Comerica Incorporated (CMA) reported third-quarter 2011 operating earnings of 62 cents per share, significantly beating the Zacks Consensus Estimate of 52 cents.
However, the reported quarter earnings included $21 million or 11 cents of merger and restructuring charges related to acquisition of Sterling Bancshares Inc. During the reported quarter, the company completed the acquisition of Sterling that was announced in the previous quarter.
After considering this expense, the net income in the reported quarter was $98 million or 51 cents compared with $96 million or 53 cents in the prior quarter and $59 million or 33 cents recorded in the prior year quarter.
Total revenue in the quarter was $624 million, up 5.2% sequentially and 5.8% year over year. However, total revenue missed the Zacks Consensus Estimate of $627 million.
The improvement in the results reflected the growth in Comerica’s top line, partially offset by higher non-interest expenses. Further, a significant improvement in credit quality and strong capital ratios also acted as a positive catalyst.
Behind the Headlines
Comerica’s net interest income surged 8.2% from the prior quarter and 4.7% year over year to $423 million in the reported quarter. The rise was mainly due to increase in average earning assets.
Net interest margin (NIM) improved 4 basis points (bps) sequentially but declined 5 bps year over year to 3.18% in the quarter. The hike was primarily attributable to the acquisition of the Sterling loan portfolio.
In the reported quarter, non-interest income was $201 million, down from $202 million in the prior quarter but grew from $186 million in previous year quarter.
Non-interest expenses during the reported quarter totaled $460 million, up 12.5% sequentially and 14.4% year over year. The rise was principally driven by restructuring expenses associated with the Sterling acquisition.
Credit Quality
Comerica recorded significant improvement in credit quality during the reported quarter. Provision for loan losses fell 19.1% sequentially and a whopping 68.9% year over year to $38 million during the quarter.
Net credit-related charge-offs decreased $13 million sequentially to $77 million in the reported quarter. The decrease was mainly aided by a decline in Middle Market business line, which was partially offset by an increase in Commercial Real Estate business line.
Comerica’s nonperforming assets increased slightly from $1,044 million in the prior quarter but fell from $1,311 million in the year ago quarter to $1,045 million. However, the company’s nonperforming loans were $958 million, declining 16.4% sequentially and 19.6% year over year.
Balance Sheet and Profitability Ratios
As of September 30, 2011, total assets and common shareholders' equity were $60.9 billion and $7.0 billion, respectively, compared with $54.1 billion and $6.0 billion, respectively, as of June 30, 2011.
As of September 30, 2011, Comerica's tangible common equity ratio was 10.43% compared with 10.90% as of June 30, 2011. The estimated Tier 1 ratio was 10.57%, up from 10.53% as of June 30, 2011.
Share Repurchase
During the reported quarter, Comerica repurchased 2.1 million shares of common stock in the open market under the share repurchase program.
Guidance for the Fourth Quarter of 2011
NIM is guided to be 3.15%, reflecting the benefit from an increase in mortgage-backed investment securities and lower excess liquidity, offset by a reduction in the accretion of the purchase discount on the acquired Sterling loan portfolio.
Management expects non-interest income to fall by a mid-single digit sequentially, primarily due to the impact of regulatory changes and no significant net securities gains.
Regarding expenses, Comerica’s management projects a low mid-single-digit rise excluding restructuring costs resulting from the Sterling addition. Comerica also expects to incur merger and restructuring charges of approximately $25 million in the fourth quarter 2011. The company anticipates total acquisition synergies of approximately about $56 million or 35% of Sterling expenses, with the majority to be realized next year.
Management anticipates net credit-related charge-offs in the range of $65-$75 million, while provision for credit losses to trend lower sequentially.
Furthermore, both average loans and average earning assets are also expected to rise sequentially.
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 augur well to some extent. The acquisition of Sterling will enhance its growth in Texas. 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.
One of the close peers of Comerica, KeyCorp (KEY) is scheduled to report third quarter earnings of October 20.
Comerica currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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