© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Comerica quarterly earnings call.
At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you’ll need to press star, one on your telephone.
I would now like to hand the conference over to Darlene Persons, Director of Investor Relations. Please go ahead.
Thanks Regina. Good morning and welcome to Comerica’s first quarter 2021 earnings conference call.
Participating on this call will be our President, Chairman and CEO, Curt Farmer, Chief Financial Officer Jim Herzog, Chief Credit Officer Melinda Chausse, and Executive Director of our commercial bank, Peter Sefzik.
During this presentation, we will be referring to slides which provide additional details. The presentation 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 could cause actual results to materially vary from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. Please refer to the Safe Harbor statement in today’s earnings release on Slide 2, which I incorporate into this call, as well as our SEC filings for factors that can cause actual results to differ.
Now I’ll turn the call over to Curt, who will begin on Slide 3.
Good morning everyone and thank you for joining our call.
The year is off to a good start. In the first quarter, we generated earnings of $2.43 per share, a 59% increase over the fourth quarter primarily driven by strong credit quality. Our ROE grew to over 18% and our ROA was 1.68%.
I am pleased to report that we are hearing more optimism among our customers and colleagues across our markets. Stimulus payments to individuals and enhanced unemployment benefits, along with PPP loans to small and medium sized businesses have provided much needed relief to those that are struggling. Also, the infrastructure bill that is being considered is expected to spread spending over many years. This physical stimulus and the ramp-up in the vaccine distribution in combination with ample liquidity and low borrowing costs has the potential to spur substantial activity. Economic metrics are improving quickly and the outlook for the back half of the year is for strong economic growth. As the economy continues to reopen and pre-pandemic conditions return, many businesses are beginning to experience accelerating activity.
I remain very proud of the unwavering commitment of our team to serve our customers, communities and each other. We have again stepped up our efforts to support those affected by the pandemic. Last month Comerica and the Comerica Charitable Foundation pledged approximately $50 million to support small businesses and communities impacted by COVID. This support is in addition to the $11 million committed in 2020.
As you know, last year we funded $3.9 billion in the first round of PPP loans. Also, so far this year due to hard work of colleagues across the bank, we further assisted businesses by funding close to $1 billion in a second round of PPP. In addition, in the first quarter we processed over $600 million in PPP loan repayments, mainly through forgiveness.
Turning to our first quarter financial performance on Slide 4, compared to the fourth quarter, average loans decreased with seasonally lower home purchase volumes impacting our mortgage banker business. Also, total line utilization across nearly all businesses has remained low; however, our loan pipeline has continued to grow. Average deposits increased over $1 billion to another all-time high as customers received additional stimulus payments.
Net interest income was impacted by $17 million in lease residual adjustments in an expiring legacy portfolio. Excluding this impact, pre-tax pre-provision net revenue increased 5% despite the shorter quarter and the decline in loan volume. This increase in PP&R was due to continued robust fee generating activity and our expense discipline.
As far as credit, our conservative culture, diverse portfolio, as well as deep expertise has served us well. Strong credit performance and an improvement in our economic forecast resulted in a negative provision of $182 million. The credit reserve remains healthy at 1.59%. Net charge-offs were only three basis points.
Through the cycles, our net charge-offs have typically been at or below our peer group average, including during the past year as we navigated the pandemic. With more confidence in the economic recovery and an estimated CET-1 ratio of 11.09%, we plan to restart share repurchases.
In the second quarter, we expect to make significant strides towards our 10% target giving careful consideration to earnings generation as well as capital needs to fund future loan growth. Our ongoing goal is to provide an attractive return to our shareholders, which includes a dividend that currently has a yield of about 4%.
Now I’ll turn the call over to Jim.
Thanks Curt and good morning everyone.
Turning to Slide 5, average loans decreased approximately $800 million. As Curt mentioned, the biggest driver was mortgage banker, which declined from its record high in the fourth quarter due to lower purchase volumes. Energy decreased as higher oil prices are resulting in improved cash flow and capital markets activity. We had expected national dealer loans would begin to rebound in the first quarter; however, supply chain issues, most notably with computer chips, have stymied production. In addition, March auto sales were the second highest of all time for that month, further depleting inventory. Dealer loans were $1.5 billion below the first quarter of 2020. We remain confident that floor plan balances will eventually rebuild to historical levels.
Equity fund services was a bright spot, increasing over $200 million with strong fund formation. Total period end loans reflected decreases of $900 million in dealer and $700 million in mortgage banker. Line utilization for the total portfolio declined to 47%. We feel good about the pipeline, which now sits above pre-pandemic levels. It increased in nearly every business line and loans in the last stage of the pipeline nearly doubled over the fourth quarter. Ultimately, we would expect this to translate into loan growth.
As far as loan yields, there were $17 million in lease residual value adjustments mostly on aircraft in an expiring legacy portfolio. We have not done business in this segment for many years and no further adjustments are expected. Excluding the 14 basis point impact from the residual adjustment, loan yields increased three basis points with the benefit of accelerated fees from PPP forgiveness. Continued pricing actions, particularly adding rate floors when possible as loans renew, offset the decline in LIBOR.
Average deposits increased 2% or $1.1 billion to a new record, as shown on Slide 6. Consumer deposits increased nearly $1 billion primarily due to seasonality and the additional stimulus received in January. Customers continue to conserve and maintain excess cash balances. With strong deposit growth, our loan to deposit ratio decreased to 69%.
The average cost of interest-bearing deposits reached an all time low of eight basis points, a decrease of three basis points from the fourth quarter, and our total funding costs fell to only nine basis points.
Slide 7 provides details on our securities portfolio. Period-end balances are up modestly as we recently began to gradually deploy some of our excess liquidity by opportunistically increasing the size of the portfolio. Lower rates on replacement of about $1 billion in payments received during the quarter resulted in the yield on the portfolio declining to 1.89%.
Yields on repayments averaged approximately 235 basis points while recent reinvestments have been in the low 180s. We expect to mostly offset the yield pressure on MBS in the near term with a modestly larger portfolio; however, maturing treasuries will likely be a slight headwind in the back half of the year depending on the mix of MBS and treasuries we would likely replace them with, as well as market conditions.
Turning to Slide 8, excluding the impact of the lease residual adjustment and two fewer days in the quarter, net interest income was roughly stable and the net interest margin would have increased two basis points. As far as the details, interest income on loans decreased $28 million and reduced the net interest margin by eight basis points. This was primarily due to the $17 million of lease residual adjustments which had a nine basis point impact on the margin, as well as two fewer days in the quarter which had a $7 million impact. Lower loan balances had a $5 million impact and were partially offset by a $3 million increase in fees related to PPP loans.
Other portfolio dynamics had a $2 million unfavorable impact and included lower LIBOR partially offset by pricing actions. Lower securities yields, as I outlined in the previous slide, had a $2 million or one basis point negative impact. Continued prudent management of deposit pricing added $3 million and one basis point to the margin, and a reduction in wholesale funding added $1 million and one basis point.
Average balances at the Fed were relatively steady and remain extraordinarily high at $12.5 billion. This continues to weigh heavily on the margin with a gross impact of approximately 41 basis points.
Credit quality was strong and metrics are moving in the right direction, as shown on Slide 9. Net charge-offs were only $3 million or three basis points. Non-performing assets decreased $34 million and at 64 basis points of total loans, they are about only half of our 20-year average. Inflows to non-accrual were also very low.
Criticized loans declined $366 million and comprised 5% of the total portfolio. Positive migration on the portfolio combined with growing confidence in improving economic forecasts resulted in a decrease in our allowance for credit losses. Of note, both the social distancing related segments as well as the energy portfolio have performed better than expected; however, we continue to apply a more severe economic forecast to these areas. Our total reserve ratio is very healthy at 1.59%, or 1.72% excluding PPP loans, and remains well above pre-pandemic levels.
Non-interest income increased $5 million, as outlined on Slide 10, sustaining the positive trend we’ve seen for the past year. Derivative income increased $11 million as volumes remain robust, particularly for energy hedges, combined with a $10 million benefit from a change in the credit valuation adjustment. Note that we have made a change in reporting. We have combined foreign exchange and customer derivative income, which was previously included in other non-interest income, into a combined derivative income line item. Prior periods have been adjusted to reflect this change.
Warrant and investment banking fees moved higher and we had smaller increases in fiduciary and deposit service charges. Partly offsetting this, commercial lending fees decreased $6 million with the seasonal decline in syndication activity. Deferred comp asset returns were $3 million, a $6 million decrease from the fourth quarter and are an offset in non-interest expenses.
Note card fees remained elevated. They were over 20% higher than a year ago due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment. All in all, another strong quarter for fee income.
Turning to expenses on Slide 11, which decreased $18 million or 4%, starting with salaries and benefits which were up $11 million due to seasonal factors. This increase was driven by annual stock compensation and payroll taxes resetting. Providing a partial offset was a decrease in deferred comp as well as a reduction due to two fewer days in the quarter and seasonally lower staff insurance costs.
All other expenses decreased $29 million. As discussed last quarter, strong investment performance in 2020 has resulted in an $8 million reduction in pension costs, which is included in other non-interest expense. In addition, effective January 1, we adopted a change in the accounting method for our pension plan. Previous quarters have been adjusted, specifically fourth quarter pension expense was reduced by $8 million. This change also decreased AOCI and increased retained earnings at year end by $104 million, which resulted in a 16 basis point increase to our CET-1 ratio.
Finally, we realized seasonal decreases in advertising and occupancy, lower operating losses and FDIC expense, as well as smaller decreases in other categories. Our strong expense discipline is assisting us in navigating this low rate environment as we invest for the future.
Our CET-1 ratio increased to an estimated 11.09%, a shown on Slide 12. As always, our priority is to use our capital to support our customers and drive growth while providing an attractive return to our shareholders. In this regard, we have maintained a very competitive dividend yield.
As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital to shareholders. With more confidence in the path of the economic recovery, we plan to resume share repurchases in the second quarter. We expect to make significant strides toward our CET-1 target of 10%.
Slide 13 provides our outlook for the second quarter relative to the first quarter. In addition, we have provided expected trends for the second half of the year relative to the second quarter outlook.
In the second quarter, excluding PPP loans, we expect loan volume to be stable. We expect growth in several lines of business, led by middle market as a result of increasing M&A as well as working capital and capex needs; however, this will be offset by continuing headwinds in mortgage banker, national dealer, and energy. In line with the MBA forecasts, mortgage banker is expected to decline as refi volumes begin to cool with higher rates.
We expect national dealer to continue to decrease as auto inventory levels are challenged by strong demand combined with supply issues. Also, energy loans are expected to remain on the current declining trend as higher oil prices are driving improved cash flow and capital markets activity.
As far as PPP loans, it is difficult to predict; however, we believe loan forgiveness will pick up towards the end of the second quarter and the bulk should be repaid by year-end. Excluding PPP loan activity, we believe loans should grow across nearly all business lines in the second half of the year. This is based on our robust pipeline and expectations that the economy will continue to strengthen.
We expect average deposits to remain strong with the second quarter benefitting from the latest federal stimulus. These record levels are expected to wane in the back half of the year as customers start to put cash to work.
As far as net interest income, the $17 million lease residual adjustment we took in the first quarter will not recur. That aside, all other factors, including PPP, are expected to offset each other in the second quarter. For example, headwinds from lower reinvestment yields on securities should be offset by a modestly larger portfolio. As we move into the second half of the year, we expect pressure on securities yields and swap maturities to be roughly offset by non-PPP loan growth. In addition, lower PPP loan volume and accelerated fees are expected to be a headwind. Of course, PPP activity is difficult to predict and may result in variability.
Credit quality is expected to remain strong. Assuming the economy remains on the current path, we expect our allowance should move towards pre-pandemic levels. We expect non-interest income in the second quarter to benefit from higher card fees driven by recent stimulus payments, as well as increased syndication fees following lower seasonal activity in the first quarter. Also, we expect growth in fiduciary income reflecting annual tax related activity and new business generation. This growth is expected to be more than offset by a decline in derivatives and warrant income from elevated levels, as well as deferred comp which is not assumed to repeat.
As we progress through the year, we believe customer-driven fee categories in general should growth with improving economic conditions; however, card fees are expected to be a headwind as the benefit from growing merchant and corporate volumes could be more than offset by lower government card activity due to the absence of further individual stimulus payments.
We expect expenses to be stable in the second quarter. Salary and benefit expenses are expected to decrease in the second quarter with lower stock comp as well as lower payroll taxes, partly offset by annual merit and one additional day. Offsetting this decrease, we expect a rise in outside processing tied to growth in card fees, as well as seasonally higher marketing and occupancy expenses.
As far as the second half of the year, by maintaining our focus on expenses we expect to offset higher tech spend. In addition, we expect increases in certain line items due to seasonality and revenue growth.
Finally, as I indicated on the previous slide, we plan to restart share repurchases in the second quarter.
Now I’ll turn the call back to Curt.
Thank you Jim.
As I mentioned at the beginning of the call, we’re off to a good start and we expect the economy will continue to improve throughout this year. We believe firming manufacturing conditions, increasing business and consumer confidence, as well as pent-up demand will support strong economic growth.
It is hard to believe that just over a year ago, we drastically changed the ways in which we work and live. We have demonstrated the resilience of our business model as we embraced our core values and rose to the occasion to support our customers, communities, and each other. Our success is anchored by our ability to provide our expertise and experience to build and solidify deep, enduring relationships, particularly during challenging times. I’m extremely proud of the work our team has done to ensure we continue to deliver the same high level of service.
We are focused on delivering a more diversified and balanced revenue base with an emphasis on fee generation. Our progress is demonstrated in our results as non-interest income has increased in each of the past four quarters. Our robust card platform is a great example. It’s helped position us for the recent and likely ongoing changes in customer behavior. Also, our fiduciary business has grown with strong collaboration between wealth management, commercial and retail bank divisions. In February, we increased the breadth and scale of our trust alliance business through the acquisition of a small group with expertise in this area.
In addition, we are committed to maintaining our strong expense discipline. Our technology investments are enhancing the customer and colleague experience, helping to attract and retain customers and improving colleague efficiency. Finally, our disciplined credit culture and strong capital base continue to serve us well. These key strengths provide the foundation to continue to deliver long term shareholder value.
Thank you for your time, and now we’ll be happy to take your questions.
[Operator instructions]
Our first question will come from the line of Ken Zerbe with Morgan Stanley.
Morning Ken.
Great, thanks. Good morning.
In terms of buybacks, good to hear that you’re starting it sooner rather than later. Are you able to quantify your buyback expectation in 2Q, and also when do you expect that you might be able to get back to that 10% CE Tier 1?
Good morning Ken, thanks for the question. We would not expect to get right back to 10% in the second quarter. We’re going to be monitoring the environment throughout the second quarter, and one of the things on our mind is that we are looking at the potential for some pretty good loan growth in the second half of the year, if not late in the second quarter, and so it’s important to us to make sure that we have a buffer above 10%, just to make sure that we can accommodate our customers and their needs and have the capital to support that growth. We do expect to make significant strides towards that 10% level, but we don’t want to thread the needle too tightly there. We think it’s important to leave some type of buffer there for potential loan growth that could pop up late in the quarter or in the couple quarters following the second quarter.
Got it, so it sounds like it’s more of at least a ’22 event, if you’re going to keep the capital to support loan growth in the back half? Okay.
We’ll make that assessment as we move through ’21. Certainly second quarter, we would expect to keep a buffer, and as we go through the last two quarters, we’ll make that determination as we go through ’21.
Got it, okay. Then my other question, you mentioned that you are investing some of your excess liquidity into securities. Is your view changing at all on how much of those excess deposits stay on your balance sheet over the long term?
You know, we do expect that some of those deposits will start to wane in the second half of the year in the long term, but we do feel pretty good about the liquidity position. We’re not expecting the Fed to materially change from its accommodative policy at this point, so we are comfortable taking measured steps to invest some excess liquidity into securities. That’s again something we’re going to monitor throughout the year. We want to avoid making any real big moves, but we think it is prudent to go ahead and invest some of that excess liquidity and the monitor in future quarters what’s going on in the economy, with the Fed, and make that assessment as we move into the latter quarters of the year.
All right, thank you.
Thank you Ken.
Your next question comes from the line of Terry McEvoy with Stephens.
Good morning Terry.
Hi, good morning. First question, your expectations around growth and middle market lending, I know you said pipelines are higher and I think there was some commentary on M&A, but could you just run through your confidence behind that statement and any markets or industries that stand out?
Terry, it’s Peter. We feel pretty good on the outlook, particularly in the second of the year, as Jim and Curt mentioned. The second quarter will be interesting to see how it unfolds as the economies start to open up, and we feel good about it in just about all of our markets, the major markets of Michigan, Texas and California. The pipeline looks pretty good, activity level looks good. What you just still aren’t seeing is utilization, so that’s probably the biggest challenge, but we do feel good on our outlook, as we’ve mentioned, and are encouraged about the optimism that we hear from our customers and their renewed belief that things are turning, if you will.
Thanks, and then as a follow-up, there’s been a lot of talk about businesses and individuals moving from California to Texas. I’m just curious, what are your thoughts here? Is this a net neutral to Comerica, or could you see some outside growth on the Texas side?
Terry, I appreciate the question. I think it’s a positive for us either way. We’ve got great franchise in both markets, and if anything it gives us the ability to really support our customers because to the extent that they’re moving and we can help them with that process, I think that puts us at an advantage. From the conversations we’ve had with customers, it’s not an uncommon conversation to have about the move, and I think it puts us as a real advantage to be able to support them either way.
Thanks, appreciate it.
Your next question comes from the line of Bill Carcache with Wolfe Research.
Good morning Bill.
Good morning. The idea that dealer floor plan levels will take longer to return to their historical levels, can you discuss how much of that you think is transitory, and more broadly, how are you thinking just in general of dealers possibly running with less inventory than they have historically?
Bill, it’s Peter again. Our dealer groups are doing really, really in this environment, interestingly enough, so they’ve got the challenges of inventory, getting cars, but they are performing really well, so obviously the balances are lower that we see, and we think that will come back. There’s been a lot of press about this issue - matter of fact, today there’s an article in the Journal about it, just the supply constraints, getting chips, getting cars produced. It’s not just chips, it’s lots of other supplies - raw materials in general, I think are in short supply.
All of that said, we think it’s probably more like 2022 before dealer starts to see floor plan balances increase. We were encouraged, I think coming into ’21, that that might happen sooner, but it’s clearly not happening. The supply constraints are still there. But in the meantime, we’re growing our customer base, our dealers are performing really well, and we continue to stay very committed to supporting that business.
That’s very helpful, thank you. As a follow-up, could you give a bit more color on how you’re thinking about the stickiness of the deposit growth that you guys have experienced, and then if you could also discuss your front book and back book pricing dynamics and how those look across both your securities and loan portfolios, just how do new money yields compare to what’s coming off.
Yes, we are expecting a large portion of the excess liquidity to stick around for some time, which is why we were comfortable investing some of that into the securities portfolio at the end of the quarter. We’ll certainly consider doing so in upcoming quarters. So much of the excess liquidity is going to be dependent upon what the Federal Reserve does, what happens with economic activity, so it’s really hard to say where it’s going to go, but I do think it’s fair to say that a pretty good portion of that excess liquidity is likely here to stay for some short to medium term. We would expect some of it to be put to use in the back half of the year.
Regarding your securities question, for the remainder of this year, we do expect for the securities to continue to roll off and pay off at rates that are higher than what we’re putting on the books, so we will have some continued reduction in the loan yield as each quarter progresses. But as you saw in the chart and on the slides, that decrease in yield is getting smaller each quarter as those yields start to converge on each other, but we don’t expect for that crossover point to occur this year, so we’ll continue to monitor that and make the right opportunistic purchases with the right structure. But we do think for the remainder of the year, we will continue to see yields roll off that are higher than what we’re putting on.
That’s very helpful. Thank you for taking my questions.
Thank you Bill.
Thank you.
Your next question comes from the line of Ken Usdin with Jefferies.
Morning Ken.
Hey, good morning. Thanks. Slide 18, you guys talk about go-forward considerations for the swap and bond portfolio. I’m just wondering with all of your interest rate sensitivity, how are you thinking about potentially adding to that book and laddering in over time vis-à-vis what you’ve mentioned and starting to do in the securities book itself? Thanks.
Yes, thanks Ken. Interesting that you mentioned hedging as well as the securities book. In a sense, we are hedging with securities right now, and we feel like we’re in a fortunate position in that we have an alignment of two different objectives in a sense by using securities to hedge. We can reduce asset sensitivity right now moving some earnings into the current period while maintaining some upside still, but we think we can do so in a way that efficiently uses the excess liquidity to buy securities that are yielding significantly more than hedges would. Right now, the hedges would carry about 50 BPs of positive carry; the securities we’re buying, about 170 BPs of positive carry, and frankly we’re a little agnostic as to what line item or geography we achieve both that earnings accretion and the reduction in asset sensitivity.
Right now, we see a lot of percentage in using excess liquidity on securities, and as that excess liquidity begins to wane, you may see us start to transition to more synthetic approaches.
Okay, got it. Thank you. Just a follow-up on the cost side, you’ve been pretty stable, some pluses or minuses underneath with the payments cards and pension and whatnot, and you’re talking about flattish from here. Can you just talk about the puts and takes about incremental investment dollars versus your points that you make about the other controls underneath? Is flat a good outlook as we even look longer term than just the next few quarters? Thanks.
Yes Ken, certainly to be clear, we do expect to be flat in the second quarter, but I did mention that even though we hope to self-fund some of our technology expenses, we will expect to see the typical seasonal increases, modest increases in the second half of the year. Also, we do think the economy is going to be in pretty good shape in the second half of the year, so we want to make sure we’re in a position to support that, so there will be some modest expense increase in the second half of the year as we support that growth. Certainly as an example, as card starts to take off throughout the year with additional stimulus that’s just come into the system, we would expect outside processing to step in or step up, and we do want to make sure we’re there for the customers, so there will be some modest expense growth as we move through the latter two quarters of the year.
Beyond that, we’ll have to assess 2022 as we move through this year. As always, we’ve done a pretty good job on expenses. They’re always very front of mind, and that’s something we have a bit of a maniacal emphasis on in terms of making sure we challenge every expense. We don’t think there are any big wholesale changes that we’re going to make to our expense structure at this point, but we do challenge expenses as we move through the year and we expect to maintain that very modest, flat to modest expense growth as we move from year to year.
Okay, thanks for that color.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Morning everybody. To start, it’s nice to hear that your customer’s more optimistic. I’m curious, what are you hearing from your commercial customers in terms of what they plan to do with both the deposits they’re sitting on, and do we need to see those get materially reduced before loan growth resumes?
Hey Steve, it’s Peter. I think the short answer to that is yes. I think that deposits need to come down some before we start to see that utilization. I didn’t feel as strongly about that maybe a quarter or two ago, but it certainly feels like the amount of liquidity in the system is just excessive and restricting the need to borrow money.
Now that said, I think that there will be a time where companies are going to be--they’re going to want more cushion, so they’re going to borrow money but they’re going to maintain deposits, so I think there’s a nice level that we will get to. We hope it’s, as we’ve mentioned, in the second half of the year as we maybe see some liquidity kind of move through the system.
I think it’s a little bit to be determined on that, but it certainly feels like some utilization of those deposits is going to be needed to really see the borrowing pick up.
Okay, that’s helpful. Then I know it’s tough to provide a full year outlook this year - there’s just so many moving parts, but in terms of loan growth, what’s your best guess what full year loan growth looks like? I’m trying to get a better sense of how you guys stack up versus your peers, and there’s quite a few pluses and minuses on your outlook slide.
Yes, well certainly--it’s Jim, Steve. I’ll take that first part of the question and then Peter can add on. It’s really been a bit of a rollercoaster year to year, so it’s very difficult to look at year-to-year comparisons. Each quarter has had its own story, and certainly we’re going to see several billion dollars in PPP loans paid down as we move through this year, so I would probably look at it in the context of just the go-forward outlook. As you heard me say, we do expect them to be stable in the second quarter ex-PPP. We’ll certainly be down in total due to PPP loans being prepaid as we move through the second half of the year, but as we mentioned, we do expect solid loan growth in the second half of the year with the ex-PPP portfolio.
Hopefully that helps, and Peter, anything you’d add onto that?
I think, Jim, you answered it. Steve, we’ve got some businesses that move, swing pretty big - mortgage banker, dealer and energy, we’ve talked about those. But when you look at the rest of our general businesses, I think historically we’ve grown pretty consistently with those economies. I think being in the markets that we’re in gives us a real opportunity to grow with those economies as things come back.
Okay, that’s helpful. If I could squeeze one last one in, I just want to understand the commentary around spread. I know it’s tough to pinpoint NIM, right, just given all the liquidity we’re talking about, but if we look at net interest spread of 220 in the quarter, is the message you’re giving us today is that you expect the spread to continue to decline through 2021?
You know Steven, I’m so hesitant to talk about NIM because we are so volatile on our deposits. I’d really like to look at it in terms of net interest income since the cash at the Fed really has no capital consuming characteristics. We do expect net interest income to be somewhat stable ex-PPP. We will see a little bit of decrease as we move late into ’21, just due to the fact that once you lose several billion dollars of PPP loans that are yielding around 2%, it’s unavoidable that that’s going to have some negative impact on net interest income, and that’s very hard to make up. I would say relatively stable ex-PPP, and then PPP will put some downward pressure late in the year. Hopefully as the economy picks up, you start to replace those PPP loans with real traditional loans and customers start investing for the future.
Okay. Thanks for all the color.
Thank you.
Thanks Steve.
Your next question comes from the line of Brock Vandervliet with UBS.
Good morning Brock.
Good morning. Just wanted to circle back on your rate sensitivity. Given the expectations here eventually around rate hikes, can you review your hedging profile, particularly the floors that you have in place or may not have in place, just to give us a sense of at the point when rates finally lift on the short end, how quickly do you accrue that benefit?
Yes Brock, it’s Jim - happy to take that question. Even though we have invested in securities over the last two or three quarters, fixed rate securities, we do continue to be very asset sensitive. That’s one of the reasons we’re comfortable making those investments in longer duration securities. You’ll see on Slide 18 that we’re actually showing more asset sensitivity than we have traditionally. You see the 100 BP linear non-parallel shift in rates which produced $156 million of income - that’s higher than we would typically see, and one of the reasons for that is all the excess cash that we have on deposit at the Fed.
Now as the economy continues to progress, you’d expect two things to happen in coordination with each other. You would expect to see rates rise, which is the genesis of your question, but typically that would be accompanied by improving economic conditions which would probably result in either the Fed drying up some of that liquidity or customers putting that cash to use, so I would expect to see that $156 million sensitivity marker that you see on Page 18 start to come down a little bit as we invest in more securities and as excess cash comes down to the Fed.
But having said that, there is no doubt that we are going to benefit significantly if rates do go up.
Okay, and just to put a finer point on that, some of your peers are quick to call out caveats that the benefit wouldn’t immediately accrue. It sounds like this is a different situation here, where the benefit is pretty direct drive.
Well, the benefit would certainly immediately accrue if rates went up, and probably more so for Comerica than peer banks just given the very significant asset-sensitive book we have and the LIBOR-based characteristics we have. Now, we do have significant loan floors in place and they are giving us significant lift, but even with that we maintain quite a bit of asset sensitivity, so we would certainly benefit right away.
Okay, great. Thanks for the question.
Thanks Brock.
Your next question comes from the line of Gary Tenner with DA Davidson.
Morning Gary.
Thanks, good morning. The question’s largely been asked, but just for modeling purposes, in terms of PPP fees yet to be recognized, could you update where those stand after the second round and the first quarter forgiveness?
Yes Gary. PPPs to be recognized, it remains to be seen how much of them are recognized through typical amortization. The longer these loans stay on the books, the more we’re going to see amortized through time. Obviously the quicker they’re forgiven, the more we get accelerated fees, likely all at one time.
Currently in terms of fees outstanding, we have between the two rounds about $76 million of fees on the book right now. In terms of how that might play out, we’re going to recognize a fair amount of that throughout this year as just amortization as part of that 2% that we’re getting on PPP loans. We’ll get obviously some of it next year for those loans that stay on the books.
Just to give you a feel for how this year might progress and what you might see in terms of earnings impact, the accelerated fees, if you look at those just in a vacuum, we had about $12 million of accelerated fees in Q1 and that’s compared to $5 million in Q4 of ’20, so we did have a $7 million increase. It’s very unpredictable as to how this might play out, but in some of the guidance that we’ve offered you in the script, we would expect that $12 million of accelerated fees to be somewhat stable in the second quarter. We would expect it to be higher in the third quarter - it could be 50% higher, it could be double, it remains to be seen, and then we would see it kind of come back to the first and second level in the fourth quarter. Those are the types of blips you might see in our net interest income quarter to quarter related to accelerated PPPs.
Now if you take that and you adjoin it to some gradual run down of the loans that are on the books right now, essentially the $3.5 billion that on the books, and you assume that runs down at a typical 2% rate, you put those together and it gives you a feel for what PPP is going to do to net interest income as we move from quarter to quarter.
Great, I appreciate the color. Just to be clear, though, I thought in your prepared remarks you’d noted that you expected the bulk, I think you said, of PPP loans to be forgiven by the end of this year, so most of those fees should be recognized as revenue this year?
That’s right. We would expect 5% to 10%, 5% to 15% to be on the book still at year end - that remains to be seen, but the vast majority should be gone by the end of the year.
Great, thank you.
Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.
Good morning Jon.
Thanks, good morning. Peter, maybe a question for you. You talked about the increasing pipeline. Can you talk about the magnitude of that change in the pipeline and maybe how different it was than a quarter ago?
Yes Jon, sure. A quarter ago, we were sort of using--you know, back to pre-pandemic levels. I think that language that you’re sort of hearing now is that it’s above pre-pandemic levels, so we feel like the pipeline is about as good as I can really, frankly, remember, being in this role for the last few years, so it’s encouraging. I would say it has exceeded sort of where we thought we would be at this point.
Now again, seeing all that come to fruition, we’ve still got a lot of work to do, but it certainly feels like we have gone above pre-pandemic levels versus last quarter, when I think was kind of using terminology of being back to pre-pandemic levels. That gives you an idea of it, so.
Okay. Then maybe to tie that into the deposit question we keep asking, you’re talking about deposits beginning to wane as customers put cash to use, and I think all we see from a high level is just the big deposit growth. Are you seeing evidence, maybe early evidence of some clients starting to do that, starting to take their cash balances down for business activity, or is that just not the case yet?
Jon, I would say little evidence, circumstantial maybe, even. I can’t say that we’re seeing hard evidence of that occurring just yet. Now again, we feel like the activity will lead to that sort of use of cash, but I can’t say that we’re seeing a whole lot of hard evidence that that is occurring.
Okay, and then maybe one for Melinda. On the reserves and talking about eventually heading back to pre-pandemic levels, is the message here it’s a glide path to pre-pandemic levels, or is the message that if the economy continues to mend, we could get another acute step-down in the reserve levels?
Thanks for the question. Yes, I think that obviously given the performance of the portfolio, which has really exceeded our expectations and is far better than, I think, what anybody could have expected coming into the pandemic, assuming that there is no negative migration, which again we don’t see anything in the portfolio right now that would lead us to believe that, and that the economic forecast remains positive to improving, we’re going to continue to see reserves come down close to that or around that pre-pandemic level.
I mean, CECL is a very complex accounting exercise, so it’s very difficult to peg a percentage or a number that it’s going to get to, but we feel very, very confident it will be moving in the direction of pre-pandemic levels throughout the remainder of this year.
Okay, and I accept and respect what you said on it’s complicated, but pre-pandemic levels would be--if we look at 2019, that’s a good baseline for pre-pandemic? It seems like a simple question, but is that how you think about it?
Yes. Our day one CECL was about 1.26, 1.3, so that would be a good number to sort of have in mind.
Okay, thank you.
We have no further questions at this time. I will turn the call back over to Curt Farmer for any closing remarks.
Let me just close by saying again that we are very encouraged by recent health metrics and economic trends, and I just remain very proud of our team and how we’ve managed through this challenging environment. As always, we are very appreciative of your ongoing interest in our company. Have a good day. Thank you.
Ladies and gentlemen, that does conclude today’s call. Thank you all for joining. You may now disconnect.