1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10706
Comerica Incorporated
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(313) 222-3300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of April 30, 1997: 105,633,000 shares
2
Explanatory Note
On May 15, 1997, Comerica Incorporated (the "Corporation") filed its
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1997, with the Securities and Exchange Commission (the "Commission").
The Corporation is now filing with the Commission its amended Quarterly
Report on Form 10-Q/A. The sole purpose for filing the amended Quarterly
Report is to correct the erroneous average balance for short-term
borrowings at March 31, 1996, which was set forth in Table I of the
Corporation's Quarterly Report on Form 10-Q. Each of the other figures set
forth in the Quarterly Report on Form 10-Q is correct; the incorrect
figure was a typographical error.
For ease of reference, this amended Quarterly Report contains all of
the information required to be set forth in a Quarterly Report on Form
10-Q.
3
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
March 31, December 31, March 31,
(In thousands, except share data) 1997 1996 1996
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,703,871 $ 1,901,760 $ 1,230,251
Interest-bearing deposits with banks 66,847 27,329 3,069
Federal funds sold and securities
purchased under agreements to
resell 53,650 32,200 99,994
Trading account securities 6,319 6,009 9,106
Loans held for sale 30,970 38,069 79,962
Investment securities available
for sale 4,798,923 4,800,034 6,715,161
Commercial loans 14,158,843 13,520,246 12,783,170
International loans 1,933,784 1,706,388 1,483,900
Real estate construction loans 786,227 750,760 673,026
Commercial mortgage loans 3,509,272 3,445,562 3,562,550
Residential mortgage loans 1,722,274 1,743,876 2,099,874
Consumer loans 4,514,663 4,634,258 4,615,139
Lease financing 424,624 405,618 331,201
----------- ----------- -----------
Total loans 27,049,687 26,206,708 25,548,860
Less allowance for loan losses (391,418) (367,165) (357,248)
----------- ----------- -----------
Net loans 26,658,269 25,839,543 25,191,612
Premises and equipment 397,955 407,663 464,708
Customers' liability on acceptances
outstanding 34,692 33,102 74,263
Accrued income and other assets 1,116,212 1,120,362 1,155,355
----------- ----------- -----------
TOTAL ASSETS $34,867,708 $34,206,071 $35,023,481
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 6,491,323 $ 6,712,985 $ 5,790,068
Interest-bearing deposits 15,388,382 15,357,840 16,125,602
Deposits in foreign offices 268,094 296,348 994,908
----------- ----------- -----------
Total deposits 22,147,799 22,367,173 22,910,578
Federal funds purchased and
securities sold under
agreements to repurchase 1,500,964 1,395,540 2,343,001
Other borrowed funds 2,663,017 3,093,651 1,830,038
Acceptances outstanding 34,692 33,102 74,263
Accrued expenses and other
liabilities 459,716 459,267 408,372
Medium- and long-term debt 5,492,082 4,241,769 4,745,805
----------- ----------- -----------
Total liabilities 32,298,270 31,590,502 32,312,057
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
3/31/97 and 12/31/96 250,000 250,000 -
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-105,861,240 shares at
3/31/97, 107,297,345 shares at
12/31/96 and 119,294,531 shares
at 3/31/96 529,306 536,487 596,473
Capital surplus - - 513,950
Unrealized gains and losses on
investment securities available
for sale (49,847) (22,789) (29,722)
Retained earnings 1,842,488 1,854,116 1,703,403
Deferred compensation (2,509) (2,245) (2,965)
Less cost of common stock in
treasury-1,776,564 shares at
3/31/96 - - (69,715)
----------- ----------- -----------
Total shareholders' equity 2,569,438 2,615,569 2,711,424
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $34,867,708 $34,206,071 $35,023,481
=========== =========== ===========
/TABLE
4
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31
--------------------
(In thousands, except per share data) 1997 1996
-------- --------
INTEREST INCOME
Interest and fees on loans $545,572 $536,878
Interest on investment securities:
Taxable 76,483 108,321
Exempt from federal income tax 3,055 5,328
-------- --------
Total interest on investment
securities 79,538 113,649
Trading account interest 65 75
Interest on federal funds sold and
securities purchased under agreements
to resell 728 1,744
Interest on time deposits with banks 747 118
Interest on loans held for sale 593 1,966
-------- --------
Total interest income 627,243 654,430
INTEREST EXPENSE
Interest on deposits 159,666 180,890
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 28,450 33,196
Other borrowed funds 26,989 29,539
Interest on medium- and long-term debt 75,681 71,250
Net interest rate swap income (15,328) (9,706)
-------- --------
Total interest expense 275,458 305,169
-------- --------
Net interest income 351,785 349,261
Provision for loan losses 41,000 28,500
-------- --------
Net interest income after
provision for loan losses 310,785 320,761
NONINTEREST INCOME
Income from fiduciary activities 33,076 33,605
Service charges on deposit accounts 34,954 35,140
Customhouse broker fees - 8,124
Revolving credit fees 4,566 6,924
Securities gains 122 360
Other noninterest income 56,676 53,275
-------- --------
Total noninterest income 129,394 137,428
NONINTEREST EXPENSES
Salaries and employee benefits 132,915 145,924
Net occupancy expense 23,292 26,831
Equipment expense 16,068 18,046
FDIC insurance expense 568 626
Telecommunications expense 7,144 7,638
Other noninterest expenses 68,750 79,910
-------- --------
Total noninterest expenses 248,737 278,975
-------- --------
Income before income taxes 191,442 179,214
Provision for income taxes 67,670 62,608
-------- --------
NET INCOME $123,772 $116,606
======== ========
Net income applicable to common stock $119,497 $116,606
======== ========
Primary net income per share $ 1.10 $ 0.98
Average common and common equivalent
shares 109,089 119,161
Cash dividends declared on common stock $ 45,682 $ 41,239
Dividends per common share $ 0.43 $ 0.35
5
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Nonredeem-
able Unrealized Total
Preferred Common Capital Gains/ Retained Deferred Treasury Shareholders'
(in thousands) Stock Stock Surplus (Losses) Earnings Compensation Stock Equity
--------- --------- --------- ---------- ---------- ------------ --------- -------------
BALANCES AT
JANUARY 1, 1996 $ - $575,473 $ 410,618 $ (4,141) $1,640,980 $ (1,974) $(13,229) $2,607,727
Net income for 1996 - - - - 116,606 - - 116,606
Cash dividends
declared on
common stock - - - - (41,239) - - (41,239)
Purchase of
2,134,924 shares
of common stock - - - - - - (86,064) (86,064)
Issuance of common
stock:
Employee stock
plans - - 4,860 - (12,944) (1,197) 23,933 14,652
Acquisitions - 21,000 98,472 - - - 5,645 125,117
Amortization of
deferred
compensation - - - - - 206 - 206
Change in unrealized
gains/(losses) on
investment securities
available for sale - - - (25,581) - - - (25,581)
-------- -------- --------- --------- ---------- --------- -------- ----------
BALANCES AT
MARCH 31, 1996 $ - $596,473 $ 513,950 $(29,722) $1,703,403 $ (2,965) $(69,715) $2,711,424
======== ======== ========= ======== ========== ========= ======== ==========
BALANCES AT
JANUARY 1, 1997 $250,000 $536,487 $ - $(22,789) $1,854,116 $ (2,245) $ - $2,615,569
Net income for 1997 - - - - 123,772 - - 123,772
Cash dividends
declared:
Preferred stock - - - - (4,275) - - (4,275)
Common stock - - - - (45,682) - - (45,682)
Purchase and
retirement of
1,810,250 shares of
common stock - (9,051) (13,052) - (85,443) - - (107,546)
Issuance of common
stock under employee
stock plans - 1,870 13,052 - - (530) - 14,392
Amortization of
deferred compensation - - - - - 266 - 266
Change in unrealized
gains/(losses) on
investment securities
available for sale - - - (27,058) - - - (27,058)
-------- -------- --------- --------- ---------- --------- -------- ----------
BALANCES AT MARCH 31,
1997 $250,000 $529,306 $ - $ (49,847) $1,842,488 $ (2,509) $ - $2,569,438
======== ======== ========= ========= ========== ========== ======== ==========
/TABLE
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31
---------------------------
(in thousands) 1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income $ 123,772 $ 116,606
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 41,000 28,500
Depreciation 15,359 16,898
Restructuring charge (15,386) -
Net (increase) decrease in trading
account securities (310) 1,562
Net decrease in loans held for sale 7,099 431,600
Net (increase) decrease in accrued income
receivable (11,091) 5,412
Net increase in accrued expenses 15,835 23,363
Net amortization of intangibles 7,111 8,077
Other, net 59,319 203,858
------------ ------------
Total adjustments 118,936 719,270
------------ ------------
Net cash provided by operating
activities 242,708 835,876
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks (39,518) 20,555
Net (increase) decrease in federal funds sold
and securities purchased under agreements
to resell (21,450) 173,804
Proceeds from sale of investment securities
available for sale 12,818 5,894
Proceeds from maturity of investment
securities available for sale 211,261 352,722
Purchases of investment securities
available for sale (305,321) (29,774)
Net increase in loans (other
than purchased loans) (826,082) (439,820)
Purchase of loans (33,644) (5,463)
Fixed assets, net (5,651) (12,718)
Net decrease in customers' liability on
acceptances outstanding (1,590) (53,128)
Net cash provided by acquisitions/sales - 89,023
------------ ------------
Net cash provided by (used in)
investing activities (1,009,177) 101,095
FINANCING ACTIVITIES:
Net decrease in deposits (219,374) (1,268,668)
Net decrease in short-term borrowings (325,210) (510,631)
Net decrease in acceptances outstanding 1,590 53,128
Proceeds from issuance of medium- and
long-term debt 1,450,000 201,000
Repayments and purchases of medium- and
long-term debt (199,687) (99,611)
Proceeds from issuance of common stock
and other capital transactions 14,922 15,849
Purchase of common stock for treasury
and retirement (107,546) (86,064)
Dividends paid (46,115) (40,098)
------------ ------------
Net cash provided by (used in)
financing activities 568,580 (1,735,095)
------------ ------------
Net decrease in cash and due from banks (197,889) (798,124)
Cash and due from banks at beginning of year 1,901,760 2,028,375
------------ ------------
Cash and due from banks at end of period $ 1,703,871 $ 1,230,251
============ ============
Interest paid $ 283,987 $ 316,457
============ ============
Income taxes paid $ 5,935 $ 848
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 1,771 $ 2,992
============ ============
Stock issued for acquisitions $ - $ 125,117
============ ============
7
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 three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1997. 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, 1996.
Note 2 - Investment Securities
At March 31, 1997 investment securities having a carrying value of
$3.2 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 $67 million.
Note 3 - Allowance for Loan Losses
The following analyzes the changes in the allowance for loan losses
included in the consolidated balance sheets:
1997 1996
(in thousands) --------- ---------
Balance at January 1 $ 367,165 $ 341,344
Allowance acquired - 10,370
Loans charged off (28,476) (30,226)
Recoveries on loans previously
charged off 11,729 7,260
--------- ---------
Net loans charged off (16,747) (22,966)
Provision for loan losses 41,000 28,500
--------- ---------
Balance at March 31 $ 391,418 $ 357,248
========= =========
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 $78 million for the quarter ended March
31, 1997 compared to $137 million for the comparable period last year.
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Loan Losses (Continued)
The following are period-end balances:
(in thousands) March 31, 1997 December 31, 1996
-------------- -----------------
Total impaired loans $53,597 $98,050
Impaired loans requiring
an allowance 33,646 59,960
Impairment allowance 7,433 19,528
Those impaired loans not requiring an allowance represent loans for which
the fair value exceeded the recorded investment in the loan.
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at March 31,
1997 and December 31, 1996:
(in thousands) March 31, 1997 December 31, 1996
-------------- -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,807 $ 74,782
10.125% subordinated debentures
due 1998 74,903 74,880
7.25% subordinated notes due 2007 148,579 148,548
---------- ----------
Total parent company 298,289 298,210
Subsidiaries
Subordinated notes:
7.875% subordinated notes due 2026 146,840 146,814
8.375% subordinated notes due 2024 147,879 147,860
7.25% subordinated notes due 2002 149,127 149,089
6.875% subordinated notes due 2008 99,162 99,143
7.125% subordinated notes due 2013 148,140 148,112
---------- ----------
Total subordinated notes 691,148 691,018
Medium-term notes:
Floating rate based on Treasury bill
indices 399,983 399,955
Floating rate based on Prime indices 100,048 -
Floating rate based on LIBOR indices 1,948,806 1,448,947
Floating rate based on Federal Funds
indices 149,986 -
Fixed rate notes with interest rates
ranging from 5.75% to 6.875% 1,899,223 1,399,040
---------- ----------
Total medium-term notes 4,498,046 3,247,942
Notes payable maturing on dates
ranging from 1997 through 2015 4,599 4,599
---------- ----------
Total subsidiaries 5,193,793 3,943,559
---------- ----------
Total medium- and long-term
debt $5,492,082 $4,241,769
========== ==========
/TABLE
9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory federal
income tax rates to income before income taxes as reported in the financial
statements after deducting non-taxable items, principally interest income on
state and municipal securities.
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
March 31, 1997 December 31, 1996
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
(in millions) Amount Gains Losses Value Amount Gains Losses Value
(1) (2) (3) (1) (2) (3)
------------------------------ ------------------------------
Risk Management
Interest rate contracts
Swaps (4) $ 7,321 $ 37 $(178) $(141) $8,015 $ 42 $ (97) $ (55)
Options, caps and
floors purchased 52 - - - 53 - - -
Caps written 151 - - - 152 - - -
Foreign exchange contracts
Spot and forwards 439 7 (7) - 444 26 (4) 22
Swaps 44 1 - 1 38 - (1) (1)
------- ---- ----- ----- ------ ---- ----- -----
Total risk management 8,007 45 (185) (140) 8,702 68 (102) (34)
Customer Initiated and
Other
Interest rate contracts
Caps written 367 - (1) (1) 358 - - -
Floors purchased 22 - - - 2 - - -
Swaps 30 5 (5) - 30 5 (5) -
Foreign exchange contracts
Spot, forward, futures
and options 1,153 23 (19) 4 644 19 (18) 1
------- ---- ----- ----- ------ ---- ----- -----
Total customer initiated
and other 1,572 28 (25) 3 1,034 24 (23) 1
------- ---- ----- ----- ------ ---- ----- -----
Total derivatives and
foreign exchange
contracts $ 9,579 $ 73 $(210) $(137) $9,736 $ 92 $(125) $ (33)
======= ==== ===== ===== ====== ==== ===== =====
(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 $4,199 million and $5,054 million
at March 31, 1997 and December 31, 1996, respectively. These swaps had net unrealized losses of
$112 million and $63 million at March 31, 1997 and December 31, 1996, respectively. As of March
31, 1997 index amortizing swaps had an average expected life of approximately 3 years with a
stated maturity that averaged 5 years.
11
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 March 31, 1997. 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 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 March 31, 1997 and December 31, 1996, the notional amounts of
commitments to purchase securities totaled $13 million and $60 million,
respectively; the notional amounts of commitments to sell securities
totaled $15 million and $8 million, respectively; and the notional amounts
of commitments to sell mortgage loans totaled $31 million and $23 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
quarter ended March 31, 1997 and for the year ended December 31, 1996.
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 three-month period ended
March 31, 1997 and for the year ended December 31, 1996.
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
March 31, 1997 and $2.0 billion at December 31, 1996. 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 Interest Rate Swaps:
(dollar amounts 2002- Dec. 31,
in millions) 1997 1998 1999 2000 2001 2023 Total 1996
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ - $ - $ 300 $ - $ - $ 300 $ -
Amortizing 80 100 - - - - 180 184
Index amortizing 582 799 1,036 764 307 691 4,179 5,014
Weighted average: (1)
Receive rate 5.96% 6.24% 6.39% 6.25% 6.46% 6.33% 6.27% 6.11%
Pay rate 5.56% 5.56% 5.54% 5.62% 5.55% 5.56% 5.57% 5.56%
Floating/floating
swaps (3) $ - $ - $ 25 $ 15 $ - $ - $ 40 $ 25
Fixed rate asset
designation:
Pay fixed swaps
Generic $ - $ - $ 2 $ - $ - $ - $ 2 $ 2
Index amortizing 3 3 3 11 - - 20 40
Weighted average: (1)
Receive rate 5.63% 5.63% 5.65% 5.63% -% -% 5.63% 5.60%
Pay rate 5.34% 5.34% 6.70% 5.34% -% -% 5.65% 5.35%
Medium- and long-term
debt designation:
Generic receive
fixed swaps $ 700 $ 500 $ - $ 200 $ - $ 850 $2,250 $2,350
Weighted average: (1)
Receive rate 6.14% 5.92% -% 6.91% -% 7.78% 6.78% 6.62%
Pay rate 5.41% 5.53% -% 5.54% -% 5.66% 5.54% 5.53%
Floating/floating
swaps $ 100 $ 250 $ - $ - $ - $ - $ 350 $ 400
Weighted average: (2)
Receive rate 5.53% 5.40% -% -% -% -% 5.44% 5.32%
Pay rate 5.46% 5.40% -% -% -% -% 5.42% 5.39%
Total notional amount $1,465 $1,652 $1,066 $1,290 $ 307 $1,541 $7,321 $8,015
(1) Variable rates are based on LIBOR rates paid or received at March 31, 1997.
(2) Variable rates paid are based on LIBOR at March 31, 1997, while variable rates received
are based on prime.
(3) Variable rates paid are based on LIBOR at March 31, 1997, and were 5.68% and 5.69% for swaps
maturing in 1999 and 2000 respectively. Variable rates received represents the return on a
principal only total return swap. This return is based on principal paydowns of the
referenced security as well as changes in market value.
/TABLE
13
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, 1996 $ 8,220 $ 482 $ 390 $ 644
Additions 1,070 1,304 40 9,577
Maturities/amortizations (1,766) (1,303) (11) (9,068)
Terminations - - - -
------- ------- ------ -------
Balances at March 31, 1997 $ 7,524 $ 483 $ 419 $ 1,153
======= ======= ====== =======
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 1996 annual report on page 27 and in Notes
1 and 18 to the consolidated financial statements.
Note 7 - Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards (SFAS) No. 128 on "Earnings
per Share". The statement changes the computation, presentation, and
disclosure requirements for earnings per share in financial statements for
periods ending after December 15, 1997. The following table compares
reported earnings per share, as computed under Accounting Principles Board
(APB) Opinion No. 15, and a pro forma presentation computed under SFAS No.
128.
Three months ended March 31
---------------------------
1997 1996
------ ------
As reported under APB Opinion No. 15
------------------------------------
Primary earnings per share $1.10 $0.98
===== =====
Fully diluted earnings per share $1.10 $0.98
===== =====
Pro forma under SFAS No. 128
----------------------------
Basic earnings per share $1.12 $0.99
===== =====
Diluted earnings per share $1.10 $0.98
===== =====
/TABLE
14
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
-------------------
Results of Operations
- ---------------------
Net income for the quarter ended March 31, 1997 was $124 million, up
$7 million, or 6 percent, from $117 million reported for the first quarter
of 1996. Net income per share increased 12 percent to $1.10 from $0.98 a
year ago. Return on average common shareholders' equity was 20.41 percent
and return on average assets was 1.46 percent, compared to 17.27 percent
and 1.33 percent, respectively, for the comparable quarter last year.
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 March 31, 1997.
On a fully taxable equivalent (FTE) basis, net interest income was $354
million for the three months ended March 31, 1997, unchanged over the
comparable quarter in 1996.
Excluding the sale of the Corporation's Illinois subsidiary, average
total loans for the first quarter of 1997 increased $2.1 billion, or 9
percent, over the first quarter of 1996, driven primarily by growth in the
commercial, international, 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 March 31, 1997, was 4.59
percent, an increase of 21 basis points from 4.38 percent for the first
quarter of 1996.
Net income generated by the risk management interest rate swap
portfolio resulted in a contribution of 20 basis points to the net
interest margin in the first quarter of 1997, compared to a 12 basis-point
contribution in the year-earlier quarter. 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.
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 March 31, 1997, the Corporation was
in a asset sensitive position of $849 million (on an elasticity adjusted
basis), or 3 percent of earning assets. The earnings simulation analysis
performed at the end of the quarter reflects changes to both interest
rates and loan, investment and deposit volumes. The measurement of risk
exposure at March 31, 1997 for a 200 basis point rise in short-term
interest rates identified approximately $13 million, or less than 1
percent, of net interest income at risk during the next 12 months. If
short-term interest rates decline 200 basis points, the Corporation will
have approximately $18 million, or less than 2 percent, of net interest
income at risk. 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.
15
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
March 31, 1997 March 31, 1996
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $26,229 $547 8.43% $25,144 $538 8.60%
Investment securities 4,745 81 6.81 6,951 117 6.71
Other earning assets 141 2 6.17 249 4 6.39
- ----------------------------------------------------------------------------------------------
Total earning assets 31,115 630 8.17 32,344 659 8.18
Interest-bearing deposits 15,958 160 4.06 17,390 181 4.18
Short-term borrowings 4,249 55 5.29 4,639 63 5.44
Medium- and long-term debt 4,850 76 6.31 4,609 71 6.21
Net interest rate swap (income)/
expense (1) - (15) - - (10) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,057 276 4.45 $26,638 305 4.61
----------------- -----------------
Net interest income/
Rate spread (FTE) $354 3.72 $354 3.57
====== ======
FTE adjustment $ 2 $ 4
====== ======
Impact of net noninterest-
bearing sources of funds 0.87 0.81
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent
of average earning assets (FTE) 4.59% 4.38%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended March 31, 1997, to the related assets and liabilities, the average yield on total
loans was 8.56 percent as of March 31, 1997, compared to 8.65 percent a year ago. The average cost
of funds for medium- and long-term debt was 5.77 percent as of March 31, 1997, compared to 5.81
percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ (12) $ 21 $ 9
Investment securities 2 (38) (36)
Other earning assets - (2) (2)
------------------------------
Total earning assets (10) (19) (29)
Interest-bearing deposits (6) (15) (21)
Short-term borrowings (3) (5) (8)
Medium- and long-term debt 1 4 5
Net interest rate swap (income)/expense (5) - (5)
------------------------------
Total interest-bearing sources (13) (16) (29)
------------------------------
Net interest income/Rate spread (FTE) $ 3 $ (3) $ -
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
16
Provision for Loan Losses
- -------------------------
The provision for loan losses for the first quarter of 1997 was $41
million, up $13 million from the first quarter of 1996. 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 $129 million for the three months ended March
31, 1997, a decrease of $8 million, or 6 percent, over the same period in
1996. Customhouse broker and revolving credit fees decreased due to
sales and joint ventures, respectively, of those businesses. Included in
other noninterest income for the first quarter of 1997 is a $17 million
pre-tax gain on the sale of the Corporation's bond indenture services
business. Excluding the effects of non-recurring items and divestitures,
noninterest income rose $5 million, a 4 percent increase over the
corresponding period in 1996.
Noninterest Expenses
- --------------------
Noninterest expenses decreased 11 percent, or $30 million, to $249
million for the three months ended March 31, 1997. This was primarily a
result of divestitures and the realization of benefits from the
Corporation's ongoing cost control efforts. Excluding the effects of non-
recurring items and divestitures, noninterest expenses remained flat when
compared with the first quarter of 1996.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the first quarter of 1997 totaled
$68 million, an increase of 8 percent compared to $63 million reported for
the same period a year ago. The effective tax rate was 35 percent for
both the first quarter of 1997 and 1996.
Financial Condition
- -------------------
Total assets were $34.9 billion at March 31, 1997, compared with
$34.2 billion at December 31, 1996. The Corporation has continued to
generate loan growth in 1997, concentrated in the commercial and
international loan categories. Since December 31, 1996, total loans have
increased $843 million, or 3 percent.
Total liabilities increased $708 million, or 2 percent, to $32.3
billion since December 31, 1996. This was primarily a result of the net
issuance of $1.3 billion of medium-term notes, partially offset by a $431
million decline in other borrowed funds.
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.
17
At March 31, 1997, the allowance for loan losses was $391 million,
an increase of $24 million, or 7 percent, since December 31, 1996. The
allowance as a percentage of total loans increased to 1.45 percent,
compared to 1.40 percent at December 31, 1996. As a percentage of total
nonperforming assets, the allowance increased substantially from 263
percent at year-end 1996 to 407 percent at March 31, 1997.
Net charge-offs for the first quarter of 1997 were $17 million, or
0.26 percent of average total loans, compared with $23 million, or 0.37
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 declined $44 million, or 31 percent, since
December 31, 1996, and were categorized as follows:
(in thousands) March 31, 1997 December 31, 1996
-------------- -----------------
Nonaccrual loans:
Commercial $ 33,279 $ 71,991
Real estate construction 3,423 3,576
Commercial mortgage 18,734 22,567
Residential mortgage 5,209 5,160
--------- ---------
Total nonaccrual loans 60,645 130,294
Reduced-rate loans 8,785 8,009
--------- ---------
Total nonperforming loans 69,430 111,303
Other real estate 26,745 28,398
--------- ---------
Total nonperforming
assets $ 96,175 $ 139,701
========= =========
Loans past due 90 days or
more-domestic $ 54,860 $ 51,748
========= =========
Nonperforming assets as a percentage of total loans and other real
estate at March 31, 1997 and December 31, 1996, were 0.36 percent and 0.53
percent, respectively.
Capital
- -------
Common shareholders' equity was down $19 million from December 31,
1996 to March 31, 1997, excluding the change in unrealized losses on
investment securities available for sale. The decrease was due to the
repurchase and retirement of 1.8 million shares of common stock under
various corporate programs, offset by the retention of $74 million in
earnings.
18
Capital ratios continue to comfortably exceed minimum regulatory
requirements as follows:
March 31, December 31,
1997 1996
----------- -----------
Leverage ratio (3.00 - minimum) 6.98% 7.07%
Tier 1 risk-based capital
ratio (4.0 - minimum) 6.90 7.18
Total risk-based capital
ratio (8.0 - minimum) 10.64 10.99
At March 31, 1997, 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, 1996, 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, and
the Circuit Court of Appeals upheld the judgment on December 19, 1996.
The time period allowed for review of this decision has now expired.
19
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
January 22, 1997 - 1996 Earnings and Results of Phase III
20
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: May 23, 1997