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CMA > SEC Filings for CMA > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for COMERICA INC /NEW/

Form 10-Q for COMERICA INC /NEW/


29-Apr-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. In addition, the Corporation may make other written and oral communications from time to time that contain such statements. All statements regarding the Corporation's expected financial position, strategies and growth prospects and general economic conditions expected to exist in the future are forward-looking statements. The words, "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 the Corporation or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of the Corporation's management based on information known to the Corporation's management as of the date of this report and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of the Corporation's management for future or past operations, products or services, and forecasts of the Corporation'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 the Corporation'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, the Corporation'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; volatility and disruptions in global capital and credit markets; changes in the Corporation's credit rating; the interdependence of financial service companies; changes in regulation or oversight; unfavorable developments concerning credit quality; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of the Corporation's customers; operational difficulties, failure of technology infrastructure or information security incidents; the implementation of the Corporation's strategies and business initiatives; the Corporation's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; 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 the Corporation'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 and floods; changes in accounting standards and the critical nature of the Corporation's accounting policies. The Corporation 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, 2013. Forward-looking statements speak only as of the date they are made. The Corporation 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 report or in any documents, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.


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RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2014 was $139 million, an increase of $5 million from $134 million reported for the three months ended March 31, 2013. This increase was primarily the result of decreases of $10 million in noninterest expenses and $7 million in the provision for credit losses, partially offset by decreases of $6 million in net interest income and $5 million in noninterest income. Net income per diluted common share was $0.73 for the three months ended March 31, 2014, compared to $0.70 for the same period one year ago. Average diluted common shares were 187 million for both the three-month periods ended March 31, 2014 and 2013. Full-Year 2014 Outlook Compared to Full-Year 2013 Management expectations for full-year 2014 compared to 2013, assuming a continuation of the current economic and low rate environment, are as follows:
Average loan growth consistent with 3 percent growth achieved in 2013, reflecting stabilization in Mortgage Banker Finance near average fourth quarter 2013 level and continued focus on pricing and structure discipline.

Net interest income modestly lower, reflecting a decline in purchase accounting accretion, to $20 million to $30 million, and the effect of continued pressure from the low rate environment, partially offset by loan growth.

Provision for credit losses and net charge-offs stable. Increases to the allowance for credit losses due to loan growth offset by continued strong credit quality.

Noninterest income modestly lower, reflecting stable customer-driven fee income and lower noncustomer-driven income. Growth in fiduciary income and card fees offset by lower capital market activity.

Noninterest expenses lower, reflecting lower litigation-related expenses and a more than 50 percent decrease in pension expense, to $35 million to $40 million.

Income tax expense to approximate 32 percent of pre-tax income, reflecting the change in accounting for affordable housing projects that qualify for the low-income housing tax credit described below. The impact of the increase in the effective tax rate is fully offset by a related increase in noninterest income, resulting in no impact to net income.

The Corporation early adopted an amendment to U.S. generally accepted accounting principles in the first quarter 2014 related to the accounting for affordable housing projects that qualify for the low-income housing tax credit. Amortization of the initial investment cost of qualifying projects is now recorded in the provision for income taxes together with the tax credits and benefits received. Previously, the amortization was recorded as a reduction to other noninterest income. All prior period amounts in this financial review have been restated to reflect the adoption of the amendment, which resulted in offsetting increases to other noninterest income and the provision for income taxes of $13 million for the three months ended March 31, 2013 ($56 million for full-year 2013). The adoption had no impact on net income for any period presented.
Net Interest Income
Net interest income was $410 million for the three months ended March 31, 2014, a decrease of $6 million compared to $416 million for the three months ended March 31, 2013. The decrease in net interest income resulted primarily from a decrease in yields on earning assets, partially offset by a the benefit provided by a decrease in funding costs and an increase in average earning assets. Average earning assets increased $1.3 billion, or 2 percent, to $59.9 billion for the three months ended March 31, 2014, compared to $58.6 billion for the same period in 2013. The increase in average earning assets primarily reflected increases of $1.6 billion in average interest-bearing deposits with banks and $458 million in average loans, partially offset by a decrease of $739 million in average investment securities available-for-sale. The net interest margin (FTE) for the three months ended March 31, 2014 decreased 11 basis points to 2.77 percent, from 2.88 percent for the comparable period in 2013, primarily from decreased yields on loans and the impact of an increase in excess liquidity, partially offset by lower deposit rates and improved yields on mortgage-backed investment securities. The decrease in loan yields was primarily the result of the impact of a lower rate environment, repayments on higher-yielding loans, positive credit quality migration throughout the portfolio and shifts in the average loan portfolio mix. Yields on mortgage-backed investment securities increased primarily due to decreased premium amortization resulting from slower prepayment speeds, largely reflecting the cumulative impact of a retrospective adjustment made in the three months ended March 31, 2014. Excess liquidity reduced the net interest margin by approximately 24 basis points and 17 basis points in the three months ended March 31, 2014 and 2013, respectively. Excess liquidity was represented by $5.3 billion and $3.7 billion of average balances deposited with the Federal Reserve Bank (FRB) in the three months ended March 31, 2014 and 2013, respectively, included in "interest-bearing deposits with banks" on the consolidated balance sheets. The "Quarterly Analysis of Net Interest Income & Rate/Volume - Fully Taxable Equivalent" table above provides an analysis of net interest income (FTE) for the three months ended March 31, 2014 and 2013 and details the components of the change in net interest income on a FTE basis for the three months ended March 31, 2014 compared to the same period in the prior year.
For further discussion of the effects of market rates on net interest income, refer to the "Market and Liquidity Risk" section of this financial review.


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Quarterly Analysis of Net Interest Income & Rate/Volume - Fully Taxable

Equivalent (FTE)
                                                            Three Months Ended
                                             March 31, 2014                    March 31, 2013
                                      Average               Average     Average               Average
(dollar amounts in millions)          Balance    Interest     Rate      Balance    Interest     Rate
Commercial loans                     $ 28,362   $     221     3.17 %   $ 28,056   $     229     3.31 %
Real estate construction loans          1,827          15     3.40        1,314          13     4.15
Commercial mortgage loans               8,770          86     3.97        9,398          95     4.08
Lease financing                           848           9     4.07          857           7     3.23
International loans                     1,301          12     3.68        1,282          11     3.62
Residential mortgage loans              1,724          17     3.86        1,556          17     4.39
Consumer loans                          2,243          17     3.16        2,154          18     3.36
Total loans (a)                        45,075         377     3.39       44,617         390     3.54

Mortgage-backed securities
available-for-sale                      8,911          55     2.42        9,635          53     2.25
Other investment securities
available-for-sale                        371           -     0.43          386           -     0.50
Total investment securities
available-for-sale                      9,282          55     2.34       10,021          53     2.17

Interest-bearing deposits with banks
(b)                                     5,448           4     0.26        3,852           2     0.27
Other short-term investments              111           -     0.66          117           1     2.30
Total earning assets                   59,916         436     2.94       58,607         446     3.09

Cash and due from banks                   913                               979
Allowance for loan losses                (603 )                            (633 )
Accrued income and other assets         4,482                             4,498
Total assets                         $ 64,708                          $ 63,451

Money market and interest-bearing
checking deposits                    $ 22,261           6     0.11     $ 21,294           7     0.14
Savings deposits                        1,700           -     0.03        1,623           -     0.03
Customer certificates of deposit        5,109           5     0.36        5,744           7     0.47
Foreign office time deposits              464           -     0.42          525           1     0.55
Total interest-bearing deposits        29,534          11     0.15       29,186          15     0.21
Short-term borrowings                     185           -     0.03          123           -     0.11
Medium- and long-term debt              3,545          14     1.53        4,707          15     1.32
Total interest-bearing sources         33,264          25     0.30       34,016          30     0.36

Noninterest-bearing deposits           23,236                            21,506
Accrued expenses and other
liabilities                               979                               973
Total shareholders' equity              7,229                             6,956
Total liabilities and shareholders'
equity                               $ 64,708                          $ 63,451

Net interest income/rate spread
(FTE)                                           $     411     2.64                $     416     2.73

FTE adjustment                                  $       1                         $       -

Impact of net noninterest-bearing
sources of funds                                              0.13                              0.15
Net interest margin (as a percentage
of average earning assets)
(FTE) (a) (b)                                                 2.77 %                            2.88 %

(a) Accretion of the purchase discount on the acquired loan portfolio of $12 million and $11 million increased the net interest margin by 8 basis points for both the three-month periods ended March 31, 2014 and 2013.

(b) Excess liquidity, represented by average balances deposited with the Federal Reserve Bank, reduced the net interest margin by 24 basis points and 17 basis points in the three months ended March 31, 2014 and 2013, respectively.


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Quarterly Analysis of Net Interest Income & Rate/Volume - Fully Taxable

Equivalent (FTE) (continued)
                                                       Three Months Ended
                                                 March 31, 2014/March 31, 2013
                                                              Increase
                                              Increase       (Decrease)        Net
                                             (Decrease)        Due to       Increase
(in millions)                               Due to Rate      Volume (a)    (Decrease)
Interest Income (FTE):
Loans                                    $        (16 )     $     3       $    (13 )
Investment securities available-for-sale            5            (3 )            2
Interest-bearing deposits with banks                -             2              2
Other short-term investments                       (1 )           -             (1 )
Total interest income (FTE)                       (12 )           2            (10 )

Interest Expense:
Interest-bearing deposits                          (3 )          (1 )           (4 )
Medium- and long-term debt                          3            (4 )           (1 )
Total interest expense                              -            (5 )           (5 )
Net interest income (FTE)                $        (12 )     $     7       $     (5 )

(a) Rate/volume variances are allocated to variances due to volume.

Provision for Credit Losses
The provision for credit losses was $9 million for the three months ended March 31, 2014, compared to $16 million for the same period in 2013. The provision for credit losses includes both the provision for loan losses and the provision for credit losses on lending-related commitments.
The provision for loan losses is recorded to maintain the allowance for loan losses at the level deemed appropriate by the Corporation to cover probable credit losses inherent in the portfolio. For a discussion of the allowance for loan losses and the methodology used in the determination of the allowance for loan losses, refer to the "Credit Risk" and "Critical Accounting Policies" sections of this financial review. The provision for loan losses was $8 million for the three months ended March 31, 2014, compared to $12 million for the three months ended March 31, 2013. Credit quality in the loan portfolio continued to improve in the three months ended March 31, 2014, compared to the same period in the prior year. Improvements in credit quality included a decline of $755 million in the Corporation's criticized loan list from March 31, 2013 to March 31, 2014. Reflected in the decline in criticized loans was a decrease in nonaccrual loans of $177 million. The Corporation's criticized loan list is consistent with loans in the Special Mention, Substandard and Doubtful categories defined by regulatory authorities.
Net loan charge-offs in the three months ended March 31, 2014 decreased $12 million to $12 million, or 0.10 percent of average total loans, compared to $24 million, or 0.21 percent, for the three months ended March 31, 2013. The $12 million decrease in net loan charge-offs in the three months ended March 31, 2014, compared to the same period in 2013, reflected decreases in most business lines, with the largest decreases in general Middle Market and Small Business, partially offset by increases in Technology and Life Sciences and Commercial Real Estate.
The provision for credit losses on lending-related commitments is recorded to maintain the allowance for credit losses on lending-related commitments at the level deemed appropriate by the Corporation to cover probable credit losses inherent in lending-related commitments. The provision for credit losses on lending-related commitments was $1 million in the three months ended March 31, 2014, compared to $4 million in the three months ended March 31, 2013. The $3 million decrease reflected a $4 million decrease in the provision for unfunded commitments, partially offset by a $1 million increase in the provision for letters of credit. Lending-related commitment charge-offs were insignificant for the three months ended March 31, 2014 and 2013.
An analysis of the allowance for credit losses and nonperforming assets is presented under the "Credit Risk" subheading in the "Risk Management" section of this financial review.


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Noninterest Income
                                                 Three Months Ended March 31,
(in millions)                                           2014                    2013
Customer-driven income:
Service charges on deposit accounts      $            54                       $  55
Fiduciary income                                      44                          43
Commercial lending fees                               20                          21
Card fees                                             19                          17
Letter of credit fees                                 14                          16
Foreign exchange income                                9                           9
Brokerage fees                                         5                           5
Other customer-driven income (a)                      19                          20
Total customer-driven noninterest income             184                         186
Noncustomer-driven income:
Bank-owned life insurance                              9                           9
Net securities gains (losses)                          1                           -
Other noncustomer-driven income (a)                   14                          18
Total noninterest income                 $           208                       $ 213

(a) The table below provides further details on certain categories included in other noninterest income.

Noninterest income was $208 million for the three months ended March 31, 2014, a decrease of $5 million compared to $213 million for the same period in 2013. The decrease primarily reflected a $4 million decrease in securities trading income, as shown in the following table, which illustrates certain categories included in "other noninterest income" on the consolidated statements of comprehensive income.

                                                Three Months Ended March 31,
(in millions)                                          2014                    2013
Other noninterest income:
Other customer-driven income:
Investment banking fees                 $           4                         $   5
All other customer-driven income                   15                            15
Total other customer-driven income                 19                            20
Other noncustomer-driven income:
Securities trading income                           1                             5
Deferred compensation asset returns (a)             2                             3
All other noncustomer-driven income                11                            10
Total other noncustomer-driven income              14                            18
Total other noninterest income          $          33                         $  38

(a) Compensation deferred by the Corporation's officers is invested based on investment selections of the officers. Income earned on these assets is reported in noninterest income and the offsetting increase in liability is reported in salaries expense.

Noninterest Expenses
                                       Three Months Ended March 31,
(in millions)                                 2014                    2013
Salaries and benefits expense  $           247                       $ 251
Net occupancy expense                       40                          39
Equipment expense                           14                          15
Outside processing fee expense              28                          28
Software expense                            22                          22
Litigation-related expense                   3                           3
FDIC insurance expense                       8                           9
Advertising expense                          6                           6
Other noninterest expenses                  38                          43
Total noninterest expenses     $           406                       $ 416

Noninterest expenses were $406 million for the three months ended March 31, 2014, a decrease of $10 million compared to $416 million for the three months ended March 31, 2013. The decrease primarily reflected a $4 million decrease in salaries and


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benefits expense and small decreases in several other categories of noninterest expense. Salaries and benefits expense decreased primarily due to a decrease in pension expense, partially offset by increases in payroll taxes and share-based compensation expense.

STRATEGIC LINES OF BUSINESS
The Corporation's management accounting system assigns balance sheet and income statement items to each segment using certain methodologies, which are regularly reviewed and refined. These methodologies may be modified as the management accounting system is enhanced and changes occur in the organizational structure and/or product lines.
Business Segments
The Corporation's operations are strategically aligned into three major business segments: the Business Bank, the Retail Bank and Wealth Management. These business segments are differentiated based upon the products and services provided. In addition to the three major business segments, Finance is also reported as a segment. The Other category includes items not directly associated with these business segments or the Finance segment. The performance of the business segments is not comparable with the Corporation's consolidated results and is not necessarily comparable with similar information for any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Note 13 to the consolidated financial statements describes the business activities of each business segment and presents financial results of these business segments for the three months ended March 31, 2014 and 2013.
The following table presents net income (loss) by business segment.
                                   Three Months Ended March 31,
(dollar amounts in millions)         2014                  2013
Business Bank                $   198         85 %     $ 198      85 %
Retail Bank                        9          4          10       4
Wealth Management                 26         11          25      11
                                 233        100 %       233     100 %
Finance                          (92 )                  (98 )
Other (a)                         (2 )                   (1 )
Total                        $   139                  $ 134

(a) Includes items not directly associated with the three major business segments or the Finance Division. The Business Bank's net income of $198 million for the three months ended March 31, 2014 was unchanged compared to the three months ended March 31, 2013. Net interest income (FTE) of $371 million decreased $4 million in the three months ended March 31, 2014, primarily due to lower loan yields, partially offset by an increase in accretion of the purchase discount on the acquired loan portfolio, the benefit provided by an increase of $174 million in average loans and a decrease in net funds transfer pricing (FTP) charges. Average deposits increased $1.5 billion. The provision for credit losses decreased $4 million to $16 million for the three months ended March 31, 2014, compared to the same period in the prior year, primarily due to improved credit quality. Net credit-related charge-offs of $11 million decreased $5 million in the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily reflecting a decrease in general Middle Market, partially offset by increases in . . .

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