Comerica Inc (CMA) 2014 Q2 法說會逐字稿

Good morning, my name is Valerie and I will be your conference operator today.

At this time I would like to welcome everyone to the Comerica second-quarter 2014 earnings conference call.

(Operator Instructions).

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

Ms. Persons, you may begin.

Thank you, Valerie.

Good morning, and welcome to Comerica's second-quarter 2014 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; Vice Chairman of the Retail Bank and Wealth Management, Curt Farmer; and Chief Credit Officer, John Killian.

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 her second-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 could 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 incorporate into this call, as well as or SEC filing.

Also this conference call will reference non-GAAP measures and in that regard I would direct you to the reconciliation of these measures within this presentation.

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

Good morning.

Today we reported second-quarter 2014 net income of $151 million or $0.80 per share compared to $139 million or $0.73 per share in the first quarter and $143 million or $0.76 per share one year ago.

It was a solid quarter with broad based loan growth contributing to increased revenue.

Together with strong credit quality and our continued drive for efficiency we had a 10% increase in earnings per share compared to the first quarter of 2014.

Turning to slide 4 and additional highlights.

Compared to the first quarter, average loans were up $1.7 billion, or 4%, and period-end loans were up $1.4 billion, or 3%, with notable growth in virtually every business line.

Loan commitments grew by more than $1 billion.

We attribute these results to continued improvements in the economy reflected particularly in the loan growth in Texas and California as well as our expertise in faster growing business lines and our consistent focus on relationships.

On a year-over-year basis we had average loan growth of $1.8 billion or 4% with growth in every business line except Mortgage Banker Finance, which was driven by the overall industry decline in mortgage volumes.

The largest increases were in Technology and Life Sciences, National Dealer Services, Commercial Real Estate and Energy.

Average deposits were up $614 million or 1% compared to the first quarter, while period-end deposits were up $420 million to $54.2 billion.

Compared to a year ago, average deposits increased $1.9 billion or 4%, almost entirely driven by an increase in non-interest-bearing deposits.

Turning to the income statement and comparing our second-quarter results to the first quarter of 2014, net interest income increased $6 million to $416 million, primarily due to an increase in loans and one additional day in the quarter, partially offset by a decrease in loan yields, accretion and non-accrual interest collected.

Credit quality continued to be strong with the provision for credit losses and net charge-offs still at low levels, consistent with the last several quarters.

Noninterest income increased $12 million to $220 million with a $9 million increase in customer driven fee income, which included increases in a number of categories.

Noninterest expenses decreased slightly by $2 million to $404 million.

Our strong capital position supports our growth and enables us to return excess capital to shareholders.

We repurchased 1.2 million shares under our share repurchase program in the second quarter.

Together with dividends we returned $95 million or 63% of second-quarter 2014 net income to shareholders.

Turning to slide 5 and a quick look at the performance of our three primary markets on a quarter-over-quarter basis.

Texas posted the largest percentage increase in average loans in the second quarter.

Average loans in Texas were up slightly over $600 million or 6% with increases in all business lines.

Texas deposits were down $150 million as middle market companies used their excess cash to invest in their business.

Payroll employment growth in most metropolitan areas of Texas continues to be strong.

Residential construction activity is picking up to meet the strong demographic demand and drilling activity continues at a robust rate.

Average loans in California were up over $600 million or 4% largely driven by growth in National Dealer Services and Commercial Real Estate.

Average deposits were up 4% with the biggest lift from general Middle Market and Corporate Banking, partially offset by a decline in Technology and Life Sciences.

Payroll job growth and California remains above the US average fueled by gains in high-tech industries and strengthening housing markets.

Average loans in Michigan were stable across all our business lines.

Deposits were also stable with a modest increase in retail deposits offsetting a small decline in commercial deposits.

There has been some improvement in housing markets statewide, but payroll employment in Michigan has been flat over the past year.

Looking ahead, national macroeconomic conditions appear to be favorable.

The marketplace is competitive but we are confident in our ability to add new customer relationships and expand existing ones while maintaining our credit, pricing and structured discipline.

In June we received word that our -- out of 25 largest US commercial banks Comerica is ranked number five among customers and number four among noncustomers in the 2014 American Banker Reputation Institute survey of bank reputations.

In closing, we had a solid quarter given this competitive and persistently low rate environment.

We continue to be focused on growing the bottom line by carefully managing the things we can control such as expanding customer relationships, maintaining expense discipline as well as credit quality all the while taking a prudent conservative approach to capital.

And now I will turn the call over to Karen.

Thank you, Ralph, and good morning, everyone.

Turning to slide 6. Quarter over quarter total average loans increased 4% or $1.7 billion following a $1 billion increase in the first quarter.

Commercial loans were the major driver increasing $1.5 billion or 5%.

Our total commitments grew over $1 billion to $54.3 billion driven by increases in virtually all businesses.

Line utilization was 49.3%, up from 48.3% at the end of the first quarter.

Importantly, our pipeline remains robust.

Our loan growth trends remained strong and broad-based through April, then slowed in May and June, similar to the commercial loan trends we've seen in the H.8 data reported by the Fed.

Our average commercial loan growth outpaced the industry, which grew about 2% based on the Fed's H.8 data for US commercial banks from April 2 to July 2.

Compared to the first quarter we saw average loan growth in almost every business line.

The largest increases were noted in Mortgage Banker with $433 million, National Dealer Services $330 million, Energy $254 million, Technology and Life Sciences $205 million, general Middle Market $158 million in commercial real estate $149 million.

Of note, period end balances of our Shared National Credit, or SNC, relationships grew less than 2% or approximately $150 million, a fraction of our $1.4 billion in total period end growth.

Finally loan yields, shown in the yellow diamonds, decreased 8 basis points in the quarter of which 4 basis points can be attributed to lower accretion and lower interest collected on nonaccrual loans.

Much of the remaining decrease is due to amortization and pay off of older higher-yielding loans, a mix change in customer usage and competitive pressures.

Turning to deposits on slide 7. Our total average deposits increased $614 million, or 1%, to $53.4 billion reflecting an increase in non-interest-bearing deposits.

Period end deposits grew $420 million to $54.2 billion.

As shown by the yellow diamonds on the slide, deposit pricing was stable at 15 basis points.

Slide 8 provides details on our securities portfolio, which primarily consist of mortgage-backed securities that averaged $9 billion for the quarter.

The estimated duration of our portfolio still sits at 4 years and the expected duration under a 200 basis point rate shock extended slightly to 4.7 years.

The yield on the MBS book drops $2 million, or 7 basis points, to 2.35% mainly due to a decrease from the retrospective adjustment to the premium amortization recorded in the first quarter.

While there was a decrease the second quarter still had a small amount of retrospective adjustment, which is not anticipated to happen every quarter and contributed 6 basis points to the yield.

And while our goal is to reinvest prepays at or above the current portfolio yield, the yields on the securities that are prepaying are typically above the portfolio yield and therefore anticipated to put continued modest pressure on the average yield.

Based on current rate expectations we believe that the pace of prepays will be about $400 million to $500 million in the third quarter, slightly higher than the past few quarters due to an increase in mortgage volume around the summer moving season.

In light of the fact that Fannie and Freddie backed securities are subject to a haircut and a cap under the proposed liquidity coverage ratio, or LCR, we continue to reinvest the prepays in Ginnie Mae securities.

As far as the proposed LCR, given our good loan growth and debt repayment in the quarter we did see a decline in our excess liquidity balance which had an impact on our LCR estimate.

However, we continue to feel comfortable that we will meet the proposed phase-in threshold within the required time frame.

And reinvestment of the prepays in Ginnie Mae securities will assist us in meeting the requirement without being subject to caps and haircuts.

As and when needed we have ready access to the Federal home loan bank line and the debt market, which will allow us to fund additional high-quality liquid assets or HQLA.

When and how much will depend on our own balance sheet dynamics and the final rule.

As we discussed at a recent conference, the impact on our asset sensitivity and earnings depends on how any additional HQLA is funded and initially invested.

Turning to slide 9, net interest income increased $6 million and net interest margin increased 1 basis point.

Strong loan growth added $12 million and one additional day in the quarter added $4 million.

These positive effects were partially offset by a $3 million impact from lower loan yields due to the portfolio dynamics I discussed a moment ago, a decrease of $2 million in interest collected on our nonaccrual loans from an elevated first-quarter amount and lower accretion of $2 million.

And as discussed on the prior slide, interest earned on investment securities decreased $2 million.

All of these decreases combined negatively impacted the margin by 5 basis points and were more than offset by a decline in excess liquidity, which added 6 basis points to the margin.

Just to note, we expect accretion for 2014 to be $25 million to $30 million, and, as you can see in the bars on the slide, $22 million has been realized year to date.

The remaining accretion on the full portfolio is only about $22 million, which we expect to realize in small increments each quarter over the next few years.

As stated before, we believe our balance sheet remains well-positioned for a rise in short-term rates.

At a recent investor conference and in our 10-Q we shared our [stance] (technical difficulty) of rate sensitivity model as well as alternative scenarios with varying assumptions.

In all cases, as of June 30, our asset liability model, which calculates a dynamic balance sheet assuming historical relationships, shows that a 200 basis point increase in rates over a one year period equivalent to 100 basis points on average results in a benefit to net interest income from about $180 million to about $240 million depending on the assumption.

Turning to the credit picture on slide 10.

Net charge-offs decreased to $9 million or 8 basis points of average loans and included $19 million in recovery.

Our criticized loans, nonperforming loans and the allowance coverage ratio were all relatively stable.

Our allowance covers our trailing 12-month net charge-offs over 11 times.

Our solid credit metrics combined with loan and commitment growth resulted in a slight increase in the provision for credit losses to $11 million and a small reserve build.

Of note, we received our annual SNC exam results last month.

They are reflected in our second-quarter results and were not significant.

Slide 11 outlines noninterest income which increased $12 million.

Customer driven fees increased $9 million, including a $3 million increase in commercial lending fees from low activity in the first quarter, as well as a $3 million increase in foreign-exchange income due to a few large transactions and good volume.

We had smaller changes in several other areas such as increases in fiduciary and investment banking fees.

The $3 million increase in noncustomer driven income included a $2 million increase in bank owned life insurance, or BOLI, and a $2 million increase in customer-related warrant income offset by a $1 million decrease in deferred compensation plan asset returns, which was completely offset in noninterest expense.

Noncustomer driven income is difficult to predict.

Elevated BOLI and warrant income in the second quarter may not be repeated in the back half of the year.

Turning to slide 12, noninterest expenses decreased $2 million.

Salaries and benefits expense decreased $7 million reflecting seasonal declines in share-based compensation and payroll tax expense, partially offset by the impact of one more day and a full quarter of merit increases.

We had small increases in several other categories such as software expense, operational losses and outside processing.

Holding expenses relatively stable while we grow revenue we were able to drive the efficiency ratio down to 63% from 66% last quarter.

Moving to slide 13 and capital management.

As Ralph mentioned, we repurchased 1.2 million shares under our share repurchase program.

Our 2014 capital plan includes share repurchases up to $236 million over the four quarters ending first quarter 2015.

Combining shares repurchased with the dividends paid we returned 63% of net income to our shareholders in the second quarter.

Our 2014 capital plan also includes the redemption of $150 million subordinated notes, at par, which we called effective today July 15.

These notes have a carrying value of $182 million which will result in a $32 million gain.

Due to the non-core nature of this gain we have not included it in our outlook.

Our access to liquidity was clearly demonstrated when we issued $350 million in senior debt from the holding company in May.

The five-year security has a coupon of 2.125% which we swapped to floating at six-month LIBOR plus 42 basis points.

This was the first debt issuance we've done in almost 4 years and we were very pleased with the outcome.

Our capital position remains strong with a tangible common equity ratio of 10.4% and an estimated Basel III Tier 1 common capital ratio of 10.2% at June 30 on a fully phased-in basis excluding the impact of AOCI.

Finally, turning to slide 14.

Our outlook for full-year 2014 compared to 2013 remains essentially unchanged from what we outlined on our call in April with the exception of loan growth.

We had previously indicated we anticipated 3% annual growth in average loans in 2014, consistent with 2013.

However, given the stronger growth we have had in the first half of the year, we now expect moderate annual growth of about 4% to 6% in average loans.

As you know, we typically see seasonality in Dealer and Mortgage Banker in the second half of the year.

Average dealer loans increased $330 million in the second quarter and much or more of that growth can be offset by seasonality in the third quarter.

As far as Mortgage Banker, we have indicated that we expect this to average about $1.1 billion for the year.

For the rest of the loan portfolio we expect continued growth.

However, keep in mind that the pace of growth slowed through the quarter and we continue to expect persistent headwinds from owner occupied commercial real estate mortgages with normal amortization.

Stiff competition continues for loans across all of our businesses and, while we fully intend to maintain our loan pricing and credit discipline, we do expect further portfolio yield declines.

It is important to note that where we could land in the 4% to 6% range will depend on the level of seasonality in Dealer and Mortgage Banker, along with whether or not the recent slower pace of growth continues in the rest of our businesses.

We believe it would take less seasonality than we've seen historically and more robust loan growth than we've had recently in the rest of our businesses to reach the top end of the range.

We continue to expect our net interest income to be modestly lower year over year, even with stronger loan growth, primarily due to lower accretion.

We had $49 million in accretion in 2013 and expect $25 million to $30 million in 2014 with $22 million already reported in the first half of the year.

And while we are pleased with the growth in our loan portfolio, which is helping net interest income, we do expect continued pressure from the low rate environment to approximately offset the positive effects from loan growth.

We continue to expect lower noninterest expenses primarily due to lower litigation-related expenses and a reduction in pension expense.

As a reminder, in the second half of the year we expect slightly higher outside processing, occupancy and advertising expenses.

Finally, our share count should reflect both the execution of our capital plan as well as the dilutive impact from our warrants and employee options when our stock price increases.

Our rule of thumb is that for every $1 increase in average stock price for the quarter warrant and option dilution is about 250,000 shares.

In closing, we are pleased with the loan growth and expense control we have had in the first half of the year.

We continue to focus on the things we can control, deepening and expanding customer relationships while carefully managing expenses.

We remain focused on delivering growth to our bottom line.

Now, operator, we would like to open up the call for questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

Second-quarter loan growth was strong, but did it change the way you're viewing the potential for growth in the second half or is the new guidance just reflective of a strong April?

Yes, Steve, as I mentioned, we did see good growth in the second quarter and we did change our outlook to 4% to 6%.

Based on that growth in the first half, as well as looking into the future, where we land in that range does depend on the seasonality that we could have in both our Dealer and our Mortgage Banker business, as well as continued growth in the rest of our businesses.

But, Karen, if you take the seasonality or those two businesses out of the equation, what you saw in the second quarter -- did that make you any more optimistic for the back half of the year?

We are optimistic for the back half of the year, but we are mindful of the recent monthly trends that we've seen where we saw more robust growth in April followed by a slowing in both May and June.

And we are mindful of that.

That is why we have a broader range on our outlook for the rest of the year, 4% to 6%, because it depends on whether or not those trends continue and the amount of seasonality that we see in the rest of our businesses in Mortgage and Dealer.

Okay.

The auto sector continues to get better and you can see that pretty clearly in your Dealer finance numbers.

But the loan growth in Michigan has been pretty flat.

Why are you not seeing any pick up there?

Lars, do you want to --?

Sure, absolutely.

A big part of our portfolio in Michigan, Steve, is related to the auto industry and a big part of that is suppliers to the industry.

Those suppliers who are running at very high capacity rates have not yet really (inaudible) to make significant CapEx and expansion.

They're running three shifts, they're very productive, but we have not yet seen that kind of significant CapEx turn that you would sometimes see in a recovering industry.

However, we have continued to see commitments increase over a period of time.

And we think we are very well positioned with some excellent customers to capture that growth once we see investments begin.

That's helpful.

Maybe just one final one regarding the reinvestment of MBS into Ginnie Maes.

Karen, what's the average yield you are adding Ginnies?

Today it would be between [2.20%] and [2.30%].

We do remain focused on trying to add securities to our portfolio at or above our current portfolio yield.

Okay, thanks for all the color.

John Pancari, Evercore.

So a follow-up to Steve's question.

Can you -- maybe to help us a little bit with how to think about this slowing that you're seeing -- that you saw in May and June.

Can you give us a bit more color, what portfolios and can you help kind of give us a little bit of a quantification around how much of slowing that you're seeing in that pace of growth in certain portfolios?

Lars?

Yes.

You know, the growth that we did have, John, as we headed out of the first quarter into the second was very broad across all of our lines of business.

And I would say that there has been a similar kind of slowing of activity levels.

However, we're continuing to hear from our customers slightly more optimistic comments about future investments.

We also saw an increase in commitments across virtually every business that we have and that was pretty steady throughout the quarter.

So, frankly, I can't put my finger on exactly an industry or a group that would be a key contributor.

But we think that we're well-positioned, given that we can control what we can control, the business activity and fundamentals do pick up in the second half of the year.

I think we've got the right businesses, whether it's Technology and Life Sciences, it is Energy, general Middle Market and others that can benefit us, but we're going to have to -- going to see how the economy responds.

Lars, in prior quarters we've kind of scene that up and down as well.

And this is not the first time.

Yes, we have.

There is a bit of a seasonality and often times in the third quarter a piece of that is obviously linked in the third quarter to our Mortgage -- excuse me, to our Dealer finance business.

But also the third quarter does tend to be a little bit softer and then we get stronger into the fourth quarter.

So, I'm optimistic.

I think we've got some great colleagues with very deep industry expertise and they're out there very active in the market.

And we're going to drive the growth that we can do without over reaching in a very competitive environment and very disciplined on pricing as well as structure.

Okay.

And is it too early to get a sense of July?

I think if you follow the H.8 trends, that's what we have been seeing so far at least.

Okay.

All right and then lastly, just around the excess liquidity.

Just to confirm, so the decline in the excess liquidity balance is the 40% decline in end of period excess liquidity -- Karen, that should not necessitate a material change in your approach in how you're positioning for LCR, is that correct?

Yes, we did see a decline in excess liquidity and that was driven by loan growth and debt pay-downs that we did in the quarter.

We have been repositioning the pay-downs and prepays of our securities portfolio into Ginnie Mae securities and we are on a glide path towards the end of the year to be more positioned in Ginnies so that we hopefully are not subject to any caps and haircuts.

That will obviously help us with the required rule.

The rule is not yet final, as you know, much could change in it.

And so, what we ultimately need to do will depend on our balance sheet at the time and the ultimate final rule.

Okay, thank you.

Ken Usdin, Jeffries.

A follow-up on the balance sheet mix and structure.

So, Karen, if their excess liquidity has kind of gotten down and you did a really good remixing this quarter, without a meaningful increase in the security size of the book and with loan growth still looking pretty good, if not a little bit high versus the seasonality stuff that's coming, loans are still outgrowing deposits, you still have some room.

How would you start to think about overall balance sheet growth if your loans continue to outgrow deposits?

What's your first choices for filling that gap on the right side of the balance sheet?

Would it be to issue more sub debt, is it FHLB advances?

I think we're at this kind of period where the banks might start to have to think about that a little bit differently.

Yes, so we have said that as loans grow and our excess liquidity decreases according to the proposed LCR rule we will need to be adding high-quality liquid assets.

As I said, when and how much depends on balance sheet dynamics and the final rule.

To be compliant high-quality liquid assets can be several types of securities as well as just extra cash on your balance sheet.

And we do have ready access to the FHLB lines that we've got as well as the debt markets to be able to quickly add should we need to.

Okay.

So it's whatever funding mechanism is most attractive at the time?

That would be correct.

Most likely it would be FHLB when and if we need it.

Okay.

Got it, that's what I was trying to get at, okay.

And then secondly, so the seasonality that you're very clear about, I know you're still talking about Mortgage Banker averaging $1.1 billion, but can you just give us a little bit more flavor for just the underlying trends beneath both the floor plan business and Mortgage Banker in terms of is normal seasonality expected to hold versus the differing trends we've seen in both of those respective businesses about lower mortgage originations and higher auto originations?

How is that different than perhaps your original thoughts at the beginning of the year?

So on Mortgage Banker we did say as part of our outlook that we expect the full year balances to average $1.1 billion where they were at the end of the year.

We do see seasonality through the year.

We saw a decline in the first quarter, we saw an increase of more than $430 million this quarter.

And when you look at Mortgage Banker you typically see the peaks in the summer months and the troughs in the winter months aligned with the selling season.

So we do continue to expect seasonality.

That business can be very volatile.

And if you look at history the seasonality can be anywhere between 15% and 25% in the winter months.

I may also just mention in particular on the Mortgage Banking finance business that we are very much positively gapped towards the purchase market and that's been a deliberate strategy to try to capture the recovering national housing market.

And in fact, if you look at the second quarter our production was about 83% purchase versus industry at about 59%.

So we think we have positioned ourselves well for the future.

And we're also increasing market share, are we not?

Yes, we are absolutely, Ralph, increasing market share.

We're continuing to see a very robust pipeline.

We are adding new customers, we're expanding with existing ones.

And I think it's an industry that our reputation continues to strengthen and I think is well-positioned for the future.

And then can you just comment on the floor plan side?

Yes, on the floor plan we mentioned that we had a $330 million increase in our Dealer business this quarter.

The seasonality in floor plan typically happens in the third quarter, a little bit into the fourth quarter.

But if you look at typical seasonality it can go down between 5% and 10% of floor plan financing.

So that $330 million or more could go down as part of seasonality.

Yes, and I may just add on one additional issue.

As we look back say over the last 10 years, I think Karen gave the range very nicely in terms of what we would typically expect.

However, there are outlying years where we do not see the seasonality.

And we'll just have to kind of see how that plays out.

Now obviously with annualized sales at 17 million units if that continues to rise that can certainly have some impact.

And that's close to the high before the downturn.

Yes, it is.

It's the highest level in many years.

Right.

And that again is why our loan outlook for the rest of the year is a larger range between 4% and 6% depending on what happens with that ultimate seasonality.

All right, thanks, guys.

Appreciate it.

Ken Zerbe, Morgan Stanley.

First question, you mentioned that the SNCs were up about $150 million end of period, which seems like a little bit slower growth.

Was that by choice given stronger growth in other areas or is there something specific to that segment that actually led to the lower or slower growth?

Lars?

Yes.

No, there was nothing deliberate about it.

And frankly, there's nothing really deliberate about our SNC strategy.

It is simply a conservative risk management tool that we use to manage our credit exposures.

All of our businesses are originated through lines of business that we've been in for a long period of time.

It just happened to be that we actually did not see much increase this quarter.

And in fact the increase we did see was really the two largest areas were general Middle Market and Mortgage Banking finance that continues to do very well and we were spreading some of our credit risk.

Okay.

All right.

And then, Karen, a question for you.

You said swapped the $350 million, it was like 2% fixed-rate debt into floating.

I guess my question is why?

I mean, you guys make a big deal of being very asset sensitive, but this seems to be a move that would reduce that asset sensitivity.

Actually keeping it swapped does not change our asset sensitivity.

That is one of the reasons, but we also recognize that we have significant upside just based on our own balance sheet.

And so, keeping bad asset sensitivity with swapping it we decided was not a bad strategy.

So when you said it doesn't change, you mean it doesn't change it meaningfully or it doesn't change it at all?

It doesn't change it meaningfully.

Right.

Understood.

Okay, all right, great, thank you very much.

Michael Rose, Raymond James.

Just a question on the growth and commitments utilization continues to go higher.

Any discernible trends either by geography or business type?

Lars?

Yes.

Frankly, obviously, as you can see from the numbers that we are up about 100 basis points in utilization of 49.3.

But if you take out Mortgage Banking finance, which this is an end of period measurement, utilization rates were flat.

There was really no significant pattern there or changes in terms of utilizations.

Okay.

And then on the change in the reserve methodology, obviously I wouldn't expect much change in the near term, given credit trends are so strong.

But how would it potentially impact provisioning methods or methodology or levels, once we get it to another credit cycle?

Thanks.

John?

Yes, I would be glad to.

Most importantly, we have to remember that the enhancements to the approach were largely neutral to the total allowance for loan losses for Comerica overall.

What we did actually was enhance the approach used to determine our standard loss factors.

And in short, that had the effect of capturing certain elements in the quantitative component of the reserve that had previously been captured in the qualitative; simple as that.

It did cause some changes in reserve allocations to some lines of business and some markets, as more of the reserve was allocated based on risk ratings rather than on simple loan balance totals.

But an overall picture, the allocation changes there were modest as well.

So no overall change to the Comerica picture because of this.

So in a credit cycle, you wouldn't expect any changes in the overall kind of provisioning levels relative to what you had before if you applied this retroactively.

That is correct.

Okay.

Thank you very much.

Terry McEvoy, Sterne Agee.

If I look back at the first quarter, the Energy portfolio is $3 billion and the Energy segment of the SNC portfolio was also $3 billion.

And then in the second quarter, Energy loans up over $250 million, but the SNC portfolio up just $100 million.

I know you commented on the SNC exam and the impact there.

What is going on within Energy?

Are you looking in different areas, moving down market for those numbers to move in the opposite direction?

Lars?

So yes, Energy was up over $250 million or 9%, but that was not a significant contributor to our shared national credit portfolio.

It represents less than 7% of our overall banks?

portfolio.

I can't tell you that there was any specific strategies are around that.

Energy credits do tend to be kind of syndicated heavy, just because the agent banks end up having to hold large positions, which would be outside of our conservative credit discipline.

But there was really nothing unusual.

I would say you may have seen some declines in some facilities that were [agented] and a few credits that were booked or advances that were not Shared National Credits during the quarter, but nothing unusual there.

Great.

And then as a follow-up, digging into the specialized businesses, where are you seeing the least amount of spread compression?

And just some overall comments on the competitive trends within National Dealer Services, Tech and the Mortgage Banker book.

Yes, so, I'd say Energy continues to be obviously a business that we get a decent margin in given our long-term expertise in that area.

We also see that in our Technology business.

We frankly get nice returns in our general Middle Market business where we have been operating for many, many decades.

And frankly we add I think a different value proposition to the customers, a premium service experience and that's what we focus on doing.

But whether it's environmental services, entertainment, a number of other businesses, we are continually reallocating our resources to those higher yield businesses to try to capture the growth as it's available in the marketplace and we're going to continue to do that.

Thank you.

Geoffrey Elliott, Autonomous Research.

I've got a couple of questions on rising rates and deposits.

We hear kind of different messages from different banks on how they expect rates to impact deposits, which obviously if you look at a system level there has been a lot of growth particularly in non-interest-bearing deposits.

So I am interested in your take on that.

And then specifically on the guidance you gave us on what happens to net interest income when rates rise.

You say that's based on historical patterns and customer behavior, but obviously we've not had a period in recent history where rates have been this low.

So curious as to how you extrapolate from the historical patterns to such a low rate environment?

Karen?

Yes, so, Geoffrey, at a recent investor conference in early June we did share various scenarios around our rate sensitivity.

In our standard scenario that we talk about in our 10-Q we do expect in a 200 basis point rate increase or 100 basis points on average in an annual period.

We do expect deposits to decline.

And we do expect on deposit pricing that the deposit pricing [beta] is in line with historical experience.

But that said, we don't know if that will be the future, so we did provide some sensitivity scenarios of what if deposits decline more, what if pricing increases more than it has over history, what if loans grow faster, what if rates rise faster.

And depending on those varying assumptions we showed that we are still very well positioned to benefit when rates do rise and that range can be between $180 million and $260 million.

And just more broadly, JPMorgan, for example, have talked about system deposit outflows of $1 trillion in the second half of 2015.

When rates start moving up that clearly hurts them at very high end of the range in terms of expectations for system outflows.

Other banks kind of say that deposits almost always keep rising.

So just thinking about the system as a whole how would you position yourself on that spectrum?

Yes and in fact one of the sensitivity analyses we did can be reflective of that scenario.

So that $1 trillion outflow that JPMorgan has talked about is about a 10% or slightly more outflow in the system.

And on one of our sensitivity analyses we said what if deposits decline $3 billion on average more than what we had assumed in the base scenario.

And keep in mind that would be $6 billion point to point.

And that would be more than the deposit outflow than JPMorgan had talked about in the $1 trillion scenario.

So the base case is $3 billion of outflows and then you're adding $3 billion on top?

We don't disclose the exact amount of our standard case, but we do expect deposits to decline in that standard case.

And then the sensitivity of what if they decline, another $3 billion on average or $6 billion point-to-point on top of that.

That was one of the scenarios we showed.

Great.

Thank you very much.

Bill Carcache, Nomura.

Karen, can you talk about the interplay between LCR and your excess capital?

From a capital perspective stronger loan growth will give you the opportunity to put more of your excess capital to work.

But I thought, Karen, that I heard you say that you'd need to add high-quality liquid assets as your loans grow.

So just trying to kind of understand that interplay.

Any perspective around that would help.

Yes.

We did say and we have said all along that as loans grow and excess liquidity does decrease we will need to add high-quality liquid assets.

But we remain mindful of the fact that the rule is not final.

And if we were to add securities today on a proposed rule, not a final rule, those securities are marked to market in a rising rate environment and the numerator on the LCR equation is a mark-to-market numerator.

So we remain mindful of that.

When and how much high-quality liquid assets we need, or will need, really depends on our balance sheet dynamics at the time that we do need it.

And depends on what the ultimate final rule will be.

So there's a lot of unknowns at this stage.

Right.

Yes, but broadly speaking is there a general scenario where you would find yourself with a fair amount of excess capital still that -- on the right-hand side of your balance sheet?

But on the left hand side of your balance sheet you're not necessarily able to return that given that the level of high-quality liquid assets that you need, you're somewhat constrained by LCR in your ability to be able to draw those down to return that excess capital?

But regulatory approvals aside, I'm just kind of trying to understand the dynamics of the balance sheet.

So we have and have had over the last couple of years more excess liquidity than we've had in history and that's been driven by the dynamics of our balance sheet, where we've had greater deposit growth than we've had loan growth.

It is not typical for us to be having that much excess liquidity over a long period of time.

So we will operate with less excess liquidity over a long period of time.

Our excess liquidity balances at the end of the second quarter reached $2.5 billion have increased a little bit since then.

So we recognize that they decrease because of loan growth and because of debt pay downs that were purposeful.

But our excess liquidity over time is not necessarily going to be that large.

And over time, depending on the final LCR rule, high-quality liquid assets are needed.

And whether or not we keep that in cash on the balance sheet or invest it in securities is a decision that we'll make at that point in time.

Okay, fair enough.

Switching gears, just one other question on the LCR disclosures that you gave recently.

Could you also just give us some perspective on what percentage of your deposit base you consider non-operating?

The proposed rule as written is very thinly written or particularly around operating account deposits.

So we will be looking to more clarification of that in the (multiple speakers) rule.

So it's very difficult to give you a number on that.

Okay, thanks very much.

Sameer Gokhale, Janney Capital Markets.

Just a couple of questions.

I noticed that the provision for credit losses on your lending-related commitments increased by about $4 million from the last quarter.

Now I would assume part of that increase is just because the absolute size of your commitments grew from Q1 to Q2, but the magnitude of the increase still seems a little larger compared to the overall increase in your commitments.

I was just wondering if there is anything going on in there in terms of the mix of commitments or anything else that might account for that increase in that provisioning?

John?

No, there is nothing, Sameer, that is unusual going on there.

I think what you're seeing to some extent is the law of small numbers causing what looks like an outsized change when it really isn't.

But there's no underlying change in the portfolio or what's going on with it.

Okay.

And then on a different note, I know you did talk about the competitive environment, and you gave some perspective in terms of the different businesses.

But I was wondering if you were able to quantify, if you look at your total middle market business and you try to look at yields on new business booked, this quarter versus last quarter, could you give a sense for what the actual yields were?

Because what I'm really trying to get a sense for is your margin and your yield on average may be coming down because of where yields on new business are.

But are we seeing that yields are stabilizing on new business, because at least we'll get some sense of where those could stabilize and then be actually less of a -- putting downward pressure on the margin.

So could you give us a sense for that yield on new business within the middle market segment?

Yes, Sameer, when you look at our overall portfolio yield, that has been coming down.

It's been more reflective of mix shift in our usage on our portfolio and higher yielding loans.

While we don't have many fixed rate loans on our books we do have some.

And those higher yielding loans that mature and run off have an impact on the portfolio, less around new business booked because we are very focused around maintaining spreads at our current separate business portfolio yields for all new and renewed business.

So I'm sorry.

Would you characterize the yields on -- from a competitive standpoint would you characterize the environment as being competitive but stable?

Or do you see still further competition driving yields lower on new business?

That's what I was trying to get a sense for.

I may have missed it in your comments but that's what I'm trying to get at.

Lars, why don't you --.

Yes.

You know, Sameer, I don't think that we have seen the competitive environment get relatively worse or more competitive over the past quarter or two.

But it is very, very competitive.

We don't give specific yields on new production by line of business.

But I would tell you from a loan spread perspective, we actually did see loan spreads in general Middle Market do well over the past quarter.

And part of that is we're trying to stay very focused on the parts of the market where we can deliver value to customers that are willing to pay for the Comerica value proposition.

So I guess in summary, a stable competitive environment, but we think that we're well-positioned to be able to compete in the marketplace.

Okay, thank you.

And then just a question on operating expenses I think.

This 2014 CCAR was the first one that Comerica went through.

And I was trying to get a sense for costs that you might have incurred in going through that process and whether those costs should come down, not only over the course of this year, but perhaps into 2015 as maybe there were some consulting fees and other things you might have paid for that you may not need to incur going forward.

So could you give us a sense for that?

I don't think I saw it explicitly mentioned in your outlook.

Karen?

Yes.

We have talked about the fact that increased regulation from CCAR, Dodd Frank in general has had us increase expenses by over $20 million annually.

Most of that is in our run rate and most of that is related to the stress test.

We have been less focused on using consultants in the stress test, so I wouldn't anticipate that we could see benefits in the future on that expense.

Okay, perfect.

Thank you.

Matt Burnell, Wells Fargo Securities.

Actually this is Jason Harbes from Matt team.

how are you guys doing?

Hi, Jason.

Good.

Good.

So just a follow-up on the credit question that was asked.

I guess I was just a little bit surprised that the net charge-off guidance didn't change considering that you're running it basically 40% to 50% below last year's levels.

So I'm just I guess curious why you would kind of maintain that net charge-off guidance for the full year.

John?

Well, again, it might be a reflection of the law of small numbers, but if you take a look at our net charge-offs for the past several quarters, they've all been pretty close.

They're in a period where I would call them a relatively small stable range and that's what our outlook expects as we go forward for the rest of the year.

Okay, that's fair.

And then just switching over to the fee income line that was a little better than we were expecting.

But it sounds like there were some episodic trades on the FX side that may not recur.

Is that fair, did I hear that correctly?

Yes.

We did benefit from a few larger trades on the FX side this quarter.

We did also see some good volume as well.

Okay, thank you very much.

Bob Ramsey, FBR Capital Markets.

Really only one quick question.

But I was curious, you've talked a lot about the loan growth and how that has affected the LCR positioning.

Just curious if the LCR requirements in any way affect your appetite for loan growth as we go into the back half of this year?

Karen?

So on LCR again, because the rule is not final we are not going to have any knee-jerk reactions around it at this stage.

We are focused on prudently growing our balance sheet with the right assets and we will continue to focus on that.

Yes, it depends on the final rules and how they're written as to what effect it may have on specific businesses.

Okay.

And so, then once you sort of have the final rules in place, is the thought process at that point you -- I know you had talked early in the call, but would be willing to borrow or sort of do what you need to do to purchase whatever liquid assets are necessary?

That's correct.

Yes.

We feel confident that no matter what the final rule is we'll be able to easily handle it.

Great, thank you very much.

Keith Murray, ISI.

Could you just -- on page 19 of the press release where you give the detail on asset yields, just scratching my head a little bit.

It looks like the yield on loans, yield on securities both declined sequentially, but the total yield on earning assets went up.

Could you just give me the back-and-forth of the dynamic behind that?

Sure, sure.

Our loans and security yields did decline in the quarter, yes, our asset yields did go up and the key reason for that is our excess liquidity.

Our excess liquidity declined, that had been earning 25 basis points.

So as that declines and is put into assets that are earning higher that's what impacted our overall asset yield.

Okay, thanks.

And then you've talked before about if the 10-year yield doesn't pick up as we head to the end of the year pension expense might creep up in 2015.

Are there any potential expense areas you guys look at and think that they could somewhat offset a potential increase next year in pension expense?

Yes, we're not giving guidance for 2015.

But what I would say is that we have a culture of maintaining focus on self funding wherever we have an expense increased to try to find ways to self fund that increase to keep expenses as flat as possible.

Yes.

Thanks.

And then just the last one.

You mentioned the total deposits decline a little bit in Texas as corporations use some of their money and put it to work.

Are you seeing a dynamic like that anywhere else?

Any change in deposit behavior anywhere else?

We did see deposits decline in mostly Middle Market in Texas and it's due to the phenomenon that we talked about.

While we have seen smaller declines in some other areas they were not notable, and so we're not seeing any big trends.

There's not robust growth either in the commercial side.

Correct.

So that is a indicator as well.

Yes, we did see some gains in deposits in the state of California in several businesses where we had some growth, which was positive for the quarter.

Okay, thank you very much.

Thank you.

There are no further questions in the queue.

I would now like to turn the call back over to Mr. Ralph Babb.

I'd like to thank you all for being on the call today and for your interest in Comerica.

And I hope everybody has a great day.

Thank you very much.

Thank you for participating in this morning's conference call.

You may now disconnect.