Comerica Inc (CMA) 2019 Q1 法說會逐字稿

Good morning.

My name is Michelle, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Comerica First Quarter 2019 Earnings Call.

(Operator Instructions) .

I would now like to turn the call over to Darlene Persons, Director of Investor Relations.

Please go ahead.

Thank you, Michelle.

Good morning, and welcome to Comerica's First Quarter 2019 Earnings Conference Call.

Participating on this call will be our Chairman Ralph Babb; President Curt Farmer; Chief Financial Officer Muneera Carr; and Chief Credit Officer Pete Guilfoile.

During this presentation, we will be referring to slides that 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 vary materially from expectations.

Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements.

I refer you 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 can cause actual results to differ.

Also, this conference call will reference non-GAAP measures.

And in that regard, I direct you to the reconciliation of these measures within this presentation.

Now I'll turn the call over to Ralph, who will begin on Slide 3.

Good morning, and thank you for joining our call.

Today, we reported first quarter earnings of $339 million or $2.11 per share.

Our earnings per share increased 12% over the fourth quarter and reflected solid loan growth, continued careful management of loan and deposit pricing as well as expense control.

In addition, our credit metrics remain strong and we continue our share buyback program repurchasing 5.1 million shares.

Altogether this drove an ROE of over 18% and an ROA of 1.97% for the quarter.

Relative to the first quarter of last year, our earnings per share increased 33% and pretax income is up 27%.

This is primarily due to higher interest rates, good credit quality, successful execution of our GEAR Up initiatives, along with active capital management.

On Slide 4, we have provided details on the adjustments related to certain items.

In the first quarter, we realized $11 million in discrete tax benefits, primarily related to employee stock transactions.

These tax benefits provided the opportunity to reposition $1 billion of lower-yielding treasury securities, resulting in an $8 million pretax loss.

This action will increase interest revenue by approximately $1 million per quarter.

Prior periods have been adjusted for restructuring charges related to our GEAR Up initiatives.

Slide 5 provides an overview of our first quarter results.

First quarter average loans increased $845 million from the fourth quarter.

This growth was broad-based and is particularly noteworthy as seasonality typically hampers loans in the first quarter.

In part, we believe this is a result of the efficiency benefits of our end-to-end redesign of our lending process.

This initiative has reduced turnaround time for loan requests and produced greater marketing capacity for our relationship managers.

As far as deposits, we saw the normal seasonal decline in noninterest-bearing deposits.

Also, we are seeing customers funding growth, acquisitions and capital expenditures from their cash balances and some are also choosing our off-balance-sheet offerings.

We continue to closely monitor our deposit base and have adjusted standard rates for certain products as we continue to manage deposit pricing to attract and retain customers.

Net interest income benefited from higher interest rates and loan growth.

This was more than offset by 2 fewer days in the quarter and lower balances at the Fed.

Our net interest margin increased 9 basis points to 3.79%.

We continued to have strong credit quality as evidenced by 8 basis points in net charge-offs as well as a decline in nonaccrual loans.

This led to a reduction in our allowance for loan losses and a negative provision of $13 million.

Excluding the $8 million loss on securities, noninterest income decreased $4 million from seasonally strong fourth quarter activity.

Netting out fourth quarter restructuring costs, expenses were stable.

An increase in salaries and benefits expenses in conjunction with annual stock compensation was offset by decreases in most categories.

We have maintained our expense discipline and our efficiency ratio continued to improve to 51%.

As I previously mentioned, employee stock activity resulted in a credit to our income tax provision of $11 million and added approximately 550,000 shares.

We repurchased 5.1 million shares and our estimated CET1 capital ratio decreased 36 basis points to 10.78%.

And now I'll turn the call over to Muneera, who will go over the quarter in more detail.

Thanks, Ralph.

Good morning, everyone.

Turning to Slide 6. First quarter average loans increased $845 million or 1.7% compared to the fourth quarter and the trend was positive through the quarter.

With growth in the bulk of our business lines, we outpaced the industry's average commercial loan growth based on the Fed's H8 data for the first quarter, which was one of the best the industry has seen in years.

Our auto dealer portfolio increased $434 million as dealers build their inventory of 2019 models and we added and expanded customer relationships.

Average energy balances grew $317 million due to reduced capital markets activity throughout most of the quarter as well as higher loan demand due to expanded borrowing bases and continued CapEx.

We remain committed to supporting our energy customers who are generally well positioned as they have reduced leverage and their cost base since the last downturn.

We also drove loan growth in general Middle Market in all 3 of our primary geographies as well as Equity Funds Services, U.S. Banking, Commercial Real Estate and Retail Banking.

Partly offsetting this growth was the seasonal decline in mortgage banker of $342 million with a normal winter slowdown in home sales.

Loan commitments were relatively stable following strong year-end growth as well as timing of activity in Equity Funds Services.

Total utilization increased to 52.7% and the pipeline remained strong.

Our loan yields increased 17 basis points in conjunction with the increase in short-term rates.

As you can see on Slide 7, average deposits decreased in line with our normal seasonal pattern.

Average noninterest-bearing deposits declined $1.7 billion, while interest-bearing deposits were stable.

As Ralph mentioned, with higher rates and continued solid economic conditions, we are seeing customers use their cash in their business and some are seeking other investment offerings through Comerica Securities.

We stay close to our customers and aim to provide them the best cash management solutions to meet their financial goals.

Starting mid-quarter, we started seeing a rebound in deposit balances, which is consistent with trend in prior years.

Average March balances were $1 billion higher than February.

Of note, period-end deposits decreased, primarily due to the timing of monthly federal benefit activity in our government prepaid card business, which had a $1.2 billion impact.

We remain focused on our relationship approach to manage deposit pricing.

In conjunction with the increase in short-term rates, late last year, our deposit costs increased 16 basis points in the first quarter.

In mid-March, with the backdrop of solid loan growth, we made pricing adjustments to certain deposit categories.

We expect our second quarter average interest-bearing deposit rate to be in the low 90 basis points range.

From there, the pace of increase is expected to moderate for the rest of the year as we believe we are well positioned competitively.

Of course, we are closely monitoring our deposits, funding requirements, short-term rates as well as the competitive landscape.

Slide 8 provides detail on our securities portfolio.

The yield on the portfolio continued to trend up.

While yields on MBS securities came under pressure in the first quarter, we were able to make purchases as incrementally higher yields than the securities that have paid down contributing $1 million to net interest income.

In addition, as Ralph mentioned, we repositioned $1 billion of treasuries at the end of the quarter.

The higher yield on the purchased securities will result in an additional $1 million in net interest income per quarter.

This 4-year duration of the new securities will help extend the duration on the overall portfolio, which was a little under 3 years at the end of the first quarter.

Turning to Slide 9. Net interest income decreased $8 million, while our net interest margin increased 9 basis points to 3.79%.

Our loan portfolio added $17 million and 14 basis points to the margin.

Increased interest rates provided the largest benefit along with loan growth.

This was partly offset by 2 fewer days and a small impact from a mix shift in the portfolio.

Higher yields on the securities book added $1 million and 1 basis point to the margin.

As far as Fed deposits, the higher Fed funds rate was more than offset by a $2.1 billion decline in balances.

The net impact was a $12 million reduction in net interest income, which added 5 basis points to the margin.

Deposit costs rose with increased pay rates as well as a minor mix shift in balances, which together had an impact of $9 million or 7 basis points.

As far as wholesale funding costs, the increase in short-term rates as well as the effect of the $350 million in senior debt issued on February 1st, cost $5 million and had a 4 basis point impact on the margin.

In summary, the net benefit from increased rates was $11 million or 6 basis points on the margin.

This benefit, combined with loan growth was more than offset by 2 fewer days in the quarter and lower balances, at the Fed.

As we indicated last month, when we presented at an investor conference, we have begun our program to moderate some of our asset sensitivity by gradually adding hedges.

We continue to closely assess our position and determine the appropriate path given our balance sheet movements, our outlook for rates and the market price for hedges.

So far, we have added $1.7 billion in interest rate swaps with an average tenor of 3.3 years and an average rate of 228 basis points.

Based on current rates, the impact on net interest income of the swaps we added is expected to be nominal.

Additional information can be found in the appendix.

Credit quality remained strong, as shown on Slide 10.

Our net charge-offs remained very low at $11 million or 8 basis points.

Nonaccrual loans declined and now comprise only 38 basis points of our total loans.

Total criticized loans increased slightly from historically low levels and represent 3.6% of total loans as of quarter-end.

Sustained strong performance of the overall portfolio and continued solid economic conditions across our geography and within industry exposures resulted in a small release in the reserve and a reserve ratio of 1.29%.

We remain vigilant, closely monitoring our portfolio for signs of stress.

However, at this point, we are not seeing any concerning trends.

Turning to non-interest income on Slide 11.

Excluding the $8 million loss from the repositioning of the securities portfolio, noninterest income decreased $4 million.

Fiduciary income declined $2 million, mostly due to lower financial market values.

In addition, we had small changes in several other categories, such as card, commercial lending and letters of credit, which were impacted by seasonality, including 2 less business days in the quarter.

Of note, fee income in the second quarter is typically stronger, including seasonally [higher] (corrected by company after the call) card and fiduciary income.

Expenses remain well controlled, as shown on Slide 12.

Salaries and benefits increased as a result of annual stock compensation, which was partly offset by lower executive incentives and fewer days in the first quarter.

Pension expense was lower as a result of the increase in discount rate and legal costs declined mainly due to the recovery of legal expenses previously incurred.

Both of these items are included in other expenses.

Software costs declined and equipment costs benefited from unusually low maintenance and repair expenses.

Typical seasonality was apparent in reductions in several line items, such as advertising, outside processing and occupancy.

Looking forward to the rest of the year, expenses typically reflect lower stock compensation, partly offset by merit and additional days as well as higher technology, outside processing expenses, advertising and occupancy.

Turning to Slide 13.

In the first quarter, we repurchased 5.1 million or 3% of total shares under our equity repurchase program.

Together with dividends, we returned $530 million to shareholders.

Our estimated CET1 ratio declined to 10.78%.

We are on track to meet our goal of a CET1 ratio of 9.5% to 10% by the end of this year.

We continue to give careful consideration to earnings generation, capital needs and market conditions as we determine the pace of the share buybacks.

Now I will turn the call back to Ralph to provide an update on our outlook for 2019.

Thank you, Muneera.

As usual, our outlook assumes a continuation of the current economic and interest rate environment.

We continue to expect total average loans to increase approximately 2% to 4% in 2019 relative to 2018.

We anticipate growth in most business lines, which is supported by positive loan trends in most of our businesses over the past few quarters.

Conditions in our markets remain good, yet customers remain somewhat cautious given more uncertainty regarding the path of the economy and lingering trade talks.

Coincident with loan growth, customers are using cash in their businesses and this is reflected in our deposit levels.

In addition, customers are more efficiently managing their cash position in this higher rate environment.

On a year-over-year basis, we continue to expect average deposits to decline about 1% to 2%, increasing gradually through the remainder of the year.

We believe the mix shift into interest bearing will continue at a moderate pace.

Our goal is to offer superior products and services along with appropriate pricing to attract and retain long-term customer relationships.

As a result of the recent pricing adjustments we made on deposit products along with lower LIBOR rates, we now expect our 2019 net interest income to increase 3% to 4% over 2018.

We continue to expect to benefit from solid loan growth as well as the completed securities portfolio repositioning.

This is expected to be somewhat offset by higher wholesale debt to help fund our share repurchase program as well as lower nonaccrual interest recoveries.

Incorporating the strong credit quality we achieved in the first quarter, we have lowered the forecast to our provision to 10 to 15 basis points.

We believe our portfolio will continue to perform well and begin to migrate towards a more normal credit environment as the year progresses.

Taking account of the $8 million securities loss incurred in the first quarter, we have adjusted our outlook for noninterest income growth of 1% to 2%.

There is no change in our outlook for expenses, the tax rate or capital target.

In closing, our first quarter results demonstrate our ability to drive loan growth, while maintaining favorable credit metrics and well-controlled expenses.

We remain committed to appropriately managing our capital base, returning excess capital to our shareholders in a meaningful way, while we support growth and investment in our businesses.

Our return on assets, return on equity and efficiency ratios continue to clearly demonstrate our ability to enhance shareholder value.

Now we will be happy to take your questions.

(Operator Instructions) Your first question comes from John Pancari from Evercore.

On the NII guidance change, I guess, if you could just talk through a little bit more of the rationale behind the change.

Wasn't higher deposit pricing already factored into your expectation when you presented at conference this quarter?

And then also, I want to get some color around the interest recoveries.

I wouldn't believe that your -- I didn't think that you will be modeling expected recoveries going forward as you look at the year's guidance, but I'm just trying to understand how much of an impact that had, that change.

Muneera?

So you're right, from the last time we presented at the conference, the one big change was the standard pricing changes that we made in mid-March.

And so while we had factored some increases, it wasn't quite to the extent of the changes that we made.

Beyond that, the levels of 30-day LIBOR have been fairly variable, so that's another component.

And then, even though it's nominal, some of our hedging activity that we have done so far to date is the third aspect of the change.

And then, I think you also asked about nonaccrual interest recoveries and so you're right, we typically don't include -- we have a normal level of $1 million to $2 million that we forecast for those types of recoveries.

And in the first quarter, those recoveries were elevated.

I would expect them to come down from what we have posted for Q1.

Okay.

All right.

And then, I know you also adjusted your NII expectation a bit on the fee side as well as -- your fee expectation as well as the net interest income.

Why not any type of expense offset to that?

So the only change we made on the fees was for the $8 million loss that we picked up on the securities portfolio.

And for that reason, there isn't -- it's not like other fees are coming down and that's why we left our expense guidance alone, and that flat outlook, I think that we're doing really well on the expense front and we remain fairly well disciplined.

The next question will come from Erika Najarian from Bank of America.

So I just wanted to make sure that we are interpreting some of the color on the net interest margin correctly.

Muneera, in just sort of plugging in some of the major assumptions like deposit costs and the securities restructuring, I'm getting to a base net interest margin of about 3.74% for the second quarter.

I'm wondering if that's the right ballpark to think about the second quarter.

And if the rate outlook persists, what you expect for the quarterly trajectory of the net interest margin from there?

So that was some fast math there.

We typically don't provide guidance on net interest margins.

I can generally talk to it in terms of net interest income and what I expect there.

For net interest income, I do expect that for the remainder of the year, we will see net interest income to be stable to slightly improving from the first quarter levels, that is mainly because of the loan growth that we're expecting as well as the incremental 5 days for the rest of the year and offsetting that will be our higher funding costs.

And in that regard, I have provided our deposit cost guidance and also, the fact that the senior debt that we issued was on February 1. So we'd have an incremental month at least in the second quarter for those costs.

And other than that, I've mentioned the fact that our nonaccrual interest recovery should come down from the elevated levels that you saw and then the LIBOR -- variability in LIBOR as well as the hedging activity that we're doing.

So all of that should help you triangulate to the margin that we're trying to get to.

Got it.

And on Slide 18, thank you for giving us updated interest rate sensitivity analysis.

And as we think about, now it's funny, the market is looking to the part of the chart that says down 50 basis points, which is down $65 million.

And I'm wondering as we think about that current down 50 basis point scenario, in your model, what are you assuming for how you could ease funding costs or how much deposit competition remains?

And what can you do for the rest of the year from a hedging program perspective to perhaps narrow the sensitivity?

So the information that we're providing on that interest rate sensitivity slide is to give people an idea of what things would look like if rates come down, really to use the down 50 on average, that is an instantaneous shock of 25 basis points.

We are looking at where our deposit costs are today in doing that calculation.

We're factoring in the floors that we would have on some of our deposits.

And so it's based on what we could really manage if we had to come down 25 basis points, what would that really look like.

It's not factoring additional increases that we will have in deposit costs because this is an as-of calculation based on quarter-end.

We will continue to, on the hedging side, look at our overall balance sheet, look at what's happening in the interest rate environment.

We'll continue to make good gradual measured progress on that front to ensure that we are protecting ourselves from downside risk.

On that front, I will tell you that we continue to have a positive view on the U.S. economy.

We are not expecting a recession in the near future and we are fairly confident that we can get our hedging program completed in a gradual, systematic manner.

The next question will come from Ken Zerbe from Morgan Stanley.

I guess, maybe just starting off with the negative provision expense in the quarter.

Like, obviously, I know you guys have a fair amount of discretion in terms of when you think about the reserve, broadly speaking, but given so the dialogue is about, is the economy weakening and there is some concern there, can you just talk about how much discretion you did apply to the reserve release this quarter?

And does it make sense to be a little more conservative in terms of keeping the reserve going forward?

Well, we do give a lot of discretion to it.

We're very patient when releasing reserves.

We want to see our credit metrics being very strong over a sustained period of time and that's exactly what we saw.

We didn't see just good credit metrics.

Over the past quarter or 2, they've been really exceptional.

Net charge-offs of 8 basis points.

Our nonaccrual inflow we believe is a record-low level right now.

Our nonaccrual loans are extremely low and our criticized remains very low.

So that's -- the reduction in our reserves this quarter is a reflection of what we've seen over the past few quarters.

All right.

Fair enough.

And then actually just if we can go back to Slide 18, down at the very bottom, you talked about the hedging that you have no additions modeled.

Can you just talk about that a little bit in more detail?

Because obviously, you're still very asset-sensitive.

There is the potential that rates do decline.

I understand that the Fed funds expectation is that we do get a couple of rate cuts going forward.

Are we at a point right now where it just doesn't make sense to hedge unless you're even more negative than the Fed funds futures curve?

I'm just trying to figure out the dynamics of when you would want to add additional hedges or not.

Okay.

So Slide 18 is based on 3/31 and -- where we were with our hedges and what our balance sheet looked like on that date.

So it's not adding future projections of where the program will go and you can see that in the second quarter, we continued to make progress on the hedging front.

Overall, just high-level thoughts on hedging, as I said, we remain positive and constructive on the U.S. economy.

We feel fairly confident that we will get to July and see the longest expansion in U.S. history.

I would say that since the fourth quarter, there has been a lot of volatility in the financial markets, a lot of news on the global economy.

And so what we are trying to do here is ensure that we are protecting ourselves from downside risk as well as maintaining some of our asset sensitivity to benefit should momentum pickup in the U.S. economy.

And so the best way to do all of that is to have a systematic balanced measured pace and making sure that we're positioning our balance sheet appropriately.

Your next question will come from Steven Alexopoulos from JPMorgan.

I want to follow up on cash management which you're seeing in your commercial customers.

And if we look at the guidance for interest-bearing deposit cost to move to 90 basis points and then moderate in 2Q, I know that you're getting a lot of pushback, I think we get it that the likely move up, but what gives you confidence that deposit costs will then moderate given you'll be at around 90 and many of your customers could get 2%-plus?

Trying to understand where deposit costs ultimately go to.

Muneera?

So Steven, the way we are looking at the cost side of the equation, our commercial customers have remained fairly current as we've gone through the rising rate cycle.

And then, on the retail front, we've been pretty deliberate and we've done about 4 standard pricing changes when rates have gone up 8x in the last 2 years.

Clearly, we continue to monitor the competitive landscape and we are making the right changes that we think will help us be well positioned for the future and our cost outlook that we are providing to you is based on all of those conditions -- all of those positionings.

And so I feel that because of that, deposit pricing pressure will level off.

Now having said all of that, deposit pricing for the industry is driven by the need for liquidity and as the economy gets stronger, as loan growth gets stronger, people will look for funding and that in turn could put some additional pressure on the deposit pricing front.

We will continue to monitor the competitive landscape.

I see all that as being a net positive because the things are really going well.

I will say that when I look at our deposit cost at 78 basis points for the first quarter and even the 90 that we're projecting, I would say that we are generally in line with or better than our peers.

We'll have to wait and see sort of how things progress as the year goes on.

Muneera, are you seeing pressure ease at all yet in terms of customers looking for exception pricing?

I would say, on the commercial side, yes, we are seeing a little bit of easing there, and on the retail side, we are well positioned at the current time.

Okay.

And then on the hedges, just given the shape of the yield curve, can you walk us through the economics to put on new swaps here?

What rate are you giving a variable and then what are you receiving fixed?

So variable, we're doing 30-day LIBOR swaps.

So our received fixed is that average rate that I mentioned in my comments, [228 basis points] (corrected by company after the call) on average.

And if you go to Slide 19, we've tried to provide you greater transparency into what we've executed so far.

Okay.

And relative to the $900 million you added this quarter, is that about the quarterly pace you expect moving forward?

I think that will depend.

We will maintain our flexibility and we'll see how things transpire in the economy and in the market and we'll try to be as opportunistic as we can.

Your next question will come from Brett Rabatin from Piper Jaffray.

I wanted to start with credit.

I realize it's very strong and charge-offs are pretty minimal.

You did have a bit of an increase in criticized this quarter and I know a small piece of that was energy related.

Can you talk maybe about industries that impacted criticized loans this quarter, and if there were any underlying trends in what you saw?

Sure.

Pete?

Yes, so Brett, bear in mind we were coming off of a record level low of criticized at year-end at 3.1%.

And we really didn't feel that, that level of criticized was sustainable even if credit quality remains excellent, which it has.

So I would describe the modest increase that we saw in criticized this quarter to be more bouncing along the bottom, if you will, than any trend.

And there were no lines of business that we saw that were stressed at all this quarter.

There were just some modest level of increases in a number of lines of business, including Energy, but if you take a look at that increase in the Energy criticized, it was pretty modest and it was fairly normal in the scheme of things.

Okay.

And then the other question I wanted to ask was just around Technology and Life Sciences, if you could give any color around the trends there and I guess, I thought maybe that might grow a little more this quarter, especially the capital call line of credit business.

Can you maybe just help us with what was the underlying trends in the quarter for that?

Sure.

Curt?

Yes, Brett, so on the core Technology and Life Sciences business, we did see a slight decrease, about $30 million for the quarter.

Actually, loan production for us remained pretty strong through the quarter with a lot of emphasis for us continuing to be around new-to-new relationships.

We do feel like the pipeline and momentum there is starting to build a little bit.

I think the challenge for us in Technology and Life Sciences continues to be our strategy of staying early stage and sticking to a very granular strategy.

So a lot of the deals that we were booking are smaller in nature.

So we're doing a lot of $1 million, $2 million, $3 million-type transactions and just the sheer volume associated with those may take a little bit more to move the needle.

But we do feel like we've got the right strategy overall.

It continues to be a very attractive business for us from an overall relationship perspective, especially on the depository side and the fee income side associated with the business.

So we're not concerned about for the longer-term growth trajectory around the business, but shorter term, we have seen a little bit of the business kind of moving sideways.

We continue to see nice growth in the Equity Funds Services component, as we've mentioned on previous calls, and we were up about $93 million in that business line.

We see activity, and new fund creation continues to be strong.

Your next question will come from Ken Usdin from Jefferies.

A question on capital.

So I know you reiterated your commentary that you would expect to get into the 9.5%, 10% CET1 range this year, but just after you took, you had the $500 million buybacks for a couple of quarters and then you went to $475 million.

And I'm just wondering how you're thinking about the pace of capital return from here and then the pacing in terms of getting into that range.

And is there any reason why you wouldn't eventually head to the lower end?

Muneera?

All right.

So the way we see it, we have all year to get to our target of 9.5% to 10%.

We are being measured.

We want to take a look at how loan growth does for us this year.

Clearly, that would be the best use of our capital.

And then beyond that, we want to wait and see how the economy does.

And I think that we are making good progress.

I mean, with a 10 handle and being at the 10.78%, clearly I would say we are moving in the right direction and we'll continue to make adjustments as we approach the end of the year.

Okay.

So -- all right.

And then a follow-up question just on the loan side, it's interesting to hear about the customers using cash, but yet you also saw one of the best middle markets growth quarters in some time.

So can you talk about just what you're seeing across the customer base then?

Is it -- if people are using the deposits, why are you even seeing the loan growth and when you're seeing the loan growth, is it not taking away from deposits?

Just I guess, the question is more about the loan-to-deposit ratio and where you'd expect that to kind of settle out if there is an usage on one side, but expansion still on the left side of the balance sheet?

Curt?

Yes, there were kind of 2 parts to that question.

One is about loan growth overall and where we're seeing it and the deposit utilization and then secondly, where we think LDR, loan/deposit ratio might be for longer term and are we concerned about it?

So on the lending side, we are seeing pretty broad-based loan growth.

First quarter is usually a soft quarter for us.

So that is nice to see that we saw growth across a number of businesses, Energy, all 3 of our general Middle Markets, Texas, California and Michigan, Equity Funds Services, U.S. Banking, Commercial Real Estate, Retail Banking all we've mentioned previously you saw on the slide.

We did have a normal seasonality and -- but dealer increasing and the decline in Mortgage Banker Finance and we saw also, I think, some good momentum or we feel like we've got some good momentum heading into the second quarter.

Period-end loans were up over $50 billion, up about $140 million for the quarter and then sort of the moving average, $624 million above the quarter, and pipeline feels pretty good heading into the second quarter.

I don't have a perfect answer for you as in terms of why are we seeing loan growth and also still like deposits are being utilized as well, but it's more anecdotal in terms of the feedback we're getting from customers.

I think they are pushing on both levers right now and feeling pretty good about the economy despite some -- the longer-term outlook considerations and some of the concerns, whether it's around global issues, trade, Brexit, China and kind of the list goes on.

But I think, for right now, most of our customers are in a net borrowing mode and we're starting to see a little bit of CapEx occur as well.

So we think it's really dipping into both buckets, both utilizing credit facility, originating new credit facilities as well as tapping into deposits.

They have sort of both levers being pulled.

And then I'd like to shift and talk a little bit about the loan/deposit ratio.

We do feel like that with where we are today at 93% that we still have capacity for growth in the loan portfolio.

The first quarter is a seasonal low period for us.

We are forecasting, as we said earlier, that the second quarter would be relatively stable and then down sort of 1% to 2% for the full year, but a lot of that is because of the activity we saw in Q1.

So we're expecting some growth trend for the rest of the year really based on sort of seasonal patterns.

We do -- as Muneera said earlier, we think we're well positioned on the rate front.

We continue to take the relationship-based approach to serving our clients whether those are retail clients or commercial clients.

And then we've been in a net customer acquisition mode.

And so over 40% of our new loan production in the last 12 months has been to new customers and with almost all those new customers comes depository relationships.

We gain the core operating funds, treasury management services, et cetera, with those clients.

And so we feel like that we're well positioned from a longer-term perspective and do not have any sort of near-term concerns about loan-to-deposit ratio.

Your next question will come from Jennifer Demba from SunTrust.

Just a question on M&A interest at this point in the cycle, Ralph, and wondering what you think the transactions announced earlier this year mean for the industry in general?

Well, in general, we have the same stance we've had for a long time when you look at where we are located in the growth potential that we have in the 3 large markets of Michigan and California and Texas.

And that doesn't say we would look at the possibility of an acquisition, but it would be in those markets as it would have to fit from a number of different ways and that is very important and I would underline again we've got the right people and the right locations now in the markets and continuing to grow there will be very important for us.

And I think when you look at the economy, especially right now, it's slowing down just a little bit, but on the other hand, when you look at Texas and when you look at California, it's still moving quite well.

Michigan is slowing just a bit.

Because of the car industry, it is slowing down just a bit.

But overall, we're very well positioned for growth and to create value over the longer periods of time with the markets we're in today.

Okay.

And you feel that Comerica is large enough to make the necessary technology investments it needs to stay competitive in your market segments at this point?

We do and especially today when you have the ability to use vendors and bring in the products and services to be very competitive.

And I'll ask Curt, he can give you a few examples of that, that are very important and that are positioning us very well, I would say.

Yes, Jennifer, I would echo what Ralph said around leveraging key vendor relationships.

A lot of technology that's being developed feels like it's fairly ubiquitous across the industry and easily accessible through key vendor relationships.

We've done a lot to leverage cloud technology; we've moved over 150 of our applications to the cloud in the last 12 or 18 months.

And we've done a lot to sort of rationalize various applications and legacy platforms, which has freed up capacity for us in terms of our expense base to continue to invest in additional capabilities, whether they are on the cyber front, whether they are on the side of customer enablement or colleague enablement.

So there is a lot of tools that we've been putting in place that are more digital oriented, leveraging robotics, artificial intelligence, again leveraging cloud capabilities, and so we feel like we're well positioned.

A lot of work we did through GEAR Up allowed us to create the efficiencies and reorient our technology spend overall due to rationalization that we did and then coupled with some shifting away from increase in regulatory spend on the technology front.

So all that sort of coupled together, we feel like we're well positioned.

The next question comes from Gary Tenner from D.A. Davidson.

I just wanted to talk about the loan growth guidance for the year, unchanged from where it was last quarter despite what was really the best first quarter you guys have had in 4 or 5 years, with most loan categories really moving very well.

If you think of what looks to be at least a mildly resurgent mortgage market going into the second quarter, maybe helping warehouse, can you talk about why there were changes to the guidance -- what your outlook is for the back half of the year and just provide some detail there?

Curt?

Yes, Gary.

So I'll go back to what I said earlier.

The first quarter for us is normally a flat-to-down quarter because of the seasonality across a number of businesses, but primarily Mortgage Banker Finance.

And so to come out with a very strong quarter that was very broad-based, including some businesses like Middle Market, Commercial Real Estate, Equity Funds Services, some of the businesses that I mentioned earlier to see some resurgence of little bit of energy activity, all that we think bodes very well for us getting into the second quarter, which is typically one of our stronger quarters from a growth perspective with both Mortgage Banker Finance and dealer being net positive contributors in the quarter, but we're still early in the year.

And so we feel like a range that we've given of 2% to 4% makes sense for us with a number of unknowns that are out there.

I mean, overall sentiment seems to be positive, but there is still some caution out there.

And so there is a notable level of uncertainty around a number of things, whether it's the overall economic, the political backdrop that I mentioned earlier and you can go through the list, trade policy, some labor constraints in some of the markets, Brexit, et cetera.

We're continuing to see some deleveraging with some clients and while we're seeing some CapEx spend, it's not necessarily broad-based, continues to be a pretty competitive landscape.

We talked about that previously with both bank and non-bank lending, but investor activity is pretty high and we can be on the net positive side of that or the net negative side of that, depending upon the transactions.

So there are some things that don't give a sort of a clear picture longer term, but for the near term, we feel good about the growth projection of the lending side of the business and that's why we're sticking sort of in that 2% to 4% range.

As the year goes on, certainly, if we see loan growth accelerating, we'll have a chance to revise that forecast, but right now, we feel good about the range that we've indicated.

The next question comes from Dave Rochester from Deutsche Bank.

Perhaps just a quick follow-up on the buybacks.

Given your expectations on earnings and buyback activity for the rest of the year, I was just wondering how much more debt you think you'll need to issue to cover that cash need at the holding company?

Or this last issuance covers you for the rest of the year?

Muneera?

Okay.

So Dave, for the most part, the last issuance will cover us.

We do have a maturity that's coming up in May, and so we will replenish that maturity of $350 million in the back half of the year.

Okay.

So another $350 million, but that's going to cover the maturity in May, right?

Yes, that's right.

Okay, got it.

And then on the NIM, you mentioned you think that mix shift into interest-bearing deposits will continue, are you expecting that shift to continue to drive deposit costs higher even if the interest-bearing deposit cost stabilizes near that 90 basis point level you were talking about just given that migration?

I think -- yes, I do think that we want to make sure that we are taking care of our customers, particularly on the rate front so that we can retain the relationship.

And from what we see, there are still some customers who continue to seek yield and hence, my statement that we do think that some of that activity will continue in the back half of the year.

The good news there is that we are able to retain our customers.

Got you.

And then, if deposits continue to decline next year, is deposit borrowings should grow to fill the funding gap or can you still shift cash over to fill that gap?

And if so, how much excess cash you think you have at this point where you can shift it over?

I think, looking, I mean, you're asking about next year and overall, deposits are difficult to predict.

I mean, I'll tell you generally that for this year, our outlook that we provided, the 1% to 2% decline, I think we feel generally pretty good about that.

We've given you all our historical trends.

We do think with the rebound in the seasonal deposits that flow out in the first quarter, on the retail side, we feel good, as Curt mentioned, with the rates that we have and the investments we're making in the digital retail platform.

So we do think that we will be able to attract retail customers and have less of a headwind from municipal deposits that have been flowing out just given the absolute level at which we -- those municipal deposits are today and then of course, as we continue to grow loans, that would help us overall on the deposit front as well.

That's what we can see for this year.

As far as next year is concerned, we'll just have to wait and see how things evolve.

That's a little bit difficult for me to predict.

Sure, and I appreciate that.

I guess, just an overarching question, if there are any funding gaps, the deposit growth is -- or deposit runoff is stronger than you expect, do you have excess cash where you feel like you can shift that over to fund loan growth?

Or is it more of where you expect an increase in borrowings over what you had this quarter?

Oh, absolutely.

So yes, particularly at the bank level, which is where we would fund loan growth, we do have a lot of efficient sources of funding.

The securities portfolio remains a reservoir of liquidity for us and then beyond that, our ability to get efficient, attractive funding both from market-indexed deposits and FHLB advances remain.

So we should be able to fund any loan growth that we generate without too many issues on the funding front.

Your next question comes from Scott Siefers from Sandler O'Neill.

I think most of my questions have been answered.

But Muneera, I just wanted to ask one more follow-up on the deposits.

And I think you touched on it a bit in response to the last question, but when we look at the typical back half rebound in deposit balances, what in your thinking would cause that to continue to hold true in sort of a high rate environment where there seems to be more potential use of those funds, i.e.

using deposits -- your customers using their deposits to expand that kind of stuff?

What would cause that typical rebound to continue to hold during this type of environment?

So on that front, I mean, we are -- the reason we showed our last 4-year trends on that slide was to reflect and show -- represent what the seasonality has been in our portfolio.

And when we do a granular analysis of the deposit movements, we do see that a fair amount of the decline in the first quarter was with a typical seasonal trend.

And also, in the last 4 years, when you think about the fact that we've -- 2 out of the last 4 years have been in a rising rate environment, that the decline in municipal deposits is included in those trends, all of that makes us feel better about what the rest of the year will look like.

We also did some comparison of our deposit base with how we saw depositors reacting to '04/'07 cycle, and for the most part, this cycle is on par with what we saw then and so all of that goes into the outlook that we provided.

Your next question comes from Erika Najarian from Bank of America.

I just had one follow-up question, if I may.

You spoke a little bit about the impact of interest recoveries to your margin, but the actual recoveries on a dollar basis, loan recoveries didn't really change much quarter-over-quarter.

And Muneera, I'm wondering if you could give us a sense of the impact of interest recoveries in the first quarter of '19 versus the fourth quarter of '18?

So interest recoveries in the first quarter were about $4 million or so and we normally expect $1 million to $2 million, Erika.

So when you're thinking about the future and you're trying to model out the rest of the year, that's approximately the decline that I'm expecting, about $1 million to $2 million on the nonaccrual interest recoveries.

Your next question is from Steve Moss from B. Riley FBR.

Just following up on Erika's comments around loan yields.

1-month LIBOR has come off a couple of basis points and you guys are -- seems to be gradually hedging over the course of the year, which should pressure your loan yields incrementally.

Just kind of wondering where you think if LIBOR stays stable here, 1-month LIBOR, especially around 248, do you think we see -- maybe we continue to see a 5 handle by year-end on average loan yields or does that -- do you assume in your model in your NII guide that goes below 5%?

So in the first quarter, our loan yields were 5.07% and rate rise is clearly the biggest driver of loan yield.

And so as the Fed pauses, at least that particular benefit for the time being is also on a pause, but we are maintaining our pricing discipline.

And so I don't really expect any compression from a spread standpoint.

And then beyond that, you've got the small impact of nonaccrual interest recoveries that I just mentioned and portfolio mix, as the year goes on, will have a minor impact on loan yields as well, but generally, I would expect them to be more or less stable.

I have no further questions in queue.

I'll turn the call back over to Ralph Babb, Chairman and Chief Executive Officer.

I would like to thank everyone for being with us and having the interest in Comerica, and thank you again for joining the call and everyone, we hope has a great day.

Thanks very much.

Thank you, everyone.

This will conclude today's conference call.

You may now disconnect.