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, 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 September 30, 1995: 114,556,000 shares
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
Sept. 30, Dec. 31, Sept. 30,
(In thousands, except per share data) 1995 1994 1994
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,523,520 $ 1,822,313 $ 1,410,911
Interest-bearing deposits with banks 52,442 378,873 275,361
Federal funds sold and securities
purchased under agreements to resell 733,200 46,000 50,499
Trading account securities 4,783 4,332 8,473
Mortgages held for sale 138,741 91,547 108,565
Investment securities available for sale 2,779,920 2,906,296 3,047,713
Investment securities held to
maturity (estimated fair value of
$4,534,625 at 9/30/95, $4,659,317 at
12/31/94 and $4,864,287 at 9/30/94) 4,591,928 4,970,165 5,081,797
----------- ----------- -----------
Total investment securities 7,371,848 7,876,461 8,129,510
Commercial loans 11,679,983 10,633,808 9,787,241
International loans 1,400,513 1,195,328 1,167,371
Real estate construction loans 574,208 413,987 398,557
Commercial mortgage loans 3,200,054 3,056,337 3,008,809
Residential mortgage loans 2,451,943 2,436,445 2,289,889
Consumer loans 4,734,944 4,214,716 3,942,077
Lease financing 305,425 258,625 222,807
----------- ----------- -----------
Total loans 24,347,070 22,209,246 20,816,751
Less allowance for loan losses (342,914) (326,195) (327,962)
----------- ----------- -----------
Net loans 24,004,156 21,883,051 20,488,789
Premises and equipment 456,424 437,757 440,254
Customers' liability on acceptances
outstanding 34,336 33,632 38,502
Accrued income and other assets 1,029,076 855,936 852,725
----------- ----------- -----------
TOTAL ASSETS $35,348,526 $33,429,902 $31,803,589
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-bearing) $ 5,180,358 $ 5,257,396 $ 4,617,674
Interest-bearing deposits 15,098,517 14,741,438 14,886,757
Deposits in foreign offices 1,732,254 2,433,482 820,265
----------- ----------- -----------
Total deposits 22,011,129 22,432,316 20,324,696
Federal funds purchased and securities
sold under agreements to repurchase 763,882 2,594,189 1,655,471
Other borrowed funds 4,665,515 1,611,219 3,528,471
Acceptances outstanding 34,336 33,632 38,502
Accrued expenses and other liabilities 372,102 268,823 268,353
Medium- and long-term debt 4,948,576 4,097,943 3,602,381
----------- ----------- -----------
Total liabilities 32,795,540 31,038,122 29,417,874
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-115,094,531 shares at
9/30/95, 119,294,531 shares
at 12/31/94 and 9/30/94 575,473 596,473 596,473
Capital surplus 414,672 525,052 524,915
Unrealized gains and losses on investment
securities available for sale 2,719 (55,039) (33,772)
Retained earnings 1,574,639 1,390,405 1,331,379
Less cost of common stock in
treasury-538,453 shares at 9/30/95,
2,382,333 shares at 12/31/94 and
1,193,179 shares at 9/30/94 (14,517) (65,111) (33,280)
----------- ----------- -----------
Total shareholders' equity 2,552,986 2,391,780 2,385,715
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $35,348,526 $33,429,902 $31,803,589
=========== =========== ===========
/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) 1995 1994 1995 1994
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $532,490 $408,709 $1,550,093 $1,129,270
Interest on investment securities:
Taxable 115,225 117,805 353,639 327,425
Exempt from federal income tax 6,390 7,358 20,214 23,445
-------- -------- ---------- ----------
Total interest on investment
securities 121,615 125,163 373,853 350,870
Trading account interest 15 52 169 (18)
Interest on federal funds sold and
securities purchased under agreements
to resell 3,405 642 6,041 4,095
Interest on time deposits with banks 1,099 3,646 7,550 17,204
Interest on mortgages held for sale 3,054 2,722 5,586 8,965
-------- -------- ---------- ----------
Total interest income 661,678 540,934 1,943,292 1,510,386
INTEREST EXPENSE
Interest on deposits 183,958 141,129 538,194 389,231
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 35,876 33,241 117,928 81,092
Other borrowed funds 41,301 16,880 112,050 60,894
Interest on medium- and long-term debt 76,607 41,741 211,133 89,418
Net interest rate swap (income)/expense 612 (5,056) 5,126 (28,093)
-------- -------- ---------- ----------
Total interest expense 338,354 227,935 984,431 592,542
-------- -------- ---------- ----------
Net interest income 323,324 312,999 958,861 917,844
Provision for loan losses 26,000 14,000 53,500 44,000
-------- -------- ---------- ----------
Net interest income after
provision for loan losses 297,324 298,999 905,361 873,844
NONINTEREST INCOME
Income from fiduciary activities 31,129 29,019 93,863 91,738
Service charges on deposit accounts 33,150 32,029 97,138 91,456
Customhouse broker fees 8,789 10,201 27,137 30,481
Revolving credit fees 13,699 10,200 37,636 28,557
Securities gains 516 1,581 788 2,363
Other noninterest income 40,831 33,608 113,006 99,415
-------- -------- ---------- ----------
Total noninterest income 128,114 116,638 369,568 344,010
NONINTEREST EXPENSES
Salaries and employee benefits 142,507 138,456 420,374 406,407
Net occupancy expense 24,649 25,188 73,306 74,881
Equipment expense 16,787 16,313 50,670 49,570
FDIC insurance expense (500) 11,106 21,418 33,129
Telecommunications expense 7,230 6,748 22,027 18,869
Other noninterest expenses 74,223 65,304 221,582 196,842
-------- -------- ---------- ----------
Total noninterest expenses 264,896 263,115 809,377 779,698
-------- -------- ---------- ----------
Income before income taxes 160,542 152,522 465,552 438,156
Provision for income taxes 55,240 51,918 158,696 147,511
-------- -------- ---------- ----------
NET INCOME $105,302 $100,604 $ 306,856 $ 290,645
======== ======== ========== ==========
NET INCOME PER SHARE:
Primary $0.91 $0.84 $2.62 $2.46
Fully diluted $0.91 $0.84 $2.61 $2.46
Primary average shares 115,993 119,436 117,199 118,148
Cash dividends declared $40,089 $37,897 $118,237 $107,724
Dividends per share $0.35 $0.32 $1.02 $0.92
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 - - - 290,645 - 290,645
Cash dividends
declared - - - (107,724) - (107,724)
Purchase of
1,601,164
shares - - - - (43,892) (43,892)
Issuance of
shares:
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
SEPTEMBER
30, 1994 $596,473 $524,915 $(33,772) $1,331,379 $ (33,280) $2,385,715
======== ======== ======== ========== ========= ==========
BALANCES AT
JANUARY 1,
1995 $596,473 $525,052 $(55,039) $1,390,405 $ (65,111) $2,391,780
Net income for
1995 - - - 306,856 - 306,856
Cash dividends
declared - - - (118,237) - (118,237)
Purchase of
1,405,500
shares - - - - (38,725) (38,725)
Purchase and
retirement
of 4,200,000
shares (21,000) (112,691) - - - (133,691)
Issuance of
shares:
Employee
stock plans - 191 - (4,385) 13,669 9,475
Acquisitions - 1,450 - - 75,650 77,100
Amortization of
deferred
compensation - 670 - - - 670
Change in
unrealized
gains/(losses)
on investment
securities
available for
sale - - 57,758 - - 57,758
-------- -------- -------- ---------- --------- ----------
BALANCES AT
SEPTEMBER
30, 1995 $575,473 $414,672 $ 2,719 $1,574,639 $ (14,517) $2,552,986
======== ======== ======== ========== ========= ==========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30
---------------------------
(in thousands) 1995 1994
------------ ------------
OPERATING ACTIVITIES:
Net income $ 306,856 $ 290,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 53,500 44,000
Depreciation 47,355 44,320
Net increase in trading account securities (451) (4,873)
Net (increase) decrease in mortgages held
for sale (47,194) 222,102
Net increase in accrued income receivable (30,830) (26,289)
Net increase (decrease) in accrued expenses 111,488 (20,113)
Net amortization of intangibles 21,519 17,994
Funding for employee benefit plans (125,000) (59,719)
Other, net (25,607) 35,109
------------ ------------
Total adjustments 4,780 252,531
------------ ------------
Net cash provided by operating
activities 311,636 543,176
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
with banks 326,431 751,112
Net (increase) decrease in federal funds sold
and securities purchased under agreements
to resell (651,900) 1,041,290
Proceeds from sale of investment securities
available for sale 39,342 1,509
Proceeds from maturity of investment
securities available for sale 308,979 455,785
Purchases of investment securities
available for sale (31,434) (1,147,791)
Proceeds from maturity of investment
securities held to maturity 579,776 1,249,296
Purchases of investment securities
held to maturity (164,828) (2,125,409)
Net increase in loans (other
than purchased loans) (1,904,378) (844,671)
Purchase of loans (44,110) (227,192)
Fixed assets, net (49,166) (65,452)
Net increase in customers'
liability on acceptances outstanding (704) (290)
Net cash provided by acquisitions 28,835 58,626
------------ ------------
Net cash used in investing
activities (1,563,157) (853,187)
FINANCING ACTIVITIES:
Net decrease in deposits (839,927) (1,802,852)
Net increase (decrease) in short-term
borrowings 1,223,989 (77,988)
Net increase in acceptances
outstanding 704 290
Proceeds from issuance of medium- and
long-term debt 2,460,000 2,750,000
Repayments and purchases of medium- and
long-term debt (1,614,011) (608,175)
Proceeds from issuance of common stock
and other capital transactions 10,145 4,910
Purchase of common stock for treasury
and retirement (172,416) (43,892)
Dividends paid (115,756) (102,066)
------------ ------------
Net cash provided by financing
activities 952,728 120,227
------------ ------------
Net decrease in cash and due from banks (298,793) (189,784)
Cash and due from banks at beginning of year 1,822,313 1,600,695
------------ ------------
Cash and due from banks at end of period $ 1,523,520 $ 1,410,911
============ ============
Interest paid $ 926,747 $ 597,862
============ ============
Income taxes paid $ 130,629 $ 127,851
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 15,249 $ 12,241
============ ============
Treasury stock issued for acquisitions $ 77,100 $ 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, the statements 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, 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 September 30, 1995 investment securities having a carrying value
of $5.6 billion were pledged where permitted or required by law to secure
liabilities and public and other deposits, including deposits of the State
of Michigan of $36 million.
Note 3 - Allowance for Loan Losses
The following analyzes the changes in the allowance for loan losses
included in the consolidated balance sheets:
(in thousands) 1995 1994
--------- ---------
Balance at January 1 $ 326,195 $ 298,685
Allowance acquired 3,260 19,467
Loans charged off (73,831) (60,863)
Recoveries on loans previously
charged off 33,790 26,673
--------- ---------
Net loans charged off (40,041) (34,190)
Provision for loan losses 53,500 44,000
--------- ---------
Balance at September 30 $ 342,914 $ 327,962
========= =========
A loan is considered impaired if it is probable that interest and
principal payments will not be made in accordance with the contractual
terms of the loan agreement. Consistent with this definition, all
nonaccrual and reduced-rate loans (with the exception of residential
mortgage and consumer loans) are impaired. Impaired loans averaged $156
million and $150 million for the quarter and nine months ended September
30, 1995, respectively. Of the $150 million period-end impaired loans,
approximately $84 million required an allowance for loan losses of $19
million in accordance with SFAS No. 114. The remaining impaired loan
balance represents loans for which the fair value exceeded the recorded
investment in the loan.
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at September
30, 1995 and December 31, 1994:
(in thousands) September 30, 1995 December 31, 1994
------------------ -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,669 $ 74,601
10.125% subordinated debentures
due 1998 74,781 74,721
7.25% subordinated notes due
2007 148,591 -
---------- ----------
Total parent company 298,041 149,322
Subsidiaries
Subordinated notes:
8.375% subordinated notes due
2024 147,762 147,709
7.25% subordinated notes due
2002 148,891 148,777
6.875% subordinated notes due
2008 99,047 98,990
7.125% subordinated notes due
2013 147,972 147,890
FDIC subordinated note due 1995 4,500 4,500
---------- ----------
Total subordinated notes 548,172 547,866
Medium-term notes:
Floating rate based on Treasury
bill indices 1,899,600 2,849,205
Floating rate based on Prime
indices 550,000 299,988
Floating rate based on LIBOR
indices 299,934 25,000
Fixed rate notes with interest
rates ranging from 5.65% to 7.5% 1,348,240 224,610
---------- ----------
Total medium-term notes 4,097,774 3,398,803
Notes payable bearing interest at
rates ranging from 7.35% to
8.00% and maturing on dates
ranging from 1995 through 2015 4,589 1,952
---------- ----------
Total subsidiaries 4,650,535 3,948,621
---------- ----------
Total medium- and long-term
debt $4,948,576 $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.
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
September 30, 1995 December 31, 1994
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
Amount Gains Losses Value Amount Gains Losses Value
(in millions) (1) (2) (3) (1) (2) (3)
------------------------------ ------------------------------
Risk Management
Interest rate contracts
Swaps (4) $4,224 $34 $(59) $(25) $3,643 $ 4 $(238) $(234)
Caps purchased 25 - - - 50 - - -
Caps written 178 - - - 198 - (1) (1)
Foreign exchange
contracts
Spot and forwards 124 2 - 2 98 - (1) (1)
Swaps 49 7 - 7 25 - - -
Commitments
To purchase securities 59 - - - - - - -
To sell securities 2 - - - - - - -
To sell loans 165 - - - 77 - - -
------ --- ---- ---- ------ --- ----- -----
Total risk management 4,826 43 (59) (16) 4,091 4 (240) (236)
Customer Initiated and
Other
Interest rate contracts
Caps written 474 - - - 321 - (1) (1)
Options purchased 27 - - - - - - -
Swaps 4 - - - 7 - - -
Foreign exchange contracts
Spot, forward, futures
and options 552 9 (8) 1 503 5 (4) 1
------ --- ---- ---- ------ --- ----- -----
Total customer
initiated and other 1,057 9 (8) 1 831 5 (5) -
------ --- ---- ---- ------ --- ----- -----
Total derivatives and
foreign exchange
contracts $5,883 $52 $(67) $(15) $4,922 $ 9 $(245) $(236)
====== === ==== ==== ====== === ===== =====
(1) The notional or contract amounts of derivatives and foreign exchange contracts 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 or master netting arrangements with
counterparties that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally represent the
estimated amounts the Corporation would receive or pay to terminate or otherwise settle the
contracts at the balance sheet date. Futures contracts are subject to daily cash
settlements; therefore, the fair value of these instruments is zero. The fair values of
customer initiated and other derivatives and foreign exchange contracts are reflected in the
consolidated balance sheets.
(4) Includes the notional amount of index amortizing swaps of $2,143 million and $1,936
million at September 30, 1995 and December 31, 1994, respectively. These swaps had net
unrealized losses of $30 million and $133 million at September 30, 1995 and December 31,
1994, respectively. As of September 30, 1995, index amortizing swaps had an average expected
life of approximately 2.05 years with a stated maturity that averaged 3.25 years.
9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
(Continued)
Risk Management
- ---------------
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
sensitivity of the Corporation's net interest income to a change in
interest rates. Foreign exchange rate risk arises from changes in the
value of certain assets and liabilities denominated in foreign currencies.
The Corporation employs off-balance sheet derivative financial instruments
and foreign exchange contracts, in addition to certain on-balance sheet
instruments, to manage exposure to these and other risks, including
liquidity risk.
The Corporation principally uses off-balance sheet derivatives as an
end-user in connection with asset and liability management activities.
The main objective of asset and liability management is to maximize net
interest income while operating within acceptable ranges of interest rate
sensitivity and providing adequate levels of liquidity and funding. 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. Interest rate swaps are primarily used to alter the
interest rate characteristics of certain assets and liabilities in order
to provide a more precise match between their rate maturities.
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 September 30, 1995. The swaps are grouped by the assets
or liabilities to which they have been designated.
Various other types of off-balance sheet financial instruments may
also be used for risk management purposes, including 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.
Customer Initiated and Other
- -----------------------------
The Corporation earns additional income by executing various
transactions, primarily foreign exchange contracts and interest rate caps,
at the request of customers.
The average fair value of customer initiated and other foreign
exchange contracts was $1 million for both the nine months ended September
30, 1995 and the year ended December 31, 1994. Foreign exchange contracts
generated $5 million of income for the nine months ended September 30,
1995, compared to $3 million for the same period a year earlier and $5
million for the year ended December 31, 1994. The risks associated with
customer initiated foreign exchange contracts are generally reduced by
entering into offsetting foreign exchange contracts.
Customer initiated interest rate caps generally are not offset by
other on- or off-balance sheet financial instruments; however, diminutive
authority limits have been established for engaging in these transactions
in order to minimize risk exposure. As a result, average fair values and
income from this activity were not significant for the nine-month period
ended September 30, 1995 and for the year ended December 31, 1994.
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
(Continued)
Available credit lines on fixed rate credit card and check product
accounts, which expose the Corporation to the risk of a reduction in net
interest income as rates increase, totaled approximately $2.0 billion and
$1.9 billion at September 30, 1995 and December 31, 1994, respectively.
Market risk exposure arising from these revolving credit commitments is
very limited, however, since it is unlikely that a significant number of
customers with these accounts will simultaneously borrow up to their
maximum available credit lines.
- -----------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
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 21 16 84 100 - - 221 297
Index Amortizing 281 361 961 175 130 235 2,143 1,936
Weighted average: (1)
Receive rate 6.42% 5.76% 5.23% 5.70% 6.20% 5.83% 5.64% 5.38%
Pay rate 5.88% 5.88% 5.91% 5.85% 5.83% 5.81% 5.88% 5.78%
Fixed rate asset designation:
Generic pay fixed swaps $ 98 $ 35 $ - $ - $ 2 $ - $ 135 $ 185
Weighted average: (1)
Receive rate 5.91% 5.91% -% -% 5.83% -% 5.95% 5.91%
Pay rate 6.31% 7.05% -% -% 8.73% -% 6.56% 7.43%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ - $ 600 $ 50 $ - $ - $700 $1,350 $ 675
Weighted average: (1)
Receive rate -% 6.27% 9.35% -% -% 7.65% 7.10% 7.37%
Pay rate - 5.88% 5.89% -% -% 5.96% 5.92% 5.73%
Generic pay fixed swaps $ - $ 25 $ - $ - $ - $ - $ 25 $ 25
Weighted average: (1)
Receive rate -% 5.88% -% -% -% -% 5.88% 6.89%
Pay rate -% 8.28% -% -% -% -% 8.28% 8.28%
Basis swaps $ - $ 300 $ - $ - $ - $ - $ 300 $ 475
Weighted average: (1)
Receive rate -% 5.80% -% -% -% -% 5.80% 6.01%
Pay rate -% 5.80% -% -% -% -% 5.80% 5.80%
Total notional amount $400 $1,387 $1,095 $275 $132 $935 $4,224 $3,643
- -----------------------------------------------------------------------------------------
(1) Variable rates are based on those rates paid or received at September 30, 1995.
Variable rates paid or received are based on LIBOR.
- -----------------------------------------------------------------------------------------
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
(Continued)
Off-Balance-Sheet Derivative and Foreign Exchange Activity
- ----------------------------------------------------------
The following table provides a reconciliation of the beginning and
ending notional amounts for interest rate derivatives and foreign exchange
contracts.
Customer Initiated
Risk Management and Other
----------------------- -----------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
(in millions) Contracts Contracts Contracts Contracts
----------------------- -----------------------
Balances at December 31, 1994 $ 3,891 $ 123 $ 328 $ 503
Additions 1,678 1,817 427 26,367
Maturities/amortizations (1,142) (1,767) (250) (26,318)
Terminations - - - -
------- ------- ----- --------
Balances at September 30, 1995 $ 4,427 $ 173 $ 505 $ 552
======= ======= ===== ========
Additional information regarding the nature, terms and attendant risks of
the above off-balance sheet derivatives and foreign exchange contracts, along
with information on derivative accounting policies, can be found in the
Corporation's 1994 annual report on Form 10-K on pages 33 through 37 and in
Notes 1 and 17 to the consolidated financial statements.
12
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
-----------------------
Results of Operations
- ---------------------
Comerica Incorporated reported net income of $105 million for the
quarter ended September 30, 1995, an increase of nearly $5 million, or 5
percent, over the amount reported for the third quarter of 1994. Net
income per share increased 8 percent to $0.91 from $0.84 a year ago.
Return on average common shareholders' equity was 16.81 percent and return
on average assets was 1.22 percent, compared to 17.11 percent and 1.27
percent, respectively, for the comparable quarter last year.
For the nine months ended September 30, 1995, net income rose 6
percent to $307 million, or $2.62 per share, compared to net income of
$291 million, or $2.46 per share, reported for the same period in 1994.
Return on average common shareholders' equity was 16.45 percent and return
on average assets was 1.20 percent for the year-to-date period, compared
to 16.94 percent and 1.24 percent, respectively, a year earlier.
Acquisitions
- ------------
On October 27, 1995, the Corporation completed the acquisition of
QuestStar Bank, N.A. (QuestStar) in Houston, Texas, for approximately $25
million in cash. At September 30, 1995, QuestStar had approximately $200
million in total assets. The transaction was accounted for as a purchase.
In May 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 of common stock then valued at $120
million. At March 31, 1995 Metrobank had approximately $1.3 billion in
total assets. The transaction will be accounted for as a purchase and,
subject to regulatory approval, is expected to be completed in the first
quarter of 1996.
Net Interest Income
- -------------------
The Rate-Volume Analyses in Tables I and II detail the components of
the change in net interest income (FTE) for the quarter and nine months
ended September 30, 1995. On a fully taxable equivalent (FTE) basis, net
interest income was $329 million for the three months ended September 30,
1995, up $10 million, or 3 percent, from $319 million reported for the
comparable quarter in 1994. This increase, primarily the result of
acquisitions and continued expansion in the loan portfolio, was partially
offset by the utilization of wholesale funds to support loan growth and
customers shifting deposits from NOW, savings and money market accounts to
higher-paying certificates of deposit.
Growth in commercial and consumer loan balances accounted for more
than 75 percent of the overall increase in average total loans. For the
third quarter of 1995, average commercial loans rose $1.9 billion, or 19
percent, over the prior year, reflecting continued strong loan demand by
corporate customers. Average consumer loans increased $842 million, or 22
percent, over the comparable period a year earlier, due to rapid growth in
the revolving credit portfolio. This growth resulted as customers
responded to bankcard promotions begun in the third quarter of 1994.
Investments in other earning assets were reduced in order to partially
fund loan growth.
13
The net interest margin for the three months ended September 30,
1995, was 4.10 percent, a decline of 5 basis points from 4.15 percent for
the second quarter of 1995, and 25 basis points from 4.35 percent for the
third quarter of 1994. Continued margin compression is an indication of
market pressure to maintain competitive pricing on loan and deposit
products and the Corporation's increased use of purchased funds, a more
expensive funding vehicle.
For the nine months ended September 30, 1995, net interest income
(FTE) totaled $976 million, an increase of $40 million, or 4 percent, over
the amount reported for the same period a year ago. This increase in net
interest income, led by acquisitions and growth in commercial and consumer
loans, was partially offset by a rise in purchased funds used to support
loan growth as well as an overall increase in interest-bearing deposits as
customers invested more funds in certificates of deposit. Average
commercial loans grew $1.8 billion, or 19 percent, while average consumer
loans rose $784 million, or 21 percent. The average balances of
investment securities and temporary investments were reduced to facilitate
loan growth.
The net interest margin for the nine months ended September 30,
1995, was 4.14 percent, a decrease of 2 basis points from 4.16 percent for
the six months ended June 30, 1995, and 20 basis points from 4.34 percent
for the first nine months of 1994. Continued compression in the margin
for the year-to-date period is attributable to the same factors discussed
above for the third quarter.
Net interest income growth for the quarter and nine months ended
September 30, 1995, was also partially offset as the Corporation's risk
management interest rate swap portfolio continued to generate net interest
expense. These interest rate swaps are designated against certain assets
and liabilities, therefore, the impact on net interest income attributable
to these off-balance sheet instruments is generally offset by net interest
income generated by on-balance sheet assets and liabilities.
In addition to using interest rate swaps and other off-balance sheet
instruments to control the Corporation's exposure to interest rate risk,
management attempts to minimize the effect of movements in interest rates
on net interest income by regularly performing interest sensitivity gap
and earnings simulation analyses.
At September 30, 1995, the Corporation was in an asset sensitive
position of approximately $542 million (on an elasticity-adjusted basis),
or 1.66 percent of earning assets. The earnings simulation analysis
performed at September 30, 1995, indicated forecasted net interest income
is at risk by less than 4 percent if short-term interest rates decreased
200 basis points or could increase by less than 1 percent if short-term
interest rates rose 200 basis points. These results are within
established corporate policy guidelines.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the third quarter of 1995 was $26
million, up $12 million from the third quarter of 1994. For the nine
months ended September 30, 1995, the provision for loan losses was $54
million, an increase of $10 million over the provision for the same period
a year ago. The provision is predicated upon maintaining an adequate
allowance for loan losses, which is further discussed in the section
entitled "Financial Condition."
14
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
September 30, 1995 September 30, 1994
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $23,984 $ 534 8.86% $20,463 $ 411 7.99%
Investment securities 7,534 125 6.63 8,228 129 6.24
Other earning assets 451 8 6.67 479 7 5.86
- ----------------------------------------------------------------------------------------------
Total earning assets 31,969 667 8.30 29,170 547 7.45
Interest-bearing deposits 16,926 184 4.31 16,743 141 3.34
Short-term borrowings 5,280 77 5.80 4,361 50 4.56
Medium- and long-term debt 4,779 77 6.37 3,185 42 5.24
Net interest rate swap
(income)/expense (1) - - - - (5) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,985 338 4.98 $24,289 228 3.73
----------------- -----------------
Net interest income/
Rate spread (FTE) $ 329 3.32 $ 319 3.72
====== ======
FTE adjustment $ 5 $ 6
====== ======
Impact of net noninterest-
bearing sources of funds 0.78 0.63
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent
of average earning assets (FTE) 4.10% 4.35%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended September 30, 1995, to the related assets and liabilities, the average yield on total
loans was 8.85 percent as of September 30, 1995, compared to 8.08 percent a year ago. The average
cost of funds for medium- and long-term debt was 6.14 percent as of September 30, 1995, compared
to 4.97 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 45 $ 78 $ 123
Investment securities 7 (11) (4)
Other earning assets 1 - 1
------------------------------
Total earning assets 53 67 120
Interest-bearing deposits 36 7 43
Short-term borrowings 14 13 27
Medium- and long-term debt 9 26 35
Net interest rate swap
(income)/expense 5 - 5
------------------------------
Total interest-bearing sources 64 46 110
------------------------------
Net interest income/Rate spread (FTE) $ (11) $ 21 $ 10
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
15
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Nine Months Ended
-------------------------------------------------------------
September 30, 1995 September 30, 1994
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $23,291 $1,556 8.93% $19,825 $1,135 7.65%
Investment securities 7,721 385 6.62 7,996 363 6.06
Other earning assets 389 19 6.67 931 30 4.34
- ----------------------------------------------------------------------------------------------
Total earning assets 31,401 1,960 8.33 28,752 1,528 7.10
Interest-bearing deposits 16,875 538 4.26 16,641 389 3.13
Short-term borrowings 5,200 230 5.91 4,948 142 3.84
Medium- and long-term debt 4,393 211 6.42 2,298 89 5.19
Net interest rate swap
(income)/expense (1) - 5 - - (28) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,468 984 4.97 $23,887 592 3.32
----------------- ------------------
Net interest income/
Rate spread (FTE) $ 976 3.36 $ 936 3.78
====== ======
FTE adjustment $ 17 $ 18
====== ======
Impact of net noninterest-bearing
sources of funds 0.78 0.56
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.14% 4.34%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the nine
months ended September 30, 1995, to the related assets and liabilities, the average yield on
total loans was 8.83 percent as of September 30, 1995, compared to 7.77 percent a year ago.
The average cost of funds for medium- and long-term debt was 6.16 percent as of September 30,
1995, compared to 4.71 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 189 $ 232 $ 421
Investment securities 35 (13) 22
Other earning assets 16 (27) (11)
------------------------------
Total earning assets 240 192 432
Interest-bearing deposits 130 19 149
Short-term borrowings 77 11 88
Medium- and long-term debt 21 101 122
Net interest rate swap
(income)/expense 33 - 33
------------------------------
Total interest-bearing sources 261 131 392
------------------------------
Net interest income/Rate spread (FTE) $ (21) $ 61 $ 40
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
16
Noninterest Income
- ------------------
After adjusting for acquisitions, noninterest income rose $10
million to $127 million for the three months ended September 30, 1995, a
9 percent increase from the corresponding period in 1994. This growth in
noninterest income, primarily attributable to an escalation in revenue
within the other noninterest income category and a $3 million increase in
revolving credit fees resulting from new credit card balances, was
partially offset by decreases in customhouse brokerage fees and securities
gains.
Other noninterest income grew $7 million, or 21 percent, from the
third quarter of 1994, benefiting principally from increases in fees and
commissions generated by the investment management, securities brokerage
and insurance businesses.
For the nine months ended September 30, 1995, noninterest income
totaled $361 million, excluding the effects of acquisitions, an increase
of $17 million, or 5 percent, over the comparable period in 1994. Growth
in noninterest income primarily resulted from an $8 million boost in
revolving credit fees arising directly from growth in the bankcard
portfolio and an increase in other noninterest income. Reductions in
income associated with customhouse brokerage fees and securities gains
partially offset the rise in noninterest income.
Other noninterest income for the first nine months of 1995 reached
$112 million, an increase of $12 million, or 13 percent, over the same
period a year earlier. Earnings from investment management activities
contributed $6 million to other noninterest income for the nine-month
period, while the securities brokerage and insurance areas generated over
$5 million in additional fees and commissions. A decline in income from
mortgage-related activities, particularly gains from bulk sales of
mortgage servicing rights, partially offset the increase in other
noninterest income.
Noninterest Expenses
- --------------------
Noninterest expenses for the three months ending September 30,
1995, rose 3 percent, or $8 million, from the corresponding period in
1994, excluding the effects of acquisitions and a $12 million rebate
received in connection with a lower FDIC insurance rate. This nominal
increase in noninterest expenses was the result of normal business growth.
For the nine months ended September 30, 1995, noninterest expenses
were well-controlled, rising less than 2 percent from the same period a
year ago, excluding the expenses associated with acquisitions and the
aforementioned FDIC insurance premium rebate.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the nine months ended September
30, 1995, totaled $159 million, an increase of 8 percent compared to $148
million reported for the same period a year ago. The effective tax rate
was 34 percent for the first nine months of both 1995 and 1994.
17
Financial Condition
- -------------------
Total assets at September 30, 1995 were $35.3 billion, up $2 billion
or 6 percent since December 31, 1994.
Earning assets growth of $2 billion, or 7 percent, to $32.6 billion
since year-end 1994 was mainly caused by a $2.1 billion, or 10 percent,
increase in total loans. This increase was partially funded by a decline
in the investment securities portfolio of $505 million.
Since December 31, 1994, loan growth has remained strong as a result
of both acquisitions and continued expansion in the commercial and
consumer loan portfolios. Commercial loans showed the strongest
improvement, increasing $1.0 billion, or 10 percent, reflecting prolonged
customer demand in the Corporation's markets. Consumer loans followed
with an increase of $520 million, or 12 percent, largely due to growth in
revolving credit loans.
Total liabilities increased $1.8 billion, or 6 percent, to $32.8
billion since December 31, 1994, primarily due to the addition of $1.2
billion in short-term borrowings and an increase of $850 million in
medium- and long-term debt. The rise in medium- and long-term debt
reflects the net result of the issuance of $2.4 billion of medium- and
long-term notes and the maturity of approximately $1.6 billion of medium-
term notes since December 31, 1994. Refer to the notes to the
consolidated financial statements for an analysis of medium- and long-term
debt. As the deposit base remains relatively flat, greater reliance on
federal funds purchased, other short-term borrowings, and medium- and
long-term debt is necessary to support expanding loan volumes.
Allowance for Loan Losses and Nonperforming Assets
- --------------------------------------------------
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 loan loss experience, current economic conditions and
trends, geographic dispersion of borrowers, trends in past due and
nonaccrual amounts, risk characteristics of various categories and
concentrations of loans, and transfer risks.
At September 30, 1995, the allowance for loan losses was $343
million, an increase of $17 million, or 5 percent, since December 31,
1994. Due to the magnitude of loan growth during 1995, the allowance as
a percentage of total loans declined slightly to 1.41 percent from 1.47
percent at December 31, 1994. However, the allowance as a percentage of
total nonperforming assets increased from 160 percent at year-end 1994 to
178 percent at September 30, 1995.
Net charge-offs for the third quarter of 1995 were $21 million, or
0.35 percent of average total loans, compared with $11 million, or 0.21
percent of average total loans in the third quarter of 1994. The level of
charge-offs, while still below historical norms, has increased relative to
the extremely low levels experienced over the past year due to credit card
loans. For the first nine months of both 1995 and 1994, net charge-offs
of $40 million and $34 million, respectively, represented just 0.23
percent of average total loans. An analysis of the allowance for loan
losses is presented in the notes to the consolidated financial statements.
18
Nonperforming assets declined 6 percent since December 31, 1994, and
were categorized as follows:
September 30, December 31,
(in thousands) 1995 1994
------------- ------------
Nonaccrual loans:
Commercial $ 98,653 $ 88,514
Real estate construction 9,788 16,941
Commercial mortgage 35,408 47,152
Residential mortgage 7,933 9,116
------------- ------------
Total nonaccrual loans 151,782 161,723
Reduced-rate loans 4,137 2,299
------------- ------------
Total nonperforming loans 155,919 164,022
Other real estate 36,941 40,462
------------- ------------
Total nonperforming assets $ 192,860 $ 204,484
============= ============
Loans past due 90 days or more $ 71,924 $ 39,161
============= ============
Nonperforming assets as a percentage of total loans and other real
estate at September 30, 1995 and December 31, 1994, were 0.79 percent and
0.92 percent, respectively. The $33 million increase in loans past due 90
days or more since year-end 1994 is related principally to credit card
loans.
Capital
- -------
Shareholders' equity increased $161 million from December 31, 1994
to September 30, 1995, principally through retention of $189 million in
earnings, the issuance of $76 million of common stock in connection with
the acquisition of University Bank & Trust (University) in March 1995, and
a $58 million decrease in unrealized losses on investment securities
available for sale. The repurchase of 1.4 million shares, or $39 million,
of common stock related to the acquisition of University partially offset
the rise in shareholders' equity, along with the repurchase and retirement
of 4.2 million shares, or $134 million, of common stock related to the
impending Metrobank acquisition.
Capital ratios continue to comfortably exceed minimum regulatory
requirements as follows:
September 30, December 31,
1995 1994
------------- ------------
Leverage ratio (3.00 - minimum) 6.72% 6.93%
Tier 1 risk-based capital
ratio (4.0 - minimum) 7.75 8.13
Total risk-based capital
ratio (8.0 - minimum) 11.47 11.68
19
At September 30, 1995, the capital ratios of all 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 operation in that year.
20
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities
(a) Changes in documents defining rights of security holders.
On July 21, 1995, the Corporation made several amendments to its
bylaws. Among other things, these amendments modified the procedure for
holders of its Common Stock, $5.00 par value per share, to make director
nominations and added procedures regarding shareholder requests for
business to be conducted at a shareholder meeting. Advance notice of
director nominations must be given by a shareholder not less than 60 days
nor more than 90 days prior to the anniversary date of the immediately
preceding annual meeting of shareholders; previously, such notice had to
be given at least 30 days prior to such anniversary date. In addition,
shareholders who desire to bring business at a shareholders meeting must
comply with the advance notice provisions listed above as well as satisfy
certain other technical notice requirements. A copy of the amended bylaws
is attached hereto as Exhibit (4).
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(4) Instruments Defining the Rights of Security Holders
- Corporate Bylaws As Amended on July 21, 1995
(11) Statement re: Computation of Earnings Per Share
(b) Reports on Form 8-K
None.
21
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/Ralph W. Babb, Jr.
--------------------------------------
Ralph W. Babb, Jr.
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: October 31, 1995