CMA Comerica Inc

DALLAS, Oct. 19, 2011 /PRNewswire/ -- Comerica Incorporated (NYSE: CMA) today reported third quarter 2011 net income of $98 million, an increase of $2 million compared to $96 million for the second quarter 2011. Third quarter 2011 included merger and restructuring charges of $33 million ($21 million, after tax; $0.11 per diluted share) associated with the acquisition of Sterling, completed on July 28, 2011, compared to $5 million ($3 million, after tax; $0.02 per diluted share) in the second quarter 2011.

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"Our third quarter results reflect our acquisition of Sterling, which expands our growth in Texas, a state expected to outperform the national economy again this year," said Ralph W. Babb Jr., chairman and chief executive officer.  "Systems integrations are on track and expected to be completed by year-end.  We plan to capitalize on revenue synergies, including opportunities to leverage distribution channels to increase commercial lending and cross-sales of cash management and other services, as well as wealth management products.  In short, the Sterling acquisition provides an exceptional growth opportunity in one of the most attractive markets in the U.S.

"The Sterling acquisition primarily drove our $2 billion increase in period-end loans in the third quarter.  Comerica legacy loans reflected increases in Texas, as well as in commercial loans, primarily in Specialty Businesses, including Mortgage Banker Finance, Technology and Life Sciences and Energy Lending; offset by decreases in National Dealer Services, Global Corporate Banking and Small Business Banking."  

"With the uncertain national and global economies, we have heightened our focus on revenue generating initiatives and expense controls," said Babb.  "In addition to delivering the revenue and expense synergies from the Sterling acquisition, we plan to reallocate resources to faster growing businesses, leverage opportunities to lower deposit pricing and continue to utilize technology to produce efficiencies, among many other action items.  By continuing to strengthen our franchise, we believe we will be able to drive growth in this challenging economic environment."

Third Quarter 2011 Highlights Compared to Second Quarter 2011

• Period-end total loans increased $2.0 billion, primarily due to the addition of Sterling. Comerica legacy period-end loans primarily reflected an increase in Specialty Businesses ($1.0 billion; 20 percent), offset by decreases in the National Dealer Services ($290 million; 9 percent), Global Corporate Banking ($194 million; 4 percent), Commercial Real Estate ($152 million; 4 percent) and Small Business Banking ($125 million; 4 percent) business lines.  The increase in period-end Comerica legacy loans in Specialty Businesses primarily reflected increases in Mortgage Banker Finance ($450 million), Technology and Life Sciences ($264 million) and Energy Lending ($208 million). Specialty Businesses, along with $393 million from Sterling, were the primary contributors to the $1.1 billion increase in period-end commercial loans. Comerica legacy commercial loans increased $668 million, or three percent. In the Texas market, Comerica legacy period-end total loans increased $113 million, or two percent.    
• Average core deposits increased $3.5 billion in the third quarter 2011, with increases in all major markets, led by the Texas market, which reflected average Sterling core deposits of $2.5 billion.
• The net interest margin of 3.18 percent increased four basis points compared to the second quarter 2011, primarily resulting from the acquisition of the Sterling loan portfolio.  Accretion of the purchase discount on the acquired Sterling loan portfolio increased the net interest margin by 20 basis points, partially offset by the impact of an increase in excess liquidity (-8 basis points) and accelerated premium amortization due to increased prepayment activity on mortgage-backed investment securities (-6 basis points).
• Credit quality continued to improve in the third quarter 2011. Net credit-related charge-offs decreased $13 million to $77 million.  Watch list loans and nonperforming loans continued to trend downward for both Comerica legacy loans and the acquired Sterling loan portfolio.  
• Noninterest expenses increased $51 million to $460 million in the third quarter 2011, compared to the second quarter 2011. Third quarter 2011 noninterest expenses included $18 million of noninterest expenses from Sterling operations and $33 million of merger and restructuring charges related to the Sterling acquisition, up from $5 million in the second quarter 2011.
• Comerica repurchased 2.1 million shares of common stock under the share repurchase program in the third quarter 2011, compared to 400,000 shares repurchased in the first half of 2011.

Net Interest Income and Net Interest Margin

• The $32 million increase in net interest income in the third quarter 2011, when compared to the second quarter 2011, resulted primarily from an increase in average earning assets and the accretion of the purchase discount on the acquired Sterling loan portfolio of $27 million, partially offset by accelerated premium amortization of $8 million due to increased prepayment activity on mortgage-backed investment securities.
• The net interest margin of 3.18 percent increased four basis points compared to the second quarter 2011.  The increase in the net interest margin resulted primarily from the acquisition of the Sterling loan portfolio, partially offset by the impact of an increase in excess liquidity (-8 basis points) and accelerated premium amortization on mortgage-backed investment securities (-6 basis points).  Accretion of the purchase discount on the acquired Sterling loan portfolio increased the net interest margin by 20 basis points.
• Average earning assets increased $3.1 billion, primarily due to increases of $924 million in average loans, $751 million in average investment securities available-for-sale and $1.4 billion in excess liquidity.  Sterling contributed $1.4 billion and $700 million, respectively, to the increases in average loans and average investment securities available-for-sale.
• Third quarter 2011 average core deposits increased $3.5 billion compared to second quarter 2011. Noninterest-bearing deposits increased $1.7 billion, money market and interest-bearing checking deposits increased $1.4 billion and customer certificates of deposit increased $269 million. Sterling provided $2.5 billion of the total increase in average core deposits.  

Noninterest Income

Noninterest income was $201 million for the third quarter 2011, compared to $202 million for the second quarter 2011.  The $1 million decrease primarily resulted from decreases in fiduciary income ($2 million) and other noninterest income ($14 million), partially offset by increases in net securities gains ($8 million) and several fee categories.  The decrease in other noninterest income primarily resulted from decreases in deferred compensation asset returns ($7 million) (offset by a decrease in deferred compensation plan costs in noninterest expense) and principal investing and warrants ($4 million).  Noninterest income included $16 million from Sterling in the third quarter 2011, which included net securities gains of $11 million, primarily due to the repositioning of the acquired Sterling investment securities portfolio.  

Noninterest Expenses

Noninterest expenses totaled $460 million in the third quarter 2011, an increase of $51 million from the second quarter 2011. The increase in non-interest expenses primarily reflected an increase in merger and restructuring charges of $28 million and $18 million of noninterest expenses from Sterling operations.  Merger and restructuring charges include the incremental costs to integrate the operations of Sterling.  Such expenses include costs related to terminations of certain existing Sterling leases and other contracts, systems integration and related charges, estimated severance and other employee-related charges, and other transaction costs.

Provision for Income Taxes

The provision for income taxes was $28 million, a decrease of $13 million from the previous quarter.  The second quarter 2011 provision for income taxes included net after-tax charges of $8 million for various tax items.

Credit Quality

"We continue to be very pleased with our broad-based, steady improvement in credit quality," said Babb.  "This was the ninth consecutive quarter of decline in net charge-offs, with a $13 million decrease.  Internal watch list loans and nonperforming loans continued to trend downward for both Comerica legacy loans and the Sterling loan portfolio.  We continued to see reductions in inflows to nonaccrual loans and positive migration in other credit metrics. Our customers, generally, are in a stronger position today, with higher liquidity, lower leverage and increased efficiency.  These positive attributes will assist them in whatever economic scenario emerges in the coming months.  As a result of the overall improvements in credit quality we have seen, the provision for loan losses declined to $38 million."

Credit Quality (continued)

• Net credit-related charge-offs decreased $13 million to $77 million in the third quarter 2011, from $90 million in the second quarter 2011. The decrease in net credit-related charge-offs primarily reflected a decrease of $18 million in the Middle Market business line, partially offset by an increase of $8 million in the Commercial Real Estate business line.
• Watch list loans and nonperforming loans continued to trend downward for both Comerica legacy loans and the acquired Sterling loan portfolio.  Internal watch list loans increased $142 million to $5.0 billion from June 30, 2011 to September 30, 2011, due to the inclusion of $405 million of Sterling watch list loans at September 30, 2011.
• During the third quarter 2011, $130 million of borrower relationships greater than $2 million were transferred to nonaccrual status, a decrease of $20 million from the second quarter 2011.  Of the transfers of borrower relationships greater than $2 million to nonaccrual in the third quarter 2011, $63 million were from the Middle Market business line, primarily in the Western and Midwest markets, and $48 million were from the Commercial Real Estate business line, primarily in the Western market.
• Nonperforming loans decreased $16 million, compared to June 30, 2011, to $958 million, or 2.32 percent of total loans, at September 30, 2011.  Nonperforming assets included $24 million of Sterling foreclosed property at September 30, 2011.  
• The allowance for loan losses to total loans ratio was 1.86 percent and 2.06 percent at September 30, 2011 and June 30, 2011, respectively.  The decrease in the ratio primarily reflected the impact of the Sterling loans recorded at fair value at acquisition without a corresponding allowance for loan losses.  The remaining fair value discount on Sterling acquired loans was $236 million at September 30, 2011.

Balance Sheet and Capital Management

Total assets and common shareholders' equity were $60.9 billion and $7.0 billion, respectively, at September 30, 2011, compared to $54.1 billion and $6.0 billion, respectively, at June 30, 2011. There were approximately 199 million common shares outstanding at September 30, 2011. Comerica repurchased 2.1 million shares of common stock in the open market during the third quarter 2011 under the share repurchase program.

As previously announced, Comerica completed the acquisition of Sterling on July 28, 2011.  In connection with the acquisition, Comerica issued approximately 24 million shares of common stock.  The fair value of assets acquired included $2.1 billion of loans and $1.5 billion of investment securities, and liabilities assumed included $4.0 billion of deposits. Goodwill resulting from the acquisition totaled $485 million.

Comerica's tangible common equity ratio was 10.43 percent at September 30, 2011, a decrease of 47 basis points from June 30, 2011.  The estimated Tier 1 common capital ratio increased four basis points, to 10.57 percent at September 30, 2011, from June 30, 2011.  

Fourth Quarter 2011 Outlook

For the fourth quarter 2011, compared to the third quarter 2011, management expects the following, assuming a continuation of the current economic environment:

• A low-single digit increase in average total loans, largely reflecting the impact of one additional month of Sterling. Period-end loans are expected to be relatively stable.  In the fourth quarter 2011, loans in the National Dealer Services business line are expected to grow, Mortgage Banker Finance loan growth is expected to moderate, and loans in the Commercial Real Estate business line are expected to continue to decrease.  
• Average earning assets of approximately $54.5 billion, reflecting increases, primarily related to Sterling, in average loans and average investment securities available-for-sale.  
• An average net interest margin of about 3.15 percent, reflecting the benefit from an increase in mortgage-backed investment securities, one additional month of Sterling and lower excess liquidity, offset by a reduction in the accretion of the purchase discount on the acquired Sterling loan portfolio ($15 million to $20 million, compared to $27 million in the third quarter 2011).
• Net credit-related charge-offs between $65 million and $75 million for the fourth quarter 2011. The provision for credit losses is expected to trend modestly lower from the third quarter 2011.
• A mid-single digit decline in noninterest income in the fourth quarter 2011 compared to the third quarter 2011, primarily due to the impact of regulatory changes and no significant net securities gains expected in the fourth quarter 2011, partially offset by one additional month of Sterling noninterest income in the fourth quarter 2011.
• Excluding merger and restructuring charges, a low- to mid-single digit increase in noninterest expenses in the fourth quarter 2011 compared to the third quarter 2011, primarily due to one additional month of Sterling expenses in the fourth quarter 2011.
• Merger and restructuring charges of approximately $25 million, after-tax, ($40 million, pre-tax) recognized in the fourth quarter 2011.
• Total acquisition synergies of approximately 35 percent of Sterling expenses, or about $56 million, with the majority realized in 2012.
• For fourth quarter 2011, income tax expense to approximate 36 percent of income before income taxes less approximately $17 million in tax benefits.
• Continue share repurchase program that, combined with dividend payments, results in a payout up to 50 percent of full-year earnings.

Business Segments

Comerica's operations are strategically aligned into three major business segments: the Business Bank, the Retail Bank, and Wealth Management.  The Finance Division is also included as a segment. The financial results below are based on the internal business unit structure of the Corporation and methodologies in effect at September 30, 2011 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses third quarter 2011 results compared to second quarter 2011.

The following table presents net income (loss) by business segment.

Business Bank

• Average loans increased $569 million, primarily due to the addition of Sterling and increases in Mortgage Banker Finance, Technology and Life Sciences and Global Corporate Banking, partially offset by decreases in National Dealer Services, Commercial Real Estate and Middle Market.
• Average deposits increased $1.4 billion, primarily due to the addition of Sterling and increases in Global Corporate Banking, the Financial Services Division and Technology and Life Sciences, partially offset by a decrease in Mortgage Banker Finance.
• The net interest margin of 4.81 percent increased 16 basis points, primarily due to the benefit from the accretion of the purchase discount on the acquired Sterling loan portfolio.
• The provision for loan losses increased $14 million, primarily reflecting increases in Commercial Real Estate and Leasing, partially offset by declines in Middle Market and Global Corporate Banking.
• Noninterest expenses increased $4 million, reflecting expenses from Sterling operations of $5 million and increases in net allocated corporate overhead expenses, legal fees and the provision for credit losses on lending-related commitments, partially offset by decreases in incentive compensation and FDIC insurance expense.

Retail Bank

• Average loans increased $490 million, primarily due to the addition of Sterling, partially offset by decreases in Small Business Banking and Personal Banking.
• Average deposits increased $2.1 billion. Sterling contributed $1.9 billion of the increase in average deposits.
• The net interest margin of 3.46 percent increased 24 basis points, primarily reflecting the benefit from the accretion of the purchase discount on the acquired Sterling loan portfolio.
• The provision for loan losses decreased $7 million, reflecting declines in both Small Business Banking and Personal Banking.
• Noninterest expenses increased $12 million, primarily due to the Sterling acquisition, partially offset by a decrease in FDIC insurance expense.

Wealth Management

• Average loans decreased $90 million.
• Average deposits increased $220 million, primarily reflecting an increase in the Western market.
• The net interest margin of 3.85 percent decreased 22 basis points, primarily due to a decrease in loan spreads, partially offset by an increase in deposit balances.
• The provision for loan losses decreased $8 million, primarily reflecting decreases in the Midwest and Florida markets.
• Noninterest income decreased $7 million, primarily due to a decrease in fiduciary income.

Geographic Market Segments

Comerica also provides market segment results for four primary geographic markets: Midwest, Western, Texas and Florida.  In addition to the four primary geographic markets, Other Markets and International are also reported as market segments.  The financial results below are based on methodologies in effect at September 30, 2011 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses third quarter 2011 results compared to second quarter 2011.

The following table presents net income (loss) by market segment.

Midwest Market

• Average loans decreased $178 million, with an increase in Global Corporate Banking more than offset by declines in most other business lines.
• Average deposits increased $192 million, primarily due to an increase in Global Corporate Banking.
• The net interest margin of 4.27 percent decreased 19 basis points, primarily due to decreases in loan and deposit spreads and a decline in loan balances.
• The provision for loan losses increased $6 million, primarily reflecting an increase in Middle Market, partially offset by a decline in Global Corporate Banking.
• Noninterest income decreased $4 million, primarily due to decreases in fiduciary income and investment banking fees.

Western Market

• Average loans decreased $232 million, primarily due to a decrease in National Dealer Services.  
• Average deposits increased $517 million, reflecting increases in most business lines.
• The net interest margin of 5.06 percent decreased 29 basis points, primarily due to decreases in loan and deposit spreads and a decline in loan balances.
• The provision for loan losses decreased $6 million, primarily reflecting a decrease in Middle Market, partially offset by an increase in Commercial Real Estate.
• Noninterest income decreased $5 million, primarily due to a decrease in warrant income.

Texas Market

• Average loans increased $1.3 billion, primarily due to the addition of Sterling.
• Average deposits increased $2.7 billion, primarily reflecting the addition of Sterling and an increase in Global Corporate Banking.
• The net interest margin of 6.40 percent increased 121 basis points, primarily reflecting the benefit from the accretion of the purchase discount on the acquired Sterling loan portfolio and higher loan spreads, partially offset by a decline in deposit spreads.
• The provision for loan losses decreased $5 million, primarily reflecting a decrease in Middle Market.
• Noninterest income increased $4 million, primarily due to increases in warrant income and service charges on deposit accounts related to the Sterling acquisition.
• Noninterest expenses increased $16 million, primarily due to the Sterling acquisition.

Florida Market

• Average loans decreased $88 million, primarily due to decreases in National Dealer Services and Commercial Real Estate.
• The net interest margin of 2.94 percent decreased 20 basis points, primarily due to decreases in loan and deposits spreads.
• The provision for loan losses decreased $9 million, primarily reflecting decreases in Commercial Real Estate, Middle Market and Private Banking.

Conference Call and Webcast

Comerica will host a conference call to review third quarter 2011 financial results at 7 a.m. CT Wednesday, October 19, 2011. Interested parties may access the conference call by calling (800) 309-2262 or (706) 679-5261 (event ID No. 11574116). The call and supplemental financial information can also be accessed on the Internet at www.comerica.com.  A telephone replay will be available approximately two hours following the conference call through October 31, 2011. The conference call replay can be accessed by calling (800) 642-1687 or (706) 645-9291 (event ID No. 11574116). A replay of the Webcast can also be accessed via Comerica's "Investor Relations" page at www.comerica.com.

Comerica Incorporated is a financial services company headquartered in Dallas, Texas, and strategically aligned by three major business segments: the Business Bank, the Retail Bank, and Wealth Management. Comerica focuses on relationships and helping people and businesses be successful. In addition to Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico.

This press release contains both financial measures based on accounting principles generally accepted in the United States (GAAP) and non-GAAP based financial measures, which are used where management believes it to be helpful in understanding Comerica's results of operations or financial position.  Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconcilement to the comparable GAAP financial measure, can be found in this press release.  These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Forward-looking Statements

Any statements in this news release that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "believes," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "opportunity," "initiative," "outcome," "continue," "remain," "maintain," "trend," "objective," "pending," "looks forward" and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions, as they relate to Comerica or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of Comerica's management based on information known to Comerica's management as of the date of this news release and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Comerica's management for future or past operations, products or services, and forecasts of Comerica's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, estimates of credit trends and global stability. Such statements reflect the view of Comerica's management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Comerica's actual results could differ materially from those discussed.  Factors that could cause or contribute to such differences are changes in general economic, political or industry conditions and related credit and market conditions; changes in trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve Board; adverse conditions in the capital markets; the interdependence of financial service companies; changes in regulation or oversight, including the effects of recently enacted legislation, actions taken by or proposed by the U.S. Treasury, the Board of Governors of the Federal Reserve System, the Texas Department of Banking and the Federal Deposit Insurance Corporation, legislation or regulations enacted in the future, and the impact and expiration of such legislation and regulatory actions; unfavorable developments concerning credit quality; the acquisition of Sterling Bancshares, Inc., or any future acquisitions; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries in which Comerica has a concentration of loans, including, but not limited to, the automotive production industry and the real estate business lines; the implementation of Comerica's strategies and business models, including the anticipated performance of any new banking centers and the implementation of revenue enhancements and efficiency improvements; Comerica's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; operational difficulties or information security problems; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; the entry of new competitors in Comerica's markets; changes in customer borrowing, repayment, investment and deposit practices; management's ability to maintain and expand customer relationships; management's ability to retain key officers and employees; the impact of legal and regulatory proceedings; the effectiveness of methods of reducing risk exposures; the effects of war and other armed conflicts or acts of terrorism and the effects of catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, droughts and floods. Comerica cautions that the foregoing list of factors is not exclusive. For discussion of factors that may cause actual results to differ from expectations, please refer to our filings with the Securities and Exchange Commission. In particular, please refer to "Item 1A. Risk Factors" beginning on page 16 of Comerica's Annual Report on Form 10-K for the year ended December 31, 2010, "Item 1A. Risk Factors" beginning on page 65 of Comerica's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and "Item 1A. Risk Factors" beginning on page 74 of Comerica's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this news release or in any documents, Comerica claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

SOURCE Comerica Incorporated