Jul 17, 2015
Executives
Darlene Persons - Director, Investor Relations Ralph Babb - Chairman Curtis Farmer - President Karen Parkhill - Vice Chairman and -CFO Pete Guilfoile - Chief Credit Officer Pat Faubion - EVP, Business Bank
Analysts
Scott Siefers - Sandler O’Neil Steven Alexopoulos - JP Morgan Erika Najarian - Bank of America Ken Usdin - Jefferies Dave Rochester - Deutsche Bank David Eads - UBS John Pancari - Evercore ISI Brett Rabatin - Piper Jaffray Bob Ramsey - FBR Capital Ken Zerbe - Morgan Stanley Matt Burnell - Wells Fargo Securities Michael Rose - Raymond James Terry McEvoy - Stephens Incorporated David Darst - Guggenheim Securities John Moran - Macquarie Capital Kevin Barker - Compass Point Jordan Hymowitz - Philadelphia Financial Sameer Gokhale - Janney Montgomery Mike Mayo - CLSA
Operator
Good morning. My name is Carmen and I will be your conference operator today.
At this time, I would like to welcome everyone to the Comerica Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Darlene Persons, Director of Investor Relations.
Please go ahead.
Darlene Persons
Thank you, Carmen. Good morning.
And welcome to Comerica’s second quarter 2015 earnings conference call. Participating on this call will be our Chairman, Ralph Babb; President, Curtis Farmer; Vice Chairman and Chief Financial Officer, Karen Parkhill; Chief Credit Officer, Pete Guilfoile; and Executive Vice President of the Business Bank, Pat Faubion.
A copy of our press release and presentation slides are available on the SEC’s website, as well as in the Investor Relations section of our website, comerica.com. As we review our second quarter results, we will be referring to the slides which provide additional 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 actual results to vary materially from expectations.
Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statements contained in this release issued today, as well as slide two of this presentation, which I incorporate into this call, as well as our filings with the SEC for factors that could cause actual results to differ.
Also, this conference call will reference non-GAAP measures and in that regard, I would direct you to the reconciliation of these measures within this presentation. Now, I’ll turn the call over to Ralph who will begin on slide three.
Ralph Babb
Good morning. Our second quarter results reflect the advantages of our diverse geographic footprint and industry expertise.
Today, we reported second quarter 2015 net income of $135 million compared to $134 million for the first quarter and $151 million for the second quarter of 2014. Earnings per diluted share were $0.73 for both the second and first quarters of 2015 and $0.80 for the second quarter of 2014.
Turning to slide four and highlights from our second quarter results. Average loans were up $2.1 billion or 5% compared to a year ago.
Average loans grew $682 million or 1% relative to the first quarter with increases in most markets and business lines. The largest contributor quarter over quarter was mortgage banker finance which grew $690 million as we continue to increase our market share and benefited from a pick-up in activity due to summer home sales.
This was partially offset by $276 million decrease in average loans in our energy line of business as customers continued to adjust their cash flow needs and tap the capital markets. Average deposits were up $4 billion or 8% compared to a year ago.
Relative to the first quarter, average deposits increased $408 million or 1% with non-interest bearing deposits up $668 million. In further comparing our second quarter results to the first quarter, net interest income increased $8 million or 2% to $421 million, primarily due to an increase in loan volumes and one more day in the quarter.
Overall, credit quality remains solid. Net charge-offs continue to be well below normal levels at 15 basis points or $18 million.
Net charge-offs related to our energy exposure were nominal. The provision for credit losses increased from a very low level due to an increase in criticized loans related to energy as well as uncertainty due to continued volatility and the sustained low oil and gas prices.
Reserve to total loans ratio was increased to 1.24% and the reserve covers non-performing loans 1.7 times. The outcome of the recent shared national credit exam is incorporated into our results.
Non-interest income increased $6 million or 2% to $261 million, reflecting increases in card fees and smaller increases in several other fee categories. Non-interest expenses decreased $23 million to $436 million, primarily due to a $31 million reduction in litigation-related expenses and seasonally lower salary and benefit expenses, partially offset by higher outside processing fees related to increased revenue generating activities.
The decline in litigation-related expenses reflected a reduction in legal reserves including a favorable court ruling which reversed a jury verdict against Comerica and sent the case back for a new trial. Our capital position continues to be solid.
Stock and warrant repurchases under our equity repurchase program combined with dividends returned $96 million to shareholders in the second quarter. As announced in April, we increased the quarterly dividend by 5% to $0.21 per share.
Turning to slide five and look at our primary markets. Our Texas Economic Index issued earlier this month and tracking data through April, shows that the Texas economy continued to ease from lower oil prices.
However, job creation in Texas has bounced back and ranked third nationally for most jobs created in May. And for the last 12 months, Texas was the number two job generator, behind only California.
The diversity of the Texas economy together with the geographic diversity of our footprint and the positive momentum of the national economy continues to serve us well. Average loans in Texas were down about 2% compared to the first quarter due the decline in our energy loans while average deposits were relatively stable.
Our California Economic Index has shown another month of growth. The California economy gained momentum after a soft first quarter.
The state economy is large, diverse and resilient. Court [ph] activity is normalizing and the high-tech sector remains strong.
Real estate markets in Northern California are tight and Southern California markets are tightening as well. Average loans in California were up 1.5% compared to the first quarter with technology and life sciences, national dealer services, private banking and small business are contributing to the growth.
Average deposits were up 2.6%, led by technology and life sciences and general middle market. Our Michigan economic index has shown another gain.
Strong auto sales are supportive of Michigan’s manufacturing sector and are buffering the negative impact of the strong dollar on export oriented manufacturing. Job creation is on an upward trend in Michigan and real estate markets continue to firm up.
Average loans in Michigan were up by 0.5% compared to the first quarter, led by middle market banking while average deposits were stable. Before turning it over to Karen, since our last earnings call in April, Curt Farmer was named Comerica’s President; and earlier this week, we announced the change in leadership of our Business Bank, appointing Pat Faubion, a 31 year Comerica veteran to head our Business Bank.
While Curt and Pat bring considerable experience and expertise, I look forward to working with both of them in their new roles. In closing, we believe our balance sheet remains well positioned for rising rates.
We remain focused on the long-term with the relationship banking strategy that continues to serve us well. And now, I will turn the call over to Karen.
Karen Parkhill
Thank you, Ralph and good morning everyone. Turning to slide six, quarter-over-quarter, total average loans increased $682 million or 1.4%.
Mortgage banker was the largest contributor to average loan growth with $690 million increase over the first quarter due to new and expanded relationships as well as seasonality related to summer home sales. In addition, average loans grew in the majority of our business lines, including general middle market, private banking, national dealer services, mall business, and technology and life sciences.
As expected, average loans in our energy line of business did decline by $276 million and average loans in our corporate banking business also declined, as we continue to maintain our pricing and structure discipline in one of the most the competitive segments in the industry. Based on the Fed’s H8 data, our average total loan growth outpaced the large U.S.
commercial banks, which grew 1.2% from April 1st to July 1st. Total loan commitments increased $582 million at quarter-end, with growth in nearly every business line, more than offsetting declines in energy and corporate banking.
Utilization also increased to 51% from 50% at the end of the first quarter with usage increasing in almost every business line, other than energy and technology and life sciences, importantly our pipeline increased. Our loan yields increased 1 basis point in the second quarter as shown in the yellow diamond.
We benefited from a 1 basis point increase in 30-day LIBOR. Turning to deposits on slide seven.
Average deposits increased $408 million in the second quarter, driven by a $668 million increase in non-interest bearing deposits. A seasonal tax related increase in retail balances was a major contributor.
Period end total deposits increased $690 million to $58.3 billion. We continue to prudently manage deposit pricing which remained very low and decreased 1 basis point to 14 basis points as shown by the yellow diamonds on the slide.
Slide eight shows our securities portfolio increase as we continue to position ourselves for compliance with the new liquidity coverage ratio or LCR. While our average balances were stable from the first quarter at $9.9 billion, our period end balances reflect the purchase of additional treasury securities in June.
The estimated duration of our total portfolio sits at 3.8 years and the expected duration under a 200 basis-point rate shock extends it modestly to 4.6 years. In the current rate environment, we expect continued minor pressure on the average security wheel as you can see in the yellow diamond on the slide.
As far as LCR compliance, we still feel comfortable that we will meet the proposed phase in threshold by continuing to add high quality liquid assets or HQLA over the next year and half to meet the requirement plus the buffer to withstand normal volatility. In early June, we issued $500 million in five-year senior bank debt and swap it to floating at six months LIBOR plus 75 basis points.
We invested a portion of the proceeds 200 million in five year treasuries, yielding about 150 basis points. As long as interest rates remain low, we expect to continue to execute in this manner to minimize any impact to those earnings and our asset sensitive position.
We have said before that the amount of additional HQLA needed is fluid and depends on loan and deposit growth as well as our continued assessment of both our own data and the rule. Based on our estimate of what we know today, we believe that by the end of 2016, we will need to add 1 billion to 3 billion in HQLA which we will fund by tapping a variety of sources in manageable increment.
We estimate that based on our current assessment as of quarter-end, our LCR was in the mid 80s, up from about 80% at the end of the first quarter. Turning to slide nine, net interest income grew $8 million in the second quarter.
Loan growth, one additional day in the quarter, and higher loan yields together drove in an $11 million increase. This was partly offset by lower securities yield, lower average balances at the fed and an increase in interest expense on debt.
Our net interest margin increased 1 basis point, primarily driven by higher loan yields which reflected 1 basis point increase in 30-day LIBOR. Compared to the second quarter of 2014, excluding the $8 million decline in accretion, net interest income increased $13 million, largely due to loan growth.
We continue to be well positioned to benefit when rates rise. Our standard asset liability case shows that a 200 basis-point increase in rates over a one year period equivalent to 100 basis points on average would result in an increase to net interest income of about $220 million.
We also share in the appendix several alternative assumptions to our standard case, which changes to the pace of deposit decline, loan growth and rate rises. And in all cases, we remain well-positioned for rising rates.
Because we have continued to experience strong deposit growth in this persistently low rate environment, our standard model which has reflected only historical behavior now also reflects a further decrease in deposits as rates begin to rise. While it is difficult to predict how deposits may react when we move out of this unprecedented environment, the longer our deposits continue to increase, it becomes more likely in our view that customers will ultimately use funds in their businesses or other investments.
Turning to slide 10, our overall credit picture remains solid and fully reflects the results to the shared national credit exam completed in the second quarter. Net charge-offs were 15 basis points and while up from a very low level in the first quarter, they remain well below what is historically normal for us.
The increase in net charge-offs can be attributed to corporate banking and technology and life sciences which tend to be lumpy. This is partially offset by net recoveries in private banking and commercial real estate.
Our criticized loans grew $294 million to $2.4 billion or less than 5% of total loans which is well below our historical experience. The increase was driven by $329 million increase in criticized loans related to energy.
Inflows to non-accruals were $145 million of which $100 million were energy related. While non-accrual loans were up to $349 million, they are still only 70 basis points of total loans.
As far as energy, we have essentially completed the spring redeterminations for our E&P customers which comprise 70% of our energy business line. On average, loan to values and advance rates remain stable from the prior redetermination.
As of quarter end, commitments in our energy line of business have declined about 5% and outstandings are down 7% relative to the first quarter. Overall, our energy customers are taking the necessary actions to adjust their cash flow and reduce their bank debt such as cutting their expenses, disposing of assets and tapping the capital markets.
As of quarter end approximately 14% or $578 million of energy and energy related portfolio is classified as criticized, including non-accruals of $119 million and there were only $2 million of charge-offs. The $47 million provision for our total portfolio reflected higher reserves for energy loans as a result of an increase in criticized loans and the impact of continued volatility and sustained low energy prices.
To a lesser extent corporate banking as well as technology and life sciences contributed to the increase in provision, largely as a result of charge-offs and variability. These increases were partially offset by credit quality improvements in the remainder of the portfolio which had a decline in non-accrual and criticized loans.
It is important to note that while we have prudently increased the reserves for energy, we are very comfortable with our portfolio and continue to believe charge-offs will be manageable. In summary, our consistent robust methodology resulted in a $28 million increase to the allowance for credit losses to $668 million and the coverage of our non-performing loans remains very strong at 1.7 times.
Slide 11 outlines non-interest income, which increased $6 million to $261 million, largely driven by a $5 million increase in card fees, due to higher revenue from merchant payment processing services and interchange. In addition, we have increases in service charges on deposit accounts, fiduciary income, and brokerage fees.
This was partially offset by a $3 million decline in commercial lending fees, resulting from lower syndication fees and lower unused commitment fees from higher line utilization. As a reminder, in the third quarter, we made contractual changes to a card program that impacted the way we present both revenues and expenses, and is shown in the lighter shaded portion of the bars on the left chart.
Turning to slide 12, non-interest expenses decreased $23 million and included a $31 million decrease in litigation related expenses, including a reduction in reserves for a case that received a favorable ruling on appeal. Salaries and benefits decreased $2 million due to seasonal decline in payroll taxes and stock-based compensation expense, partially offset by an increase in technology related contract labor, merit increases and one additional day in the second quarter.
Finally, outside processing fees associated with revenue generating activities increased $8 million. Moving to slide 13 and capital management.
Our 2015 capital plan includes equity repurchases up to $393 million. In the second quarter, we repurchased 1 million shares for $49 million and 500,000 warrants for $10 million under the equity repurchase program.
When you combine this with the recent 5% increase in the dividend to $0.21 per share, we returned 71% of second quarter net income to shareholders. Despite the repurchases, diluted average shares remained flat at 182 million for the second quarter as the impact from the increase in Comerica’s average stock price caused an increase in share dilution from options and warrants.
As you might recall, the Federal Reserve scenario in the stress test included a gradual increase in rates over the forecasted period. Given that the pace of our equity repurchases is expected to move in line with our performance and a rise in interest rates.
Turning to slide 14 and our outlook for full year 2015, which assumes the continuation of the current economic and rate environment. As we have said before, average loans for the full year are expected to grow at about the same pace as 2014.
We expect a typical third quarter seasonal decline in our dealer, mortgage banker, and general middle market business line followed by typical historical rebound in the fourth quarter. In addition, we anticipate the decline in energy outstandings should continue.
We expect our net interest income for the full year to be relatively stable with last year, assuming no rise in interest rate with loan growth offsetting the decrease in purchase accounting accretion. And as far as credit measures in the second half of 2015, we expect net charge-off rates to be similar to the 15 basis points we had in the second quarter and criticized loans to remain below normal levels.
Because the impact from volatility in oil and gas prices is difficult to predict, continued negative migration is possible and maybe partially offset by a reduction in loan balances. As always, we remain focused on the emerging trends and have increased our reserve allocation the last three quarters, as a result.
The remainder of the loan book is expected to continue to perform well. On a full year basis, we expect non-interest income to be relatively stable.
Excluding the impact of the accounting presentation of a card program, which is offset in non-interest expense, we continue to expect lower letters of credit, derivatives and warrant income which should be mostly offset by growth in card and fiduciary fees. Non-interest expenses are expected to be higher in the second half of the year relative to the first half, primarily due to three more days and the full impact of merit increases as well as the ramp up in spending for technology projects and regulatory compliance.
Also outside processing expenses are expected to continue to grow with increased card revenue. Finally, occupancy expenses are expected to increase from seasonal taxes and higher rent expense.
In closing, we are pleased with the continued loan and deposit growth as well as increased net interest and fee income. Credit quality for the bulk of our portfolio remains very strong and we continue to believe that energy charge-offs will be manageable.
We remain focused on the long-term and we expect that as rates rise, our revenue picture look even brighter. As always we believe our relationship banking strategy combined with our diverse geographic footprint will continue to assist us in building long-term shareholder value.
Now we would like to open up the call for questions.
Operator
[Operator Instructions] Your first question comes from the line of Scott Siefers with Sandler O’Neil.
Scott Siefers
I guess, maybe to start on the energy book. Pardon me.
Given the volatility in the provision, can you give us sort of any sense for how much of that was kind of front end loaded whether it was because of the resulted redetermination or SNC Exam versus how much of that will be ongoing? I mean, I guess, my sense is a lot of it is -- was front end loaded and then you got a declining base of energy related loans that should release some pressure, but anything that you can offer to just kind of help scope that would be appreciated.
Ralph Babb
Pete?
Pete Guilfoile
Sure. So, we’re about three quarters away through our risk ratings and so we have updated the portfolio largely for the decline in energy prices.
So from that perspective, we’re a good way of the way through it. We do expect though for there to be some continued migration in the portfolio as our borrowers continue to adjust to this lower price environment but we also expect that we’re going to continue to see pay downs on our energy loans which is going -- have a offsetting effect to the additional migration that we expect to see in the coming quarters.
Scott Siefers
And I don’t think you have, but can you remind me, have you guys disclosed what the energy reserve is in the past? And if so, what the number is as of the second quarter?
Karen Parkhill
We haven’t disclosed the amount of reserve allocation for any industry, mainly because we view that the reserve is there to cover any and all losses. At the beginning of this downturn back in the fourth quarter, we did talk about the fact that we had increased our qualitative reserves against energy at that point in time.
We also talked in the first quarter about the fact that we had increased our qualitative reserve modestly. And this quarter, our overall energy reserves have increased including maintaining a portion of qualitative reserves, given the fact that Pete talked about, that we expect continued potential negative migration in the portfolio.
Operator
Your next question is from the line of Steven Alexopoulos with JP Morgan.
Steven Alexopoulos
Maybe to follow-up on Scott’s question, some of your answers, so I can understand them. Of the $329 million increase in criticized loans tied to energy, how much of that was tied to the SNC Exam?
Pete Guilfoile
Steve, we don’t think it’s appropriate for us to discuss results of the SNC Exam. What we can tell you is, is that we have incorporated all the risk rating changes that came out of the SNC Exam in our June 30th results.
Steven Alexopoulos
To drive that level of increase in criticized, was there anything else that happened in the quarter outside of the SNC Exam, because I think you are more than half way through the redetermination process, right, as of last quarter?
Pete Guilfoile
That’s right. There is -- we’re seeing continued migration in the energy portfolio and that’s what we really expected, Steve.
We’re not seeing anything that we didn’t expect to see in the first quarter. And I think we feel as good about the energy portfolio today as we did a quarter ago.
Steven Alexopoulos
And in terms of the provision, I think prior to this quarter, you would have established a provision based on your peak losses. The last time we saw a sharp decline in oil.
Why has that not been enough so far?
Karen Parkhill
Steve, I would say that on the reserves, we did equate our qualitative reserve at the beginning of the downturn to be about equal to the peak net charge-offs in the last cycle. But what I would say is each cycle is different.
And in the last cycle there was a lot of other things going on other than energy; it was back in 2008, 2009. And we have increased our reserves this cycle prudently.
Steven Alexopoulos
And maybe Karen, $50 oil today at the time fall reset that’s upcoming, what percent of the portfolios [ph] be protected by hedges at that point?
Pete Guilfoile
Steve, right now, I can tell you that 60% of our borrowers have more than 50% of their revenues hedged for a year or more and about third of them have 50% or more of their revenues hedged out two years or more. So, I don’t think it’s going to change a great deal between now and the fall but it’s difficult to model that.
We have been encouraged by the fact that the amount of hedging really is not changed over the past couple quarters. And our borrowers continue to look for opportunities to layer in hedging when our opportunity is to do that.
We expect that to continue.
Steven Alexopoulos
And maybe just a final one and changing director for a second for Ralph, obviously disappointing news on Lars departing the company. How do you think about and how should we think about any potential business impact from him leaving?
And given that he’s gone to a competitor, do you have a non-compete in place to protect against key employees, key customers getting poached? Thanks.
Ralph Babb
Okay. What I would say is as we mentioned in my comments as well as in the announcement that Pat Faubion is moving up to take Lars’s place.
Pat’s for this for over 31 years; understands the business banking environment very well. He also has been the Texas market president for a number of years.
And so I think that transition will go very smoothly from that standpoint. As we have talked about in the past, Pat will report to Curt.
And Curt as well has a good deal of experience in all of our markets and understands our approach to our customers. So, I feel very good about the transition and we wish Lars the best.
Operator
Your next question is from the line of Erika Najarian with Bank of America.
Erika Najarian
Karen thanks very much for the outlook on expenses for the second half of the year. I guess how we should think about as we determine quarterly run rate about the litigation accrual reversal; does that come back to your run rate next quarter and that we should base our forecast off of?
Karen Parkhill
Yes, the litigation related expenses are not typical. And so those should not be included in the run rate.
Erika Najarian
So just to be clear, the base would actually be 466 as we think about the second half of the year?
Karen Parkhill
Yes. That’s correct Erika.
Erika Najarian
And just, I wanted to make sure I understood the comments on buyback. So, are you hinting towards slower buyback activity?
I just wanted to make sure I understood the message. You were saying that the pace of buyback could be relative to potential change interest rate.
I just wanted to make sure I understood the message there.
Karen Parkhill
Yes. So, in the past, you probably have noted that our buybacks have been pretty evenly spread in the quarters.
And our current five-quarter approval was against the scenario that the Fed has put out it’s a public scenario that shows interest rates increasing, starting in the back half of this year and ramping up increasingly through the approval period. And as a result, that has a good impact on our performance; and our share repurchase would be in line with that.
Operator
Your next question comes from the line of Ken Usdin with Jefferies.
Ken Usdin
Karen, just a follow-up on the expenses; analysts want to ask you to just walk through a couple of these lines. When we look at on slide 14, those, the three points about the increase in tech, increase in regulatory, increase pension; am I correct in reading that most of those three things are in the run rate?
Karen Parkhill
How you should read them is that we show our full year which is what we’ve pointed to in prior outlook. For example, the technology increase is to 100 million for the full year but in the first half we booked $45 million which points to greater increase in the second half.
That’s how should you read it.
Ken Usdin
So the tech one of those three is the only one that really hasn’t increased in the second half of those three?
Karen Parkhill
That’s correct.
Ken Usdin
And then secondly then, can you just try to help us understand little bit more about the bottom point there about to the magnitude of increase over 467 starting point that you’ll see from merit and those outside processing in occupancy costs?
Karen Parkhill
We typically see an impact in our salary and benefits line item obviously by three more days in the quarter. That is a typical.
So, you can look back at prior years. Merit increase is also very typical where merit increases typically happen in the spring and then you’ll see a fuller version of those as you hit the second half.
And then higher outside processing fees would increase commensurate with revenue generating activity. And occupancy expenses as we talked about, increase because of taxes and rent increases in the back half.
Ken Usdin
So just in summary then, it’s fair to say that the third and fourth quarters should be not just higher than the first-half but distinctly little bit higher than the second quarter; is that fair to say?
Karen Parkhill
That is fair to say.
Operator
Your next question comes from the line of Dave Rochester with Deutsche Bank.
Dave Rochester
I just wanted to follow-up on a previous answer you guys gave on an energy question. You mentioned you were through the redetermination process but you were three quarters away through the risk rating process.
I don’t know if I heard that correctly, but if I did, I was just wondering why there is a difference there.
Pete Guilfoile
Yes, sure Dave. I’d be glad to clarify that.
We’re 97% through the redetermination process which means that we’re 97% through re-risk rating our E&P -- the E&P segment of our portfolio. The 75% I referred to is the entire line of business which includes E&P, midstream and energy services.
Dave Rochester
So, the midstream and the energy services have not been revaluated as yet?
Pete Guilfoile
No, they have. We’re about 70 some percent through the energy services piece; we’re like E&P, we’re seeing some migration; and we’re about little over 50% through the midstream segment where we’re seeing really no migration.
Dave Rochester
And could you guys give any color on your outlook for debt issuance in the second half, given your expected needs for HQLA growth that you’re talking about?
Karen Parkhill
As I mentioned, we expect to raise wholesale funding for HQLA purposes, between 1 billion to 3 billion from now through the end of next year.
Dave Rochester
So, the 1 billion to 3 billion is -- sorry. Go ahead.
Karen Parkhill
Yes, the 1 billion to 3 billion is an 18-month period.
Dave Rochester
And you expect to fund all of that with wholesale funding or just a portion of that?
Karen Parkhill
Well, we expect to fund it with wholesale funding, but our definition of wholesale funding is not just debt in the capital markets. That would be one from of it; another form is we have plenty of capacity to draw down on our federal home loan bank line; and then we also consider broker deposits as a cheap form of wholesale funding.
So, we have a variety of sources that we would tap in manageable increments.
Operator
Your next question comes from the line of David Eads with UBS.
David Eads
Maybe looking at the Texas portfolio outside of energy, I am curious if you have any kind of sense for the trajectory of loan balances there over the rest of the year? And I am curious if we saw any increases in the non-performers, our criticized loans in the non-energy part of the Texas portfolio?
Pat Faubion
The Texas portfolio as noted on the slides was down about 2% but that’s entirely attributed to the energy book which is to be expected and the other lines of business net to about flat. Pete, do you want to address the credit issue there?
Pete Guilfoile
Sure. David, we’re really not seeing a lot of migration in the Texas portfolio outside of energy with one exception, we have a small TLS book out of Houston.
This book is largely pre-revenue venture back companies that are developing new technologies in the oil patch. And you can imagine that the business model for them has changed a great deal as oil has gone from 90 to 50.
The good news in that portfolio is it’s quite small; it’s only about 85 million and 2% of our total energy and energy related. Other than that, we’re seeing good experience in terms of the Texas portfolio including commercial real estate.
Karen Parkhill
And Dave, I would just mentioned that our loan outlook for the entire company does assume a continuation of the current economic environment, which includes a slowdown in activity in Texas.
David Eads
And then I am just kind of curious of how the energy kind of redetermination process works, just given the changes we’ve had in the oil prices over the past quarter. Is it a function where the redetermination made on the oil price using as of the date it’s done or assuming at certain price?
I guess the bottom-line question is, how much is the drop of price is from 60 bucks to 50 bucks, how much of that is already baked into the current -- the 2Q level, how much could impact going forward?
Pete Guilfoile
Yes. I can tell you that for the 97% we have done redeterminations on all of those risk ratings, reflect current energy prices.
The way the redeterminations work David, is we do -- we use the price deck that is approved at the time of redetermination. However, the price deck, if we go back all the way to January, our price decks which are very conservative are reflective at or below current prices.
So, we’re very comfortable that we have reflected current energy prices in the 97% of the portfolio that we have re-risk rated.
David Eads
And that’s including, because I know you guys have discounts to prices. So basically you are saying that the price deck on a weighted average will be below where it is now and that gives you comfort that you’re kind of -- reflecting the current price?
Pete Guilfoile
Yes, because we don’t necessary set the price deck at current prices. We set the price deck at we think is appropriate and then we sensitize off of that pretty significantly.
Operator
Your next question comes from the line of John Pancari with Evercore ISI.
John Pancari
So, back to energy. Of the 300 million increase in criticized and energy criticize, how much of that was E&P versus midstream and oil service?
Ralph Babb
Of the 300 million E&P, let me put to you this way. Right now our E&P portfolio is -- 15% of that portfolio is criticized; energy services is about 16%, is criticized.
The two combined are about 440 million.
John Pancari
Okay. So that -- just so I understand again that 15% for E&P?
Ralph Babb
Yes. The criticized, there is a percentage of the entire E&P portfolio right now is 15% criticized and the criticized portion of our energy services book is 16%.
John Pancari
Got it. So, the total energy -- the criticized ratio for the total energy portfolio is in that 16%-17% range?
Ralph Babb
It’s actually 13% because midstream that we really don’t have a much in the way of criticized loans in midstream. So, in total, it’s 13% for the entire portfolio, entire line of business portfolio.
John Pancari
So, now where would that number last cycle, like where is that compared to your peak? Is that already above where you peaked before?
Ralph Babb
I don’t have the number off-hand but I’m quite sure, it was not. At the peak, I know our energy services book which was the worst part of it last downturn, I think we reached about 37% criticized there.
Karen Parkhill
And keep in mind that criticized loan does not necessarily become a charge-off. Last cycle our peak net charge-off was 69 basis points.
John Pancari
What you’re providing, it looks like at higher level that you did last time, even though the peak criticized from last time or higher than where they’re now. So I guess that points to just the regulatory environment around this type of portfolio; is that fair?
Karen Parkhill
There is increased scrutiny around this portfolio in the current environment.
John Pancari
And then lastly if I could just ask, around the reserve, I know Karen, you indicated, you didn’t quantify that. But is it fair to assume just based upon the number you did give.
I think it was two quarters ago, about the energy loan loss reserve ratio, I think it was around 1.5%, 1.6%. If we assume factoring the reserve editions for energy and also adjust for what we think were the charge-offs for the quarter, is it fair to assume that your energy loss reserve is in the ballpark of 270 basis points?
Karen Parkhill
I’m not going to comment on the allocation for energy reserves, really because of what I said earlier that we believe that reserves are there to cover any and all losses. But I will say obviously that we’ve increased the reserves against our energy portfolio for the last three quarters.
And this quarter we have increased the overall allocation as well as it continues to maintain a qualitative portion.
Operator
Your next question comes from the line Brett Rabatin with Piper Jaffray.
Brett Rabatin
I guess just a question around the guidance on the provision and charge-offs, the updated numbers. I realize that criticized loans don’t necessarily mean charge-offs, but I guess I was looking for some color around the guidance in the back half of the year for charge-offs to remain similar to 2Q, 15 basis points, despite the increase in criticized loans overall.
Any thought on why you guys didn’t change that to a higher number?
Karen Parkhill
So, on net charge-offs, again we expect net charge-offs to be well below what we redeem normal or through the cycle for us which is about 40 basis points. And we’re trying to give color on the back half of the year that while charge-offs continue to bounce around along the bottom right now, they likely won’t be as low in the back half of the year as they have been for quarters prior to this one.
And that’s why we’re saying approximately equal to the second quarter. And overall provision is very difficult to predict and will depend on what happens in the energy space.
If oil prices continue to remain low, we expect that to have additional impact on credit migration in our energy and energy related book but we do also expect that that could be offset by loan pay down.
Pete Guilfoile
If I could just add, a good portion of the increase in criticized of course in the E&P book. This is an asset-based book; it’s very well secured.
And even though we had to make loans in this segment substandard because they need the definition of impaired, they’re still well secured.
Brett Rabatin
And I guess the other question was just a follow-up again on the energy stuff. Last quarter there was a bigger difference between criticized and E&P versus service which is I guess what I wasn’t expecting.
Any thoughts around the increase in criticized on E&P versus criticized this quarter?
Pete Guilfoile
I can tell you that we still feel very good about the E&P segment of the portfolio. These are large energy companies, the strong balance sheets.
We have very few, only a handful of credits; Pat pointed to three. They have efficiencies at this point in time.
So, we’re in very strong position in terms of our collateral position clever position on the E&P portfolio.
Brett Rabatin
And then I guess just lastly if I can. The Texas being flat outside of energy kind of any thoughts around why Texas is flat aside from the energy with the things going on besides obvious energy implications?
Pat Faubion
The overall economy in Texas although it is more diverse than the last energy downturn, is in a slump and that’s noted in our economic forecast provided by Robert Dye. The pipelines however are still strong and all of our lines of business are continuing to grow.
Ralph Babb
And as I mentioned earlier, we’re seeing employment pick up again, so positive signs from that standpoint.
Pete Guilfoile
If I could also add, the middle market segment of portfolio which is energy related, what we’re really seeing there is a good thing. We’re seeing as these companies’ revenues drop off that balance sheets are shrinking and they’re using their cash to pay down debt.
So that’s actually been a positive thing. But it is the headwind in terms of loan numbers.
Operator
Your next question comes from the line of Bob Ramsey with FBR Capital.
Bob Ramsey
I was just hoping you could maybe share a little color, in the scenario that you all have outlined where energy prices stay where they are today and you see some contraction in loan balances, in that scenario, how should we think about the provision expense in the back half of the year? Does the back half look like the first half; does it look more like the first quarter or just kind of curious in that scenario what it looks like?
Karen Parkhill
Bob, it’s very difficult to predict. But what I would say is that we’ve given you a sense of where we think net charge-offs will be in the back half of the year.
And then on the rest of the provision, that really does depend on negative credit migration that could be possible. But again, we point to the fact that that could be offset by the decline in balances.
So, it is difficult to predict. I would also remind people that we do continue to have a qualitative reserve against what could be further migration.
Bob Ramsey
And could it be fully offset by the drop in balances or is it more of a partial offset?
Karen Parkhill
That is difficult to predict. So, we can’t say.
Bob Ramsey
Help me think to how should we think about the amount of contraction we could see in the energy portfolios? Will it look similar to this quarter or do you have any sense of whether there could be acceleration?
Pat Faubion
Energy loans did peak for us in February and since then they’ve been declining. As we expect, as companies adjust for cash flow and really operate within cash flow and also tapping the capital markets, we do expect to continue to see the decline over the course of the year as company continues to manage our cash flow, although we could see some temporary upticks of capital markets access type material.
But we do expect lower CapEx, lower production and lower cash flow which translates to decreased loan demand.
Karen Parkhill
I would also add that in the appendix we do show the history of our energy portfolio and you can see how it reacted in the last downturn which can help us to guide.
Bob Ramsey
And then I guess shifting away from energy, but still talking about loan growth, obviously this was a really strong quarter for the mortgage banker finance portfolio. I know you guys have said seasonally in the back half of the year to expect that to come in a bit.
Just curious of your comment on the strength this quarter and whether the seasonal decline really is more of a 4Q than 3Q event or how you’re thinking about the trajectory there?
Curtis Farmer
I would say just a brawl as you’ve already commented that we’re seeing the normal seasonal buying period of spring and summer and we’re not through the summer season. Yes, so it continues a little bit into the third quarter as well, but typically we would see to fall off in Q3 and Q4.
We from overall perspective saw nice growth in mortgage banker finance. And the piece I think that has potential to fall off in the second half of the year is the refi activity as rates continue to increase.
But home purchases as real estate values firm up across the country may be more stable versus refi.
Bob Ramsey
And how much of the current book is refi versus purchase?
Curtis Farmer
We’re 70% on the purchase side which compares to the MBA [ph] data which would say the industry average is more than the 55% range.
Operator
Your next question comes from the line of Ken Zerbe with Morgan Stanley.
Ken Zerbe
I guess first question in terms of -- if you look at the price of oil over the last quarter, just had an upward bias in the ballpark and say at the end of the quarter roughly $60. Was your reserves based on the $60ish oil price because obviously it’s come down a fair bit and about roughly $50 right now?
I am just wondering if what you base to reserve on and is the drop from 60 to 50 actually the main driver of your additional reserve build that you’re referring to.
Pete Guilfoile
The answer is, our price deck did not reflect $60 oil and it hasn’t reflected that all year. Our price deck was set well below that level and it’s been at that level for the entire year.
So again, with all the redeterminations that we’ve done, we’ve been doing them with prices that are at or below whatever the current oil price is, gas prices are.
Ralph Babb
And the price is also just to the amount direct borrowing.
Pete Guilfoile
It is typically around 65% of PDP.
Ken Zerbe
But the drops at $50 oil now, are you saying that you would not change your price deck based on where oil was today, you have not…
Pete Guilfoile
That’s correct, that’s what I am saying. I am saying our price deck is appropriate given where prices are today.
So we look at it all the time.
Ken Zerbe
And on the 75% that you’ve reviewed, I think it was of the E&P and midstream. When you guys go through and build or put reserves on the stuff that you’ve reviewed, do you also extrapolate to the other 25% you haven’t done yet or is that something we could see deteriorate next quarter?
Ralph Babb
We actually do, do that. And we have an extrapolation and that’s one of the factors we use in terms of determining what our qualitative reserve should be.
Operator
Your next question comes from the line of Matt Burnell with Wells Fargo Securities.
Matt Burnell
One more on energy, maybe tying into to your comments about the capital markets. It sounds like your clients have been able to tap the capital markets over the past few months to be able to reduce your exposure.
Can you maybe give us a qualitative measure of sort of their ability to do that; has that -- have the markets tightened for that over the past few months?
Pat Faubion
The capital markets have been very open to energy credits. And as you suggest our borrowers have been very adaptive tapping those capital markets.
And today that we remain opened. My comment was if capital markets tightened, that could reduce the run-off that we see in our portfolio.
I don’t have a way to predict what the capital markets might do with regard to energy companies.
Matt Burnell
And then Ralph, maybe a question for you; you say on slide 13 that the pace of future buyback activity within the 393 million that you’re targeting for the current capital planning cycle is somewhat dependent, I guess, on your financial performance. And if you end up getting a redetermination later this year that’s tougher than you expect that increases your provisions.
I guess the question is really at the end of the day, how committed are you to generating or to fulfilling that 393 million repurchase, within the context of also trying to grow tangible booked value?
Ralph Babb
We are always focused on the return to our shareholders as we’ve talked about many times and we will continue to look and evaluate that. It depends what you gave an example, it depends what happens there and what the analysis is at that point in time and what we feel like as to the decision we would make.
You can’t predict that until you’re there.
Operator
Your next question comes from the line of Michael Rose with Raymond James.
Michael Rose
Just a follow-up on other energy questions. Do you have a sense for kind of debt to EBITDA levels for your companies on average and how that change your energy companies on average, how that changed with the access to the capital markets?
Obviously the lower that leverage goes the better it is for loss content. Thanks.
Pete Guilfoile
I don’t have an aggregate statistic for you. Obviously the cash flow leverage of many borrowers as increases as cash flows have decreased but our focus really is on more on balance sheet leverage, because it’s really capital and liquidity that are important in downturns and that’s what really gets our borrowers through downturns.
And so not that cash flow leverage isn’t important; we look at that as well, but balance sheet leverage is probably our main focus.
Operator
Your next question comes from the line of Terry McEvoy with Stephens Incorporated.
Terry McEvoy
Just a question for Karen. The $130 million increase in tech and regulatory expenses this year, is that a good run rate, as we look out into 2016 or some of that kind of a build-up of investments that should tail off into next year?
Karen Parkhill
The increase in those expenses are mostly headcount related and so that is something that should stick for the run rate. Small amount of consulting expenses, which depending on what happens, may or may not stick in the run rate, but it’s a very small piece of it.
In terms of just technology in general, we do expect to have these increased technology expenses at least over the next few years.
Terry McEvoy
And then as a follow-up, sorry to go back to energy, but did any of the reserve build or increase in criticized loans come from that $725 million portfolio that you identified, I believe last quarter?
Pete Guilfoile
I believe, you’re referring to our energy related portfolio.
Terry McEvoy
Correct, yes.
Pete Guilfoile
I would say, a relatively minor piece of it came from that. The energy related portfolio is really a very broad segment and one end of the spectrum you have those life sciences companies that I spoke about earlier and then the other end of the spectrum are really refineries, which had no impact.
So, most of the negative migration has really been in that technology and life sciences segment. And I think I’ve noted earlier, it was quite small, about 85 million in total loan balances.
Operator
Your next question comes from the line of David Darst with Guggenheim Securities.
David Darst
When you look at your commercial lending fees, have a higher percentage of those been generated from energy loans or is that spread out among other commercial and commercial real estate credits?
Karen Parkhill
Our commercial lending fees are spread across all of our credits, David. They did decline a little bit this quarter, mainly due to a little bit lower syndication activity and because we saw an increase in our line utilization, we had lower commitment fees.
David Darst
Is historically more of your syndication activity has been done within energy funding?
Karen Parkhill
No. Typically where we lead syndications is more on the middle market space than in the energy space.
Operator
Your next question comes from the line of John Moran with Macquarie Capital.
John Moran
Just one more on energy. The SNC as a percentage of the energy book, I’m not mistaking, was about 75% or so last quarter; is that unchanged?
Pete Guilfoile
John, it’s actually higher than that; about -- it’s over 90% of our energy book -- line of business book are shared national credits. And another way of looking at it is 30% of our shared national credit book is energy, which is the largest segment.
John Moran
And the regulatory exam on that happens now twice a year, so that gives another hard look in 4Q, if I’m correct?
Pete Guilfoile
The actual increase in shared national credit reviews; this really sets up in 2016. There will be a pilot that is done later in this year but it’s not schedule to step up until 2016.
And just to make one other comment about that, I just wanted to follow-up with that 30%. Again, the rest of our shared national credit portfolio outside of energy continues to perform it really, really well.
John Moran
I think for Karen on the HQLA build and I just want to make sure that I got the numbers right. It sounds like 500 million in five-year senior swapped at six month LIBOR plus 75 and was deployed in the 200 million five-year U.S treasuries at one and half.
Would you expect the kind of 1 to 3 billion in build between now and the end of ‘16 being similar sort of assets because I think there is some banks that are going a little bit longer and getting yields kind of in the twos on some of this.
Karen Parkhill
Our focus on the securities portfolio is to maintain highly liquid, highly rated short duration securities. And particularly in this low rate environment, we are very mindful of our asset sensitive position and not prematurely altering that upside.
So, if the low rate environment continues, you can expect us to continue to execute our LCR strategy in a similar fashion to what we did this past quarter. Again, how we look at our securities book will be focused on not giving up our asset sensitivity upside to prematurely.
Operator
Your next question comes from the line of Kevin Barker with Compass Point.
Kevin Barker
I was hoping you could expand on how much of your construction and development loans are within Houston MSA or other potential areas of MSA.
Curtis Farmer
From a CRE perspective overall the Houston, if you look at Texas, Texas is about 28% of total commercial real estate for us and the Houston market makes us about 40% of that number; the rest of it would be outside of the Houston market.
Ralph Babb
Pete, you might comment on the credit performance that we’ve seen.
Pete Guilfoile
The commercial real estate portfolio in Houston continues to perform really well; it’s largely apartment construction portfolio. We have about 20 projects; we have five that are fully complete and in lease up and all five of them are seeing rents at or above pro forma levels.
So the portfolio is performing really well.
Ralph Babb
And we tend to focus on long time customers.
Pete Guilfoile
We do. We have very strong national developers in that Houston market.
And typically we have 30% to 35% cash equity in these projects; our loan to values range from 50% to 60%. So even though we haven’t seen any decrease in rents yet, we do expect there could be pressure on rents as this more supply comes on line in next 18 months.
But if we do, we still think our projects would be in great shape because of the structures that we have.
Ralph Babb
And also almost no office exposure at all.
Curtis Farmer
We are seeing outside of the Houston market and there are some opportunities in the rest of Texas especially in the DFW area.
Ralph Babb
Continuing to see a lot of them.
Kevin Barker
And then what percentage of your commercial real estate specifically expenses [ph] are oil or hotel -- I mean office or hotel and not necessarily construction?
Pete Guilfoile
Hotels and office are not a segment that we are actively pursuing at all. So, the portion that would be hotel would be negligible and the portion that is office would be quite small.
Operator
Your next question comes from the line of Jordan Hymowitz with Philadelphia Financial.
Jordan Hymowitz
I was just wondering that small energy tax portfolio; is that included in the energy prospect you mention is that separate?
Ralph Babb
Yes, I think your question was, is our energy related piece included in the energy numbers in the deck?
Jordan Hymowitz
Yes.
Karen Parkhill
What I would say is our energy technology or TLS business is part of what we’ve included in the additional approximately $725 million loans which we’re calling energy related. That is not part of our energy line of business; it’s really driven from some middle market, small business, technology, life sciences companies outside of our energy line of business.
But at $725 million; it’s not a large number.
Jordan Hymowitz
My second question is syndicated flows; they’re not up to review until next year. So if there is deterioration in the energy portion of that book; will that be included in the reserves you took this quarter or it only be related to the energy flows in your book than you currently control?
Ralph Babb
Yes, it’s a whole book. We’re looking at our risk ratings continuously throughout the year and irrespective of that is the shared national credit exam this fall or next frame; we’re going to look at them the same way.
Jordan Hymowitz
So the answer is yes then and what includes the shared national credit this reserve?
Ralph Babb
Yes.
Operator
Your next question comes from the line of Sameer Gokhale with Janney Montgomery.
Sameer Gokhale
You talked quite a bit about the provisioning for the energy portfolio, but there is just something I would like to just clarify in terms of the mechanics because Karen you referred to slide 19 because one of the drivers of your reserves and provisions clearly is the dollar amount of loans outstanding. And we can see that there has been a decline in the size of the energy portfolio and you can see the trend as you referred to during the last down cycle.
So just to make sure, I am trying -- at least think of the basics of the mechanics correctly. If you assume that that portfolio, the energy portfolio should shrink on a quarterly basis by between $200 million to $250 million a quarter, then the question becomes on what pace do criticize loans increase as the offset potentially.
So that’s one thing. And then the other thing would probably be what level of energy prices, oil prices you factored in.
And I think you talked about it and suggested that. In your assumptions you assume that energy -- that oil prices are actually below current level.
So, if my thinking is right on the mechanics of that that suggests that again borrowing an increase in criticized loans that exceeds the decline in your average -- in your loan portfolio, unless that happens and your provisioning level should actually fall going forward compared to Q2 levels. I mean am I thinking of that correctly, specifically as far as it relates to this portfolio?
Pete Guilfoile
I think we expect to happen, we expect to see continued run-off in the energy portfolio and we expect that our criticized portion of the energy portfolio will also continue to run-off. We saw that in the past quarter and we expect to see it in future quarters.
It’s hard for us to figure out how much of that run-off is going to offset any additional migration that we expect in the portfolio over the next quarter or two but we think that it will be significant.
Karen Parkhill
And again, we purposely aren’t giving a provision outlook for next quarter or the quarter after really because it is difficult to predict.
Sameer Gokhale
And then can you give us a sense of the magnitude of the loss severity again that you assumed in this energy portfolio in your book?
Pete Guilfoile
The loss severity in terms of the portfolio, is that what you’re referring to Sameer?
Sameer Gokhale
In terms of the loans where you actually took reserve additional provisions for those specific loans that were criticized and you need to provide for those, what was the loss severity you’d assumed on those loans?
Pete Guilfoile
So, we have to risk rate our portfolio based on definitions of impairment and definitions of -- there is different definitions that we have to follow and they don’t necessarily relate to losses that we expect in the portfolio. Again, the vast majority of our energy book are really well-secured loans.
And we don’t think that it will necessarily translate into credit losses that might be normally associated with a typical substandard C&I credit.
Operator
Your next question is from the line of Tom Hennessy with CLSA.
Mike Mayo
Actually it’s Mike Mayo for Tom. Just some clarification to 90% of the energy book is shared national credit and of those what percent are you lead agent on and how is the line utilization change on those credits?
Ralph Babb
We don’t disclose the number of deals. I don’t believe that we agent.
Again, I can tell you that we’re not the agent on the vast majority of them. And it goes along with our energy strategy.
We want to deal with a certain segment of the energy industry and it’s the segment that we feel -- it has the least risk. And we can’t use our own balance sheet in the vast majority of cases to agent those kinds of deals.
So that’s why we are more often than not, a participant and not the agent.
Karen Parkhill
And on line utilization Mike in the energy business, our line utilization did decrease to 48% from 50% last quarter, commitments also declined.
Mike Mayo
And is that because you’re reducing the access to the companies or because the custodies are drawing down less?
Pat Faubion
I think it’s because these companies are operating within your cash flow and they’re paying down debt appropriately.
Mike Mayo
And the catalyst for the $300 million increase in criticized loans, was that an internal review; was that regulatory; it’s a combination?
Pete Guilfoile
Yes, it has to do with our risk ratings and we don’t distinguish between how loans get risk rated at certain way. So, it’s really a reflection of fact that we have risk rated the credits we think appropriately and those are the reserves that are associated with them.
Mike Mayo
And then lastly, the buybacks, at what point would you slow or stop buyback because what you’re saying? You said, you are not indicating a provision outlook for the next couple of quarters.
On the one handed, if times get tougher than you expect, maybe you want to conserve capital, on the other hand, I mean regulators and industry already stress test, you are pretty vigorously and you’re buying back stock after summing that stress, maybe you should just keep buying back through even a tougher cycle. Kind of what’s your thought on that?
And what do you think the regulators’ thoughts are on that?
Ralph Babb
That’s one we have to look at like we were talking about earlier. It depends what’s going on at the time and we will make a decision accordingly, like we have in the past when we’ve seen smooth economies and things going the right way but also things have slowed down and we need to make a decision to be more cautious about returning capital.
But I would underline that we always have looked at maximizing the amount of capital that we have returned that we can’t use, to our shareholders.
Operator
There are no further questions at this time. I would now like to turn the call back over to Ralph Babb, Chairman and CEO, for any closing remarks.
Ralph Babb
I would just thank you all for being here today and your interest in Comerica and hope everyone has a good day. Thank you.
Operator
Thank you again for joining us today. This does conclude today’s conference.
You may now disconnect.