ratio would have been 9.22%. Although potential regulatory changes have not yet been proposed considering our size, portfolio and projections, we feel very good about our ability to support our customers and comply with the anticipated capital requirements.
Our outlook for 2023 is on Slide 15, and assumes no significant change in the economic environment. We continue to project full year 2023 average loan growth of 8%. The strategic exit of Mortgage Banker Finance and increased selectivity is expected to keep loan balances relatively flat into the third quarter. Our projected full year average deposit decline of 14% to 15% is attributable to quantitative tightening that began last year and the impact of the first quarter of 2023 industry events. Assuming continued normalization of deposit trends and additional FOMC actions, we expect only a modest deposit decline through the second half of the year. We expect our highest year of net interest income in 2023, growing 1% to 2% over last year’s record results. Although we anticipate short-term rates will remain high through the remainder of the year, our asset sensitivity position is designed to protect our strong profitability by minimizing the negative impact of rates when they decline.
Credit quality remained excellent and we expect continued migration to remain manageable. Given the strong performance through the first two quarters, we forecast full year 2023 net charge-offs to remain below our normal 20 to 40 basis points range. Noninterest income exceeded expectations for the first half of the year and we expect full year to grow 7% to 9% over 2022. Benefits from non-customer income related to FHLB dividends and risk management income are expected to continue, but likely at declining rates as we repay maturing advances and rates normalize.
While we expect strong foreign exchange income and derivative income, we anticipate levels to moderate from the incredible performance today. Even with potential headwinds in the second half of the year relative to the first half, the overall noninterest income run rate remains compelling. Noninterest expenses are expected to increase approximately 9% year-over-year and 3% of that growth is the result of higher pension expense for 2023. Talent acquisition, investments benefiting our deposit strategy and the enhanced regulatory and compliance focus given our size and business model are expected to create some expense pressure compared to prior guidance.
As we look into the third quarter, the cost of filling open positions and other expenses pressure should largely offset — be offset by an expected credit to modernization expense, driven by corporate facilities. Although the precise timing for this type of credit can be challenging to predict. Prudent expense management remains a priority as we balanced expense pressures with the need to invest for the future. Strong profitability is expected to further grow our capital position in excess of our target, and we believe that trend will continue until we resume share repurchases.
Now, I will turn the call back to Curt.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Thank you, Jim. Slide 16 summarizes our competitive advantage with the local delivery of sophisticated comprehensive product and industry expertise of our [Indecipherable] bankers, we feel we encapsulate the best features of the largest and smallest competitors. Diversification remains an important tenet of our core strategy and exporting our business model to expansion markets has further enhanced our attractive geographic profile.
By accelerating certain investments already underway, such as payment, small Business, wealth management and capital markets, we are elevating the product and capability tailored to meet our customers’ needs, while enhancing our funding profile, revenue mix and overall return on capital. Optimizing our portfolio to the strategic exit of Mortgage Banker Finance and increasing flow activity across the rest of our business lines prioritizes capital and funding for our target customers.
Throughout our 174-year history, we have successfully navigated a number of economic event. And once again, our business model was tested and proved to be sound. As a leading bank for business with strong retail and wealth management capability, we play a unique role supporting our customers as a trusted long-term banking partner.
Thanks for your time this morning, and now we’d be happy to take some questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of John Pancari from Evercore. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, John.
John Pancari — Evercore — Analyst
Good morning — good morning. On the deposit growth outlook, I know you lowered your deposit growth expectation despite the end-of-period deposits actually increasing and coming in a little bit better-than-expected. I know you indicated you expect only a modest deposits decline in the back half. Can you maybe just give us some of the color around the rationale for the lower growth expectation and what type of trend that you expect to develop as you look at the back half? Thanks.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah. Good morning, John, it’s Jim. Thanks for the question. Yeah, the relatively stable or modest increase was relative to the second quarter average of $64 billion. We do expect to stay very close to that on average through the end-of-the year. There are some dynamics churning on below that. Core deposits will probably take a small step-down from the average of Q2 just because in the first half of the second quarter we did have just some very modest run-off. But then again we added some brokered deposits also that roughly offset that during the quarter that on an average basis will carry through. So we do think by the end-of-the year we will still be hovering around that $63 billion to $64 billion number.
We were a little bit elevated on 6/30 [Phonetic] as you see in the bar on the right, and so I would not expect all those balances to stick around. We had $800 million of card that was elevated relative to this typical average. And then we did have some elevated customer balances on 6/30 that I would not expect to stick around either. So that is a little bit of an inflated number. I would maybe stick more to the average guidance of gravitating down to $63 billion to $64 billion by the end of the year on average.
John Pancari — Evercore — Analyst
Okay, great. Thanks for that color. And then separately also on the deposit front. In terms of the noninterest-bearing mix, I know it’s 48% current. Where do you see that bottoming? Already, I think you’re at your pre-pandemic level. You were running at around 40% on total deposits. So where do you think that could bottom? And then separately, I’m sorry if I missed it, but if you can give us your updated through-cycle deposit beta expectation? I believe you were taking mid 50s and you’re currently at 47% now. Thanks.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yes, we are — we are on average as well as June 30th hovering in that 47%, 48% area. Consistent with what I’ve said in the beta investor conference, we still think we’re going to dip just slightly below 45%, so think about maybe 44% to 45%. The average ratio was a little bit elevated because it doesn’t consider a little bit of run-off that occurred early in the second quarter. The June 30th ratio of 47% is a little elevated due to the elevated noninterest-bearing balances that I referred to before. And so I kind of think of us being on a kind of a spot basis [Indecipherable] of the elevated balances. I really think of us today as being 45% to 46%, and I see that dipping down to maybe 44% to 45% by the end-of-the year.
Keep in mind that there are a number of variables involved here. Noninterest-bearing flows will be the most important variable. But to the extent we are successful in bringing back interest-bearing deposits, that could push that ratio down to and we would, of course, welcome back those interest-bearing deposits.
In terms of the beta question. Yeah, we still think we’re going to-end up on an cumulative basis in the mid 50s. I mean, right now I have 56% implied in the guidance, but pretty consistent with what we’ve been saying for the last few months. So we’re still right around that mid 50% area.
John Pancari — Evercore — Analyst
Great. Thanks so much.
Operator
Thank you your next. Your next question comes from the line of Steven Alexopoulos from J.P. Morgan. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, Steve.
Steven Alexopoulos — J.P. Morgan — Analyst
Good morning, everyone. Jim, I just wanted to drill down in your answer to John’s question. So the stability or modest decline in deposits for the rest of the year, you’re saying that’s coming from outflows slowing, it’s not — because you had strong outflow this quarter, but you plug the hole at broker deposit. So you’re not saying you need to do the brokered for the second-half to remain fairly stable down a bit if outflows are slow. Correct?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
That’s right. To be clear, we have really no plans to add broker deposits between now and the end of the year. I think we’re at a pretty good resting spot. We do think the customer core deposits have very much stabilized. We do see whether you define it by where we were in the second quarter average or if you look at June 30th, which put some elevated balances and you normalize for that number for those elevated balances. From there, we see just some very modest decline between now and into the year.
Now, we’ve not really factored in a material amount of seasonal deposits which in the past have come in. But seasonal patterns have gone out the window over the last year. We’re not exactly sure what to expect there. So there could be some opportunity there. But overall if you adjust that $66 billion on June 30th for card, it may be a modest amount of elevated balances, we would see just a modest decline from that level on, assuming we don’t get a large in both seasonal deposits.
Steven Alexopoulos — J.P. Morgan — Analyst
And If we think about the margin and the outflow of noninterest-bearing, right, replacement notes with basically time deposits, that’s really pressured the NIM. So if that, both the [Indecipherable] bottom of the NIMM right now.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
If you look at our guidance, Steven, we do have just a little bit more pressure to go there. You see the net interest income guidance that we imply, you do see a small step-down in Q3 and then a smaller step down in Q4. Now as a partial offset to that, I never like to talk about NIM percentage because our NIM percentage can bounce around the reasons that don’t correlate with income, whether it’d be the level of securities, whether it be the level of cash that we carry and the reasons for keeping the cash. If we do see cash balances go down, if that is putting a bit of a drag on the NIM, if they go down to normal levels, I would see the NIM being very close to where it’s at now, and you might see another three or four puts downward pressure on the NIM as the deposit mix is roughly offsetting the smaller balance sheet as we deflate for that excess cash.
If we don’t reduce cash balances, and forecast assumes we do, but if we hold to these cash levels that we’re currently at, you could see another. 9, 10 bps to NIM. But again, I’m not expecting that at this point. I’m more focused on getting the cash down as things continue to stabilize. So we’re very near the bottom. Just maybe a few bps depending on what we do with our cash position.
Steven Alexopoulos — J.P. Morgan — Analyst
And maybe a final question. I know we’re going to get the new capital fairly soon, but you guys are $91 billion of assets. We’re heading to think about crossing that $100 billion assets threshold organic. I know it is not great environment to be considering M&A transactions. But when you think about just the capital burden, the [Technical Issues] potentially, does that makes sense to cross that organically?
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Yes, Steve, this is Curt. I’ll take that question. And you’re right, we are within a certain range of that $100 million market, around $91 billion in assets. And. assuming that with just the organic growth that we would eventually cross that number we’ve been planning now for the last two years, I have a little bit more work to do just to be prepared for whatever regulatory increased [Indecipherable] going back into the stress-test capital planning, etc., if we became a category four bank.
We think just through organic growth that would probably be a few years out. And our view has continued to be that we’re going to focus on doing the right thing for the shareholders, growing the company, growing the assets of the company as we have over a 174-year history. And if that means crossing that $100 billion market would mean crossing that $100 billion mark, but we think that we’re trying to think about it from a long-term perspective and just trying to be prepared for whatever calls on regulatory oversight might be associated with that if it is causing it from an organic perspective.
Steven Alexopoulos — J.P. Morgan — Analyst
Thanks for all the color.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Thanks, Steve.
Operator
Your next question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, Ebrahim.
Ebrahim Poonawala — Bank of America — Analyst
Hey, good morning. I guess just following up on Steve’s last question on these capital changes. Even if you don’t cross $100 billion, what are the changes you expect to make in terms of just balance sheet management, either loan-to-deposit ratio, liquidity, etc., once these rules are out?
Curtis C. Farmer — Chairman, President and Chief Executive Officer
This is Curt, Ebrahim. The most anticipated ruling is really around the treatment of AOCI in regulatory ratios. And while all the conversation thus far has been focused on banks north of $100 billion, we do anticipate that there might be some eventual phase and below $100 billion. Nothing official on that right now, but we’re just trying to be prepared if that comes to pass.
If you look at sort of where we are from a CET1 perspective at 10.31% and if you factor in AOCI, we would be slightly south of 7%, like 6.93%. And so we would have a little bit of work to do to raise capital, but we believe it would be phased in. And just through normal earnings of the company, we could get back to an appropriate CET1 level. We do not believe that we’d have to go to the external market to raise capital to get back to that level. So we think we’re well-positioned with whatever ruling might come out. And again, given that we’re below the $100 billion mark, we think we will have some more time if it got applied to banks below that level.
Ebrahim Poonawala — Bank of America — Analyst
And just in terms of liquidity, the loan-to-deposit ratio in the 80s still seems like the right place to be.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
I believe Ebrahim you’re asking about the stabilization of the loan-to-deposit ratio?
Ebrahim Poonawala — Bank of America — Analyst
Yeah. We do expect to stay in the mid 80s. We do think it was again just slightly elevated on June 30th, but we do have a plan to stay in the mid 80s and certainly some of the asset optimization things we’re doing will ensure that. So we’re right around that area that we’re comfortable in.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
And it also is below our historical averages as well where we’ve normally operated.
Ebrahim Poonawala — Bank of America — Analyst
Understood. And just one separate question if I may. Given your customer base, give us a sense of your outlook in terms of credit, health of the customer? There’s not a lot of corporate bonds that have yet to the priced to the higher rates over the last 12 months. What’s your expectation in terms of the next year and the likelihood of a recession, soft landing, etc.,?
Melinda A. Chausse — Senior Executive Vice President, Chief Credit Officer
Yeah, Ebrahim, this is Melinda. Obviously, the credit performance continues to be really strong. It was a really nice quarter for us, obviously, third quarter of net recoveries kind of unprecedented. Nonperforming assets, again modest decline and very low inflow, but we did see an increase in the criticized category, which is exactly what we’ve been expecting to see over the last couple of quarters. The preponderance of the increase that we saw is in what I call core middle-market C&I portfolio, which would include a number of leveraged loans and that’s automotive supplier sector. So again, we have expected that we would begin to see normalization. It’s taken a couple of extra quarters to actually — to actually get there. We’ve been bouncing around the bottom for a long-time.
Our current economic forecast that we use in our CECL process does call for a mild recession, and I think you know whether it’s a mild recession or we end up with a soft landing, I think we’re prepared for a mild recession. As it relates to the reserve build, and the reserve build this quarter really reflects kind of the portfolio growth as Jim said, as well as that migration. But as of now, we don’t — we don’t see a lot of loss content. And as Jim guided, we think that for the remainder of this year will be above that average that we’ve typically guided.
Ebrahim Poonawala — Bank of America — Analyst
Makes sense. Thank you.
Melinda A. Chausse — Senior Executive Vice President, Chief Credit Officer
You are welcome.
Operator
Your next question comes from the line of Jon Arfstrom from RBC Capital Markets. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, John.
Jon Arfstrom — RBC Capital Markets — Analyst
Good morning, everyone. Hey, good morning. Melinda, just to follow-up on that one. How do you expect — do you expect more normalization and how do you generally expect those numbers to progress on criticized?
Melinda A. Chausse — Senior Executive Vice President, Chief Credit Officer
Yeah. I mean, I think we expect it will continue to have some migration in the portfolio. There is no doubt that the — the customer base has been incredibly resilient. Obviously, payments over the last couple of years challenges, very low levered, lots of liquidity, lots of availability, but inflationary pressures over the last 18 months are starting to show up in the portfolio in terms of pressure around growth and net margins. So cash flows are little more stretched and I would expect it will continue to see some additional migration. I think we’re very well reserved, and all of that is taken into sort of the process that we go through each quarter.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. And maybe somewhat ties into it, but maybe if you repeat. But you talked about increased selectivity in lending. Can you talk a little bit more about that, kind of where you are being a little bit more cautious? And then the CRE number, it sounds like that was more construction projects funding up. I think you said things are slowing there, but can you just confirm that?
Peter Sefzik — Senior EVP & Chief Banking Officer
Jon, it’s Peter. Yeah. I think when we talk about it, it’s really around, quite candidly pricing expectations across the loan portfolio, and we continue to be really selective about it. I’ve said in the past, we’re more focused on sort of credit than we are maybe trying to earn business on pricing over-time. And right now between those two options, we want to make sure that we’re earning for the company. And so our selectivity and expectations on pricing, and I think you’re seeing that across the industry just as capital is kind of being contained here, that we’re being very careful about where we deploy it, for taking care of existing customers, our expectations on profitability or higher relationship or higher. So, that’s kind of across the portfolio, I think in commercial real estate specifically. We’d actually kind of started dialing back a little bit on that, even beginning of this year, maybe end of last year, just starting to be very careful in taking care of our existing sponsors. We’ve got great sponsors. We feel really good about the portfolio, very limited office exposure. Watching what’s happening in multi-family. We expect though, our projects that kind of carry commercial real estate balances really into next year. So we feeling good about it of where we are. We feel good about it from a credit standpoint, our sponsor’s standpoint. But our expectations on pricing has definitely gone up this year.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay, good. Thank you for that. And then just one for you, Ralph [Phonetic], maybe kind of an odd question, but you’ve dealt with COVID, you’ve dealt with the funding crisis as CEO. So it’s been a hell of a run for you. But do you feel like it’s largely business as usual for Comerica right now? Are you still fighting some of these questions from depositors. And this funding crisis that’s happened over the last four months.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Well, Jon, first of all, I’m honored that you referred to me as Ralph, because I know you…
Jon Arfstrom — RBC Capital Markets — Analyst
Did I say that, I apologize.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Yeah. Our long-term German Ralph [Speech Overlap] He doing great and remains very engaged in the community here.
Jon Arfstrom — RBC Capital Markets — Analyst
I was asking you.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Just amended about the comments, your question that you asked me. The last 30, 60 days, a number of us have been out in the market, visiting with both employees and town hall format, but also with customers in Michigan, California, the Carolinas, Texas, Florida, etc. And I would say the conversations really have shifted for the most part back to more business as usual, as you would refer to it. When customers are asking us about things, customers normally ask us about the economy, about interest rate, about availability to capital and credit, what we’re seeing in terms of M&A activity in various industries — Industry outlooks. And so I feel like that things have definitely stabilized in terms of customer communication, customer conversations. And we’re focused, as Peter said, on taking care of our existing customers. And that’s something that I think we do very well. We’ve got really great long-standing relationships.
And I might just remind you and the other listeners that really throughout the crisis, we did not lose customers. We saw some customers diversifying deposits. And we hope over time and seeing some signs — early signs of that, the customer will bring some of those deposit back — that deposits back where some moved out.
As you alluded to earlier, it has been an interesting time. I became the CEO in April 2019, and you know all the events that have occurred since then. But, I think our company is so resilient to manage through 174 years of all the disruptions that have occurred in the economy in the world during that time. And we just do, I think, a great job of rallying together and it really pretty much is business as usual. I referred to in my comments earlier a lot of things that we’re focused on and we remain focused on beyond just taking care of our employees and our customers, expanding into new markets, focusing on product capabilities, focusing on small-business, growing the commercial bank, growing wealth management, growing the retail bank. And we feel like the future for us remains very bright as an organization.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. Well, Curt, I’ve never had so many emails in response so much, but I know you’re doing a great job. Thank you, Curt.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Brody Preston from UBS. Please go ahead.
Brody Preston — UBS — Analyst
Hello, everybody.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning.
Brody Preston — UBS — Analyst
Hey. I just wanted to — I wanted to ask on the on the tech and life sciences deposits. I noticed that those continue to move down a little bit, but it looked like the rate of change kind of lowed there. I was wondering kind of what drove that decline? Is it kind of back to normal cash burn for those clients? And kind of what the, I guess is there a growth outlook for that business line now that there has been this disruption with the largest competitor there no longer are [Indecipherable]
Peter Sefzik — Senior EVP & Chief Banking Officer
Hey, Brody. This is Peter. Yeah, the decline in deposits in TLS, we really started actually seeing that back in the middle of last year. So I think that cash started being consumed in that space with all the things that you’ve kind of seen happening with tech. I think what happened earlier this year probably accelerated that a little bit further. But as far as where we go from here, we’re being very cautious about our relationships. We’re watching what’s going on in the VC community, raising capital, new codes that are being formed. We’ve been in that business a long, long-time. We plan to stay in it. We’re looking at — we’re very careful about where we’re adding people, here we’re adding relationships. And so I think that we will be in the business. I think it’s probably at some point you’re going to — you’ll start to see cash build again across the industry and certainly at Comerica. I don’t know that it’s necessarily in the next six months. I think we’ve probably got a little more cash burn going on in this space.
That said, we are bringing on new relationships. And as I said, we’re adding people. We feel really good about the industry and the opportunity over the long-term, but we probably got some time to go here of cash burn and I think a number of these companies are going to need to raise some — raise some capital and we’ll see what happens in the industry going-forward.
Brody Preston — UBS — Analyst
Got it. And then I was hoping just within the AOCI walk, if you could give us some indication as to what the condition of prepayment rate you’re assuming within your effective duration calculation is?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, Brody, it’s Jim. I mean, that prepayment rate varies somewhat widely depending on the type of security. Of course, we have some bullets in there on the commercial side that generally don’t have much in the way of prepayment. And then we have a number of various tranches of MBA securities that have some variance to them. So, I don’t think there’s any one number that would likely answer your question, but we certainly have prepayment rates factored into that.
Brody Preston — UBS — Analyst
Got it. Is it reflective of kind of what the market has bearing on a quarter-to-quarter basis, Jim?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, absolutely. That’s something we prudently do every quarter is monitor the market prepayment rate, so very much in-line with the market.
Brody Preston — UBS — Analyst
Got it, great. And then I wanted to ask just on the fixed rate loan portfolio, the portion of the portfolio is fixed rate more purely fixed rate, not so much the swap portion. I wanted to get a sense for kind of what the quarterly repricing cadence looks like on that and kind of what the existing yield on that book is?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, that book is a relatively small part of our portfolio, less than 80% of our loans. It does — it does yield well below our current portfolio. We haven’t disclosed the exact rate, but I would say this in generally blow, which isn’t surprising given how fast interest rates have gone up. Contractual life on that is about eight years, so remaining life would be about four years. We do see it amortizing along a pretty straight line path amongst that four-year remaining life and we see the — I would say — I would say that fixed rate portfolio of prices are probably 15 bps a quarter. We kind of parlay that along. It’s a percentage of the overall loan book. You’re looking at maybe a different quarter of loan yields going up because of their pricing of the fixed rate book. So that will be a very small tailwind for us, but it just depends on where the curve goes, where the repriced at and prepaid — prepayment patterns kinds of follow-through there.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
It’s really one of the strengths of our model is the floating rate. Most of our loans are floating rate across our portfolio. So we’re able to benefit on the actual loan book when interest rates are going up like this, to your question there, Brody.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
That’s right. And It gives us a lot more control to because we can more synthetically manage our asset-liability position as opposed to being a diversity in prepayment rates.
Brody Preston — UBS — Analyst
Got it. And then last one from me. I just was open for a remind here on the on the swaps the — the yield that you disclosed, the 238 [Phonetic] for this year, the 250 [Phonetic] for next year. Are those that — are those just the received fix rate or is that a net rate? And if it is just the received [Indecipherable] current kind of pay floating rate is on those swaps?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, these are fixed received rates and the pay floating is pretty much aligned with LIBOR — and the 30-day LIBOR previously as the quarter progressed, as well as the combination of monthly SOFR and the Bisbee [Phonetic], Of course LIBOR is behind this now, but pretty much in line with monthly SOFR and monthly Bisbee. So, that obviously is changing as the Federal Reserve makes its changes and so on.
Brody Preston — UBS — Analyst
Go it. Is there any spread there over that rate?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah. I mean, you know that, Bisbee [Phonetic], SOFR depending on where we’re at with the FOMC increase coming up here, obviously you’re looking at kind of a pay rate in the 5.25 range. So, that would give you the spread relative to this yield that you see here — received rate.
Brody Preston — UBS — Analyst
Thank you very much for tTaking the questions. I appreciate it.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Thanks, Brody.
Operator
Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Manan, good morning.
Manan Gosalia — Morgan Stanley — Analyst
Hey, good morning. I just wanted to follow-up on the earlier line of questioning on deposit balances. You noted that deposits to stabilize. And if I look at your last update at our conference in June to the end of the quarter, NIB has actually improved quite nicely, even if I strip out the card-related deposits that you mentioned. So can you talk about what drove that and what made Just just such a strong month? I know you said the conversations have moved back to business as usual, but maybe you can expand on what changed in those conversations in the last three weeks of June for deposit customers, specifically?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, I would the segment on, its Jim. Really nothing changed. We’re very much on the trajectory that we had forecasted. And as I mentioned beyond card, we did have some elevated customer balances on the noninterest-bearing side, really in the last few days of the month or longer with us. Depending on how you think about how often those types of balances come back, were anywhere from another $0.5 billion to a $1 billion elevated at the end of the month. But again, we often get these types of deposits too. So, I don’t want to fully discount them. But it is important to understand we were a little bit elevated on June 30th.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Yeah, I might — this is Curt coming on, just add what said earlier or is found on what I’ve said earlier. I think just as things have settled down, the understanding that the concerns were maybe ever played for the whole industry and customers are back, just more business as usual. There are top to that credit and fee income, products and services and how we can take advantage or support them from an advisory standpoint. But I think just getting the banking crisis out of the media and just the noise that was associated with those first couple of months dying down has really shifted the conversation quite a bit.
Manan Gosalia — Morgan Stanley — Analyst
Got it. That’s helpful. And then just separately, I realize the FDIC special assessment hasn’t been finalized, but I was wondering if you know once it’s finalized, does that come out all in one quarter where there is a reserve or does it come out over the course of the two years as the proposal three has?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Well, we’re still waiting, of course, for the rule to be finalized and they spend a lot of input provided there. So we really don’t know where it’s going to end up. I mean, I think the best speculation is from a cash basis will probably pay it once the rule is established, but it would be recognized on an expense basis and therefore its impact of capital over a couple years, but there are — there are a number of variables at play there in terms of all the input being provided. So, I think we just have to wait and see what the final rule has in it.
Manan Gosalia — Morgan Stanley — Analyst
Got it. Thank you.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, and It would be a one-time hit the capital though once it is recognized.
Operator
Your next question comes from the line of Peter Winter from D.A. Davidson. Please go ahead.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Good morning, Peter.
Peter Winter — D.A. Davidson — Analyst
Good morning. I was wondering with deposits closer to stabilization or the outflows slowing, net interest margin nearing a bottom, do you think net interest income could stabilize in 2024 relative to the fourth quarter?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
We think it’s getting very close to betas based on where the curve was on June 30th. We think betas will probably stop rising once you get to around December-January, but of course you will have the full quarter effect of that, probably dipping a little bit into 2024. We’re bringing loan balances down throughout the year. Most of that loan balance drop will occur in the fourth quarter. So you could get a full quarter average that kind of tripping into the first quarter of 2024 also. So just because of those quarter-to-quarter bleed-ins, I don’t know there will be a 100% stabilized in Q1 of next year, but I do think it will stabilize, if not Q1, probably in Q2. There are some other variables going on in terms of how pricing plays out in the industry that could be a potential tailwind. But yeah, I think as we crossed over the year, you’re very close to a bottom there. I would say by Q2 probably at an inflection point.
Peter Winter — D.A. Davidson — Analyst
Got it. That’s helpful. And then obviously, there’s a lot going on, on the expense side, nonrecurring between the pension, the modernization. Can you just remind us what a normal expense growth rate is? And is that more likely next year?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
We typically putting aside some abnormal ebbs and flows by those things related to pension. I mean, we typically think of expenses as being in the 5% range in terms of what we shoot for, but that’s going to vary from year-to-year depending on what pressures are on us, things like FDIC can make a difference as that — that can be elevated for a year or two at a time. Again, pension can be a big factor. So, I don’t think any one year is ever going to exactly be the average. But over the cycle, I kind of think about it as probably 4.5% to 5%.
Peter Winter — D.A. Davidson — Analyst
Got it Thanks a lot.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
And the Inflation obviously being a huge factor also.
Operator
Your next question comes from the line of Chris McGratty from KBW. Please go ahead.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Good morning, Chris.
Christopher McGratty — KBW — Analyst
Hey, good morning, Jim. Quick question on the rate outlook. Obviously, the market expects one next week. But if we stay in a higher for longer for the rest of the year and next year you get the forward curve, you get a couple of cuts. Could you talk about how are you think your balance sheet will respond in terms of margin performance given all the hedges you put on?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah, we’re we’re pretty neutral, right now, Chris, in terms of our interest rate positioning. So we don’t think it would be an impact regardless of what the Fed does. We are just the slightest bit to the downside for both an up-and-down rate scenario. I would say the longer the Fed holds rates at a high level, I do think that’s probably puts all work pressure, the less pressure on our projections because I do think we have the potential for a very-very slow bleed if they’re kept high for a very extended period of time in terms of betas and deposit flows. I don’t think it’s material, but I don’t think it’s necessarily helpful to have been elevated for an extended period of time.
Christopher McGratty — KBW — Analyst
Great. And then my follow-up on capital. I’m interested in your thoughts on what would need to happen to return to a buyback? Obviously, we know the regulatory aspect. But what is it specifically that would be the moment where you would kind of back off?
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Yeah. I would say two things. Chris. One, obviously stabilization in the overall banking industry, and I think we’re doing most of it, but I think that we’re not 100% as an industry out-of-the woods yet even though things are very stable at Comerica. So certainly stability there would be good. And then obviously once we understand, receive and understand the new capital rules, as soon as we can get comfortable and we are comfortable right now, but we’ll wait and see how comfortable we are once the rules come out. Once we have some degree of certainty that we can hit our targets based on the new rules, I think that would put us in a position to really start thinking about share buyback.
Christopher McGratty — KBW — Analyst
Great. Thank you.
James J. Herzog — Senior Executive Vice President, Chief Financial Officer
Thank you.
Operator
And at this time there are no further questions. I’d like to turn the call-back to Curt Farmer, President, Chairman and Chief Executive Officer.
Curtis C. Farmer — Chairman, President and Chief Executive Officer
Well, thank you so much everyone for dialing-in and listening to the call today. As always, we appreciate your interest in our company and hope you have a good day. Thank you.
Operator
[Operator Closing Remarks]