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Comerica Incorporated (NYSE:CMA)

Q1 2012 Earnings Call

April 17, 2012 8:00 am ET

Executives

Darlene P. Persons - Senior Vice President and Director of Investor Relations

Ralph W. Babb - Chairman, Chief Executive officer, President, Chairman of Capital Committee, Chairman of Special Preferred Stock Committee, Member of Management Policy Committee, Chief Executive officer of Comerica Bank, President of Comerica Bank and Chairman of Comerica Bank

Karen L. Parkhill - Vice Chairman and Chief Financial Officer

Lars C. Anderson - Vice Chairman, Member of Management Policy Committee and Vice Chairman of The Business Bank

John M. Killian - Executive Vice President of Credit Policy, Chief Credit officer, Executive Vice President, Member of Management Policy Committee, Chief Credit officer of Comerica Bank and Executive Vice President of Comerica Bank

Analysts

Conor Fitzgerald

Ken A. Zerbe - Morgan Stanley, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Jessica Ribner - FBR Capital Markets & Co., Research Division

Robert Placet - Deutsche Bank AG, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Josh Levin - Citigroup Inc, Research Division

Justin C. Maurer - Lord, Abbett & Co. LLC

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Unknown Analyst

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica First Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Darlene Persons, Director of Investor Relations. Ma'am, you may begin your conference.

Darlene P. Persons

Thank you, Regina. Good morning, and welcome to Comerica's First Quarter 2012 Earnings Conference Call. Participating on this call will be our Chairman, Ralph Babb; Vice Chairman and Chief Financial Officer; Karen Parkhill; Vice Chairman of the Business Bank, Lars Anderson; and Chief Credit Officer, John Killian. You’ll hear that Lars has a touch of laryngitis, but he is still ready to answer your questions.

A copy of our press release and presentation slides are available on the SEC's website, as well as in the Investor Relations section of our website, comerica.com. As we review our first quarter results, we will be referring to the slides which provide additional details on our earnings.

Before we get started, I would like to remind you that this conference call contains forward-looking statements, and in that regard, you should be mindful of the risks and uncertainties that can cause future results to vary from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statement contained in the release issued today, as well as Slide 2 of this presentation, which I incorporated into this call, as well as our filings with the SEC. Also, this conference call will reference non-GAAP measures. In that regard, I will 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

Good morning. Today, we reported first quarter 2012 earnings of $0.66 per share on net income of $130 million, a 36% increase from the fourth quarter of 2011.

Turning to Slide #4 and further highlights. Loans continued to grow in the first quarter, with average loans up $815 million or 2%, primarily reflecting an increase of $1.2 billion or 5% in commercial loans. The increase in commercial loans was broad-based across the majority of business lines and all major markets. As expected, commercial loan growth was partially offset by the continued decline in Commercial Real Estate loans.

Deposits also continued to grow. We had record deposits of $49.3 billion at March 31, 2012, and had an increase in average deposits of $532 million or 1%, primarily reflecting an increase of $461 million in noninterest-bearing deposits.

Net interest income, including accretion, was stable. Noninterest income increased $24 million, driven by a $10 million or 6% increase in customer-driven fees, offsetting the headwinds of regulatory reform.

We continued to have tight control of expenses. Noninterest expenses decreased $30 million in the first quarter to $448 million, primarily due to the decrease in restructuring expenses related to our acquisition of Sterling Bank shares.

Credit quality continued to improve in the first quarter. This was the 11th consecutive quarter of a decline in net charge-offs with a $15 million decrease. Net charge-offs are at the lowest level since the third quarter of 2007. The provision for loan losses was relatively stable. Our expectations is that we will continue to see the provision and net charge-offs at or near these levels for the remainder of the year, assuming the current pace of economic growth is sustained.

We continue to approach capital management from a position of strength. As we announced on March 14, 2012, the Federal Reserve did not object to our capital plan and the capital distributions contemplated in the plan. The capital plan, which was approved by our Board of Directors, provides up to $375 million in equity repurchases from the first quarter of 2012 through the first quarter of 2013. We repurchased $33 million or 1.1 million shares under the share repurchase program in the first quarter of 2012. Our capital plan further contemplates an increase in our quarterly dividend from $0.10 per share to $0.15 per share, a 50% increase. A dividend proposal will be considered by our board at our meeting on April 24, 2012.

Turning to Slide 5 and our key markets and customer sentiment. Our customers in Texas are feeling more optimistic, as evidenced by the 4% quarter-over-quarter average loan growth led by increases in Energy, Middle Market and Global Corporate Banking. We continued to leverage the synergies from our Sterling acquisition. Momentum in the Texas economy increased in early 2012 after cooling at the end of 2011. Labor market conditions improved, the energy sector remained active, and residential construction activity has increased. We expect to see ongoing gains in our Texas economic activity index throughout 2012, driven by continued strength in those 3 areas.

Average loans in our Midwest market, which is primarily Michigan, were up 1% for the fourth quarter, driven by National Dealer Services and Global Corporate Banking. A rebounding U.S. auto industry drove our Michigan economic activity index sharply higher in the start of this year after stalling in late 2011. Every component of the Michigan index has increased, a sign that the recovery in Michigan is reaching beyond the revitalized auto industry and into the non-manufacturing sectors of the state economy. This is good news for our customers in the state, where we have a long history of service through numerous economic cycles.

Average loans in our western market were up 3% compared to the fourth quarter, led by National Dealer Services and Technology & Life Sciences. Our California economic activity index remains flat. Some parts of the California economy are vibrant, notably the high-tech industries of Silicon Valley, which includes many of our Technology & Life Sciences customers. However, the housing sector is still a drag on the California economy. In addition, the state's large government sector remains challenged by weaker-than-expected state tax revenues and expected cuts in federal defense spending. These challenges will likely keep California's economic growth in check through the first half of the year.

In closing, continued loan and deposit growth, increased customer fee income, tight expense management and solid credit performance reaffirm our focus on improving the bottom line, even in this low-rate environment and slow-growing national economy. Our capital position remains strong, and we continue to be active capital managers. We are in the right markets with experienced, dedicated colleagues and the products and services our customers’ desire.

And now, I will turn the call over to Karen.

Karen L. Parkhill

Thank you, Ralph, and good morning. Turning to Slide 6. Ralph talked about total average loan growth of 2% or $815 million quarter-over-quarter, as shown on the left-hand side of the slide. On the right-hand side, you can see commercial loans drove the increase, up $1.2 billion or 5%, driven by broad-based increases across National Dealer Services, Energy, Global Corporate Banking, Middle Market Banking and Technology & Life Sciences. Our commercial loan growth was partially offset by an average decrease of $352 million or 3% in commercial mortgage and real estate construction loans.

Importantly, as you can see by the green bar depicted on the slide, our Mortgage Banker average loans quarter-over-quarter were virtually unchanged. We have talked about variability in that business. In fact, in the fourth quarter, period-end Mortgage Banker loans grew $500 million and then declined $250 million in the first quarter. We believe our balances in this business could continue to be variable as mortgage rates stabilize and refinancing becomes a smaller component of the overall volume.

Turning to Slide 7, which shows the period-end loan balance picture. Decreases in Commercial Real Estate, Mortgage Banker and consumer loans were offset by broad-based increases in all other commercial loans, resulting in a $333 million or 1% increase from the end of the fourth quarter 2011 to the end of the first quarter this year. Period-end commercial loans increased 3% quarter-over-quarter. We continue to believe the pace of decline in our real estate balances is slowing. And as said before, Mortgage Banker loan balances are difficult to predict. However, we do expect continued variability.

Importantly, commitments increased for the third quarter in a row, with a $1 billion increase this quarter on the heels of a $1.9 billion increase in the fourth quarter. In fact, commitments are at the highest level since the third quarter of 2009, with Middle Market, Commercial Real Estate and Energy contributing the largest increases. Because of this growth in commitments, line utilization remains stable at 47.4%. Also, our pipeline increased significantly in the first quarter across almost all of our business lines, with approximately 2/3 attributed to new business.

As you know, we track our loan growth against the industry. On Slide 8, you can see our average loans have been growing at a more rapid pace than the industry for the past few quarters. We have benefited from the fact that we have a higher proportion of C&I loans, which have been growing at a relatively faster pace. Also, the Sterling acquisition, which closed at the end of July last year, has helped accelerate our growth. The former Sterling footprint, which was predominantly Houston, San Antonio and Kerrville, has seen loan growth of over 10% since the acquisition closed, which is in line with the revenue synergy goal we announced last year. Growth in Middle Market and Energy has more than offset the planned runoff in Commercial Real Estate.

C&I loans are depicted by the chart on the right. Remember that C&I loans, as defined by H.8 data, do not include Mortgage Banker. Our average C&I loan growth was impacted by the decline in dealer outstands in the second and third quarters of last year, mainly due to the Japanese supply chain disruption in our auto dealer lending business. As this started to rebound through the fourth and first quarters, our loan growth outpaced the industry. In addition, we believe that we benefit from our footprint, which includes the faster growing market of Texas, as well as our focus on Middle Market and expertise in several industries that are seeing accelerated growth, such as Energy and Technology & Life Sciences.

As shown on Slide 9, our deposits continued to grow in the first quarter across all major markets and most lines of business. In fact, period-end deposits grew $1.5 billion to $49.3 billion, topping the record level we set in the fourth quarter. Our average deposits increased $532 million quarter-over-quarter with over 85% of it coming from noninterest-bearing deposits. We are pleased not only that a large portion of our deposit growth is noninterest bearing, but also that the interest-bearing deposits grew even as we continued to carefully lower deposit pricing as shown by the yellow diamonds on the page. Our cost of deposits today averages 26 basis points.

Turning to Slide 10. Our net interest income was stable. Quarter-over-quarter, loan growth contributed about $7 million to the net interest income change and a decrease in our deposit costs added about $2 million. These increases were partially offset by one less day in the quarter, worth about $5 million, and about a $5 million impact from a decrease in loan yields. The decrease in loan yields was primarily driven by a mix shift in the loan portfolio with a decline in Commercial Real Estate loans and an increase in commercial loans. We remain focused on holding spreads for new and renewed credit facilities. However, we have seen some spreads tighten consistent with improving credit risk migration.

Accretion of the purchase discount on the acquired Sterling loan portfolio was $25 million in the first quarter 2012 compared to $26 million in the fourth quarter. Accretion should continue to trend downward as we expect to recognize total accretion of about $35 million to $45 million for the remainder of the year. Just as a reminder, our target level for the securities portfolio continues to be $9 billion, heavily weighted and highly liquid, highly rated mortgage-backed securities. Currently, the average yield is 2.73% with a duration of 2.9 years.

As mentioned before, our balance sheet remains well positioned for rising rates. Approximately 80% of our loans are floating rates, and 70% of that is LIBOR based, predominantly 30-day LIBOR. Therefore, the impact of the low-rate environment has been absorbed, and rate movement on the long end of the curve should have little impact on us. We believe a 200-basis point annual increase in rates, equivalent to 100 basis points on average, would result in approximately $165 million increase in net interest income, which is an increase from the $150 million number given last quarter, primarily due to strong noninterest-bearing deposit growth.

Turning to the credit picture on Slide 11. Credit quality continues to improve. Net charge-offs in the quarter decreased $15 million to $45 million or 43 basis points of average loans. Our growth charge-offs decreased $23 million to $62 million. Recoveries were $17 million compared to the $25 million we had in the fourth quarter. Over the last 8 quarters, recoveries have averaged about $20 million per quarter, substantially higher than the $7 million average per quarter for the 2 years prior to that. As noted before, the timing and size of recoveries is the most difficult credit metric to forecast.

Our provision for loan losses was relatively stable at $23 million, reflecting the increase in loan balances, improved overall credit quality and our prudent, consistent reserving methodology. We ended the quarter with a reserve ratio of 1.64%.

Our watch list and nonperforming loans also continued to trend downward, with a slight uptick in the third quarter last year reflecting the addition of the Sterling loan portfolio. Watch list loans decreased over $261 million to $4.2 billion at March 31. Nonperforming loans decreased $31 million. Foreclosed property remains low and in fact, decreased $27 million or almost 30% to $67 million.

Slide 12 outlines the growth in noninterest income, which grew 13% to $206 million in the first quarter 2012. The $24 million increase included a $10 million or 6% growth in customer-driven fee income resulting from increases in service charges on deposit accounts, investment banking fees, fiduciary income and commercial lending fees. We were also aided by the cross-sell successes we are having with the legacy Sterling footprint. We believe we are well on the way to meeting the fee income goal we had set for Sterling as a part of the revenue synergies we had announced.

The growth in noninterest income is partially a result of annual service charges paid in the first quarter, about $3 million, as well as the implementation of our profit improvement revenue initiative. We are pleased to be offsetting the headwinds which have resulted from regulatory reform, such as reduced interchange fees. Other changes in noninterest income include an increase of $4 million in gains from the redemption of auction rate securities and $5 million in charges incurred in the fourth quarter related to the Visa settlement.

Turning to Slide 13. We continue to maintain good expense control. Expenses this quarter benefited from the fact that we recorded no restructuring costs compared to $37 million in the fourth quarter. As a reminder, we still expect to incur about $40 million on restructuring expenses for the remainder of 2012, with about $5 million to $10 million in the second quarter.

Our careful expense management resulted in a decrease in net occupancy expense of $6 million and a decline in salaries expense of $4 million, reflecting a 2% decrease in our workforce, as shown on the slide. This was partially offset by increases in litigation and legal expenses of $5 million and employee benefits expense of $8 million, primarily due to an increase in pension expense. Litigation and legal expenses increased primarily due to changes in loss estimates reflecting recent developments on certain litigation contingencies and are not expected to be repeated.

Turning to capital on Slide 14. As Ralph mentioned, the Federal Reserve completed its review of Comerica's 2012 capital plan last month. The plan provides for up to $375 million in equity repurchases for the first quarter period ending March 13, 2013. Additionally, our board will consider a 50% increase in Comerica's quarterly dividend next week.

This slide shows our payout ratio would have been 81% had we executed on the capital plan in the first quarter. This is significantly higher than last year and the peer median. We used first quarter estimates for our peers and assumed our capital plans were also in place in the first quarter. There are only 2 peers that have active share repurchase programs and only 2 that have announced dividend increases.

We believe our payout relative to peers is a reflection of our strong capital position, with 10.37% Tier 1 capital. Importantly, the quality of our capital ranks among the best in our peer group, with common stock comprising over 99% of our Tier 1. It will be 100% common after we redeem the remaining $25 million of Trust Preferred Securities outstanding, which we intend to do in the second quarter.

At some conferences last month, we communicated long-term goals for our efficiency ratio to be below 60% and return on assets to be above 1.3%. On Slide 15, we have provided a walk-forward, depicting how we expect to reach the return on asset goal. Our average ROA over the past 20 years is about 1.2%, and our goal is to surpass that level by growing revenues and keeping expenses as flat as possible over the longer term. As you can see on this slide, driving loan and fee growth while managing expenses are key drivers. Importantly, while we believe a modest increase in rates will be necessary to reach our goal, we expect to well exceed our goal in a normal rate environment.

Finally, our outlook. Our expectation for full year 2012 compared to full year 2011 remains unchanged from what we outlined on our call in January, with one exception. We now expect the provision to decline from the full year 2011 level and instead be in line with the run rate from the first quarter. This is consistent with our view that we should continue to see positive credit migration, partially offset by moderate loan growth, which, combined, is now expected to result in a modest reserve release.

In closing, we are very pleased with our continued loan and deposit growth, increased customer fee income, tight expense management and solid credit performance. Even in the current economic and regulatory environment, we feel confident we can continue to deliver strong bottom line growth to our shareholders.

Now we are happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from the line of Erika Penala with Bank of America.

Conor Fitzgerald

This is Conor Fitzgerald for Erika. Just on your guidance, quickly, for the outlook for average loans to increase moderately, which, like you said, you didn't change. Because 1Q '12 was pretty strong, was there any pull-forward there? Or do you expect that kind of growth to taper off in the second half of 2012?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes. I think that was Conor, and I apologize, again, for my laryngitis to everybody. Obviously, we had a very strong quarter, in particular in commercial loan growth, up 5%, $1.2 billion. The growth was very broad-based across a lot of our major markets, most of our businesses. So we feel very good about our momentum as we look forward into the second quarter, but we are expecting moderate average growth for 2012, and that's given the backdrop of a continued weak economic environment. And we also have to keep in mind that we do have some businesses with some variability, Conor. For example, dealer. Dealers tend to build their inventories in the spring and sell them down in the summer, so there's some seasonality there. And of course, Mortgage Banking Finance. You've seen there's some variability as mortgage rates continue to change. That can certainly impact the outstandings of our portfolio as we head through the balance of the year. But again, I'd point out that we do have very nice momentum. Commercial Real Estate commitment’s up. Energy commitment’s up, Middle Market -- and it's very broad-based, so we feel good about the balance of the year.

Operator

Your next question will come from the line of Ken Zerbe with Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Two quick questions here. But first of all, in terms of mortgage banking, I saw balances were down, but did the higher mortgage banking fees contribute to the noninterest income this quarter?

Karen L. Parkhill

We did.

Lars C. Anderson

Yes.

Karen L. Parkhill

Go ahead, Ralph.

Ralph W. Babb

Go ahead, Karen.

Karen L. Parkhill

We did see fee increases in commercial lending increase. And in Mortgage Banker, that obviously contributed a little bit.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay. And then just the other question on what is your outlook for reducing your excess liquidity going forward. It looks like you were able to bring that down a bit this quarter.

Karen L. Parkhill

We did bring it down. It's now, on ending, under $3 billion on excess liquidity. Clearly, that is a factor of loan growth going forward. Hard to give an outlook, loan and deposit growth, obviously.

Operator

Your next question will come from the line of John Pancari with Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

Sorry to hurt you again here, Lars, but can you give us a little bit more color on the pickup in Mid-Market loan growth? I mean, that's been an area that -- you haven't seen a big pickup in that yet. You've seen more so large corporate, but it's good to see the Mid Market move here, and I just want to get some added color around what you're seeing there and the sustainability of that.

Lars C. Anderson

Yes. No problem. Glad to address it for you, John. First of all, as I pointed out, I think, on the last conference call, that as we look at our business, Middle Market business, it really includes kind of our general Middle Market as we break that out and a lot of our other kind of Middle Market industry groups. We had nice broad-based growth last quarter. And I'd also point out, we've had 4 consecutive quarters now of commercial loan growth, so we've had a continuation of nice momentum. If you look specifically at the first quarter, obviously, we did have a nice quarter. If you look at the average balances: our general Middle Market was up about $170 million, which was really positive; our dealer business, up over $400 million; Energy up $350; Technology & Life Sciences was up $125 million; our international strategy, which is really Middle Market-oriented, that was up $80 million. And yes, large corporate, that has U.S. banking in that, was up $180 million. But on a relative basis, that was a smaller component of a very broad-based Middle Market growth momentum for our company. So we feel very good about kind of the momentum across the board, John.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. That's helpful. Then in terms of pricing, I mean, are you seeing the need to give a little bit more here in terms of pricing? And are you becoming a bit more accommodated to meet that demand?

Lars C. Anderson

We're really not willing to trade off kind of volume for pricing. And the fact of the matter is we're staying very focused on our relationship banking strategy that has a very disciplined relationship pricing model, and it served us very well for a long period of time. Now with that said, we are seeing the most kind of competitive pricing at the larger end of the market, but frankly, the whole market, overall, is competitive today. What we're trying to really focus on is spending more time in the marketplace. We've enhanced kind of our sales focus, business development focus, investing in resources. And I think if you spend more time with customers, more time with prospects, you put yourself in a position to have more opportunities and get paid for it, and that's kind of the hallmark of Comerica. And frankly, we're seeing our new and renewed loan spreads largely holding, even in today's environment.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then lastly, Karen, on the margin, I know you don't really give guidance here. But just given your color that you had said about the funding cost and what you're seeing on loan yields here, is it fair to assume that this stability that we see here this quarter is sustainable and that this could be the margin floor or at least -- or maybe an inflection in the margin?

Karen L. Parkhill

Yes. On our outlook on margin, as you know, we do talk about net interest income, so I'll talk about it from that perspective. We did say from a year-over-year period, from 2011 to 2012, that we do expect net interest income to increase moderately. And when we said that, that was a reflection of assuming moderate loan growth, accretion at a slightly higher level year-over-year and a full year of Sterling. So we are still focused on that guidance. Hopefully that's helpful.

Operator

Your next question will come from the line of Steven Alexopoulos with JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

On the buyback, the pace seemed a little bit light here in the first quarter. Just wondering, do you expect to use the entire $375 million authorization through 1Q '13? And then how should we think about the pace? Is it now more stock-price focused? Or are you still targeting a percent of net income?

Ralph W. Babb

Actually, as you -- Stephen, this is Ralph. As we were talking about in the comments, we were approved to do up to $375 million in the stock repurchase program, and we started off with $33 million in the first quarter. And we will move to use that as we move through the 5 quarters, which first quarter being the first of that quarter and the first quarter of '13 being the last, and it will accelerate as we move along. And as you know, at the current level, with our stock price trading right at tangible book value, that is a good investment for the shareholders longer term to execute our buyback at these levels, as well as we mentioned that we will be talking at the board meeting here next week about raising the dividend 50% as well.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay. Just one question on this loan growth guidance. Last quarter, I think you guys said you expected 2% to 5% average growth, I'd say. I think Karen defined moderate. Do you still see that as a reasonable range? Or are you a bit more optimistic given how strong the numbers came in this quarter?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes. I mean, Karen can speak to kind of the 2012 kind of expectations, but we continue to feel good about moderate average loan growth for the year. With that said, clearly, commitment’s up $1 billion, 4 consecutive quarters of commercial loan growth. Our pipelines are up very significantly as are commitments to commit, and it's very broad-based. We -- you already heard some of the discussion about some of the recovery in Michigan and hopefully, maybe the beginnings of it in California. So with all that said, we still continue to look at the year against a pretty weak economic environment with some variable businesses.

Karen L. Parkhill

And I would add, when we gave that guidance, Steve, we were focused on the fact that Mortgage Banker was likely to be variable.

Operator

Your next question will come from the line of Paul Miller with FBR.

Jessica Ribner - FBR Capital Markets & Co., Research Division

It's Jessica Ribner in place for Paul. Sorry for that. We just had a couple of questions on what you're seeing in C&I. And also, I -- if you had said it, I'm sorry, but I had missed any guidance for merger charges going forward.

Ralph W. Babb

Karen, do you want to take the restructuring charges for the quarter?

Karen L. Parkhill

Yes. So on restructuring charges, as you know, we did not have any restructuring charges this quarter. We do expect to have about $40 million of restructuring charges for the rest of the year, with about $5 million to $10 million in the second quarter.

Ralph W. Babb

Lars?

Lars C. Anderson

Sure. Okay. So Jessica, I'll pick up the C&I question for you. As I shared earlier, we are seeing very broad-based kind of listing activity. I'd say it's -- there's nothing -- there's no particular business or industry that's carrying the day for us. Obviously, Energy, a nice expansion, as you would expect, we're very well positioned in that industry. And it continues to expand, and we're working with our customers there, but Technology & Life Sciences continues to do very well. Our customers there are expanding. We continue to see that as a growth business for us. But if you just look at our general Middle Market, I think that we're seeing our customers more encouraged and maybe in a position to begin to make more decisions for investment in hiring than they have in the past. They're still guarded relative to the past. I'd also point out that x -- outside of C&I, we're beginning to feel a little bit more comfortable with Commercial Real Estate as the pace of declines decrease. I referenced earlier that the growth in commitments about Commercial Real Estate have -- that was one of the key drivers, and we're definitely seeing a slowing pace of decline. So on a consolidated basis, hoping that, that will give us some additional strength in overall commercial loan growth.

Ralph W. Babb

I think one of the things, Lars, too, that we're hearing from our people is, especially the Middle Market and the manufacturing side are beginning to run out of capacity, which means they're starting to invest for the future.

Lars C. Anderson

Yes. As I mentioned, they still tend to be guarded. But in a number of industries, you are beginning to see some investment, and that's part of -- that's really what's the key driver in our general Middle Market that we're seeing. There's expansion of plants, equipment, and we're seeing some hiring going on in particular industries. And I think that bodes well for the future for us and for our markets.

Jessica Ribner - FBR Capital Markets & Co., Research Division

And just one follow-up question. Where do you see utilization rates going forward?

Lars C. Anderson

Well, as you may have seen in the deck, the utilization rate was stable. It was actually -- it was a good story though, because, of course, in that formula, the denominator moved faster than the numerator. So it was one of those issues that we're having growth on both sides of the formula. So I think it's a real positive. It's hard to exactly peg where utilizations will be. We're just hoping that we continue to see usage levels increase and if this interest in investing in businesses in Middle Market continues and frankly, that we continue to grow with our customers and continue to move market share, which I'm convinced that we're doing today.

Ralph W. Babb

Yes. As we mentioned earlier, the commitments were up $1 billion, and the utilization was actually consistent at the 47, I think, .4% [ph].

Karen L. Parkhill

Correct.

Lars C. Anderson

Correct. Yes.

Operator

The next question will come from the line of Matt O'Connor with Deutsche Bank.

Robert Placet - Deutsche Bank AG, Research Division

This is Rob Placet from Matt's team. Just a follow-up on the topic of capital and share buybacks. I guess given your announced share buyback plan and outlook for continued loan growth, where do guys see your capital ratios trending through the year? And can you remind us if you have a target capital ratio or at least a level where you wouldn't want to go below?

Ralph W. Babb

Karen, you want to...

Karen L. Parkhill

Sure. In terms of target capital ratio, that is something that we would -- we have done in the past and would like to get back to. But until the capital rules are clear, very difficult for us to be giving a target capital out there.

Robert Placet - Deutsche Bank AG, Research Division

Right. Okay. And then well, just in terms of how we should think about your capital ratios trending through the year, if we assume loan growth continues and if we assume that you guys execute on your entire share buyback plan, what does that mean for your capital ratios?

Karen L. Parkhill

Yes. Obviously, our -- for uses of capital, we like loan growth. So should we see robust loan growth, you can see that capital come down slightly. It's very difficult to predict though, so it's not something that we try to predict.

Ralph W. Babb

That would be good to see, see loan growth even better than we expected and use the capital for leveraging the loan growth, which is profitability over the long term and return over the long term. And that will always be balanced, as we have in the past.

Robert Placet - Deutsche Bank AG, Research Division

Right. So with that said, if loan growth does come in better than expected this year, should we expect maybe reduced buybacks than what you guys announced?

Ralph W. Babb

I think at the current level of what we're forecasting, I don't expect that. If loan -- it would have to be very robust to put us in that position. And like Karen said, we have to come to a conclusion on what the capital guidelines are going to be going forward and then what cushion we would put into that as well.

Robert Placet - Deutsche Bank AG, Research Division

Okay. Great. And if I could just get a follow-up just on your comments on reserve release from here. I guess as we look at your reserves to loans, already at 1.6% and with an outlook for continued loan growth, I guess, is it possible that you draw down reserves too much this year? And maybe, again, if loan growth comes in better than expected, you could actually see some modest reserve build next year?

Ralph W. Babb

John, do you want to take that?

John M. Killian

Sure. As you know, it's not quite as simple as just having a target for a reserve level. We do have a very rigorous methodology, which we've been using for over 10 years. That includes reviewing every sizable problem loan every quarter, and that methodology has served us well in up and down cycles. The average carrying value of our non-accrual loans, for example, is 60%. If you look at our $704 million reserve on the ALLL at the end of the quarter, it's almost 4x the annualized first quarter net charge-off run rate. So we feel we are pretty well reserved, and going forward, we're going to follow the methodology. Reserve levels will vary as charge-offs and problem loans decline, but increase as the portfolio grows as well.

Operator

Your next question will come from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Commercial Real Estate MTLs ticked up a little bit at 1Q '12, and I'm wondering if you could provide us some commentary around kind of that trend and also, how underlying early-stage delinquencies in both classified assets trended within our Commercial Real Estate, if you have the data.

Ralph W. Babb

John?

John M. Killian

Yes. A little color on Commercial Real Estate. Frankly, Craig, I'm feeling pretty good about the trends in the Commercial Real Estate portfolio. It's -- the credit metrics in Commercial Real Estate have improved dramatically over the last 10 quarters or so, and they continue to improve. It is possible to have a slight variability from quarter-to-quarter, and that's what we saw in the first quarter. But the overall momentum is still really improving, and it improves across the board. Past dues, nonperformers, inflow, it's all going in the right direction with a little variability, as you saw in the first quarter.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then just on the securities portfolio. I know you guys use 200 basis points commonly to kind of look at your net interest income on a scenario basis in terms of a parallel shift. But if you take in the same 200 basis point parallel shift and you run it through your securities portfolio, do you know roughly what it does to your duration of 2.9, in terms of duration extension?

Ralph W. Babb

Karen?

Karen L. Parkhill

Can you repeat the question, please?

Craig Siegenthaler - Crédit Suisse AG, Research Division

Yes. So you guys use 200 basis points. You referenced on the call, in the K in terms of an interest rate scenario and what the impact is net interest income in terms of your earnings power. And if you take that same 200 basis points and instead, you look at the impact to the duration of the securities portfolio, which right now is 2.9, do you know what that extends to?

Karen L. Parkhill

It would increase it to over 4, likely, somewhere between 4 and 5.

Operator

Your next question will come from the line of Brian Foran with Nomura.

Brian Foran - Nomura Securities Co. Ltd., Research Division

This is, I think, about some of these deal impacts and modeling them out for the rest of the year. So you gave enough guidance that we can kind of back into quarterly run rates. But is the integration expense simply timing of discrete projects you have in place? Or is there something that's going better than you had planned in the integration? And I guess, really, where I'm going is, the back half of the year implied is like $15 million to $20 million, and obviously, that's your best estimate right now. But what's the degree of confidence around that back half of the year integration expense? And is there a risk that it comes in lower as it did in the first quarter?

Karen L. Parkhill

Yes. On integration, we do have confidence. The rest of the integration to be done right now is really around our leases for real estate and our properties, and so that's why it's timed and back-half loaded. We do feel confident in that estimate.

Brian Foran - Nomura Securities Co. Ltd., Research Division

And then I guess the same kind of question on the accretable yield. The $25 million in the guidance implies it steps down by about half for the rest of the year. Was there just kind of one or a handful of discrete recoveries that drew that higher in the first quarter? Or is there -- and I guess the background for the question would be a lot of the banks that did deals have kind of had a steady stream of non-accretable difference steadily reclassified to accretable, and so kind of the accretion lasts much longer and higher than expected. Is there any kind of that kind of theme developing in the book? Or is it really just timing of a couple of recoveries in the first quarter?

Karen L. Parkhill

It's mostly just timing. We did see a little bit more accretion this quarter than expected, mainly due to, obviously, prepays on deals that we were refinancing. We do have about a little less than $100 million left in our accretion to go from here, and we do feel fairly confident with our guidance of $35 million to $45 million, for the rest of the year.

Brian Foran - Nomura Securities Co. Ltd., Research Division

The last one for me, I mean, just kind of Mortgage Banker versus Dealer Floor Plan, one normalizing down, one normalizing up. I mean, I guess my dummy math has always been just take them both back to where they were kind of in 2010 and '11, and that would put Dealer Floor Plan at $3.5 billion to the $4 billion range, mortgage in the $500 million to $1 billion and imply the 2 portfolios combined need to come down a bit. But at the same time, I guess there's been a lot of disarray in the wholesale mortgage funding channel. It seems like you guys might have a share story that goes beyond just volumes when we look at these balances. And so I know it's impossible to say the normalized level of a Mortgage Banker is exactly x, but I guess is it too harsh to take it back to 2010 and '11 levels? Or is that still kind of where it should trend over time as mortgage activity normalizes?

Ralph W. Babb

Lars, do you want to take that?

Lars C. Anderson

Yes. First of all, I guess there's 2 points there. I can quickly speak to, first, Mortgage Banking Finance and then Dealer. In Mortgage Banking Finance, 2 key drivers that we're seeing in terms of the variability in the outstandings of that business. One is clearly mortgage rates. That drives volumes and clearly impacts the outstandings in our portfolio, and we did expect and do expect that there'd be some moderation if rates pull back this year. So trying to determine the exact balances in that portfolio would be challenging. I think you've just kind of look at it through that lens. But one of the things I want to underscore, there has been a lot of change in the industry, and there is no question about it that we have been moving market share. A lot of disruption, we've been in this industry a long time. We've got a terrific reputation, a solid source of financing, and the businesses continues to perform really outstanding for us. And frankly, our cross-sell to those customers has really been kind of leading in terms of our industry groups. In terms of our Dealer portfolio, very difficult to tell where those balances will be. Obviously, we’re very pleased to see sales units up over $14 million. To the degree that, that grows was as we hit through the balance of the year, that could certainly positively impact us, but I'd keep in mind, too, that the industry does have seasonality in it, as I spoke to earlier.

Operator

Your next question will come from the line of Brett Rabatin with Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Sorry, Lars, to keep having you talk there, but was curious if there was anything that affected the Energy balances at the end of the quarter. Obviously, growth wasn't as strong as the average for the quarter. And then also, was curious, Karen -- I didn't quite hear if I missed it. Was there any change to what was defined as moderately increasing on the loan growth of 2% to 5%?

Ralph W. Babb

Lars, do you want to start?

Lars C. Anderson

Sure. Let me speak first to Energy. None of our portfolios follow exactly the averages and endpoints. There's variation there. But something to keep in mind, I think, with Energy, obviously, we had nice growth on an average basis of $350 million. The endpoints clearly are up in the $80 million range. You would also see in our noninterest income that we had a really strong quarter in terms of bond economics, where we're working with our customers into bringing debt capital solutions to them. So there is some variation. There's a windows in the bond markets, and our customers do recap from time to time. So you see some variation, but I think, overall, our customers are stable. They're growing, and I think it's going to be a good business for us with nice noninterest income associated with hedging and accessing the bond market.

Ralph W. Babb

So there was no particular event that was driving that?

Lars C. Anderson

No particular event.

Karen L. Parkhill

And then on the question about moderate loan growth. There was no change in our definition of 2% to 5% on moderate loan growth. And while we are pleased with our pipeline, that is a full-year 2011 to full-year 2012 forecast, and we put it out there with -- keeping in mind the economic backdrop and the fact that we do expect variability in our Mortgage Banker business.

Operator

Your next question will come from the line of Terry McAvoy with Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

A question for Karen. The efficiency improvement revenue enhancement program that was announced, I believe, after third quarter earnings, with the goal of $100 million, any sort of kind of status where are we now? And I guess, specifically, is that built into maybe the fee income trends that we saw in the first quarter, reflecting any changes that were made as part of that program?

Karen L. Parkhill

Yes. Just to remind people on our profit improvement program that we talked about last fall, that was $100 million improvement in profit improvement driven by both expense and revenue focus, 2/3 expense and 1/3 revenue. That plan is very much on track. It is something that we monitor and talk about monthly at the executive level. There are over 350 projects that make up that profit improvement plan. We are tracking them to completion, and yes, it is built into our outlook and on both fee income and on expenses.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Just one other question. As I look at your 3 core markets and loan growth, the Midwest region had the slowest amount of growth, which I find a little surprising, given what your economic activity index for the state continues to report each month. Is that a reflection of losing market share? Or are you holding your own? Or maybe is it just that your runoff of Commercial Real Estate is a little bit more pronounced in the Midwest than in Michigan that's maybe hurting the bottom line balances?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes. The Midwest and Michigan in particular, obviously, is seeing some recovery. We are seeing some Commercial Real Estate projects that kind of run off. So that does impact us in that market, but we've got a very solid book of business there. We continue to move some market share, I think, there, pick up some new customers. But most of all, we're seeing some growth with some existing customers, but I don't think there's any big story there other than a nice steady increase in activity in that market.

Operator

Your next question will come from the line of Josh Levin with Citigroup.

Josh Levin - Citigroup Inc, Research Division

When you talk to your C&I loan clients about their investment plans, how are they thinking about the trade-off between using the cash on their balance sheets to fund their investing versus borrowing to fund their CapEx?

Lars C. Anderson

Sure. It's interesting. We continue to get record levels of deposits. In fact, this particular quarter, noninterest-bearing demand deposits were the big driver. Those are relationship deposits primarily driven by businesses. It's interesting. We're seeing a pickup in investments, CapEx, hiring, working capital, and yet, our customers tend to be carrying more liquidity than we've seen in the past. I'm not sure if it's a paradigm kind of shift, maybe a more cautious position, but we clearly see this as different than prior cycles, and it's clearly benefiting us from a deposit growth perspective.

Ralph W. Babb

I think that's true both with the consumer as well as the business side. People are being more cautious, in talking to various -- of our customers are holding more liquidity, as Lars was saying.

Lars C. Anderson

Yes, we're even seeing that in small business, Ralph, so it's -- will be kind of across the board. Yes.

Josh Levin - Citigroup Inc, Research Division

And when you talk about taking market share, do you have a sense of how much market share you're taking from other banks versus non-bank competitors, such as the capital markets?

Lars C. Anderson

Unfortunately, in commercial corporate banking, there's not a good index for that. So what I'm always looking at is how the overall markets are growing and how we're growing relative to them in the spaces that we serve and we know, and I feel very good. Like I've mentioned 4 consecutive of quarters of nice commercial loan growth. The last 2 have been very robust. So I feel very confident that we're outpacing the markets. But I would tell you, we're not changing our strategies. It's not a result of us changing what our markets are, our businesses. I think that what we're doing is we're reallocating resources. We're creating more accountability. We're spending more time in the market, the customers as well as prospects, and I think that's serving us well.

Operator

You next question will come from the line of Justin Maurer with Lord, Abbett.

Justin C. Maurer - Lord, Abbett & Co. LLC

Just a quick question on the -- I've talked about mortgage. Does HARP help that business at all? Or is that largely done just kind of through the existing larger bank servers and such? Or should you guys potentially see any benefit from that?

Lars C. Anderson

Yes. Justin, the HARP volume has not really impacted our customers in Mortgage Banking Finance. Our customers are primarily focused on, really, more the prime mortgage market. So it has not had a significant impact on our volumes. Market share gains and favorable mortgage rates have been the key drivers.

Operator

Your next question will come from the line of Matt Burnell with Wells Fargo.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Let me give Lars a rest for at least a couple of seconds and ask Karen a couple of quick questions. If I calculate your all-in cost of deposits, including noninterest-bearing deposits, those -- looks like those were down about 2 basis points quarter-over-quarter to 16 basis points. You mentioned that the -- that it was 26 basis points for the interest-bearing deposits. How much lower do you think you can drive those from the current levels?

Karen L. Parkhill

Yes. We are monitoring our cost of deposits at a very granular level, and we focus on it every month. So because of our keen focus, we will continue to find opportunities. I'm not sure though that those opportunities will continue to add up to something meaningful at the total average deposit cost level.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

And I'm presuming your net interest income guidance includes the effect of the drops TARP repayment?

Karen L. Parkhill

It does. TARP repayment is built into our guidance.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Right. And then just one final quick question. The commercial mortgage loan yields are up about 80 basis point year-over-year. They're up a little bit less than 20 basis points quarter-over-quarter. Can you give a little color as to what's driving that?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes. No problem. I feel a lot better than I sound. I think a significant impact to that is the fact that the majority activity that we're seeing is in footprint urban market-oriented, multifamily projects, construction projects, very well capitalized. Obviously, that's a -- tends to be a fee-rich kind of opportunity for the company, and I think that, that's having a very positive impact on us. I think that that will also help us once we begin to see drawdowns on those facilities just in terms of overall growth in the Commercial Real Estate portfolio.

Karen L. Parkhill

We are also aided in that portfolio by accretion from the Sterling loan discount on the Commercial Real Estate loans coming off.

Lars C. Anderson

That's true.

Operator

Your next question will come from the line of Brian (sic) [Ryan] Nash with Goldman Sachs.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Just a couple of follow-ups from earlier questions. You guys reiterated moderately higher net interest income year-over-year, although 1/2 last year excluding Sterling. So I just -- I appreciate we'll be up moderately, but how do we think about the run rate for the rest of the year relative to 1Q? I think given your guidance that accretion will be coming down, is the expectation of a decline from here? Or can we see loan growth actually offset the accretion headwinds?

Karen L. Parkhill

Yes. Clearly, loan growth will be the key driver going forward. We do, as you said and as we guided, expect accretion to be coming down. So we are focused on loan growth being the driver.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Okay. And Lars, I have a sore throat too, so I'll try to make this one quick. But I understand you guys are taking share in the Mortgage Banking area, and HARP isn't really impacting. But I'm just trying to understand, we look at industry volumes, we've seen apps up each of the last 2 quarters, and I understand there could be differences in terms of timing, but I guess I'm just trying to understand. Your balances were down quarter-over-quarter. Can you just give us a sense of what actually drove the balances down relative to what we see in the rest of the industry?

Lars C. Anderson

Well, some of the headlines, Brian, are being driven by the HARP volumes overall, but we did expect that we would see some declines in the first quarter. If you look at the averages, it was only down $50 million. It was down $250 million in terms of end points. So it kind of tracked about what we had expected. Volumes, overall, for the mortgage companies that we bank, which are very much a prime mortgage-oriented market, did decline some. I will tell you that the percentage of purchase volumes did increase, which I think was a positive for us in that business. It's going to be driven though largely by mortgage interest rate changes throughout the balance of the year. I think that'll be a big driver for us.

Operator

Your next question will come from the line of Brian Klock with Keefe, Bruyette, Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

A question for Karen. First, on the fee income, you guys have talked about a good solid start to the year. I guess what I'm trying to figure out is within the other noninterest income, it was $29 million. And I know you talked about certain things within the investment banking and other sort of items. Maybe the bigger question, just on the $206 million, what is sort of a more recurring run rate out of that number? Because if I annualize that number, it gets to be significantly higher than the $792 million they had for the full year of 2011. So it seemed if you're keeping your guidance the same, should we think that the next -- the rest of the year should be a lower level of fee income versus this first quarter?

Karen L. Parkhill

Yes. On our noninterest income, I think it's important -- on the 6% increase in customer-related fees that we talked about, that was a $10 million increase. Important to note that $3 million of that, approximately, is driven by an annual increase in service charges, so that would not be repeated for the rest of the year. Also, on noninterest income, we did have securities gains, which we don't build into our forecast when we give the outlook. Those are very difficult to predict.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. I appreciate that. And then one other question for you, Karen, on the securities portfolio. You say that the target is for a $9 billion target on the MBS portfolio. It's around $9.5 billion right now, I guess. What’s the quarterly cash flows coming off of that portfolio? In case the loan growth does slow down, is that something that would just build back in taxes liquidity?

Karen L. Parkhill

Yes. Currently, right now in our securities portfolio, we are reinvesting our prepayments. Those are averaging around $850 million to $900 million a quarter. We expect that to continue. The $9 billion target is still our target, but included in the balance sheet number is some unrealized gains from our mark-to-market of that portfolio. So that's why you see it above $9.5 billion -- at approximately $9.5 billion right now. We do also -- while we're not market timers, we do try to, as we reinvest those prepaid, hit the market when we can have some better yields, and so that's why you see variability in that target balance number.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Great. And actually, Lars, sorry, I got one more question for you. On the syndicated credit book, it looks like that was up about $300 million in the first quarter. Maybe you can kind of give some guidance. And is it sort of across those key portfolios of National Dealer Service, Energy and the Middle Market? Is that where we saw the growth in the syndicated books?

Lars C. Anderson

Yes. Brian, that's a pretty good description, but I would say it was very much weighted towards general Middle Market. We had a lot of activity in the fourth quarter kind of coming into the first quarter with just kind of core Middle Market companies that we had good activity on.

Operator

Your next question will come from Michael Rose with Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

Just a quick question on M&A. You're about 9 months out from the Sterling deal. Obviously, you have a buyback in place, and probably, you're going to increase the dividend here. Any updated thoughts on M&A activity and kind of what you're seeing in your opportunities going forward?

Ralph W. Babb

I think as I said before, I feel very comfortable with our footprint today and where we are. And if you remember, when we announced Sterling, that was a very strategic move for us, because it put us into Houston and San Antonio as well as Kerrville. As things come up, we -- we're always looking, but from the standpoint of expansion today, it would have to fit and be at an appropriate price to expand in those markets where we are.

Operator

Your next question will come from the line of Chris Mutascio with Stifel, Nicolaus.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Karen, a couple of follow-up questions. You mentioned confidence in both the M&A cost the rest of the year and also, the accretable yield. In terms of your confidence, is your confidence that those are the numbers that are going to be actual or that you're confident that you can beat those numbers going forward in terms of M&A expense and accretable yield?

Karen L. Parkhill

So I think you're talking -- when you say M&A expense, you're talking about the restructuring charges.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Yes.

Karen L. Parkhill

We've given a range for that guidance of $5 million to $10 million next quarter. Hard to tell you where it's going to be within that range. We've also said that we expect about $40 million for the rest of the year. Again, there's a plus or minus there, more likely a minus than a plus.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then when you look at things in a vacuum, given some of the comments on the accretable yield and the restructuring cost in the second quarter, I'm looking from first quarter to second quarter, is it roughly about a $0.10 headwind given the fact that accretable yield could be down $12 million to $15 million, and the M&A expense could be up $5 million to $10 million versus first quarter?

Karen L. Parkhill

Yes. Clearly, there is a headwind from accretion coming down and restructuring charges going up next quarter.

Operator

Your next question comes from Sean Ryan [ph] with Endava Global Research [ph].

Unknown Analyst

I just had a question about the securities portfolio, just with the duration creeping out a little bit more this quarter. Just wondering how you're thinking about that, and if -- I'm not sure you're comfortable with this level. Is there some point beyond which you don't want to go? Should we expect to see it continue to creep out a bit more?

Karen L. Parkhill

We want, in our securities portfolio, to obviously be in highly liquid, highly rated securities. We are in that. It's mostly invested in mortgage-backed securities, which are highly liquid. Yes, the duration did creep out a little bit but not much, moved from 2.7 last quarter to 2.9 this quarter. We are -- we do have robust prepays on that portfolio, as we talked about, averaging between $850 million and $900 million per quarter. We are continuing to reinvest those prepays. Should we see robust loan growth and our -- with our deposit growth, we will, obviously, not continue to reinvest those prepays. So hopefully, that answers your question.

Ralph W. Babb

We've not changed the strategy is really what you're saying.

Karen L. Parkhill

Yes, strategy remains the same.

Operator

Your next question will come from Jeff Davis with Guggenheim Securities.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

My questions have been have been answered.

Operator

Your next question will come from Steve Scinicariello with UBS.

Stephen Scinicariello - UBS Investment Bank, Research Division

Just a couple of quick ones for you. So I just noticed on the strong pipelines, 2/3 coming from new business. I know that's up from last quarter, and I just kind of wanted to follow up, like what are some of the key reasons or some of the key drivers why you're picking up share from the competition out there?

Ralph W. Babb

Lars?

Lars C. Anderson

Yes. Well, you are accurate. 2/3 of the pipeline today is new business opportunities for Comerica. I'd like to be able to make it easy and point to one particular business, but I can't do that. It's very broad-based. It's not broad-based just across our businesses. It's broad-based across our major markets also. So that would -- I think it gives us good momentum as we head into the second quarter.

Stephen Scinicariello - UBS Investment Bank, Research Division

Great. No, it definitely, definitely looks strong. And then just looking on Page 28 of the slide deck, focusing on the strong deposit growth, up 6% on the Specialty business side, just curious to get a little bit more color there just given how strong that has been.

Ralph W. Babb

Karen?

Karen L. Parkhill

Yes. We continue to see deposit growth across most of our businesses and our markets. The Specialty business deposit growth has been driven by businesses like our Technology & Life Sciences business.

Stephen Scinicariello - UBS Investment Bank, Research Division

So basically, is there any reason why we shouldn't see these kind of trends continue as you continue to book these new customers and take market share? Or it sounds like as long as this momentum continues, then these result -- type of results can continue as well. Is that fair?

Karen L. Parkhill

And I think because we drive full relationships with our customers, when we are capturing new customers, we are focused on gaining their transaction account deposit. So yes, from that perspective of new customer gain, we should expect to see increased deposit.

Operator

Your next question will come from Jon Arfstrom from RBC Capital Markets.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Sorry to prolong this call, but I just have one question for you, Ralph. In terms of Michigan, the legacy Michigan versus today, curious your view as to what's changed and what's possible. I guess, a little background. The reason I ask is it's been stable to a drag in that market for a long time, really, 5 years, maybe even 10 years, and it's pretty obvious to me that things have changed for the better. And I'm just curious what you think is possible longer term in that market and whether or not it's possible that it can start to keep pace with the rest of the franchise in terms of growth.

Ralph W. Babb

I think as I mentioned earlier in talking about our activity index there, it has bounced back extremely well. It's broad-based, and we're seeing expansion not just in the auto industry but now, more broad-based. And as I look at Robert Dye, who's our Chief Economist, and his projections, he's looking for GDP to increase significantly better than the national average going forward. So I think things are moving in the right direction. We have a lot of very good customers and clients there. We're seeing expansion start to happen. And as was mentioned earlier, capacity is running out, which is a good news, meaning as in the auto industry that Lars was talking about, with auto sales at the $14 million -- I'm sorry, the 14 million unit level, that expansion is accelerating. So I feel very good about what's happening in Michigan today as do our colleagues there, and it's a very important market for us today and going forward.

Operator

Your next question comes from the line of Kevin Reynolds with Wunderlich Securities.

Kevin B. Reynolds - Wunderlich Securities Inc., Research Division

All my questions have been answered by now.

Operator

And your next question will come from the line of Gary Tenner with D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

I just have one quick question. On your kind of slide deck, talked about your long-term ROA goal of 1.3%. Obviously, interest rates is a big piece of that, but you did point out that the loan growth assumption of 5% to 6% is pretty meaningful. I assume that that's 5% to 6% on an annualized basis and not just aggregate from here. So what does that -- what would that translate to without knowing kind of the time line you're looking at here on this target in terms of the kind of loan-to-earning asset mix? Obviously, that mix becomes a big part of achieving that goal.

Ralph W. Babb

Karen?

Karen L. Parkhill

Yes. Sure. Yes, the loan growth there -- this is a long-term goal, so that loan growth is a long-term number, but it is annualized. So when we think about the loan-to-deposit ratio, which I think is what your question is, we do -- it's hard -- it's very difficult to predict deposits. And so we didn't build that much into the equation, but what we did build into the equation is the interest rate that we would earn, as you can see on the chart. We don't need to get to a normalized rate environment, which we would define as Fed funds and LIBOR, which moves in tandem with Fed funds, typically, to be around 3.5% to reach our goal.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Well, I guess -- if I just ask a follow-up to that, I guess what I was really asking is not so much loan-to-deposit mix, but as you looked at your kind of earning asset, asked at what right now is 75% loans and 25% non-loan earning assets. What does that have to get to, to drive you towards that 1.3% number?

Karen L. Parkhill

We are focused on loan growth on -- over the long term much more than overall asset growth. So we would expect that a better growth in our mix between loans versus the rest of the earning assets would skew more heavily toward loans.

Operator

At this time, there are no further questions. I will now turn the conference back over to Mr. Babb for any closing remarks.

Ralph W. Babb

Well, thank you, all, for your interest and being on the call today. We appreciate it, and I hope everyone has a good day. Thanks.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you, all, for joining, and you may now disconnect.

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