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 March 31, 1995
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 April 30, 1995: 118,194,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
March 31, December 31, March 31,
(In thousands, except per share data) 1995 1994 1994
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,628,359 $ 1,822,313 $ 1,586,946
Interest-bearing deposits with banks 180,710 378,873 791,607
Federal funds sold and securities
purchased under agreements to
resell 68,200 46,000 121,041
Trading account securities 2,287 4,332 5,768
Mortgages held for sale 49,300 91,547 194,817
Investment securities available
for sale 2,951,025 2,906,296 3,229,015
Investment securities held to
maturity (estimated fair value
of $4,830,368 at 3/31/95,
$4,659,317 at 12/31/94 and
$5,310,525 at 3/31/94) 4,971,778 4,970,165 5,365,748
----------- ----------- -----------
Total investment securities 7,922,803 7,876,461 8,594,763
Commercial loans 11,160,791 10,633,808 9,450,856
International loans 1,134,541 1,195,328 1,172,861
Real estate construction loans 471,488 413,987 399,478
Commercial mortgage loans 3,174,989 3,056,337 2,953,978
Residential mortgage loans 2,499,519 2,436,445 2,161,824
Consumer loans 4,389,978 4,214,716 3,655,422
Lease financing 265,458 258,625 204,187
----------- ----------- -----------
Total loans 23,096,764 22,209,246 19,998,606
Less allowance for loan losses (335,272) (326,195) (319,586)
----------- ----------- -----------
Net loans 22,761,492 21,883,051 19,679,020
Premises and equipment 460,137 437,757 414,461
Customers' liability on acceptances
outstanding 43,730 33,632 35,329
Accrued income and other assets 991,927 855,936 739,144
----------- ----------- -----------
TOTAL ASSETS $34,108,945 $33,429,902 $32,162,896
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 4,956,262 $ 5,257,396 $ 5,278,470
Interest-bearing deposits 15,102,206 14,741,438 15,056,736
Deposits in foreign offices 1,857,864 2,433,482 1,285,236
----------- ----------- -----------
Total deposits 21,916,332 22,432,316 21,620,442
Federal funds purchased and
securities sold under
agreements to repurchase 3,347,116 2,594,189 1,847,457
Other borrowed funds 2,100,976 1,611,219 4,152,101
Acceptances outstanding 43,730 33,632 35,329
Accrued expenses and other
liabilities 314,945 268,823 308,345
Medium- and long-term debt 3,873,123 4,097,943 1,885,478
----------- ----------- -----------
Total liabilities 31,596,222 31,038,122 29,849,152
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-119,294,531 shares at
3/31/95, 12/31/94 and 3/31/94 596,473 596,473 596,473
Capital surplus 526,465 525,052 524,523
Unrealized gains and losses on
investment securities available
for sale (31,327) (55,039) 4,624
Retained earnings 1,451,929 1,390,405 1,209,647
Less cost of common stock in
treasury-1,129,549 shares at 3/31/95,
2,382,333 shares at 12/31/94 and
787,521 shares at 3/31/94 (30,817) (65,111) (21,523)
----------- ----------- -----------
Total shareholders' equity 2,512,723 2,391,780 2,313,744
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $34,108,945 $33,429,902 $32,162,896
=========== =========== ===========
/TABLE
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31
--------------------
(In thousands, except per share data) 1995 1994
-------- --------
INTEREST INCOME
Interest and fees on loans $489,743 $340,179
Interest on investment securities:
Taxable 118,991 93,124
Exempt from federal income tax 6,770 8,665
-------- --------
Total interest on investment
securities 125,761 101,789
Trading account interest 51 (136)
Interest on federal funds sold and
securities purchased under agreements
to resell 728 2,468
Interest on time deposits with banks 4,200 7,365
Interest on mortgages held for sale 1,139 3,730
-------- --------
Total interest income 621,622 455,395
INTEREST EXPENSE
Interest on deposits 171,825 118,699
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 40,376 18,405
Other borrowed funds 30,401 20,195
Interest on medium- and long-term debt 64,740 22,291
Net interest rate swap (income)/expense 1,794 (14,486)
-------- --------
Total interest expense 309,136 165,104
-------- --------
Net interest income 312,486 290,291
Provision for loan losses 12,000 15,000
-------- --------
Net interest income after
provision for loan losses 300,486 275,291
NONINTEREST INCOME
Income from fiduciary activities 30,741 32,005
Service charges on deposit accounts 31,847 29,174
Customhouse broker fees 9,249 9,725
Revolving credit fees 11,048 7,931
Securities gains 201 424
Other noninterest income 36,426 32,686
-------- --------
Total noninterest income 119,512 111,945
NONINTEREST EXPENSES
Salaries and employee benefits 137,107 131,704
Net occupancy expense 24,267 24,578
Equipment expense 17,029 16,197
FDIC insurance expense 10,845 10,709
Telecommunications expense 7,693 5,175
Other noninterest expenses 71,448 63,343
-------- --------
Total noninterest expenses 268,389 251,706
-------- --------
Income before income taxes 151,609 135,530
Provision for income taxes 51,587 44,667
-------- --------
NET INCOME $100,022 $ 90,863
======== ========
NET INCOME PER SHARE:
Primary $0.85 $0.79
Fully diluted $0.85 $0.79
Primary average shares 117,364 115,464
Cash dividends declared $37,216 $31,931
Dividends per share $0.32 $0.28
4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Unrealized Total
Common Capital Gains/ Retained Treasury Shareholders'
(in thousands) Stock Surplus (Losses) Earnings Stock Equity
--------- --------- ---------- ----------- ---------- ------------
BALANCES AT JANUARY 1,
1994 $ 596,473 $ 524,186 $ 27,473 $ 1,155,280 $ (121,754) $ 2,181,658
Net income for 1994 - - - 90,863 - 90,863
Cash dividends declared
on common stock - - - (31,931) - (31,931)
Purchase of 981,700
shares of common
stock - - - - (26,330) (26,330)
Issuance of common
stock:
Employee stock plans - 178 - (707) 1,340 811
Acquisition of Pacific
Western - - - (3,858) 125,221 121,363
Amortization of deferred
compensation - 159 - - - 159
Change in unrealized
gains/(losses) on
investment securities
available for sale - - (18,725) - - (18,725)
--------- --------- --------- ----------- ---------- ------------
BALANCES AT MARCH 31,
1994 $ 596,473 $ 524,523 $ 8,748 $ 1,209,647 $ (21,523) $ 2,317,868
========= ========= ========= =========== ========== ===========
BALANCES AT JANUARY 1,
1995 $ 596,473 $ 525,052 $ (55,039) $ 1,390,405 $ (65,111) $ 2,391,780
Net income for 1995 - - - 100,022 - 100,022
Cash dividends declared
on common stock - - - (37,216) - (37,216)
Purchase of 1,346,600
shares of common stock - - - - (36,623) (36,623)
Issuance of common stock:
Employee stock plans - 437 - (1,282) 2,224 1,379
Acquisition of
University Bank and
Trust - 704 - - 68,693 69,397
Amortization of deferred
compensation - 272 - - - 272
Change in unrealized
gains/(losses) on
investment securities
available for sale - - 23,712 - - 23,712
--------- --------- --------- ----------- ---------- -----------
BALANCES AT MARCH 31,
1995 $ 596,473 $ 526,465 $ (31,327) $ 1,451,929 $ (30,817) $ 2,512,723
========= ========= ========= =========== ========== ===========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31
---------------------------
(in thousands) 1995 1994
------------ ------------
OPERATING ACTIVITIES:
Net income $ 100,022 $ 90,863
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 12,000 15,000
Depreciation 15,284 14,215
Net (increase) decrease in trading
account securities 2,045 (2,168)
Net decrease in mortgages held for sale 42,247 135,850
Net increase in accrued income receivable (17,426) (13,827)
Net increase in accrued expenses 71,836 62,138
Net amortization of intangibles 7,900 6,557
Funding for postretirement benefits other
than pensions (75,000) -
Other, net (46,470) 5,066
------------ ------------
Total adjustments 12,416 222,831
------------ ------------
Net cash provided by operating
activities 112,438 313,694
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
with banks 198,163 234,866
Net decrease in federal funds sold and
securities purchased under agreements
to resell 13,100 970,748
Proceeds from sale of investment securities
available for sale 8,928 -
Proceeds from maturity of investment
securities available for sale 89,241 131,797
Purchases of investment securities
available for sale (5,648) (1,002,000)
Proceeds from maturity of investment
securities held to maturity 157,197 655,278
Purchases of investment securities
held to maturity (120,927) (1,800,860)
Net increase in loans (other
than purchased loans) (645,568) (236,522)
Purchase of loans (18,756) (206,723)
Fixed assets, net (20,883) (16,168)
Net (increase) decrease in customers'
liability on acceptances outstanding (10,098) 2,883
Net cash provided by acquisitions 27,993 79,076
------------ ------------
Net cash used in investing
activities (327,258) (1,187,625)
FINANCING ACTIVITIES:
Net decrease in deposits (934,724) (102,749)
Net increase in short-term borrowings 1,242,684 598,428
Net increase (decrease) in
acceptances outstanding 10,098 (2,883)
Proceeds from issuance of medium- and
long-term debt 100,000 500,000
Repayments and purchases of medium- and
long-term debt (324,820) (75,078)
Proceeds from issuance of common stock
and other capital transactions 1,651 970
Purchase of common stock for treasury (36,623) (26,330)
Dividends paid (37,400) (32,176)
------------ ------------
Net cash provided by financing
activities 20,866 860,182
------------ ------------
Net decrease in cash and due from banks (193,954) (13,749)
Cash and due from banks at beginning of year 1,822,313 1,600,695
------------ ------------
Cash and due from banks at end of period $ 1,628,359 $ 1,586,946
============ ============
Interest paid $ 297,703 $ 159,842
============ ============
Income taxes paid $ 50,756 $ 76
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 3,323 $ 1,629
============ ============
Treasury stock issued for acquisition $ 69,397 $ 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 three months ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1995. 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, 1994.
Note 2 - Investment Securities
At March 31, 1995 investment securities having a carrying value of
$6,126,787,000 were pledged where permitted or required by law to secure
liabilities and public and other deposits including deposits of the State
of Michigan of $23,518,000.
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:
1995 1994
(in thousands) --------- ---------
Balance at January 1 $ 326,195 $ 298,685
Allowance acquired 3,260 16,517
Loans charged off (16,793) (18,203)
Recoveries on loans previously
charged off 10,610 7,587
--------- ---------
Net loans charged off (6,183) (10,616)
Provision for loan losses 12,000 15,000
--------- ---------
Balance at March 31 $ 335,272 $ 319,586
========= =========
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) Nos. 114 and 118 relating to the accounting and disclosure for
impaired loans effective January 1, 1995. The Statements consider a loan
impaired when it is probable that payment of interest and principal will
not be made in accordance with the contractual terms of the loan
agreement. Consistent with this definition, all nonaccrual and reduced
rate loans are impaired and substandard loans are reviewed for possible
impairment. The Statement excludes large groups of smaller-balance
homogenous loans which are collectively evaluated for impairment such as
residential mortgage and consumer loans.
Loan impairment is measured using one of two methods. All
collateral dependent loans, which represent 62 percent of total impaired
loans, are evaluated based on the fair value of the related collateral.
Remaining loan impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate.
Impaired loans, excluding residential mortgage and consumer loans,
averaged $150 million for the three months ended March 31, 1995. Of the
$149 million period-end impaired loans, approximately $79 million required
and allowance for loan losses of $22 million according to SFAS No. 114
calculations. The remaining impaired loan balance represents loans for
which the fair value exceeded the recorded investment in the loan;
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Loan Losses (Continued)
therefore a related allowance for loan losses is not required pursuant to
the Statement.
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at March 31,
1995 and December 31, 1994:
(in thousands) March 31, 1995 Dec. 31, 1994
-------------- -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,624 $ 74,601
10.125% subordinated debentures
due 1998 74,741 74,721
---------- ----------
Total parent company 149,365 149,322
Subsidiaries
Subordinated notes:
8.375% subordinated notes due 2024 147,729 147,709
7.25% subordinated notes due 2002 148,817 148,777
6.875% subordinated notes due 2008 99,009 98,990
7.125% subordinated notes due 2013 147,918 147,890
FDIC subordinated note due 1995 4,500 4,500
---------- ----------
Total subordinated notes 547,973 547,866
Medium-term notes:
Floating rate based on Treasury bill
indices 2,699,362 2,849,205
Floating rate based on Prime indices 200,000 299,988
Floating rate based on LIBOR indices 25,000 25,000
Fixed rate notes with interest rates
ranging from 5.95% to 7.5% 249,577 224,610
---------- ----------
Total medium-term notes 3,173,939 3,398,803
Notes payable bearing interest at
rates ranging from 6.29% to 11.15%
and maturing on dates ranging from
1995 through 1996 1,846 1,952
---------- ----------
Total subsidiaries 3,723,758 3,948,621
---------- ----------
Total medium- and long-term
debt $3,873,123 $4,097,943
========== ==========
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 - Off-Balance-Sheet Derivative Financial Instruments
March 31, 1995 December 31, 1994
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
(in millions) Amount Gains Losses Value Amount Gains Losses Value
(1) (2) (3) (1) (2) (3)
Risk Management
Derivatives
Interest rate contracts
Swaps (4) $3,331 $ 4 $(172) $(168) $3,643 $ 4 $(238) $(234)
Caps purchased 25 - - - 50 - - -
Caps written 155 1 - 1 198 - (1) (1)
Foreign exchange rate
contracts
Forward agreements 139 - (4) (4) 98 - (1) (1)
Swaps 33 8 - 8 25 - - -
Commitments
To purchase securities 26 - - - - - - -
To sell securities 3 - - - - - - -
To sell loans 43 - (1) (1) 77 - - -
------ ---- ----- ----- ------ ---- ----- -----
Total risk management 3,755 13 (177) (164) 4,091 4 (240) (236)
Customer Initiated and
Other Derivatives
Interest rate contracts
Options and caps written 565 - (2) (2) 321 - (1) (1)
Options purchased 4 - - - - - - -
Swaps 6 - - - 7 - - -
Foreign exchange rate
contracts
Spot, forward, futures
and options 524 6 (5) 1 503 5 (4) 1
------ ---- ----- ----- ------ ---- ----- -----
Total customer initiated
and other 1,099 6 (7) (1) 831 5 (5) -
------ ---- ----- ----- ------ ---- ----- -----
Total derivatives $4,854 $ 19 $(184) $(165) $4,922 $ 9 $(245) $(236)
====== ==== ===== ===== ====== ==== ===== =====
(1) The notional or contract amounts of derivative financial instruments represent the extent
of the Corporation's involvement in such transactions. These amounts are generally used as a
point of reference for calculating the amounts to be exchanged in accordance with the terms of
the agreement and, therefore, are not reflected in the consolidated balance sheets. The potential
for gain or loss associated with the credit or market risks inherent in such transactions is
significantly less than the notional or contract amounts.
(2) Represents credit risk exposure which is measured as the cost to replace, at current market
rates, contracts in a profitable position. Credit risk amounts are calculated before
consideration is given to bilateral collateral agreements with counterparties that effectively
reduce credit risk.
(3) The fair values of derivatives generally represent the estimated amounts the Corporation
would receive or pay to terminate or otherwise settle the contracts at the balance sheet date.
Where available, quoted market rates or prices, current settlement values, pricing models or
formulas using current assumptions were used to determine fair value. Customer initiated
derivatives are carried at fair value in the consolidated balance sheets.
(4) Includes the notional amount of index amortizing swaps of $1,886 million and $1,936 million
at March 31, 1995 and December 31, 1994, respectively. These swaps had net unrealized losses of
$76 million and $133 million at March 31, 1995 and December 31, 1994, respectively. As of March
31, 1995, index amortizing swaps had an average expected life of approximately 2.17 years with
a stated maturity that averaged 2.73 years.
/TABLE
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivative Financial Instruments (Continued)
Risk Management Derivatives
Interest rate risk arises in the normal course of business to the
extent there is a difference between the repricing and maturity
characteristics of interest-earning assets and interest-bearing
liabilities. This gap in the balance sheet structure reflects the
Corporation's sensitivity to a change in interest rates. The principal
objectives of asset and liability management are to (1) provide maximum
levels of net interest income while operating within acceptable ranges for
interest rate sensitivity and (2) ensure adequate levels of liquidity and
funding. Foreign exchange rate risk arises from changes in the value of
certain assets and liabilities denominated in foreign currencies.
Although certain on-balance-sheet instruments, such as fixed-rate
investment securities, are used to manage interest rate and liquidity
risks, off-balance-sheet derivative financial instruments permit the
Corporation to manage exposure to interest and foreign exchange rate risks
without significantly impacting balance sheet leverage and liquidity.
In connection with asset and liability management, the Corporation's
use of derivatives takes place predominately in the interest rate markets
and mainly involves interest rate swaps, both amortizing and non-
amortizing. Other derivative financial instruments which may be used for
risk management purposes include interest rate caps, forward and futures
interest and foreign exchange rate contracts, foreign exchange rate swaps,
commitments to purchase and sell securities and commitments to sell
mortgage loans.
Interest rate swaps effectively change the interest rate
characteristics of certain assets and liabilities (for example, from a
floating rate to a fixed rate, a fixed rate to a floating rate, or from
one floating rate index to another). Interest rate swaps allow the
Corporation to achieve a better match between the rate maturity of loans
and their funding sources, which reduces the sensitivity of net interest
income to interest rate changes.
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivative Financial Instruments (Continued)
The following table summarizes the expected maturity distribution of
the notional amount of interest rate swaps used for risk management
purposes. The table also indicates the weighted average interest rates
associated with amounts to be received or paid on interest rate swap
agreements as of March 31, 1995. The swaps are grouped by the assets or
liabilities to which they have been designated.
2000- Dec. 31,
(dollar amounts in millions) 1995 1996 1997 1998 1999 2014 Total 1994
Variable rate asset designation:
Receive fixed swaps
Generic $ - $ 50 $ - $ - $ - $ - $ 50 $ 50
Amortizing 69 16 84 101 - - 270 297
Index Amortizing 110 220 1,068 102 75 311 1,886 1,936
Weighted average: (1)
Receive rate 5.35% 5.97% 5.15% 5.36% 5.89% 5.58% 5.38% 5.38%
Pay rate 6.27% 6.32% 6.35% 6.30% 6.20% 6.14% 6.30% 5.78%
Fixed rate asset designation:
Generic pay fixed swaps $138 $ 35 $ - $ - $ 2 $ - $ 175 $ 185
Weighted average: (1)
Receive rate 6.39% 6.34% -% -% 6.83% -% 6.38% 5.91%
Pay rate 7.20% 7.05% -% -% 8.73% -% 7.19% 7.43%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ - $100 $ 50 $ - $ - $550 $ 700 $ 675
Weighted average: (1)
Receive rate -% 7.71% 9.35% -% -% 7.69% 7.81% 7.37%
Pay rate - 6.23% 6.33% -% -% 6.46% 6.42% 5.73%
Generic pay fixed swaps $ - $ 25 $ - $ - $ - $ - $ 25 $ 25
Weighted average: (1)
Receive rate -% 6.89% -% -% -% -% 6.89% 6.89%
Pay rate -% 8.28% -% -% -% -% 8.28% 8.28%
Basis swaps $225 $ - $ - $ - $ - $ - $ 225 $ 475
Weighted average: (1)
Receive rate 6.07% -% -% -% -% -% 6.07% 6.01%
Pay rate 6.20% -% -% -% -% -% 6.20% 5.80%
Total notional amount $542 $446 $1,202 $203 $ 77 $861 $3,331 $3,643
(1) Variable rates are based on rates paid or received at March 31, 1995. Variable rates paid
or received on receive fixed swaps and pay fixed swaps, respectively, are based on LIBOR. For
basis swaps, the Corporation receives a variable rate based on Treasuries and pays a variable rate
based on LIBOR.
/TABLE
12
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivative Financial Instruments (Continued)
Customer Initiated and Other Derivatives
Derivatives activity also includes providing various derivative
products to customers, principally, foreign exchange contracts and
interest rate caps. Customer initiated interest rate caps are not
necessarily offset by other on- or off-balance-sheet financial
instruments; however, diminutive authority limits have been established
for engaging in these transactions which minimizes risk exposure. Because
of these limits, average fair values and income from this activity were
not significant for the first quarter of 1995 and for the year ended
December 31, 1994.
Average fair value amounts for foreign exchange contracts were
insignificant for the three months ended March 31, 1995. The fair value
of these contracts averaged approximately $1 million during 1994. Foreign
exchange contracts generated approximately $1.4 million of net income
during the first three months of 1995, compared to $0.8 million for the
same period a year ago and $5 million for the year ended December 31,
1994.
Unused lines of credit on fixed rate credit card and check product
accounts expose the Corporation to the risk of income reduction as rates
increase. Exposure to market risk arising from these revolving credit
commitments is very limited since it is unlikely that a significant
portion of credit card and check product customers will simultaneously
borrow up to the maximum credit lines. At March 31, 1995 and December 31,
1994, available credit lines on fixed rate credit card and check product
accounts totaled $2.0 billion and $1.9 billion, respectively.
Additional information regarding the nature and terms of risk
management and customer initiated off-balance-sheet derivative financial
instruments and their associated risks, along with information on
derivative accounting policies, may be found in the Corporation's 1994
Annual Report/Form 10-K on pages 33 through 37 and in Notes 1 and 17 to
the consolidated financial statements.
13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivative Financial Instruments (Continued)
Off-Balance-Sheet Derivatives Activity
A reconciliation of the beginning and ending notional amounts for
significant derivative categories is provided below.
Risk Management Customer Initiated and Other
Foreign Foreign
Interest Exchange Interest Exchange
Rate Rate Rate Rate
(in millions) Contracts Contracts Contracts Contracts
Balances at December 31, 1994 $ 3,891 $ 123 $ 328 $ 503
Additions 100 506 254 9,941
Maturities/amortizations (480) (457) (7) (9,920)
Terminations - - - -
------- ----- ----- -------
Balances at March 31, 1995 $ 3,511 $ 172 $ 575 $ 524
======= ===== ===== =======
/TABLE
14
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Comerica Incorporated reported net income of $100 million, or $0.85
per share, for the first quarter of 1995, a 10 percent increase in net
income from $91 million, or $0.79 per share, for the comparable quarter a
year ago. Return on average common shareholders' equity was 16.55 percent
and return on average assets was 1.21 percent, compared to 16.59 percent
and 1.22 percent, respectively, in 1994.
Beginning January 1, 1995, investment advisory activity is conducted
through the new partnership formed by the combination of the Corporation's
investment management subsidiaries and Munder Capital Management. The net
impact on operations of the Corporation's minority interest in Munder was
not significant in the first quarter.
Acquisitions
On March 31, 1995, the Corporation completed the acquisition of
University Bank & Trust (University) in Palo Alto, California, for
approximately 2.5 million shares, or $69 million, of common stock in a
transaction accounted for under the purchase accounting method. The March
31, 1995 consolidated balance sheet includes University's total assets of
$490 million, loans of $230 million, deposits of $419 million and
nonperforming assets of $4 million.
On May 2, 1995, the Corporation entered into an Agreement and Plan
of Merger to acquire Metrobank, headquartered in Los Angeles, California,
for approximately 4.2 million shares, or $120 million, of common stock.
At March 31, 1995, Metrobank had approximately $1.3 billion in total
assets. The transaction is expected to be accounted for under the
purchase accounting method and, subject to regulatory approval, is
expected to be consummated in the first quarter of 1996.
Net Interest Income
Net interest income for the first quarter of 1995, on a fully
taxable equivalent (FTE) basis, rose to $318 million, an increase of $22
million, or 7 percent, over the comparable period a year earlier. The
increase in net interest income, fueled primarily by strong growth in
earning assets, was partially offset by higher-costing wholesale funding
15
sources. Total average earning assets increased $3 billion, or 11
percent, compared to last year's first quarter, due to growth in all
corporate and retail loan categories, as well as in the investment
securities portfolio. Average commercial loans rose $2 billion, or 16
percent, and average investment securities rose $548 million, or 8
percent, compared to the first quarter of 1994. These increases were
offset by a $1 billion, or 73 percent, decrease in average temporary
investments, including reductions in bank deposits of $598 million,
federal funds sold of $225 million, and mortgages held for sale of $176
million. The net interest margin fell 16 basis points to 4.17 percent
from 4.33 percent a year ago. This decline in margin principally resulted
from greater utilization of short- and medium-term liabilities while
operating in a liability sensitive position during the series of interest
rate hikes that occurred between the first quarter of 1994 and the first
quarter of 1995.
The Rate-Volume Analysis in Table I indicates the components of the
change in net interest income (FTE) for the quarter ended March 31, 1995.
Interest rate swaps used for risk management purposes reduced net interest
income by $2 million for the three months ended March 31, 1995, compared
to contributions of $15 million for the same period in 1994 and $29
million for the year ended December 31, 1994.
The Corporation's one-year interest sensitivity gap as of March 31,
1995 was in a slightly asset sensitive position of approximately $178
million (on an elasticity-adjusted basis), or 0.57 percent of earning
assets. This position is within established policy guidelines which
require the operating range for interest rate sensitivity, after
elasticity adjustments, to be between an asset sensitive position of 10
percent and a liability sensitive position of 5 percent. The Corporation
expects to continue adding asset sensitivity throughout 1995.
Net interest income is frequently evaluated under what is believed
to be the most likely balance sheet structure and interest rate
environment in order to provide management with practical information for
use in assessing the proper balance sheet structure given the
Corporation's operating range for interest rate sensitivity. A risk
measurement system is maintained that enables management to evaluate the
impact on the most likely net interest income forecast of a 200 basis
16
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
March 31, 1995 March 31, 1994
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $22,365 $492 8.89% $18,968 $342 7.28%
Investment securities 7,817 129 6.57 7,269 106 5.89
Other earning assets 376 6 6.63 1,377 14 3.96
- ----------------------------------------------------------------------------------------------
Total earning assets 30,558 627 8.26 27,614 462 6.75
Interest-bearing deposits 16,781 172 4.15 16,196 119 2.97
Short-term borrowings 4,882 71 5.88 4,968 38 3.15
Medium- and long-term debt 4,033 64 6.49 1,688 22 5.28
Net interest rate swap income
or expense (1) - 2 - - (14) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,696 309 4.88 $22,852 165 2.92
----------------- -----------------
Net interest income/
Rate spread (FTE) $318 3.38 $297 3.83
====== ======
FTE adjustment $ 6 $ 6
====== ======
Impact of net noninterest-
bearing sources of funds 0.79 0.50
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent
of average earning assets (FTE) 4.17% 4.33%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps to the related
assets and liabilities, the average yield on total loans would have been 8.71 percent as of March
31, 1995, compared to 7.44 percent a year ago. The average cost of funds for medium- and long-term
debt would have been 6.15 percent as of March 31, 1995, compared to 4.33 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 75 $ 75 $ 150
Investment securities 14 9 23
Other earning assets 9 (17) (8)
------------------------------
Total earning assets 98 67 165
Interest-bearing deposits 44 9 53
Short-term borrowings 34 (1) 33
Medium- and long-term debt 5 37 42
Net interest rate swap income 16 - 16
------------------------------
Total interest-bearing sources 99 45 144
------------------------------
Net interest income/Rate spread (FTE) $ (1) $ 22 $ 21
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
17
point increase or decrease in short-term interest rates. As of March 31,
1995, the risk measurement system revealed that, for a 200 basis point
increase in short-term interest rates, the Corporation is at risk of a $7
million, or 0.56 percent, reduction in forecasted net interest income over
the next year. On the other hand, if short-term interest rates declined
200 basis points, forecasted net interest income could potentially
increase $19 million, or 1.41 percent, over the course of a year. These
results are well within corporate policy guidelines which limit adverse
change to no more than 5 percent of the most likely net interest income
forecast.
Provision for Loan Losses
The provision for loan losses was $12 million in the first quarter
of 1995 versus $15 million in the first quarter of 1994. 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.
Noninterest Income
After adjusting for acquisitions, noninterest income rose $3
million, or 2 percent, for the three months ended March 31, 1995, compared
to the same period in 1994. This increase reflects a $2 million
escalation in revolving credit fees associated with the usage of new cards
issued as a result of bankcard marketing programs implemented in the last
nine months. Other noninterest income benefited from the recognition of
nearly $2 million in income from the Corporation's minority interest in
the Munder Capital Management (Munder) partnership formed in December
1994, along with an increase of $2 million in income from lines of credit
fees and insurance commissions. These increases were partially offset by
a $2 million reduction in income from mortgage-related activities.
Noninterest Expenses
Excluding the effect of acquisitions, noninterest expenses increased
just over $1 million compared to the same period last year. Most of the
18
increase was concentrated in the telecommunications and other noninterest
expense categories which, on a combined basis, rose approximately $5
million, or 7 percent, over the prior year. Telecommunications expense
increased due to efforts undertaken to improve existing telecommunications
networks. The increase in other noninterest expenses is primarily
attributable to higher investment management fees paid to Munder. These
increases were partially offset by a $3 million reduction in net occupancy
costs, salaries and benefits arising primarily from the transfer of
employees to Munder, back office efficiencies, and branch consolidations.
Provision for Income Taxes
The provision for income taxes for the first three months of 1995
totaled $52 million, a 15 percent increase over the provision of $45
million for the first quarter of 1994. 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. The Corpora-
tion has experienced relatively lower levels of tax-exempt interest income
over the past year, causing the effective tax rate to rise to 34 percent
in the first quarter of 1995 from 33 percent in the first quarter of 1994.
Financial Condition
Total assets at March 31, 1995 rose $679 million to $34.1 billion,
a 2 percent increase since December 31, 1994.
Earning assets grew $714 million, or 2 percent, to $31.3 billion
since year-end 1994, as loans increased $888 million, or 4 percent, and
investment securities rose less than 1 percent, or $46 million. These
increases were partially offset by reductions in temporary investments,
reflecting a $198 million decrease in interest-bearing deposits with banks
and a $42 million decline in mortgages held for sale.
The rise in loans was mainly due to the acquisition of University,
continued growth in the corporate loans area, and a boost in the number of
bank cards issued in response to several marketing programs introduced
late in 1994. Commercial loans jumped $527 million while commercial
mortgage and real estate construction loans increased $119 million and $58
19
million, respectively. Consumer loans increased $175 million from year-
end 1994. Increases in the loan portfolio were somewhat offset by a $61
million decrease in international loans since December 31, 1994, caused by
a decline in lending to Latin American countries.
Total liabilities rose $558 million, or 2 percent, to $31.6 billion
since December 31, 1994, mainly because of increased utilization of
alternative sources of funding, such as federal funds purchased and other
borrowed funds. Despite University's $419 million contribution of
primarily interest-bearing deposits, total deposits fell $516 million, or
2 percent, from year-end 1994.
Consequently, short-term borrowings increased $1.2 billion, or 30
percent, to support earning assets growth. This increase in short-term
liabilities was partially offset by a $225 million, or 5 percent, decline
in medium- and long-term debt caused by the maturities of medium-term
notes during the first quarter of 1995. An analysis of medium- and 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 $335 million at March 31, 1995, an
increase of $9 million, or 3 percent, since December 31, 1994. As a
percentage of total loans, the allowance was 1.45 percent, compared to
1.47 percent at December 31, 1994. Net charge-offs were $6 million, or
0.11 percent of average loans, for the first quarter of 1995, versus $11
million, or 0.22 percent of average loans, for the comparable period a
year ago.
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 such
factors as recent loss experience, current economic conditions and trends,
trends in past due and nonaccrual amounts, risk characteristics of various
categories and concentrations of loans, geographic dispersion of
borrowers, and transfer risks. An analysis of the allowance for loan
losses is contained in the notes to the consolidated financial statements.
20
Nonperforming assets remained relatively flat since December 31,
1994, and were categorized as follows:
(in thousands) March 31, 1995 Dec. 31, 1994
-------------- -------------
Nonaccrual loans:
Commercial $ 96,561 $ 88,514
Real estate construction 13,193 16,941
Real estate mortgage
(principally commercial) 53,065 56,268
--------- ---------
Total nonaccrual loans 162,819 161,723
Reduced-rate loans 2,643 2,299
--------- ---------
Total nonperforming loans 165,462 164,022
Other real estate 39,451 40,462
--------- ---------
Total nonperforming
assets $ 204,913 $ 204,484
========= =========
Loans past due 90 days $ 40,305 $ 39,161
========= =========
Nonperforming assets as a percentage of total loans and other real
estate at March 31, 1995 and December 31, 1994, were 0.89 percent and 0.92
percent, respectively.
Capital
Shareholders' equity increased $121 million from December 31, 1994
to March 31, 1995, principally through retention of $63 million in
earnings, the issuance of $69 million of common stock in connection with
the acquisition of University, and a $24 million decrease in unrealized
losses on investment securities available for sale. This increase was
partially offset by the repurchase of 1,346,600 shares, or $37 million, of
common stock.
Capital ratios continue to comfortably exceed minimum regulatory
requirements as follows:
March 31, December 31
1995 1994
------------- ------------
Minimum leverage ratio (3.00 - minimum) 7.02% 6.93%
Tier 1 risk-based capital
ratio (4.0 - minimum) 8.03 8.13
Total risk-based capital
ratio (8.0 - minimum) 11.46 11.68
21
At March 31, 1995, 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, 1994, a lawsuit was filed on July 24, 1990, by the State of
Michigan against a subsidiary bank involving hazardous waste issues. The
Corporation's motion for summary judgment was granted in January 1993,
however, the State of Michigan has filed an appeal that is still pending.
Management believes that even if the summary judgment is not upheld on
appeal, the results of this action will not have a materially adverse
effect on the Corporation's consolidated financial position. Although,
depending upon the amount of the ultimate liability, if any, and the
consolidated results of operations in the year of final resolution, the
legal action may have a materially adverse effect on the consolidated
results of operations in that year.
22
PART II
ITEM 6. Exhibits
(a) Exhibits
11. Statements re: computation of earnings per share
(b) Reports on Form 8-K
None
23
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: May 12, 1995