Comerica likely won't be able to renew lucrative Treasury contract

Comerica Bank has received notice from the Treasury Department that it will likely lose a lucrative government contract involving debit cards for Social Security recipients and veterans, which would wipe out more than $3 billion in non-interest bearing deposits at the Dallas bank.

On Friday, Comerica disclosed that the $71.8 billion-asset bank received preliminary notification that it was rejected as the financial agent for the Treasury's Direct Express program, though it also said the contract decision is not yet final. The program offers a way to deliver government benefits to roughly 4.5 million Americans who do not have bank accounts.

"At this time we do not expect that Comerica Bank will retain the business long term," Jim Herzog, Comerica's chief financial officer, told analysts Friday. "The process remains fluid as contract negotiations are not yet final."

Treasury did not immediately respond to a request for comment.

Comerica's stock price fell 10.6% to $50.38 a share in intraday trading after the company released its quarterly earnings report, which included the disclosure about the Direct Express contract.

Shares in Comerica fell Friday based on the loss of the Direct Express bid and on 2024 net interest income guidance that was updated by the bank's management to drop 14%, worse than the 13% decline that was previously projected, Ben Gerlinger, an analyst at Citigroup, wrote in a research note.

Comerica has faced allegations that it mismanaged the Direct Express program, violating contractual obligations by outsourcing fraud complaints from Direct Express beneficiaries to a vendor in Pakistan. There have also been allegations that Comerica shared sensitive consumer data with vendors and failed to reimburse beneficiaries who claimed their government benefits were stolen.

In the second quarter, Comerica received roughly $3.3 billion in non-interest-bearing deposits from the Direct Express program. The deposits boost the bank's liquidity at little cost, allowing the bank to lend to more customers.

Last year, Direct Express also provided Comerica with $137 million in noninterest income from card fees. That figure was $29 million in the second quarter of 2024. Herzog said Friday that the fee income from Direct Express was generally offset by expenses associated with managing the program.

The bank's five-year contract with Treasury expires in 2025. Comerica does not currently expect an impact to its 2024 deposit balances, noninterest income or expenses, according to Herzog.

But the loss of the Treasury contract will have earnings implications next year, depending on how and when deposits move away from Comerica, Jefferies analyst Ken Usdin wrote in a research note. His worst-case scenario is for an earnings hit of $1.00 per share.

Comerica first won the Direct Express contract in 2008. The contract was renewed in 2014 and again in 2020. Since 2013, Treasury has required all federal benefit recipients to receive their monthly benefits electronically, either by direct deposit or through the Direct Express debit card.

Herzog put a positive spin on the expected loss of deposits, stating: "We see this as an opportunity to refocus and reprioritize resources towards targeted deposit strategies more aligned with our core relationship operating model."

"The financial value has been of non-interest-bearing deposit balances related to monthly benefits funded on the cards, which have grown over time," he said. "There are various potential scenarios with regards to the timing and mechanics of the deposit transition, and we expect more detail in the coming quarters as terms become final."

"It is absolutely our intention to replace these deposits over time," he said.

Peter Sefzik, Comerica's chief banking officer, said that the bank's executives believe that Direct Express deposits will leave over "a longer time period rather than a shorter time period."

Regulation and compliance

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In June, Comerica agreed to a proposed settlement of a class-action lawsuit alleging the bank denied refunds to Direct Express prepaid card users. The plaintiffs had accused Comerica of violating the Electronic Fund Transfer Act, which imposes certain consumer protection requirements on banks when they handle fraud claims.

And last year, Comerica Chairman and CEO Curtis Farmer and Herzog were sued by shareholders who alleged they made materially false and misleading statements about the Dallas bank's oversight of Direct Express.

Comerica said Friday that it expects a formal transition plan for managing Direct Express accounts and deposits to be agreed upon once Treasury finalizes a contract with a new provider. The bank said it will continue to support its customers through the transition to a new provider while also prioritizing efforts to drive deposits.

In the second quarter, Comerica's deposits fell by $2.3 billion to $63.1 billion. Its average cost of interest-bearing deposits fell by five basis points to 3.23%, reflecting a big decline in brokered time deposits that the bank said was partially offset by growth in core interest-bearing deposits.

Comerica also said that short-term borrowings fell $1.9 billion to $666 million, reflecting a reduction in Federal Home Loan bank advances. Farmer, Comerica's chairman and CEO, said deposits remained pressured by persistently high interest rates, though fee income and expenses both improved in the second quarter.

Net interest income at Comerica fell by $15 million to $533 million, driven by a decline in deposits held at the Federal Reserve Bank, lower loan volume and the net impact of higher short-term rates. But Comerica's net interest margin rose by six basis points to 2.86%.

Comerica reported second-quarter net income of $206 million, or $1.09 per share, down from $273 million, or $2.01 per share, a year earlier.