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, 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 October 31, 1997: 105,056,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
September 30, December 31, September 30,
(In thousands, except share data) 1997 1996 1996
------------- ------------ -------------
ASSETS
Cash and due from banks $ 1,886,293 $ 1,901,760 $ 1,825,035
Interest-bearing deposits with banks 3,148 27,329 17,694
Federal funds sold and securities
purchased under agreements to
resell 41,358 32,200 663,300
Trading account securities 5,718 6,009 4,192
Loans held for sale 42,745 38,069 45,812
Investment securities available
for sale 4,716,940 4,800,034 5,181,562
Commercial loans 14,865,246 13,520,246 12,901,329
International loans 2,110,663 1,706,388 1,594,841
Real estate construction loans 974,779 750,760 749,849
Commercial mortgage loans 3,574,011 3,445,562 3,381,442
Residential mortgage loans 1,642,226 1,743,876 1,775,318
Consumer loans 4,432,242 4,634,258 4,599,028
Lease financing 496,825 405,618 365,514
----------- ----------- -----------
Total loans 28,095,992 26,206,708 25,367,321
Less allowance for loan losses (412,582) (367,165) (357,456)
----------- ----------- -----------
Net loans 27,683,410 25,839,543 25,009,865
Premises and equipment 384,202 407,663 425,836
Customers' liability on acceptances
outstanding 26,237 33,102 60,150
Accrued income and other assets 1,114,832 1,120,362 1,108,300
----------- ----------- -----------
TOTAL ASSETS $35,904,883 $34,206,071 $34,341,746
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 6,420,063 $ 6,712,985 $ 6,103,117
Interest-bearing deposits 15,131,775 15,357,840 15,231,254
Deposits in foreign offices 506,466 296,348 528,678
----------- ----------- -----------
Total deposits 22,058,304 22,367,173 21,863,049
Federal funds purchased and
securities sold under
agreements to repurchase 625,469 1,395,540 599,683
Other borrowed funds 3,465,473 3,093,651 4,362,090
Acceptances outstanding 26,237 33,102 60,150
Accrued expenses and other
liabilities 369,597 459,267 365,855
Medium- and long-term debt 6,615,449 4,241,769 4,491,981
----------- ----------- -----------
Total liabilities 33,160,529 31,590,502 31,742,808
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
9/30/97, 12/31/96 and 9/30/96 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 250,000,000 shares
Issued-105,239,666 shares at
9/30/97, 107,297,345 shares at
12/31/96 and 107,402,840 shares
at 9/30/96 526,198 536,487 537,014
Capital surplus - - 12,575
Unrealized gains and losses on
investment securities available
for sale 7,606 (22,789) (42,597)
Retained earnings 1,962,568 1,854,116 1,844,430
Deferred compensation (2,018) (2,245) (2,484)
----------- ----------- -----------
Total shareholders' equity 2,744,354 2,615,569 2,598,938
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $35,904,883 $34,206,071 $34,341,746
=========== =========== ===========
/TABLE
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ------------------------
(In thousands, except per share data) 1997 1996 1997 1996
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $590,198 $540,097 $1,714,211 $1,617,898
Interest on investment securities:
Taxable 80,265 86,212 236,282 287,833
Exempt from federal income tax 2,486 3,871 8,478 14,254
-------- -------- ---------- ----------
Total interest on investment
securities 82,751 90,083 244,760 302,087
Trading account interest 55 35 157 156
Interest on federal funds sold and
securities purchased under agreements
to resell 835 1,165 2,988 4,312
Interest on time deposits with banks 198 988 1,190 1,432
Interest on loans held for sale 634 1,053 1,934 4,158
-------- -------- ---------- ----------
Total interest income 674,671 633,421 1,965,240 1,930,043
INTEREST EXPENSE
Interest on deposits 173,193 167,561 502,664 520,378
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 27,276 20,617 82,794 77,670
Other borrowed funds 22,813 27,511 79,399 84,812
Interest on medium- and long-term debt 101,613 76,919 263,795 224,240
Net interest rate swap income (11,805) (12,454) (40,306) (36,074)
-------- -------- ---------- ----------
Total interest expense 313,090 280,154 888,346 871,026
-------- -------- ---------- ----------
Net interest income 361,581 353,267 1,076,894 1,059,017
Provision for loan losses 34,000 28,500 109,000 82,000
-------- -------- ---------- ----------
Net interest income after
provision for loan losses 327,581 324,767 967,894 977,017
NONINTEREST INCOME
Income from fiduciary activities 37,622 32,494 106,871 99,388
Service charges on deposit accounts 35,036 34,621 104,985 105,361
Customhouse broker fees - - - 10,764
Revolving credit fees 4,846 5,293 14,186 16,735
Securities gains/(losses) 1,096 (276) (141) 3,394
Other noninterest income 57,747 44,196 161,287 138,904
-------- -------- ---------- ----------
Total noninterest income 136,347 116,328 387,188 374,546
NONINTEREST EXPENSES
Salaries and employee benefits 135,311 135,055 403,669 424,015
Net occupancy expense 22,311 23,817 67,699 76,390
Equipment expense 15,055 16,508 46,288 51,344
FDIC insurance expense 799 6,179 2,184 7,444
Telecommunications expense 6,894 6,376 20,965 21,433
Other noninterest expenses 72,252 65,700 209,813 222,180
-------- -------- ---------- ----------
Total noninterest expenses 252,622 253,635 750,618 802,806
-------- -------- ---------- ----------
Income before income taxes 211,306 187,460 604,464 548,757
Provision for income taxes 74,239 65,942 213,915 192,412
-------- -------- ---------- ----------
NET INCOME $137,067 $121,518 $ 390,549 $ 356,345
======== ======== ========== ==========
Net income applicable to common stock $132,792 $116,768 $ 377,724 $ 351,595
======== ======== ========== ==========
Primary net income per share $1.23 $1.04 $3.49 $3.02
Average common and common
equivalent shares 108,143 112,538 108,382 116,563
Cash dividends declared on common stock $45,253 $45,951 $136,276 $128,278
Dividends per common share $0.43 $0.39 $1.29 $1.13
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 - - - - 356,345 - - 356,345
Issuance of preferred
stock 250,000 - (3,214) - - - - 246,786
Cash dividends
declared
Preferred stock - - - - (4,750) - - (4,750)
Common stock - - - - (128,278) - - (128,278)
Purchase and retire-
ment of 11,896,496 - (59,483) (501,847) - - - (36,324) (597,654)
Issuance of common
stock for:
Employee stock
plans - 24 8,546 - (20,075) (1,197) 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
SEPTEMBER 30, 1996 $250,000 $537,014 $ 12,575 $(42,597) $1,844,430 $ (2,484) $ - $2,598,938
======== ======== ========= ======== ========== ========= ========= ==========
BALANCES AT
JANUARY 1, 1997 $250,000 $536,487 $ - $(22,789) $1,854,116 $ (2,245) $ - $2,615,569
Net income for 1997 - - - - 390,549 - - 390,549
Cash dividends
declared:
Preferred stock - - - - (12,825) - - (12,825)
Common stock - - - - (136,276) - - (136,276)
Purchase and
retirement of
2,772,227 shares of
common stock - (13,861) (24,860) - (133,005) - - (171,726)
Issuance of common
stock under employee
stock plans - 3,572 24,860 - 9 (531) - 27,910
Amortization of
deferred compensation - - - - - 758 - 758
Change in unrealized
gains/(losses) on
investment securities
available for sale - - - 30,395 - - - 30,395
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT
SEPTEMBER 30, 1997 $250,000 $526,198 $ - $ 7,606 $1,962,568 $ (2,018) $ - $2,744,354
======== ======== ========= ========= ========== ========== ========= ==========
/TABLE
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30
---------------------------
(in thousands) 1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income $ 390,549 $ 356,345
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 109,000 82,000
Depreciation 44,344 49,741
Restructuring charge (40,837) -
Net decrease in trading account securities 291 6,476
Net (increase) decrease in loans held
for sale (4,676) 465,750
Net (increase) decrease in accrued
income receivable (24,031) 1,764
Net increase (decrease) in accrued expenses 8,037 (58,202)
Net amortization of intangibles 21,132 23,399
Funding for employee benefit plans - (25,000)
Other, net 42,946 232,537
------------ ------------
Total adjustments 156,206 778,465
------------ ------------
Net cash provided by operating
activities 546,755 1,134,810
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
with banks 24,181 5,930
Net increase in federal funds sold
and securities purchased under agreements
to resell (9,158) (626,202)
Proceeds from sale of investment securities
available for sale 175,782 1,100,180
Proceeds from maturity of investment
securities available for sale 768,755 1,029,425
Purchases of investment securities
available for sale (880,174) (444,454)
Net increase in loans (other
than purchased loans) (1,902,362) (1,038,893)
Purchase of loans (50,505) (29,433)
Fixed assets, net (20,883) (47,176)
Net (increase) decrease in customers'
liability on acceptances outstanding 6,865 (39,389)
Net cash provided by acquisitions/sales - 200,459
------------ ------------
Net cash provided by (used in)
investing activities (1,887,499) 110,447
FINANCING ACTIVITIES:
Net decrease in deposits (308,869) (1,329,983)
Net increase (decrease) in short-term
borrowings (398,249) 343,526
Net increase (decrease) in acceptances
outstanding (6,865) 39,389
Proceeds from issuance of medium- and
long-term debt 4,525,000 1,851,000
Repayments and purchases of medium- and
long-term debt (2,151,320) (1,903,438)
Proceeds from issuance of preferred stock - 246,786
Proceeds from issuance of common stock
and other capital transactions 28,441 28,280
Purchase of common stock for treasury
and retirement (171,726) (597,654)
Dividends paid (191,135) (126,503)
------------ ------------
Net cash provided by (used in)
financing activities 1,325,277 (1,448,597)
------------ ------------
Net decrease in cash and due from banks (15,467) (203,340)
Cash and due from banks at beginning of year 1,901,760 2,028,375
------------ ------------
Cash and due from banks at end of period $ 1,886,293 $ 1,825,035
============ ============
Interest paid $ 874,178 $ 910,053
============ ============
Income taxes paid $ 215,349 $ 182,483
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 6,031 $ 9,152
============ ============
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 nine months ended September 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 September 30, 1997, investment securities having a carrying value
of $2.9 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 $38 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 (sold), net - (3,630)
Loans charged off (93,462) (90,654)
Recoveries on loans previously
charged off 29,879 28,396
--------- ---------
Net loans charged off (63,583) (62,258)
Provision for loan losses 109,000 82,000
--------- ---------
Balance at September 30 $ 412,582 $ 357,456
========= =========
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 $84 million and $71 million for the
quarter and nine months ended September 30, 1997, respectively, compared
to $102 million and $120 million for the comparable periods last year.
The following are period-end balances:
(in thousands) September 30, 1997 December 31, 1996
------------------ -----------------
Total impaired loans $88,241 $98,050
Impaired loans requiring
an allowance 69,609 59,960
Impairment allowance 23,162 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 September
30, 1997 and December 31, 1996:
(in thousands) September 30, 1997 December 31, 1996
------------------ -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,853 $ 74,782
10.125% subordinated debentures
due 1998 74,945 74,880
7.25% subordinated notes due
2007 148,645 148,548
---------- ----------
Total parent company 298,443 298,210
Subsidiaries
Subordinated notes:
7.25% subordinated notes due
2007 198,128 -
7.875% subordinated notes due
2026 146,887 146,814
8.375% subordinated notes due
2024 147,918 147,860
7.25% subordinated notes due
2002 149,206 149,089
6.875% subordinated notes due
2008 99,200 99,143
7.125% subordinated notes due
2013 148,196 148,112
---------- ----------
Total subordinated notes 889,535 691,018
Medium-term notes:
Floating rate based on Treasury
bill indices 37,000 399,955
Floating rate based on Prime
indices 1,100,021 -
Floating rate based on LIBOR
indices 2,786,658 1,448,947
Floating rate based on Federal
Funds indices 349,994 -
Fixed rate notes with interest
rates ranging from 5.80%
to 6.75% 1,149,504 1,399,040
---------- ----------
Total medium-term notes 5,423,177 3,247,942
Notes payable maturing on dates
ranging from 1997 through 2015 4,294 4,599
---------- ----------
Total subsidiaries 6,317,066 3,943,559
---------- ----------
Total medium- and long-term
debt $6,615,449 $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
September 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) $ 8,129 $ 92 $ (39) $ 53 $8,015 $ 42 $ (97) $(55)
Options, caps and
floors purchased 52 - - - 53 - - -
Caps written - - - - 152 - - -
Foreign exchange contracts
Spot and forwards 900 3 (9) (6) 444 26 (4) 22
Swaps 160 6 (1) 5 38 - (1) (1)
------- ---- ----- ----- ------ ---- ----- ----
Total risk management 9,241 101 (49) 52 8,702 68 (102) (34)
Customer Initiated and
Other
Interest rate contracts
Caps written 366 - - - 358 - - -
Floors purchased 32 - - - 2 - - -
Forward rate agreements
purchased 120 - - - - - - -
Forward rate agreements
sold 120 - - - - - - -
Swaps 30 5 (5) - 30 5 (5) -
Foreign exchange contracts
Spot, forward, futures
and options 1,593 19 (13) 6 644 19 (18) 1
------- ---- ----- ----- ------ ---- ------ ----
Total customer
initiated and other 2,261 24 (18) 6 1,034 24 (23) 1
------- ---- ----- ----- ------ ---- ------ ----
Total derivatives and
foreign exchange
contracts $11,502 $125 $ (67) $ 58 $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 $3,760 million and $5,054
million at September 30, 1997 and December 31, 1996, respectively. These swaps had net
unrealized losses of $21 million and $63 million at September 30, 1997 and December 31, 1996,
respectively. As of September 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). Management believes 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, although there can be no assurance that such a strategy will be
successful.
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, 1997. 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, 1997 and December 31, 1996, the notional amounts of
commitments to purchase securities totaled $15 million and $60 million,
respectively; the notional amounts of commitments to sell securities
totaled $17 million and $8 million, respectively; and the notional amounts
of commitments to sell mortgage loans totaled $33 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, interest rate caps and
forward rate agreements, at the request of customers. Market risk
arising from customer initiated foreign exchange contracts and forward
rate agreements 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
September 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 nine-month period ended
September 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 $1.8 billion at
September 30, 1997 and $2.0 billion at December 31, 1996. Management
believes that market risk exposure arising from these revolving 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 40 100 - - - - 140 184
Index Amortizing 180 712 782 826 445 797 3,742 5,014
Weighted average: (1)
Receive rate 6.17% 6.22% 6.40% 6.33% 6.47% 6.33% 6.33% 6.11%
Pay rate 5.71% 5.71% 5.71% 5.71% 5.71% 5.69% 5.71% 5.56%
Floating/Floating swaps (3) $ - $ - $ 25 $ 15 $ - $ - $ 40 $ 25
Fixed rate asset designation:
Pay fixed swaps
Generic $ - $ - $ 2 $ - $ - $ - $ 2 $ 2
Index Amortizing 1 3 3 11 - - 18 40
Weighted average: (1)
Receive rate 5.66% 5.66% 5.75% 5.66% -% -% 5.68% 5.60%
Pay rate 5.34% 5.34% 6.70% 5.34% -% -% 5.68% 5.35%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ - $ 750 $ - $ 200 $ - $1,050 $2,000 $2,350
Weighted average: (1)
Receive rate -% 5.97% -% 6.91% -% 7.62% 6.93% 6.62%
Pay rate -% 5.59% - 5.72% -% 5.91% 5.77% 5.53%
Floating/Floating swaps $ - $1,450 $ - $ 37 $ - $ - $1,487 $ 400
Weighted average: (2)
Receive rate -% 5.68% -% 5.88% -% -% 5.68% 5.32%
Pay rate -% 5.65% -% 5.74% -% -% 5.66% 5.39%
Total notional amount $ 221 $3,015 $ 812 $1,789 $445 $1,847 $8,129 $8,015
- -----------------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR rates paid or received at September 30, 1997.
(2) Variable rates paid are based on LIBOR at September 30, 1997, while variable rates
received are based on prime.
(3) Variable rates paid are based on LIBOR at September 30, 1997, and were 5.93% and
5.88% for swaps maturing in 1999 and 2000 respectively. Variable rates
received represent 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)
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.
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 3,163 4,507 344 34,740
Maturities/amortizations (3,202) (3,929) (66) (33,791)
Terminations - - - -
------- ------- ----- --------
Balances at September 30, 1997 $ 8,181 $ 1,060 $ 668 $ 1,593
======= ======= ===== ========
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.
14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 7 - Earnings per Share - (Continued)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ -------
As reported under APB
Opinion No. 15
- ----------------------------
Primary earnings per share $1.23 $1.04 $3.49 $3.02
===== ===== ===== =====
Fully diluted earnings per
share $1.23 $1.04 $3.47 $3.00
===== ===== ===== =====
Pro forma under SFAS No. 128
- ----------------------------
Basic earnings per share $1.26 $1.06 $3.57 $3.07
===== ===== ===== =====
Diluted earnings per share $1.23 $1.04 $3.49 $3.02
===== ===== ===== =====
/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 September 30, 1997 was $137
million, up $15 million, or 13 percent, from $122 million reported for the
third quarter of 1996. Net income per share increased 18 percent to $1.23
from $1.04 a year ago. Return on average common shareholders' equity was
21.86 percent and return on average assets was 1.56 percent, compared to
19.05 percent and 1.45 percent, respectively, for the comparable quarter
last year.
Net income for the first nine months of 1997 was $3.49 per share, or
$391 million, compared to $3.02, or $356 million, for the same period in
1996, increases of 16 percent and 10 percent, respectively. Return on
common equity was 21.20 percent and return on assets was 1.50 percent,
compared to 17.99 percent and 1.38 percent, respectively, for the first
nine months of 1996.
Net Interest Income
- -------------------
The rate-volume analysis in Table I details the components of the
change in net interest income on a fully taxable equivalent basis (FTE)
for the quarter ended September 30, 1997. On a FTE basis, net interest
income was $364 million for the three months ended September 30, 1997, an
increase of $7 million over the comparable quarter in 1996.
Excluding the sale of the Corporation's Illinois subsidiary, average
total loans for the third quarter of 1997 increased $2.6 billion, or 10
percent, over the third quarter of 1996, driven primarily by growth in the
commercial, international, and real estate construction portfolios. This
growth in loans was the primary factor in the rise in net interest income.
The net interest margin for the three months ended September 30, 1997, was
4.48 percent, a decrease of 14 basis points from 4.62 percent for the
third quarter of 1996. This decrease in net interest margin was a result
of higher funding costs associated with a greater reliance on medium- and
long-term debt in the mix of interest-bearing liabilities.
Table II provides an analysis of net interest income for the first
nine months of 1997. On a FTE basis, net interest income for the nine
16
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
September 30, 1997 September 30, 1996
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $27,435 $591 8.56% $25,178 $542 8.56%
Investment securities 4,754 84 7.05 5,335 92 6.77
Other earning assets 95 2 7.35 206 3 6.33
- ----------------------------------------------------------------------------------------------
Total earning assets 32,284 677 8.33 30,719 637 8.23
Interest-bearing deposits 16,194 173 4.24 16,292 168 4.09
Short-term borrowings 3,559 50 5.58 3,621 48 5.29
Medium- and long-term debt 6,464 102 6.25 4,916 77 6.23
Net interest rate swap (income)/
expense (1) - (12) - - (13) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,217 313 4.74 $24,829 280 4.49
-------------- ---------------
Net interest income/
Rate spread (FTE) $364 3.59 $357 3.74
==== ====
FTE adjustment $ 2 $ 3
==== ====
Impact of net noninterest-bearing
sources of funds 0.89 0.88
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.48% 4.62%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended September 30, 1997, to the related assets and liabilities, the average yield on total
loans was 8.64 percent as of September 30, 1997, compared to 8.68 percent a year ago. The average
cost of funds for medium- and long-term debt was 5.86 percent as of September 30, 1997, compared
to 5.78 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 4 $ 45 $ 49
Investment securities 4 (12) (8)
Other earning assets 3 (4) (1)
------------------------------
Total earning assets 11 29 40
Interest-bearing deposits 4 1 5
Short-term borrowings 3 (1) 2
Medium- and long-term debt - 25 25
Net interest rate swap
(income)/expense 1 - 1
------------------------------
Total interest-bearing sources 8 25 33
------------------------------
Net interest income/Rate spread (FTE) $ 3 $ 4 $ 7
==============================
* 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)
Nine Months Ended
-------------------------------------------------------------
September 30, 1997 September 30, 1996
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $26,908 $1,717 8.53% $25,304 $1,622 8.56%
Investment securities 4,768 249 6.92 6,058 310 6.76
Other earning assets 131 6 6.48 219 10 6.19
- ----------------------------------------------------------------------------------------------
Total earning assets 31,807 1,972 8.28 31,581 1,942 8.19
Interest-bearing deposits 16,189 502 4.15 16,865 520 4.12
Short-term borrowings 3,980 162 5.45 4,064 163 5.34
Medium- and long-term debt 5,619 264 6.27 4,837 224 6.19
Net interest rate swap
(income)/expense (1) - (40) - - (36) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,788 888 4.60 $25,766 871 4.52
----------------- ------------------
Net interest income/
Rate spread (FTE) $1,084 3.68 $1,071 3.67
====== ======
FTE adjustment $ 7 $ 12
====== ======
Impact of net noninterest-bearing
sources of funds 0.87 0.85
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.55% 4.52%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the nine
months ended September 30, 1997, to the related assets and liabilities, the average yield on
total loans was 8.63 percent as of September 30, 1997, compared to 8.67 percent a year ago.
The average cost of funds for medium- and long-term debt was 5.81 percent as of September 30,
1997, compared to 5.69 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ - $ 95 $ 95
Investment securities 7 (68) (61)
Other earning assets - (4) (4)
------------------------------
Total earning assets 7 23 30
Interest-bearing deposits (1) (17) (18)
Short-term borrowings 3 (4) (1)
Medium- and long-term debt 3 37 40
Net interest rate swap
(income)/expense (4) - (4)
------------------------------
Total interest-bearing sources 1 16 17
------------------------------
Net interest income/Rate spread (FTE) $ 6 $ 7 $ 13
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
18
months ended September 30, 1997 was $1,084 million compared to $1,071
million for the same period in 1996. This increase was due to the same
factors indicated in the quarterly discussion. Excluding the sale of the
Corporation's Illinois subsidiary, average total loans increased $2.3
billion for the first nine months of 1997 compared to the first nine
months of 1996. The net interest margin for the nine months ended
September 30, 1997 was 4.55 percent compared to 4.52 percent for the same
period in 1996.
Net income generated by the risk management interest rate swap
portfolio resulted in a contribution of 15 basis points to the net
interest margin in the third quarter of 1997, compared to a 16 basis-point
contribution in the year-earlier quarter. The contribution for the first
nine months of 1997 was 17 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 September 30, 1997, the Corporation
was in an asset sensitive position of $360 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 September 30, 1997 for a 200 basis point rise in
short-term interest rates identified approximately $18 million, or 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
19
have approximately $43 million, or 3 percent, of net interest income at
risk. These results are within established corporate policy guidelines.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the third quarter of 1997 was $34
million, up $6 million from the third quarter of 1996. The provision for
the first nine months of 1997 was $109 million compared to $82 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 $136 million for the three months ended
September 30, 1997, an increase of 20 million, or 17 percent over the same
period in 1996. Excluding the effect of large nonrecurring items and
divestitures in both periods, noninterest income increased 18 percent in
the third quarter of 1997, compared to the third quarter of 1996.
Fiduciary income, investment banking, and retail and commercial fee income
accounted for the majority of this increase. Included in the large
nonrecurring items in other noninterest income for the third quarter of
1997 was a $6 million pre-tax gain related to the final settlement from
the sale of the Corporation's bond indenture services business. For the
first nine months of 1997, noninterest income was $387 million, an
increase of $13 million, or 3 percent, from the first nine months of 1996.
Customhouse broker and revolving credit fees decreased due to sales and
joint ventures, respectively, of those businesses. Included in the large
nonrecurring items was $23 million of pre-tax gains from the bond
indenture sale in the first and third quarters of 1997. Excluding the
effects of large non-recurring items and divestitures in both periods,
noninterest income rose $33 million, a 9 percent increase over the first
nine months of 1996.
20
Noninterest Expenses
- --------------------
Noninterest expenses were $253 million for the quarter ended
September 30, 1997, a decrease of $1 million, or less than 1 percent, from
the third quarter of 1996. Included in other noninterest expense for the
third quarter of 1997 were $6 million of litigation accruals. For the
first nine months of 1997, noninterest expenses were $751 million, a
decrease of $52 million, or 7 percent, from the first nine months of 1996.
These decreases were 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 in
both periods, noninterest expenses remained essentially unchanged when
compared with the third quarter and first nine months of 1996.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the third quarter of 1997 totaled
$74 million, an increase of 13 percent compared to $66 million reported
for the same period a year ago. The provision for the first nine months
of 1997 was $214 million compared to $192 million for the same period in
1996. The effective tax rate was 35 percent for the third quarter and
first nine months of both 1997 and 1996.
Financial Condition
- -------------------
Total assets were $35.9 billion at September 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,
international, and real estate construction loan categories. Since
December 31, 1996, total loans have increased $1.9 billion, or 7 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 $2.4 billion of medium-term and long-term notes, offset by a
$309 million decline in deposits and a $398 million decline in short-term
borrowings.
21
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. However, there can be no
assurance that the actual loss ratios will not vary from those projected.
At September 30, 1997, the allowance for loan losses was $413
million, an increase of $45 million, or 12 percent, since December 31,
1996. The allowance as a percentage of total loans increased to 1.47
percent, compared to 1.40 percent at December 31, 1996. As a percentage
of total nonperforming assets, the allowance increased from 263 percent at
year-end 1996 to 313 percent at September 30, 1997.
Net charge-offs for the third quarter of 1997 were $26 million, or
0.38 percent of average total loans, compared with $22 million, or 0.34
percent, for the year-earlier quarter. Net charge-offs for the first nine
months of 1997 were $64 million, or 0.32 percent of average total loans,
compared with $62 million, or 0.33 percent, for the same period last year.
An analysis of the allowance for loan losses is presented in note 5 to the
consolidated financial statements.
Nonperforming assets declined $8 million, or 6 percent, since
December 31, 1996, and were categorized as follows:
September 30, December 31,
(in thousands) 1997 1996
------------- ------------
Nonaccrual loans:
Commercial $ 77,021 $ 71,991
Real estate construction 2,209 3,576
Commercial mortgage 11,437 22,567
Residential mortgage 3,890 5,160
------------- ------------
Total nonaccrual loans 94,557 130,294
Reduced-rate loans 10,702 8,009
------------- ------------
Total nonperforming loans 105,259 111,303
Other real estate 26,371 28,398
------------- ------------
Total nonperforming assets $ 131,630 $ 139,701
============= ============
Loans past due 90 days or more $ 52,003 $ 51,748
============= ============
/TABLE
22
Nonperforming assets as a percentage of total loans and other real
estate at September 30, 1997 and December 31, 1996, were 0.47 percent and
0.53 percent, respectively.
Capital
- -------
Common shareholders' equity was up $98 million from December 31,
1996 to September 30, 1997, excluding the change in unrealized
gains/(losses) on investment securities available for sale. The increase
was due to the retention of $241 million in earnings, offset by the
repurchase and retirement of 2.8 million shares of common stock under
various corporate programs.
Capital ratios continue to comfortably exceed minimum regulatory
requirements as follows:
September 30, December 31,
1997 1996
------------- ------------
Leverage ratio (3.00 - minimum) 7.13% 7.07%
Tier 1 risk-based capital
ratio (4.0 - minimum) 7.09 7.18
Total risk-based capital
ratio (8.0 - minimum) 11.25 10.99
At September 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.
Included in Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition are forward-looking statements based on
on current 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.
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 September 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/Marvin J. Elenbaas
--------------------------------------
Marvin J. Elenbaas
First Vice President and Controller
(Chief Accounting Officer)
Date: November 13, 1997