Comerica Inc. said it is continuing to reduce its dependence on the Midwest by focusing more on higher-growth markets in Texas and the Southwest.
However, the company, which moved its headquarters from Detroit to Dallas in August, 2007, said the ailing economy and higher credit losses have forced it to slow its pace.
The $65.2 billion-asset Comerica, which posted sharply lower third-quarter earnings because of one-time charges and higher provisions for losses on residential construction and development loans, is deliberately decelerating loan growth and branch openings, even in its newer markets of Texas and the Southwest, said Beth Acton, Comerica's chief financial officer.
"The economy is weaker, so naturally there is less loan demand," Ms. Acton said in an interview Friday. "In addition, we want to make sure we're being careful in terms of the kind of new loans we put on the books."
To date, Comerica has managed to log 12% year-over-year growth in commercial lending, but Ms. Acton conceded that the pace is likely drop off over the next 12 months because of the economy.
And though the company is still opening branches, it will open fewer than it had planned.
Comerica is on schedule to open 15 branches in newer markets by the end of the year, for a total of 28 in 2008. However, it will scale back its expansion plans in 2009, opening 17 branches instead of 27, Ms. Acton said.
It will continue to close branches in Michigan, where it has about 55% of its 424 branches.
Eventually the company expects to have a larger percentage of its branches outside Michigan, Ms. Acton said, though she would not give a target.
Comerica will also make fewer loans in the Midwest. Ms. Acton said that is partly because of a decline in loan demand and also because Comerica already has significant market share in the region. The company believes its prospects are better in Texas and the Southwest, she said. About 4% of its loans and nine of its branches in Florida.
More than a third of Comerica's loans are in the Midwest, a third are in the Southwest, and only 15% are in Texas, where it would like to do more lending.
"Texas is still outperforming the national average, so even in a modest recession, Texas will still have positive growth," Ms. Acton said. "There continues to be population growth, and there are more Fortune 500 companies based in Dallas than any other city."
Though parts of the Southwest have been hit hard by the housing slowdown, Comerica still sees growth opportunities in the region. It remains upbeat about long-term growth, particularly in California, Ms. Acton said..
Comerica, which announced its third-quarter results Friday, reported some softness in commercial and industrial loans for both middle-market and small businesses, particularly the Midwest but also in its other markets. Comerica is still making those types of loans but is being "more selective" in this economy, Ms. Acton said.
Sean Ryan, an analyst at Sterne, Agee & Leach Inc., said that while Comerica has steadily increased both loans and deposits in its "Sun Belt franchise," the Midwest is still the single biggest geographical component of its business. As losses from its residential construction loan portfolio in California and Michigan subside, Comerica will likely have to deal more with rising credit issues in commercial and industrial lending, and most of those issues will come from the Midwest.
"Clearly, there's probably going to be a disproportionate share of pain coming out of the Midwest," he said. "A state like Michigan dominated by industries in decline is apt to have more problems than the rest of the country, including Texas."
Texas will be affected by the national economic slowdown, but its own economy is strong compared with most markets, Mr. Ryan said. "They didn't have the ridiculous overinvestment in housing, and so you don't have that weighing down on the economy."
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research, said that overall, credit quality next year may not be as much of a problem as it was this year, but "that depends on whether we unfreeze everything and get the market going again — and that depends on whether Libor moves back down."
Comerica reported that its third-quarter net income fell 85% from a year earlier, to $27 million, or 18 cents a share. The average estimate of analysts polled by Thomson Reuters was 12 cents.
Comerica's earnings were hurt by several charges: a pretax charge of $96 million ($61 million after taxes) resulting from the repurchase of $1.5 billion auction-rate securities from customers; and net after-tax charges of $7 million, which included settlements with the Internal Revenue Service on certain structured leasing transactions and on disallowed foreign tax credits related to a series of loans to foreign borrowers.
The charges were offset by a $27 million pretax gain ($17 million after taxes) on the sale of Visa Inc. stock, and analysts said the gain explains why Comerica beat their earnings estimates.
Comerica's provision for credit losses rose nearly fourfold from a year earlier, to $174 million, but it fell 2% from the second quarter. Net chargeoffs nearly tripled from a year earlier, to $116 million, but rose 3% from the second quarter.
Nonperforming assets more than tripled from a year earlier, to $881 million, or 1.71% of total loans and foreclosed property. They rose 18% from the second quarter.
In an effort to preserve capital, Comerica has been shrinking its balance sheet. Average loans fell 7%, to $51.5 billion, from the linked quarter on an annualized basis. This quarter the company will likely sell 10 to 15 residential construction loans that it made in California, Ms. Acton said.
Comerica's deposits have benefited from a flight to quality; average no-interest deposits, excluding escrow deposits in its Financial Services Division, increased 13%, to $9.1 billion, on a linked-quarter, annualized basis.
For the full year, Comerica said that it expects low- to mid- single-digit average loan growth; net interest margin of about 3.05%; net chargeoffs of about $450 million, with the full-year provision to exceed that.
Comerica's third-quarter 2008 estimated Tier 1 common, Tier 1 and total risk-based capital ratios were 6.69%, 7.35%, and 11.22%, respectively.
The company plans to cut its dividend by 50% beginning in the fourth quarter. In September it paid a 66-cent dividend to shareholders. Like other banking companies, Comerica said it is considering raising additional capital by selling stakes to the government, Ms. Acton said.
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Corrected October 20, 2008 at 7:11PM: Clarification: An earlier version of this story gave an incorrect date for when its headquarters moved from Detroit to Dallas. Comerica moved in August of last year.