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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10706
Comerica Incorporated
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(313) 222-3300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of October 31, 1996: 107,443,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
Sept. 30, December 31, Sept. 30,
(In thousands, except share data) 1996 1995 1995
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,825,035 $ 2,028,375 $ 1,523,520
Interest-bearing deposits with banks 17,694 23,568 52,442
Federal funds sold and securities
purchased under agreements to
resell 663,300 203,798 733,200
Trading account securities 4,192 10,668 4,783
Loans held for sale 45,812 511,562 138,741
Investment securities available
for sale 5,181,562 6,859,310 2,779,920
Investment securities held to
maturity (estimated fair value
of $4,534,625 at 9/30/95) - - 4,591,928
----------- ----------- -----------
Total investment securities 5,181,562 6,859,310 7,371,848
Commercial loans 12,901,329 12,041,009 11,679,983
International loans 1,594,841 1,384,814 1,400,513
Real estate construction loans 749,849 641,432 574,208
Commercial mortgage loans 3,381,442 3,254,041 3,200,054
Residential mortgage loans 1,775,318 2,221,359 2,451,943
Consumer loans 4,599,028 4,570,015 4,734,944
Lease financing 365,514 329,608 305,425
----------- ----------- -----------
Total loans 25,367,321 24,442,278 24,347,070
Less allowance for loan losses (357,456) (341,344) (342,914)
----------- ----------- -----------
Net loans 25,009,865 24,100,934 24,004,156
Premises and equipment 425,836 455,002 456,424
Customers' liability on acceptances
outstanding 60,150 21,135 34,336
Accrued income and other assets 1,108,300 1,255,522 1,029,076
----------- ----------- -----------
TOTAL ASSETS $34,341,746 $35,469,874 $35,348,526
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 6,103,117 $ 5,579,536 $ 5,180,358
Interest-bearing deposits 15,231,254 15,461,213 15,098,517
Deposits in foreign offices 528,678 2,126,466 1,732,254
----------- ----------- -----------
Total deposits 21,863,049 23,167,215 22,011,129
Federal funds purchased and
securities sold under
agreements to repurchase 599,683 3,206,612 763,882
Other borrowed funds 4,362,090 1,467,550 4,665,515
Acceptances outstanding 60,150 21,135 34,336
Accrued expenses and other
liabilities 365,855 355,219 372,102
Medium- and long-term debt 4,491,981 4,644,416 4,948,576
----------- ----------- -----------
Total liabilities 31,742,808 32,862,147 32,795,540
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
9/30/96 250,000 - -
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-107,402,840 shares at
9/30/96, 115,094,531 shares at
12/31/95 and 115,094,531 shares
at 9/30/96 537,014 575,473 575,473
Capital surplus 10,091 408,644 414,672
Unrealized gains and losses on
investment securities available
for sale (42,597) (4,141) 2,719
Retained earnings 1,884,430 1,640,980 1,574,639
Less cost of common stock in
treasury-490,704 shares at 12/31/95
and 538,453 shares at 9/30/95 - (13,229) (14,517)
----------- ----------- -----------
Total shareholders' equity 2,598,938 2,607,727 2,552,986
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $34,341,746 $35,469,874 $35,348,526
=========== =========== ===========
/TABLE
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended Six Months Ended
September 30 September 30
-------------------- ------------------------
(In thousands, except per share data) 1996 1995 1996 1995
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $540,097 $532,490 $1,617,898 $1,550,093
Interest on investment securities:
Taxable 86,212 115,225 287,833 353,639
Exempt from federal income tax 3,871 6,390 14,254 20,214
-------- -------- ---------- ----------
Total interest on investment
securities 90,083 121,615 302,087 373,853
Trading account interest 35 15 156 169
Interest on federal funds sold and
securities purchased under agreements
to resell 1,165 3,405 4,312 6,041
Interest on time deposits with banks 988 1,099 1,432 7,550
Interest on loans held for sale 1,053 3,054 4,158 5,586
-------- -------- ---------- ----------
Total interest income 633,421 661,678 1,930,043 1,943,292
INTEREST EXPENSE
Interest on deposits 167,561 183,958 520,378 538,194
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 20,617 35,876 77,670 117,928
Other borrowed funds 27,511 41,301 84,812 112,050
Interest on medium- and long-term debt 76,919 76,607 224,240 211,133
Net interest rate swap (income)/expense (12,454) 612 (36,074) 5,126
-------- -------- ---------- ----------
Total interest expense 280,154 338,354 871,026 984,431
-------- -------- ---------- ----------
Net interest income 353,267 323,324 1,059,017 958,861
Provision for loan losses 28,500 26,000 82,000 53,500
-------- -------- ---------- ----------
Net interest income after
provision for loan losses 324,767 297,324 977,017 905,361
NONINTEREST INCOME
Income from fiduciary activities 32,494 31,129 99,388 93,863
Service charges on deposit accounts 34,621 33,150 105,361 97,138
Customhouse broker fees - 8,789 10,764 27,137
Revolving credit fees 5,293 9,974 16,735 26,228
Securities gains/(losses) (276) 516 3,394 788
Other noninterest income 44,196 40,831 138,904 113,006
-------- -------- ---------- ----------
Total noninterest income 116,328 124,389 374,546 358,160
NONINTEREST EXPENSES
Salaries and employee benefits 135,055 142,507 424,015 420,374
Net occupancy expense 23,817 24,649 76,390 73,306
Equipment expense 16,508 16,787 51,344 50,670
FDIC insurance expense 6,179 (500) 7,444 21,418
Telecommunications expense 6,376 7,230 21,433 22,027
Other noninterest expenses 65,700 70,498 222,180 210,174
-------- -------- ---------- ----------
Total noninterest expenses 253,635 261,171 802,806 797,969
-------- -------- ---------- ----------
Income before income taxes 187,460 160,542 548,757 465,552
Provision for income taxes 65,942 55,240 192,412 158,696
-------- -------- ---------- ----------
NET INCOME $121,518 $105,302 $ 356,345 $ 306,856
======== ======== ========== ==========
Net income applicable to common stock $116,768 $105,302 $ 351,595 $ 306,856
======== ======== ========== ==========
Net income per share $1.04 $0.91 $3.02 $2.62
Average common and common
equivalent shares 112,538 115,993 116,563 117,199
Cash dividends declared on common stock $41,951 $40,089 $128,278 $118,237
Dividends per common share $0.39 $0.35 $1.13 $1.02
4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Nonredeem-
able Unrealized Total
Preferred Common Capital Gains/ Retained Treasury Shareholders'
(in thousands) Stock Stock Surplus (Losses) Earnings Stock Equity
--------- --------- --------- ---------- ---------- --------- -------------
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
SEPT. 30,
1995 $ - $575,473 $ 414,672 $ 2,719 $1,574,639 $ (14,517) $2,552,986
======== ======== ========= ======== ========== ========= ==========
BALANCES AT
JANUARY 1,
1996 $ - $575,473 $ 408,644 $ (4,141) $1,640,980 $ (13,229) $2,607,727
Net income for
1996 - - - - 356,345 - 356,345
Issuance of
preferred
stock 250,000 - (3,214) - - - 246,786
Cash dividends
declared on
preferred
stock - - - - (4,750) - (4,750)
Cash dividends
declared
on common
stock - - - - (128,278) - (128,278)
Purchase and
retirement
of 11,896,496
shares of
common stock - (59,483) (501,847) - - (36,324) (597,654)
Issuance of
common stock
for:
Employee
stock plans - 24 7,349 - (20,075) 40,295 27,593
Acquisitions - 21,000 98,472 - 208 9,258 128,938
Amortization of
deferred
compensation - - 687 - - - 687
Change in
unrealized
gains/(losses)
on investment
securities
available for
sale - - - (38,456) - - (38,456)
-------- -------- --------- -------- ---------- ---------- ----------
BALANCES AT
SEPT. 30,
1996 $250,000 $537,014 $ 10,091 $ (42,597) $1,844,430 $ - $2,598,938
======== ======== ========= ========= ========== ========== ==========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30
---------------------------
(in thousands) 1996 1995
------------ ------------
OPERATING ACTIVITIES:
Net income $ 356,345 $ 306,856
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 82,000 53,500
Depreciation 49,741 47,355
Net (increase) decrease in trading
account securities 6,476 (451)
Net (increase) decrease in loans held
for sale 465,750 (47,194)
Net (increase) decrease in accrued
income receivable 1,764 (30,830)
Net increase (decrease) in accrued expenses (58,202) 111,488
Net amortization of intangibles 23,399 21,519
Funding for employee benefit plans (25,000) (125,000)
Other, net 232,537 (25,607)
------------ ------------
Total adjustments 778,465 4,780
------------ ------------
Net cash provided by operating
activities 1,134,810 311,636
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
with banks 5,930 326,431
Net increase in federal funds sold
and securities purchased under agreements
to resell (626,202) (651,900)
Proceeds from sale of investment securities
available for sale 1,100,180 39,342
Proceeds from maturity of investment
securities available for sale 1,029,425 308,979
Purchases of investment securities
available for sale (444,454) (31,434)
Proceeds from maturity of investment
securities held to maturity - 579,776
Purchases of investment securities
held to maturity - (164,828)
Net increase in loans (other
than purchased loans) (1,038,893) (1,904,378)
Purchase of loans (29,433) (44,110)
Fixed assets, net (47,176) (49,166)
Net increase in customers'
liability on acceptances outstanding (39,389) (704)
Net cash provided by acquisitions/sales 200,459 28,835
------------ ------------
Net cash provided by (used in)
investing activities 110,447 (1,563,157)
FINANCING ACTIVITIES:
Net decrease in deposits (1,329,983) (839,927)
Net increase in short-term borrowings 343,526 1,223,989
Net increase in acceptances
outstanding 39,389 704
Proceeds from issuance of medium- and
long-term debt 1,851,000 2,460,000
Repayments and purchases of medium- and
long-term debt (1,903,438) (1,614,011)
Proceeds from issuance of preferred stock 246,786 -
Proceeds from issuance of common stock
and other capital transactions 28,280 10,145
Purchase of common stock for treasury
and retirement (597,654) (172,416)
Dividends paid (126,503) (115,756)
------------ ------------
Net cash provided by (used in)
financing activities (1,448,597) 952,728
------------ ------------
Net decrease in cash and due from banks (203,340) (298,793)
Cash and due from banks at beginning of year 2,028,375 1,822,313
------------ ------------
Cash and due from banks at end of period $ 1,825,035 $ 1,523,520
============ ============
Interest paid $ 910,053 $ 926,747
============ ============
Income taxes paid $ 182,483 $ 130,629
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 9,152 $ 15,249
============ ============
Stock issued for acquisitions $ 128,938 $ 77,100
============ ============
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, 1996 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996. 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, 1995.
Note 2 - Investment Securities
At September 30, 1996 investment securities having a carrying value
of $3.8 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 $43 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) 1996 1995
--------- ---------
Balance at January 1 $ 341,344 $ 326,195
Allowance acquired (sold), net (3,630) 3,260
Loans charged off (90,654) (73,831)
Recoveries on loans previously
charged off 28,396 33,790
--------- ---------
Net loans charged off (62,258) (40,041)
Provision for loan losses 82,000 53,500
--------- ---------
Balance at September 30 $ 357,456 $ 342,914
========= =========
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Loan Losses - (Continued)
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," considers a loan
impaired when 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 $102 million and $120 million for the
quarter and nine months ended September 30, 1996, respectively.
Approximately $45 million, of the $93 million in total period-end impaired
loans, required an allowance for loan losses of $9 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.
8
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, 1996 and December 31, 1995:
(in thousands) Sept. 30, 1996 December 31, 1995
-------------- -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,759 $ 74,692
10.125% subordinated debentures
due 1998 74,861 74,800
7.25% subordinated notes due
2007 148,584 148,584
---------- ----------
Total parent company 298,204 298,076
Subsidiaries
Subordinated notes:
7.875% subordinated notes due
2026 146,878 -
8.375% subordinated notes due
2024 147,840 147,782
7.25% subordinated notes due
2002 149,049 148,931
6.875% subordinated notes due
2008 99,124 99,066
7.125% subordinated notes due
2013 148,084 148,000
---------- ----------
Total subordinated notes 690,975 543,779
Medium-term notes:
Floating rate based on Treasury
bill indices 649,898 1,099,701
Floating rate based on Prime
indices - 550,000
Floating rate based on LIBOR
indices 1,448,960 624,937
Fixed rate notes with interest
rates ranging from 5.50%
to 6.875% 1,398,845 1,523,433
---------- ----------
Total medium-term notes 3,497,703 3,798,071
Notes payable maturing on dates
ranging from 1996 through 2015 5,099 4,490
---------- ----------
Total subsidiaries 4,193,777 4,346,340
---------- ----------
Total medium- and long-term
debt $4,491,981 $4,644,416
========== ==========
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 Derivatives and Foreign Exchange Contracts
September 30, 1996 December 31, 1995
------------------------------ ------------------------------
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) $ 8,549 $ 28 $(169) $(141) $5,925 $ 88 $(20) $ 68
Options, caps and
floors purchased 56 - - - 40 19 (21) (2)
Caps written 152 - - - 154 - - -
Foreign exchange
contracts
Spot and forwards 487 5 (2) 3 229 2 (1) 1
Swaps 35 - (2) (2) 50 8 - 8
------- ---- ----- ----- ------ ---- ---- ----
Total risk management 9,279 33 (173) (140) 6,398 117 (42) 75
Customer Initiated and
Other
Interest rate contracts
Caps written 449 - - - 360 - - -
Floors purchased 2 - - - - - - -
Swaps 30 6 (6) - 3 - - -
Foreign exchange
contracts
Spot, forward, futures
and options 803 9 (7) 2 320 5 (5) -
------- ---- ----- ----- ------ ---- ----- ----
Total customer
initiated and other 1,284 15 (13) 2 683 5 (5) -
------- ---- ----- ----- ------ ---- ----- ----
Total derivatives and
foreign exchange
contracts $10,563 $ 48 $(186) $(138) $7,081 $122 $(47) $ 75
======= ==== ===== ===== ====== ==== ===== ====
(1) Notional or contract amounts, which represent the extent of involvement in the
derivatives market, are generally used to determine the contractual cash flows required in
accordance with the terms of the agreement. These amounts are typically not exchanged,
significantly exceed amounts subject to credit or market risk, and are not reflected in the
consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current market
rates, contracts in a profitable position. Credit risk is calculated before consideration
is given to bilateral collateral agreements or master netting arrangements 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. The fair values of customer initiated and other
derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
Futures contracts are subject to daily cash settlements; therefore, the fair value of these
instruments is zero.
(4) Includes index amortizing swaps with a notional amount of $5,259 million and $3,688
million at September 30, 1996 and December 31, 1995, respectively. These swaps had net
unrealized loss of $107 million at September 30, 1996 versus a net unrealized gain of $4
million at December 31, 1995. As of September 30, 1996 index amortizing swaps had an average
expected life of approximately 2.83 years with a stated maturity that averaged 4.75 years.
10
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 on-balance sheet instruments such as investment
securities, as well as off-balance sheet derivative financial instruments
and foreign exchange contracts to manage exposure to these and other
risks, including liquidity risk.
As an end-user, the Corporation mainly accesses the interest rate
markets to obtain off-balance sheet derivatives instruments for use
principally in connection with asset and liability management activities.
Interest rate swaps are predominantly utilized with the objective of
managing the sensitivity of net interest income to interest rate
fluctuations. To accomplish this objective, interest rate swaps are
primarily used to modify 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). This strategy achieves an optimal match between the rate
maturities of assets and their funding sources which, in turn, reduces the
overall exposure of net interest income to interest rate risk.
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, 1996. The swaps are grouped by the assets
or liabilities to which they have been designated.
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
(Continued)
Various other types of off-balance sheet financial instruments may
also be used to manage interest rate and foreign currency risks associated
with specific assets or liabilities, including interest rate caps and
floors, forward and futures interest and foreign exchange rate contracts,
and foreign exchange rate swaps, which are reflected in the table above.
At September 30, 1996 and December 31, 1995, the notional amounts of
commitments to purchase securities totaled $2 million and $16 million,
respectively; the notional amounts of commitments to sell securities
totaled $3 million and $14 million, respectively; and the notional amounts
of commitments to sell mortgage loans totaled $32 million and $147
million, respectively. These commitments, which are similar in nature to
forward contracts, are not reflected in the above table due to the
immaterial impact they have on the financial statements.
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. Market risk arising from customer initiated
foreign exchange contracts is significantly minimized by entering into
offsetting transactions. Average fair values and income from customer
initiated and other foreign exchange contracts were not material for the
nine-month period ended September 30, 1996 and for the year ended December
31, 1995.
Customer initiated interest rate caps generally are not offset by
other on- or off-balance sheet financial instruments; however, 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, 1996 and for the year ended December 31, 1995.
12
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 $1.9 billion at
September 30, 1996 and $2.0 billion at December 31, 1995. 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.
13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
(Continued)
- -----------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
2001- Dec. 31,
(dollar amounts in millions) 1996 1997 1998 1999 2000 2014 Total 1994
-----------------------------------------------------------------------------------------
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ - $ - $ - $ - $ - $ - $ 50
Amortizing 4 84 100 - - - 188 200
Index Amortizing 237 1,473 875 1,090 673 870 5,218 3,688
Weighted average: (1)
Receive rate 6.34% 5.64% 6.25% 6.39% 6.16% 6.39% 6.12% 6.02%
Pay rate 5.56% 5.58% 5.57% 5.54% 5.55% 5.54% 5.56% 5.84%
Floating/Floating swaps $ - $ - $ - $ 25 $ - $ - $ 25 $ -
Weighted average: (3)
Receive rate -% -% -% 5.80% -% -% 5.80% -%
Pay rate -% -% -% 49.57% -% -% 49.57% -%
Fixed rate asset designation:
Pay fixed swaps
Generic $ 25 $ - $ - $ 2 $ - $ - $ 27 $ 37
Index Amortizing 1 24 3 3 10 - 41 -
Weighted average: (1)
Receive rate 5.55% 5.61% 5.50% 5.62% 5.50% -% 5.57% 5.76%
Pay rate 6.31% 5.07% 5.34% 6.70% 5.34% -% 5.72% 7.14%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ 100 $1,300 $ - $ - $200 $ 850 $2,450 $1,375
Weighted average: (1)
Receive rate 5.65% 5.82% -% -% 6.91% 7.78% 6.58% 7.01%
Pay rate 5.47% 5.45% - -% 5.56% 5.74% 5.56% 5.80%
Generic pay fixed swaps $ 25 $ - $ - $ - $ - $ - $ 25 $ 25
Weighted average: (1)
Receive rate 5.81% -% -% -% -% -% 5.81% 5.70%
Pay rate 8.28% -% -% -% -% -% 8.28% 8.28%
Floating/Floating swaps $ 175 $ 400 $ - $ - $ - $ - $ 575 $ 550
Weighted average: (2)
Receive rate 5.63% 5.32% -% -% -% -% 5.41% 5.76%
Pay rate 5.50% 5.45% -% -% -% -% 5.46% 5.75%
Total notional amount $ 567 $3,281 $978 $1,120 $883 $1,720 $8,549 $5,925
- -----------------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR rates paid or received at September 30, 1996.
(2) Variable rates paid are based on LIBOR at September 30, 1996, while variable rates
received are based on prime or LIBOR
(3) Variable rates paid are based on LIBOR at September 30, 1996, while variable rates
received represent returns on a principal only total return swap.
- -----------------------------------------------------------------------------------------
14
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, 1995 $ 6,119 $ 279 $ 363 $ 320
Additions 4,020 3,357 234 28,191
Maturities/amortizations (1,382) (3,114) (116) (27,708)
Terminations - - - -
------- ------- ----- --------
Balances at September 30, 1996 $ 8,757 $ 522 $ 481 $ 803
======= ======= ===== ========
Additional information regarding the nature, terms and associated
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 1995 annual report on page 30 and in Notes
1 and 17 to the consolidated financial statements.
15
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
-----------------------
Results of Operations
- ---------------------
Net income for the quarter ended September 30, 1996 was $122
million, up $17 million, or 15 percent, from $105 million reported for the
third quarter of 1995. Net income per share increased 14 percent to $1.04
from $0.91 a year ago. Return on average common shareholders' equity was
19.05 percent and return on average assets was 1.45 percent, compared to
16.81 percent and 1.22 percent, respectively, for the comparable quarter
last year.
Net income for the first nine months of 1996 was $356 million or
$3.02 per share, compared to $307 million or $2.62 for the same period in
1995. Return on common equity was 17.99 percent and return on assets was
1.38 percent, compared to 16.45 percent and 1.20 percent, respectively,
for the first nine months of 1995.
Acquisitions
- ------------
In January 1996, the corporation completed the acquisition of
Metrobank, headquartered in Los Angeles, California, for $125 million of
common stock, in a transaction accounted for as a purchase. Metrobank
contributed total assets of $1.2 billion, loans of $700 million and
deposits of $1 billion, as well as nonperforming assets of $18 million.
Metrobank's results of operations are reflected in the consolidated
statement of income for the nine months ended September 30, 1996.
Net Interest Income
- -------------------
The Rate-Volume Analyses in Table I details the components of the
change in net interest income (FTE) for the quarter ended September 30,
1996. On a fully taxable equivalent (FTE) basis, net interest income was
$357 million for the three months ended September 30, 1996, an increase of
$28 million, or 9 percent, over the amount reported for the comparable
16
quarter in 1995. The improvement was primarily the result of loan growth
and an increase in the net interest rate margin.
Excluding the sale of the Corporation's Illinois subsidiary, average
total loans for the third quarter of 1996 increased $1.8 billion, or 7
percent, over the third quarter of 1995, driven primarily by growth in the
commercial and commercial mortgage portfolios. This growth in loans,
along with a decline in lower return investment securities, created a
favorable shift in the mix of earning assets. This shift was the primary
factor in the rise in net interest margin. The net interest margin for
the three months ended September 30, 1996, was 4.62 percent, an increase
of 52 basis points from 4.10 percent for the third quarter of 1995.
Table II provides an analysis of net interest income for the first
nine months of 1996. On an FTE basis, net interest income for the nine
months ended September 30, 1996 was $1,071 million compared to $976
million for the same period in 1995. Average total loans increased $2.0
billion for the first nine months of 1996 compared to the first nine
months of 1995. The net interest margin for the nine months ended
September 30, 1996 was 4.52 percent compared to 4.14 percent for the same
period in 1995.
Net income generated by the risk management interest rate swap
portfolio resulted in a contribution of 16 basis points to the net
interest margin in the third quarter of 1996, compared to a 1 basis-point
reduction in the year-earlier quarter. The contribution for the first
nine months of 1996 was 15 basis points compared to a 2 basis point
reduction in 1995. Interest rate swaps permit management to control the
sensitivity of net interest income to fluctuations in interest rates in a
manner similar to on-balance sheet investment securities but without
significant impact to capital or liquidity. These instruments are
designated against certain assets and liabilities, therefore, their impact
on net interest income is generally offset by and should be considered in
relation to the level of net interest income generated by the related on-
balance sheet assets and liabilities.
17
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 monitor the effect of movements in interest rates
on net interest income by regularly performing interest sensitivity gap
and earnings simulation analyses. At September 30, 1996, the Corporation
was in a neutral asset/liability position (on an elasticity adjusted
basis). The earnings simulation analysis performed at the end of the
quarter covers the calendar year 1997 and reflects changes to both
interest rates and loan, investment and deposit volumes. For 1997,
forecasted net interest income could decline $34 million, or less than 3
percent, for a 200 basis point rise in short-term interest rates. Given
a 200 basis point decline in short-term interest rates, forecasted net
interest income could decline $32 million, or less than 3 percent, due
principally to an anticipated weaker economy and lower loan volumes.
These results are within established corporate policy guidelines. The
preceding forward-looking statements are based on current expectations,
but there are numerous factors that could cause variances in these
projections as economic, industry and competitive conditions change.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the third quarter of 1996 was $29
million, up $3 million from the third quarter of 1995. The provision for
the first nine months of 1996 was $82 million compared to $54 million for
the same period in 1995. The provision is predicated upon maintaining an
adequate allowance for loan losses, which is discussed in the section
entitled "Financial Condition."
Noninterest Income
- ------------------
Noninterest income was $116 million for the three months ended
September 30, 1996, a decrease of $8 million, or 6 percent, over the same
period in 1995. For the first nine months of 1996, noninterest income
rose $16 million, or 5 percent, over the same period in 1995. Fiduciary
income, service charges and other noninterest income increased for both
18
the three and nine months ended September 30, 1996. Included in other
noninterest income for the third quarter of 1996 is a $6 million pre-tax
gain on the sale of the Corporation's Illinois subsidiary. Customhouse
broker and revolving credit fees decreased during these periods due to
sales and joint ventures, respectively, of those businesses.
Noninterest Expenses
- --------------------
Noninterest expenses decreased 3 percent, or $8 million, to $254
million for the three months ended September 30, 1996. This total
includes a one-time pre-tax assessment of $5 million related to the
recapitalization of the Savings Association Insurance Fund (SAIF). After
adjusting for the effects of acquisitions, divestitures, and the
aforementioned charge, noninterest expenses decreased 2 percent compared
to the third quarter of 1995.
19
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
September 30, 1996 September 30, 1995
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $25,178 $542 8.56% $23,984 $534 8.86%
Investment securities 5,335 92 6.77 7,534 125 6.63
Other earning assets 206 3 6.33 451 8 6.67
- ----------------------------------------------------------------------------------------------
Total earning assets 30,719 637 8.23 31,969 667 8.30
Interest-bearing deposits 16,292 168 4.09 16,926 184 4.31
Short-term borrowings 3,621 48 5.29 5,280 77 5.80
Medium- and long-term debt 4,916 77 6.23 4,779 77 6.37
Net interest rate swap (income)/
expense (1) - (13) - - - -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $24,829 280 4.49 $26,985 338 4.98
-------------- ---------------
Net interest income/
Rate spread (FTE) $357 3.74 $329 3.32
==== ====
FTE adjustments $ 3 $ 5
==== ====
Impact of net noninterest-bearing
sources of funds 0.88 0.78
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.62% 4.10%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended September 30, 1996, to the related assets and liabilities, the average yield on total
loans was 8.68 percent as of September 30, 1996, compared to 8.85 percent a year ago. The average
cost of funds for medium- and long-term debt was 5.78 percent as of September 30, 1996, compared
to 6.14 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $(18) $ 26 $ 8
Investment securities 2 (35) (33)
Other earning assets - (5) (5)
------------------------------
Total earning assets (16) (14) (30)
Interest-bearing deposits (7) (9) (16)
Short-term borrowings (7) (22) (29)
Medium- and long-term debt (2) 2 -
Net interest rate swap
(income)/expense (13) - (13)
------------------------------
Total interest-bearing sources (29) (29) (58)
------------------------------
Net interest income/Rate spread (FTE) $ 13 $ 15 $ 28
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
20
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Nine Months Ended
-------------------------------------------------------------
September 30, 1996 September 30, 1995
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $25,304 $1,622 8.56% $23,291 $1,556 8.93%
Investment securities 6,058 310 6.76 7,721 385 6.62
Other earning assets 219 10 6.19 389 19 6.67
- ----------------------------------------------------------------------------------------------
Total earning assets 31,581 1,942 8.19 31,401 1,960 8.33
Interest-bearing deposits 16,865 520 4.12 16,875 538 4.26
Short-term borrowings 4,064 163 5.34 5,200 230 5.91
Medium- and long-term debt 4,837 224 6.19 4,393 211 6.42
Net interest rate swap
(income)/expense (1) - (36) - - 5 -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,766 871 4.52 $26,468 984 4.97
----------------- ------------------
Net interest income/
Rate spread (FTE) $l,071 3.67 $ 976 3.36
====== ======
FTE adjustment $ 12 $ 17
====== ======
Impact of net noninterest-bearing
sources of funds 0.85 0.78
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.52% 4.14%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the nine
months ended September 30, 1996, to the related assets and liabilities, the average yield on
total loans was 8.67 percent as of September 30, 1996, compared to 8.83 percent a year ago.
The average cost of funds for medium- and long-term debt was 5.69 percent as of September 30,
1996, compared to 6.16 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $(61) $127 $ 66
Investment securities 8 (83) (75)
Other earning assets (2) (7) (9)
------------------------------
Total earning assets (55) 37 (18)
Interest-bearing deposits (13) (5) (18)
Short-term borrowings (22) (45) (67)
Medium- and long-term debt (7) 20 13
Net interest rate swap
(income)/expense (41) - (41)
------------------------------
Total interest-bearing sources (83) (30) (113)
------------------------------
Net interest income/Rate spread (FTE) $ 28 $ 67 $ 95
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
21
Excluding the effects of acquisitions, divestitures, and
nonrecurring items, noninterest expense for the first nine months of 1996
remained relatively unchanged compared to the same period in 1995.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the third quarter of 1996 totaled
$66 million, an increase of 19 percent compared to $55 million reported
for the same period a year ago. The effective tax rate increased to 35
percent for the third quarter of 1996 from 34 percent for the third
quarter of 1995, as a result of lower tax-exempt income.
Financial Condition
- -------------------
Total assets were $34.3 billion at September 30, 1996, compared with
$35.5 billion at December 31, 1995. The sale of the Corporation's
Illinois subsidiary during the third quarter of this year reduced total
assets by $1.3 billion, loans by $765 million and deposits by $986
million. Excluding the Illinois sale, loan growth in 1996 has been
concentrated in the commercial and commercial mortgage loan categories,
which rose $1.2 billion, or 10 percent, and $334 million, or 10 percent,
respectively, since December 31, 1995. Loan growth has been partially
funded by the sale of $1.1 billion of investment securities during the
year.
Total liabilities fell $1.1 billion, or 3 percent, to $31.7 billion
since December 31, 1995, primarily due to the Illinois sale. The overall
decline in liabilities was net of a $524 million increase in demand
deposits, reflecting the Metrobank acquisition.
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
22
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, 1996, the allowance for loan losses was $357
million, an increase of $16 million, or 5 percent, since December 31,
1995. The allowance as a percentage of total loans increased slightly to
1.41 percent, compared to 1.40 percent at December 31, 1995. As a
percentage of total nonperforming assets, the allowance increased from 209
percent at year-end 1995 to 274 percent at September 30, 1996.
Net charge-offs for the third quarter of 1996 were $22 million, or
0.34 percent of average total loans, compared with $21 million, or 0.35
percent, for the year-earlier quarter. An analysis of the allowance for
loan losses is presented in the notes to the consolidated financial
statements.
Nonperforming assets have declined significantly since December 31,
1995, and were categorized as follows:
September 30, December 31,
(in thousands) 1996 1995
------------- ------------
Nonaccrual loans:
Commercial $ 64,615 $ 87,195
Real estate construction 4,896 6,578
Commercial mortgage 19,984 31,123
Residential mortgage 4,521 5,507
------------- ------------
Total nonaccrual loans 94,016 130,403
Reduced-rate loans 7,555 3,244
------------- ------------
Total nonperforming loans 101,571 133,647
Other real estate 29,035 29,384
------------- ------------
Total nonperforming assets $ 130,606 $ 163,031
============= ============
Loans past due 90 days or more $ 50,084 $ 57,134
============= ============
Nonperforming assets as a percentage of total loans and other real
estate at September 30, 1996 and December 31, 1995, were 0.51 percent and
0.67 percent, respectively.
23
Capital
- -------
Common shareholders' equity was down $220 million from December 31,
1995 to September 30, 1996, excluding the change in unrealized losses on
investment securities available for sale. The decrease was due to the
repurchase and retirement of 12 million shares of common stock under
various corporate programs, offset by the retention of $223 million in
earnings and the issuance of $125 million of common stock in connection
with the acquisition of Metrobank in January 1996.
During the second quarter, the Corporation issued 5 million shares
of Fixed/Adjustable Rate Noncumulative Preferred Stock, Series E, with a
stated value of $50 per share. Dividends are payable quarterly, at a rate
of 6.84% per annum through July 1, 2001. Thereafter, the rate will be
equal to .625% plus an effective rate, but not less than 7.34% nor greater
than 13.34%. The effective rate will be equal to the highest of the
Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty
Year Constant Maturity Rate (as defined in the prospectus). The
Corporation, at its option, may redeem all or part of the outstanding
shares on or after July 1, 2001.
Capital ratios continue to comfortably exceed minimum regulatory
requirements as follows:
September 30, December 31,
1996 1995
------------- ------------
Leverage ratio (3.00 - minimum) 7.09% 6.87%
Tier 1 risk-based capital
ratio (4.0 - minimum) 7.34 7.63
Total risk-based capital
ratio (8.0 - minimum) 11.19 11.21
At September 30, 1996, 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.
24
Other Matters
- -------------
On August 2, 1996, the Corporation sold its Illinois subsidiary,
Comerica Bank-Illinois, for approximately $160 million in cash.
On May 18, 1996, the Corporation sold the business and certain
assets of John V. Carr & Son, Inc., the wholly owned customs brokerage and
freight forwarding subsidiary of Comerica Bank.
In March 1996, the Corporation formed a strategic alliance with
National Data Corporation's subsidiary, National Data Payment Systems
(NDPS), to provide the Corporation's business customers with a
comprehensive line of merchant credit card processing systems and
services. The Corporation provides merchant contracts and multi-state
marketing opportunities to the new joint venture, Comerica Merchant
Alliance, while NDPS provides processing, settlement, authorization and
marketing support.
As disclosed in Part I, Item 3 of Form 10-K for the year ended
December 31, 1995, 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.
25
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(11) Statement re: Computation of Earnings Per Share
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended September 30, 1996.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMERICA INCORPORATED
--------------------------------------
(Registrant)
/s/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: November 14, 1996