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 June 30, 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 July 31, 1997: 105,519,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
June 30, December 31, June 30,
(In thousands, except share data) 1997 1996 1996
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,949,851 $ 1,901,760 $ 1,677,375
Interest-bearing deposits with banks 8,016 27,329 228,589
Federal funds sold and securities
purchased under agreements to
resell 124,800 32,200 442,850
Trading account securities 6,123 6,009 5,032
Loans held for sale 38,452 38,069 58,454
Investment securities available
for sale 4,808,231 4,800,034 5,590,562
Commercial loans 14,687,352 13,520,246 13,208,865
International loans 2,022,621 1,706,388 1,505,585
Real estate construction loans 867,787 750,760 698,592
Commercial mortgage loans 3,554,351 3,445,562 3,603,524
Residential mortgage loans 1,687,900 1,743,876 2,009,141
Consumer loans 4,474,213 4,634,258 4,643,212
Lease financing 430,514 405,618 360,038
----------- ----------- -----------
Total loans 27,724,738 26,206,708 26,028,957
Less allowance for loan losses (404,525) (367,165) (364,601)
----------- ----------- -----------
Net loans 27,320,213 25,839,543 25,664,356
Premises and equipment 388,827 407,663 462,480
Customers' liability on acceptances
outstanding 30,737 33,102 104,027
Accrued income and other assets 1,179,053 1,120,362 1,152,402
----------- ----------- -----------
TOTAL ASSETS $35,854,303 $34,206,071 $35,386,127
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 6,858,247 $ 6,712,985 $ 6,280,195
Interest-bearing deposits 15,110,753 15,357,840 16,176,726
Deposits in foreign offices 707,541 296,348 491,418
----------- ----------- -----------
Total deposits 22,676,541 22,367,173 22,948,339
Federal funds purchased and
securities sold under
agreements to repurchase 500,011 1,395,540 355,547
Other borrowed funds 3,534,555 3,093,651 3,790,109
Acceptances outstanding 30,737 33,102 104,027
Accrued expenses and other
liabilities 373,748 459,267 276,881
Medium- and long-term debt 6,070,543 4,241,769 5,045,054
----------- ----------- -----------
Total liabilities 33,186,135 31,590,502 32,519,957
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
6/30/97, 12/31/96 and 6/30/96 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-105,620,404 shares at
6/30/97, 107,297,345 shares at
12/31/96 and 119,294,531 shares
at 6/30/96 528,102 536,487 596,473
Capital surplus - - 512,155
Unrealized gains and losses on
investment securities available
for sale (13,993) (22,789) (81,428)
Retained earnings 1,906,324 1,854,116 1,773,684
Deferred compensation (2,265) (2,245) (2,723)
Less cost of common stock in
treasury-4,371,333 shares at
6/30/96 - - (181,991)
----------- ----------- -----------
Total shareholders' equity 2,668,168 2,615,569 2,866,170
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $35,854,303 $34,206,071 $35,386,127
=========== =========== ===========
/TABLE
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------------
(In thousands, except per share data) 1997 1996 1997 1996
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $578,441 $540,923 $1,124,013 $1,077,801
Interest on investment securities:
Taxable 79,534 93,300 156,017 201,621
Exempt from federal income tax 2,937 5,055 5,992 10,383
-------- -------- ---------- ----------
Total interest on investment
securities 82,471 98,355 162,009 212,004
Trading account interest 37 46 102 121
Interest on federal funds sold and
securities purchased under agreements
to resell 1,425 1,403 2,153 3,147
Interest on time deposits with banks 245 326 992 444
Interest on loans held for sale 707 1,139 1,300 3,105
-------- -------- ---------- ----------
Total interest income 663,326 642,192 1,290,569 1,296,622
INTEREST EXPENSE
Interest on deposits 169,805 171,927 329,471 352,817
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 27,068 23,857 55,518 57,053
Other borrowed funds 29,597 27,762 56,586 57,301
Interest on medium- and long-term debt 86,501 76,071 162,182 147,321
Net interest rate swap income (13,173) (13,914) (28,501) (23,620)
-------- -------- ---------- ----------
Total interest expense 299,798 285,703 575,256 590,872
-------- -------- ---------- ----------
Net interest income 363,528 356,489 715,313 705,750
Provision for loan losses 34,000 25,000 75,000 53,500
-------- -------- ---------- ----------
Net interest income after
provision for loan losses 329,528 331,489 640,313 652,250
NONINTEREST INCOME
Income from fiduciary activities 36,173 33,289 69,249 66,894
Service charges on deposit accounts 34,995 35,600 69,949 70,740
Customhouse broker fees - 2,640 - 10,764
Revolving credit fees 4,774 4,518 9,340 11,442
Securities gains/(losses) (1,359) 3,310 (1,237) 3,670
Other noninterest income 46,864 41,433 103,540 94,708
-------- -------- ---------- ----------
Total noninterest income 121,447 120,790 250,841 258,218
NONINTEREST EXPENSES
Salaries and employee benefits 135,443 143,036 268,358 288,960
Net occupancy expense 22,096 25,742 45,388 52,573
Equipment expense 15,165 16,790 31,233 34,836
FDIC insurance expense 817 639 1,385 1,265
Telecommunications expense 6,927 7,419 14,071 15,057
Other noninterest expenses 68,811 76,570 137,561 156,480
-------- -------- ---------- ----------
Total noninterest expenses 249,259 270,196 497,996 549,171
-------- -------- ---------- ----------
Income before income taxes 201,716 182,083 393,158 361,297
Provision for income taxes 72,006 63,862 139,676 126,470
-------- -------- ---------- ----------
NET INCOME $129,710 $118,221 $ 253,482 $ 234,827
======== ======== ========== ==========
Net income applicable to common stock $125,435 $118,221 $ 244,932 $ 234,827
======== ======== ========== ==========
Net income per share $1.16 $1.00 $2.26 $1.98
Average common and common
equivalent shares 107,933 118,098 108,506 118,620
Cash dividends declared on common stock $45,341 $45,088 $ 91,023 $ 86,327
Dividends per common share $0.43 $0.39 $0.86 $0.74
4
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 - - - - 234,827 - - 234,827
Issuance of preferred
stock 250,000 - (3,125) - - - - 246,875
Cash dividends
declared on
common stock - - - - (86,327) - - (86,327)
Purchase of
4,986,626 shares
of common stock - - - - - - (208,653) (208,653)
Issuance of common
stock for:
Employee stock
plans - - 6,190 - (16,004) (1,197) 30,633 19,622
Acquisitions - 21,000 98,472 - 208 - 9,258 128,938
Amortization of
deferred
compensation - - - - - 448 - 448
Change in unrealized
gains/(losses) on
investment securities
available for sale - - - (77,287) - - - (77,287)
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT
JUNE 30, 1996 $250,000 $596,473 $ 512,155 $ (81,428) $1,773,684 $ (2,723) $(181,991) $2,866,170
======== ======== ========= ========= ========== ========= ========= ==========
BALANCES AT
JANUARY 1, 1997 $250,000 $536,487 $ - $ (22,789) $1,854,116 $ (2,245) $ - $2,615,569
Net income for 1997 - - - - 253,482 - - 253,482
Cash dividends
declared:
Preferred stock - - - - (8,550) - - (8,550)
Common stock - - - - (91,023) - - (91,023)
Purchase and
retirement of
2,235,350 shares of
common stock - (11,176) (18,956) - (101,701) - - (131,833)
Issuance of common
stock under employee
stock plans - 2,791 18,956 - - (530) - 21,217
Amortization of
deferred compensation - - - - - 510 - 510
Change in unrealized
gains/(losses) on
investment securities
available for sale - - - 8,796 - - - 8,796
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT JUNE 30,
1997 $250,000 $528,102 $ - $ (13,993) $1,906,324 $ (2,265) $ - $2,668,168
======== ======== ========= ========= ========== ========= ========= ==========
/TABLE
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Six Months Ended
June 30
---------------------------
(in thousands) 1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income $ 253,482 $ 234,827
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 75,000 53,500
Depreciation 29,850 33,540
Restructuring charge (33,944) -
Net (increase) decrease in trading
account securities (114) 5,636
Net (increase) decrease in loans held
for sale (383) 453,108
Net (increase) decrease in accrued
income receivable (6,403) 10,171
Net increase in accrued expenses (40,250) (108,735)
Net amortization of intangibles 14,069 16,069
Funding for employee benefit plans - (25,000)
Other, net (23,243) 213,863
------------ ------------
Total adjustments 14,582 652,152
------------ ------------
Net cash provided by operating
activities 268,064 886,979
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks 19,313 (204,965)
Net increase in federal funds sold
and securities purchased under agreements
to resell (92,600) (169,052)
Proceeds from sale of investment securities
available for sale 155,183 1,079,019
Proceeds from maturity of investment
securities available for sale 522,543 695,040
Purchases of investment securities
available for sale (735,033) (367,060)
Net increase in loans (other
than purchased loans) (1,507,761) (931,537)
Purchase of loans (47,909) (11,490)
Fixed assets, net (11,014) (31,533)
Net (increase) decrease in customers'
liability on acceptances outstanding 2,365 (82,892)
Net cash provided by acquisitions/sales - 94,232
------------ ------------
Net cash provided by (used in)
investing activities (1,694,913) 69,762
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 309,368 (1,230,907)
Net decrease in short-term borrowings (454,625) (537,291)
Net increase (decrease) in acceptances
outstanding (2,365) 82,892
Proceeds from issuance of medium- and
long-term debt 3,230,000 1,101,000
Repayments and purchases of medium- and
long-term debt (1,401,226) (700,362)
Proceeds from issuance of preferred stock - 246,875
Proceeds from issuance of common stock
and other capital transactions 21,747 20,070
Purchase of common stock for treasury
and retirement (131,833) (208,653)
Dividends paid (96,126) (81,365)
------------ ------------
Net cash provided by (used in)
financing activities 1,474,940 (1,307,741)
------------ ------------
Net increase (decrease) in cash and due
from banks 48,091 (351,000)
Cash and due from banks at beginning of year 1,901,760 2,028,375
------------ ------------
Cash and due from banks at end of period $ 1,949,851 $ 1,677,375
============ ============
Interest paid $ 572,773 $ 634,240
============ ============
Income taxes paid $ 152,185 $ 127,238
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 3,705 $ 5,872
============ ============
Stock issued for acquisitions $ - $ 128,938
============ ============
6
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies
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 six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
annual report of Comerica Incorporated and Subsidiaries (the
"Corporation") on Form 10-K for the year ended December 31, 1996.
Derivative financial instruments, including foreign exchange
contracts, may be used to manage the Corporation's exposure to interest
rate and foreign currency risks. These instruments are treated as hedges,
and accounted for on an accrual basis, since there is a high correlation
with the on-balance sheet instrument being hedged. If this correlation
ceases to exist, the existing unrealized gain or loss is amortized over
the remaining term of the instrument, and future changes in fair value are
accounted for on a mark-to-market basis. Derivative financial instruments
executed as a service to customers are accounted for on a mark-to-market
basis. For further information, refer to the Accounting Policies footnote
in the Corporation's 1996 annual report.
Note 2 - Investment Securities
At June 30, 1997 investment securities having a carrying value of
$3.1 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 $53 million.
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Loan Losses
The following analyzes the changes in the allowance for loan losses
included in the consolidated balance sheets:
(in thousands) 1997 1996
--------- ---------
Balance at January 1 $ 367,165 $ 341,344
Allowance acquired - 10,370
Loans charged off (59,537) (57,950)
Recoveries on loans previously
charged off 21,897 17,337
--------- ---------
Net loans charged off (37,640) (40,613)
Provision for loan losses 75,000 53,500
--------- ---------
Balance at June 30 $ 404,525 $ 364,601
========= =========
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 $52 million and $65 million for the
quarter and six months ended June 30, 1997, respectively, compared to $121
million and $129 million for the comparable periods last year.
The following are period-end balances:
(in thousands) June 30, 1997 December 31, 1996
------------- -----------------
Total impaired loans $51,002 $98,050
Impaired loans requiring
an allowance 29,047 59,960
Impairment allowance 4,963 19,528
Those impaired loans not requiring an allowance represent 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 June 30,
1997 and December 31, 1996:
(in thousands) June 30, 1997 December 31, 1996
------------- -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,830 $ 74,782
10.125% subordinated debentures
due 1998 74,923 74,880
7.25% subordinated notes due
2007 148,613 148,548
---------- ----------
Total parent company 298,366 298,210
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 198,145 -
7.875% subordinated notes due 2026 146,860 146,814
8.375% subordinated notes due 2024 147,898 147,860
7.25% subordinated notes due 2002 149,167 149,089
6.875% subordinated notes due 2008 99,181 99,143
7.125% subordinated notes due 2013 148,167 148,112
---------- ----------
Total subordinated notes 889,418 691,018
Medium-term notes:
Floating rate based on Treasury
bill indices - 399,955
Floating rate based on Prime
indices 750,035 -
Floating rate based on LIBOR
indices 2,128,758 1,448,947
Floating rate based on federal
funds indices 349,990 -
Fixed rate notes with interest
rates ranging from 5.75%
to 6.875% 1,649,377 1,399,040
---------- ----------
Total medium-term notes 4,878,160 3,247,942
Notes payable maturing on dates
ranging from 1997 through 2015 4,599 4,599
---------- ----------
Total subsidiaries 5,772,177 3,943,559
---------- ----------
Total medium- and long-term
debt $6,070,543 $4,241,769
========== ==========
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. State and foreign
taxes are then added to the federal provision.
9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
June 30, 1997 December 31, 1996
------------------------------ ------------------------------
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) $ 8,275 $ 59 $ (94) $ (35) $8,015 $ 42 $ (97) $(55)
Options, caps and
floors purchased 54 - - - 53 - - -
Caps written 151 - - - 152 - - -
Foreign exchange
contracts
Spot and forwards 992 11 (3) 8 444 26 (4) 22
Swaps 49 - - - 38 - (1) (1)
------- ---- ----- ----- ------ ---- ----- ----
Total risk management 9,521 70 (97) (27) 8,702 68 (102) (34)
Customer Initiated and
Other
Interest rate contracts
Caps written 354 - - - 358 - - -
Floors purchased 22 - - - 2 - - -
Swaps 30 5 (5) - 30 5 (5) -
Foreign exchange
contracts
Spot, forward, futures
and options 952 16 (10) 6 644 19 (18) 1
------- ---- ----- ----- ------ ---- ------ ----
Total customer
initiated and other 1,358 21 (15) 6 1,034 24 (23) 1
------- ---- ----- ----- ------ ---- ------ ----
Total derivatives and
foreign exchange
contracts $10,879 $ 91 $(112) $ (21) $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 $3,923 million and $5,054
million at June 30, 1997 and December 31, 1996, respectively. These swaps had net unrealized
losses of $59 million and $63 million at June 30, 1997 and December 31, 1996, respectively.
As of June 30, 1997, index amortizing swaps had an average expected life of approximately 3
years with a stated maturity that averaged 5 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 June 30, 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
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts
(Continued)
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 June 30, 1997 and December 31, 1996, the notional amounts of
commitments to purchase securities totaled $20 million and $60 million,
respectively; the notional amounts of commitments to sell securities
totaled $14 million and $8 million, respectively; and the notional amounts
of commitments to sell mortgage loans totaled $26 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 June 30, 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 six-month period ended
June 30, 1997 and for the year ended December 31, 1996.
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 $2.1 billion at
June 30, 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
12
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:
2002- Dec. 31,
(dollar amounts in millions) 1997 1998 1999 2000 2001 2023 Total 1996
-----------------------------------------------------------------------------------------
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ - $ - $ 700 $ - $ - $ 700 $ -
Amortizing 60 100 - - - - 160 184
Index Amortizing 345 964 1,174 727 288 405 3,903 5,014
Weighted average: (1)
Receive rate 6.15% 6.26% 6.38% 6.32% 6.41% 6.39% 6.32% 6.11%
Pay rate 5.77% 5.79% 5.80% 5.78% 5.78% 5.71% 5.78% 5.56%
Floating/floating swaps (3) $ - $ - $ 25 $ 15 $ - $ - $ 40 $ 25
Fixed rate asset designation:
Pay fixed swaps
Generic $ - $ - $ 2 $ - $ - $ - $ 2 $ 2
Index Amortizing 2 4 3 11 - - 20 40
Weighted average: (1)
Receive rate 5.69% 5.69% 5.77% 5.69% -% -% 5.71% 5.60%
Pay rate 5.37% 5.37% 7.04% 5.34% -% -% 5.66% 5.35%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ 350 $ 750 $ - $ 200 $ - $1,050 $2,350 $2,350
Weighted average: (1)
Receive rate 5.93% 5.97% -% 6.91% -% 7.62% 6.78% 6.62%
Pay rate 5.69% 5.66% - 5.81% -% 5.83% 5.75% 5.53%
Floating/Floating swaps $ - $1,100 $ - $ - $ - $ - $1,100 $ 400
Weighted average: (2)
Receive rate -% 5.50% -% -% -% -% 5.50% 5.32%
Pay rate -% 5.75% -% -% -% -% 5.75% 5.39%
Total notional amount $ 757 $2,918 $1,204 $1,653 $288 $1,455 $8,275 $8,015
- -----------------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR rates paid or received at June 30, 1997.
(2) Variable rates paid are based on LIBOR at June 30, 1997, while variable rates
received are based on prime.
(3) Variable rates paid are based on LIBOR at June 30, 1997, and were 5.99% and
5.94% 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)
lines.
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 2,774 3,176 80 22,371
Maturities/amortizations (2,514) (2,617) (64) (22,063)
Terminations - - - -
------- ------- ----- --------
Balances at June 30, 1997 $ 8,480 $ 1,041 $ 406 $ 952
======= ======= ===== ========
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 of 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.
14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 7 - Earnings per Share - (Continued)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
As reported under APB
Opinion No. 15
- ----------------------------
Primary earnings per share $1.16 $1.00 $2.26 $1.98
===== ===== ===== =====
Fully diluted earnings per
share $1.16 $1.00 $2.25 $1.98
===== ===== ===== =====
Pro forma under SFAS No. 128
- ----------------------------
Basic earnings per share $1.19 $1.02 $2.31 $2.01
===== ===== ===== =====
Diluted earnings per share $1.16 $1.00 $2.26 $1.98
===== ===== ===== =====
/TABLE
15
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
-----------------------
Results of Operations
- ---------------------
Net income for the quarter ended June 30, 1997 was $130 million, up
$12 million, or 10 percent, from $118 million reported for the second
quarter of 1996. Net income per share increased 16 percent to $1.16 from
$1.00 a year ago. Return on average common shareholders' equity was 21.31
percent and return on average assets was 1.49 percent, compared to 17.73
percent and 1.37 percent, respectively, for the comparable quarter last
year.
Net income for the first six months of 1997 was $2.26 per share, or
$253 million, compared to $1.98 or $235 million for the same period in
1996, increases of 14 percent and 8 percent, respectively. Return on
common equity was 20.86 percent and return on assets was 1.48 percent,
compared to 17.50 percent and 1.35 percent, respectively, for the first
six months of 1996.
Net Interest Income
- -------------------
The rate-volume analysis in Table I details the components of the
change in net interest income (FTE) for the quarter ended June 30, 1997.
On a fully taxable equivalent (FTE) basis, net interest income was $366
million for the three months ended June 30, 1997, an increase of $5
million over the comparable quarter in 1996.
Excluding the sale of the Corporation's Illinois subsidiary, average
total loans for the second quarter of 1997 increased $2.4 billion, or 10
percent, over the second quarter of 1996, driven primarily by growth in
the commercial, international, and commercial mortgage portfolios. The
net interest margin for the three months ended June 30, 1997, was 4.57
percent, an increase of 2 basis points from 4.55 percent for the second
quarter of 1996.
Table II provides an analysis of net interest income for the first
six months of 1997. On an FTE basis, net interest income for the six
months ended June 30, 1997 was $720 million compared to $714 million for
the same period in 1996. This increase was due to the same factors
16
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
June 30, 1997 June 30, 1996
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $27,046 $579 8.59% $25,592 $542 8.51%
Investment securities 4,806 84 6.90 5,895 101 6.78
Other earning assets 157 3 6.24 202 3 5.77
- ----------------------------------------------------------------------------------------------
Total earning assets 32,009 666 8.32 31,689 646 8.17
Interest-bearing deposits 16,412 170 4.15 16,918 172 4.09
Short-term borrowings 4,140 57 5.49 3,938 51 5.28
Medium- and long-term debt 5,525 86 6.28 4,986 76 6.13
Net interest rate swap (income)/
expense (1) - (13) - - (14) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,077 300 4.61 $25,842 285 4.45
-------------- ---------------
Net interest income/
Rate spread (FTE) $366 3.71 $361 3.72
==== ====
FTE adjustment $ 2 $ 4
==== ====
Impact of net noninterest-bearing
sources of funds 0.86 0.83
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.57% 4.55%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended June 30, 1997, to the related assets and liabilities, the average yield on total loans
was 8.68 percent as of June 30, 1997, compared to 8.66 percent a year ago. The average cost of
funds for medium- and long-term debt was 5.80 percent as of June 30, 1997, compared to 5.74 percent
a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 8 $ 29 $ 37
Investment securities 2 (19) (17)
Other earning assets 1 (1) -
------------------------------
Total earning assets 11 9 20
Interest-bearing deposits 1 (3) (2)
Short-term borrowings 3 3 6
Medium- and long-term debt 2 8 10
Net interest rate swap
(income)/expense 1 - 1
------------------------------
Total interest-bearing sources 7 8 15
------------------------------
Net interest income/Rate spread (FTE) $ 4 $ 1 $ 5
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
17
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Six Months Ended
-------------------------------------------------------------
June 30, 1997 June 30, 1996
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $26,640 $1,126 8.51% $25,368 $1,080 8.56%
Investment securities 4,776 165 6.86 6,423 218 6.75
Other earning assets 149 4 6.20 225 7 6.17
- ----------------------------------------------------------------------------------------------
Total earning assets 31,565 1,295 8.24 32,016 1,305 8.17
Interest-bearing deposits 16,186 329 4.10 17,154 353 4.14
Short-term borrowings 4,195 112 5.39 4,289 114 5.36
Medium- and long-term debt 5,189 162 6.29 4,797 147 6.17
Net interest rate swap
(income)/expense (1) - (28) - - (23) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,570 575 4.53 $26,240 591 4.53
----------------- ------------------
Net interest income/
Rate spread (FTE) $ 720 3.71 $ 714 3.64
====== ======
FTE adjustment $ 5 $ 8
====== ======
Impact of net noninterest-bearing
sources of funds 0.87 0.83
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.58% 4.47%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the six
months ended June 30, 1997, to the related assets and liabilities, the average yield on total
loans was 8.63 percent as of June 30, 1997, compared to 8.68 percent a year ago. The average
cost of funds for medium- and long-term debt was 5.79 percent as of June 30, 1997, compared to
5.79 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ (4) $ 50 $ 46
Investment securities 4 (57) (53)
Other earning assets - (3) (3)
------------------------------
Total earning assets - (10) (10)
Interest-bearing deposits (5) (19) (24)
Short-term borrowings - (2) (2)
Medium- and long-term debt 3 12 15
Net interest rate swap
(income)/expense (5) - (5)
------------------------------
Total interest-bearing sources (7) (9) (16)
------------------------------
Net interest income/Rate spread (FTE) $ 7 $ (1) $ 6
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
18
indicated in the quarterly discussion. Excluding the sale of the
Corporation's Illinois subsidiary, average total loans increased $2.2
billion for the first six months of 1997 compared to the first six months
of 1996. The net interest margin for the six months ended June 30, 1997
was 4.58 percent compared to 4.47 percent for the same period in 1996.
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 second quarter of 1997, compared to a 18 basis-
point contribution in the year-earlier quarter. The contribution for the
first six months of 1997 was 18 basis points compared to a 15 basis-point
contribution in 1996. 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 June 30, 1997, the Corporation was
in a asset sensitive position of $410 million (on an elasticity adjusted
basis), or 1 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 June 30, 1997 for a 200 basis point rise in short-term
interest rates identified approximately $5 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 $15 million, or 1 percent, of net interest income at
risk. These results are within established corporate policy guidelines.
The preceding forward-looking statements are based on current
19
expectations and the assumptions made in the earnings simulation analyses,
but there are numerous factors that could cause variances in these
projections, and their underlying assumptions, as economic, industry and
competitive conditions change.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the second quarter of 1997 was $34
million, up $9 million from the second quarter of 1996. The provision for
the first six months of 1997 was $75 million compared to $54 million for
the same period in 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 $121 million for the three months ended June
30, 1997, unchanged over the same period in 1996. Excluding the effect of
divestitures and securities gains and losses, noninterest income increased
11 percent in the second quarter of 1997, compared to the second quarter
of 1996. Trust fees and both retail and commercial fee income accounted
for the majority of this increase. For the first six months of 1997,
noninterest income was $251 million, a decrease of $7 million, or 3
percent, from the first six months of 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 was 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
$13 million, a 5 percent increase over the first six months of 1996.
Noninterest Expenses
- --------------------
Noninterest expenses decreased 8 percent, or $21 million, to $249
million for the quarter ended June 30, 1997. For the first six months of
1997, noninterest expenses were $498 million, a decrease of $51 million,
or 9 percent, from the first six months of 1996. These decreases were
20
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 and first six months of 1996.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the second quarter of 1997
totaled $72 million, an increase of 13 percent compared to $64 million
reported for the same period a year ago. The provision for the first six
months of 1997 was $140 million compared to $126 million for the same
period in 1996. The effective tax rate was 36 percent for the second
quarter and first six months of 1997 compared to 35 percent for comparable
periods in 1996. The increase in the effective rate is due to a reduction
in tax-exempt securities as well as a higher proportion of state income
taxes.
Financial Condition
- -------------------
Total assets were $35.9 billion at June 30, 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 $1.5 billion, or 6 percent.
Total liabilities increased $1.6 billion, or 5 percent, to $33.2
billion since December 31, 1996. This was primarily a result of the net
issuance of $1.8 billion of medium-term and long-term notes, offset by a
$455 million decline in short-term borrowings.
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
21
concentrations of loans, and transfer risks.
At June 30, 1997, the allowance for loan losses was $405 million, an
increase of $37 million, or 10 percent, since December 31, 1996. The
allowance as a percentage of total loans increased to 1.46 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 431 percent at June 30, 1997.
Net charge-offs for the second quarter of 1997 were $21 million, or
0.31 percent of average total loans, compared with $18 million, or 0.28
percent, for the year-earlier quarter. Net charge-offs for the first six
months of 1997 were $38 million, or 0.28 percent of average total loans,
compared with $41 million, or 0.32 percent, for the same period last year.
An analysis of the allowance for loan losses is presented in the notes to
the consolidated financial statements.
Nonperforming assets declined $46 million, or 33 percent, since
December 31, 1996, and were categorized as follows:
June 30, December 31,
(in thousands) 1997 1996
------------- ------------
Nonaccrual loans:
Commercial $ 30,737 $ 71,991
Real estate construction 2,381 3,576
Commercial mortgage 19,251 22,567
Residential mortgage 4,790 5,160
------------- ------------
Total nonaccrual loans 57,159 130,294
Reduced-rate loans 9,889 8,009
------------- ------------
Total nonperforming loans 67,048 111,303
Other real estate 26,754 28,398
------------- ------------
Total nonperforming assets $ 93,802 $ 139,701
============= ============
Loans past due 90 days or more $ 53,620 $ 51,748
============= ============
Nonperforming assets as a percentage of total loans and other real
estate at June 30, 1997 and December 31, 1996, were 0.34 percent and 0.53
percent, respectively.
22
Capital
- -------
Common shareholders' equity was up $44 million from December 31,
1996 to June 30, 1997, excluding the change in unrealized losses on
investment securities available for sale. The increase was due to the
retention of $154 million in earnings, offset by the repurchase and
retirement of 2.2 million shares of common stock under various corporate
programs.
Capital ratios continue to comfortably exceed minimum regulatory
requirements as follows:
June 30, December 31,
1997 1996
------------- ------------
Leverage ratio (3.00 - minimum) 6.97% 7.07%
Tier 1 risk-based capital
ratio (4.0 - minimum) 6.91 7.18
Total risk-based capital
ratio (8.0 - minimum) 11.08 10.99
At June 30, 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.
23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(11) Statement re: Computation of Earnings Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended June 30, 1997.
24
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: August 8, 1997