Comerica Inc (CMA) 2015 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Comerica second-quarter 2015 earnings call.

(Operator Instructions).

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

Please go ahead.

Thank you, Carmen.

Good morning and welcome to Comerica's second-quarter 2015 earnings conference call.

Participating on this call will be our Chairman, Ralph Babb; President, Curt Farmer; Vice Chairman and Chief Financial Officer, Karen Parkhill; Chief Credit Officer, Pete Guilfoile; and Executive Vice President of the Business Bank, Pat Faubion.

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 second-quarter results, we will be referring to the slides which provide additional detail 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 actual results to vary materially from expectations.

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

I refer you to the Safe Harbor statements contained in the release issued today as well as slide 2 of this presentation, which I incorporate into this call as well as our filings with the SEC for factors that could cause actual results to differ.

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

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

Good morning.

Our second-quarter results reflect the advantages of our diverse geographic footprint and industry expertise.

Today we reported second-quarter 2015 net income of $135 million compared to $134 million for the first quarter and $151 million for the second quarter of 2014.

Earnings per diluted share were $0.73 for both the second and first quarters of 2015 and $0.80 for the second quarter of 2014.

Turning to slide four and highlights from our second-quarter results, average loans were up $2.1 billion, or 5% compared to a year ago.

Average loans grew $682 million or 1% relative to the first quarter with increases in most markets and business lines.

The largest contributor quarter-over-quarter was Mortgage Banker Finance, which grew $690 million as we continued to increase our market share and benefited from a pickup in activity due to summer home sales.

This was partially offset by a $276 million decrease in average loans in our energy line of business as customers continued to adjust their cash flow needs and tap the capital markets.

Average deposits were up $4 billion or 8% compared to a year ago.

Relative to the first quarter, average deposits increased $408 million or 1% with non-interest bearing deposits up $668 million.

In further comparing our second-quarter results to the first quarter, net interest income increased $8 million or 2% to $421 million primarily due to an increase in loan volumes and one more day in the quarter.

Overall, credit quality remained solid.

Net charge-offs continue to be well below normal levels at 15 basis points or $18 million.

Net charge-offs related to our energy exposure were nominal.

The provision for credit losses increased from a very low level due to an increase in criticized loans related to energy as well as uncertainty due to continued volatility and the sustained low oil and gas prices.

The reserve to total loans ratio was increased to 1.24% and the reserve covers nonperforming loans 1.7 times.

The outcome of the recent Shared National Credit Exam is incorporated into our results.

Non-interest income increased $6 million or 2% to $261 million reflecting increases in card fees and smaller increases in several other fee categories.

Non-interest expenses decreased $23 million to $436 million primarily due to a $31 million reduction in litigation-related expenses and seasonally lower salary and benefit expenses partially offset by higher outside processing fees related to increased revenue generating activities.

The decline in litigation-related expenses reflected a reduction in legal reserves including a favorable court ruling which reversed a jury verdict against Comerica and sent the case back for a new trial.

Our capital position continues to be solid.

Stock and warrant repurchases under our equity repurchase program combined with dividends returned $96 million to shareholders in the second quarter.

As announced in April, we increased the quarterly dividend by 5% to $0.21 per share.

Turning to slide 5 and a look at our primary markets, our Texas Economic Index issued earlier this month and tracking data through April shows that the Texas economy continued to ease from lower oil prices.

However, job creation in Texas has bounced back and ranked third nationally for most jobs created in May.

And for the last 12 months, Texas was the number-two job generator behind only California.

The diversity of the Texas economy together with the geographic diversity of our footprint and the positive momentum of the national economy continues to serve us well.

Average loans in Texas were down about 2% compared to the first quarter due to the decline in our energy loans while average deposits were relatively stable.

Our California Economic Index has shown another month of growth.

The California economy gained momentum after a soft first quarter.

The state economy is large, diverse and resilient.

Port activity is normalizing and the high-tech sector remains strong.

Real estate markets in Northern California are tight and Southern California markets are tightening as well.

Average loans in California were up 1.5% compared to the first quarter with technology and life sciences, national dealer services, private banking and small business all contributing to the growth.

Average deposits were up 2.6% led by technology and life sciences and general middle-market.

Our Michigan Economic Index has shown another gain.

Strong auto sales are supportive of Michigan's manufacturing sector and are buffering the negative impact of a strong dollar on export oriented manufacturing.

Job creation is on an upward trend in Michigan and real estate markets continue to firm up.

Average loans in Michigan were up 0.5% compared to the first quarter led by middle-market banking while average deposits were stable.

Before turning it over to Karen, since our last earnings call in April, Curt Farmer was named Comerica's President and earlier this week we announced a change in leadership of our business bank appointing Pat Faubion, a 31-year Comerica veteran, to head our business bank.

Both Curt and Pat bring considerable experience and expertise.

I look forward to working with both of them in their new roles.

In closing, we believe our balance sheet remains well-positioned for rising rates.

We remain focused on the long term with a relationship banking strategy that continues to serve us well.

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 $682 million or 1.4%.

Mortgage Banker was the largest contributor to average loan growth with a $690 million increase over the first quarter due to new and expanded relationships as well as seasonality related to summer home sales.

In addition, average loans grew in the majority of our business lines including general middle market, private banking, national dealer services, small business and technology and life sciences.

As expected, average loans in our energy line of business did decline by $276 million and average loans in our corporate banking business also declined as we continue to maintain our pricing and structure discipline in one of the most competitive segments in the industry.

Based on the Fed's H8 data, our average total loan growth outpaced the large US commercial banks which grew 1.2% from April 1 to July 1. Total loan commitments increased $582 million at quarter end with growth in nearly every business line more than offsetting declines in energy and corporate banking.

Utilization also increased to 51% from 50% at the end of the first quarter with usage increasing in almost every business line other than energy and technology and life sciences.

Importantly, our pipeline increased.

Our loan yields increased 1 basis point in the second quarter as shown in the yellow diamonds.

We benefited from a 1 basis point increase in 30-day LIBOR.

Turning to deposits on slide 7, average deposits increased $408 million in the second quarter driven by a $668 million increase in noninterest-bearing deposits.

A seasonal tax related increase in retail balances was the major contributor.

Period end total deposits increased $690 million to $58.3 billion.

We continue to prudently manage deposit pricing which remained very low and decreased 1 basis point to 14 basis points as shown by the yellow diamonds on the slide.

Slide 8 shows our securities portfolio increased as we continue to position ourselves for compliance with the new liquidity coverage ratio, or LCR.

While our average balances were stable from the first quarter at $9.9 billion, our period end balances reflect the purchase of additional Treasury Securities in June.

The estimated duration of our total portfolio sits at 3.8 years and the expected duration under a 200 basis point rate shock extends it modestly to 4.6 years.

In the current rate environment, we expect continued minor pressure on the average securities yield as you can see in the yellow diamonds on the slide.

As far as LCR compliance, we still feel comfortable that we will meet the proposed phase-in threshold by continuing to add high-quality liquid assets, or HQLA, over the next year and a half to meet the requirements plus a buffer to withstand normal volatility.

In early June, we issued $500 million in five-year senior bank debt and swapped it to floating at six month LIBOR plus 75 basis points.

We invested a portion of the proceeds, $200 million, in five-year treasuries yielding about 150 basis points.

As long as interest rates remain low, we expect to continue to execute in this manner to minimize any impact to both earnings and our asset-sensitive position.

We have said before that the amount of additional HQLA needed is fluid and depends on loan and deposit growth as well as our continued assessment of both our own data and the rule.

Based on our estimate of what we know today, we believe that by the end of 2016 we will need to add $1 billion to $3 billion in HQLA, which we will fund by tapping a variety of sources in manageable increments.

We estimate that based on our current assessment as of quarter end, our LCR was in the mid-80s, up from about 80% at the end of the first quarter.

Turning to slide 9, net interest income grew $8 million in the second quarter.

Loan growth, one additional day in the quarter and higher loan yields together drove an $11 million increase.

This was partly offset by lower securities yields, lower average balances at the Fed and an increase in interest expense on debt.

Our net interest margin increased 1 basis point primarily driven by higher loan yields which reflected a 1 basis point increase in 30-day LIBOR.

Compared to the second quarter of 2014, excluding the $8 million decline in accretion, net interest income increased $13 million largely due to loan growth.

We continue to be well positioned to benefit when rates rise.

Our standard asset liability case shows that a 200 basis point increase in rates over a one-year period equivalent to 100 basis points on average would result in an increase to net interest income of about $220 million.

We also share in the appendix several alternative assumptions to our standard case with changes to the pace of deposit decline, loan growth and rate rises.

And in all cases, we remain well-positioned for rising rates.

Because we have continued to experience strong deposit growth in this persistently low rate environment, our standard model, which had reflected only historical behavior, now also reflects a further decrease in deposits as rates begin to rise.

While it is difficult to predict how deposits may react when we move out of this unprecedented environment, the longer our deposits continue to increase, it becomes more likely in our view that customers will ultimately use funds in their businesses or other investments.

Turning to slide 10, our overall credit picture remains solid and fully reflects the results of the Shared National Credit Exam completed in the second quarter.

Net charge offs were 15 basis points and while up from a very low level in the first quarter, they remain well below what is historically normal for us.

The increase in net charge offs can be attributed to corporate banking and technology and life sciences which tend to be lumpy.

This was partially offset by net recoveries in private banking and commercial real estate.

Our criticized loans grew $294 million to $2.4 billion or less than 5% of total loans which is well below our historical experience.

The increase was driven by a $329 million increase in criticized loans related to energy.

Inflows to non-accruals were $145 million of which $100 million were energy-related.

While non-accrual loans were up to $349 million, they are still only 70 basis points of total loans.

As far as energy, we have essentially completed the Spring re-determinations for our E&P customers which comprise 70% of our energy business line.

On average, loan to values and advanced rates remained stable from the prior redetermination.

As of quarter end, commitments in our energy line of business have declined about 5% and outstandings are down 7% relative to the first quarter.

Overall our energy customers are taking the necessary actions to adjust their cash flow and reduce their bank debt such as cutting their expenses, disposing of assets and tapping the capital markets.

As of quarter end, approximately 14% or $578 million of energy and energy-related portfolio is classified as criticized, including non-accruals of $119 million.

And there were only $2 million of charge offs.

The $47 million provision for our total portfolio reflected higher reserves for energy loans as a result of an increase in criticized loans and the impact of continued volatility and sustained low energy prices.

To a lesser extent, corporate banking as well as technology and life sciences contributed to the increase in provision, largely as a result of charge-offs and variability.

These increases were partially offset by credit quality improvements in the remainder of the portfolio which had a decline in nonaccrual and criticized loans.

It is important to note that while we have prudently increased the reserves for energy, we are very comfortable with our portfolio and continue to believe charge-offs will be manageable.

In summary, our consistent robust methodology resulted in a $28 million increase to the allowance for credit losses to $668 million and the coverage of our nonperforming loans remains very strong at 1.7 times.

Slide 11 outlines non-interest income which increased $6 million to $261 million largely driven by a $5 million increase in card fees due to higher revenue from merchant payment processing services and interchange.

In addition, we had increases in service charges on deposit accounts, fiduciary income and brokerage fees.

This was partially offset by a $3 million decline in commercial lending fees resulting from lower syndication fees and lower unused commitment fees from higher line utilization.

As a reminder, in the first quarter we made contractual changes to a card program that impacted the way we present both revenues and expenses and is shown in the lighter shaded portion of the bars on the left chart.

Turning to slide 12, noninterest expenses decreased $23 million and included a $31 million decrease in litigation-related expenses, including a reduction in reserves for a case that received a favorable ruling on appeal.

Salaries and benefits decreased $2 million due to seasonal declines in payroll taxes and stock-based compensation expense, partially offset by an increase in technology-related contract labor, merit increases and one additional day in the second quarter.

Finally, outside processing fees associated with revenue-generating activities increased $8 million.

Moving to slide 13 and capital management.

Our 2015 capital plan includes equity repurchases up to $393 million.

In the second quarter, we repurchased 1 million shares for $49 million and 500,000 warrants for $10 million under the equity repurchase program.

When you combine this with the recent 5% increase in the dividend to $0.21 per share, we returned 71% of second-quarter net income to shareholders.

Despite the repurchases, diluted average shares remained flat at 182 million for the second quarter as the impact from the increase in Comerica's average stock price caused an increase in share dilution from options and warrants.

As you might recall, the Federal Reserve scenario in the stress test included a gradual increase in rates over the forecasted period.

Given that, the pace of our equity repurchases is expected to move in line with our performance and a rise in interest rates.

Turning to slide 14 and our outlook for full-year 2015 which assumes a continuation of the current economic and rate environment, as we have said before, average loans for the full year are expected to grow at about the same pace as 2014.

We expect the typical third-quarter seasonal declines in our dealer, mortgage banker and general middle-market business lines followed by a typical historical rebound in the fourth quarter.

In addition, we anticipate the decline in energy outstandings should continue.

We expect our net interest income for the full year to be relatively stable with last year assuming no rise in interest rates with loan growth offsetting the decrease in purchase accounting accretion.

And as far as credit measures in the second half of 2015, we expect net charge-off rates to be similar to the 15 basis points we had in the second quarter and criticized loans to remain below normal levels.

Because the impact from volatility in oil and gas prices is difficult to predict, continued negative migration is possible and may be partially offset by a reduction in loan balances.

As always, we remain focused on the emerging trends and have increased our reserve allocation the last three quarters as a result.

The remainder of the loan book is expected to continue to perform well.

On a full-year basis, we expect noninterest income to be relatively stable, excluding the impact of the accounting presentation of a card program which is offset in noninterest expense.

We continue to expect lower letters of credit, derivatives and warrant income which should be mostly offset by growth in card and fiduciary fees.

Noninterest expenses are expected to be higher in the second half of the year relative to the first half primarily due to three more days and the full impact of merit increases as well as the ramp up in spending for technology projects and regulatory compliance.

Also outside processing expenses are expected to continue to grow with increased card revenue.

Finally, occupancy expenses are expected to increase from seasonal taxes and higher rent expense.

In closing, we are pleased with the continued loan and deposit growth as well as increased net interest and fee income.

Credit quality for the bulk of our portfolio remains very strong and we continue to believe that energy charge-offs will be manageable.

We remain focused on the long-term and we expect that as rates rise our revenue picture looks even brighter.

As always, we believe our relationship banking strategy combined with our diverse geographic footprint will continue to assist us in building long-term shareholder value.

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

(Operator Instructions).

Scott Siefers, Sandler O'Neill.

I guess just maybe to start on the energy book -- I guess just given the volatility in the provision, can you give us any sense for how much of that was front-end loaded, whether it was because of the results of the redetermination or the SNC Exam versus how much of that will be ongoing?

My sense is a lot of it was front-end loaded and then if it got a declining base of energy-related loans, that should relieve some pressure.

But anything that you can offer to help scope that would be appreciated.

Pete.

Sure.

So we are about three quarters of the way through our risk ratings and so we have updated the portfolio largely for the decline in energy prices.

So from the perspective, we are a good way of the way through it.

We do expect though for there to be some continued migration in the portfolio as our borrowers continue to adjust to this lower price environment.

But we also expect that we are going to continue to see pay downs on our energy loans, which is going to have an offsetting effect to the additional migration that we expect to see in the coming quarters.

Okay.

All right, that's helpful.

Thank you.

I don't think you have but can you remind me, have you guys disclosed what the energy reserve is in the past and if so, what the number is as of the second quarter?

Sure, Scott.

We haven't disclosed the amount of reserve allocation for any industry mainly because we view that the reserve is there to cover any and all losses.

At the beginning of this downturn back in the fourth quarter, we did talk about the fact that we had increased our qualitative reserve against energy at that point in time.

We also talked in the first quarter about the fact that we had increased our qualitative reserve modestly.

And this quarter our overall energy reserves have increased, including maintaining a portion of qualitative reserves given the fact that Pete talked about that we expect continued potential negative migration in the portfolio.

Okay.

That's good color.

Thank you guys very much.

Steven Alexopoulos, JPMorgan.

Maybe to follow up on Scott's question and some of your answers so I can understand them, of the $329 million increase in criticized loans tied to energy, how much of that was tied to the SNC Exam?

Steve, we don't think it's appropriate for us to discuss the results of the SNC exam.

What we can tell you is is that we have incorporated all the risk-rating changes that came out of the SNC Exam in our June 30 results.

Okay.

To drive that level of increase in criticized, was there anything else that happened in the quarter outside of the SNC Exam?

Because I think you were more than halfway through the redetermination process as of last quarter?

That's right.

No, we are seeing continued migration in the energy portfolio and that's what we really expected, Steve.

We are not seeing anything that we didn't expect to see in the first quarter and I think we feel as good about the energy portfolio today as we did a quarter ago.

Okay.

And in terms of the provision, I think prior to this quarter you had established a provision based on your peak losses the last time we saw a sharp decline in oil.

Why has that not been enough so far?

Steve, I would say that on the reserves, we did equate our qualitative reserve at the beginning of the downturn to be about equal to the peak net charge-offs in the last cycle.

But what I would say is each cycle is different and in the last cycle, there was a lot of other things going on other than energy.

It was back in 2008, 2009 and we have increased our reserves this cycle prudently.

Okay.

And maybe Karen, at $50 oil today -- at the time of the fall reset that is upcoming, what percent of the portfolio will be protected by hedges at that point?

Steve, right now I can tell you that 60% of our borrowers have more than 50% of their revenues hedged for a year or more and about one-third of them have 50% or more of their revenues hedged out two years or more.

So I don't think it's going to change a great deal between now and the fall but it's difficult to model that.

We have been encouraged by the fact that the amount of hedging really has not changed over the past couple quarters and our borrowers continue to look for opportunities to layer in hedging when there are opportunities to do that and we expect that to continue.

Okay.

And maybe just a final one changing direction for a second.

For Ralph, obviously disappointing news on Lars departing the Company.

How do you think about, or how should we think about any potential business impact from him leaving?

And given that he's gone to a competitor, do you have a non-compete in place to protect against key employees, key customers getting poached?

Thanks.

Okay, what I would say is, as we mentioned in my comments as well as in the announcement that Pat Faubion is moving up to take Lars' place.

Pat's been with us for over 31 years, understands the business banking environment very well, has also have been the Texas Market President for a number of years and so I think that transition will go very smoothly from that standpoint.

As we have talked about in the past, Pat will report to Curt and Curt as well has a good deal of experience in all of our markets and understands our approach to our customers.

So I feel very good about the transition and we wish Lars the best.

Okay.

Thanks for the color.

Erika Najarian, Bank of America.

Karen, thanks very much for the outlook on expenses for the second half of the year.

I guess how should we think about as we determine quarterly run rates about the litigation accrual reversal?

Does that come back to your run rate next quarter and that's what we should base our forecasts off of?

Yes, the litigation related expenses are not typical and so those should not be included in the run rate.

So just to be clear, the base would actually be [466] as we think about the second half of the year?

Yes, that's correct, Erika.

Okay.

And just -- I wanted to make sure I understood the comments on buybacks.

So are you hinting towards slower buyback activity?

I just wanted to make sure I understood the message.

You were saying that the pace of buybacks would be relative to potential change in interest rates.

I just wanted to make sure I understood the message there.

Yes, so in the past you probably have noticed that our buybacks have been pretty evenly spread in the quarters.

Our current five-quarter approval was against a scenario that the Fed put out.

It's a public scenario that shows interest rates increasing starting in the back half of this year and ramping up increasingly through the approval period.

And as a result, that has a good impact on our performance and our share repurchase would be in line with that.

Okay.

Thank you.

Ken Usdin, Jefferies.

Karen, just a follow-up on the expenses, I almost want to just ask you to walk through a couple of these lines.

When we look at on slide 14 the three points about the increase and tech increase and regulatory increase in pension, am I correct in reading that that most of those three things are in the run rate?

Yes, how you should read them is that we show our full-year which is what we pointed to in prior outlooks.

But for example, the technology increase is to $100 million for the full year but in the first half, we booked $45 million, which points to greater increase in the second half.

That's how you should read it.

Okay, so the tech one of those three is the only one that really has an increase in the second half of those three?

That's correct.

And then secondly then, can you just try to help us understand a little bit more about the bottom point there about the magnitude of increase over a [467] starting point that you will see from merit and those outside processing and occupancy costs?

Yes, we typically see an impact in our salary and benefits line item obviously by three more days in the quarter.

That is typical so you can look back at prior years.

Merit increase is also very typical where merit increases typically happen in the spring and then you'll see a fuller version of those as you hit the second half.

And then higher outside processing fees would increase commensurate with revenue-generating activity and occupancy expenses as we talked about increase because of taxes and rent increases in the back half.

Okay.

So just in summary then, it is fair to say that the third and fourth quarters should be not just higher than the first half but distinctly a little bit higher than the second quarter, is that fair to say?

That is fair to say.

Okay.

Got it.

Thanks, Karen.

Dave Rochester, Deutsche Bank.

I just wanted to follow up on a previous answer you guys gave on an energy question.

You mentioned you were through the redetermination process but you were three-quarters of the way through the risk-rating process.

I don't know if I heard that correctly but if I did I was just wondering why there's a difference there?

Sure, Dave.

I'll be glad to clarify that.

We are 97% through the redetermination process, which means that we are 97% through rerisk-rating the E&P segment of our portfolio.

The 75% I refer to is the entire line of business which includes E&P, midstream and energy services.

Got you.

So the midstream and the energy services have not been reevaluated as yet?

No, they have.

We are about 70-some% through the energy services piece where like E&P we are seeing some migration and we are about a little over 50% through the midstream segment where we are seeing really no migration.

Great.

That's good color.

Thank you.

And could you guys give any color on your outlook for debt issuance in the second half given your expected needs for HQLA growth that you were talking about?

Yes, Dave as I mentioned, we expect to raise wholesale funding for HQLA purposes between $1 billion to $3 billion from now through the end of next year -- (multiple speakers)

So the $1 billion to $3 billion is -- sorry, go ahead.

Yes, the $1 billion to $3 billion is an 18-month period.

And you expect to fund all of that with wholesale funding or just a portion of that?

Well, we expect to fund it with wholesale funding but our definition of wholesale funding is not just debt in the capital markets.

That would be one form of it.

Another form is we have plenty of capacity to draw down on our Federal Home Loan Bank line and then we also consider brokered deposits as a cheap form of wholesale funding.

So we have a variety of sources that we would tap in manageable increments.

Great.

Thanks for the color.

Appreciate it.

David Eads, UBS.

Good morning.

Thanks for taking the call.

Maybe looking at the Texas portfolio outside of energy, I am curious if you have any kind of sense for the trajectory of loan balances there over the rest of the year?

And I'm curious if we saw any increases in the non-performers or criticized loans in the non-energy part of the Texas portfolio?

Pat, do you want to take that?

Sure.

The Texas portfolio as noted on the slides was down about 2% but that's entirely attributed to the energy book which is to be expected and the other lines of business net to about flat.

Pete, do you want to address the credit issue there?

Sure, David, we are really not seeing a lot of migration in the Texas portfolio outside of energy with one exception.

We have a small TLS book out of Houston.

This book is largely pre-revenue venture-backed companies that are developing new technologies in the oil patch and you can imagine that the business model for them has changed a great deal as well as gone from 90 to 50.

The good news in that portfolio is it is quite small.

It's only about $85 million and 2% of our total energy and energy related.

Other than that, we are seeing good experience in terms of the Texas portfolio including commercial real estate.

And David, I would just mentioned that our loan outlook for the entire Company does assume a continuation of the current economic environment which includes a slowdown in activity in Texas.

Great.

Thanks.

And then I'm just kind of curious of how the energy redetermination process works just given the changes we've had in oil prices over the past quarter.

Is it a function where the redeterminations are made on the oil price as of the day it's done or assuming a certain price?

I guess the bottom line question is, how much does the drop of prices from $60 to $50, how much of that is already baked into the current -- the 2Q level and how much could impact going forward?

Yes, I can tell that for the 97% we've done redeterminations on, all of those risk-ratings reflect current energy prices.

The way the redeterminations work, David, is we do -- we use the price deck that is approved at the time of the redetermination.

However, the price decks, if you go all the way back to January from our price decks, which are very conservative, are reflective at or below current prices.

So we are very comfortable that we have reflected current energy prices in the 97% of the portfolio that we have rerisk-rated.

And that's including -- because I know you guys have discounts to prices -- so basically you're saying that the price deck is on a weighted average would be below where it is now and that gives you comfort that you're reflecting the current price?

Yes, because we don't necessarily set the price deck at current prices.

We set the price deck at what we think is appropriate and then we sensitize off of that pretty significantly.

Right.

All right, great.

That helps a lot.

John Pancari, Evercore ISI.

Okay, so back to energy.

Of the $300 million increase in criticized -- in energy criticized -- how much of that was E&P versus midstream and oil service?

Of the $300 million E&P -- well let me put it to you this way -- right now our E&P portfolio is 15% of that portfolio is criticized.

Energy services is about 16% is criticized.

The two combined are about $440 million.

Okay, so just so I understand again, that 15% for E&P --

Yes, the criticized as a percentage of the entire E&P portfolio right now is 15% criticized.

And the criticized portion of our energy services book is 16%.

Got it.

So the total energy -- the criticized ratio for the total energy portfolio is in that 16%, 17% range?

It's actually only 13% because midstream, we really don't have much in the way of criticized loans in midstream, so in total, it's 13% for the entire portfolio -- entire line of business portfolio.

Okay, so now where was that number last cycle?

Like where does that compare to your peak?

Is that already above where you peaked before?

I don't have the number offhand but I'm quite sure it was not.

At the peak I know our energy services book, which was the worst part of it in the last downturn, I think we reached about 37% criticized there.

And keep in mind that a criticized loan does not necessarily become a charge-off.

Last cycle our peak net charge-off was 69 basis points.

Okay, but you are providing it looks like at a higher level than you did last time even though the peak criticizeds from last time are higher than where they are now.

So I guess that points to just the regulatory environment around this type of portfolio, is that fair?

There is increased scrutiny around this portfolio in the current environment.

Okay.

And then lastly if I could just ask around the reserve, I know, Karen, you indicated you didn't quantify that but is it fair to assume just based upon the number you did give, I think it was two quarters ago, about the energy loan-loss reserve ratio, I think it was around 1.5%, 1.6%.

If we assume -- factor in the reserve additions for energy and also adjust for what we think were the charge--offs for the quarter, is it fair to assume that your energy loan-loss reserve is in the ballpark of 270 basis points?

I'm not going to comment on the allocation for energy reserves really because of what I said earlier, that we believe that reserves are there to cover any and all losses.

But I will say obviously that we've increased the reserves against our energy portfolio for the last three quarters and this quarter we have increased the overall allocation as well as it continues to maintain a qualitative portion.

Okay.

Thanks for taking my questions.

Brett Rabatin, Piper Jaffray.

I guess just a question around the guidance on the provision and charge-offs, the updated numbers.

I realize that criticized loans don't necessarily mean charge-offs.

But I guess I was looking for some color around the guidance in the back half of the year for charge-offs to remain similar to 2Q of 15 basis points despite the increase in criticized loans over all.

Just any thought on why you guys didn't change that to a higher number.

So on net charge-offs, again we expect net charge-offs to be well below what we would deem normal or through the cycle for us, which is about 40 basis points.

And we are trying to give color on the back half of the year that while charge-offs continue to bounce around along the bottom right now, they likely won't be as low in the back half of the year as they have been for quarters prior to this one.

And that's why we are saying approximately equal to the second quarter.

Overall provision is very difficult to predict and will depend on what happens in the energy space.

If oil prices continue to remain low, we expect that to have additional impact on credit migration in our energy and energy-related book.

But we do also expect that that could be offset by loan paydown.

If I could just add, a good portion of the increase in criticized, of course, is on the E&P book.

This is an asset-based book.

It's very well secured, and even though we had to make loans in this segment substandard because of the definition of impaired, they are still well secured.

Okay.

Understood.

Then I guess the other question was just a follow-up again on the energy stuff.

Last quarter there was a bigger difference between criticized and E&P versus service, which is I guess what I would've expected.

Any thoughts around the increase in criticized on E&P versus criticized this quarter?

I can tell you that we still feel very good about the E&P segment of the portfolio.

These are large energy companies with strong balance sheets.

We have very few, only a handful, of credits -- Pat is pointing to three -- that have deficiencies at this point in time.

So we are in very strong position in terms of our collateral position on the E&P portfolio.

Okay.

And then I guess just lastly if I can, the Texas being flat outside of energy; any thoughts around why Texas is flat aside from the energy with the things going on besides the obvious energy implications?

Pat, do you want to take that?

Well, the overall economy in Texas, although it is more diverse than the last energy downturn, is in a slump and that's noted in our economic forecasts provided by Robert Dye.

The pipelines, however, are still strong and all of our lines of business are continuing to grow.

And as I mentioned earlier, we are seeing employment pick up again, so positive signs from that standpoint.

If I could also add, the middle-market segment of our portfolio, which is energy-related, what we are really seeing there is a good thing.

We are seeing as these companies revenues drop off, their balance sheets are shrinking and they are using their cash to pay down debt and so that has been actually a positive thing, but it's a headwind in terms of the loan numbers.

Okay.

I appreciate all the color.

Bob Ramsey, FBR Capital.

I was just hoping you could maybe share a little color.

In the scenario that you all have outlined where energy prices stay where they are today and you see some contraction in loan balances, in that scenario how should we think about the provision expense in the back half of the year?

Does the back half look like the first half?

Does it look more like the first quarter or just kind of curious on that scenario and what it looks like.

Karen?

Yes, Bob it's very difficult to predict.

But what I would say is that we've given you a sense of where we think net charge-offs will be in the back half of the year and then on the rest of the provision, that really does depend on negative credit migration that could be possible.

But again, we point to the fact that that could be offset by the decline in balances.

So it is difficult to predict.

I would also remind people that we do continue to have a qualitative reserve against what could be further migration.

Okay.

And could it be fully offset by the drop in balances or is it more of a partial offset?

That is difficult to predict, so we can't say.

Okay.

Help me think too, how should we think about the amount of contraction we could see in the energy portfolios?

Will it look similar to this quarter or do you have any sense of whether there could be an acceleration?

Pat, do you want to take that?

Sure.

Energy loans did peak for us in February and since then they've been declining as we expect, as companies adjust their cash flow and really operate within cash flow and also tap into capital markets.

We do expect to continue to see the decline over the course of the year as the Company continues to manage their cash flow, although we could see some temporary upticks if capital market access tightens materially.

But we do expect lower CapEx, lower production and lower cash flow which translates to decreased loan demand.

I would also add that in the appendix we do show the history of our energy portfolio and you can see how it reacted in the last downturn which can help as a guide.

Okay.

Fair enough.

And then I guess shifting away from energy but still talking about loan growth, obviously this was a really strong quarter for the mortgage banker finance portfolio.

I know you guys have said seasonally the back half of the year to expect that to come in a bit.

Just curious if you could comment on the strength this quarter and whether the seasonal decline really is more of a 4Q than 3Q event, or how you are thinking about the trajectory there?

Curt, do you want to take that?

Sure.

I would say just overall as you've already commented, that we are seeing the normal seasonal buying period of spring and summer and we are not through the summer season yet so it continues a little bit into the third quarter as well.

But typically we would see some fall off in Q3 and Q4.

We from an overall perspective saw nice growth in Mortgage Banker Finance and the piece I think that has potential to fall off in the second half of the year is the refi activity as rates continue to increase that as home purchases as real estate values firm up across the country may be more stable versus refi.

And how much of the current book is refi versus purchase?

We are 70% on the purchase side which compares to the MBA data which would say the industry average is more in the 55% range.

Okay.

Thank you.

Ken Zerbe, Morgan Stanley.

I guess the first question, in terms of if we look at the price of oil over the last quarter, it had an upward bias and I am going to ballpark and say it ended the quarter roughly at $60.

Was your reserves based on the $60-ish oil price because obviously it's come down a fair bit down to about roughly $50 right now.

I'm just wondering what you base the reserve on and is the drop from $60 to $50 actually the main driver of your additional reserve build that you are referring to?

The answer is our price deck did not reflect $60 oil and it hasn't reflected that all year.

Our price deck was set well below that level and it has been at that level for the entire year.

So again, with all the redetermination that we've done, we've been doing them with prices that are at or below whatever the current oil price is -- gas prices are.

Then the price is also discounted as to the amount that you are borrowing.

Our interest rate is typically around 65% of PDP.

Got it.

But the drop to $50 oil now, are you saying that you would not change your price deck based on where oil is today?

(multiple speakers)

No.

That's correct.

That's why I'm saying I think our price deck is appropriate given where prices are today.

But we look at it all the time.

Okay.

And on the 75% that you've reviewed I think it was of the E&P and midstream, when you guys go through and put reserves on the stuff that you reviewed, do you also extrapolate to the other 25% you haven't done yet or is that something we could see deteriorate next quarter?

We actually do that and we have an extrapolation and that's one of the factors we use in terms of determining what our qualitative reserve should be.

Got it.

Great.

Thank you very much.

Matt Burnell, Wells Fargo Securities.

One more on energy, maybe tying into your comments about the capital markets.

It sounds like your clients have been able to tap the capital markets over the past few months to be able to reduce your exposure.

Can you maybe give us a qualitative measure of their ability to do that?

Have the markets tightened for that over the past few months?

Pat, do you want to take that?

The capital markets have been very open to energy credits and as you suggest, our borrowers have been very adept at tapping those capital markets.

And today they remain open.

My comment was if capital markets tighten that could reduce the runoff that we see in our portfolio.

But I don't have a way to predict what the capital markets might do with regard to energy companies.

Fair enough.

And then, Ralph, maybe a question for you.

You say on slide 13 that the pace of future buyback activity within the $393 million that you are targeting for the current capital planning cycle is somewhat dependent I guess on your financial performance.

And if you end up getting a redetermination later this year that's tougher than you expect that increases your provisions, I guess the question is really at the end of the day, how committed are you to generating or to fulfilling that $393 million repurchase within the context of also trying to grow tangible book value?

We are always focused on the return to our shareholders as we talked about many times and we will continue to look and evaluate that.

It depends what -- you gave an example -- it depends what happens there and what the analysis is at that point in time and what we feel like as to the decision we would make.

You can't predict that until you're there.

Right.

Fair enough.

Thank you for the color.

Michael Rose, Raymond James.

Just a follow-up and then an energy question.

Do you have a sense for kind of debt to EBITDA levels for your companies on average -- your energy companies on average -- and how they've changed with the access to capital markets?

Obviously the lower that leverage goes, the better it is for loss content.

Pete?

I don't have an aggregate statistic for you.

Obviously the cash flow leverage of many borrowers has increases as cash flows have decreased.

But our focus really is on more on balance sheet leverage because it's really capital and liquidity that are important in downturns and that's what really gets our borrowers through downturns and so not that cash flow leverage isn't important, we look at that as well, but balance sheet leverage is probably our main focus.

Okay, great.

Thanks for taking my question.

Terry McEvoy, Stephens Incorporated.

Just a question for Karen.

The $130 million increase in tech and regulatory expenses this year, is that a good run rate as we look out into 2016, or is some of that kind of a buildup of investments that should tail off into next year?

The increase in those expenses are mostly headcount related and so that is something that should stick for the run rate.

A small amount of consulting expenses which depending on what happens may or may not stick in the run rate but it's a very small piece of it.

In terms of just technology in general, we do expect to have these increased technology expenses at least over the next few years.

And then as a follow-up, sorry to go back to energy, but did any of the reserve build or increase in criticized loans come from that $725 million portfolio that you identified I believe last quarter?

I believe you're referring to our energy related-portfolio?

Correct, yes.

I would say a relatively minor piece of it came from that.

The energy-related portfolio is really a very broad segment and on one end of the spectrum you have those technology and life sciences companies that I spoke about earlier and then on the other end of the spectrum are really refineries, which have had no impact.

So most of the negative migration has really been in that technology and life sciences segment and I think I noted earlier it was quite small, about $85 million in total loan balances.

Great.

Thanks a lot.

David Darst, Guggenheim Securities.

So you've covered about everything but here is just a quick one.

When you look at your commercial lending fees, have a higher percentage of those been generated from energy loans, or is that spread out among other commercial and commercial real estate credits?

Our commercial lending fees are spread across all of our credits, David.

They did decline a little bit this quarter mainly due to a little bit lower syndication activity and because we saw an increase in our line utilization, we had lower commitment fees.

Okay, great.

Has historically more of your syndication activity been done within energy lending?

No, typically where we lead syndication, it's more in the middle-market space than in the energy space.

Okay, great.

Thank you.

John Moran, Macquarie Capital.

Just one more on energy.

The SNC as a percentage of the energy book, if I am not mistaken, was about 75% or so less quarter.

Is that unchanged?

Yes, John it actually higher than that.

It's over 90% of our energy book -- line of business book, our Shared National Credits, and another way of looking at it is 30% of our Shared National Credit book is energy, which is the largest segment.

Okay.

And the regulatory exam on that happens now twice a year, so that gets another hard look in 4Q if I am correct?

The actual increase in Shared National Credit reviews really steps up in 2016.

There will be a pilot that is done later in this year but it's not scheduled to step up until 2016.

And just to make one other comment about that, I just want to follow up with that 30%, again the rest of our Shared National Credit portfolio outside of energy continues to perform really, really well.

I think one for Karen on the HQLA build.

And I just want to make sure that I got the numbers right.

It sounds like $500 million in five-year senior swap at six-month LIBOR plus 75 and was deployed into $200 million five-year US treasuries at 1.5%.

Would you expect the $1 billion to $3 billion in build between now and the end of 2016 to be into similar sort of assets because I think there's some banks that going a little bit longer and getting yields kind of in the 2%s on some of this?

Our focus on the securities portfolio is to maintain highly liquid, highly rated short duration securities and particularly in this low rate environment, we are very mindful of our asset-sensitive position and not prematurely altering that upside.

So if the low rate environment continues, you can expect those to continue to execute our LCR our strategy in a similar fashion to what we did this past quarter.

Again, how we look at our securities book will be a focus on not giving up our asset-sensitivity upside too prematurely.

Got it.

Thanks very much.

Kevin Barker, Compass Point.

I was hoping you could expand upon how much of your construction and development loans are within the Houston MSA or other oil patch MSAs?

Curt, do you want to take that?

Sure, from a CRA or CRE perspective overall, the Houston market if you look at Texas, Texas is about 28% of total commercial real estate for us and the Houston market makes up about 40% of that number.

So the rest of it would be outside of the Houston market.

Pete, you might comment on the credit performance that we've seen?

Yes, the commercial real estate portfolio in Houston continues to perform really well.

It's largely an apartment construction portfolio.

We have about 20 projects.

We have five that are fully complete and in lease-up and all five of them are seeing rents at or above pro forma levels, so the portfolio is performing really well.

We tend to focus on long-time customers.

We do.

We have very strong national developers in that Houston market and typically we have 30% to 35% cash equity in each of the projects.

Our loan to values range from 50% to 60% so even though we haven't seen any decrease in rents yet, we do expect there could be pressure on rents as there's more supply comes online in the next 18 months.

But if we do, we still think our projects would be in great shape because of the structures that we have.

And also almost no office exposure at all.

Correct.

We are seeing though the outside of the Houston market, there are some opportunities in the rest of Texas, especially in the DFW area.

Yes, continue to see a lot of them.

And then what percentage of your commercial real estate is specifically in (inaudible) are oil or hotel -- I mean office or hotel and not necessarily construction?

Yes, hotels and office are not a segment that we are actively pursuing at all, so the portion that would be hotel would be negligible and the portion that is office would be quite small.

Okay.

Thank you very much.

Jordan Hymowitz, Philadelphia Financial.

I was just wondering in that small energy tech portfolio, is that included in the energy book that you mentioned, or is that separate?

I think your question was, is our energy related piece including the energy numbers in the deck?

Yes.

Yes.

What I would say is our energy technology or TLS business is part of what we've included in the additional approximately $725 million loans which we are calling energy-related.

That is not part of our energy line of business.

It's really driven from some middle-market small business, technology life-sciences companies outside of our energy line of business but at $725 million, it's not a large number.

Okay.

And my second question is on the syndicated loans, they are not up for review until next year so if there is a deterioration in the energy portion of that book, would that be included in the reserves you took this quarter or would only be related to the energy loans in your book that you currently control?

Yes, it's the whole book.

We are looking at our risk-ratings continuously throughout the year and irrespective of (technical difficulty) where or not there's a Shared National Credit Exam this fall or next spring, we are going to look at them the same way.

So the answer is yes in that it would include the Shared National Credit (inaudible) reserve?

Yes.

Okay, thank you.

Sameer Gokhale, Janney Montgomery.

You talk quite a bit about the provisioning for your energy portfolio but there is just something I would like to just clarify in terms of the mechanics because, Karen, you refer to slide 19 because one of the drivers of your reserves and provisions clearly is the dollar amount of loans outstanding and we can see that there's been a decline in the size of the energy portfolio and you can see the trend as you referred to during the last down cycle.

So just to make sure, I'm trying to at least think of the basics of the mechanics correctly -- if you assume that that portfolio, the energy portfolio, should shrink on a quarterly basis by between $200 million to $250 million a quarter, then the question becomes at what pace do criticized loans increase as they offset potentially?

So that's one thing.

And then the other thing would probably be what level of energy prices, oil prices, you factored in.

I think you talked about it and suggested that in your assumptions you've assumed that energy -- that oil prices are actually below current levels.

So if my thinking is right on the mechanics of that, that suggests that again barring an increase in criticized loans that exceeds the decline in your own portfolio, unless that happens then your provisioning levels should actually fall going forward compared to Q2 levels.

Am I thinking of that correctly specifically as far as it relates to this portfolio?

Sameer, here's what I think we expect to happen.

We expect to see continued runoff in the energy portfolio and we expect that our criticized portion of the energy portfolio will also continue to run off.

We saw that in the past quarter and we expect to see it in future quarters.

It's hard for us to figure out how much of that runoff is going to offset any additional migration that we expect in the portfolio over the next quarter or two.

But we think it will be significant.

And again, we purposely aren't giving a provision outlook for next quarter or the quarter after really because it is difficult to predict.

Okay.

And then can you give us a sense of the magnitude of the loss severity again that you assumed in this energy portfolio in your book?

The loss severity in terms of the portfolio?

Is that what you are referring to, Sameer?

No, in terms of the loans where you actually took a reserve additional provisions for those specific loans that were criticized, you need to provide for those, what was the loss severity you assumed on those loans?

Yes, so we have to risk-rate our portfolio based on definitions of impairment and definitions of there's different definitions that we have to follow.

And they don't necessarily relate to losses that we expect in the portfolio.

Again, the vast majority of our energy book are really well secured loans and we don't think that it will necessarily translate into credit losses that might be normally associated with a typical substandard C&I credit.

Okay.

All right.

That's helpful.

Thank you.

Tom Hennessy, CLSA.

Actually it's Mike Mayo in for Tom.

Just some clarification.

So 90% of the energy book is Shared National Credit and of those what percent are you lead agent on and how has the line utilization changed on those credits?

We don't disclose the number of deals, I don't believe, that we agent.

Again, I can just tell you that we are not the agent on the vast majority of them and it goes along with our energy strategy.

We want to deal with a certain segment of the energy industry and it's the segment that we feel has the least risk and we can't use our own balance sheet in the vast majority of cases to agent those kinds of deals.

So that's why we are more often than not a participant and not the agent.

And on line utilization, Mike, in the energy business our line utilization did decrease to 48% from 50% last quarter.

Commitments also declined.

And is that because you are reducing the access to the companies or because the companies are drawing down less?

I think it's because these companies are operating within their cash flow and they are paying down debt appropriately.

Okay.

And the catalyst for the $300 million increase in criticized loans, was that an internal review, was that revelatory -- some combination?

Yes, it has to do with our risk-ratings and we don't distinguish between how loans get risk-rated a certain way, so it's really a reflection of the fact that we have risk-rated the credits we think appropriately and those are the reserves that are associated with them.

And then lastly, the buybacks, at what point would you slow or stop buybacks because of what you're seeing?

You said you are not indicating a provision outlook for the next couple quarters.

On the one hand if times get tougher than you expect maybe you want to conserve capital.

On the other hand, regulators and industry already stressed tested you pretty rigorously and you're buying back stock after some of that stress.

Maybe you should just keep buying back through even a tougher cycle.

What's your thought on that and what do you think the regulators thoughts are on that?

That's one we have to look at.

Like we were talking about earlier, it depends what's going on at the time and we will make a decision accordingly.

Like we have in the past when we've seen smooth economies and things going the right way but also things have slowed down and we need to make a decision to be more cautious about returning capital.

But I would underline that we always have looked at maximizing the amount of capital that we have returned that we can't use to our shareholders.

Karen, do want to add anything to that?

Okay, thank you.

There are no further questions at this time.

I would now like to turn the call back over to Ralph Babb, Chairman and CEO, for any closing remarks.

I would just thank you all for being here today and your interest in Comerica and hope everyone has a good day.

Thank you.

Thank you again for joining us today.

This does conclude today's conference.

You may now disconnect.