Comerica Inc
NYSE:CMA
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Comerica Inc
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Good morning, my name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to Darlene Persons, Director of Investor Relations. Ma'am, you may begin.
Thank you, Regina. Good morning and welcome to Comerica's second quarter 2019 earnings conference call. Participating on this call will be our President and CEO, Curt Farmer; Chief Financial Officer, Muneera Carr; and Chief Credit Officer, Pete Guilfoile.
During this presentation, we will be referring to slides which provide additional detail. 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 and in that regard you should be mindful of the risks and uncertainties that can cause actual results to materially vary from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. Please refer to the Safe Harbor statement in today's release and Slide 2 which I incorporate into this call as well as our SEC filings for factors that could 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 within the presentation.
Now I'll turn the call over to Curt who will begin on Slide 3.
Good morning everyone. After the last earnings call, I was then CEO and Ralph Babb assumed the position of Executive Chairman. Since becoming CEO in 2002, Ralph has created a tremendous legacy at Comerica. He managed the company through an incredible amount of economic change and disruption in the industry that has positioned us well for the future. I will continue to work closely with Ralph as I transition into my new role.
Turning to Slide 3. Today, we reported second quarter earnings of $298 million or $1.94 per share. This resulted in an ROE of over 16% and an ROA of almost 1.7% for the quarter. Our loan growth is strong, reaching a record level and outpacing the industry H.8 data for the second consecutive quarter. Also, total commitments grew over $300 million and line utilization increased about 40 basis points to 53%.
Our pipeline remains solid, particularly in light of the loan growth we grow in the last two quarters. Overall, our customers are performing well and we’re positioned to continue to support their growing working capital, CapEx or acquisition financing requirements. Fee income also increased in the quarter, including growth in fiduciary and card categories. Continued careful cost management resulted in a $9 million reduction in expenses. Altogether, this drove a $10 million increase in pre-tax, pre-provision net revenue, excluding the $8 million securities loss incurred in the first quarter.
The credit provision increased primarily due to loan growth as well as valuation impairments on select energy credits. Credit quality remains solid with net charge-offs of 26 basis points and nonperforming assets remain low at 45 basis points of total loans. We continue to return excess capital through our share buyback program, repurchasing 5.7 million shares. Combined with dividend, we returned $525 million to shareholders.
Relative to the second quarter of last year, our results reflect our ability to generate solid loans and fee income growth, while also reducing expenses as a result of the successful execution of our GEAR Up initiatives. Last year very strong credit quality, including net recoveries resulted in a reserve release and a negative provision. While this quarter our provisioning was more in line with our historical norm. Through active capital management, we’ve reduced our share count by 12%. Altogether, our earnings per share increased 4% year-over-year.
And now I will turn the call over to Muneera, who will go through the quarter in more detail.
Thanks, Curt. Good morning, everyone. Turning to Slide 4. Second quarter average loans increased $1.3 billion or 3% compared to the first quarter. Mortgage banker increased over $700 million, reflecting a combination of seasonality and strong refi volume. We also drove an increase of over 2% in general middle market loans with growth across all three of our primary geographies. Loans to commercial real estate developers, primarily in Texas, also increased.
Growth in energy balances was primarily a result of higher line utilization by existing customers due in part to softer capital markets. Total period end loans increased $1.5 billion led by mortgage banker, general middle market, and equity fund services. Our loan yields decreased 7 basis points. This was a result of lower LIBOR combined with a residual value adjustment of two leases, a minor impact from hedging and a mix shift in the portfolio.
Slide 5 provides details on the progress. Average core balances were stable, which is in line with our normal seasonal pattern. Coincident with loan growth, noninterest bearing deposits have declined as customers are funding growth, acquisitions and capital expenditures from their cash balances. As expected, we also saw a mix shift into interest-bearing deposits. In addition, we added broker deposits which provide low cost flexible funding for our loan growth. Our deposit mix remain very favorable with noninterest bearing deposits comprising nearly 50% of the total.
In line with the guidance we provided, deposit costs were 94 basis points and reflected the standard pricing adjustments we made in March. We remain focused on our relationship approach to manage deposit pricing. For the second half of the year, deposit costs are expected to move up or down a few basis points, depending on mix shift, on funding requirement, short-term rate and the company landscape.
As you can see on Slide 6, the yield on the securities portfolio continued to trend up. While yields on MBS securities has been under pressure, we were able to make purchases at incrementally higher yields than the securities that have paid down. This benefit combined with the repositioning we completed at the end of the first quarter, contributed $10 million of net interest income.
The current rate environment has not had a significant impact on our duration or the relatively small unamortized premium of the portfolio. Assuming a flat rate environment, we expect securities yield to remain at the current level for the remainder of the year.
Turning to Slide 7. Noninterest income decreased $3 million and the net interest margin declined 12 basis points to 3.67%. Our loan portfolio added $14 million, specifically loan growth and one additional day in the quarter contributed $22 million. This was partly offset by lower loan yields, which I already discussed. Altogether, the loan portfolio had a 2 basis points negative impact to the margin. Higher yields on the securities book added $3 million and 1 basis points to the margin.
Deposit costs were higher with the increase in interest bearing deposits as well as higher pay rates, which combined has an impact of $15 million or 9 basis points. Higher wholesale funding needed to support loan growth and our share buyback program had a $5 million or 2 basis point impact to the margin.
In summary, the benefit from strong loan growth and one additional day in the quarter was more than offset by the net impact from rates combined with higher funding needs. Credit quality remained solid as shown on Slide 8. Our net charge-offs was $32 million or 26 basis points, which is at the lower end of our historical norm of 20 to 40 basis points. Excluding energy, net charge-offs for the remainder of the portfolio were only 6 basis points.
While total charge-offs were higher than recent quarters, we do not see this as a trend as the increase was due to the impairment of select energy loans, specifically the valuation on a few liquidating energy assets were impacted by volatile oil and gas prices and weak capital market. We have substantially completed our semi-annual redetermination process and believe our reserves are appropriate.
Total nonaccrual loans remained low at $224 million or 43 basis points of our total loans. Excluding a $51 million increase from energy, nonaccrual loans declined. There was a small increase in total criticized loans which represented less than 4% of total loans as of quarter end. Energy criticized loans declined $30 million. A combination of loan growth and the additional reserves for the energy loans I discussed, resulted in an $11 million increase in the reserve and a ratio of 1.27%.We expect that the provision for the remainder of the year will be approximately $25 million to $35 million per quarter.
Turning to noninterest income on Slide 9. Recall in the first quarter, we incurred an $8 million loss from the repositioning of the securities portfolio. Excluding this loss, noninterest income increased $4 million. Fiduciary income increased $3 million mainly due to annual tax service fees and higher market volumes. Our continued focus on growing card fees resulted in an $2 million increase. We also had a $2 million increase in bank owned life insurance and small increases in several other categories, including letters of credit.
Deferred comp asset returns, which were offset in noninterest expenses were less than $1 million, resulting in a $3 million decline from the first quarter. Expenses remain well controlled and our efficiency ratio dropped below 50% as shown in Slide 10. Salaries and benefits decreased $20 million following annual share-based compensation and higher payroll taxes in the first quarter as well as the decrease in the deferred comps that I mentioned. This was partly offset by annual merit raises and one additional day.
Advertising expenses increased $4 million from a seasonal low first quarter. Legal costs increased following a recovery in the first quarter of legal expenses previously incurred. Also, outside processing increased $2 million and was mostly tied to technology initiatives and revenue-generating activity.
Turning to Slide 11. In the second quarter, we repurchased 5.7 million shares under our share repurchase program which is nearly 4% of our total shares. On a year-over-year basis, our share count is down 12%. Together with dividends, we returned $525 million to shareholders in the second quarter. Our goal is to provide an attractive return for our shareholders by way of the buyback as well as a healthy dividend which currently have a yield of over 3.7%.
Turning to Slide 12 and the rate environment. While recent economic data has been mixed, the markets are expecting the Fed to cut rates later this month. Our standard model indicates a 25 basis point rate reduction will have an estimated $60 million impact to net interest income over the 12-month period. The pace at which we’re able to adjust deposit pricing will depend on competition and our need for funding. Therefore, we’ve provided a couple of scenarios with different deposit betas. Of course, the ultimate outcome for a net interest income depends on a variety of factors such as: the pace at which LIBOR moves, loan growth and balance sheet movement, as well as any interest rate hedges that we may add.
In March, we began hedging program. Over a 2.5 month period, we added $2.8 billion in interest rate swaps with an average tenor of 3.3 years and an average fixed rate of 223 basis points. Current rates for hedges and the corresponding downside protection provided are not attractive, therefore we have paused the program. Our strategy is to make steady progress in building our hedging program over time.
Turning to our outlook on Slide 13, which assumes a continuation of the current economic environment and interest rate as of June 30. Given the strong loan performance so far this year, we adjusted our expectation and now expect to drive 3% to 4% growth in full-year average loan relative to 2018. Recall, that seasonal factors can impact loan in the back half of the year. This includes declines in mortgage banker as the summer home buying season ends as well as dealer due to model year changeover. Also, middle-market typically experienced with a summer slowdown.
We expect average deposits to be stable for the remainder of the year, resulting in a decline of about 2% on a full year-over-year basis. Based on LIBOR as of June 30 and the higher funding costs, we now expect our 2019 net interest income to increase about 2% over 2018. The full-year benefit from our solid loan growth is expected to be partially offset by higher debt to help fund our share repurchase program and loan growth as well as the deposit mix shift and lower nonaccrual interest recoveries.
We have updated our forecast for the provision to be between 15 to 20 basis points for the full-year. We believe our overall portfolio will continue to perform well and we are adequately reserved for the issues that surfaced in the Energy book in the second quarter. There is no change in our outlook to noninterest income.
On a full-year basis, we continue to expect our expenses to remain stable excluding the restructuring charges we incurred last year. As far as the remainder of the year, we expect to see higher technology cost, primarily related to investments in our retail bank and higher outside processing expenses tied to revenue-generating activities as well as the impact from additional days.
In addition, we recently launched an advertising campaign related to brand awareness, which will be ramping up through the end of the year. Finally, with the possibility that the pickup in loan growth may be sustained, we are targeting a CET1 ratio of about 10% by the end of 2019. As we determine the pace of our share buyback, we will carefully consider our expected earnings generation, capital needs to fund loan growth and market condition.
Now, I'll turn the call back to Curt to provide some closing remarks.
Thank you, Muneera. We believe this outlook which includes loan and fee income growth as well as prudent expense control from capital management will drive superior returns. Over the past few years, we are focused on transforming ourselves to be more efficient and drive revenue growth. We’ve also maintained our underwriting discipline and reduced our excess capital. These actions have produced strong results, including and ROE of over 16% and better positioned us to weather changes in the economy or interest rate environment.
Next month our company will celebrate its 170th anniversary. Over our history, we’ve managed through many different economic, credit and interest rate cycles. As I’ve met with customers and colleagues across our geography over the past month or so, the tone is optimistic and sentiment remains relatively positive. Yet the economic backdrop remains uncertain and the market is currently pricing in rate curves.
As Muneera laid out, the impact from a possible reduction and short-term rates is manageable. And with our efficiency ratio in the low 50s, we remain focused on controlling the things we can control and maintaining strong performance metrics. While maintaining our expense discipline, we continue to invest in our future. For example, through our TechVision 2020 program, we've adapted our systems and IT talents for faster development and deployment of products and services for both colleagues and customers. In addition, this program is producing savings that can be reinvested.
In closing, we believe our key strengths will continue to produce superior returns. Our geographic footprint combined with our relationship banking strategy provides the foundation for our steadfast goal of driving profitable growth and enhancing long-term shareholder value.
Now, we'd be happy to take your questions.
[Operator Instructions] Our first question comes from the line of Brett Rabatin with Piper Jaffray. Please go ahead.
Hi. Good morning, everyone.
Good morning, Brett.
Wanted to start off on the margin, and the pressure in 2Q was mostly a function on the funding side. And given the guidance for 2% NII growth for the year, sort of implies a 3.55 average for the margin in the back half if I’m looking at the balances, right? Can you talk about your expectations for the margin in the back half of the year? And then just thinking about in the period DDA, which was better than the average for the quarter. Can you take any solace on that and expect maybe less pressure on funding costs, maybe just a little bit more color on how you’re thinking about the margin?
Okay.
Brett, let Muneera handle that.
Thank you. All right. Brett, so to give you a little bit more color on the back half for the margin, I will start by saying that our margin number of 3.67% is a pretty strong starting place for us. The biggest impact that I see to margin, clearly those come from rates. I mean, we are asset sensitive. And so we’ve provided you a variety of scenarios on Slide 12 as to what a possible rate cut could mean to us. Be it across the spectrum, you can look at the 10% data, which is essentially a repricing of our market index deposits to a 25% data, which is essentially what will happen if there's some lag in deposit pricing as a result of the competitive environment as well as us continuing to use a relationship-based approach from a pricing standpoint to a 50% data, which essentially reflects our standard pricing adjustments that we will continue to make to the deposit base. So you can prorate those impacts that we provided. I think the move across the spectrum on that front, but beyond that just for the third quarter LIBOR has continued to decline through the month of July. We have a Slide on 15 -- Slide 15 shows our loan composition, about 75% of our loans are tied to LIBOR, so a 10 basis points decline essentially means loan yields will be coming down about 7.5 basis points and you can probably compute that adjustment as well. Our shift to funding since that was part of your focus, from our funding standpoint, when I think about current company liquidity, we had a debt maturity in May. We were looking to replenish that in the back half, but you can also see that we’re closer to our target. And so I think that overall from a funding standpoint, I think that the impacts will be nominal in the back half. We will continue to use our funding from diverse sources, broker deposits, FHLB, to some extent the capital markets have continued to be efficient with our funding base. Hopefully that gives you some color.
That’s helpful, Muneera. The other thing I want to ask about was just energy. And we’ve seen some stress in the energy space, even though oil prices aren't that bad. Can you talk about -- give us a little flavor for what’s going on in the energy book and those credits that you’ve saw to stress in, were they gas related? Which fields were they? Can you give us a little more color on those credits as well?
Sure, Brett. First of all, our energy book remains in very good shape. We just got through our redetermination process and that went very well. We saw no meaningful migration in the portfolio at all. Borrowing bases were up modestly. Hedging was down just a tad. But overall, it was a good review. We feel very good about our book and where its situated right now. The issues in energy really had to do with about five credits, a couple of which were still leftovers from the downturn that we are going through a liquidation process. And what we’ve found over the course of the quarter was a decreased appetite for energy assets are going through some kind of liquidation process, particularly ones that are damaged in some way. And that leads to description of these five credits. We felt the need to take some charges to move the book value on these assets down to where our new expectations are on the sale of those assets. And then we also increased our reserves to cover what we would consider it to be a reasonable worst-case scenario for the disposition of these five assets. So that’s basically what we’re seeing.
Okay. Great. I appreciate all the color.
Thank you, Brett.
Your next question comes from line of Ken Zerbe with Morgan Stanley.
Great. Good morning.
Good morning, Ken.
Maybe a question for Muneera to start with. Just on Slide 13, you had the two issues I just want to try to reconcile. So the capital management your CET1 target of 10%, I believe you said you’re -- that, that's the higher now than the 9.5% to 10% because of the potential for sustained faster loan growth. But at the same time the top bullet, the average loans is up 3% to 4%, they really reflect the very strong first half you had, but it implies a fairly weak seasonally lower second half loan growth. Can you just help reconcile that? Why are you holding more capital with the expectation that your loans are going to -- loan growth is going to slow in second half? Thanks.
Muneera?
Good morning, Ken. So we are taking a longer-term view than just the back half. And if you look at the second quarter, you can see that the great loan growth that we had consumed about 25 basis points of capital. That just goes to show you how quickly capital can be impacted as a result of growth. And loan growth is the best use that we can put our capital too. So when we think about it that way, that’s one of our consideration. And then, second, capital ratios are calculated at a single point in time in the quarter. It's usually done in the last day. And we typically do see a pretty ramp up in our loans as we are approaching quarter end and that just becomes yet another consideration for us as we triangulate how we approach the target and how we want to think about it.
Okay. So if loan growth is little bit stronger than expected, is that -- sorry, if loan growth is weaker than expected, is it possible that you could accelerate buybacks versus what you’re currently expecting?
I think you will see us continuing to manage around that 10% target that we’ve mentioned. What I will share with you is, we continue to produce a strong bottom line number. And so as you think about going forward, some of those earnings will go to pay dividend, some of those earnings will go to help us capital accretion if necessary. But we do plan to plan to continue to return the rest to our shareholders and you will find that our payout will continue to be strong.
Okay, got it. And then just one other question. In terms of the provision guidance, the 15 to 20 basis points, or actually specifically the $25 million to $35 million per quarter, it seems like that kind of implies a little bit higher provision than what your prior guidance was. I understand there's no issues in the energy beyond what you’ve already taken, but are you trying to imply that maybe we're back to sort of more normal provision numbers or more normal charge-off rates versus kind of where we’ve been at a very favorable period, or are you seeing any kind of deterioration that would suggest the higher provision as warranted?
Pete?
Yes. So, Ken, the revision in our guidance is completely a function of second quarter results. And so we are not changing our outlook at all for the second half. That $25 million to $35 million per quarter would be more in line with normal. We’ve been doing better than that over the last couple of years and we'd hope we could still beat that. We are not seeing any need to build reserves from here. We feel really good about our reserves and we feel really good about the loan portfolio, ex energy. As Muneera mentioned, net charge-offs of only 6 basis points. So don’t see a lot of need to build reserves and this is -- this kind of reflects closer to what we will consider normal.
Okay. Thank you very much.
Thank you, Ken.
Your next question comes from the line of John Pancari with Evercore ISI.
Good morning.
Good morning, John.
Back to the outlook slide, just wanted to confirm, I know you say you’re assuming the continuation of the current economic and rate environment. Does that mean that you're assuming no change in rates, or does that mean you’re assuming the forward curve, which implies cuts?
Muneera?
John, we are assuming rates as of 6.30, so LIBOR as an example on 6.40 was 2.40, we are not baking in the forward rate curve. This is consistent with what we did when rates were rising. It is our opinion that we should give you our outlook based on where things stand at quarter end and people can have differing opinions on whether or not rate cuts will come to pass or how many will come to pass. So we’re separately giving you that impact on Slide 12. And you can make whatever adjustments you deem best to get to your expectation.
Okay. So based on that, if -- and I see that you gave the NII impact on those scenarios, so that’s fine in terms of the margin in NII. Now if we do get cuts, how does that change your expense expectation? I know there's not always a clear tie-in to expenses when there is rate changes, but given that environment and given your asset sensitivity, how does that change how you’re thinking about your expense growth outlook?
John, this is Curt. I will make a couple of comments there. We’ve done a lot of work out of the GEAR Up initiative around both improving our overall efficiency and expense base, but also helping us on the revenue capacity side as well. So we think we’re well positioned coming out that worked in the last few years to be able to maintain attractive efficiency and return. Our performance metrics even in a declining rate environment. Having said that, we are always looking at in our DNA, in our culture expense opportunities and really thinking about how we continue to leverage technology more efficiently and adopt things like AI, artificial intelligence technology in many of our noncustomer facing areas. And thinking about things like real estate etcetera, so we’re always thinking about ways that we can operate more efficiently from an expense standpoint. And if we retain or remained in a low interest rate environment over a longer period of time, then those are things we would lean into. I would also say though that just from the overall perspective, we’re very focused on the top line loan growth and fee income growth. We do continue to have a very favorable funding platform and so as rates come down we'd at some point have the opportunity to reduce pricing on the funding side. And then lastly, I will just say that we have managed through lots of interest rate cycles over time in our 170 year history and we continue to take the long-term view. What we’re not going to do is change our long-term strategy. We are not going to sacrifice pricing or structure or anything on the credit side or sacrifice our relationship focus. And so those are the things that we can control that we remained focused on.
Okay. Thank you.
Your next question comes from the line of Steven Alexopoulos with JPMorgan.
Hi. Good morning, everybody.
Hi, Steven.
To follow-up on John's question, so if I look at Slide 12 and the scenarios you’re providing, let's suppose that the 10% deposit beta scenario plays out and NII is worse than expected. What I think a lot of us are struggling with is, okay you had GEAR Up, is there any room left to cut expenses? Is there an appetite? Curt is the new CEO to cut expenses. Could earnings growth go negative? I think we're trying to piece these together to see your appetite to offset will looks like it's coming in the back half of the year.
Steven, thank you for the question. And I would reemphasize a lot of things that we said previously. I do believe that the GEAR Up initiatives have positioned us better and the sensitivity and other analysis that we’ve shown you is that we still can produce attractive efficiency ratios and return metrics even in a declining rate environment. And as I’ve said earlier, we’re willing to always look at expense initiatives, but not as sacrificing our long-term strategy and not to sacrifice revenue growth. And so we continue to think about other ways that we can be more efficient as an organization. I mentioned some of those to you previously. We are not announcing a big initiative or anything of that nature. This is more part of as we go. And some things we will be thinking about even if we were not in the declining rate environment.
Okay. That’s helpful. So it sounds like if the worst case scenario play out for NIM, we should brace for earnings to potentially decline, you’re not willing to sacrifice the long-term just to cut into the company. That’s what you’re essentially saying, right?
Yes, but I would also say to you that when you look at our full-year forecast, we are still calling for expenses to be flat year-over-year. And so we’ve proven that we can drive growth in the balance sheet as we are showing with our loan growth and still maintain a flat expense environment. So those are obviously things that we would be focused on.
Then separately for Muneera, if we look at the hedge program, it looks like you didn’t add to it this quarter. Can you give us a sense of what the costs would be to reduce asset sensitivity at this stage?
Yes, that’s fixed rate that we could lock in. Almost really doesn’t matter whether it's 2, 3, 4 years out, it's all hovering around the 170 basis points range.
Okay. Thanks for taking my questions.
You’re welcome.
Your next question comes from the line of Brock Vandervliet with UBS.
Hi. Good morning.
Hello, Brock.
Hi, good morning. Just wanted to add to that prior question in terms of the hedges that you have added the $2.8 billion, where do you see that by the end of the year and what’s your target for hedging at this point?
So what we’ve said, Brock, and continues to be our strategy is, we view this as a long-term rebuilding of the hedging program. And if we could replay in the 2020 hindsight here, we'd have probably added more hedges in the latter half of last year. But at that point, there were still a forecast around potential rate increases, and so we were trying to protect the upside revenue of the company. And so as we go along here, we’ve paused the program, but I would emphasize the word pause, it does not mean that we are softening at this point, but we need to be very firmly selective on a go-forward basis. And if there's an opportunity for us to continue to add hedges, we will do so. But over a longer period of time, you would expect us to build a larger hedging portfolio as we go through different interest rate changes over time. But right now, I do not foresee us adding hedges at this point. But again, it will depend on where we get from here and sort of in terms of the rate cycle.
Okay. And I’m just going back to slide 12. All eyes on this one slide. This is the first disclosure I’ve seen where there is real scenario analysis is shown. Could you just kind of walk through the different betas in particular, and based on what you know of your deposit mix and how should we kind of think about those deposit betas?
Yes, Muneera?
All right. Well, as I mentioned in my comments earlier, we are trying to be transparent on what a rate cut means to us. And I know that -- I expect that. Similar to what happened at the start of this rate cycle, where betas were a little bit slow as rates were moving up. That’s similarly on -- if rates were to decline, you will essentially see a gradual progression in deposit betas and you will see us sort of move across the spectrum that we’re reflecting on slide 12. And I tried to give a little bit of color. The 10% beta essentially reflects what we think would be more or less immediately pricing of our market index deposits that should come through fairly quickly. The 25% beta reflects a bit of a lag. We have to wait and see how the competitive environment is doing, make adjustments, use our relationship-based model to continue to make changes as we go down -- go through the cycle. And then the last that is what kind of pricing changes transpire. So I think that you will see as rates progress down that we will be moving along this path. I think we’ve done a really good job of managing our loan and deposit pricing, and we’ve been able to attract and retain customers, and you can expect the same if rates are to change.
Okay. Thank you.
Thank you, Brock.
Your next question comes from the line of Peter Winter with Wedbush Securities.
Hello, Peter.
Good morning. I’m just wondering, if I look at net interest income for 2020, just directionally, if we do get this three rate cuts, which is in the Fed fund futures, do you think you can grow net interest income in 2020?
We are asset sensitive and clearly rates do mean a lot to us. And as Curt said earlier, we will be focused on overall growing revenue, organically growing loans. We are in great markets. We have a lot of capacity, all of that will still continue. But no doubt, rates will carry the impact. What I will share with you, Peter, is even after three rate cuts and even after you consider the impact that’s been laying out on slide 12, our margin will still be quite competitive in our peer group.
Okay. And just if I look at expenses, in the second quarter, they came in lower than we’re expecting and you maintain your expense guidance for the full-year, which would assume a pretty big jump up, I guess in expenses in the second half of the year. Is there any chance that maybe expenses -- expense growth could come in a little bit lower than guidance?
Peter, the reason that the expenses -- primarily the reason they were lower in the second quarter is, in the first quarter we’ve our normal stock and compensation benefits that we provide our employees and so the associated taxes that go along with that. And so you normally see, seasonally the expenses in the second quarter decline. And so the forecast we gave for full-year expenses to be flat year-over-year, but second half some of the items that we mentioned to you would still be there. And obviously, if there are opportunities for us to spend lower than that, we would be focused on it, but we are trying to give you sort of the full-year guidance that we are expecting some higher outside processing, some technology-related costs, some of the advertising that’s sort of seasonal, especially, rest from our sponsorships in the second half of the year.
Okay. Thanks, Curt.
Thanks, Peter.
Your next question comes from the line of Steve Moss with B. Riley FBR .
Good morning.
Good morning.
On the capital front, just with the kind of like a move up in the CET1 target here, is 10% kind of the floor for capital going forward? Just even if you had better loan growth, you could still manage to like a 9.5% target, given you’re profitably with three rate cuts?
Yes. Steve, what I would say to you is that we are guiding you to the 10% number. We’ve not set any longer-term targets. It's something we will be working on over the course of the second half of the year. But as Muneera alluded to earlier, even without a revision to that target, we still believe that we can, in a meaningful way, continue to return capital through our shareholders, both in terms of dividend and buyback.
Okay. And then second thing just on the deposit funding costs. Have you seen any decline in deposit costs so far in the past month or two?
We are seeing some competitors starting to pull back a little bit on deposit costs and we always remain very, very focused on taking care of our clients as part of our relationship strategy. And so we do believe, at some point, if interest rates do come down and competitive landscape continues to evolve, that we'd have a chance to revise our deposit pricing. But we’re going to be careful in how we do that and make sure we’re taking care of our customers along the way.
All right. Thank you very much.
Your next question comes from the line of Erika Najarian with Bank of America.
Good morning, Erika.
Good morning. I just had one follow-up question on the capital side. I think what more surprised investors was lopping off sort of the lower end of the capital target for the year. And I’m wondering, is the question that we should ask, do you have a different capital binding constraint in CET1? Is there more bindings …?
Well, I’m not more [indiscernible] Muneera?
Sure. Erika, the binding constraint for us would be Tier 1 capital.
Got it. Thank you.
Your next question comes from the line of Gary Tenner with D.A. Davidson.
Thanks. Good morning.
Yes, Gary.
Hey, just wanted to ask the really positive trends on the general middle-market lending this quarter. I think that's really been talked about too much. But after several quarters, I think, a pretty minimal growth. If you go back to second quarter last year, you had nice little spike this year over this quarter. So was it -- what’s your sense of kind of the sustainability of growth in demand in that space? Is this the result of pent-up, kind of planning on your customers' part in terms of investment, or how do you -- what do you attribute that growth there?
Gary, I would say a couple things. We’ve been very focused on trying to increase our activities in the middle-market space. We've had growth in the last several years in our -- many of our industry verticals in areas of specialization, but we’ve not seen growth in middle-market. And so when you look at the last 12 months and really the last six months, many of the things that we’ve worked on through GEAR Up and other initiatives, I believe are starting to come to pass. And so we had worked very hard on restructuring of our lending process to increase our [indiscernible] capacity, so then we have more time interfacing with customers and prospects. We deployed some new technology and some CRM applications, etcetera. They’re helping from an enablement standpoint. And then we’ve been very focused on new client acquisition, especially in middle-market at about 40% of our new originations, again this quarter were to what we call new transactions, new customers. And then I would say, more specifically as it relates to middle-market, I know there's some overall economic concerns out there. We think our customers remain relatively positive, and so we've had some good traditional working capital opportunities, some acquisition-related financing opportunities, that we’ve been on the right side of, but we've also seen some CapEx. Eventually, if you put off building a new plant for a 10-year, you've eventually got to build something and so we had a few of those types of opportunities. S, we feel relatively constructive and optimistic about middle-market lending going forward, the pipeline remains pretty solid. Commitments were up and utilization were up in middle-market lending as well. And that really is not just a new phenomenon, but it's something that has been building for us. Last quarter, we saw growth in all three of our geographies also.
Right. Thanks for the detail.
Your next question comes from the line of Marty Mosby with Vining Sparks.
Hello, Marty.
Hello. Good morning.
Good morning.
Muneera, I want to ask a little about the NII. When you started talking about, moving at up 2% and then you start taking it down for the interest rate sensitivity that you mentioned, then you start looking at the current run rate. So, it's been running about $605 million in the first six months of the year. If you kind of back yourself down from your numbers, you’re pretty flat to last year, which means or implies that the number has to move by the fourth quarter almost back to where it was in the first quarter of last year. What I’m getting at is last year rates went up 100 basis points and now we are talking about one or two or three at the most, pullback in rates. But the sensitivity, it looks like it's racing a much bigger move on the upside on the backend. So, is there something else in funding costs or incremental balance sheet growth that’s costing a little bit more that is more fundamental than just interest rates, because it seems like there's a little bit more sensitivity on the downside with what you are guiding to right now.
So I think, Marty, you are absolutely right in some of the comments that you made. Funding is a big difference between last year and this year. We’ve done a lot on the capital front. And to be able to buy all those shares back, we've had to issue a lot of debt. And clearly, that just takes away from overall net interest income. So that’s certainly by far the biggest element of it. And then beyond that, our balance sheet has continued to change over the last couple of years. Even though we have the highest proportion of noninterest bearing deposits in our peer group, clearly that's something, as rates have gone up, customers have put some of that money to use a little bit more effectively. And our asset sensitivity is a good kind of asset sensitivity that comes as a result of what’s going on, on the liability side, i.e., the free funding that we had and that has shrunk a little bit over time. So those are a couple of things that I can give to you to consider on why things are different on the way down.
And then when we think about -- when you're talking about hedging, but also when you’re thinking about your securities portfolio, you are sort of doing some restructuring last year, which was -- is very valuable at this point that you did what you did last year, but you probably could have done more of that as well. How much do we need? Let's say, that we had short-term rates go down and the economy does well and so eventually that begins to round up at the back-end of the curve slightly, how much of a round up would you need to be able to step in and be able to hedge the balance sheet more proactively to take away some of this downside risk and be able to begin to kind of bite at the apple again to restructure the portfolio? Is it 10 basis points, 20 basis points, 30 basis points, 40 basis points? How many basis points on the long end do we need to have a little bit better environment once we do see some loosening on the short end?
So there's a couple of things that you’re mentioning in your question there. Part of it was about the securities portfolio and part of it was, what type of rate would cause us to move forward on the hedging front. On the securities portfolio, we've done -- we've been quite opportunistic. And you're absolutely right, we've taken a couple of opportunities to really help the yield of that portfolio along. As it gives us more fixed rate assets on our balance sheet, we like to make up there. It mutes [ph] our asset sensitivity. It gives us liquidity. So for all those reasons, I think what I would expect out of the securities portfolio is, for it to be essentially stable, we will continue to look for other opportunities as they come along. But as I said in my comments, I would expect that the yield there will remain stable. Beyond that and when you talk about what kind of a rate would cause us to move on the hedging front, that is a complicated question and one that is discussed a lot here at Comerica. Our opinion today is that, if the Fed is looking to essentially use rate cuts to sustain and prolong the economic expansions then -- and they’re successful in achieving that objective, then future outcome is likely to be better than what the market has priced in. And so we’re being patient. I don't really think that we’re chasing a particular magic number. For us, it is -- we continue to monitor the economic developments. We continue to monitor market prices, and we will continue to adapt to the uncertainty that we see and adjust our balance sheet profile accordingly. So that's sort of our game plan now.
Thanks. And then just lastly, Curt, when you look at your provisioning and the guidance that you're giving, you've been running somewhere in the, just call it $15 million to $20 million range per quarter once we back out kind of noise in the last six quarters until this quarter and then you jumped up quite a bit. You were talking about certain loans, five loans that created this jump up, but then we are kind of dropping provisioning from where it's at this quarter, but not going back to really what was closer to a $15 million kind of run rates. We are almost doubling the run rate of provision from what we’ve had over the last year and a half to what you're now expecting to have in the rest -- in the second half of the year. So, just want to make sure we are just focused on these five loans in this particular quarter and there's just some -- just conservatism baked into your guidance on the provision side going forward.
I think there's always -- we always try to bake in some conservative view into provisions. By design there are things you know about and anticipate in the portfolio and then sometimes things happen that can be more surprising. And as Pete alluded to earlier, we do not know of anything out there right now that is of concern to us in the rest of the portfolio. While it continues to be a fairly benign credit environment, we’re seeing loan growth and that facilitates or necessitates us in increasing some provision as we go just based on the accounting rules associated with that. But we're trying to give you a view that would say kind of a more normalized environment, what might that look like. And it's been such a benign and low charge-off environment for so long, it's hard to think about what a more normalized environment might look like longer term. But we’re trying to be conservative in those estimates, but also trying to give you a sense of sort of -- at least what the profitability could be, if we see a change in the credit environment.
Thanks.
[Operator Instructions] And your next question comes from the line of John Pancari with Evercore ISI.
Hello, John.
Good morning. Good morning. Thanks for taking my follow-up. Just back on the capital point. I know you just indicated that your binding constraint is Tier 1. So you're at 10.2% Tier 1, 8.5% is the regulatory minimum. What's your internal buffer? Is it about 1.5%?
Well, it tends to be in the range, John. Just recognize that we’ve a lot of constituencies that we’ve to cater to on that front. We’ve to think about our regulators, rating agencies, our customers, depositors. And all of that is all part and parcel of the consideration and where we go on capital front. We -- for us, when we think about, as Curt said, the 2020 financial plan, at that point, we will also look at the capital plan and have some internal discussions and see what if anything we can update on that front.
Okay. And then -- go ahead.
I would just say, John, we normally would give our forward guidance on the fourth quarter earnings call.
Got it. Got it. So then, I guess regarding that planning, I might as well ask about it now. So, why not issue preferreds then if CET -- if Tier 1 is your issue and then buy back common. And then separately, Ralph -- Curt, 'm curious on your take here, is M&A plans for the bank coming into play here? Thanks.
John, preferred is something that we’ve looked at periodically and we will continue to look at periodically. Certainly we are points along the way, but we did not think preferred was very attractive. And so it's something we will think about and make some assessments longer term there, but certainly on -- in these forms and others, we'd make you aware of that. And then on the M&A front, nothing has changed for us. We continue to focus on organic growth and we continue to be very patient around M&A transactions. I think we’ve done two in the last four years, and both of those were transactions that made a lot of strategic sense for us. They really were good cultural fit and aligned with the businesses and geographies that we operate in today. Our appetite around M&A is -- continues to be limited to really primarily Texas and California and potential targets are relatively few. And so we’re focused on growing our geographies and growing our lines of business in those primary markets, we still feel like we’ve a lot of upward growth opportunity.
All right. Thanks, Curt. Appreciate it.
Thank you, John.
I will now turn the call back over to Curt Farmer, President and Chief Executive Officer for closing remarks.
We appreciate everyone's interest in Comerica. Thank you for joining our call today and have a great day.
Ladies and gentlemen, this will conclude today’s call. Thank you all for joining. You may now disconnect.