Comerica's (CMA) CEO Ralph Babb on Q2 2014 Results - Earnings Call Transcript

| About: Comerica Inc. (CMA)

Comerica, Inc. (NYSE:CMA)

Q2 2014 Earnings Conference Call

July 15, 2014, 08:00 AM ET

Executives

Darlene Persons - Director of IR

Ralph Babb - Chairman and Chief Executive Officer

Karen Parkhill - Vice Chairman and Chief Financial Officer

Lars Anderson - Vice Chairman, The Business Bank

John Killian - Chief Credit Officer

Analysts

Steven Alexopoulos - JPMorgan

John Pancari - Evercore

Ken Usdin - Jefferies

Ken Zerbe - Morgan Stanley

Michael Rose - Raymond James

Terry McEvoy - Sterne, Agee

Geoffrey Elliott - Autonomous Research

Bill Carcache - Nomura Securities

Sameer Gokhale - Janney Capital Markets

Jason Harbes - Wells Fargo Securities

Bob Ramsey - FBR Capital Markets

Keith Murray - ISI

Operator

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.

Darlene Persons

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 our 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 can cause future results to vary from expectations. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statement contained in this release issued today, as well as Slide 2 of this presentation, which I incorporate into this call, as well as our SEC filings. 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.

Ralph Babb

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 in 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 noninterest-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 nonaccrual 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 in 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 market 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 structure discipline.

In June, we received word that out of 25 largest US commercial banks, Comerica is ranked number five among customers and number four among non-customers 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 bottomline 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.

Karen Parkhill

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

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 and 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 yield, shown in the yellow diamond, 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 payoffs of older higher yielding loans, a mix change in customer usage and competitive pressures.

Turning to deposit on Slide 7, our total average deposit increased $614 million or 1% to $53.4 billion, reflecting an increase in noninterest-bearing deposit. 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 four years and the expected duration under a 200 basis point rate shock extends it slightly to 4.7 years. The yield on the MBS book dropped $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 prepaid 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 the 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 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 phased-in threshold within the required timeframe and reinvestment of the prepays in Ginnie Mae securities will assist us in meeting the requirement without being subject to cap and haircut. As and when needed, we have ready access to the federal home loan bank lines and the debt markets, which will allow us to fund additional high-quality liquid assets or HQLA. When and how much will depend on our own balance sheet dynamic 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 yield 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 standard rate sensitivity model as well as alternative scenarios with varying assumptions. In all cases, as of June 30th, 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 a 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 recoveries. 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 non-customer-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 return, which was completely offset in noninterest expense. Non-customer-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. While the expense is 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 15th. 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 is the first debt issuance we've done in almost four years and we were very pleased with the outcome. Our capital position remained strong with a tangible common equity ratio of 10.4% and an estimated Basil III tier 1 common capital ratio of 10.2% at June 30th on a fully phased in basis excluding the impact of AOCI.

Finally, turning to Slide 15, our outlook for full year 2014 compared to 2013 remained 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. This 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 decline.

It is important to note that where we could land in a 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 on our stock price increases. Our rule of thumb is that for every $1 increase in average stock price for the quarter, warrants and option dilution is about 250,000 shares.

In closing, we are pleased with the loan growth and expense control we've 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 bottomline.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steven Alexopoulos with JPMorgan.

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?

Karen Parkhill

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.

Steven Alexopoulos - JPMorgan

But, Karen, if you take this seasonality, 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?

Karen Parkhill

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's 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.

Steven Alexopoulos - JPMorgan

The auto sector continues to get better and you could 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 pickup there?

Lars Anderson

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 turned to make significant CapEx and expansion. They're running three shifts. They're very productive, but we've not yet seen that kind of significant CapEx turn that you would sometime see in a recovering industry. However we have continued to see no commitments increase over a period of time and we think we're very well positioned with some excellent customers to capture that growth once we see investments begin.

Steven Alexopoulos - JPMorgan

Maybe just one final one regarding the reinvestment of MBS into Ginnie Mae's, Karen, what's the average yield you're adding to Ginnie's?

Karen Parkhill

Today, it would be between $220 million and $230 million. We do remain focused on trying to add securities to our portfolio at or above our current portfolio yield.

Operator

Your next question comes from the line of John Pancari with Evercore.

John Pancari - Evercore

It's a follow-up to Steve's question. Can you maybe help us a little bit 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 quantification around how much of a slowing you're seeing in that pace of growth in certain portfolios?

Lars Anderson

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's been a similar kind of slowing of activity levels. However, we are 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 got the right businesses, whether it's technology and life sciences, it's energy, general middle market and others that can benefit us, but we're going to have to see how the economy responds.

Ralph Babb

In prior quarters, we've kind of seen that up and down as well, that’s not the first time.

Lars Anderson

We have. There's a bit of a seasonality and oftentimes in the third quarter. A piece of that is obviously linked in the third quarter 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 are out there very active in the market and we're going to drive the growth that we can do without overreaching in a very competitive environment, staying very disciplined on pricing as well as structure.

John Pancari - Evercore

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

Karen Parkhill

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

John Pancari - Evercore

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?

Karen Parkhill

Yeah, we did see a decline in excess liquidity and that was driven by loan growth and debt paydowns that we did in the quarter. We have been repositioning the paydowns 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 Ginnie's, 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. And so what we ultimately need to do will depend on our balance sheet at the time and the ultimate final rule.

Operator

Your next question comes from the line of Ken Usdin with Jefferies.

Ken Usdin - Jefferies

A follow-up on the balance sheet mix and structure. So, Karen, the extra liquidity has kind of gotten down and you did a really good remix in this quarter without a meaningful increase in the securities 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 your 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 sub-advances? I think we're at this kind of period where the banks might start to have to think about that little bit differently.

Karen Parkhill

Yeah, 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.

Ken Usdin - Jefferies

So whatever funding mechanism is most attractive at the time?

Karen Parkhill

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

Ken Usdin - Jefferies

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?

Karen Parkhill

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 decline in the first quarter. We saw an increase of more than $430 million this quarter. And when you look 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 month.

Lars Anderson

I may also just mention in particular on the mortgage banking finance business that we are very much positively adept 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've positioned ourselves well for the future.

Ralph Babb

And we're also increasing market share.

Lars Anderson

Yeah, we're absolutely, Ralph, increasing market share. We're continuing to see a very robust pipeline. We're 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.

Ken Usdin - Jefferies

And could you just comment on the floor plan side?

Karen Parkhill

Yeah, 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.

Lars Anderson

I may just add on one additional issues. 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. And obviously with annualized sales, its 17 million units, if that continues to rise, that can certainly have some impact.

Karen Parkhill

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

Lars Anderson

Yes, it is. It's the highest level in many years.

Karen Parkhill

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 alternate seasonality.

Operator

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

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 Anderson

No, there was nothing deliberate about it. And frankly, there is nothing deliberate about our SNC strategy. It is simply a conservative risk management took that we use to manage our credit exposures. All of our business has originated through the 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 due to the two largest areas, general middle market and mortgage banking finance that continues to do very well and we were spreading some of our credit risk.

Ken Zerbe - Morgan Stanley

And then, Karen, a question for you. You said you 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.

Karen Parkhill

Actually keeping it swap 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 that asset sensitivity with swapping it, we decided, was not a bad strategy.

Ken Zerbe - Morgan Stanley

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

Karen Parkhill

It doesn't change it meaningfully.

Operator

Your next question comes from the line of Michael Rose with Raymond James.

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 Anderson

Yeah, 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 is an end of period measurement, utilization rates were flat. There was really no significant pattern there or changes in terms of utilizations.

Michael Rose - Raymond James

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?

John Killian

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 has 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 in overall picture, the allocation changes there were modest as well. So no overall change to the Comerica picture because of this.

Michael Rose - Raymond James

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.

John Killian

That's correct.

Operator

Your next question comes from the line of Terry McEvoy with Sterne, Agee.

Terry McEvoy - Sterne, Agee

If I look back at the first quarter, the energy portfolio was $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's going on within energy? Are you looking in different areas, moving down-market for those numbers to move in the opposite direction?

Lars Anderson

Energy was up over $250 million or 9%, but that was not a significant contributor to our shared national credit portfolio, represents less than 7% of our overall bank's portfolio. I can't tell you that there was any specific strategies around that. Energy credits do tend to be syndicated heavy just because the agent banks end up having a whole large positions, which would be outside of our conservative credit discipline. But there was really nothing unusual. I would say that 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.

Terry McEvoy - Sterne, Agee

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.

Lars Anderson

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 a, I think, different 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 on the marketplace and we're going to continue to do that.

Operator

Your next question comes from the line of Geoffrey Elliott with Autonomous Research.

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 noninterest-bearing deposits. So I'm 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 in 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 Parkhill

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 and in annual period, we do expect deposits to decline and we do expect on deposit pricing that the deposit pricing 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.

Geoffrey Elliott - Autonomous Research

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 puts 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?

Karen Parkhill

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 10% or slightly more outflow in the system. And on one of our sensitivity analyses, we said what if deposits declined $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 has talked about in the $1 trillion scenario.

Geoffrey Elliott - Autonomous Research

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

Karen Parkhill

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

Operator

Your next question comes from the line of Bill Carcache with Nomura Securities.

Bill Carcache - Nomura Securities

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, 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.

Karen Parkhill

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 that 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 marked-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 is a lot of unknowns at this stage.

Bill Carcache - Nomura Securities

Broadly speaking, is there a general scenario where you would find yourself with a fair amount of excess capital 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? Regulatory approvals aside, I'm just kind of trying to understand the dynamics of the balance sheet.

Karen Parkhill

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 great deposit growth than we've had loan growth. It's 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 paydowns 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.

Bill Carcache - Nomura Securities

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?

Karen Parkhill

The proposed rule, as written, is very thinly written, particularly around operating account deposit. So we will be looking to more clarification of that in the final rule. It's very difficult for us to give you a number on that.

Operator

Your next question comes from the line of Sameer Gokhale with Janney Capital Markets.

Sameer Gokhale - Janney Capital Markets

Just a couple of questions. 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 Killian

No, there is nothing, Sameer, that's 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 is no underlying change in the portfolio or what's going on within.

Sameer Gokhale - Janney Capital Markets

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 are 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?

Karen Parkhill

Sameer, when you look at our overall portfolio yield, that has been coming down. It's been more reflective of mixed shift in our usage on our portfolio and higher yielding loans, while we don't have many fixed rate loans on our book, 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.

Sameer Gokhale - Janney Capital Markets

So, I'm sorry, 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 Anderson

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.

Sameer Gokhale - Janney Capital Markets

And then just a question on operating expenses. I mean 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 Parkhill

We have talked about the fact that increased regulation from CCAR, Dodd-Frank in general has had increased 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.

Operator

Your next question comes from the line of Matt Burnell with Wells Fargo Securities.

Jason Harbes - Wells Fargo Securities

Hey, good morning. Actually this is Jason Harbes from Matt's team. 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 Killian

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 during a period where I would call a relatively small stable range, and that's what our outlook expects as we go forward through the rest of the year.

Jason Harbes - Wells Fargo Securities

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?

Karen Parkhill

Yes, we did benefit from a few larger trades on the FX side this quarter. We did also see some good volume as well.

Operator

Your next question comes from the line of Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets

Really only one quick question. 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 Parkhill

So on LCR again, because the rule is not final, we are not going to have any major 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.

Ralph Babb

Yeah, it depends on the final rules as to what effect it may have on specific businesses.

Bob Ramsey - FBR Capital Markets

And so then once you sort of have the final rules in place, 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?

Karen Parkhill

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

Operator

Your final question comes from the line of Keith Murray with ISI.

Keith Murray - ISI

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

Karen Parkhill

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.

Keith Murray - ISI

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?

Karen Parkhill

Yeah, 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 increase to try to find ways to self-fund that increase to keep expenses as flat as possible.

Keith Murray - ISI

You mentioned the total deposits declined 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?

Karen Parkhill

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.

Ralph Babb

There's not robust growth either in the commercial side, so that it is an indicator as well.

Lars Anderson

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

Operator

There are no further questions in the queue. I would now like to turn the call back over to Mr. Ralph Babb.

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.

Operator

Thank you for participating in this morning's conference call. You may now disconnect.

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