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 September 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 October 31, 1994: 117,596,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
Sept. 30, Dec. 31, Sept. 30,
(In thousands, except per share data) 1994 1993 1993
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,410,911 $ 1,600,695 $ 1,407,581
Interest-bearing deposits with banks 275,361 1,026,473 905,408
Federal funds sold and securities
purchased under agreements to
resell 50,499 1,091,789 40,830
Trading account securities 8,473 3,600 10,413
Mortgages held for sale 108,565 330,667 230,470
Investment securities available
for sale 3,047,713 2,322,101 -
Investment securities held to
maturity (estimated fair value
of $4,864,287 at 9/30/94,
$4,030,492 at 12/31/93 and
$6,464,853 at 9/30/93) 5,081,797 3,977,450 6,320,251
----------- ----------- -----------
Total investment securities 8,129,510 6,299,551 6,320,251
Commercial loans 9,787,241 9,086,757 8,828,146
International loans 1,167,371 1,135,585 1,056,125
Real estate construction loans 398,557 437,481 442,502
Commercial mortgage loans 3,008,809 2,699,861 2,629,013
Residential mortgage loans 2,289,889 1,856,822 1,937,542
Consumer loans 3,942,077 3,674,256 3,660,334
Lease financing 222,807 209,185 198,261
----------- ----------- -----------
Total loans 20,816,751 19,099,947 18,751,923
Less allowance for loan losses (327,962) (298,685) (305,892)
----------- ----------- -----------
Net loans 20,488,789 18,801,262 18,446,031
Premises and equipment 440,254 399,123 384,686
Customers' liability on acceptances
outstanding 38,502 38,212 41,807
Accrued income and other assets 852,725 703,501 682,459
----------- ----------- -----------
TOTAL ASSETS $31,803,589 $30,294,873 $28,469,936
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 4,617,674 $ 4,939,234 $ 4,501,769
Interest-bearing deposits 14,886,757 14,642,834 14,661,764
Deposits in foreign offices 820,265 1,367,811 1,030,869
----------- ----------- -----------
Total deposits 20,324,696 20,949,879 20,194,402
Federal funds purchased and
securities sold under
agreements to repurchase 1,655,471 450,092 841,021
Other borrowed funds 3,528,471 4,950,507 3,681,190
Acceptances outstanding 38,502 38,212 41,807
Accrued expenses and other
liabilities 268,353 263,969 234,919
Long-term debt 3,602,381 1,460,556 1,267,309
----------- ----------- -----------
Total liabilities 29,417,874 28,113,215 26,260,648
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-119,294,531 shares at
9/30/94, 119,294,531 shares
at 12/31/93, and 120,081,660
shares at 9/30/93 596,473 596,473 600,408
Capital surplus 524,915 524,186 541,449
Unrealized gains/(losses) on investment
securities available for sale (33,772) 27,473 -
Retained earnings 1,331,379 1,155,280 1,097,941
Less cost of common stock in
treasury-1,193,179 shares at 9/30/94,
4,423,603 shares at 12/31/93 and
1,033,466 shares at 9/30/93 (33,280) (121,754) (30,510)
----------- ----------- -----------
Total shareholders' equity 2,385,715 2,181,658 2,209,288
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $31,803,589 $30,294,873 $28,469,936
=========== =========== ===========
/TABLE
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ------------------------
(In thousands, except per share data) 1994 1993 1994 1993
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $408,709 $349,516 $1,129,270 $1,038,193
Interest on investment securities:
Taxable 117,805 68,229 327,425 227,544
Exempt from federal income tax 7,358 9,724 23,445 31,654
-------- -------- ---------- ----------
Total interest on investment
securities 125,163 77,953 350,870 259,198
Trading account interest 52 72 (18) 412
Interest on federal funds sold and
securities purchased under agreements
to resell 642 1,077 4,095 3,403
Interest on time deposits with banks 3,646 6,402 17,204 19,988
Interest on mortgages held for sale 2,722 3,068 8,965 10,065
-------- -------- ---------- ----------
Total interest income 540,934 438,088 1,510,386 1,331,259
INTEREST EXPENSE
Interest on deposits 141,129 128,469 389,231 404,019
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 33,241 8,354 81,092 26,379
Other borrowed funds 16,880 13,276 60,894 31,643
Interest on long-term debt 41,741 15,613 89,418 44,795
Net interest rate swap income (5,056) (7,539) (28,093) (20,978)
-------- -------- ---------- ----------
Total interest expense 227,935 158,173 592,542 485,858
-------- -------- ---------- ----------
Net interest income 312,999 279,915 917,844 845,401
Provision for loan losses 14,000 15,000 44,000 55,000
-------- -------- ---------- ----------
Net interest income after
provision for loan losses 298,999 264,915 873,844 790,401
NONINTEREST INCOME
Income from fiduciary activities 29,019 29,311 91,738 91,175
Service charges on deposit accounts 32,029 30,325 91,456 91,120
Customhouse broker fees 10,201 10,134 30,481 29,349
Revolving credit fees 10,200 9,195 28,557 26,003
Securities gains 1,581 526 2,363 1,567
Other noninterest income 33,608 30,523 99,415 91,986
-------- -------- ---------- ----------
Total noninterest income 116,638 110,014 344,010 331,200
NONINTEREST EXPENSES
Salaries and employee benefits 138,456 133,118 406,407 403,213
Net occupancy expense 25,188 24,135 74,881 72,714
Equipment expense 16,313 15,714 49,570 46,090
FDIC insurance expense 11,106 10,758 33,129 33,699
Other noninterest expenses 72,052 70,096 215,711 205,832
-------- -------- ---------- ----------
Total noninterest expenses 263,115 253,821 779,698 761,548
-------- -------- ---------- ----------
Income before income taxes 152,522 121,108 438,156 360,053
Provision for income taxes 51,918 37,412 147,511 109,505
-------- -------- ---------- ----------
NET INCOME $100,604 $ 83,696 $ 290,645 $ 250,548
======== ======== ========== ==========
Net income applicable to common stock $100,604 $ 83,696 $ 290,645 $ 250,506
======== ======== ========== ==========
NET INCOME PER SHARE:
Primary $.84 $.70 $2.46 $2.09
Fully diluted $.84 $.70 $2.46 $2.08
Primary average shares 119,436 120,080 118,148 120,079
Cash dividends declared $37,897 $33,291 $107,724 $93,284
Dividends per share $.32 $.28 $.92 $.79
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 - - - - 250,548 - 250,548
Cash dividends
declared:
Preferred
stock - - - - (42) - (42)
Common stock - - - - (93,284) - (93,284)
Purchase of
500,317 shares
of common stock - - - - - (14,717) (14,717)
Retirement of
treasury
stock - (170) - - (505) 675 -
Issuance of
common stock
under employee
stock plans
and for
conversion of
debentures - 3,780 2,846 - (6,101) 12,394 12,919
Stock split - 287,579 - - (287,579) - -
Amortization of
deferred
compensation - - 506 - - - 506
Redemption of
preferred
stock (37,605) - - - (4,174) - (41,779)
-------- --------- --------- ---------- ----------- --------- -----------
BALANCES AT
SEPT. 30,
1993 $ - $ 600,408 $ 541,449 $ - $ 1,097,941 $ (30,510) $ 2,209,288
======== ========= ========= ========== =========== ========== ===========
BALANCES AT
JANUARY 1,
1994 $ - $ 596,473 $ 524,186 $ 27,473 $ 1,155,280 $(121,754) $ 2,181,658
Net income for
1994 - - - - 290,645 - 290,645
Cash dividends
declared on
common stock - - - - (107,724) - (107,724)
Purchase of
1,601,164
shares of
common stock - - - - - (43,892) (43,892)
Issuance of
common stock:
Employee
stock plans - - 318 - (2,964) 7,145 4,499
Acquisition
of Pacific
Western - - - - (3,858) 125,221 121,363
Amortization of
deferred
compensation - - 411 - - - 411
Change in
unrealized
gains/(losses)
on investment
securities
available for
sale - - - (61,245) - - (61,245)
-------- --------- --------- ---------- ----------- --------- -----------
BALANCES AT
SEPT. 30,
1994 $ - $ 596,473 $ 524,915 $ (33,772) $ 1,331,379 $ (33,280) $ 2,385,715
======== ========= ========= ========== =========== ========== ===========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30
---------------------------
(in thousands) 1994 1993
------------ ------------
OPERATING ACTIVITIES:
Net income $ 290,645 $ 250,548
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 44,000 55,000
Depreciation 44,320 41,016
Net (increase) decrease in trading
account securities (4,873) 98,966
Net decrease in mortgages held for sale 222,102 4,242
Net increase in accrued income receivable (26,289) (1,540)
Net increase (decrease) in accrued expenses (20,113) 15,468
Net amortization of intangibles 21,277 28,470
Other, net (27,893) (92,405)
------------ ------------
Total adjustments 252,531 149,217
------------ ------------
Net cash provided by operating
activities 543,176 399,765
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
with banks 751,112 416,107
Net decrease in federal funds sold and
securities purchased under agreements
to resell 1,041,290 45,802
Proceeds from sale of investment securities
available for sale 1,509 -
Proceeds from maturity of investment
securities available for sale 455,785 -
Purchases of investment securities
available for sale (1,147,791) -
Proceeds from maturity of investment
securities held to maturity 1,249,296 2,246,289
Purchases of investment securities
held to maturity (2,125,409) (3,332,236)
Net increase in loans (other
than purchased loans) (844,671) (563,591)
Purchase of loans (227,192) (20,226)
Fixed assets, net (65,452) (51,411)
Net increase in customers' liability
on acceptances outstanding (290) (16,143)
Net cash provided by acquisitions 58,626 -
------------ ------------
Net cash used in investing
activities (853,187) (1,275,409)
FINANCING ACTIVITIES:
Net decrease in deposits (1,802,852) (1,005,116)
Net increase (decrease) in short-term
borrowings (77,988) 1,300,502
Net decrease in acceptances outstanding 290 16,143
Proceeds from issuance of long-term debt 2,750,000 705,000
Repayments and purchases of long-term
debt (608,175) (173,788)
Proceeds from issuance of common stock
and other capital transactions 4,910 8,329
Purchase of common stock for treasury (43,892) (14,717)
Redemption of preferred stock - (41,779)
Dividends paid (102,066) (91,091)
------------ ------------
Net cash provided by financing
activities 120,227 703,483
------------ ------------
Net decrease in cash and due from banks (189,784) (172,161)
Cash and due from banks at beginning of year 1,600,695 1,579,742
------------ ------------
Cash and due from banks at end of period $ 1,410,911 $ 1,407,581
============ ============
Interest paid $ 597,862 $ 485,360
============ ============
Income taxes paid $ 127,851 $ 85,512
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 12,241 $ 27,086
============ ============
Conversion of debentures to equity $ - $ 5,095
============ ============
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 nine months ended September 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 September 30, 1994 investment securities having a carrying value
of $6,175,807,000 were pledged where permitted or required by law to
secure liabilities and public and other deposits including deposits of the
State of Michigan of $34,738,000.
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Loan Losses
The following analyzes the changes in the allowance for loan losses
included in the consolidated balance sheets:
1994 1993
(in thousands) --------- ---------
Balance at January 1 $ 298,685 $ 308,007
Allowance acquired 19,467 -
Loans charged off (60,863) (81,193)
Recoveries on loans previously
charged off 26,673 24,078
--------- ---------
Net loans charged off (34,190) (57,115)
Provision for loan losses 44,000 55,000
--------- ---------
Balance at September 30 $ 327,962 $ 305,892
========= =========
Note 4 - Long-term Debt
Long-term debt consisted of the following at September 30, 1994 and
December 31, 1993:
(in thousands) Sept. 30, 1994 Dec. 31, 1993
-------------- -----------------
9.75% subordinated notes
due 1999 $ 74,579 $ 74,511
10.125% subordinated debentures
due 1998 74,701 74,641
---------- ----------
Total Parent Company 149,280 149,152
8.375% subordinated notes due 2024 147,690 -
7.25% subordinated notes due 2002 148,738 148,619
Medium-term fixed rate notes bearing
interest at rates ranging from 3.35%
to 5.95% and maturing on dates
ranging from 1994 through 1997 2,898,785 904,285
6.875% subordinated notes due 2008 98,970 98,913
7.125% subordinated notes due 2013 147,862 147,779
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 2,056 2,867
---------- ----------
Total Subsidiaries 3,453,101 1,311,404
---------- ----------
Total Comerica Incorporated $3,602,381 $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 various types of derivative products,
primarily interest rate swaps, to manage the interest rate, currency and
other market risks associated with assets and liabilities. The
Corporation's use of derivatives takes place predominately in the interest
rate markets and involves the use of forwards, futures, swaps, caps,
floors and options. Corporate Policy allows only diminutive authority
limits for trading derivatives and, therefore, related notional values and
gains and losses are insignificant.
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 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. In addition, Bilateral Collateral Agreements are in
place with a substantial number of counterparties in order to minimize
credit risk exposure and secure amounts due. At September 30, 1994 and
December 31, 1993, the replacement cost of uncollaterized off-balance-
sheet derivatives in an unrealized gain position approximated $12 million
and $66 million, respectively.
All of the Corporation's derivative contracts, excluding futures
contracts which are exchange-traded, have been transacted with either
major investment banks or commercial banks, resulting in some degree of
liquidity. Since the Corporation uses derivatives to alter the interest
and foreign exchange rate characteristics of underlying assets and
liabilities, termination of a contract would be an unlikely event, and the
Corporation always has the option of offsetting a contract with an
opposite effect derivative product.
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
Summary information with respect to the Corporation's off-balance-
sheet derivative activity follows:
Nine Months
Ended Year Ended
September 30, December 31,
(in millions) 1994 1993
------------ ------------
Notional balance at
beginning of period $ 4,414 $ 3,025
Additions 35,816 51,622
Maturities/Amortizations (35,138) (50,233)
Terminations - -
-------- --------
Notional balance at end of period $ 5,092 $ 4,414
======== ========
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
The notional and fair values of the Corporation's off-balance-sheet
derivatives instrument portfolio are shown below:
September 30, 1994 December 31, 1993
------------------- -------------------
Notional Fair Notional Fair
(in millions) Value Value Value Value
-------- ------ -------- ------
Interest rate contracts
Swaps:
Variable rate asset
designation:
Generic receive fixed $ 50 $ 1 $ 550 $ 18
Amortized receive
fixed 328 (23) - -
Index amortized
receive fixed 2,008 (116) 1,883 24
Fixed rate asset
designation:
Generic receive fixed 21 - 121 -
Generic pay fixed 195 - 600 (13)
Amortized receive fixed 17 - 21 -
Amortized pay fixed 8 - 9 -
Long-term debt designation:
Generic receive fixed 675 (36) 375 14
Generic pay fixed 25 (1) 25 (2)
Floating/Floating 675 (1) 50 -
Futures and forwards - - 65 63
Caps written and purchased 355 3 339 1
------ ------ ------ ------
Total interest rate
contracts $4,357 $ (173) $4,038 $ 105
Foreign exchange rate
contracts
Generic receive variable
swap 15 1 20 -
Spot, forwards, and
futures 708 2 356 1
------ ------ ------ ------
Total exchange rate
contracts 735 3 376 1
------ ------ ------ ------
Total derivatives contracts $5,092 $ (170) $4,414 $ 106
====== ====== ====== ======
12
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
The Corporation uses off-balance-sheet derivative products to manage
on-balance-sheet exposure to changes in interest and foreign exchange rate
risks; therefore, the unrealized gains or losses on derivatives are offset
by the opposite effect to on-balance-sheet items. Unrealized gains and
losses on off-balance-sheet derivative products at September 30, 1994 and
December 31, 1993, are summarized as follows:
September 30, December 31,
(in millions) 1994 1993
------------- ------------
Off-Balance-Sheet Derivatives:
Unrealized gains $ 15 $ 69
Unrealized losses (188) (23)
----- ----
Net unrealized gain (loss) $(173) $ 46
===== ====
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 nine months
ended September 30, 1994, interest rate swaps generated $28 million of net
interest income, compared to $21 million for the same period in 1993, and
$32 million for the year ended December 31, 1993.
13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
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 September 30, 1994. A key assumption
in the calculation of the table is that rates remain constant at September
30, 1994 levels.
1999-
(in millions) 1994 1995 1996 1997 1998 2013 Total
----- ----- ----- ----- ----- ----- ------
Remaining Expected Maturity of Interest Rate Swaps:
Generic Receive Fixed
- ---------------------
Notional Amount $21 $75 $50 $50 $- $550 $746
Weighted Average:
Receive Rate 5.85% 3.71% 8.00% 9.35% -% 7.69% 7.37%
Pay Rate 4.81 4.81 5.13 4.88 - 5.29 5.19
Generic Pay Fixed
- -----------------
Notional Amount $10 $148 $60 $- $- $2 $220
Weighted Average:
Receive Rate 4.88% 5.03% 5.10% -% -% 5.00% 5.04%
Pay Rate 6.68 7.49 7.56 - - 8.73 7.48
Amortizing Receive
Fixed-Generic
- -------------
Notional Amount $31 $98 $24 $84 $100 $8 $345
Weighted Average:
Receive Rate 4.75% 4.75% 4.58% 4.75% 4.75% 6.29% 4.77%
Pay Rate 4.88 4.88 4.88 4.88 4.88 4.81 4.88
Amortizing Receive
Fixed-Index
- -----------
Notional Amount $129 $384 $352 $774 $94 $275 $2,008
Weighted Average:
Receive Rate 5.43% 5.49% 5.46% 5.19% 5.78% 5.70% 5.41%
Pay Rate 4.97 4.96 4.95 4.89 5.04 5.06 4.95
Amortizing Pay Fixed
- --------------------
Notional Amount $- $- $- $- $- $8 $8
Weighted Average:
Receive Rate -% -% -% -% -% 4.81% 4.81%
Pay Rate - - - - - 6.19 6.19
Floating/Floating
- -----------------
Notional Amount $200 $475 $- $- $- $- $675
Weighted Average:
Receive Rate 1.75% 4.74% -% -% -% -% 3.85%
Pay Rate 4.86 5.27 - - - - 5.15
14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives (Continued)
The Corporation's index amortizing swaps are interest rate swaps
whose notional principal amortizes, or decreases, at a rate that varies
with the level of a specified index according to a predetermined schedule.
The majority of these swaps are indexed to short-term interest rates.
Currently, the expected average life of all index amortizing swaps is
approximately 2 years with a stated maturity that averages 3 years.
LIBOR is the basis of the variable rate portion of all the
Corporation's interest rate swaps. The Corporation's basis swaps
(receiving floating/paying floating) convert variable rate debt based on
prime and Treasury bills as well as range-based floating rate debt into
variable rate debt based on LIBOR.
15
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Comerica Incorporated reported net income of $101 million for the
third quarter of 1994, an increase of 20 percent compared to $84 million
reported for the comparable period in 1993. Net income was $0.84 per
share for the third quarter of 1994, compared to $0.70 per share a year
ago. Return on average common shareholders' equity was 17.11 percent and
return on average assets was 1.27 percent for the third quarter, compared
to 15.44 percent and 1.25 percent, respectively, for the same period in
1993.
Net income for the nine months ended September 30, 1994, was $2.46
per share, or $291 million, representing an 18 percent increase per share
from net income of $2.09 per share, or $251 million, for the corresponding
period in 1993. Return on equity was 16.94 percent and return on assets
was 1.24 percent, compared to 15.73 percent and 1.25 percent,
respectively, for the first nine months in 1993.
Acquisitions
On March 31, 1994, the Corporation completed the acquisition of the
$1 billion Pacific Western Bancshares (Pacific Western) in San Jose,
California, for $121 million of common stock, in a transaction accounted
for as a purchase. The second quarter was the first to include the
operating results of Pacific Western.
On August 4, 1994, the Corporation completed the acquisition of
Lockwood Banc Group (Lockwood), in Houston, Texas, for $44 million in
cash. The transaction was accounted for as a purchase. The financial
condition of the corporation at September 30, 1994, reflects Lockwood's
contribution of $324 million in assets, $179 million in loans, and $273
million in deposits.
16
Net Interest Income
Net interest income for the third quarter of 1994, on a fully
taxable equivalent (FTE) basis, rose to $319 million, an increase of $31
million, or 11 percent, versus the comparable period a year earlier. The
rise in net interest income, primarily caused by acquisitions and strong
growth in earning assets, was partially offset by a decline in the net
interest margin. Total average earning assets increased $5 billion, or 19
percent, compared to last year's third quarter, due to acquisitions and
growth in the commercial, residential mortgage, and international loan
portfolios as well as the investment securities portfolio. Average loans
were up $2 billion, or 11 percent, while average investment securities
rose $3 billion, or 61 percent. The net interest margin fell 31 basis
points to 4.35 percent from 4.66 percent a year ago, because growth in
earning assets was funded by short-term liabilities. These funding
sources yield a lower rate spread than deposit funding sources.
For the first nine months of 1994, net interest income on an FTE
basis totaled $936 million, an increase of $68 million, or 8 percent,
compared to the same period in 1993. Average investment securities for
the nine months ended September 30, 1994, increased $3 billion, or 53
percent, over the comparable period in 1993, while total average earning
assets increased $4 billion, or 17 percent, resulting in a more desirable
mix of earning assets. Average loans increased $2 billion, or 9 percent,
due primarily to acquisitions and greater consumer demand. The net
interest margin decreased 38 basis points to 4.34 percent for the first
nine months of 1994 from 4.72 percent for the same period in 1993, because
earning asset growth was funded by short-term liabilities which produce a
lower rate spread than deposits.
The Corporation, which was asset sensitive by approximately $50
million (after elasticity adjustments) as of September 30, 1994, expects
to become more asset sensitive during the fourth quarter of 1994 as
investment securities continue to runoff and the mix of earning assets
moves toward a greater concentration of higher-yielding loans.
17
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 $14 million in the third quarter
of 1994 versus $15 million in the third quarter of 1993. For the nine
months ended September 30, 1994, the provision was $44 million compared to
$55 million in the same period last year. The provision is predicated
upon maintaining an adequate allowance for loan losses, which is further
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.
18
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
September 30, 1994 September 30, 1993
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $20,463 $ 411 7.99% $18,394 $ 351 7.60%
Investment securities 8,228 129 6.24 5,114 84 6.55
Other earning assets 479 7 5.92 1,086 11 3.94
- ----------------------------------------------------------------------------------------------
Total earning assets 29,170 547 7.45 24,594 446 7.22
Interest-bearing deposits 16,743 136 3.34 15,967 121 3.19
Short-term borrowings 4,361 50 4.61 2,890 21 3.00
Long-term debt 3,185 42 5.24 1,090 16 5.74
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $24,289 228 3.73 $19,947 158 3.15
----------------- -----------------
Net interest income/
Rate spread (FTE) $ 319 3.72 $ 288 4.07
====== ======
FTE adjustment $ 6 $ 8
====== ======
Impact of net noninterest-
bearing sources of funds 0.63 0.59
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent
of average earning assets (FTE) 4.35% 4.66%
==============================================================================================
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 19 $ 41 $ 60
Investment securities 2 43 45
Other earning assets 5 (9) (4)
------------------------------
Total earning assets 26 75 101
Interest-bearing deposits 8 7 15
Short-term borrowings 12 17 29
Long-term debt (1) 27 26
------------------------------
Total interest-bearing sources 19 51 70
------------------------------
Net interest income/Rate spread (FTE) $ 7 $ 24 $ 31
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
19
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Nine Months Ended
-------------------------------------------------------------
September 30, 1994 September 30, 1993
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $19,825 $1,135 7.65% $18,143 $1,044 7.69%
Investment securities 7,996 363 6.06 5,239 276 7.03
Other earning assets 931 30 4.34 1,161 34 3.91
- ----------------------------------------------------------------------------------------------
Total earning assets 28,752 1,528 7.10 24,543 1,354 7.37
Interest-bearing deposits 16,641 361 3.13 16,384 383 3.30
Short-term borrowings 4,948 142 3.84 2,655 58 2.92
Long-term debt 2,298 89 5.19 1,004 45 5.95
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $23,887 592 3.32 $20,043 486 3.24
----------------- ------------------
Net interest income/
Rate spread (FTE) $ 936 3.78 $ 868 4.13
====== ======
FTE adjustment $ 18 $ 23
====== ======
Impact of net noninterest-bearing
sources of funds 0.56 0.59
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.34% 4.72%
==============================================================================================
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 3 $ 88 $ 91
Investment securities (22) 109 87
Other earning assets 3 (7) (4)
------------------------------
Total earning assets (16) 190 174
Interest-bearing deposits (25) 3 (22)
Short-term borrowings 18 66 84
Long-term debt (6) 50 44
------------------------------
Total interest-bearing sources (13) 119 106
------------------------------
Net interest income/Rate spread (FTE) $ (3) $ 71 $ 68
==============================
* Rate/Volume variances are allocated to variances due to volume.
20
Noninterest Income
Noninterest income rose $2 million, after adjusting for the
acquisitions of Pacific Western and Lockwood, to $112 million in the
third quarter of 1994, a 2 percent increase versus the comparable period
in 1993.
The sale of international assets generated $1.5 million in gains
during the third quarter of 1994. Other noninterest income increased $2
million, or 8 percent, primarily due to a $3.7 million gain on the sale
of originated mortgage servicing rights (OMSRs). These increases were
offset by a $1.5 million decline in fee income from fiduciary
activities, service charges on deposits, and bank cards.
On a year-to-date basis, noninterest income rose $4 million, or
one percent, to $335 million, excluding the income associated with the
acquisitions of Pacific Western and Lockwood. Increases in gains on the
sale of securities and income from mortgage-related activities were the
primary contributors to this growth.
Gains realized on the sale of securities increased over the prior
year nine-month period due to the sale of international assets as
previously discussed. Other noninterest income increased $6 million, or
6 percent, over the corresponding period in 1993, benefiting from higher
levels of mortgage-related income due to a $7 million gain on the sale
of OMSRs. However, these increases were offset by a $3.7 million
decrease in income generated from trust fees and service charges on
deposits.
Noninterest Expenses
Exclusive of the Pacific Western and Lockwood acquisitions,
noninterest expenses decreased $5 million to $249 million for the third
quarter of 1994, a 2 percent reduction from the same period in 1993, led
by decreases in staff expenses and other noninterest expenses.
Salaries and employee benefits expenses declined $0.8 million,
excluding acquisitions, compared to the third quarter of 1993,
benefiting from decreases in temporary staffing requirements as merger-
related systems conversions are completed.
21
Other noninterest expenses decreased $4 million, or 6 percent, on
a quarter-to-quarter basis after adjusting for acquisitions, primarily
due to a $2.3 million decrease in consultants fees as the need for
merger-related consultation diminishes, and a $1.3 million reduction in
legal fees caused mainly by a recovery in the third quarter of 1994 of
fees expensed in prior years.
Excluding the expenses associated with the acquisitions of Pacific
Western and Lockwood, noninterest expenses decreased $8 million, or one
percent, to $754 million for the nine months ended September 30, 1994,
versus the comparable period a year ago. This decrease was primarily
the result of reductions in salaries and employee benefits and other
noninterest expenses. These reductions, however, were offset by an
increase in equipment expense.
Salaries and employee benefits expenses, on a year-to-date basis
and excluding acquisitions, fell $8 million, or 2 percent, versus the
first nine months of 1993, benefiting from a significant reduction in
temporary staffing requirements related to the merger and $4 million of
income received in connection with company-owned life insurance policies
which have been in effect for approximately one year.
The year-to-date increase in equipment expense of $3 million, or 6
percent, after adjusting for acquisitions, was a result of higher levels
of depreciation expense related to newly acquired computer systems.
Other noninterest expenses through September 30, 1994, decreased
$1 million from the comparable period in 1993, excluding the impact of
acquisitions, led by reductions in consultants fees and legal fees as
previously discussed.
22
Provision for Income Taxes
The provision for income taxes in the first nine months of 1994
and 1993 totaled $148 million and $110 million, respectively, an
increase of $38 million, or 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 September 30, 1994, rose $1.5 billion to $31.8
billion, a 5 percent increase since December 31, 1993.
Earning assets grew 6 percent, or $1.5 billion, since year-end
1993, led by increases in the loan and investment securities portfolios,
and partially offset by declines in interest-bearing deposits with banks
and federal funds sold.
Investment securities increased $1.1 billion, or 28 percent, since
year-end 1993, largely as a result of increased purchases of U.S.
Government Agency securities, which offer superior credit quality and
relatively attractive yields.
The $1.7 billion, or 9 percent, increase in the loan portfolio
since December 31, 1993, was concentrated in commercial loans, which
increased $700 million; commercial and residential mortgage loans, which
increased $742 million; and consumer loans, which increased $267
million. The increases were attributable to acquisitions, strong demand
for commercial loans, the purchase of two residential mortgage loan
portfolios since year-end 1993, and growth in consumer demand for bank
card and home equity loans.
Liabilities increased $1.3 billion, or 5 percent, to $29.4 billion
since December 31, 1993, mainly due to acquisitions. Increases in
federal funds purchased and long-term debt occurred to provide an
alternate source of funding in light of declines in the deposit base.
These increases were partially offset by decreases in other borrowed
funds and noninterest-bearing and foreign office deposits.
23
Despite a $1.2 billion increase in federal funds purchased and
securities sold under agreements to repurchase, short-term borrowings
declined $217 million, or 4 percent, since December 31, 1993, due
primarily to a decrease in the purchase of treasury, tax and loan funds
within other borrowed funds totaling $1.6 billion.
The Corporation's long-term debt increased $2.1 billion since
year-end 1993, primarily because of the issuance of $2.6 billion of
medium-term notes and $150 million of subordinated notes. This increase
was partially offset by the maturity of $605 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 and Nonperforming Assets
The allowance for loan losses was $328 million at September 30,
1994, an increase of $29 million, or 10 percent, since December 31,
1993. As a percentage of total loans, the allowance was 1.58 percent at
September 30, 1994, compared to 1.56 percent at December 31, 1993. Net
charge-offs were $11 million for the third quarter of 1994, and $17
million for the comparable period a year ago. For the nine months ended
September 30, 1994 and 1993, net charge-offs totaled $34 million and $57
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.
24
Nonperforming assets increased $5 million compared to December 31,
1993, and were categorized as follows:
(in thousands) Sept. 30, 1994 Dec. 31, 1993
-------------- -------------
Nonaccrual loans:
Commercial $ 67,865 $ 71,268
International - 215
Real estate construction 3,476 18,748
Real estate mortgage
(principally commercial) 88,240 63,688
--------- ---------
Total nonaccrual loans 159,581 153,919
Reduced-rate loans 2,477 5,057
--------- ---------
Total nonperforming loans 162,058 158,976
Other real estate 51,659 50,174
--------- ---------
Total nonperforming assets $ 213,717 $ 209,150
========= =========
Loans past due 90 days $ 46,607 $ 45,880
========= =========
Nonperforming assets as a percentage of total loans and other real
estate at September 30, 1994 and December 31, 1993, were 1.02 percent
and 1.09 percent, respectively.
Capital
Shareholders' equity increased $204 million from December 31, 1993
to September 30, 1994, principally through retention of earnings and the
issuance of $126 million of common stock in connection with employee
stock plans and the acquisition of Pacific Western in the first quarter
of 1994. The increase was partially offset by the repurchase of $44
million of common stock (1,601,164 shares) and a $61 million decrease in
unrealized gains (losses) on investment securities available for sale.
25
Capital ratios continue to comfortably exceed minimum regulatory
requirements and were as follows:
September 30, December 31
1994 1993
------------- ------------
Minimum leverage ratio (3.00 - minimum) 7.01% 7.04%
Tier 1 risk-based capital
ratio (4.0 - minimum) 8.40 8.21
Total risk-based capital
ratio (8.0 - minimum) 12.13 11.58
At September 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, a lawsuit was filed on July 24, 1990, by the State of
Michigan 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 Comerica Bank its motion for summary
judgment. The Attorney General has appealed the Court's order for
summary judgment. Comerica's management believes that this action will
26
not have a materially adverse effect on the Corporation's consolidated
financial position, although it may, depending upon the amount of
ultimate liability, if any, and the consolidated results of operations
in the year of final resolution, have a materially adverse effect on the
consolidated results of operations in that year.
The Corporation entered into an Agreement and Plan of Merger on
October 4, 1994, with the $422 million University Bank & Trust Company
in Palo Alto, California, for the acquisition by Comerica of University
Bank & Trust for approximately $73 million of Comerica common stock.
Consummation of the transaction, subject to regulatory and shareholder
approval, is expected in the second quarter of 1995, and is anticipated
to be accounted for as a purchase.
On November 4, 1994, the Corporation and Munder Capital Management
announced a merger of the Corporation's investment advisory business
with Munder Capital Management, Michigan's largest independent
investment advisor with assets under management totaling $8 billion.
The merger will combine the Corporation's Woodbridge Capital Management
and World Asset Management subsidiaries and Munder Capital Management,
forming a money management firm with $30 billion in assets under
management. Munder Capital Management will hold a majority interest in
the resulting partnership, which will retain the Munder Capital
Management name, and Comerica will hold a minority interest. The
merger is subject to regulatory approval, which is expected by year-end.
27
PART II
ITEM 6. Exhibits
(a) Exhibits
11. Statements re: computation of earnings per share
(b) Reports on Form 8-K
None
28
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: November 8, 1994