Comerica Reports Fourth Quarter 2012 Net Income Of $130 Million

DALLAS, Jan. 16, 2013 /PRNewswire/ -- Comerica Incorporated (NYSE: CMA) today reported fourth quarter 2012 net income of $130 million, compared to $117 million for the third quarter 2012. Earnings per fully diluted share were 68 cents for the fourth quarter 2012, compared to 61 cents for the third quarter 2012.

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Full-year 2012 net income was $521 million, an increase of $128 million, or 33 percent, compared to 2011. 2012 net income included restructuring expenses associated with the acquisition of Sterling Bancshares, Inc. (Sterling) of $35 million ($22 million, after tax), compared to $75 million ($47 million, after tax) for 2011. Earnings per fully diluted share were $2.67 for 2012, compared to $2.09 for 2011.

"Loan and fee income growth combined with expense control contributed to our 11 percent increase in net income, when compared to the third quarter," said Ralph W. Babb Jr., chairman and chief executive officer. "In this slow growing national economy, we continue to benefit from our position in growth markets and industry expertise, which helped drive an increase in average total loans of $522 million, primarily reflecting an increase of $762 million, or 3 percent, in commercial loans. We continue to capitalize on opportunities by allocating resources to faster growing markets and segments.

"Average total deposits increased $1.4 billion in the fourth quarter to a record $51.3 billion, primarily reflecting an increase of $1.3 billion, or 6 percent, in noninterest-bearing deposits."

"Excluding accretion, net interest income was stable in the fourth quarter, and noninterest income increased $7 million to $204 million, primarily due to increases in customer-driven categories. Credit quality continued to be strong and our capital position remains a source of strength to support our growth. We repurchased 3.1 million shares in the fourth quarter and 10.1 million shares for the full-year 2012 under our share repurchase program. Combined with dividends, we returned 79 percent of 2012 net income to shareholders.

"Looking ahead, we believe our focus on relationships, growth markets, industry expertise and expense management should assist us in increasing returns to shareholders and provide us the momentum that will not only carry us through an extended low-rate environment, but enable us to succeed in it, too."

Fourth Quarter and Full-Year 2012 Overview

Fourth Quarter 2012 Compared to Third Quarter 2012

• Average total loans increased $522 million, or 1 percent, to $44.1 billion, primarily reflecting an increase of $762 million, or 3 percent, in commercial loans, partially offset by a decrease of $241 million, or 2 percent, in commercial real estate loans (commercial mortgage and real estate construction loans). The increase in commercial loans was primarily driven by increases in National Dealer Services, Energy, general Middle Market and Mortgage Banker Finance, partially offset by a decrease in Corporate. Period-end loans increased $1.9 billion, or 4 percent, to $46.1 billion, primarily reflecting an increase of $2.1 billion, or 7 percent, in commercial loans, partially offset by a decrease of $239 million, or 2 percent, in commercial real estate loans.
• Average total deposits increased $1.4 billion, to $51.3 billion, primarily reflecting an increase of $1.3 billion, or 6 percent, in noninterest-bearing deposits. Period-end deposits increased $2.2 billion, to $52.2 billion.
• Net interest income was $424 million in the fourth quarter 2012 compared to $427 million in the third quarter 2012. Excluding the $2 million decrease in the accretion of the purchase discount on the acquired Sterling loan portfolio, net interest income was stable.
• Strong credit quality continued in the fourth quarter 2012. Nonaccrual loans decreased $146 million, to $519 million at December 31, 2012. Net credit-related charge-offs decreased $6 million to $37 million, or 0.34 percent of average loans, in the fourth quarter 2012. The provision for credit losses was $16 million in the fourth quarter 2012 compared to $22 million in the third quarter 2012.
• Noninterest income increased $7 million to $204 million in the fourth quarter 2012 compared to $197 million for the third quarter 2012. The increase was primarily due to increases in customer driven categories.
• Noninterest expenses decreased $22 million to $427 million in the fourth quarter 2012, compared to $449 million in the third quarter 2012. Fourth quarter 2012 included final restructuring expenses of $2 million related to the Sterling acquisition, a decrease of $23 million compared to the third quarter 2012.
• Comerica repurchased 3.1 million shares of common stock under the share repurchase program in the fourth quarter 2012. Combined with the dividend, $121 million, or 93 percent of net income, was returned to shareholders in the fourth quarter.

Full-Year 2012 Compared to Full-Year 2011

• Net income of $521 million for 2012 increased $128 million, or 33 percent, compared to 2011.
• Average total loans increased $3.2 billion, or 8 percent, to $43.3 billion in 2012, in part due to the acquisition of Sterling and reflecting an increase of $4.0 billion, or 18 percent, in commercial loans, partially offset by a decrease of $636 million in commercial real estate loans. The increase in commercial loans was primarily driven by increases in Energy, Mortgage Banker Finance, National Dealer Services, general Middle Market, Technology and Life Sciences, and Corporate. Period-end total loans increased $3.4 billion, or 8 percent, to $46.1 billion from year-end 2011 to year-end 2012.
• Average total deposits increased $5.8 billion, or 13 percent, to $49.5 billion in 2012, in part due to the acquisition of Sterling. Period-end total deposits increased $4.4 billion, or 9 percent.
• Net interest income increased $75 million, or 5 percent, primarily due to an increase in average earning assets of $5.4 billion and an $18 million increase in the accretion of the purchase discount on the acquired Sterling loan portfolio, partially offset by a decrease in yields.
• Credit quality improved significantly. The provision for credit losses declined $65 million to $79 million in 2012, compared to 2011. Net credit-related charge-offs decreased $158 million to $170 million.
• Noninterest income increased $26 million compared to 2011, primarily in customer-driven categories.
• Noninterest expenses decreased $14 million. 2012 included Sterling-related merger and restructuring charges of $35 million, compared to $75 million in 2011. Salaries and employee benefits expense increased $43 million, primarily due to increased pension expense and the impact of Sterling.
• 10.1 million shares were repurchased in 2012, which, combined with dividends, returned 79 percent of 2012 net income to shareholders.

Net Interest Income

• Net interest income of $424 million in the fourth quarter 2012 decreased $3 million compared to the third quarter 2012.
  • An increase in loan volumes increased net interest income by $4 million.
  • The continued shift in the loan portfolio mix reduced net interest income $4 million. The change in loan portfolio mix primarily reflected a decrease in higher-yielding commercial real estate loans, an increase in lower-yielding commercial loans, the maturity of higher-yielding fixed-rate loans and positive credit quality migration throughout the loan portfolio.
  • A decline in LIBOR reduced net interest income $2 million.
  • Accretion of the purchase discount on the acquired Sterling loan portfolio decreased $2 million to $13 million in the fourth quarter 2012, compared to $15 million in the third quarter 2012.
  • Interest earned on investment securities available-for-sale decreased $2 million, primarily as a result of lower reinvestment yields on mortgage-backed investment securities, partially offset by an increase in volume.
  • Funding costs decreased $1 million due to lower deposit rates. In addition, third quarter 2012 included a $2 million negative residual value adjustment to assets in the leasing portfolio.
• Average earning assets increased $1.5 billion in the fourth quarter 2012, compared to the third quarter 2012, primarily reflecting a $522 million increase in average loans, a $478 million increase in excess liquidity and a $459 million increase in average investment securities available-for-sale.
• Average deposits increased $1.4 billion in the fourth quarter 2012, compared to the third quarter 2012, primarily due to a $1.3 billion increase in average noninterest-bearing deposits. The rate paid on total average interest-bearing deposits decreased 2 basis points, to 22 basis points.
• The net interest margin of 2.87 percent decreased 9 basis points compared to the third quarter 2012. The net interest margin was negatively impacted by the continued shift in mix in the loan portfolio (4 basis points), lower yields on mortgage-backed securities (3 basis points), the decline in LIBOR (2 basis points), the increase in excess liquidity (2 basis points), and lower accretion on the acquired Sterling loan portfolio (1 basis point). The third quarter negative residual value adjustment (2 basis points) and lower funding costs (1 basis point) partially offset the decline.

Noninterest Income

Noninterest income increased $7 million to $204 million for the fourth quarter 2012 compared to $197 million for the third quarter 2012. The increase was primarily due to increases in customer driven categories, including increases in commercial lending fees of $3 million, customer derivative income of $3 million and fiduciary income of $3 million, partially offset by a decrease in letter of credit fees of $2 million.

Noninterest Expenses

Noninterest expenses decreased $22 million to $427 million in the fourth quarter 2012, compared to $449 million in the third quarter 2012. The decrease was primarily due to decreases of $23 million in restructuring expenses, $4 million in legal fees and $2 million in employee benefits expense, partially offset by an increase of $4 million in severance expense. In addition, noninterest expenses were reduced by $6 million in the third quarter 2012 due to gains on sales of assets. Restructuring charges related to the Sterling acquisition are complete.

Provision for Income Taxes

The provision for income taxes was $55 million in the fourth quarter 2012, compared to $36 million in the third quarter 2012. The $19 million increase in the provision for income taxes reflected the increase in income before income taxes, as well as adjustments for certain discrete state tax items totaling $5 million in the fourth quarter 2012. In addition, the third quarter 2012 provision for income taxes included a benefit of $4 million from interest on tax refunds, net of tax.

Credit Quality

"Credit quality continued to be strong in the fourth quarter, with lower nonaccrual loans, watch list loans and provision for credit losses," said Babb. "With net charge-offs of 34 basis points, we are well within our historically normal range. We have demonstrated throughout the cycle that we can effectively manage credit."

• Internal watch list loans continued the downward trend, declining $565 million in the fourth quarter 2012, to $3.1 billion at December 31, 2012. Nonperforming assets decreased $168 million to $587 million at December 31, 2012.
• During the fourth quarter 2012, $36 million of borrower relationships over $2 million were transferred to nonaccrual status, an increase of $1 million from the third quarter 2012.

Balance Sheet and Capital Management

Total assets and common shareholders' equity were $65.4 billion and $6.9 billion, respectively, at December 31, 2012, compared to $63.3 billion and $7.1 billion, respectively, at September 30, 2012. There were approximately 188 million common shares outstanding at December 31, 2012. Comerica repurchased $93 million of common stock (3.1 million shares) under the share repurchase program during the fourth quarter 2012. Combined with the dividend of $0.15 per share in the fourth quarter 2012, share repurchases and dividends returned 93 percent of fourth quarter 2012 net income to shareholders. Common shareholders' equity also reflected a $160 million decline in accumulated other comprehensive income, net of tax, including temporary unrealized losses on investment securities available-for-sale of $49 million and a net decline of $111 million due to actuarial losses as a result of changes in defined benefit plan assumptions, net of amortization. For full-year 2012, share repurchases totaled $304 million (10.1 million shares), which, combined with dividends, returned 79 percent of 2012 net income to shareholders.

Comerica's tangible common equity ratio was 9.71 percent at December 31, 2012, a decrease of 54 basis points from September 30, 2012. The estimated Tier 1 common capital ratio decreased 24 basis points, to 10.11 percent at December 31, 2012, from September 30, 2012. The estimated Tier 1 common ratio under fully phased-in Basel III (as proposed) was 9.1 percent at December 31, 2012.

Full-Year 2013 Outlook

For 2013, management expects the following compared to 2012, assuming a continuation of the current slow growing economic environment:

• Continued growth in average loans at a slower pace, with economic uncertainty impacting demand and a continued focus on maintaining pricing and structure discipline in a competitive environment.
• Lower net interest income, reflecting both a decline of $40 million to $50 million in purchase accounting accretion and the effect of continued low rates. Loan growth should partially offset the impact of low rates on loans and securities.
• Provision for credit losses stable, reflecting loan growth offset by a decline in nonperforming loans and net charge-offs.
• Increase in customer-driven noninterest income, reflecting continued cross-sell initiatives and selective pricing adjustments. (Outlook does not include expectations for non-customer driven income).
• Lower noninterest expense, reflecting further cost savings due to tight expense control and no restructuring expenses.
• Income tax expense to approximate 36.5 percent of pre-tax income less approximately $66 million in tax benefits.

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 December 31, 2012 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses fourth quarter 2012 results compared to third quarter 2012.

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

Business Bank

• Average loans increased $469 million, primarily reflecting increases in Middle Market and Mortgage Banker Finance, partially offset by decreases in Corporate and Commercial Real Estate. The increase in Middle Market was primarily due to increases in National Dealer Services, Energy and general Middle Market.
• Average deposits increased $908 million, primarily reflecting increases in Corporate, Middle Market and Mortgage Banker Finance. The increase in Middle Market was primarily due to an increase in the Financial Services Division.
• Net interest income increased $7 million, primarily due to a decrease in net funds transfer pricing (FTP) charges on loans and an increase in loan volume, partially offset by a decrease in accretion on the acquired Sterling loan portfolio.
• The provision for credit losses decreased $7 million, primarily reflecting decreases in Corporate and Commercial Real Estate, partially offset by an increase in Middle Market. The increase in Middle Market primarily reflected increases in the Environmental Services Group and general Middle Market.
• Noninterest income increased $3 million, primarily due to increases in commercial lending fees and customer derivative income, partially offset by a decrease in letter of credit fees.
• Noninterest expenses increased $5 million, primarily due to increases in salaries expenses and net allocated corporate overhead expenses, partially offset by a decrease in legal expenses. The increase in salaries primarily reflected increases in severance and business unit incentives. In addition, noninterest expenses were reduced in the third quarter due to gains on sales of assets.

Retail Bank

• Average loans decreased $10 million, primarily due to a decrease in Personal Banking.|
• Average deposits increased $228 million, primarily due to an increase in Small Business.
• Net interest income decreased $5 million, primarily due to a decrease in net FTP funding credits on deposits and lower accretion on the acquired Sterling loan portfolio.
• Noninterest income increased $2 million, primarily due to an increase in customer derivative income.

Wealth Management

• Average loans increased $63 million, primarily due to an increase in Private Banking. |
• Average deposits increased $131 million, primarily due to increases in Private Banking.
• Noninterest income increased $3 million, primarily the result of increases in fiduciary income and net securities gains.
• Noninterest expenses increased $6 million, primarily as a result of an operational loss.

The decrease in the net loss of $18 million in the Other segment primarily reflected the after-tax impact of the decrease in restructuring expenses in the fourth quarter 2012, compared to the third quarter 2012.

Geographic Market Segments

The geographic market segments were realigned in the fourth quarter 2012 to reflect Comerica's three largest geographic markets: Michigan, California and Texas. 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 December 31, 2012 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses fourth quarter 2012 results compared to third quarter 2012.

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

Michigan Market

• Average loans decreased $60 million, primarily due to decreases in Corporate, Personal Banking and Commercial Real Estate, partially offset by an increase in Middle Market, primarily in National Dealer Services.
• Average deposits increased $391 million, primarily due to increases in Corporate, Middle Market and Small Business.
• The provision for credit losses decreased $11 million, primarily due to a decrease in general Middle Market.
• Noninterest income increased $3 million, primarily reflecting increases in customer derivative income and commercial lending fees.
• Noninterest expenses increased $8 million, primarily due to an operational loss and third quarter 2012 gains on sales of assets that reduced noninterest expenses.

California Market

• Average loans increased $360 million, primarily due to an increase in Middle Market, primarily reflecting an increase in National Dealer Services.
• Average deposits increased $492 million, primarily due to increases in Middle Market and Private Banking. The increase in Middle Market was primarily due to an increase in general Middle Market.
• Net interest income increased $2 million, primarily due to an increase in average loan balances and a decrease in net FTP funding charges.
• The provision for loan losses increased $1 million, primarily due to an increase in Middle Market, partially offset by decreases in Commercial Real Estate and Corporate.
• Noninterest expenses increased $2 million, primarily due to nominal increases in several categories, partially offset by a decrease in legal expenses.

Texas Market

• Average loans increased $233 million, primarily due to an increase in Middle Market. The increase in Middle Market was primarily due to an increase in Energy.
• Average deposits decreased $132 million, primarily reflecting decreases in Middle Market and Corporate, partially offset by increases in Small Business and Personal Banking.
• Net interest income decreased $1 million, primarily due to a decrease in accretion on the acquired Sterling loan portfolio.
• The provision for credit losses decreased $1 million, primarily due to a decrease in Private Banking.

Conference Call and Webcast

Comerica will host a conference call to review fourth quarter 2012 financial results at 7 a.m. CT Wednesday, January 16, 2013. Interested parties may access the conference call by calling (800) 309-2262 or (706) 679-5261 (event ID No. 80972031). The call and supplemental financial information can also be accessed via Comerica's "Investor Relations" page at www.comerica.com. A telephone replay will be available approximately two hours following the conference call through January 31, 2013. The conference call replay can be accessed by calling (855) 859-2056 or (404) 537-3406 (event ID No. 80972031). 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 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" 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 the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; changes in Comerica's credit rating; the interdependence of financial service companies; changes in regulation or oversight; 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 of Comerica's customers; the implementation of Comerica's strategies and business models, including 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, failure of technology infrastructure or information security incidents; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; competitive product and pricing pressures among financial institutions within Comerica's markets; changes in customer behavior; 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, 2011 and "Item 1A. Risk Factors" beginning on page 73 of Comerica's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. 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.