1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10706
Comerica Incorporated
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(313) 222-3300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of July 31, 1994: 118,440,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
(In thousands, except share data)
June 30, Dec. 31, June 30,
1994 1993 1993
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,427,621 $ 1,600,695 $ 1,438,991
Interest-bearing deposits with banks 524,672 1,026,473 727,687
Federal funds sold and securities
purchased under agreements to
resell 28,499 1,091,789 642,472
Trading account securities 9,304 3,600 10,829
Mortgages held for sale 119,887 330,667 234,062
Investment securities available
for sale 3,152,697 2,322,101 -
Investment securities held to
maturity (estimated fair value
of $4,978,699 at 6/30/94,
$4,030,492 at 12/31/93 and
$5,260,045 at 6/30/93) 5,154,598 3,977,450 5,105,152
----------- ----------- -----------
Total investment securities 8,307,295 6,299,551 5,105,152
Commercial loans 9,665,836 9,086,757 8,757,235
International loans 1,071,794 1,135,585 864,338
Real estate construction loans 397,618 437,481 421,068
Commercial mortgage loans 2,964,814 2,699,861 2,631,798
Residential mortgage loans 2,223,598 1,856,822 1,954,293
Consumer loans 3,725,602 3,674,256 3,667,650
Lease financing 223,617 209,185 198,400
----------- ----------- -----------
Total loans 20,272,879 19,099,947 18,494,782
Less allowance for loan losses (321,853) (298,685) (308,114)
----------- ----------- -----------
Net loans 19,951,026 18,801,262 18,186,668
Premises and equipment 421,189 399,123 382,220
Customers' liability on acceptances
outstanding 39,576 38,212 52,612
Accrued income and other assets 779,961 703,501 623,310
----------- ----------- -----------
TOTAL ASSETS $31,609,030 $30,294,873 $27,404,003
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 5,017,947 $ 4,939,234 $ 4,522,975
Interest-bearing deposits 14,768,451 14,642,834 15,003,855
Deposits in foreign offices 857,205 1,367,811 1,204,285
----------- ----------- -----------
Total deposits 20,643,603 20,949,879 20,731,115
Federal funds purchased and
securities sold under
agreements to repurchase 626,718 450,092 412,959
Other borrowed funds 5,023,808 4,950,507 2,725,908
Acceptances outstanding 39,576 38,212 52,612
Accrued expenses and other
liabilities 223,681 263,969 220,776
Long-term debt 2,705,300 1,460,556 1,103,274
----------- ----------- -----------
Total liabilities 29,262,686 28,113,215 25,246,644
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-119,294,531 shares at
6/30/94, 119,294,531 shares
at 12/31/93, and 119,946,342
shares at 6/30/94 596,473 596,473 599,732
Capital surplus 524,121 524,186 540,293
Unrealized gains/(losses) on investment
securities available for sale (20,483) 27,473 -
Retained earnings 1,269,989 1,155,280 1,050,616
Less cost of common stock in
treasury-857,398 shares at 6/30/94,
4,423,603 shars at 12/31/93 and
1,124,664 shares at 6/30/93 (23,756) (121,754) (33,282)
----------- ----------- -----------
Total shareholders' equity 2,346,344 2,181,658 2,157,359
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $31,609,030 $30,294,873 $27,404,003
=========== =========== ===========
/TABLE
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ----------------------
(In thousands, except per share data) 1994 1993 1994 1993
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $380,382 $348,033 $720,561 $688,677
Interest on investment securities:
Taxable 116,496 77,140 209,620 159,315
Exempt from federal income tax 7,422 10,324 16,087 21,930
-------- -------- -------- --------
Total interest on investment
securities 123,918 87,464 225,707 181,245
Trading account interest 66 57 (70) 340
Interest on federal funds sold and
securities purchased under agreements
to resell 985 1,132 3,453 2,326
Interest on time deposits with banks 6,193 5,764 13,558 13,586
Interest on mortgages held for sale 2,513 3,574 6,243 6,997
-------- -------- -------- --------
Total interest income 514,057 446,024 969,452 893,171
INTEREST EXPENSE
Interest on deposits 129,403 135,378 248,102 275,550
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 29,446 8,813 47,851 18,025
Other borrowed funds 23,819 8,983 44,014 18,367
Interest on long-term debt 25,386 16,166 47,677 29,182
Net interest rate swap income (8,551) (6,900) (23,037) (13,439)
-------- -------- -------- --------
Total interest expense 199,503 162,440 364,607 327,685
Net interest income 314,554 283,584 604,845 565,486
Provision for loan losses 15,000 18,000 30,000 40,000
-------- -------- -------- --------
Net interest income after
provision for loan losses 299,554 265,584 574,845 525,486
NONINTEREST INCOME
Income from fiduciary activities 30,714 32,074 62,719 61,864
Service charges on deposit accounts 30,253 30,302 59,427 60,795
Customhouse broker fees 10,555 10,075 20,280 19,215
Revolving credit fees 10,426 8,906 18,357 16,808
Securities gains 358 407 782 1,041
Other noninterest income 33,121 29,744 65,807 61,463
-------- -------- -------- --------
Total noninterest income 115,427 111,508 227,372 221,186
NONINTEREST EXPENSES
Salaries and employee benefits 136,247 135,380 267,951 270,095
Net occupancy expense 25,115 24,220 49,693 48,579
Equipment expense 17,060 15,890 33,257 30,376
FDIC insurance expense 11,314 10,969 22,023 22,941
Other noninterest expenses 75,141 68,833 143,659 135,736
-------- -------- -------- --------
Total noninterest expenses 264,877 255,292 516,583 507,727
-------- -------- -------- --------
Income before income taxes 150,104 121,800 285,634 238,945
Provision for income taxes 50,926 38,073 95,593 72,093
-------- -------- -------- --------
NET INCOME $ 99,178 $ 83,727 $190,041 $166,852
======== ======== ======== ========
Net income applicable to common stock $ 99,178 $ 83,727 $190,041 $166,810
======== ======== ======== ========
NET INCOME PER SHARE:
Primary $.83 $.70 $1.62 $1.39
Fully diluted $.83 $.70 $1.62 $1.39
Primary average shares 119,530 120,183 117,497 120,100
Cash dividends declared $37,896 $30,316 $69,827 $59,993
Dividends per share $.32 $.255 $.60 $.51
4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Redeemable Unrealized Total
Preferred Common Capital Gains/ Retained Treasury Shareholders'
(in thousands) Stock Stock Surplus (Losses) Earnings Stock Equity
--------- --------- --------- ---------- ----------- -------- ------------
BALANCES AT
JANUARY 1,
1993 $ 37,605 $ 309,219 $ 538,097 $ - $ 1,239,078 $ (28,862) $ 2,095,137
Net income for
1993 - - - - 166,852 - 166,852
Cash dividends
declared:
Preferred
stock - - - - (42) - (42)
Common stock - - - - (59,993) - (59,993)
Purchase of
350,317 shares
of common stock - - - - - (10,355) (10,355)
Retirement of
treasury
stock - (170) - - (505) 675 -
Issuance of
common stock
under employee
stock plans
and for
conversion of
debentures - 3,104 1,884 - (3,021) 5,260 7,227
Stock split - 287,579 - - (287,579) - -
Amortization of
deferred
compensation - - 312 - - - 312
Redemption of
preferred
stock (37,605) - - - (4,174) - (41,779)
-------- --------- --------- ---------- ----------- --------- -----------
BALANCES AT
JUNE 30, 1993 $ - $ 599,732 $ 540,293 $ - $ 1,050,616 $ (33,282) $ 2,157,359
======== ========= ========= ========== =========== ========== ===========
BALANCES AT
JANUARY 1,
1994 $ - $ 596,473 $ 524,186 $ 27,473 $ 1,155,280 $(121,754) $ 2,181,658
Net income for
1994 - - - - 190,041 - 190,041
Cash dividends
declared on
common stock - - - - (69,827) - (69,827)
Purchase of
1,158,464
shares of
common stock - - - - - (31,488) (31,488)
Issuance of
common stock:
Employee
stock plan - - (453) - (1,647) 4,265 2,165
Acquisition
of Pacific
Western - - - - (3,858) 125,221 121,363
Amortization of
deferred
compensation - - 388 - - - 388
Change in
unrealized
gains/(losses)
on investment
securities
available for
sale - - - (47,956) - - (47,956)
-------- --------- --------- ---------- ----------- --------- -----------
BALANCES AT
JUNE 30, 1994 $ - $ 596,473 $ 524,121 $ (20,483) $ 1,269,989 $ (23,756) $ 2,346,344
======== ========= ========= ========== =========== ========== ===========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Six Months Ended
June 30
---------------------------
(in thousands) 1994 1993
------------ ------------
OPERATING ACTIVITIES:
Net income $ 190,041 $ 166,852
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 30,000 40,000
Depreciation 29,496 27,371
Net (increase) decrease in trading
account securities (5,704) 98,550
Net decrease in mortgages held for sale 210,780 650
Net increase in accrued income receivable (20,158) (2,357)
Net increase (decrease) in accrued expenses (30,325) 995
Net amortization of intangibles 13,976 18,117
Other, net (20,347) 33,025
------------ ------------
Total adjustments 207,718 216,351
------------ ------------
Net cash provided by operating
activities 397,759 383,203
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
with banks 501,801 593,828
Net (increase) decrease in federal funds
sold and securities purchased under
agreements to resell 1,063,290 (555,840)
Proceeds from maturity of investment
securities available for sale 324,056 -
Purchases of investment securities
available for sale (1,142,803) -
Proceeds from maturity of investment
securities held to maturity 1,027,206 1,409,843
Purchases of investment securities
held to maturity (2,007,240) (1,328,222)
Net increase in loans (other
than purchased loans) (485,631) (301,972)
Purchase of loans (213,897) (11,818)
Fixed assets, net (38,177) (35,300)
Net increase in customers' liability
on acceptances outstanding (1,364) (26,948)
Net cash provided by acquisition 79,076 -
------------ ------------
Net cash provided by (used in)
investing activities (893,683) (256,429)
FINANCING ACTIVITIES:
Net decrease in deposits (1,079,588) (468,403)
Net increase (decrease) in
short-term borrowings 249,396 (82,842)
Net decrease in acceptances outstanding 1,364 26,948
Proceeds from issuance of long-term debt 1,600,000 450,000
Repayments and purchases of long-term
debt (355,256) (87,918)
Proceeds from issuance of common stock
and other capital transactions 2,553 7,539
Purchase of common stock for treasury (31,488) (10,355)
Redemption of preferred stock - (41,779)
Dividends paid (64,131) (60,715)
------------ ------------
Net cash provided by (used in)
financing activities 322,850 (267,525)
------------ ------------
Net increase (decrease) in cash and
due from banks (173,074) (140,751)
Cash and due from banks at beginning of year 1,600,695 1,579,742
------------ ------------
Cash and due from banks at end of period $ 1,427,621 $ 1,438,991
============ ============
Interest paid $ 362,122 $ 329,785
============ ============
Income taxes paid $ 90,842 $ 65,468
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 7,926 $ 18,978
Conversion of debentures to equity $ - $ 3,784
============ ============
Treasury stock issued for acquisition $ 121,363 $ -
============ ============
Loan transfer to investment securities $ 91,538 $ -
============ ============
6
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1994 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1994. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Comerica Incorporated and Subsidiaries' annual report on Form 10-K for the
year ended December 31, 1993.
Note 2 - Investment Securities
At June 30, 1994 investment securities having a carrying value of
$6,282,455,000 were pledged where permitted or required by law to secure
liabilities and public and other deposits including deposits of the State
of Michigan of $35,060,000.
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Loan Losses
The following analyses the changes in the allowance for loan losses
included in the consolidated balance sheets:
1994 1993
--------- ---------
Balance at January 1 $ 298,685 $ 308,007
Allowance acquired 16,517 -
Loans charged off (39,949) (54,112)
Recoveries on loans previously
charged off 16,600 14,219
--------- ---------
Net loans charged off (23,349) (39,893)
Provision for loan losses 30,000 40,000
--------- ---------
Balance at June 30 $ 321,853 $ 308,114
========= =========
Note 4 - Long-term Debt
Long-term debt consisted of the following at June 30, 1994 and
December 31, 1993:
June 30, 1994 Dec. 31, 1993
------------- -----------------
9.75% equity subordinated notes
due 1999 $ 74,556 $ 74,511
10.125% subordinated debentures
due 1998 74,681 74,641
---------- ----------
Total Parent Company 149,237 149,152
7.25% subordinated notes due 2002 148,698 148,619
Medium-term fixed rate notes bearing
interest at rates ranging from 3.28%
to 5.95% and maturing on dates
ranging from 1994 through 1997 2,148,957 904,285
6.875% subordinated notes due 2008 98,952 98,913
7.125% subordinated notes due 2013 147,835 147,779
FDIC subordinated note due 1994
to 1995 9,000 8,941
Notes payable bearing interest at
rates ranging from 6.29% to 13%
and maturing on dates ranging from
1994 through 1996 2,621 2,867
---------- ----------
Total Subsidiaries 2,556,063 1,311,404
---------- ----------
Total Comerica Incorporated $2,705,300 $1,460,556
========== ==========
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory
federal income tax rates to income before income taxes as reported in the
financial statements after deducting non-taxable items, principally
interest income on state and municipal securities.
9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives
The Corporation utilizes derivatives, primarily interest rate swaps,
to reduce interest rate risk and currency risk exposures by hedging
specified groups of assets and liabilities. The Corporation's use of
derivatives takes place predominately in the interest rate market, and
involves the use of forwards, futures, swaps, caps, floors, and options.
Derivative financial instruments are contracts whose value is derived from
the value of underlying interest rate, foreign exchange, or equity
instruments (or related indices).
The notional, or contractual, amounts of the Corporation's off-
balance-sheet derivative instrument portfolio are not indicative of the
potential for gain or loss on such positions. Likewise, notional amounts
do not represent the credit or market risks of the positions held. Credit
risk is inherent in derivative contracts and is measured as the cost of
replacing, at current market rates, contracts in an unrealized gain
position. In order to minimize credit risk exposure, the Corporation
evaluates the creditworthiness of all off-balance-sheet counterparties
adhering to the same standards used in other credit transactions.
Bilateral collateral agreements are in place with a substantial number of
counterparties in order to secure amounts due on interest rate swap
transactions. At June 30, 1994 and December 31, 1993, the replacement
cost, net of collateral, of off-balance-sheet derivatives in an unrealized
gain position approximated $12 million and $66 million, respectively.
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
The notional amounts, used to express the extent of the
Corporation's involvement in derivatives, are shown below:
June 30, 1994 December 31, 1993
------------------- -------------------
Notional Fair Notional Fair
(in millions) Value Value Value Value
-------- ------ -------- ------
Interest rate contracts
Swaps:
Generic receive fixed $ 521 $ (9) $1,046 $ 32
Generic pay fixed 250 (4) 625 (15)
Amortizing receive fixed 2,529 (130) 1,904 24
Amortizing pay fixed 9 - 9 -
Other 676 1 50 -
Futures and forwards 15 14 65 63
Options written 279 3 283 1
Options purchased 56 - 56 -
------ ------ ------ ------
Total interest rate
contracts 4,335 (125) 4,038 105
Foreign exchange rate
contracts
Generic receive variable
swap 15 1 20 -
Spot, forwards, and
futures 609 1 356 1
------ ------ ------ ------
Total exchange rate
contracts 624 2 376 1
------ ------ ------ ------
Total derivatives
contracts $4,959 $ (123) $4,414 $ 106
====== ====== ====== ======
Since the Corporation uses off-balance-sheet interest rate derivative
products to act as a hedge against on balance sheet exposure to changes in
interest rates, the unrealized gain (loss) on derivatives is offset by the
opposite effect to on-balance-sheet items. Unrealized gains and losses on
off-balance-sheet interest rate derivative products at June 30, 1994 and
December 31, 1993 are summarized as follows:
June 30, December 31,
(in millions) 1994 1993
--------- ------------
Off-Balance-Sheet derivatives:
Unrealized gains $ 17 $ 68
Unrealized losses (157) (22)
----- ----
Net unrealized gain (loss) (140) 46
===== ====
Summary information with respect to the Corporation's off-balance-sheet
derivative activity follows:
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
Six Months
Ended Year Ended
June 30, December 31,
(in millions) 1994 1993
------------ ------------
Notional balance at
beginning of period $ 4,414 $ 3,025
Additions 24,742 51,622
Maturities/Amortizations (24,197) (50,233)
Terminations - -
------- -------
Notional balance at end of period $ 4,959 $ 4,414
======= =======
Interest rate swap agreements involve the exchange of fixed and
floating rate interest payments based on an underlying notional amount,
and constitute a major portion of the Corporation's derivative portfolio.
The Corporation utilizes swaps as an end-user to manage risk; therefore,
net interest income is recognized as it accrues. For the six months ended
June 30, 1994, interest rate swaps generated $23 million of net interest
income, compared to $13 million for the same period in 1993, and $32
million for the year ended 1993.
The table below summarizes the expected maturities and weighted average
interest rates to be paid and received on the Corporation's interest rate
swap portfolio as of June 30, 1994.
12
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
Remaining Expected Maturity of Interest Rate Swaps:
1999-
(dollars in millions) 1994 1995 1996 1997 1998 2013 Total
----- ----- ----- ----- ----- ----- ------
Generic Receive Fixed
- - ---------------------
Notional Amount $ 21 $ 75 $ 50 $ 50 $ - $ 325 $ 521
Weighted Average:
Receive Rate 5.85% 3.71% 8.00% 9.35% -% 7.09% 6.86%
Pay Rate 4.25 4.25 3.63 4.25 - 4.80 4.53
Generic Pay Fixed
- - -----------------
Notional Amount $ 40 $ 148 $ 60 $ - $ - $ 2 $ 250
Weighted Average:
Receive Rate 4.32% 4.21% 4.69% -% -% 5.00% 4.35%
Pay Rate 7.03 7.50 7.56 - - 8.73 7.45
Amortizing Receive Fixed
- - ------------------------
Notional Amount $ 389 $ 612 $ 408 $ 678 $ 191 $ 251 $2,529
Weighted Average:
Receive Rate 5.28% 5.32% 5.38% 5.17% 5.23% 5.70% 5.32%
Pay Rate 4.37 4.32 4.34 4.18 4.17 4.41 4.29
Amortizing Pay Fixed
- - --------------------
Notional Amount $ - $ - $ - $ - $ - $ 9 $ 9
Weighted Average:
Receive Rate -% -% -% -% -% 4.25% 4.25%
Pay Rate - - - - - 6.19 6.19
Other
- - -----
Notional Amount $ 350 $ 326 $ - $ - $ - $ - $ 676
Weighted Average:
Receive Rate 2.91% 4.59% -% -% -% -% 3.72%
Pay Rate 4.38 4.02 - - - - 4.21
/TABLE
13
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Comerica Incorporated reported net income of $99 million for the
three months ended June 30, 1994, an increase of 19 percent compared to
$84 million reported for the comparable period in 1993. Net income was
$0.83 per share for the second quarter of 1994, compared to $0.70 per
share for the second quarter of 1993. Return on average common
shareholders' equity was 17.10 percent and return on average assets was
1.25 percent for the second quarter, compared to 15.68 percent and 1.25
percent, respectively, for the same period in 1993. The second quarter
was the first to include the operating results of Pacific Western
Bancshares, Inc. (Pacific Western), which was purchased on March 31, 1994.
Net income for the six months ended June 30, 1994, was $190 million
or $1.62 per share representing a 17 percent increase per share from net
income of $167 million or $1.39 per share for the corresponding period in
1993. Return on equity was 16.85 percent and return on assets was 1.23
percent, compared to 15.89 percent and 1.25 percent, respectively, for the
first six months in 1993.
Acquisitions
On April 4, 1994, the Corporation entered into an Agreement and Plan
of Merger with the $331 million Lockwood Banc Group Inc., in Houston,
Texas, for the acquisition of Lockwood by Comerica for approximately $44
million in cash. The acquisition was completed on August 4, 1994, and was
accounted for as a purchase.
Net Interest Income
Net interest income for the second quarter of 1994, on a fully
taxable equivalent (FTE) basis, increased by $30 million, or 10 percent
versus the comparable period a year earlier. The increase, principally
attributable to acquisitions and strong growth in earning assets, was
partially offset by a lower net interest margin compared to the second
quarter of 1993. Total average earning assets increased $5 billion, or 20
percent compared to last year's second quarter, as a result of
14
acquisitions and growth in commercial and international loans as well as
the investment securities portfolio. The purchase of Pacific Western
added $600 million in average loans. Average investments securities
increased $3 billion, or 59 percent compared to last year's second
quarter, due to portfolio acquisitions made during the first quarter of
1994. The net interest margin fell 37 basis points from prior year's 4.73
percent to 4.36 percent in the second quarter of 1994 due to a shift in
the mix of earning assets toward lower-yielding securities.
For the first six months of 1994, net interest income on an FTE
basis amounted to $617 million, an increase of $36 million, or 6 percent
over the first half of 1993. Average investment securities for the six
months ended June 30, 1994, increased 49 percent over the comparable
period in 1993, while total average earning assets increased 16 percent,
resulting in a more favorable mix of earning assets. This change in the
mix of earning assets supported net interest income growth for the first
half of 1994. The net interest margin decreased 41 basis points in the
first six months of 1994 to 4.34 percent from 4.75 percent a year ago, in
response to reduced rate spreads on increased investments in lower-
yielding securities during the first quarter's declining rate environment.
In order to adjust to the current rising rate conditions, the Corporation,
which is liability sensitive by approximately $400 million (after
elasticity adjustments) as of June 30, 1994, expects to move toward asset
sensitivity as the year progresses.
The Rate-Volume Analyses, in Tables I and II, indicate the
components of the change in net interest income (FTE), quarterly and year-
to-date.
Provision for Loan Losses
The provision for loan losses was $15 million in the second quarter
of 1994 versus $18 million in the second quarter of 1993. For the six
months ended June 30, 1994, the provision was $30 million compared to $40
million in the same period last year. The provision is predicated upon
maintaining an adequate allowance for loan losses, which is further
15
discussed in the section entitled "Financial Condition." The reduction in
the provision from prior year is due to a lower level of charge-offs as
well as continued improvement in the quality of the loan portfolio.
16
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
June 30, 1994 June 30, 1993
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- - ----------------------------------------------------------------------------------------------
Loans $20,021 $ 382 7.65% $18,241 $ 350 7.69%
Investment securities 8,479 128 6.03 5,331 93 6.97
Other earning assets 950 10 4.12 1,072 10 3.95
- - ----------------------------------------------------------------------------------------------
Total earning assets 29,450 520 7.07 24,644 453 7.37
Interest-bearing deposits 16,978 121 3.06 16,563 128 3.28
Short-term borrowings 5,523 53 3.87 2,422 18 2.95
Long-term debt 2,004 25 5.07 1,088 16 5.94
- - ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $24,505 199 3.26 $20,073 162 3.25
----------------- -----------------
Net interest income/
Rate spread (FTE) $ 321 3.81 $ 291 4.12
====== ======
FTE adjustment $ 6 $ 7
====== ======
Impact of net noninterest-
bearing sources of funds 0.55 0.61
- - ----------------------------------------------------------------------------------------------
Net interest margin as a percent
of average earning assets (FTE) 4.36% 4.73%
==============================================================================================
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 1 $ 31 $ 32
Investment securities (7) 42 35
Other earning assets 1 (1) -
------------------------------
Total earning assets (5) 72 67
Interest-bearing deposits (9) 2 (7)
Short-term borrowings 5 30 35
Long-term debt (3) 12 9
------------------------------
Total interest-bearing sources (7) 44 37
------------------------------
Net interest income/Rate spread (FTE) $ 2 $ 28 $ 30
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
17
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Six Months Ended
-------------------------------------------------------------
June 30, 1994 June 30, 1993
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- - ----------------------------------------------------------------------------------------------
Loans $19,498 $ 724 7.47% $18,016 $ 693 7.73%
Investment securities 7,877 235 5.97 5,303 193 7.26
Other earning assets 1,162 23 4.03 1,199 23 3.91
- - ----------------------------------------------------------------------------------------------
Total earning assets 28,537 982 6.92 24,518 909 7.44
Interest-bearing deposits 16,589 225 3.02 16,596 262 3.35
Short-term borrowings 5,247 92 3.53 2,536 37 2.89
Long-term debt 1,847 48 5.16 961 29 6.08
- - ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $23,683 365 3.10 $20,093 328 3.29
----------------- ------------------
Net interest income/
Rate spread (FTE) $ 617 3.82 $ 581 4.15
====== ======
FTE adjustment $ 12 $ 15
====== ======
Impact of net noninterest-bearing
sources of funds 0.52 0.60
- - ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.34% 4.75%
==============================================================================================
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ (16) $ 47 $ 31
Investment securities (25) 67 42
Other earning assets - - -
------------------------------
Total earning assets (41) 114 73
Interest-bearing deposits (34) (3) (37)
Short-term borrowings 8 47 55
Long-term debt (4) 23 19
------------------------------
Total interest-bearing sources (30) 67 37
------------------------------
Net interest income/Rate spread (FTE) $ (11) $ 47 $ 36
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
18
Noninterest Income
Noninterest income in the second quarter of 1994 rose $4 million
to $115 million, a 4 percent increase versus the comparable period in
1993. This increase was offset by lower fiduciary and mortgage-related
income. Trust fees fell $1 million, or 4 percent from prior year,
primarily due to declines in both institutional trust fees and personal
trust fees resulting from a decrease in certain trust services as well
as declines in market values. Income relating to mortgage origination
and servicing decreased $3 million from prior year's second quarter.
Other noninterest income increased $3 million, or 11 percent over
prior year's second quarter, benefiting from a $4 million gain on the
sale of international assets.
The acquisition of Pacific Western at the beginning of the second
quarter provided an additional $4 million in noninterest income
primarily comprised of $2 million in service charges on deposit accounts
as well as increases in bankcard fees and trust fees.
For the first half of 1994, noninterest income rose $6 million to
$227 million, a 3 percent increase over the same period in 1993,
primarily due to increases in mortgage-related income and the
acquisition of Pacific Western.
Income from the mortgage portfolio increased $2 million, or 60
percent, as a result of decelerated amortization of PMSR, which
reflected lower levels of mortgage prepayments, and gains on the sale of
originated mortgage servicing rights (OMSR).
Other noninterest income in the first half of 1994 increased $4
million, or 7 percent over the corresponding period in 1993, as a result
of the previously discussed gains on the sale of international assets.
As previously discussed, the increase in noninterest income for
the six months ended June 30, 1994, reflects a $4 million contribution
of noninterest income by Pacific Western.
Noninterest Expenses
Noninterest expenses totaled $265 million for the second quarter
of 1994, a $10 million or 4 percent increase over the same period in
19
1993. Excluding the effect of the acquisition of Pacific Western,
noninterest expenses would have decreased by $2 million from prior year.
Second quarter salaries and employee benefits expenses rose by
$0.9 million, or less than one percent over the comparable quarter in
1993, reflecting increases in salaries of $5 million, or 6 percent,
primarily due to the acquisition of Pacific Western. This increase was
offset by decreases in staffing requirements as merger-related systems
conversions are completed.
Equipment expense for the quarter increased $1 million, or 7
percent over the comparable period in 1993, due to increased
depreciation related to computer hardware purchased to upgrade systems
in 1993 and expenses associated with equipment maintenance.
Other noninterest expense rose $6 million, an increase of 9
percent in the second quarter of 1994 over the corresponding period in
1993. Exclusive of Pacific Western, other noninterest expenses
increased only $1 million, or 2 percent.
For the six months ended June 30, 1994, noninterest expenses rose
$9 million, or 2 percent, to $517 million versus the comparable period a
year ago.
On a year-to-date basis, salaries and employee benefits expenses
decreased $2 million versus the first six months of 1993, primarily as a
result of reduced staffing requirements related to the merger and due to
$2 million of income received in connection with company-owned life
insurance policies which were not in effect a year ago.
The year-to-date increase in equipment expense of $3 million, or 9
percent, was caused by higher depreciation levels related to 1993
computer hardware purchases used to upgrade computer systems.
Excluding the effect of Pacific Western, other noninterest
expenses rose $3 million, an increase of 2 percent in the first six
months of 1994, over the comparable period in 1993.
20
Provision for Income Taxes
The provision for income taxes in the first six months of 1994 and
1993 totaled $96 million and $72 million, respectively, an increase of
$24 million, or 33 percent. Comparability between periods is affected,
however, by an increase in the federal statutory tax rate from 34
percent to 35 percent.
The provision for income taxes differs from taxes calculated at
the statutory rate, predominately due to tax-exempt income earned on
state and municipal securities.
Financial Condition
Total assets at June 30, 1994, rose $1.3 billion to $31.6 billion,
a 4 percent increase since December 31, 1993.
Earning assets grew 5 percent, or $1.4 billion, led by increases
in both the investment securities and loan portfolios, and partially
offset by declines in both interest-bearing deposits with banks and
federal funds sold.
Investment securities increased $2 billion since year-end 1993,
largely as a result of increased purchases of mortgage-backed U.S.
Government Agency securities, which offer superior credit quality and
relatively attractive yields.
The $1.0 billion, or 6 percent, increase in the loan portfolio was
concentrated in commercial loans and commercial and residential mortgage
loans, which increased $579 million and $632 million, respectively,
since December 31, 1993. These increases resulted primarily from the
Pacific Western acquisition and the purchase of two residential mortgage
loan portfolios during the first quarter of 1994.
21
Liabilities increased by $1.1 billion, or 4 percent, to $29.3
billion since December 31, 1993, mainly due to the acquisition of
Pacific Western. Increases in federal funds purchased and long-term
debt offset a decrease of $510 million in deposits in foreign banks.
Short-term borrowings increased by $250 million, or 5 percent
since December 31, 1993. Within short-term borrowings, federal funds
purchased and securities repurchase agreements, and other borrowed funds
increased $177 million and $73 million, respectively.
The Corporation's long-term debt increased $1.2 billion since
year-end 1993, primarily because of the issuance of $1.6 billion of
medium-term notes. This increase was partially offset by the maturity
of $355 million of medium-term notes. An analysis of long-term debt is
contained in the notes to the consolidated financial statements.
Allowance for Loan Losses
The allowance for loan losses at June 30, 1994, was $322 million,
an increase of $23 million, or 8 percent since December 31, 1993. As a
percent of total loans, the allowance was 1.59 percent at June 30, 1994,
compared to 1.56 percent at December 31, 1993. Net charge-offs were $13
million for the second quarter of 1994, and $20 million for the
comparable period in 1993. For the six months ended June 30, 1994 and
1993, net charge-offs totaled $23 million and $40 million, respectively.
An analysis of the allowance for loan losses is contained in the notes
to the consolidated financial statements.
Management determines the adequacy of the allowance for loan
losses by applying projected loss ratios to the risk-ratings of loans
both individually and by category. The projected loss ratios
incorporate a variety of factors such as recent loss experience, current
economic conditions, trends in past due and nonaccrual amounts, risk
characteristics of the various categories and concentrations of loans,
and other factors.
22
Nonperforming assets increased by $50 million since December 31,
1993, primarily due to the acquisition of Pacific Western, and were
categorized as follows:
(in thousands) June 30, 1994 Dec. 31, 1993
------------- -------------
Nonaccrual loans:
Commercial $ 90,268 $ 71,268
International - 215
Real estate construction 15,307 18,748
Real estate mortgage
(principally commercial) 91,865 63,688
--------- ---------
Total nonaccrual loans 197,440 153,919
Reduced-rate loans 2,606 5,057
--------- ---------
Total nonperforming loans 200,046 158,976
Other real estate 59,150 50,174
--------- ---------
Total nonperforming assets $ 259,196 $ 209,150
========= =========
Loans past due 90 days $ 36,701 $ 45,880
========= =========
Nonperforming assets as a percentage of total loans and other real
estate at June 30, 1994 and December 31, 1993, were 1.27 percent and
1.09 percent, respectively.
Capital
Shareholder's equity increased $165 million from December 31, 1993
to June 30, 1994, principally through retention of earnings and the
issuance of $121 million of treasury stock in connection with the
Pacific Western acquisition. The increase was partially offset by $31
million of stock repurchased (1,158,464 shares) for use in the Pacific
Western acquisition and reissuance under employee stock plans, and a $48
million decrease in unrealized gains on investment securities available
for sale.
23
Capital ratios continue to comfortably exceed minimum regulatory
requirements and were as follows:
June 30 December 31
1994 1993
------------- ------------
Minimum leverage ratio (3.00 - minimum) 6.86% 7.04%
Tier 1 risk-based capital
ratio (4.0 - minimum) 8.41 8.21
Total risk-based capital
ratio (8.0 - minimum) 11.58 11.58
At June 30, 1994, the capital ratios of all of the Corporation's
banking subsidiaries exceeded the minimum ratios required of a "well
capitalized" institution as defined in the final rule under FDICIA.
Other Matters
As disclosed in Part I, Item 3 of Form 10-K for the year ended
December 31, 1993, the State of Michigan filed on July 24, 1990 a
lawsuit against Manufacturers Bank, N.A. (which was merged with and into
Comerica Bank in September, 1992) seeking to impose strict, joint, and
several liabilities upon Manufacturers Bank pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act, and the Michigan
Water Resources Commission Act. Plaintiff alleged that Manufacturers
Bank was an operator of certain facilities which have environmental
problems and that Manufacturers Bank had indicia of ownership under
CERCLA. The facilities involved were actually owned and operated by
Auto Specialties Manufacturing Company ("AUSCO"), now in bankruptcy.
Plaintiff seeks cleanup costs and damages and has expressed the
opinion that the claim will be well in excess of $30,000,000. On
January 12, 1993, the United States District Court for the Western
District of Michigan granted Manufacturers Bank its motion for summary
judgment. The Attorney General has appealed the Court's order for
summary judgement. Comerica's management believes that this action will
not have a materially adverse effect on Comerica's consolidated
financial position, although it may, depending upon the amount of
ultimate liability, if any, and the consolidated results of operations
24
in the year of final resolution, have a materially adverse effect on the
consolidated results of operation in that year.
25
PART II
ITEM 6. Exhibits
(a) Exhibits
11. Statements re: computation of earnings per share
(b) Reports on Form 8-K
None
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMERICA INCORPORATED
--------------------------------------
(Registrant)
/s/Paul H. Martzowka
--------------------------------------
Paul H. Martzowka
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/Arthur W. Hermann
--------------------------------------
Arthur W. Hermann
Senior Vice President and Controller
(Principal Accounting Officer)
Date: August 9, 1994