Comerica Reports In Line - Analyst Blog

Comerica Inc. (CMA) reported second quarter 2011 earnings of 53 cents per share, in line with the Zacks Consensus Estimate.

While earnings improved substantially from 39 cents a year ago, it deteriorated from 57 cents reported in the prior quarter.

The sequential decrease reflects the federal income tax settlement impact as well as expenses of $5 million incurred in association with the pending acquisition of Sterling Bancshares Inc. (SBIB).

Recently, the Sterling buyout was approved by the Board of Governors of the Federal Reserve System. The deal also got the nod from the Texas Department of Banking. Comerica now expects to close the deal on July 28, 2011.

Improvement in credit quality acted as a positive catalyst for the quarter’s results at Comerica. The year-over-year progress reflected an increase in non-interest income and a drop in provision for loan losses, partially offset by higher non-interest expenses and lower net interest income.

Net income attributed to common shareholders of Comerica totaled $95 million compared with $102 million in the prior quarter and $69 million in the year-ago quarter.

Performance in Detail

Comerica’s total revenue in the quarter was $633 million, down 1.2% sequentially and 5.5% year over year. However, total revenue was well above the Zacks Consensus Estimate of $594 million.

Net interest income fell approximately 1.0% from the prior quarter and 7.3% year over year to $391 million. The sequential decline was due to the decrease in net interest margin, maturity of interest rate swaps at positive spreads in the first quarter and a fall in average loans.

Net interest margin (NIM) dropped 11 basis points (bps) sequentially and 14 bps year over year to 3.14% in the quarter. The NIM decrease reflected the impact of an increase in excess liquidity, a decrease in loan pricing on the back of a decrease in LIBOR as well as maturity of interest rate swaps at positive spreads in the prior quarter.

Non-interest income decreased 2.4% from the prior quarter but grew 4.1% year over year to $202 million. The sequential drop reflects a decrease in deferred compensation asset returns.

Non-interest expenses at Comerica during the reported quarter totaled $409 million, down 1.4% sequentially but up 3.0% year over year. The drop was principally driven by lesser expenditures on salaries, FDIC insurance, software and other real estate, partially mitigated by certain pre-integration and transaction costs incurred in connection with the pending Sterling acquisition.

Credit Quality

Comerica reported an improvement in credit quality during the reported quarter. Provision for loan losses fell 4.1% sequentially and 62.7% year over year to $47 million.

Net credit-related charge-offs decreased $11 million sequentially and $56 million year over year to $90 million in the reported quarter. The sequential decrease was mainly aided by a decline in the Middle Market business line, partially offset by an increase in the Private Banking business line.

Nonperforming assets (NPAs) decreased 5.4% sequentially and 14.0% year over year to $1,044 million as of June 30, 2011. NPAs were 2.66% of total loans and foreclosed property as of June 30, 2011, down from 2.81% at the end of the prior quarter and 2.98% at the end of the year-ago quarter. Moreover, the company’s nonperforming loans stood at $974 million, declining 5.4% sequentially and 13.1% year over year.

Balance Sheet Position

As of June 30, 2011, Comerica’s total assets and common shareholders’ equity were $54.1 billion and $6.0 billion, respectively, compared with $55.0 billion and $5.9 billion as of March 31, 2011.

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

Share Repurchase

No share repurchase was made by Comerica in the second quarter of 2011 under its share repurchase authorization due to the pending Sterling buyout. However, management anticipates share buybacks to recommence in the third quarter of 2011.

Outlook: Second Half versus First Half of 2011

Management’s guidance for the second half of 2011 includes the incorporation of anticipated results of Sterling.

Compared to the first half of 2011, Comerica’s management expects average loans to increase by a mid single digit on account of the acquisition of Sterling loans at fair value. Commercial and Industrial loan growth is expected to be modest but partially offset by continued decline in the Commercial Real Estate line of business. Earnings assets of approximately $52.5 billion are projected and combined investment securities portfolios of about $8 billion are assumed.

Net interest margin of 3.35% to 3.40% is projected with the purchase accounting accretion resulting from fair value loan discounts on Sterling legacy loans contributing 13–17 basis points or $35–$45 million, dissipation of excess liquidity and LIBOR consistent with second quarter 2011 levels. A mid single-digit decrease in non-interest income is expected from the first half of the year for the regulatory impact, partially offset by the addition of Sterling.

Comerica is expected to record net credit-related charge-offs of $165 million to $185 million while provision for credit losses is anticipated in the range of $65 million to $85 million in the second half.

Regarding expenses, Comerica’s management projected a high single-digit increase excluding restructuring costs resulting from the Sterling addition. Comerica is expected to incur after-tax restructuring expenses of approximately $80 million, with $25 million each in the third and fourth quarters of 2011 and the remainder in 2012. The company anticipates total acquisition synergies of around $56 million or 35% of Sterling expenses, with the majority to be realized in 2012.

The company will continue with the share repurchase program, which coupled with dividend payments would result in a payout ratio up to 50% of full-year earnings.

Our Take

Comerica’s strategic expansion efforts and focus on cost containment bode well. The acquisition of Sterling Bancshares Inc. would augment its growth in Texas. It can leverage Sterling’s solid network in that region and benefit from its strong deposit base. Capital deployment efforts also inspire investors’ confidence in the stock.

Yet, its significant exposure to riskier areas such as commercial real estate markets, lack of meaningful loan growth and regulatory headwinds are the downsides.

Comerica currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

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