CMA Comerica Inc

DALLAS, Oct. 18, 2016 /PRNewswire/ -- Comerica Incorporated (NYSE: CMA) today reported third quarter 2016 net income of $149 million, compared to $104 million for the second quarter 2016 and $136 million for the third quarter 2015. Earnings per diluted share were 84 cents for third quarter 2016 compared to 58 cents for second quarter 2016 and 74 cents for third quarter 2015. Comerica also continued the implementation of its efficiency and revenue initiative ("GEAR Up"), which is expected to drive additional annual pre-tax income of approximately $180 million by year-end 2017 and $270 million by year-end 2018.

"On our last earnings call, we announced that we had identified more than 20 work streams in our GEAR Up initiative that are expected to drive a significant improvement in our bottom line.  At that time, we also indicated there was more to come, as we were still identifying and analyzing opportunities.  We have determined that those new opportunities add about $40 million to our initial financial target.  As a result, we are now expecting to drive at least $270 million in additional pre-tax income for full-year 2018," said Ralph W. Babb, Jr., chairman and chief executive officer.  "These actions, which we have already begun to execute with urgency, take us a long way towards achieving a double-digit return on equity.  We expect to meet or exceed this goal with sustained growth, net of investment, normal credit costs, continued equity buybacks, and assuming only a 25 to 50 basis point increase in rates.  We are not relying on a significantly better economic environment or a substantial increase in rates to reach our goal.  We remain confident that as we deliver on this initiative, we will create greater shareholder value."

The GEAR Up initiative now includes expected pre-tax benefits of approximately $180 million in full-year 2017 and approximately $270 million in full-year 2018. Additional initiatives include a new retirement program that will replace the current pension plan and retirement account plan for most employees effective January 1, 2017. Active pension plan participants age 60 or older as of December 31, 2016 and current retirees will not be impacted. This initiative is expected to result in annual savings of approximately $35 million in full-year 2017 (assuming current actuarial assumptions). The initiative is also expected to reduce full-year 2016 pension expense to $7 million, resulting in a $4 million credit in the fourth quarter. In addition, streamlining additional operations and administrative support functions is expected to add about $5 million to the initial target.

• Expense reduction targets have been increased to approximately $150 million for full-year 2017, which increases to approximately $200 million for full-year 2018. This is to be achieved through the additional actions identified above as well as the previously announced reduction in workforce, streamlining operational processes, real estate optimization including consolidating 38 banking centers, selective outsourcing of technology functions and reduction of technology system applications. Approximately two-thirds of the workforce reduction target will be completed by year-end 2016.
• Revenue enhancements are unchanged and are expected to be approximately $30 million for full-year 2017, which increase to approximately $70 million for full-year 2018, through expanded product offerings, enhanced sales tools and training and improved customer analytics to drive opportunities.
• Total expected pre-tax restructuring charges of $140 million to $160 million to be incurred through 2018 are unchanged.

"Quarter over quarter, our earnings per share increased 45 percent. This reflected strong credit quality, a reduction in restructuring charges, solid revenue growth and well-managed expenses," said Babb. "While loans were relatively stable, average deposit growth was robust, increasing $1.5 billion. Criticized loans declined and net charge-offs were only 13 basis points of average loans. Our capital position remains solid. In line with our CCAR plan, we increased our share repurchases to 2.1 million shares for a total of $97 million, compared to $65 million in the second quarter.

"We believe we are well positioned for the future," said Babb. "We benefit meaningfully from any increase in interest rates and we continue to adeptly navigate the energy cycle. Yet, we are not waiting for the environment to improve. We are moving with urgency to execute our GEAR Up initiatives and are fully committed to delivering on these efficiency and revenue opportunities to further enhance our profitability."

Third Quarter 2016 Compared to Second Quarter 2016

Average total loans decreased $263 million to $49.2 billion.

• Primarily reflected decreases in Energy, National Dealer Services and Technology and Life Sciences; partially offset by increases in Mortgage Banker Finance and Commercial Real Estate.
• Period-end total loans decreased $1.1 billion to $49.3 billion, primarily due to decreases in National Dealer Services and Energy.

Average total deposits increased $1.5 billion to $58.1 billion.

• Driven by a $2.1 billion increase in noninterest-bearing deposits, partially offset by a $534 million decrease in interest-bearing deposits.
• Average total deposits increased in general Middle Market, Commercial Real Estate and Corporate Banking; partially offset by a decrease in Wealth Management.
• Period-end deposits increased $2.9 billion to $59.3 billion, in part reflecting an elevated deposit level associated with the government card program on the final day of the quarter.

Net interest income increased $5 million to $450 million.

• Primarily the result of one additional day in the third quarter and the benefit from an increase in LIBOR rates, partially offset by higher funding costs.

The provision for credit losses decreased $33 million to $16 million.

• Net credit-related charge-offs were $16 million, or 0.13 percent of average loans, compared to $47 million, or 0.38 percent, in the second quarter 2016. Energy net credit-related charge-offs were $6 million compared to $32 million in the second quarter 2016.
• The allowance for loan losses was $727 million, or 1.48 percent of total loans. The reserve allocation for Energy remained above 8 percent of loans in the Energy business line.

Noninterest income increased $4 million to $272 million.

• Increases in commercial lending fees, largely due to an increase in syndication agent fees, partially offset by a decrease in fiduciary income.
• Non-fee categories increased modestly, primarily due to an increase in income from bank-owned life insurance partially offset by a decrease in deferred compensation plan asset returns.

Noninterest expenses decreased $25 million to $493 million.

• Excluding a $33 million decrease in restructuring charges, noninterest expenses increased $8 million, primarily due to a $6 million decrease in gains from the sale of leased assets and a $3 million increase in outside processing fees.

Capital position remained solid at September 30, 2016.

• Increased repurchases by 640,000 shares to approximately 2.1 million shares of common stock under the equity repurchase program.
• Dividend increased 4.5 percent to 23 cents per share.
• Including dividends, returned a total of $137 million to shareholders.

Third Quarter 2016 Compared to Third Quarter 2015

Average total loans increased $234 million.

• Primarily reflected continued growth in Commercial Real Estate and Mortgage Banker Finance, partially offset by declines in Energy and general Middle Market.

Average total deposits decreased $1.1 billion, or 2 percent.

• Primarily driven by decreases in Municipalities, Corporate Banking, Technology and Life Sciences and the Financial Services Division; partially offset by increases in Retail Bank and Commercial Real Estate.

Net interest income increased $28 million, or 6 percent.

• Primarily due to higher yields on loans and Federal Reserve Bank deposits, as well as earning asset growth; partially offset by an increase in funding costs.

The provision for credit losses decreased $10 million, or 38 percent.

Noninterest income increased $12 million, or 5 percent.

• Excluding a $6 million increase in deferred compensation asset returns, noninterest income increased $6 million, primarily reflecting a $5 million increase in card fees and a $4 million increase in commercial lending fees, largely due to an increase in syndication agent fees; partially offset by decreases in warrant income and risk management hedge ineffectiveness.

Noninterest expense increased $36 million.

• Noninterest expense increased $10 million excluding third quarter 2016 restructuring charges of $20 million and a $6 million increase in deferred compensation plan expense. The remaining increase primarily reflected increases of $5 million each in software expense and FDIC insurance premiums.

Net interest income increased $5 million to $450 million in the third quarter 2016, compared to the second quarter 2016.

• Interest on loans increased $5 million, primarily reflecting the benefit from increases in LIBOR rates (+$4 million), one additional day in the third quarter (+$4 million) and the impact of a second quarter 2016 negative residual value adjustment to assets in the leasing portfolio (+$2 million), partially offset by the impact of a decrease in average loan balances (-$2 million), the impact of nonaccrual loans (-$1 million), lower fees (-$1 million) and other portfolio dynamics (-$1 million).
• Interest on investment securities decreased $1 million due to a decrease in yields.
• Interest on short-term investments increased $3 million due to an increase in average Federal Reserve Bank deposit balances.
• Interest expense on debt increased $2 million, primarily due to higher costs on variable rate debt tied to LIBOR and the full-quarter impact of Federal Home Loan Bank (FHLB) borrowings during the second quarter.

The net interest margin of 2.66 percent decreased 8 basis points compared to the second quarter 2016, primarily due to the impact of an increase in lower-yielding Federal Reserve Bank deposit balances (-8 basis points).

Credit Quality

"Credit quality was strong, with total net charge-offs of $16 million, or 13 basis points, which is well below our historical norm," said Babb. "Criticized loans declined almost $300 million and comprised less than 7 percent of our total loans.  Energy loans were 5 percent of total loans as they continued to decrease. While the overall performance of the Energy portfolio has improved, as evidenced by net charge-offs of only $6 million in the third quarter, and oil and gas prices have remained relatively stable for the past several months, we remain cautious and continued to maintain a reserve allocation of over 8 percent for Energy loans and a total reserve of 1.48 percent of total loans as of September 30, 2016.  The solid performance of our total loan portfolio contributed to a reduction in our provision expense to $16 million."

• Energy business line loans were $2.5 billion at September 30, 2016 compared to $2.7 billion at June 30, 2016.
  • Criticized Energy loans decreased $79 million, to $1.5 billion.
  • Energy net charge-offs were $6 million, compared to $32 million in the second quarter 2016.
  • The reserve allocation for loans in the Energy business line remained above 8 percent at September 30, 2016.
• Net charge-offs decreased $31 million to $16 million, or 0.13 percent of average loans, in the third quarter 2016, compared to $47 million, or 0.38 percent, in the second quarter 2016. Aside from Energy, net charge-offs were $10 million, or 8 basis points, for the remainder of the portfolio.
• During the third quarter 2016, $105 million of borrower relationships over $2 million were transferred to nonaccrual status, a decrease of $2 million compared to $107 million transferred during the second quarter. Third quarter 2016 transfers to nonaccrual included $63 million from Energy, compared to $51 million in the second quarter.
• Criticized loans decreased $290 million to $3.3 billion at September 30, 2016, compared to $3.6 billion at June 30, 2016. Criticized loans are generally consistent with the Special Mention, Substandard and Doubtful categories defined by regulatory authorities.

Fourth Quarter 2016 Outlook

For fourth quarter 2016 compared to third quarter 2016, management expects the following, assuming a continuation of the current economic and low-rate environment:

• Average loans stable, reflecting growth in National Dealer Services, Technology and Life Sciences and small increases in several other lines of business, offset by seasonality in Mortgage Banker and a continued decline in Energy.
• Net interest income slightly higher, reflecting benefits from a decline in wholesale funding costs and an increase in LIBOR.
• Provision for credit losses expected to remain low, with net charge-offs below historical norms. Provision and net charge-offs expected to be between second quarter 2016 and third quarter 2016 levels.
• Noninterest income relatively stable, excluding income from bank-owned life insurance and deferred compensation asset returns, with fee income expected to remain strong at third quarter 2016 levels.
• Noninterest expenses lower, excluding an estimated $30 million to $35 million in restructuring expense, with GEAR Up expense savings of approximately $25 million, primarily salaries and benefits (including pension); seasonal increases in outside processing, marketing and occupancy expected to be partially offset by third quarter 2016 level of deferred compensation expense not expected to repeat.
• Income tax expense to approximate 30 percent of pre-tax income.

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 September 30, 2016. The accompanying narrative addresses third quarter 2016 results compared to second quarter 2016.

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

• Average loans decreased $331 million, primarily reflecting decreases in Energy, National Dealer Services and Technology and Life Sciences, partially offset by an increase in Mortgage Banker Finance.
• Average deposits increased $1.6 billion, primarily reflecting increases in general Middle Market, Commercial Real Estate and Corporate Banking.
• Net interest income increased $6 million, primarily reflecting the benefit from one additional day in the third quarter, the impact of a second quarter 2016 negative residual value adjustment to assets in the leasing portfolio and an increase in net funds transfer pricing (FTP) credits, partially offset by the impact of a decrease in average loan balances. The increase in net FTP credits primarily reflected the benefit from the increase in average deposits partially offset by the impact of higher funding costs.
• The provision for credit losses decreased $44 million, primarily reflecting decreases in Energy and Technology and Life Sciences, in part due to lower loan balances, partially offset by an increase in general Middle Market.
• Noninterest income increased $1 million, primarily due to an increase in syndication agent fees.
• Noninterest expenses decreased $7 million, primarily reflecting a decrease in restructuring charges, partially offset by a decrease in gains from the sale of leased assets and an increase in outside processing fees.

• Average deposits increased $108 million, primarily reflecting an increase in noninterest-bearing Small Business deposits.
• Net interest income increased $1 million, primarily the result of the FTP benefit provided by the increase in average deposits.
• The provision for credit losses increased $9 million, primarily due to an increase in reserves for Small Business.
• Noninterest income increased $2 million, primarily reflecting an increase in customer derivative income.
• Noninterest expenses decreased $10 million, primarily reflecting a decrease in restructuring charges.

• Average loans increased $76 million, primarily reflecting an increase in Private Banking.
• Average deposits decreased $183 million, primarily reflecting decreases in money market and checking deposits, partially offset by an increase in noninterest-bearing deposits.
• The provision for credit losses decreased $4 million, primarily reflecting a decrease in net charge-offs.
• Noninterest income decreased $1 million, primarily due to a decrease in fiduciary income.
• Noninterest expenses decreased $6 million, primarily reflecting a decrease in restructuring charges.

Geographic Market Segments

Comerica also provides market segment results for three primary geographic markets: Michigan, California and Texas. In addition to the three primary geographic markets, Other Markets is also reported as a market segment. 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 September 30, 2016.

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

• Average loans decreased $274 million in Texas, $172 million in Michigan and $71 million in California. The decrease in Texas primarily reflected a decrease in Energy, partially offset by an increase in Commercial Real Estate, while the decrease in Michigan primarily reflected a decrease in general Middle Market and the decrease in California primarily reflected a decrease in Technology and Life Sciences, partially offset by an increase in Commercial Real Estate.
• Average deposits increased $741 million in California and $391 million in Michigan, and decreased $192 million in Texas. General Middle Market deposits increased in California and Michigan, and decreased in Texas. The increase in California also reflected an increase in Commercial Real Estate, while the decrease in Texas also reflected a decrease in Technology and Life Sciences.
• Net interest income increased $3 million in Michigan and $3 million in California, and decreased $1 million in Texas. The increases in Michigan and California primarily reflected the FTP benefit from higher deposit balances and one additional day in the third quarter, partially offset by the impact of lower loan balances and higher FTP funding costs. The decrease in Texas primarily reflected an increase in FTP funding costs.
• The provision for credit losses decreased $35 million in Texas and $21 million in California, and increased $10 million in Michigan. The decrease in Texas primarily reflected a decrease in Energy, in part due to lower loan balances. In California, the decrease primarily reflected decreases in Technology and Life Sciences and general Middle Market. The increase in Michigan primarily reflected an increase in general Middle Market.
• Noninterest income increased $5 million in California, $2 million in Texas and $1 million in Michigan. The increase in California was primarily due to increases in warrant income, syndication agent fees and card fees. The increases in both Texas and Michigan were primarily due to increases in syndication agent fees.
• Noninterest expenses decreased $11 million in Texas and $10 million in California and increased $2 million in Michigan. Restructuring charges decreased in all three primary markets. In addition to the impact of restructuring charges, the decrease in Texas reflected small decreases in several other categories and the increase in Michigan reflected a decrease in gains from the sale of leased assets.

Conference Call and Webcast

Comerica will host a conference call to review third quarter 2016 financial results at 7 a.m. CT Tuesday, October 18, 2016. Interested parties may access the conference call by calling (877) 523-5249 or (210) 591-1147 (event ID No. 67807311). The call and supplemental financial information can also be accessed via Comerica's "Investor Relations" page at www.comerica.com. A replay of the Webcast can 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," "projects," "models" 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, including the GEAR Up initiative, and forecasts of Comerica's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries as well as estimates of the economic benefits of the GEAR Up initiative, 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 changes in interest rates; changes in regulation or oversight; Comerica's ability to maintain adequate sources of funding and liquidity; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of Comerica's customers, in particular the energy industry; unfavorable developments concerning credit quality; operational difficulties, failure of technology infrastructure or information security incidents; reliance on other companies to provide certain key components of business infrastructure; factors impacting noninterest expenses which are beyond Comerica's control; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; reductions in Comerica's credit rating; whether Comerica may achieve opportunities for revenue enhancements and efficiency improvements under the GEAR Up initiative, or changes in the scope or assumptions underlying the GEAR Up initiative; the interdependence of financial service companies; the implementation of Comerica's strategies and business initiatives; damage to Comerica's reputation; Comerica's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; competitive product and pricing pressures among financial institutions within Comerica's markets; changes in customer behavior; any future strategic acquisitions or divestitures; 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, 2015, "Item 1A. Risk Factors" on page 54 of Comerica's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and "Item 1A. Risk Factors" on page 62 of Comerica's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. 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.