If the American auto industry has caught fire and burned Detroit, then Comerica (NYSE:CMA) may be a phoenix trying to rise out of the ashes of Michigan. Though the bank has had operations outside the state since the late 1980s, it has redoubled its efforts in its non-Michigan markets in an effort to counteract the slowdown from the recession in its birth state.
In particular, Comerica is focusing on Texas, Florida, and the West Coast markets -- especially California. In a show of its commitment to aggressively growing its presence outside the Midwest, the bank is in the process of moving its headquarters to Dallas.
To give investors an update on Comerica's progress and what investors have to look forward to, Beth Acton, the company's CFO, stopped by the Lehman Brothers (NYSE:LEH) Financial Services conference last week.
The five pillars
The presentation began with Comerica's review of business and strategy. The first part of the strategy is the bank's actual offerings -- it believes that with its $58 billion asset base, it can offer a broad range of services but still have the "feel and flexibility of a smaller community banking organization." Also key to the strategy are the non-Michigan markets -- California, Texas, Arizona, and Florida - which it refers to collectively as its growth markets.
The bank's plan to deliver returns to shareholders is based on five "pillars," which Acton outlined in the presentation:
- Growth. This brings us once again to those growth markets. Comerica believes that it will accelerate its growth as it opens new operations there. It also believes that the new headquarters location will help in that process.
- Balance. The idea here is to broaden its operations both geographically and by business segment. Geographic diversification is once again centered on Comerica's growth markets, while on the business segment side, it hopes to use its business banking strength to bring more customers into its institutional management and retail lines.
- Relationships. This is somewhat self-evident -- good customer relationships are important. Acton pointed out Comerica's 150-year history in Michigan and the fact that it is the largest bank in Michigan today.
- Risk management. This is of obvious importance, especially as the bank tries to accelerate its growth. Acton didn't go into much detail here, but simply said that Comerica wants to be a leader in "risk techniques, technologies, and metrics, particularly in the credit risk arena."
- Accountability. Here it was highlighted that Comerica's management doesn't get incentive compensation just for showing up -- the bank measures performance relative to peers when determining management incentives. I think it's worth noting here that while Comerica does, in fact, have a clear cash-bonus incentive plan structure, it also makes hefty equity-based awards to its executive officers that do not have a clear link to the bank's performance. In 2006, for example, the CEO recognized $1.9 million in cash incentives and $4.7 million in equity-based awards. These equity awards are determined at the discretion of the board's compensation committee with input from Hewitt, its compensation consultant.
Recent performance
Moving on to how well Comerica has been walking the walk lately, Acton reviewed the bank's recent first-quarter results. Aside from the financial services division, which has been struggling because of the softening housing market, average loans increased 6% while net interest margin was up slightly on declining deposit rates. Not surprisingly, loan growth was led by non-Midwest markets and the West in particular, which grew 15%.
On the expense side, the bank was actually able to decrease employee levels slightly despite opening nine new banking centers.
Hot-button issues
Acton's presentation also included a review of areas that she said "have been attracting a lot of attention to the industry lately." Can you guess what that might mean? If you said "real estate," then you get a big gold star!
As a bank focused largely on business customers, Comerica has a large commercial real estate portfolio. Two-thirds of the portfolio consists of mortgage loans for owner-occupied properties, largely for small-business customers. The other third consists of construction loans to real estate developers involved in residential development. She described these customers as "top-tier developers with whom we've had long-standing relationships." She described the overall portfolio as performing well, though it has seen some increase in nonperforming loans.
Comerica's consumer loan business remains a very small percentage of its overall loans at about 8%. The portfolio breaks down to roughly 42% residential mortgages, 38% home equity lines and second mortgage loans, and 20% "other," which includes loans for autos, personal watercraft, and recreational vehicles. Acton pointed out that Comerica is not in the subprime loan business, and that most of the residential mortgages it holds are from its private lending clients.
For investors who are concerned about the residential real estate market, this segment of the business could be compared favorably to competitors like US Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), and Wachovia (NYSE:WB), whose loan portfolios have a much larger exposure to consumer real estate mortgages.
She described the performance of the consumer portfolio as "relatively stable." Though the residential mortgages have held up well, softness on the home equity side has caused the bank to set aside extra reserves recently.
By the way, we're moving out of Michigan
To sum up the presentation very simply, Comerica is taking its business-focused banking model and growing it aggressively outside of Michigan. The bank would like to make its future success less dependent on whether Michigan can find a way out of the doldrums.
Over the past several years, though top-line growth has been sluggish, the company has seen more noticeable growth on the bottom line. Judging by metrics such as return on equity and assets, Comerica may very well be on to something with its current strategy.
Fool on:
- Comerica in the Blog Buzz
- The New National City: Fool by Numbers
- Growth Is Tough for Godzilla-Sized Banks
US Bancorp is an Income Investor selection.
Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Matt tried to convince The Fool's disclosure policy that Penn State can beat Michigan this year, but he's been unable to get it to agree so far.
