James J. Herzog
Executive Vice President and Chief Financial Officer at Comerica
Thanks, Curt, and good morning, everyone. Turning to Slide 5. As Curt just mentioned, loan growth was very robust, increasing $1.8 billion, driven by favorable environmental factors as well as our relationship-focused approach. As of quarter end, loan commitments were up $2 billion or 4%, and the line utilization rate held steady at about 46%. National Dealer services loans increased over $400 million. This included a $200 million increase in floor plan loans to $840 million. However, these balances remain well below our typical run rate of about $4 billion. We expect it will take some time for inventory levels to rebuild as supply issues are resolved and pent-up demand is satisfied. General middle-market average loans were up over 3% and large corporate grew 7%.
Borrowing needs are being driven by higher material prices and inventory levels as well as M&A and to a lesser extent, capex. We continue to have great success in our equity fund services business, where we provide capital call and subscription lines to venture capital and private equity firms. Of note, mortgage Banker increased about $125 million. While home sales were seasonally higher, volumes remain depressed due to higher rates, lack of housing inventory and shorter dwell times. We expect third quarter mortgage banker loans to be stable. Commercial real estate loans decreased. However, production remained strong and loan commitments were up. We expect moderate loan growth in commercial real estate as projects fund through the year. Loan yields increased 42 basis points, primarily reflecting the benefit from higher rates.
As shown on Slide 6, on a year-over-year basis, average deposits were up $2.1 billion. Relative to the first quarter, deposits declined as customers continue to put their excess liquidity to work, and we prudently manage pricing as it relates to non-relationship-based deposits in highly rate-sensitive segments. Approximately half of the decrease occurred in our municipalities and financial institutions businesses, which fall under general middle market. Notably, retail and wealth management deposits increased. The average cost of our interest-bearing deposits remained at an all-time low of 5 basis points.
We continue to monetize our asset sensitivity as rates increased by growing our securities portfolio. Average balances increased $1.7 billion, as shown on Slide 7. During the second quarter, we repurchased $3.5 billion in MBS with average yields of 350 basis points, and we had repayments of $650 million. As we continue to execute our balance sheet hedging strategy, we will likely pivot towards swaps given the relative size of our securities book and the desire to maintain adequate cash to fund loan growth.
The larger portfolio, along with the favorable new purchase yields resulted in a $23 million increase in securities income. Holding balances in rate steady at June 30th levels third quarter securities revenue would increase about $16 million. The rise in rates resulted in a mark-to-market impact on our securities portfolio of $850 million, which runs through OCI and affects our book value, but not our regulatory capital ratios. While we maintain the portfolio as available for sale, mostly for liquidity purposes, we typically hold these securities to maturity, in which case the unrealized losses should be recouped.
Net interest income increased $105 million and the net interest margin increased 55 basis points. The benefit from higher rates lifted loan income $52 million and added 26 basis points to the margin. Loan growth added $15 million and 3 basis points. One additional day in the quarter provided $4 million. And as I mentioned, the increase in the size of our securities portfolio at higher yields added $23 million. Higher rates on deposits at the Fed added $29 million, which was partly offset by lower balances and together added 26 basis points to the margin. Higher rates on our floating rate wholesale debt had a $3 million impact. Altogether, the rise in rates provided a net benefit of $82 million to net interest income.
Credit quality remained excellent as outlined on Slide 9, including no net charge-offs. Criticized loans decreased to a record low level and non-accrual loans declined as well. Overall, our customers have continued to perform well, and they maintain strong balance sheets despite supply chain issues, labor constraints and inflationary challenges. Strong credit metrics, loan growth and a somewhat weaker economic forecast resulted in a relatively stable allowance for credit losses at 1.18% of loans and a provision of only $10 million. As always, we are closely monitoring the portfolio for signs of stress. Nevertheless, with our consistent disciplined approach to credit, as well as our relationship-based diverse portfolio, we believe we are well positioned to manage through a recessionary environment.
Non-interest income increased $24 million or 10% as outlined on Slide 10. Syndication activity was strong and increased from a seasonally low first quarter, resulting in an $8 million increase in commercial lending fees. Warrant-related income also increased $8 million. Derivative income increased $7 million, including $5 million of favorable credit valuation adjustments, along with increased interest rate derivative activity. Fiduciary income increased $4 million, mainly due to annual tax-related fees. Deposit service charges increased with a pickup in activity relative to a slow first quarter. Finally, deferred comp, which is offset in expenses, decreased $7 million to a total negative return of $14 million for the quarter. Of note, relative to the second quarter last year, deferred comp decreased $20 million and card fees declined $15 million due to last year's stimulus-related activity.
Turning to expenses on Slide 11. Our efficiency ratio improved 9 percentage points to 58% as we continue to maintain our expense discipline as revenue generation accelerates and we position for future growth. Salaries and benefits increased $5 million with a number of moving pieces. Performance-based incentives tied to our strong financial results increased $17 million. Annual merit, higher staff insurance and technology-related contract labor each added $4 million. This was partly offset by the resetting of annual stock comp and payroll taxes, which impacted the first quarter.
Finally, as I mentioned on the previous slide, deferred comp asset returns decreased $7 million. Of note, our staff levels were stable as we are successfully retaining and attracting talent in a very competitive market. Certain technology-related costs such as software equipment and consulting increased $8 million. Litigation-related legal costs were higher and the increase in occupancy includes our branch consolidation activity. Operational losses decreased from the elevated first quarter level and we received a $4 million state tax refund. We are experiencing some inflationary pressure, particularly in salaries, travel and entertainment and insurance. By leveraging technology investments to increase productivity, we have been working hard to offset this headwind.
As Curt described, we continue to make progress on certain modernization initiatives which totaled $7 million in the second quarter. This is a journey which includes transformation of our retail banking delivery model, alignment of corporate facilities and technology optimization. The cost savings generated are expected to be reinvested as we continue to evolve.
Slide 12 provides details on capital management. Loans and securities portfolio growth resulted in a decrease in our CET1 ratio to an estimated 9.72%. We continue to closely monitor loan trends and we expect to move closer to the targeted CET1 ratio over the near term through capital generated from strong earnings retention. As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to shareholders. Our common equity declined in the second quarter as a result of the impact of OCI losses from our securities and swap portfolios. Excluding the OCI losses, our common equity per share increased to $1.35.
Slide 13 provides an update on our interest rate sensitivity. The bulk of our loans are floating rate and the majority of our deposits were non-interest-bearing. Therefore, as demonstrated in the second quarter, our balance sheet reacts very quickly to changes in interest rates. In order to provide a more sustainable earnings stream through the rate cycles, we have been adding hedges to lock in market expectations for future short-term rates, while, importantly, reducing the downside impact of a potential decline in short rates overtime.
To provide an outlook for net interest income, we used the forward curve as of June 30th, as well as expectations for loan and deposit activity for the remainder of the year. A slightly steeper curve and added hedges have provided incremental revenue relative to the previous outlook. We now expect 2022 net interest income to increase by approximately 31% relative to 2021, an increase to about 21% in the third quarter relative to the second quarter. Of course, there are many dynamics that may cause results to differ, specifically the pace of changes in short-term rates, deposit betas and loan activity.
Our outlook for 2022 is on Slide 14 and assumes a continuation of the current economic environment. Given the robust broad-based loan growth we've generated so far this year, we are increasing our expectation for average loans to grow 6% to 7% year-over-year excluding PPP loans. Relative to the second quarter, we expect average loans to grow 1% to 2% per quarter. In the first half of the year, in certain areas like middle market, for example, we saw increased utilization as customers work to rebuild their inventory. In the second half of the year, we expect that trend to stabilize.
Consistent with customers' increased borrowing needs, we expect they will continue to draw down deposits. Also, the impact of the Fed's tightening is expected to be partly offset by our typical fourth quarter seasonality. As far as rates, we are closely monitoring the environment and staying close to our customers. We expect increased deposit rates in the second half of the year and start moving towards our historical beta as interest rates continue to increase. Net interest income expectations were reviewed on the previous slide.
Credit quality is expected to remain strong. Assuming that the macroeconomic challenges continue to remain manageable, we expect criticized and non-accrual loans to remain low and net charge-offs could begin to trend to the lower end of our normal range of 20 basis points to 40 basis points. We believe our reserves are appropriate for the current and expected environment. Non-interest income is expected to decline 6% to 7% on a year-over-year basis. Recall that 2021 was the highest on record and included elevated levels of warrants, derivatives, stimulus-related card fees and deferred compensation. We expect third and fourth quarter levels to be consistent with the second quarter.
Following strong activity in the second quarter, we expect some pressure on commercial lending fees, derivatives and fiduciary. This may be offset by deferred comp, which is difficult to predict, therefore we assume will not repeat. We expect expenses to increase 4% to 5% year-over-year, excluding any notable expenses related to our modernization program. This year-over-year increase is primarily due to higher performance-based compensation, annual merit, technology investments and inflationary pressures.
Relative to the first half of the year, the second half is expected to increase 5% to 6%, excluding modernization-related expenses. The increase is driven by annual merit, higher staff insurance, advertising, business investment and outside processing expense, partly offset by lower performance-based comp and deferred comp. Excluding the $21 million benefit from deferred comp in the first half, which is not expected to repeat, expenses are expected to be up 3% to 4% in the second half of the year. We expect the tax rate to be 22% to 23% excluding discrete items. And finally, as I indicated on the previous slide, we are focused on our CET1 target of 10% as we monitor loan growth trends.
In summary, our outlook for the full year has improved with the benefit of higher rates, including the execution of our hedging strategy, more robust loan and fee income generation, partly offset by higher expenses in conjunction with growing revenue and our strong financial performance.
Now I'll turn the call back to Curt.