Comerica Reports Second Quarter 2011 Net Income of $96 Million

DALLAS, July 19, 2011 /PRNewswire/ -- Comerica Incorporated (NYSE: CMA) today reported second quarter 2011 net income of $96 million, a decrease of $7 million compared to $103 million for the first quarter 2011, primarily due to the impact of a federal income tax settlement. Second quarter 2011 also included $5 million of costs incurred in connection with the pending acquisition of Sterling.

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"Total average loans were down one percent and period-end loans were up modestly from March 31, 2011. We were pleased to see commercial loan growth in the second quarter, driven primarily by increases in Middle Market, Global Corporate Banking and Specialty Businesses, partially offset by a decrease in floor plan loans in National Dealer Services," said Ralph W. Babb Jr., chairman and chief executive officer.  "Commercial Real Estate declined, offsetting the commercial loan growth.  We expect the pace of decline in Commercial Real Estate to lessen in the second half of 2011 and National Dealer Services to rebound in the fourth quarter. Our core deposits continued to increase in the second quarter, which led to higher excess liquidity and a lower net interest margin.  Credit quality continued to improve and expenses were well controlled.

"We are excited about our pending acquisition of Sterling Bancshares, Inc., a strategically compelling transaction that significantly boosts our presence in the growing state of Texas.  Following the expiration of the required 15-day Department of Justice waiting period associated with the Federal Reserve Board's approval order, we expect the acquisition will close on July 28, 2011. Sterling's solid deposit base and well located branch network are expected to triple our Houston market share, provide us entry into the attractive San Antonio and Kerrville regions and complement our existing footprint in the Dallas-Fort Worth area. In short, it is a unique opportunity that provides us enhanced growth opportunities going forward.

"The Sterling integration plans remain on track.  We expect a smooth transition, given the size of the acquisition and our in-depth knowledge of the Texas market.  We look forward to welcoming Sterling customers and employees to Comerica as we begin this new chapter in our Texas banking history."

Second Quarter 2011 Highlights Compared to First Quarter 2011

• Average loans increased in the Middle Market ($160 million; one percent), Global Corporate Banking ($136 million; 3 percent), and Specialty Businesses ($62 million; one percent) business lines.  These increases were more than offset by decreases in the Commercial Real Estate ($393 million; 9 percent) and National Dealer Services ($194 million; 5 percent) business lines, resulting in a decrease in average total loans of $377 million, or one percent.  Period-end loans increased $17 million from March 31, 2011 to June 30, 2011.
• Average core deposits increased $881 million in the second quarter 2011, with increases in all major markets, led by the Texas market.
• The net interest margin of 3.14 percent decreased 11 basis points compared to the first quarter 2011, primarily resulting from an increase in excess liquidity (represented by average balances deposited with the Federal Reserve Bank), and a decrease in loan pricing based on a decrease in LIBOR.
• Average earning assets increased $789 million in the second quarter 2011.
• Credit quality improvement continued in the second quarter 2011.  Net credit-related charge-offs decreased $11 million to $90 million.  Internal watch list loans declined $339 million to $4.8 billion and nonperforming assets decreased $60 million.  
• Noninterest expenses decreased $6 million to $409 million in the second quarter 2011, compared to the first quarter 2011.  Noninterest expenses included $5 million of costs incurred in connection with the pending Sterling acquisition in the second quarter 2011, which were more than offset by declines in numerous noninterest expense categories.
• The second quarter 2011 provision for income taxes included net after-tax charges of $8 million, which primarily reflected a $19 million charge related to a final settlement agreement with the Internal Revenue Service (IRS) involving repatriation of foreign earnings on a structured investment transaction, partially offset by a release of tax reserves of $9 million resulting from Comerica's planned participation in a recently enacted State of California voluntary compliance initiative.  Comerica has no other investment structures with uncertain tax positions.
• The estimated Tier 1 capital ratio increased 18 basis points, to 10.53 percent at June 30, 2011, from March 31, 2011.

Net Interest Income and Net Interest Margin

• The $4 million decrease in net interest income in the second quarter 2011, when compared to the first quarter 2011, resulted primarily from a decline in the net interest margin, the first quarter 2011 maturities of interest rate swaps at positive spreads and a decrease in average loans, partially offset by one more day in the quarter.
• The net interest margin of 3.14 percent declined 11 basis points compared to the first quarter 2011.  The decline in the net interest margin primarily reflected the impact of an increase in excess liquidity (7 basis points), a decrease in loan pricing based on a decrease in LIBOR, and the first quarter 2011 maturities of interest rate swaps at positive spreads.
• Average earning assets increased $789 million, primarily due to increases of $1.1 billion in excess liquidity and $96 million in average investment securities available-for-sale, partially offset by a $377 million decrease in average loans.  
• Second quarter 2011 average core deposits increased $881 million compared to first quarter 2011, primarily reflecting increases in money market and NOW deposits ($410 million), noninterest-bearing deposits ($327 million) and customer certificates of deposit ($100 million).

Noninterest Income

Noninterest income was $202 million for the second quarter 2011, compared to $207 million for the first quarter 2011.  The $5 million decrease primarily resulted from a decrease in deferred compensation asset returns ($3 million) (offset by a decrease in deferred compensation plan costs in noninterest expense).

Noninterest Expenses

Noninterest expenses totaled $409 million in the second quarter 2011, a decrease of $6 million from the first quarter 2011. The decrease in noninterest expenses was primarily due to decreases in salaries expense ($3 million), FDIC insurance expense ($3 million), software expense ($3 million) and other real estate expense ($2 million), partially offset by certain pre-integration and transaction costs incurred in connection with the pending Sterling acquisition ($5 million).  

Provision for Income Taxes

The second quarter 2011 provision for income taxes included net after-tax charges of $8 million, which primarily reflected a $19 million charge related to a final settlement agreement with the IRS involving repatriation of foreign earnings on a structured investment transaction, partially offset by a release of tax reserves of $9 million resulting from Comerica's planned participation in a recently enacted State of California voluntary compliance initiative.

Credit Quality

"Broad-based, steady improvement in credit quality continued in the second quarter," said Babb.  "This was the eighth consecutive quarter of decline in net charge offs, with an $11 million decrease.  We had strong recoveries of $35 million in the second quarter, up from $22 million in the first quarter.   Credit quality migration remains positive, as demonstrated by the $339 million decline in watch list loans, which provide our best early indicator of future credit quality, as well as the $60 million decline in nonperforming assets.  As a result of these overall improvements to our credit metrics, the provision for loan losses decreased to $47 million.  Also, of note, the results of the recently received Shared National Credit Exam are reflected in our second quarter credit metrics."

• Net credit-related charge-offs decreased $11 million to $90 million in the second quarter 2011, from $101 million in the first quarter 2011. The decrease in net credit-related charge-offs primarily reflected a decrease of $22 million in the Middle Market business line, partially offset by an increase of $9 million in the Private Banking business line.
• Internal watch list loans declined $339 million to $4.8 billion from March 31, 2011 to June 30, 2011.
• During the second quarter 2011, $163 million of loan relationships greater than $2 million were transferred to nonaccrual status, a decrease of $3 million from the first quarter 2011.  Of the transfers of loan relationships greater than $2 million to nonaccrual in the second quarter 2011, $76 million were from the Middle Market business line, primarily in the Midwest and Western markets, and $29 million were from the Commercial Real Estate business line, distributed across the Florida, Western and Other markets.
• Nonperforming assets decreased $60 million, compared to March 31, 2011, to $1.0 billion, or 2.66 percent of total loans and foreclosed property, at June 30, 2011.  
• The allowance for loan losses to total loans ratio was 2.06 percent and 2.17 percent at June 30, 2011 and March 31, 2011, respectively.

Balance Sheet and Capital Management

Total assets and common shareholders' equity were $54.1 billion and $6.0 billion, respectively, at June 30, 2011, compared to $55.0 billion and $5.9 billion, respectively, at March 31, 2011. There were approximately 177 million common shares outstanding at June 30, 2011.  Comerica did not repurchase any shares of common stock in the open market in the second quarter 2011 under the share repurchase program due to the pending Sterling acquisition.  Management expects to resume repurchases in the third quarter 2011.

Comerica's tangible common equity ratio was 10.90 percent at June 30, 2011, an increase of 47 basis points from March 31, 2011. The estimated Tier 1 capital ratio increased 18 basis points, to 10.53 percent at June 30, 2011, from March 31, 2011.  

Second-Half 2011 Outlook (Combined Comerica and Sterling Results) Compared to First-Half 2011 (Comerica Only Results)

For the second half of 2011, management expects the following combined results, based on the incorporation of the projected results of Sterling operations from the expected acquisition closing date of July 28, 2011 through year-end 2011, compared to Comerica-only results for the first half of 2011, assuming a continuation of modest growth in the economy.  The acquisition is subject to customary closing conditions. The estimated purchase accounting impacts incorporated in this outlook are preliminary and may not be indicative of actual amounts that will be recorded as additional information becomes available and as additional analyses are performed.

• A mid-single digit increase in average loans due to the acquisition of Sterling loans at fair value.
• Average earning assets of approximately $52.5 billion, reflecting increases, primarily related to Sterling, in average loans and average investment securities available-for-sale, partially offset by a decrease in excess liquidity.  
• An average net interest margin of 3.35 percent to 3.40 percent, reflecting the benefit from the accretion of the purchase discount on the acquired Sterling loan portfolio ($35 million to $45 million; 13 basis points to 17 basis points), a reduction in excess liquidity, no increase in the Federal Funds rate, and LIBOR consistent with second quarter 2011 levels.
• Net credit-related charge-offs between $165 million and $185 million for the second half of 2011. The provision for credit losses is expected to be between $65 million and $85 million for the second half of 2011.
• A mid-single digit decline in noninterest income in the second half of 2011 compared to the first half of 2011, primarily due to the impact of regulatory changes, partially offset by the inclusion of Sterling.  
• Excluding merger and restructuring charges, a high single-digit increase in noninterest expenses in the second half of 2011 compared to the first half of 2011, primarily due to the addition of Sterling.
• Total merger and restructuring charges of approximately $80 million, after-tax, with about $25 million, after-tax, recognized in each of the third and fourth quarters of 2011, and the remainder recognized in 2012.
• Total acquisition synergies of approximately 35 percent of Sterling expenses, or about $56 million, with the majority realized in 2012.
• For the second half of 2011, income tax expense to approximate 36 percent of income before income taxes less approximately $33 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 June 30, 2011 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses second quarter 2011 results compared to first quarter 2011.

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

Business Bank

• Average loans decreased $229 million, reflecting increases in Middle Market, Global Corporate Banking and Specialty Businesses, more than offset by decreases in Commercial Real Estate and National Dealer Services.
• Average deposits increased $312 million, primarily due to increases in Specialty Businesses and Global Corporate Banking, partially offset by a decrease in Middle Market.
• The net interest margin of 4.65 percent decreased one basis point, primarily due to a decrease in deposit spreads.
• The provision for loan losses decreased $12 million, primarily reflecting decreases in Middle Market and Commercial Real Estate, partially offset by increases in Global Corporate Banking and Specialty Businesses.

Retail Bank

• Average loans decreased $107 million, reflecting declines across all markets and business lines.
• Average deposits increased $377 million, primarily due to increases in transaction and money market deposits, partially offset by a decrease in customer certificates of deposit.
• The net interest margin of 3.22 percent decreased three basis points, primarily due to a decrease in deposit spreads.
• Noninterest income increased $4 million, reflecting nominal increases in numerous categories.

Wealth Management

• Average loans decreased $65 million.
• Average deposits increased $178 million, primarily reflecting increases in noninterest-bearing transaction accounts.
• The net interest margin of 4.07 percent increased 31 basis points, primarily due to increases in loan spreads and deposit balances.
• The provision for loan losses increased $6 million, due to an increase in Private Banking in the Western Market.

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 June 30, 2011 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses second quarter 2011 results compared to first quarter 2011.

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

Midwest Market

• Average loans decreased $53 million, with increases in Middle Market and Global Corporate Banking more than offset by declines in most other business lines.
• Average deposits increased $89 million, primarily due to increases in Personal Banking, Small Business Banking, Commercial Real Estate and Middle Market, partially offset by decreases in Global Corporate Banking and Specialty Businesses.
• The net interest margin of 4.46 percent decreased three basis points, primarily due to decreases in deposit spreads and loan balances, partially offset by an increase in loan spreads.
• The provision for loan losses decreased $19 million, primarily reflecting decreases in Middle Market and Commercial Real Estate, partially offset by an increase in Global Corporate Banking.
• Noninterest expenses decreased $5 million, primarily due to decreases in other real estate expenses, net allocated corporate overhead expenses and FDIC insurance expense, partially offset by an increase in the provision for credit losses on lending-related commitments.

Western Market

• Average loans decreased $262 million, primarily due to decreases in National Dealer Services, Commercial Real Estate and Private Banking, partially offset by increases in Middle Market and Global Corporate Banking.
• Average deposits increased $223 million, primarily due to increases in Specialty Businesses and Private Banking, partially offset by a decrease in Middle Market.
• The net interest margin of 5.35 percent decreased two basis points, primarily due to a decrease in loan balances.
• The provision for loan losses increased $9 million, primarily due to increases in Private Banking and Specialty Businesses.

Texas Market

• Average loans increased $47 million, primarily due to increases in Middle Market and Global Corporate Banking, partially offset by a decrease in Commercial Real Estate.
• Average deposits increased $389 million, reflecting increases across most business lines.
• The net interest margin of 5.19 percent increased two basis points, primarily due to increases in loan spreads and deposit balances, partially offset by a decrease in deposit spreads.
• The provision for loan losses decreased $6 million, with decreases across most business lines.

Florida Market

• Average loans decreased $15 million, primarily due to decreases in Commercial Real Estate and National Dealer Services, partially offset by increases in Global Corporate Banking and Private Banking.
• Average deposits increased $29 million, primarily due to an increase in Private Banking.
• The net interest margin of 3.14 percent increased 32 basis points, primarily due to increases in loan spreads and deposit balances.
• The provision for loan losses increased $3 million, primarily due to increases in Middle Market, Commercial Real Estate and Private Banking.

Conference Call and Webcast

Comerica will host a conference call to review second quarter 2011 financial results at 7 a.m. CT Tuesday, July 19, 2011. Interested parties may access the conference call by calling (800) 309-2262 or (706) 679-5261 (event ID No. 77355589). 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 July 31, 2011. The conference call replay can be accessed by calling (800) 642-1687 or (706) 645-9291 (event ID No. 77355589). 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 proposed acquisition of Sterling Bancshares, Inc. ("Sterling"), 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; 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 ("SEC"). 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. 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.

Additional Information for Shareholders

In connection with the proposed merger transaction, Comerica has filed with the SEC a Registration Statement on Form S-4 that includes a Proxy Statement of Sterling and a Prospectus of Comerica, and Sterling mailed the definitive Proxy Statement/Prospectus to its shareholders on or about April 6, 2011. Each of Comerica and Sterling may file other relevant documents concerning the proposed transaction. SHAREHOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE DEFINITIVE PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY CONTAIN IMPORTANT INFORMATION.

A free copy of the definitive Proxy Statement/Prospectus, as well as other filings containing information about Comerica and Sterling, may be obtained at the SEC's Internet site (http://www.sec.gov). You may be able to obtain these documents, free of charge, from Comerica at www.comerica.com under the tab "Investor Relations" and then under the heading "SEC Filings" or from Sterling by accessing Sterling's website at www.banksterling.com under the tab "Investor Relations" and then under the heading "SEC Filings."

SOURCE Comerica Incorporated