Comerica Reports First Quarter 2016 Net Income Of $60 Million, Or 34 Cents Per Share

DALLAS, April 19, 2016 /PRNewswire/ -- Comerica Incorporated (NYSE: CMA) today reported first quarter 2016 net income of $60 million, compared to $116 million for the fourth quarter 2015 and $134 million for the first quarter 2015. Earnings per diluted share were 34 cents for first quarter 2016 compared to 64 cents for fourth quarter 2015 and 73 cents for first quarter 2015.

"Our first quarter results were impacted by the current oil and gas cycle, as we significantly increased our reserve for loan losses," said Ralph W. Babb, Jr., chairman and chief executive officer. "We continue to be prudent in our reserving approach. While this approach resulted in a higher provision this quarter, our fundamental view of the energy sector has not changed significantly. Additionally, during the quarter we benefited from the December short-term rate increase, with loan yields increasing and helping to drive a $14 million increase in net interest income."

Comerica also announced today that it launched a comprehensive review of its expense and revenue base in order to meaningfully enhance profitability. The review is currently underway and will include the assistance of the Boston Consulting Group, a globally recognized consulting firm familiar with the challenges facing the U.S. banking industry. Given the breadth of the review, Comerica expects to provide more information around the opportunities identified by the next quarterly earnings announcement and deliver to shareholders, as soon as practical, a broad, enterprise-wide plan, designed to help reach tangible targets.

"We operate Comerica for the ultimate benefit of our shareholders, and all of our actions will be directed to maximize value, while not compromising our commitment to our clients, culture, regulatory standing, responsible underwriting and strong risk management," said Babb. "We have been undertaking a process through which we are identifying meaningful opportunities to enhance revenue, operate more efficiently and lower expenses, with the goal of building a more profitable organization that is better able to drive enhanced long-term value for shareholders. We are going to pursue our cost and revenue initiative with the urgency it deserves and continue to utilize our strengths and competitive position to improve our results."

First Quarter 2016 Compared to Fourth Quarter 2015

• Average total loans decreased $156 million to $48.4 billion, primarily reflecting decreases in general Middle Market, Energy and Mortgage Banker Finance, partially offset by an increase in Commercial Real Estate. Period-end total loans increased $293 million, to $49.4 billion.
• Average total deposits decreased $3.0 billion to $56.7 billion, reflecting seasonality, purposeful pricing discipline and strategic actions in light of new liquidity coverage ratio rules, with the largest declines in Corporate Banking, the Financial Services Division and Municipalities. Period-end total deposits decreased $3.5 billion to $56.4 billion. A majority of the decrease related to an elevated deposit level associated with the government card program at year-end.
• Net interest income increased $14 million to $447 million, primarily reflecting an increase in loan yields, mostly due to increases in short-term rates, and a larger average securities portfolio, partially offset by one fewer day in the first quarter. The net interest margin increased 23 basis points to 2.81 percent, primarily reflecting higher loan yields and a decrease in Federal Reserve Bank deposits.
• The provision for credit losses increased $88 million to $148 million. The allowance for loan losses increased $90 million to $724 million, primarily due to an increase in reserves in the Energy business line, partially offset by improvements in credit quality. Net credit-related charge-offs were $58 million, or 0.49 percent, including $42 million for Energy loans.
• Noninterest income decreased $22 million to $246 million, primarily due to decreases of $10 million in commercial lending fees, following a strong fourth quarter 2015, and $7 million in deferred compensation asset returns.
• Noninterest expenses decreased $24 million to $460 million, primarily reflecting a decrease of $14 million in salaries and benefits expense and smaller decreases in many other categories.
• Capital remained solid at March 31, 2016, as evidenced by an estimated common equity Tier 1 capital ratio of 10.56 percent and a tangible common equity ratio of 10.23 percent.
• Comerica repurchased approximately 1.2 million shares of common stock under the equity repurchase program.

First Quarter 2016 Compared to First Quarter 2015

• Average total loans increased $241 million, primarily reflecting increases in Commercial Real Estate, Technology and Life Sciences, National Dealer Services and Mortgage Banker Finance, partially offset by decreases in general Middle Market, Energy and Corporate Banking.
• Average total deposits decreased $282 million, primarily driven by a decrease in Municipalities.
• Net interest income increased $34 million, primarily reflecting the benefits from higher loan yields, a larger average securities portfolio and an increase in average loans.
• The provision for credit losses increased $134 million, primarily due to an increase in reserves in the Energy business line.
• Noninterest income decreased $6 million, primarily reflecting decreases in deferred compensation asset returns and commercial lending fees, partially offset by an increase in card fees.
• Noninterest expenses increased $4 million, primarily due to an increase in technology-related expense and higher outside processing expenses related to revenue generating activities, partially offset by a decrease in deferred compensation plan expense.

 

• Net interest income increased $14 million to $447 million in the first quarter 2016, compared to the fourth quarter 2015.
  • Interest on loans increased $11 million, primarily reflecting an increase in yields (+$19 million), partially offset by the effect of one fewer day in the first quarter (-$4 million) and lower interest recognized on nonaccrual loans (-$3 million). The increase in loan yields primarily reflected the benefit from the increase in short-term rates, partially offset by lower loan prepayment fees and other portfolio dynamics.
  • Interest on investment securities increased $6 million, primarily reflecting the reinvestment of Federal Reserve Bank deposits into higher yielding Treasury securities in the second half of the fourth quarter 2015.
  • Interest on temporary investments decreased $2 million, reflecting a decrease in average Federal Reserve Bank deposit balances (-$5 million), partially offset by a benefit from the increase in short-term rates (+$3 million).
• The net interest margin of 2.81 percent increased 23 basis points compared to the fourth quarter 2015, primarily due to higher loan yields (+12 basis points) and the impact of a decrease in lower-yielding Federal Reserve Bank deposit balances (+13 basis points), partially offset by the decrease in interest recognized on nonaccrual loans (-2 basis points).

Noninterest Income

Noninterest income decreased $22 million to $246 million in the first quarter 2016, compared to $268 million for the fourth quarter 2015. The decrease primarily reflected decreases of $10 million in commercial lending fees, $7 million in deferred compensation asset returns and other impacts including lower bank-owned life insurance income and securities activity. The decrease in commercial lending fees reflected strong fourth quarter 2015 syndication agent fees as well as a decrease in commitment fees, which resulted from a combination of higher utilization levels and lower commitment totals in the first quarter 2016. Deferred compensation asset returns are offset by deferred compensation plan expense in noninterest expenses.

Noninterest Expenses

Noninterest expenses decreased $24 million to $460 million in the first quarter 2016, compared to $484 million for the fourth quarter 2015, primarily reflecting decreases of $14 million in salaries and benefits expense and decreases of $3 million each in consulting fee expense, advertising expense and net occupancy expense. The decrease in salaries and benefits expense primarily reflected decreases in pension expense, deferred compensation plan expense, technology-related contract labor expenses, and the impact of one fewer day in the quarter, partially offset by a seasonal increase in share-based compensation expense.

Credit Quality

"The provision for credit losses was $148 million and the allowance increased $90 million," said Babb. "The provision reflected the high end of the range in our 2016 guidance for the incremental impact of energy loans, adjusted upward for revised regulatory guidance, and includes the results of the Shared National Credit (SNC) exam. At March 31, 2016, our reserve allocation for loans in the Energy business line was nearly 8 percent. While the current oil and gas cycle presents a significant challenge, we believe we are adequately reserved. And remember, those reserves may not turn into losses. Aside from the provision for Energy loans, overall credit quality continued to be solid, and we are not detecting any noteworthy deterioration in Texas. Total net credit-related charge-offs were $58 million, or 49 basis points of average loans. Excluding Energy, net credit-related charge-offs for the remainder of the portfolio were low at $16 million, or 15 basis points."

 

• Energy business line loans were $3.1 billion at both March 31, 2016 and December 31, 2015. Criticized Energy loans increased $590 million, to $1.8 billion, including a $291 million increase in nonaccrual loans. Energy net charge-offs were $42 million, compared to $27 million in the fourth quarter 2015.
• Net credit-related charge-offs increased $7 million to $58 million, or 0.49 percent of average loans, in the first quarter 2016, compared to $51 million, or 0.42 percent, in the fourth quarter 2015. Fourth quarter 2015 included a large charge-off resulting from irregularities associated with a single Small Business credit.
• During the first quarter 2016, $446 million of borrower relationships over $2 million were transferred to nonaccrual status.
• Criticized loans increased $735 million to $3.9 billion at March 31, 2016, compared to $3.2 billion at December 31, 2015.

Balance Sheet and Capital Management

Total assets and common shareholders' equity were $69.0 billion and $7.6 billion, respectively, at March 31, 2016, compared to $71.9 billion and $7.6 billion, respectively, at December 31, 2015.

There were approximately 175 million common shares outstanding at March 31, 2016. Repurchases under the equity repurchase program were $42 million (1.2 million shares). Diluted average shares decreased 3 million to 176 million for the first quarter 2016.

The estimated common equity Tier 1 capital ratio, reflective of transition provisions and excluding accumulated other comprehensive income ("AOCI"), was 10.56 percent at March 31, 2016. Certain deductions and adjustments to regulatory capital began phasing in on January 1, 2015 and will be fully implemented on January 1, 2018. The estimated ratio under fully phased-in Basel III capital rules is largely the same as the transitional ratio. Comerica's tangible common equity ratio was 10.23 percent at March 31, 2016, an increase of 53 basis points from December 31, 2015.

Full-Year 2016 Outlook

Excluding the first quarter energy impact on the provision for credit losses, management expectations for full-year 2016 compared to full-year 2015, assuming the energy outlook remains stable, as well as a continuation of the current economic and low-rate environment, have not changed materially. The outlook does not reflect the impact of any revenue or expense initiatives that may be undertaken as a result of the ongoing comprehensive review. Management expects such impact to be reflected in the outlook provided on the second quarter 2016 earnings call.

• Average loans modestly higher, in line with Gross Domestic Product growth, reflecting a continued decline in Energy more than offset by increases in most other lines of business.
• Net interest income higher, reflecting the benefits from the December 2015 short-term rate increase, loan growth and a larger securities portfolio more than offsetting higher funding costs.
  • Full-year benefit from the December rise in short-term rates expected to be more than $90 million if deposit prices remain at current levels.
• Provision for credit losses higher, reflecting the first quarter 2016 reserve build for Energy, with net charge-offs for the remainder of the year between 45 basis points and 55 basis points. Additional reserve changes dependent on developments in the oil and gas sector. Continued solid credit quality in the remainder of the portfolio, with metrics, absent Energy, better than historical norms.
• Noninterest income modestly higher, primarily due to growth in card fees from merchant processing services and government card. Continued focus on cross-sell opportunities, including wealth management products such as fiduciary and brokerage services.
• Noninterest expenses higher, reflecting continued increases in technology costs and regulatory expenses, increased outside processing in line with growing revenue, higher FDIC insurance expense in part due to regulatory surcharge, and typical inflationary pressures. Additionally, 2015 benefited from a $33 million legal reserve release, which is offset by lower pension expense in 2016.
• Income tax expense to approximate 32 percent of pre-tax income.

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 reported as a segment. The financial results below are based on the internal business unit structure of the Corporation and methodologies in effect at March 31, 2016 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses first quarter 2016 results compared to fourth quarter 2015.

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

 

• Average loans decreased $121 million, primarily reflecting decreases in general Middle Market, Energy and Mortgage Banker Finance, partially offset by an increase in Commercial Real Estate.
• Average deposits decreased $2.6 billion, primarily reflecting decreases in Corporate Banking, the Financial Services Division and Municipalities. The decrease reflected seasonality, purposeful pricing discipline and strategic actions in light of new liquidity coverage ratio rules.
• Net interest income decreased $22 million, primarily reflecting an increase in net funds transfer pricing (FTP) charges and the impact of one fewer day in the quarter, partially offset by an increase in loan yields. The increase in net FTP charges primarily reflected an increase in the cost of funds due to the increase in short-term market rates as well as lower funding credits due to the decrease in average deposits.
• The provision for credit losses increased $110 million, primarily reflecting increases in Energy and general Middle Market, partially offset by a decrease in Commercial Real Estate.
• Noninterest income decreased $10 million, primarily due to a decrease in commercial lending fees, which reflected strong fourth quarter 2015 syndication agent fees as well as a decrease in commitment fees, which resulted from a combination of higher utilization levels and lower commitment totals in the first quarter 2016.

 

 

• Average deposits decreased $152 million, primarily reflecting a decrease in Small Business.
• Net interest income decreased $3 million, primarily due to a decrease in net FTP credits, largely due to the decrease in average deposits, and the impact of one fewer day in the quarter.
• The provision for credit losses decreased $20 million, primarily due to a decrease in net charge-offs in Small Business.
• Noninterest income decreased $6 million, primarily reflecting a securities loss and small decreases in several categories.
• Noninterest expenses decreased $12 million, primarily reflecting decreases in salaries and benefits expense, outside processing expenses and smaller decreases in many other categories.

 

 

• Average loans decreased $34 million.
• Average deposits decreased $184 million, primarily reflecting a decrease in Private Banking.
• Net interest income decreased $4 million, primarily due a decrease in net FTP credits, largely due to a $184 million decrease in average deposits as well as an increase in the cost of funds, partially offset by higher loan yields.
• The provision for credit losses increased $2 million to a negative provision of $5 million in the first quarter 2016, primarily reflecting credit quality improvements.
• Noninterest income increased $2 million, primarily due to higher fiduciary income.
• Noninterest expenses decreased $8 million, primarily reflecting decreases in operational losses, legal expenses and salaries and benefits expense.

Geographic Market Segments

Comerica also provides market segment results for three primary geographic markets: Michigan, California and Texas. In addition to the three primary geographic markets, Other Markets is also reported as a market segment. Other Markets includes Florida, Arizona, the International Finance division and businesses that have a significant presence outside of the three primary geographic markets. The tables below present the geographic market results based on the methodologies in effect at March 31, 2016 and are presented on a fully taxable equivalent (FTE) basis.

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

 

• Average loans decreased $212 million in Michigan, largely reflecting a decrease in general Middle Market, and $130 million in Texas, primarily reflecting decreases in National Dealer Services, Energy and general Middle Market, partially offset by an increase in Commercial Real Estate. Average loans increased $250 million in California, primarily reflecting increases in Commercial Real Estate and National Dealer Services.
• Average deposits decreased $1.9 billion in California, $427 million in Michigan and $433 million in Texas, reflecting seasonality, purposeful pricing discipline and strategic actions in light of new liquidity coverage ratio rules.
• Net interest income decreased $14 million in California, $7 million in Michigan and $8 million in Texas. The decrease in each market primarily reflected the FTP impact of the decreases in average deposits and the impact of one fewer day in the quarter.
• The provision for credit losses increased $112 million in Texas, $1 million in California and $6 million in Michigan. The increase in Texas primarily reflected increases in net charge-offs and reserves for Energy and general Middle Market. The increase in Michigan was primarily due to a charge-off in Corporate Banking.
• Noninterest income decreased $5 million in Michigan, $2 million in California and $2 million in Texas. The decreases in all markets were primarily the result of lower syndication agent and commitment fees.
• Noninterest expenses decreased $10 million in Michigan, $3 million in California and $3 million in Texas. The decrease in Michigan primarily reflected decreases in salaries and benefits expense, operational losses and outside processing fees, partially offset by an increase in asset disposal expense, as a benefit from the early termination of certain leveraged leases in the fourth quarter 2015 was not repeated. The decrease in California primarily reflected small decreases in many categories, and the decrease in Texas was due primarily to a decrease in salaries and benefits expense.

Conference Call and Webcast

Comerica will host a conference call to review first quarter 2016 financial results at 7 a.m. CT Tuesday, April 19, 2016. Interested parties may access the conference call by calling (877) 523-5249 or (210) 591-1147 (event ID No. 63729781). The call and supplemental financial information can also be accessed via Comerica's "Investor Relations" page at www.comerica.com. A replay of the Webcast can 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 a reconciliation 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," "contemplates," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "opportunity," "initiative," "outcome," "continue," "remain," "maintain," "on course," "trend," "objective," "looks forward," "projects," "models" 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; changes in monetary and fiscal policies, including changes in interest rates; changes in regulation or oversight; Comerica's ability to maintain adequate sources of funding and liquidity; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of Comerica's customers, in particular the energy industry; unfavorable developments concerning credit quality; operational difficulties, failure of technology infrastructure or information security incidents; reliance on other companies to provide certain key components of business infrastructure; factors impacting noninterest expenses which are beyond Comerica's control; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; reductions in Comerica's credit rating; the interdependence of financial service companies; the implementation of Comerica's strategies and business initiatives; damage to Comerica's reputation; Comerica's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; competitive product and pricing pressures among financial institutions within Comerica's markets; changes in customer behavior; any future strategic acquisitions or divestitures; 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 or determinations; the effectiveness of methods of reducing risk exposures; the effects of terrorist activities and other hostilities; the effects of catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, droughts and floods; changes in accounting standards and the critical nature of Comerica's accounting policies. 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 12 of Comerica's Annual Report on Form 10-K for the year ended December 31, 2015. 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.

The tangible common equity ratio removes preferred stock and the effect of intangible assets from capital and the effect of intangible assets from total assets. Tangible common equity per share of common stock removes the effect of intangible assets from common shareholders equity per share of common stock. Comerica believes these measurements are meaningful measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of common equity and to compare against other companies in the industry.

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