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Following an unfavorable verdict from the Montana jury on Tuesday, Comerica Incorporated (CMA - Analyst Report) announced revised earnings for fourth-quarter 2013 and full-year 2013. Based on the unexpected outcome of the case, which was filed in Montana Second District Judicial Court, the company increased litigation reserves and reduced incentive compensation expense as of Dec 31, 2013.

The litigation involved $9 million revolving line of credit loan, which was extended by Comerica, a third-party defendant in the case to Michigan-based office supply company—Masters Group International Inc. in 2006. Further, the line of credit was extended to $10.5 million. However, following the default in loan payment by Masters, Comerica succeeded in collecting the full amount through collection actions.

Therefore, Comerica Chairman and CEO Ralph W. Babb Jr. believed the company possessed estimable defenses for the litigation and expected a favorable outcome. However, the jury verdict came out otherwise and therefore Comerica reported revised earnings for the final quarter, adjusting for the verdict.

Revised Q4 and 2013 Results

Comerica restated fourth-quarter 2013 net income of 117 million or 62 cents per share, down from the previously reported net income of 145 million or 77 cents per share. For full-year 2013, revised net income came in at $541 million or $2.85 per share compared with the previously reported net income of $569 million or $3.00 per share.

Further, as of Dec 31, 2013, the revised estimated Tier 1 common capital ratio was 10.56%, down from the previously reported ratio of 10.60%, while the estimated Basel III Tier 1 common capital ratio remained unchanged at 10.3%. Moreover, Comerica's tangible common equity ratio was 10.07%, down from previously reported ratio of 10.11%.

Non-interest expenses which was reported at $429 million has been increased to $473 million in the quarter, including litigation-related charges of $52 million, decreased salaries of $6 million and reduced other non-interest expenses of $2 million.

However, Comerica reiterated its outlook for 2014 as reported last week. Given the sluggish growth in economy and low-interest rate environment, the company’s outlook for 2014 is modest.

Capital Deployment Update

Comerica’s board of directors increased the quarterly cash dividend for common stock to 19 cents from 12 cents per share. The revised dividend indicates a 58.3% hike in dividend. The new dividend will be paid on Apr 1, 2014, to common stock shareholders of record as of Mar 14, 2014. The hike in dividend was part of the company’s 2013 Capital Plan, which was approved by the Federal Reserve’s in Mar 2013.

Comerica’s capital deployment initiatives through dividend payment and share buybacks exhibit its capital strength. Notably, during 2013, Comerica repurchased 7.4 million shares under the existing share repurchase program. This, combined with dividends, resulted in a total payout of 76% of net income to shareholders in the year.  We expect such activities to boost investors’ confidence in the stock.

Our Viewpoint

Going forward, we expect Comerica’s continuous geographic diversification beyond its traditional and slower-growing Midwest markets to drive growth in the next cycle. Revenue synergies from opportunistic acquisitions are likely to augment top-line growth.

However, the company’s significant exposure to commercial real estate markets, the unsettled economic environment, persistent low interest rate environment, litigation issues and stringent regulatory issues remain matters of concern.

Currently, Comerica carries a Zacks Rank #3 (Hold). Some better-ranked major regional banks worth considering include Bank of America Corporation (BAC - Analyst Report), Fifth Third Bancorp (FITB - Analyst Report) and BB&T Corporation (BBT - Analyst Report). All these 3 carry a Zacks Rank #2 (Buy).

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