Brian Klock - Keefe, Bruyette, & Woods, Inc., Research DivisionBrian Foran - Nomura Securities Co. Ltd., Research Division Presentation Operator Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Comerica Third Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Darlene Persons, Director of Investor Relations. Ma'am, you may begin your conference. Darlene P. Persons Thank you, Brandy. Good morning, and welcome to Comerica's Third Quarter 2011 Earnings Conference Call. Participating on this call will be our Chairman, Ralph Babb; CFO, Beth Acton; Chief Credit Officer, John Killian; Vice Chairman of the Business Bank, Lars Anderson; and Karen Parkhill, Vice Chairman. A copy of the press release and presentation slides are available on the SEC's website, as well as the Investor Relations section of our website, comerica.com. As we review our second quarter results, we will be referring to the slides, which provide additional details on our earnings. Before we get started, I would like to remind you that this conference call contains forward-looking statements and in that regard, you should be mindful of the risks and uncertainties that can cause future results to vary from expectations. Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. I refer you to the Safe Harbor statement contained in the release issued today, as well as Slide 2 of this presentation, which I incorporate into this call, as well as our filings with the SEC. Also, this conference call will reference non-GAAP measures and in that regard, I would direct you to the reconciliation of these measures within the presentation. Now I'll turn the call over to Ralph, who will begin on Slide 3.
Ralph W. BabbGood morning. Today, we reported third quarter net income of $98 million, or $0.51 per share. Impacting the quarter were merger and restructuring charges of $33 million, which is $21 million after tax, or $0.11 per share, related to our acquisition of Sterling Bank shares, which we completed on July 28. Third quarter revenue was up 5% when compared to the second quarter, reflecting our Sterling acquisition. Turning to Slide 4 and highlights from the quarter. The Sterling acquisition primarily drove our $2 billion increase in period-end loans in the third quarter. Comerica legacy loans reflected increases in Texas as well as in commercial loans, primarily Specialty Businesses including Mortgage Banker, Energy, Technology and Life Sciences, offset by decreases in National Dealer Services, Global Corporate Banking and Small Business Banking. Specialty Businesses, along with Sterling, were the primary contributors to the $1.1 billion increase in period-end commercial loans in the third quarter. Comerica legacy commercial loans increased $668 million, or 3%. In our Texas market, Comerica legacy period-end total loans increased $113 million, or 2%. Our average core deposits were up $3.5 billion, with increases in all major markets led by Texas, which reflected average Sterling core deposits of $2.5 billion. The net interest margin increased 4 basis points to 3.18%, primarily from the acquisition of the Sterling Loan portfolio, partially offset by the impact from higher excess liquidity. Noninterest income was stable, with core operating fees up modestly, including the contribution from 2 months of Sterling. Noninterest expense increased $51 million to $460 million, including $18 million from Sterling operations and the previously mentioned $33 million of merger and restructuring charges related to the Sterling acquisition. We continue to be pleased with our broad-based steady improvement in credit quality. This was the ninth consecutive quarter of decline in net charge-offs with a $13 million decrease. Internal watch list loans and nonperforming loans continue to trend downward for both Comerica legacy loans and the Sterling Loan portfolio. We continue to see reductions in inflows to nonaccrual loans and positive migration in other credit metrics.
Our customers generally are in a stronger position today with higher liquidity, lower leverage and increased efficiency. These positive attributes will assist them in whatever economic scenario emerges in the coming months. As a result of the overall improvements in credit quality we have seen, the provision for loan losses declined to $38 million. Our post-acquisition capital remained strong as evidenced by our Tier 1 capital -- Common capital ratio of 10.57%. We repurchased 2.1 million shares in the third quarter and expect to continue to be an active repurchaser of shares for the balance of 2011.Turning to Slide 5 and our acquisition of Sterling. Systems integrations are on track and expected to be completed by year-end. We have been in ongoing communication with Sterling customers throughout this transition process and look forward to officially welcoming them to the Comerica customer platform. Sterling size, geographic footprint and customer focus uniquely fits our strategy and expands our growth in Texas. As we have mentioned previously, Sterling's solid deposit base and well-located branch network virtually triples our Houston market share, provides us entry into the attractive San Antonio region and complements our existing footprint in the Dallas-Fort Worth area. We are dedicated to ensuring we deliver the revenue synergies that we anticipate from the Sterling acquisition. These include treasury management, wealth management, trade services and derivative products. For 2012, excluding the impact of regulatory reform and the completed sale of Sterling's investment advisory business, we expect about a 15% lift in Sterling's noninterest income. This equates to about $4 million. We believe these synergies will accelerate in 2013 and beyond. In addition, we believe there are opportunities to accelerate loan growth with our Specialty Businesses and at the lower end of about 10%, or $200 million, to their loan portfolio and accelerate in future years. In summary, the Sterling acquisition provides an exceptional growth opportunity in one of the most attractive markets in the U.S. Texas is a growth leader for the U.S. economy with strong high-tech and energy sectors and strong demographic growth. Our Texas economic activity index indicates the state economy is holding steady, although lower energy prices could impact the energy sector in the months ahead. Texas is expected to outperform the national economy again this year.
The Michigan economy received a boost from increased automobile production in July as supply-chain constraints eased. Sales for the 3 Detroit automakers held up in August and September despite the severe drop in consumer confidence that we saw at the end of the summer. Lower gasoline prices and ample pent-up demand are also positives for the auto sector in Michigan.The California economy continues to struggle for traction. Consumer spending remains fundamentally constrained by a weak housing market. Silicon Valley remains a bright spot for the state economy, but some high-tech industries are vulnerable to cooler markets. With the uncertain national and global economies, we have heightened our focus on revenue-generating initiatives and expense controls. Beth will go into more detail, but in addition to delivering the revenue and expense synergies from the Sterling acquisition, we plan to reallocate resources to faster-growing businesses, leverage opportunities to lower deposit pricing and continue to utilize technology to produce efficiencies, among many other action items. By continuing to strengthen our franchise, we believe we will be able to drive growth in this challenging economic environment. Read the rest of this transcript for free on seekingalpha.com