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Comerica Reports Second Quarter 2011 Net Income Of $96 Million
Posted July 19, 2011
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Commercial Loan Growth Driven by Middle Market, Global Corporate Banking and Specialty Businesses
Pending Acquisition of Sterling Bancshares, Inc. (Sterling) Expected to Close July 28, 2011
DALLAS -- 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.
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.
· 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.
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.
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.
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."
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