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Comerica Inc (CMA) Q1 2019 Earnings Call Transcript

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Comerica Inc  (NYSE: CMA)
Q1 2019 Earnings Call
April 16, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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

Darlene P. Persons -- Director of Investor Relations

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 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 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 on -- 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.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

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 pre-tax 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 pre-tax 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 non-interest-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 two fewer days in the quarter and lower balances at the Fed. Our net interest margin increased 9 basis points to 3.79%. We continue to have strong credit quality as evidenced by 8 basis points in net charge-offs as well as a decline in non-accrual 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, non-interest 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 will turn the call over to Muneera, who will go over the quarter in more detail.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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 built their inventory of 2019 models and we added and expanded customer relationships. Average energy balances grew $317 million due to reduced capital market 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 three of our primary geographies as well as Equity Fund Services, US Banking, Commercial Real Estate, and Retail Banking. Partly offsetting this growth was a seasonal decline in Mortgage Banker of $342 million with the normal winter slowdown in home sales. Loan commitments were relatively stable following strong year-end growth as well as timing of activity in Equity Fund Services. Total utilization increased to 52.7% and the pipeline remains strong. Our loan yield 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 non-interest-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 trends 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 cost 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 requirement, short-term rates, as well as the competitive landscape. Slide 8 provides detail on our securities portfolio. The yield on the portfolio continue to trend up. While yield 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 addition of $1 million in net interest income per quarter. The four-year duration of the new securities will help extend the duration on the overall portfolio, which was a little under three 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 two 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 points 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 the loan growth was more than offset by two 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 movement, our outlook for rates, and the market prices 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 piece 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. Non-accrual loans declined and now comprise only 38 basis points of our total loans. Total criticized loans increased slightly from a historically low level 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 strength. 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, non-interest income decreased $4 million. Fiduciary income declined $2 million mostly due to lower financial markets data -- values.

In addition, we had small changes in several other categories such as cards, commercial lending, and letters of credit; which were impacted by seasonality including two less business days in the quarter. Of note, fee income in the second quarter is typically stronger, including seasonally high card and fiduciary income. Expenses remained 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 incentive 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 cost declined and equipment costs benefited from unusually low maintenance and repair expenses. Typical seasonality was apparent in reduction in several line items such as advertising, outside processing, and occupancy.

Looking forward to the rest of the year, expenses typically reflect lower stock compensations partially 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.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

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 non-accrual interest recoveries. Incorporating the strong credit quality we achieved in the first quarter, we have lowered the forecast to our provision to 10 basis point to 15 basis points.

We believe our portfolio will continue to perform well and begin to migrate toward 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 non-interest 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.

Questions and Answers:

Operator

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

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, John.

John Pancari -- Evercore ISI -- Analyst

Good morning. On the NII guidance change, I guess if you could just talk through a little bit more of the rationale behind the change. I mean, wasn't the higher deposit pricing already factored into your expectation when you presented at conference this quarter? And then also want to get some color around the interest recoveries. I wouldn't believe that you're -- 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. Thanks.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Muneera?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

Good morning, John. 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 has been fairly variable so that's another component. And then even though it's nominal, some of our hedging activity that we've done so far to date is the third aspect of the change. And then I think you also asked about non-accrual 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.

John Pancari -- Evercore ISI -- Analyst

Okay. All right, thanks. 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?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

So, the only change we made on 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 they're doing really well on the expense front and we remain fairly well disciplined.

John Pancari -- Evercore ISI -- Analyst

Okay, got it. Thank you, Muneera.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

You're welcome.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question will come from Erika Najarian from Bank of America. Your line is open.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi, good morning.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Hi, Erika. Good morning.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

So, I just wanted to make sure that we are interpreting similarly the color on the net interest margin correctly. Muneera, just sort of plugging in some of the major assumptions like deposit cost 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 trajectory -- quarterly trajectory of the net interest margin from there?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

Good morning, Erika. So, that was some fast math there. We typically don't provide guidance on net interest margin. 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 level that is mainly because of the loan growth that we are expecting as well as the incremental five days for the rest of the year and offsetting that clearly will be our higher funding cost 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 1st. So, you'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 non-accrual interest recovery should come down from the elevated levels that you saw and then the LIBOR level -- variability in LIBOR as well as the hedging activity that they're doing. So, all of that should help you triangulate to the margin that you're trying to get to.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

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 points 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?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

So, the information that we are 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 basis points 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 are 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 have 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 ad-hoc 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 US 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.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question will come from Ken Zerbe from Morgan Stanley. Your line is open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Good morning.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

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 sort of the dialog 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? It doesn't make sense to be a little more conservative in terms of keeping the reserve going forward.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Pete?

Peter W. Guilfoile -- Executive Vice President and Chief Credit Officer

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 two, they've been really exceptional. Net charge-offs of 8 basis points. Our non-accrual inflow we believe is a record low level right now. Our non-accrual 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.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Fair enough. And then actually just if we can go back to Slide 18, down at very bottom you talk 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. Is -- 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.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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 continue to make progress on the hedging front. Overall, just high level thoughts on hedging. As I said, we remain positive and constructive on the US economy. We feel fairly confident that we will get to July and see the longest expansion in US 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 pick up in the US economy. And so the best way to do all of that is to have a systematic balanced measured pace in making sure that we are positioning our balance sheet appropriately.

Ken Zerbe -- Morgan Stanley -- Analyst

All right, perfect. Thank you.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question will come from Steven Alexopoulos from JPMorgan. Your line is open.

Steve Alexopoulos -- JP Morgan -- Analyst

Good morning, everybody.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Steve.

Steve Alexopoulos -- JP Morgan -- Analyst

I just want -- 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 costs to move to 90 basis points and then moderate in 2Q, I don't think you're getting a lot of pushback. I think we get it that they'll likely move up. But what gives you confidence that deposit costs will then moderate given you'll be at around 90 basis points and many of your customers could get 2% plus. I'm trying to understand where deposit costs ultimately go to.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Muneera?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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 four standard pricing changes when rates have gone up eight times in the last two 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 positioning, 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 the 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 it means things are going really well. I will say that when I look at our deposit cost at 78 basis points for the first quarter and even the 90 basis points that we are projecting, I would say -- 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.

Steve Alexopoulos -- JP Morgan -- Analyst

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

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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.

Steve Alexopoulos -- JP Morgan -- Analyst

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 at variable and then what are you receiving fixed?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

So, variable we are doing 30-days LIBOR swaps. So, our received fixed is that average rate that I mentioned in my comments 220 basis points on average. And if you go to Slide 19, we've tried to provide you greater transparency into what we've executed so far.

Steve Alexopoulos -- JP Morgan -- Analyst

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

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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.

Steve Alexopoulos -- JP Morgan -- Analyst

Okay, great. Thanks for all the color.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

You're welcome.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question will come from Brett Rabatin from Piper Jaffray. Your line is open.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Brett.

Brett Rabatin -- Piper Jaffray & Co. -- Analyst

Good morning, Ralph. 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?

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Sure. Pete?

Peter W. Guilfoile -- Executive Vice President and Chief Credit Officer

Yes. So Brett, bear in mind we were coming off of a record low level 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 trends and there were no lines of business that we saw that were stressed at all this quarter. There was some -- 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.

Brett Rabatin -- Piper Jaffray & Co. -- Analyst

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 line of credit business. Can you maybe just help us with what -- what was the underlying trends in the quarter for them?

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Sure. Curt?

Curtis C. Farmer -- President

Yes, Brett. So on the core technology 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 starting to build a little bit. I think the challenge for us in technology and life sciences continues to be our strategy of saying 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.

It may take a little bit more to move the needle, but we do feel like we've got the right strategy overall. There 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 sort of 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 Fund 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.

Brett Rabatin -- Piper Jaffray & Co. -- Analyst

Okay. Appreciate the color.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question will come from Ken Usdin from Jefferies. Your line is open.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Ken.

Ken Usdin -- Jefferies & Co. -- Analyst

Thanks. Good morning, Ralph. Thank you. Good morning. Question on capital. So I know you reiterated your commentary that you'd expect to get into the 9.5%, 10% CET1 range this year. But just after you took -- you had the $500 million buyback 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? Thanks.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Muneera?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

All right. Good morning, Ken. 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 the 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.

Ken Usdin -- Jefferies & Co. -- Analyst

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 market's growth quarters in some time. So, could 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 a usage on one side, but an expansion still on the left side of the balance sheet? Thanks.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Curt?

Curtis C. Farmer -- President

Ken, there was kind of two parts to that question. One is about loan growth overall and where we're seeing it in the deposit utilization and then secondly, where we think LDR, loan deposit ratio might be for the 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 was nice to see that we saw growth across a number of businesses, energy, all three of our general middle market markets; Texas, California, and Michigan; Equity Fund Services, US Banking, Commercial Real Estate, Retail Banking; all as we mentioned previously and you saw on the slide. We didn't have the normal seasonality in both dealer increasing and the decline in Mortgage Banker Finance and we saw some -- I think some good momentum and we feel like we've got some good momentum heading into the second quarter. Period-end loans were up over $50 billion or 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 it felt 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 of the longer-term outlook considerations and some of the concerns whether it's around global issues, trade, Brexit, China, and the 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 facility, as well as tapping into deposits they have; sort of both levers being pulled. And then I might 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 because of the activity we saw in Q1. So, we're expecting some growth trends for the rest of the year really based on sort of seasonable patterns. We do, as Muneera said earlier, we think we're well positioned on the rate front. We continue to take a 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.

Ken Usdin -- Jefferies & Co. -- Analyst

All right. Thanks for all that color. Appreciate it.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question will come from Jennifer Demba from SunTrust. Your line is open.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Jennifer.

Jennifer Demba -- Suntrust -- Analyst

Thank you. Good morning. Just a question on the 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. Thanks.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

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 three large markets of Michigan and California and Texas. And that doesn't say we wouldn't look at the possibility of an acquisition, but it would be in those markets and 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 the car industry is slowing down just a bit. But overall, we are very well positioned for growth and to create value over the longer periods of time with the markets we're in today.

Jennifer Demba -- Suntrust -- Analyst

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

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

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 today.

Curtis C. Farmer -- President

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 months 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's 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 the 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.

Jennifer Demba -- Suntrust -- Analyst

Thanks so much.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Gary Tenner from D.A. Davidson. Your line is open.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Gary.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning. 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 four or five 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 no changes to the guidance, what your outlook is for the back half of the year, and just provide some detail there? Thanks.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Curt?

Curtis C. Farmer -- President

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 fund services, some of the businesses that I mentioned earlier; to see some resurgence and a little bit of energy activity. All that we think bodes very well for us heading 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 the range that we've given at 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's still some caution out there.

And so there's 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 are continuing to see some deleveraging with some clients. In fact we are 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. 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 -- depending upon the transaction. So there are some things that don't give us 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 are 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 -- revise that forecast. But right now, we feel good about the range that we've indicated.

Gary Tenner -- D.A. Davidson -- Analyst

All right. Thank you very much for the color.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Dave Rochester from Deutsche Bank. Your line is open.

David Rochester -- Deutsche Bank -- Analyst

Hey, good morning guys. Perhaps 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 if this last issuance covers you for the rest of the year?

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Muneera?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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.

David Rochester -- Deutsche Bank -- Analyst

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

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

Yes, that's right.

David Rochester -- Deutsche Bank -- Analyst

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 costs stabilized here that 90 basis point level you were talking about just given that migration?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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.

David Rochester -- Deutsche Bank -- Analyst

Yes, got you. Thanks. And then if deposits continue to decline next year, is the thought that 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 do you think you have at this point where you can shift it over?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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 we'll see a 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, but 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.

David Rochester -- Deutsche Bank -- Analyst

Sure, sure. I appreciate that. I guess just an overarching question if there are any funding gaps of deposit growth 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 sort of what you had this quarter?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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 index 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.

David Rochester -- Deutsche Bank -- Analyst

Great. All right. Thanks.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

You're welcome.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Scott.

Scott Siefers -- Sandler O'Neill -- Analyst

Good morning. Thanks for taking the question. I think most of my questions have been answered. But I mean, Muneera, just wanted to ask one -- one more follow-up on the deposits and I think you touched on it a bit in the 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 through in sort of a high rate environment where there seems to be more potential use of those funds than using deposits -- your customers using their deposits to expand, that kind of stuff. What would cause that typical rebound to continue to hold through in this type of environment?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

So on that front, I mean, we are -- the reason we showed our last four-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 movement, we do see that a fair amount of the decline in the first quarter was for the typical seasonal trends and also in the last four years when you think about the fact that we -- two out of the last four years have been in a rising rate environment, that's -- the decline in municipal deposits is included and 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 react in '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've provided.

Scott Siefers -- Sandler O'Neill -- Analyst

Okay. All right, that's sounds great. Thank you very much.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Erika Najarian from Bank of America. Your line is open.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. 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 when you're -- 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.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

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 non-accrual interest recoveries.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

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

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Good morning, Steve.

Stephen Moss -- B. Riley FBR -- Analyst

Good morning. Just following up on Erika's commentary on loan yields. One-month LIBOR has come off a couple of basis points and you guys are -- seem to be gradually hedging over the course of the year, which should pressure your loan yield incrementally. Just kind of wondering where you think if LIBOR stays stable here, one-month LIBOR especially around 2.48%. 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 on your NII guide that goes below 5%?

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

And 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 non-accrual 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.

Stephen Moss -- B. Riley FBR -- Analyst

Okay. Thank you very much.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

I have no further questions in queue. I turn the call back over to Ralph Babb, Chairman and Chief Executive Officer.

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

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

Operator

Thank you, everyone. This will conclude today's conference call. You may now disconnect.

Duration: 58 minutes

Call participants:

Darlene P. Persons -- Director of Investor Relations

Ralph W. Babb Jr. -- Chairman and Chief Executive Officer

Muneera S. Carr -- Executive Vice President and Chief Financial Officer

John Pancari -- Evercore ISI -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Peter W. Guilfoile -- Executive Vice President and Chief Credit Officer

Steve Alexopoulos -- JP Morgan -- Analyst

Brett Rabatin -- Piper Jaffray & Co. -- Analyst

Curtis C. Farmer -- President

Ken Usdin -- Jefferies & Co. -- Analyst

Jennifer Demba -- Suntrust -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

David Rochester -- Deutsche Bank -- Analyst

Scott Siefers -- Sandler O'Neill -- Analyst

Stephen Moss -- B. Riley FBR -- Analyst

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