Oct 17, 2014
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
Terry McEvoy - Sterne, Agee Steven Alexopoulos - JPMorgan Joshua Cohen - Jefferies Ken Zerbe - Morgan Stanley Bob Ramsey – FBR Erika Najarian - Bank of America Jennifer Demba - SunTrust Robinson Humphrey Brian Foran - Autonomous John Pancari - Evercore Sameer Gokhale - Janney Capital Markets
Operator
Good morning. My name is Regina and I will be your conference operator today.
At this time, I would like to welcome everyone to the Comerica Third Quarter 2014 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Ms.
Darlene Persons, Director of Investor Relations. Ms.
Persons, you may begin.
Darlene Persons
Thank you, Regina. Good morning and welcome to Comerica's third 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 third 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 statements contained in this 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. Also, this conference call will reference non-GAAP measures and in that regard, I will re-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 third quarter 2014 net income of $154 million or $0.82 per share compared to $151 million or $0.80 per share in the second quarter and $147 million or $0.78 per share in the third quarter 2013.
The third quarter reflected broad based average loan and deposit growth, solid credit quality and expenses that continued to be well controlled. The quarter also included a $32 million gain from the early redemption of debt as well as $15 million and charges related to efficiency incentives, initiatives and a contribution to our charitable foundation of $9 million all of which we consider to be non-core.
All together, these actions provided an after tax benefit to our third quarter results of $5 million or $0.03 per share. Turning to Slide 4 and highlights for the quarter, average total loans were up $3 billion or 7% on a year-over-year basis and were up $434 million or 1% compared to the second quarter.
Loan growth was led by Mortgage Banker Finance which increased $276 million in line with the summer home selling season. Notable loan growth was also seen in technology and life sciences, energy and commercial real-estate.
As expected, this was partly offset by $178 million decline in auto dealer floor plan loans as our customers worked down their inventory in preparation of receiving new models. And with reduced line utilization general middle market loans declined $142 million.
Overall the pace of loan growth declined relative to the second quarter due to the typical summer slowdown as well as moderating GDP growth. We believe our customers are becoming stronger and more confident, however they remain somewhat cautious and continued to build liquidity.
We grew deposits in the third quarter in almost every business line with the bulk in non-interest bearing deposits. Accounts; average total deposits increased $3.3 billion or 6% year-over-year to $55.2 billion.
Relative to the second quarter, deposits grew $1.8 billion or 3% with almost half coming from general middle market. In further comparing our third quarter results to the second quarter, net interest income decreased $2 million to $414 million primarily due to the decline in accretion of $7 million as expected partially offset by the benefit from loan growth.
Credit quality continued to be strong as the provision for credit losses and net charge-offs remain at low levels as we have seen for the last several quarters. Non-interest income declined $5 million to $215 million driven by a $3 million decline in customer-driven fees primarily foreign exchange income and a $2 million decline in non customer income.
Excluding the $8 million net benefit or $5 million after tax from the non-core actions we took in the third quarter that I mentioned earlier, non-interest expenses remained stable. Finally, we continue to execute our capital plan.
We repurchased 1.2 million shares in the third quarter under our share repurchase program. Combined with dividends we returned $95 million or 62% of third quarter net income to shareholders.
Turning to Slide 5 and a look at our three primary markets. Texas has been enjoying a remarkable period of economic expansion.
The ensuing population growth has supported even more job growth in the construction trades and in the service sector. Our third quarter average loans in Texas were up 12% compared to a year ago and average deposits increased about 3%.
California is showing above average economic growth as labor market conditions are improving quickly. In August, California created more jobs than any other state coming in right ahead of Florida and Texas.
Our California average loans have grown 11% over the past year and average deposit growth has also been strong posting a 12% increase. The Michigan economy is benefiting from strong auto sales and gains in other durable goods manufacturing.
Overall our customer’s financial performance has been strong and they continued to delever and build cash. This is reflected in the stable average loans and solid deposit growth.
Before turning it over to Karen, I wanted to mention a couple of other items. As you may know Comerica is the pre-card, prepaid card issuer for the U.S.
Treasury Direct Express Program. The Treasury has recently selected us as the financial agent for the Direct Express Program for an additional five years.
Separately, we recently announced that we entered into an agreement with Vantiv to provide payment processing solutions for our merchant services customers. Comerica’s merchant services enable businesses to enjoy the convenience of accepting card payments with a focus on providing those businesses with the means to improve efficiency as well as adapt to the latest technology and payment solutions.
The Direct Express Program, our new merchant services platform as well as our trust alliance business, which we discussed at an investor conference in September, are all great examples of how we leverage partnerships to provide a wide array of growing products and services for our customers. In closing, we are focused on the long term and building enduring relationships.
We offer our customers a value proposition by providing them products and services that meet their needs which enables us to hold our pricing parameters while not varying from underwriting standards that have served us well through many cycles. We continue to face rising regulatory and technology demands as well the possibility of higher pension expense next year if long term rates remain at their current level.
We have taken some actions this quarter intended to assist us in partially mitigating these headwinds. We remain focused on controlling the things we can control and are well positioned to benefit as the economy improves and rates ultimately rise.
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 1% or $434 million.
Commercial loans were the major driver, increasing $298 million or 1%. Commitment growth of over $850 million outpaced loan growth, resulting in a decline in utilization rate to 48.3% down from 49.3% at the end of the second quarter.
Importantly, our pipeline remained robust and increased during the quarter. Similar to the commercial loan trend we’ve seen in the H.8 data reported by the Fed, our pace of loan growth slowed in the third quarter relative to the first half of the year.
As Ralph mentioned, we believe this is in line with the typical summer slowdown including seasonality and our national dealer business along with moderating GDP growth. While the pace slowed, the growth we had in the third quarter was broad based.
The larger increases in average loans compared to the second quarter were noted in mortgage banker with $276 million, technology and life sciences $110 million, energy $95 million and commercial real estate $88 million. Two businesses declined National Dealer Services by $178 million due to model year changeover and general Middle Market by $142 million due to lower line utilization with the summer slowdown.
Period-end loans declined $174 million to $47.7 billion, yet remained well above the third quarter average. This decline included decreases in National Dealer Services of $356 million and general middle market of $246 million for the same reasons I just described, as well as the decrease in Mortgage Banker Finance of $102 million reflecting the beginning of the decline of the summer peak.
Increases in almost all other business lines partially offset the decline. Remember that our loans typically spike at quarter end, so the average for the quarter is a better indicator of trend.
Finally loan yields shown in the yellow diamond decreased 9 basis points in the quarter of which 6 basis points can be attributed to lower accretion and one basis points each attributed to lower interest collected on non-accrual loans and negative residual value adjustment to assets and our leasing portfolio, and a decline in loan yields resulting from loan portfolio dynamics such as a mix change in customer usage. Turning to deposit on Slide 7, our total average deposit increased $1.8 billion or 3% to $55.2 billion, consisting of a 5% increase in non-interest bearing deposit and a 2% increase in interest bearing deposits.
Almost every business line posted growth with the most significant increase in general middle market, which increased 6% and accounted for almost half of the increase in our total average deposit. We believe general middle markets increase in deposits and decrease in loans go hand-in-hand as customers increase their cash and have less need to borrow against their line.
Period-end deposits grew $3.4 billion to $57.6 billion and like our loans tend to spike at quarter end. Infact our deposits increased $1.5 billion in the last two weeks of the quarter.
For that reason, remember that average balances are what drives our net interest income. Deposit pricing remains low at 15 basis points as shown by the yellow diamonds on the slide.
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 mortgage backed securities book declined 6 basis points as the second quarter included a $1 million retrospective adjustment to the premium amortization and there were no adjustment recorded in the third quarter. Our goal is to reinvest prepaid at or above the current portfolio yield.
However, the yields on the securities that are prepaying are typically above the average portfolio yield and therefore if rates remain at current levels, we anticipate continued slight pressure on the average yield. Based on the current rate expectations, we believe that the pace of prepays will be about $350 million to $450 million in the fourth quarter, inline with what we have experienced the past couple of years.
In light of the fact that Fannie and Freddie-backed securities are subject to a haircut and a cap under the liquidity coverage ratio or LCR, we continue to reinvest the prepays in Ginnie Mae securities. As far as the LCR, the final rule was issued last month.
Banks our size will now need to [phase] and compliance beginning in 2016 and will be subject to a monthly calculation. While we are still in the process of accessing the final rule and will continue to do so while we work to clarify the detail and analyze our customer data, we estimate as of quarter end our LCR ratio stand at about 80%.
We continue to feel comfortable that we will meet the phase and threshold within the required timeframe, which is now 90% by January 2016. We will need to add high-quality liquid assets or HQLA over the next year to meet the 90% plus above or to withstand normal volatility.
Exactly how much in liquid assets we add will depend on our loan and deposit growth over the next 15 months and the resulting change to our access deposits as I said which count as HQLA. We had said before that adding securities should not have a significant impact to our earnings and the impact to rate sensitivity will depend on a fixed or floating nature of both the funding and the investment side.
As we make decisions on fixed versus floating we will remain mindful of the current rate environment with a focus on not pre maturely altering our overall upside to rising rates. Turning to Slide 9, net interest income decreased $2 million primarily due to a decline in accretion as expected of $7 million.
Loan growth and one additional day in the quarter each added $4 million to net interest income. This was partially offset by a $2 million negative residual value adjustment to asset in our leasing portfolio.
$2 million impact from portfolio dynamics such as the mix in customer usage as well as the $1 million decline in interest collected on non accrual loans. Other than these effects from the loan portfolio a decline in our debt interest cost, reflective of the net impact of recent maturities, redemptions and issuances provided a $2 million benefit, and interest earned on investment securities decreased $1 million as I discussed on the prior slide.
Finally the $1.1 billion increase in average deposits as I said added $1 million. The net interest margin decreased 11 basis point with the decline in accretion having a 5 basis point impact and the increase in liquidity as I said having a 4 basis point impact.
Loan portfolio dynamics and the lease residual value adjustments had a combined two basis point impact. Movements related to lower securities yield and interest on our wholesale debt netted to zero.
Just to note, we expect accretion in the fourth quarter to be about $5 million for a total of approximately $30 million for the full year. There is only about $20 million in total accretion yet to be realized which we expect to recognize in small increments each quarter over the next couple of years.
We believe our balance sheet remains well positioned for a rise in short term rates. As of September 30, our standard asset liability case which calculates the dynamic balance sheet assuming historical relationship shows that a 200 basis points increase in rates over a one year period equivalent to 100 basis points on average would result in a benefit to net interest income of about $225 million.
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 non accrual 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. In past investor conferences, we have shared alternative assumptions to our standard case, including the pace of deposit, loan and rate changes and in all cases we remain well positioned for rising rates.
Turning to the credit picture on Slide 10, net charge-offs decreased to $3 million or 3 basis points of average loans and included $21 million in recoveries. Our criticized loans decreased and nonperforming loans and the allowance coverage ratio were both stable.
Our allowance covers our trailing 12-month net charge-offs 16 times. Our solid credit metrics and strong recoveries combined with loan and commitment growth resulted in a decrease in the provision to $5 million and a small reserve build.
Slide 11 outlines non-interest income, which declined $5 million. Customer-driven fee income decreased $3 million, including a $3 million decrease in foreign exchange income from our high second quarter level and a $2 million decrease in investment banking fees.
This was partially offset by a $3 million increase in commercial lending fees. Non-customer-driven income decreased $2 million.
Turning to Slide 12, non-interest expenses included a net benefit of $8 million from non core actions taken in the third quarter. Aside from these actions expenses were stable increasing just $1 million as the impact from one additional day of salaries expense and small increases in occupancy and several other categories were partially offset by lower litigation related expenses.
The non core net benefit of $8 million included the early redemption of debt, a contribution to our charitable foundation, as well as changes related to our continual drive for efficiency. As far as the debt, I mentioned last quarter that we had called $150 million in subordinated notes effective July 15th.
These notes had a carrying value of $182 million which resulted in a $32 million gain in the third quarter. We also made a $9 million contribution to Comerica’s charitable foundation, which support non-profit organizations in the communities we serve.
As you know we are continually focused on efficiency. We did take actions in the third quarter amounting to $15 million and non core charges on a number of small projects, intended to assist us and partially offsetting the headwinds we are facing for rising regulatory and technology demand in addition to the possibility of higher pension expense next year.
For example we continuously review our real estate requirements to ensure we are optimizing our square footage. As a result, we are consolidating space and taking a charge as we exit a handful of properties.
We anticipate taking a further charge of approximately $5 million to $7 million in the fourth quarter primarily related to real estate optimization as we complete the remaining items identified. While the implementation of the project is ongoing, we estimate that by the end of next year we should achieve run rate savings of about $12 to $14 million.
Related to rising technology and regulatory demand, we will need to continue to invest in technology projects related to evolving cyber security and compliance including the liquidity coverage ratio and changes required by the card industry. Related to pension expense there are several factors that determine our annual pension expense, such as the discount rate which is set at year end.
If long term rates remain at the current level which is lower than where they were at year end 2013, the discount rate on liability could be lower driving an increase in our annual pension expense. In our 10-K we disclosed that for every 25 basis point change in the discount rate the impact is about $8 million.
In addition a new draft mortality table was released earlier this year and it is possible that the new mortality assumptions could also drive the extent higher. Moving to Slide 13 and capital management, as Ralph mentioned, we repurchased 1.2 million shares this quarter under our share repurchase program.
Combing shares repurchase with the dividends paid we returned 62% of net income to our shareholders in the third quarter and year-to-date we have returned 67% of earnings. Our capital position remains strong with a tangible common equity ratio of 9.9% and an estimated Basel III tier one common capital ratio of 10.4% at September 30th on a fully on a fully phased in basis excluding the impact of AOCI.
Turning to our final slide 14, our outlook for full year 2014 compared to full year 2013 has not changed from what we outlined on our call in July. We have however narrowed our year-over-year expectations for average loan growth to be about 5%.
It was previously 4% to 6%. And we now expect accretion to be about $30 million at the upper end of the $25 million to $30 million we had provided.
Turning to our expectations for the fourth quarter relative to the third quarter as outlined on the slide. We expect average loans to grow slightly, assuming continued moderate economic growth.
We believe we will see a rebound in our floor plan loans as auto dealers receive their 2015 model inventory. And we expect mortgage banker outstandings to decline as home sales are typically lower in the fourth quarter.
For the rest of the loan portfolio we expect a small increase. Keep in mind that competition is stiff across all of our businesses and we fully intend to maintain our loan pricing and credit discipline.
We expect our net interest income to grow slightly with a small increase in accretion to about $5 million from the $3 million in the third quarter. The positive effect from loan growth in our portfolio should approximately offset the continued pressure from the low rate environment.
With continued strong credit quality we expect net charge-off and provision to remain low, similar to what we saw in the first two quarters of the year. Overall we expect non-interest income to be relatively stable with customer driven income similar to the third quarter.
While we expect these to be modestly higher in several areas we have seen lumpiness in certain categories such as indication fees which were elevated in the third quarter. Non-customer-driven income contains items such as warrant income, preferred comp and securities gains and losses, all of which are difficult to predict but overall we expect them to decline.
Non interest expenses are expected to be higher, remember that our third quarter included a net benefit of $8 million from non core items. And as I mentioned we expect additional non core charges in the fourth quarter of about $5 million to $7 million primarily focused on real estate optimization.
Furthermore, we expect a modest increase in core expenses related to higher technology in consulting expenses as well as a seasonal increase in benefits expense. In closing, we are pleased with our third quarter broad based average loan and deposit growth and strong credit quality.
We continued to demonstrate our expense discipline and took actions in the third quarter intended to help offset some of the expense headwinds arising from increasing regulatory and technology demand. We will continue to focus on the things we can control, and we believe our relationship banking strategy combined with our geographic footprint will serve us well as the economy improves.
Now we would like to open up the call for questions.
Operator
(Operator Instructions) Our first question will come from the line of Terry McEvoy with Sterne, Agee. Please go ahead.
Ralph Babb
Good morning, Terry.
Terry McEvoy - Sterne, Agee
Hi, good morning. I guess just start with a question for you, Ralph.
As you look at the energy portfolio what’s your outlook going forward, any concerns given the drop in prices? And then specifically the servicing piece of energy is that something that we need to focus on going forward?
Ralph Babb
Okay, John you want to answer that?
John Killian
Sure. Good morning, Terry.
The short answer is no, we are not concerned at this time. We’ve been in this business for 30 years so we have seen lots of ups and downs; in fact the price was in the low 80s in 2012, 2010 and 2009 as well.
And we have about $3.4 billion in outstandings at the end of the quarter which is about 7% of the portfolio approximately 95% of our portfolio is secured. Most of our customers are well hedged on average 50% are hedged for two full years and many are for longer periods.
At current prices drilling activity probably will plateau, but production is going to be fine. So, overall I’m very comfortable at this time.
To address your services issues, that’s about 17% of the total energy portfolio right now.
Terry McEvoy - Sterne, Agee
And then, what do you expect to spend this year -- question for Karen on technology and regulatory issues, just trying to establish your base and to build off next year. And then on the expenses, if things were to stand today at the end of the year what would the pension cost look like in 2015?
Karen Parkhill
Sure, I’ll take those in pieces. In technology, we typically have an investment spend, an annual investment spend between $75 million and a $100 million and an annual expense between $30 million and $40 million.
As I mentioned we do expect that spend and expense to increase because of the increase in technology demands related to the regulatory environment, related to card industry compliance and related to cyber security. On regulatory issues and matters we have said before that year-to-date or in 2014 we have added about 85 people amounting to a little bit more than 25 million an annual run rate expense.
Much of that or the vast majority of that already build into our run rate. And we do expect that to increase as we continue to have new regulatory requirement.
On the pension expense, that expense is set at the end of every year, based on key assumptions made particularly the discount rate on our liability. That rate is set based on our long term AA corporate bond index which matches the liability, matches the duration of our pension liability.
Last year that discount rate was 5.17% and we’ll see what the discount rate is at the end of this year, but given the current rate environment if this sticks the pension expense related to the discount of the liability could increase. And if new mortality tables are introduced this year by the Society of Actuaries, our potential expense related to mortality assumptions could increase as well.
Our pension expense this year is about $39 million. You may recall last year it’s about $86 million.
Terry McEvoy - Sterne, Agee
Okay. Thank you, Karen.
Ralph Babb
Thank you.
Operator
Your next question will come from the line of Steven Alexopoulos with JPMorgan. Please go ahead.
Ralph Babb
Good morning, Steve.
Steven Alexopoulos - JPMorgan
Good morning everyone. Maybe for John Killian, I’m curious at what price does oil need to fall for you to become concerned over the portfolio?
Ralph Babb
Okay. John.
John Killian
Sure, hi, Steve. You know it depends of course on every individual borrower’s specific set of facts and their set of costs, but remembering that generally speaking we’re pretty comfortable at the 80s as I mentioned earlier.
If we go into the 70s activity will slow more. If we go into the 60s on oil, you’ll see it slow a lot, and you’ll probably see some credit issues begin to arise if we go in the 60s and stay there for a prolong period of time, because as I said a lot of our customers now are well hedged.
That’s completely different than prior ups and downs in the oil business. So that’s going to give us some runway here to get through a temporary period of lower prices.
But if it goes into the 60s and stays there for let’s call it two or three years you’ll begin to see some credit issues.
Steven Alexopoulos - JPMorgan
Okay. That’s helpful.
And Karen – thanks John. And Karen for the pension expense given the discount rate that you just highlighted, why wouldn’t this go back up to $86 million or higher based on – I assume that you’re trying to telegraph that this expense is going up meaningfully in 2015?
Karen Parkhill
Yes. It could go up meaningfully in 2015, Steve.
But again, the discount rate is set at the end of the year and we don’t have a crystal ball on what long-term rates will be at the end of the year. So, and we don’t know what the mortality tables that could be introduced between now and the end of the year would say, so, difficult for us to give you any specifics.
Steven Alexopoulos - JPMorgan
Right. Karen, do you a sense though let’s just say rates stayed where they were today and the mortality tables didn’t changed, where that level goes to next year?
Karen Parkhill
Yes. In our 10-K Steve we do disclose that for every 25 basis point change in the discount rate that would equate to about $8 million impact on the pension expense.
Steven Alexopoulos - JPMorgan
Okay. And then, maybe one final one regarding the guidance calling for the seasonal decline in mortgage warehouse following up that rates are lower, any signs of the pickup in mortgage warehouse given where rates have moved down to here in the quarter and maybe what was the mix in 3Q or purchase and refi?
Thanks.
Ralph Babb
Lars, you want to take that.
Lars Anderson
Yeah, absolutely, so looking at the third quarter, we did see the seasonal decline as Karen pointed out to you of $276 million increase over the prior quarter. But if you look at the period end we were down $102 million.
One point I’d like to make is that the decline in linked-quarter averages was down substantially less than we saw in the prior year, which I think positions us well on a go forward basis. To maybe to frame that a little bit for you, we actually increased our averages by 21% and that was against an industry.
It had an increase of about 3% in mortgage volume. But we would expect to see softness in the fourth quarter, exactly where that land is going to be very difficult to tell.
But I think we have all heard with the U.S. Treasury, 10-year Treasury where it is, mortgage activity has picked up in the most recent few days I think across the industry.
I think we’re very comfortable with our position in the industry. We continue to capture more and more customers with each quarter.
We have very deep cross-sell within the highest treasury management cross-sell across the entire company and so we see this is a growth business working with some of the best mortgage companies in America.
Ralph Babb
Lars, how about the mix on current…?
Lars Anderson
Thank you, Ralph. So the mix for us, as I mentioned in previous earnings conference calls, we have really taken an active position to pick up more of the purchase volume.
We’re up to 80%, the industry is at 58%. I think that that’s part of what helped us in this last quarter linked-quarter as outperforming the industry.
Steven Alexopoulos - JPMorgan
Okay. Thanks for taking my questions.
Ralph Babb
Thank you.
Operator
Your next question will come from the line Ken Usdin with Jefferies. Please go ahead.
Ralph Babb
Good morning, Ken.
Joshua Cohen - Jefferies
Hey, this is actually Josh in for Ken.
Ralph Babb
Good morning, Josh.
Joshua Cohen - Jefferies
Hey, good morning. So you noted the expenses this quarter were helped by a lower litigation.
How should we think about the trends for this expense item going forward?
Ralph Babb
Karen.
Karen Parkhill
Yes. I would say our litigation related expenses compared to larger banks in the industry are low.
They can be lumpy and are difficult to predict. But at this stage we feel very comfortable with the reserves that we’ve got on our balance sheet.
Joshua Cohen - Jefferies
Okay. That’s fair.
And then, to what extend do you expect the efficiency savings to offset the increases that you’re expecting in compliance and technology?
Karen Parkhill
Yeah. We are right now in the details of working through our 2015 budgeting process.
And as we typically do we’ll give an outlook on 2015 in the fourth quarter earnings call in January. But we have said that we expect these run rate savings from the actions taken both this quarter and expected next quarter resulting in $12 million to $14 million run rate savings, are intended to help partially offset some of the rising demands and increases that we see.
Joshua Cohen - Jefferies
Okay. And then just one final question, FX volume was stronger generally across the industry and it declined a bit for you in the third quarter.
Can you just provide color for that line item?
Ralph Babb
Lars.
Lars Anderson
Fixed volume -- you’re talking about in the lending space.
Ralph Babb
FX.
Lars Anderson
I’m Sorry, FX.
Ralph Babb
Foreign exchange.
Lars Anderson
Yeah, foreign exchange, we really had an anomalous quarter in the second quarter of this year. We had a several large transactions.
So, I think we’re back to really a normal run rate.
Joshua Cohen - Jefferies
Okay. Well, thanks for the color, guys.
Ralph Babb
Thank you.
Operator
Your next question will come from the line of Ken Zerbe with Morgan Stanley. Please go ahead.
Ralph Babb
Good morning, Ken. How are you?
Ken Zerbe - Morgan Stanley
Doing well. Thank you.
Maybe little more specific question on expenses. Hope you can give us a magnitude here, because I guess in fourth quarter, we’re going to add the $8 million plus the $5 million to $7 million, so it’s roughly $14 million.
When Karen mentioned the technology consulting benefits expense, are we talking about like another $14 million or what’s kind of magnitude of that unknown piece?
Karen Parkhill
Yeah, of the rest of piece -- and you’re right, Ken, you should add back the $8 million and then add back the additional $5 million to $7 million. And then top of that we expect a modest increased quarter-over-quarter related to as we said consulting, technology and a seasonal increase in healthcare benefit.
Ken Zerbe - Morgan Stanley
Okay. So, maybe $5 million, $10 million is that modest in your view broadly?
Karen Parkhill
We don’t give specific numbers.
Ken Zerbe - Morgan Stanley
Fine, okay. Then second I had just on slide seven, when you guys think about deposit run-off in a higher interest rate environment, you guys assume that sort of stable percentage of non-interest bearing deposits run-off, or does that percentage increased as deposits grow disproportionately to loan growth?
Karen Parkhill
In our standard interest rate scenario in the up 200 scenario, we do assume a modest decline in deposits and we do expect that over time as interest rates rise we’ll continue to see a mix shift out of non-interest bearing into interest bearing. Is that your question?
Ken Zerbe - Morgan Stanley
Well, I guess, let’s take your $1.3 billion of non-interest bearing this quarter which phenomenal growth, do you just assume that you’ll keep most of that, right, I mean, in the model that you use or do you assume that as we get further into the cycle as you just get a ton more of this non-interest bearing that it just increases the risk that a greater percentage actually starts to run-off in the different environment. I’m just trying to think of how you’re assessing that 200 basis point scenario?
Karen Parkhill
Yeah. Keep in mind that much of our non-interest bearing is related to commercial deposits and much of those commercial deposits are tied with an earnings credit rate to pay for operating services that our customers have with the bank.
So they tend to be far more sticky than normal non-interest bearing deposits. And we do take that into account in our interest rate sensitivities that we expect some decline but we recognize that there is stickiness to those deposits.
Ken Zerbe - Morgan Stanley
Okay. Great.
And then last question, are you replacing the debt that you redeemed this quarter with other long-term borrowings or changing your liability structure in anyway?
Karen Parkhill
Yeah. This year you’ll note that we have – did have some debt maturities and we did issue $600 million in debt.
We next year as we look forward to needing to add high quality liquid asset for the LCR ratio, we will need to be funding those and do expect to be in the debt market next year.
Ken Zerbe - Morgan Stanley
Great. All right.
Thank you
Karen Parkhill
Yeah.
Ralph Babb
Thank you.
Lars Anderson
Hey, Ralph. If I could add maybe just one point to the question about the commercial DDA in particular that maybe helpful.
As those continue to grow we’re being very active in terms of bringing payments solutions, treasury management to these core relationships and encumbering these deposits. And I think that that’s one of the reasons that as Karen develops her forecast for the run-off, one of our obviously strategies is to ensure that we make those sticky as possible.
And in addition, we are hearing from treasurers, CFOs of our customers that they are planning to run a higher liquidity levels than they did before the great recession. So I think that’s speaks favorably to our liquidity position.
Ralph Babb
Good.
Ken Zerbe - Morgan Stanley
Thank you.
Operator
Your next question will come from the line of Bob Ramsey with FBR. Please go ahead.
Ralph Babb
Good morning, Bob.
Bob Ramsey – FBR
Yeah, good morning. I was hoping you could just touch on the build in the interest-bearing deposits held at banks, the liquidity buildup on the balance sheet.
Is this in anticipation of investing some of that in high quality liquid assets or how should we think about that build?
Karen Parkhill
For us the high-quality liquid assets in the numerator of the LCR equation obviously do include the excess deposits at the Federal Reserve. And so, as we’ve seen an increase in deposits this quarter that has increased the excess deposits that we have at the Federal Reserve and has – has helped in the LCR calculation.
Does that answer your questions?
Bob Ramsey - FBR
I guess I’m asking is the intent to keep it there as excess deposits and that is your high-quality liquid assets or would the thought be that you would invest that at some point in Ginnie Maes or something with a little bit more yield?
Karen Parkhill
Yeah. So, as we think about our liquidity position and how we should invest, but we do remain mindful of the current low interest rate environment.
And the fact that locking in a lot more additional securities in this low rate environment is not that appealing, particularly when these securities will be mark-to-market and the numerator in the LCR equation is a mark-to-market numerator. So, we will be making decisions over the next year around the investment, but we will certainly keep the rate environment in mind.
Bob Ramsey - FBR
Okay. All right, that is helpful.
And then, I think I get it, but I just wanted to touch on the purchase accounting accretion. Based on the $7 million decline you all describe this quarter, I think the total accretion was $3 million this quarter, is that a good number?
Karen Parkhill
That’s correct. It was $3 million this quarter and we said that we expected to be about $5 million next quarter.
At this stage, we believe the benefit from accretion will be small every quarter going forward because we only have about $20 million left in accretion to be realized.
Bob Ramsey - FBR
Okay. And then I guess after the fourth quarter that would be down to $15 and that is the expectation it just sort of diminishes from that $5 million level over time?
Karen Parkhill
Yes. It would diminish over time.
Bob Ramsey – FBR
Okay. Great.
Thank you, guys.
Ralph Babb
Thank you.
Operator
Your next question will come from the line of Erika Najarian with Bank of America. Please go ahead.
Erika Najarian - Bank of America
Yes. Good morning.
If I could start with the other side of the efficient equation, Ralph you mentioned Direct Express payment processing and trust alliance in your prepared remarks, I was just wondering if you could give us a sense of how much in terms of revenue contribution incrementally those initiatives can add to 2015?
Ralph Babb
You know, I would like to ask Curt to talk about our alliance especially business, these are growing businesses some like of the alliance business we’ve been in for a long time, and that’s one that let me have Curt comment on that then I’ll bounce back to the others.
Curtis Farmer
Erika, thank you for the questions, so on the alliance business is where we are providing third-party trust services to broker dealers and we’ve got 13 relationships across the country with some of the larger broker dealers providing fiduciary services to the clients. It’s been a growing business for us and we’ve add an additional broker dealers to the network.
In fact if you look at a year-over-year comparison third quarter 2014 and third quarter 2013 were up about $3 million in terms of revenue. We’ve got lots of opportunities to continue to cross-sell into these broker dealers and we also have some opportunities to add some additional broker dealers over the course in the next couple of years.
So it’s a nice sort of supplemental business for us, for our fiduciary business overall and sort of a distinguishing niche for us in the trust space.
Ralph Babb
Lars, you want to talk a little bit about merchant services, which has been a business again for us for a long time.
Lars Anderson
Yeah. And I think we’re all are very excited about the new relationship with [Vantiv] is really positioning ourselves to as we mentioned earlier, expand the profit offering, the payment solutions, really have a cutting-edge technology payment platform available for customers.
But I’ll tell you in spite of that year to-date we’re up 14% on a year-over-year basis. We’re up 6% in just linked-quarter growth in merchant services.
Frankly I see this is one of our best opportunities for fee income growth on a percentage basis on a go forward basis. We’re much better efficient today and we’re seeing pipelines at levels that we have frankly never seen before in our company.
You also mentioned Direct Express. We’re obviously excited about the fact that we were reselected to serve the U.S.
Treasury as their financial agent and we’re expecting that this problem will continue to grow. We have over 5 million cards outstanding and we continue to grow a very substantial deposit base over $800 million that continues to grow.
You can see that in the – I think in slide number 24, the pricing deck -- that just continues to grow and we would expect that that trend would continue in the coming years.
Erika Najarian - Bank of America
Got it. Thank you.
And my second question is, the regulatory and technology headwinds that you mentioned, I assumes that that’s above and beyond, Karen, what you mentioned is your annual technology reinvest or investment spend? And I was wondering if you could help us get a little bit more color on what you’re spending on in terms of the regulatory-related expense and the tech upgrade for next year?
What that incremental expense spend would be related to those two issues? And how sticky is that in your deposit base as we think through what could carry over to 2016?
Karen Parkhill
Okay. So, on the regulatory and technology spend we do continue to invest in technology around cyber security, around our card industry compliance as you probably know in the credit space with PCI and EMV and things like that, it requires a technology investment.
On the regulatory front we’re continuing to invest in things, in trust testing, in the new liquidity coverage ratio, so hopefully that’s gives some color.
Erika Najarian - Bank of America
Got it. And are you prepare to give us a sense in what the incremental dollar spend maybe for 2015 and how sticky that could be?
Karen Parkhill
Yeah. We are not prepare to give dollar amount, because we are working through our budgeting process right now and setting our priorities, but we will talk about it on the fourth quarter call.
Erika Najarian - Bank of America
Okay. And just last one for me.
You have a significant amount of capital and your shareholders have been enjoying well about industry average in terms of your ability to return that back to them. If we’re in scenario where we’re lower for longer and that could induce some smaller banks to be more open to selling.
I guess, would you be interested and maybe taking advantage of that opportunity given how much excess capital you have or would you rather be prepared for stronger balance sheet growth as the macro bounces back?
Ralph Babb
As we’ve said before we’re very comfortable with our footprint today and our geographic diversion – diversity which is one of the things that was a key strategy for us and especially when we add sterling into the Houston market here in Texas and California now has been filled out as well, through an acquisition about ten years ago. And we certainly have a good footprint in Michigan.
We will look at opportunities as they come up. But the key is we now have that footprint that we can grow from an internal standpoint and it’s not based on the need to have to do acquisitions.
So it depends on what it is, where it is and the culture and fit into what our strategy is for internal growth.
Erika Najarian - Bank of America
Thank you. I appreciate the color.
Ralph Babb
Thank you.
Operator
Your next question will come from the line of Jennifer Demba with SunTrust Robinson Humphrey. Please go ahead.
Ralph Babb
Good morning.
Jennifer Demba - SunTrust Robinson Humphrey
Good morning. My question is a follow-up on the previous questions on the energy price decline and their impact.
Just hypothetically if oil prices were to stay in the low 80s, what would you expect the impact on just the general Texas economy to be, or if they were to drop down to the 60s?
Ralph Babb
Okay. John, you want to comment on that.
John Killian
Yeah. That’s an excellent question, but it’s also a very difficult one to estimate.
When I look at the statistics about the Texas economy, the mining or energy business accounts for 10% to 12% of the Texas economy, so there would definitely, Jennifer, be an impact. How big it would be, would be tough to tell.
The good news is given the economic expansion in Texas right now there’s some leeway for things to slow down a little bit and still be in a growth environment.
Ralph Babb
Yeah, I would underline the diversity in the Texas market today versus what it has been a number of years ago. Energies are very important sector certainly in the contribution but as John mentioned it is a [lower] rate today of – what’s the right word, fueling the economy, because of the diversity that’s out there.
So it won’t have near the impact it did 20 years ago.
Jennifer Demba - SunTrust Robinson Humphrey
Thank you very much.
Ralph Babb
Thank you.
Operator
Your next question will come from the line of Brian Foran with Autonomous. Please go ahead.
Brian Foran - Autonomous
Hi, good morning.
Ralph Babb
Good morning.
Brian Foran - Autonomous
I guess on the kind of middle market trends you outlined, if I think through the cycle utilization rates are up. I think they bottomed to like 44 for you guys, but still haven’t gotten back to the 50 to 55 where they were historically and we’re pretty far into the recovery and yet the deposits just keep going up.
So I know it’s a qualitative question, but just when you talk to your customers and look at the data, how much of this feels like it is cyclically, there’s these kind of two steps forward, one step back pattern to the economy and people get cautious versus how much of it do you think is secular i.e. your customers are just going to carry more liquidity and maybe use their lines less than they did 10 years ago?
Ralph Babb
I think is now as Lars comment on this too. I think its little bit of both.
That people are being more conservative today as was mentioned earlier, but also as they look forward because of what we’ve been through in the economic downturn I think customers will generally want stronger lines, larger lines and also more excess liquidity than they’ve had in the past. To be prepared for it, Lars, do you agree with that?
Lars Anderson
No. I think Brian is right on the mark.
I think its combination of two. But clearly the economy going sideways, the geopolitical environment, health issues, the healthcare cost are all contributing to equating a very cautious environment for our customers.
But I do think that they’re going to carry higher levels of liquidity on a go forward basis. I would point out that in middle market California we did see an increase in utilization rates this past quarter which I thought was a very good sign as the California market has been lagging in terms of the economy recovery until more recently and that is our largest loan portfolio.
Brian Foran - Autonomous
I guess another question on liquidity, more from your perspective, I guess reading to LCR documents you can see some of the penalties on commercial deposits have bigger outflows, the liquidity you have to hold against lines, I guess I’m still struggle little bit with, you’ve an 83% loan to deposit ratio, you have nearly $8 million of cash on the balance sheet and that kind of split out an 80% LCR ratio. When you go through the details of the calculation is it some pieces of the business that are getting disproportionate penalties or is this just the way the calculation if you kind of bread and butter middle market commercial bank, you need to have cash at 10% of balance sheet and you need to have a loan to deposit ratio on the 80s?
Karen Parkhill
Brian, you’re absolutely right that the LCR ratio does treat commercial-oriented banks a little more punitively than retail-oriented banks, because the outflow required in the calculation on commercial deposits is much greater than the outflow on retail deposits. And in addition it does assume that several commercial facilities are drawn and so it just is a little bit more punitive to banks like us.
That said, with our LCR ratio currently estimated at about 80%. We feel very confident that we can easily comply starting in 2016 and it shouldn’t have a significantly impact on us.
Brian Foran - Autonomous
Great. Thank you for taking my questions
Ralph Babb
Thank you.
Operator
Your next question will come from the line of John Pancari with Evercore. Please go ahead.
John Pancari - Evercore
Good morning.
Ralph Babb
Morning.
John Pancari - Evercore
Want to see if you can give us a little more color on your thoughts on the potential trend in the efficiency ratio through 2015? I mean, I am sorry to beat a dead horse here on expenses but just given all of the factors you have been citing, Karen, around the impacts to expenses here where you are spending, wanted to get a little bit of color on how we think about the efficiency ratio for the full year.
Thanks.
Karen Parkhill
Thank you, John. So as you know we have been focused on moving our efficiency ratio toward our target below 60% for the last several years.
And over the last several years we have successfully been able to offset the headwinds that we have been facing from the low rate environment, from the decline in accretion and from increased regulatory expenses to be able to move that efficiency ratio down. We are not ready to give our outlook for 2015 mainly because we are still working through the detailed process, but we are being in honest in saying that we do have significant headwinds next year that we are facing and we are taking action this quarter to help partially offset it.
John Pancari - Evercore
Okay. All right.
And then separately around loan pricing I wanted to see if you can give us a little more color on what you are seeing in terms of loan pricing competition. And if you could, if you could provide us with some details on new money loan yields by type, particularly C&I versus CRE, and maybe the energy portfolio as well?
Thanks.
Ralph Babb
Lars.
Lars Anderson
Okay, so first of all just in general, I’d say we are just continuing to see competitive environment out there across all of our lines of business. I’d characterize California geographically is the most competitive market in our footprint.
You know I should point out that if you look at the core yield on a line quarter basis, the yield was down one basis point on an overall basis which I thought was a real positive for us in terms of our you know the evidence of our discipline relationship pricing approach to the market, and also, the mix of our business. We are putting the resources in the right businesses and in the right markets where we can get the right kinds of growth.
In particular, you mentioned you know maybe some of the businesses specifically like energy business. We are seeing more competitors jump into the market place, both bank and non-bank and that’s not putting just pricing pressure, I think in the segment it’s also stretching credit structure.
So we are sticking to our strategy and we are not stretching on either one of them, we’ve being very selective in that, but it is a competitive market place out there. But areas like technology and life sciences mortgage banking finance, commercial real estate those were all areas that we continue I think garner nice attractive yields and we deliver a great value proposition.
We were really pleased to see small business begin to turn and begin to make contributions and that will certainly help us in our loan yields on a go-forward basis. So we are going to manage this very carefully.
We got to manage it day to day, it’s a very challenging environment but I think we are well suited to operate in this environment.
John Pancari - Evercore
Okay. Thank you.
Lars Anderson
Thank you.
Operator
Your final question will come from the line of Sameer Gokhale with Janney Capital Markets. Please go ahead.
Ralph Babb
Morning.
Sameer Gokhale - Janney Capital Markets
Hi, good morning. I had a couple of questions.
My first one was in terms of the recoveries that you had in your commercial mortgage portfolio in the quarter, they seem to be a little outsized at $12 million compared to what you had over the last few quarters. So if you could give us some perspective or insights into what led to the higher recovery that would be helpful?
Ralph Babb
Okay, John.
John Killian
Yeah, thanks Sameer. Actually if you look at our recoveries over the last four or five quarters, they have been pretty consistent in that 18, 19, 21 range.
So this quarter was frankly higher than we expected but not out of line with current trends. Sometimes it will fluctuate between C&I and CRE and this was a quarter where it did turn towards CRE.
In particular, we had one large credit that was refinanced which resulted in bit of an outsized recovery for CRE. But the overall trends have been pretty consistent at a higher level than we would have expected at this point.
Sameer Gokhale - Janney Capital Markets
Okay. And then just switching gears in terms of your national dealer services business, I think in your prepared comments you referenced the fact that the sequential decline in balances both on an average and in the period basis were partly the result of seasonality.
But given where we are at in the kind of auto lending cycle, you know I am curious as to what you are seeing in your discussions with dealers as far as their appetite for building inventories going into next year or are they being cautious? There's been talk about auto lending bubbles, an oversupply of vehicles, some people seem to suggest, so is it your view, or when you talk to them what are they saying to you?
Do they intend to keep inventory levels low going forward, or is this really this seasonality playing out?
Ralph Babb
Lars.
Lars Anderson
Yeah, so frankly the point about keeping inventories low, we have heard that for years in the industry but as we are attempting to make sure that you got all of the new models on your lot and we continue to see that I would tell you that from a floor plan utilization perspective, we saw a 10% decline in the quarter to end the quarter. So our dealers, our customers are clearly operating consistent with the way that they have in prior quarters, they are drawing down, they have gone through the heavy sale season of the summer.
They are drawing down their inventories; they are seeing a higher inventory turnover and the $17.5 million annualized sales unit is helping to contribute to that. So we would expect to see that new model builds which typically begin in November will help us grow our balances as we head towards the end of the quarter.
But I don’t see any real change in terms of the overall industry and in fact I see the confidence levels of the owners at maybe the highest levels that I’ve ever seen, they are making a lot of money and generating a lot of liquidity.
Sameer Gokhale - Janney Capital Markets
So the corollary to that then we should assume that you haven't changed any of your lending parameters for floor plan ending either. In terms of LTVs or any other parameters you don't feel that you need to be more conservative there just because it seems like the environment still appears quite bullish from the standpoint of the dealers.
Lars Anderson
Yeah I that’s right. We really haven’t changed anything.
I would tell you we are being more vigilant, more just about the regulatory environment but our customers are too and we deal with mega dealers that typically have you know robust compliance, consumer finance departments they are really staying on top of CFPB issues and are preparing themselves for the future, but we have not changed our strategy at all.
Sameer Gokhale - Janney Capital Markets
Okay, that’s helpful. Thank you.
Lars Anderson
Thank you.
Operator
I would now turn the call over to Mr. Ralph Babb, Chairman and CEO for any closing remarks.
Ralph Babb
I would just like to thank everybody for their interest in Comerica and being on the call today. We appreciate it, and everybody have a good day.
Operator
Ladies and Gentlemen, this does conclude today’s conference. Thank you all for joining and you may now disconnect.