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Yesterday, Comerica Incorporated (CMA - Analyst Report) got approval from the common shareholders of Sterling Bancshares Inc. for the merger agreement announced in January 2011.

The merger was approved by more than 84.5% of the total votes by Sterling shareholders. This represents about 85.6% of the total number of shares outstanding as of March 30, 2011.

Upon completion of the merger, following regulatory approvals, Sterling’s shareholders will be allotted 0.2365 of Comerica common stock for each share of Sterling common stock. Further, fractional shares will be paid in cash. The merger is anticipated to be completed in the second quarter of 2011.

In January 2011, concurrent with the fourth quarter of 2010 earnings release, Comerica announced that it will acquire Sterlingin a stock-for-stock transaction. The strategic acquisition will augment Comerica's growth in Texas and its capital strength. Sterling is a Houston-based bank holding company with total assets of $5.0 billion, which operates 57 banking centers in the metropolitan areas of Houston, San Antonio, Dallas and Fort Worth, Texas.

Following the deal, on a pro forma basis, Comerica will continue to have a strong capital position, including a Tier 1 capital ratio of approximately 10.0%. The transaction is anticipated to be break even to Comerica's earnings in the first full fiscal year, excluding merger and integration costs of approximately $80.0 million after-tax, and be accretive thereafter.  Estimated synergies include expense savings of $56.0 million, to be fully realized on a run-rate basis by the end of 2012.

The merger would also help Comerica to expand from 95 banking centers in Texas to 152 banking centers in the state, including 65 in Houston, 63 in Dallas/Fort Worth, 13 in San Antonio and 11 in Austin. Additionally, the acquisition will add about $3.0 billion in loans and $4.0 billion in deposits.

Earnings Recap

In April, Comerica reported first-quarter 2011 net income of 57 cents per share, beating the Zacks Consensus Estimate of 48 cents and improving from the prior-quarter figure of 53 cents. Also, earnings saw a striking year-over-year improvement from a loss of 46 cents. The year-over-year improvement in the results reflected the increase in non-interest income and net interest margin, partially offset by higher non-interest expenses and lower net interest income. Furthermore, a significant improvement in credit quality also acted as a positive catalyst.

Our Take

Comerica’s strategic expansion efforts and focus on cost containment augur well to some extent. The solid balance sheet and liquidity position has helped the company to repay bailout money and dispose of preferred securities. However, its significant exposure to riskier areas, such as commercial real estate markets, lack of loan growth and the regulatory moves, which restrict its fee income growth, forms the downside.

Comerica currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.

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