Comerica Inc. has often credited Texas expansion with bringing it through the financial crisis in better shape than many of its peers. But the terms of the company's acquisition of Sterling Bancshares Inc. show how highly it values that geographic focus.
On Tuesday, the company announced strong earnings — and an all-stock, $1 billion deal to acquire Sterling. The purchase, valuing the target at 2.3 times its tangible book value, will expand Comerica's Texas locations to 152 from 95. Of particular benefit, said CEO Ralph Babb, is that it expands Comerica into several markets in which it has little or no presence, such as San Antonio.
"We're really pleased with the fact that it's an expanding, not a consolidating acquisition," he said. "It builds on the momentum we are generating in Texas."
But several analysts on Comerica's call questioned the price. Though Texas deals are expected to come in at the high end of the market due to the state's attractive demographic and economic trends, the proposed multiple is significantly above that of most recent bank deals. And after a thorough review of Sterling's loan portfolio, Babb said, Comerica had decided to take a $330 million markdown of the company's assets.
But the premium Comerica has agreed to pay is justified, Babb said, because "the scarcity value of the metrics I was talking about, its value to anyone wanting to build our kind of franchise here, made it a very strategic fit for us."
"Does that imply you‘d do a strategic deal at any price?" one analyst asked.
Comerica will provide a 0.2365 share for each share of Sterling Bancshares, or about $10 a share based on the two companies' closing prices Friday. That would imply a 30% premium, but it shrank after Comerica's stock fell more than 8 percent on Tuesday morning.
The deal took the spotlight off of Comerica's earnings, but the company's overall numbers were impressive. The bank's $96 million, 53 cent-a-share profit for the quarter heftily beat analyst expectations, in large part because of falling loss provisions, which dropped from $122 million in the third quarter to $57 million in the fourth.
Comerica's results also suggested that it is among the vanguard of banks enjoying a gradual economic recovery. The company's overall loans outstanding held steady, with a 3%, $713 million increase in its commercial and industrial loan balances offset by continued commercial real estate loan declines. The company's outstanding lines of credit rose.
"Throughout our geographic footprint, our relationship managers report a growing sense of optimism among customers and prospects," Babb said in a press release accompanying the earnings numbers. "This can be seen in our strong loan pipeline."
Comerica's primary markets include economically troubled areas as Michigan, Arizona, Florida and California.
Comerica's profit of $96 million, or 53 cents a share, compared with a prior-year loss of $29 million, or 42 cents a share. Revenue edged up 1.6% to $620 million.
Analysts polled by Thomson Reuters had forecast earnings of 31 cents on $591 million in revenue.
Sterling Bancshares, meanwhile, reported its fourth-quarter profit increased to $1.9 million from $1.7 million and was flat on a per-share basis at 2 cents, matching the average estimate by analysts.
Its provision for credit losses dropped to $5.3 million from $11 million a year earlier and $7.7 million in the prior period.
Sandler O'Neill & Partners acted as financial adviser to Comerica. Morgan Stanley acted as financial adviser to Sterling. The deal is expected to close at midyear pending regulatory and Sterling shareholder approval.
