In 3Q11, period-end total loans increased $2.0 billion sequentially, primarily due to the addition of Sterling. Comerica legacy period-end loans primarily reflected an increase in Specialty Businesses, offset by decreases in the National Dealer Services, Global Corporate Banking, Commercial Real Estate and Small Business Banking business lines.

The Sterling acquisition primarily drove a $2.0 billion increase in period-end loans in the reported quarter. Comerica legacy loans reflected increases in Texas, as well as in commercial loans, primarily in Specialty Businesses, including Mortgage Banker Finance, Technology and Life Sciences and Energy Lending; offset by decreases in National Dealer Services, Global Corporate Banking and Small Business Banking.

In 3Q11, average earning assets increased $3.1 billion sequentially, primarily due to increases of $924.0 million in average loans, $751.0 million in average investment securities available-for-sale and $1.4 billion in excess liquidity. Sterling contributed $1.4 billion and $700.0 million, respectively, to the increases in average loans and average investment securities available-for-sale.

In 3Q11, average core deposits increased $3.5 billion sequentially with increases in all major markets, led by the Texas market, which reflected average Sterling core deposits of $2.5 billion. Non-interest-bearing deposits increased $1.7 billion, money market and interest-bearing checking deposits increased $1.4 billion and customer certificates of deposit increased $269.0 million.

Credit Quality

Broad-based, steady improvement in credit quality was recorded during the reported quarter. Net credit-related charge-offs decreased $13.0 million to $77.0 million in 3Q11, from $90.0 million in 2Q11. The decrease in net credit-related charge-offs primarily reflected decreases of $18.0 million in the Middle Market business line, partially offset by an increase of $8.0 million in the Commercial Real Estate business line.

Watch list loans and nonperforming loans continued to trend downward for both Comerica legacy loans and the acquired Sterling loan portfolio. Internal watch list loans increased $142.0 million to $5.0 billion from June 30, 2011 to September 30, 2011, due to the inclusion of $405.0 million of Sterling watch list loans as of September 30, 2011. Nonperforming loans decreased $16.0 million sequentially to $958 million, or 2.32% of total loans, as of September 30, 2011.

During 3Q11, $130.0 million of borrower relationships greater than $2.0 million were transferred to nonaccrual status, a decrease of $20.0 million from 2Q11. Of the transfers of borrower relationships greater than $2.0 million to non-accrual in the reported quarter, $63.0 million were from the Middle Market business line, primarily in the Midwest and Western markets, and $48.0 million were from the Commercial Real Estate business line, primarily in the Western market.

As of September 30, 2011, non-performing assets were approximately stable at $1.0 billion, or 2.53% of total loans and foreclosed property. Nonperforming assets included $24.0 million of Sterling foreclosed property.

Loans past due 90 days or more and still accruing were $81.0 million as of September 30, 2011, a decrease of $17.0 million compared with June 30, 2011. The provision for loan losses decreased $9.0 million sequentially in 3Q11 to $38.0 million.

The allowance for loan losses to total loans ratio was 1.86% and 2.06% as of September 30, 2011 and June 30, 2011, respectively. The decrease in the ratio primarily reflected the impact of the Sterling loans recorded at fair value at acquisition without a corresponding allowance for loan losses. The remaining fair value discount on Sterling acquired loans was $236.0 million as of September 30, 2011.

Outlook: For 4Q11, management expects the following compared with Comerica’s results for 3Q11, assuming a continuation of the current economic environment:

• A low single-digit increase in average total loans, largely reflecting the impact of one additional month of Sterling. Period-end loans are expected to be relatively stable. In 4Q11, loans in the National Dealer Services business line are expected to grow, Mortgage Banker Finance loan growth is expected to moderate, and loans in the Commercial Real Estate business line are expected to continue to decrease.

• Average earning assets of approximately $54.5 billion, reflecting increases, primarily related to Sterling, in average loans and average investment securities available-for-sale.

• Net credit-related charge-offs between $65.0 million and $75.0 million for 4Q11. The provision for credit losses is expected to trend modestly lower from 3Q11.

Capital Management

As of September 30, 2011, total assets and common shareholders' equity were $60.9 billion and $7.0 billion, respectively, as against $54.1 billion and $6.0 billion, respectively, as of June 30, 2011.

Comerica's tangible common equity ratio was 10.43% as of September 30, 2011, a decrease of 47 basis points from June 30, 2011. The estimated Tier 1 common capital ratio increased 4 basis points, to 10.57% as of September 30, 2011, from June 30, 2011.
 

Acquisition

After completing the acquisition of Sterling in July 2011, Comerica issued approximately 24 million shares of common stock. The fair value of assets acquired included $2.1 billion of loans and $1.5 billion of investment securities, and liabilities assumed included $4.0 billion of deposits. Additionally, goodwill resulting from the acquisition totaled $485.0 million.

On July 28, 2011, Comerica Inc. has closed the acquisition of Sterling Bancshares Inc. All of the outstanding shares of common stock of Sterling were acquired by Comerica in a stock-for-stock transaction. The acquired company would augment its growth in Texas with a solid deposit base and well located branch network. As per the agreement terms, Sterling shareholders received 0.2365 shares of Comerica common stock in exchange for each share of Sterling common stock they owned. Further, fractional shares were paid in cash. The systems conversion is expected to be completed by the end of this year. Till that time, Sterling branches and ATMs will retain their identity while the branches will operate as a division of Comerica.

The acquisition is a strategic fit for Comerica as it would augment its Houston market share significantly. Comerica’s market share is expected to triple in that area. Besides, it would enable the company to foray into the attractive San Antonio and Kerrville regions and add to Comerica's banking center network in Dallas-Fort Worth.

The acquisition of Sterling is expected to have minimal impact on Comerica’s Tier 1 ratio. The company expects its tangible common equity ratio to be about 10.5% on a pro-forma basis. The transaction is expected to be at break-even to Comerica's earnings in 2012 and increasingly accretive thereafter.
 

Macro Issues
• Economic downturns could result in the delinquency of outstanding loans, which could have a material adverse affect on Comerica’s earnings.
• Disruptions and uncertainty in the capital and credit markets may limit Comerica’s ability to access capital and manage liquidity.
• Concentration of the Company’s operations in slowly-growing Michigan remains a cause for concern.
• It is over dependent on the auto industry and real estate business for growth, which have been significantly impacted by recent economic conditions.
• The company is also susceptible to fluctuations in interest rate and other macroeconomic risks.
Fundamentals
• An increase in the level of provision for credit losses, nonperforming assets, net charge-offs and reserve for credit losses.
• Expected decline in top line as a result of Reg E, Durbin Amendment and host of other regulatory changes.