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, 1998
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, 1998: 155,455,000 shares
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
June 30, December 31, June 30,
(In thousands, except share data) 1998 1997 1997
------------- ------------ -------------
ASSETS
Cash and due from banks $ 2,222,463 $ 1,927,087 $ 1,949,851
Short-term investments 264,777 202,957 177,391
Investment securities available
for sale 3,396,952 4,005,962 4,808,231
Commercial loans 16,891,406 15,805,549 14,687,352
International loans 2,389,783 2,085,090 2,022,621
Real estate construction loans 981,975 940,910 867,787
Commercial mortgage loans 3,788,052 3,633,785 3,554,351
Residential mortgage loans 1,360,363 1,565,445 1,687,900
Consumer loans 1,999,634 4,347,665 4,474,213
Lease financing 591,418 516,600 430,514
----------- ----------- -----------
Total loans 28,002,631 28,895,044 27,724,738
Less allowance for credit losses (438,875) (424,147) (404,525)
----------- ----------- -----------
Net loans 27,563,756 28,470,897 27,320,213
Premises and equipment 361,003 380,157 388,827
Customers' liability on acceptances
outstanding 26,252 18,392 30,737
Accrued income and other assets 1,214,802 1,286,946 1,179,053
----------- ----------- -----------
TOTAL ASSETS $35,050,005 $36,292,398 $35,854,303
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 6,392,257 $ 6,761,202 $ 6,858,247
Interest-bearing deposits 16,226,376 15,825,115 15,818,294
----------- ----------- -----------
Total deposits 22,618,633 22,586,317 22,676,541
Federal funds purchased and
securities sold under
agreements to repurchase 1,049,308 592,860 500,011
Other borrowed funds 2,542,210 2,600,041 3,534,555
Acceptances outstanding 26,254 18,392 30,737
Accrued expenses and other
liabilities 324,616 446,625 373,748
Medium- and long-term debt 5,662,180 7,286,387 6,070,543
----------- ----------- -----------
Total liabilities 32,223,201 33,530,622 33,186,135
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
6/30/98, 12/31/97 and 6/30/97 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued-157,187,518 shares at
6/30/98, 156,815,367 shares at
12/31/97 and 105,620,404 shares
at 6/30/97 785,938 784,077 528,102
Capital surplus 14,889 - -
Unrealized gains and losses on
investment securities available
for sale (5,206) (1,937) (13,993)
Retained earnings 1,904,223 1,731,419 1,906,324
Deferred compensation (3,071) (1,783) (2,265)
Less cost of common stock in
treasury- 1,818,965 shares at
6/30/98 (119,969) - -
----------- ----------- -----------
Total shareholders' equity 2,826,804 2,761,776 2,668,168
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $35,050,005 $36,292,398 $35,854,303
=========== =========== ===========
/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) 1998 1997 1998 1997
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $590,427 $578,441 $1,197,417 $1,124,013
Interest on investment securities:
Taxable 56,582 79,534 118,888 156,017
Exempt from federal income tax 1,927 2,937 4,020 5,992
-------- -------- ---------- ----------
Total interest on investment
securities 58,509 82,471 122,908 162,009
Interest on short-term investments 2,294 2,414 4,766 4,547
-------- -------- ---------- ----------
Total interest income 651,230 663,326 1,325,091 1,290,569
INTEREST EXPENSE
Interest on deposits 160,927 169,805 328,064 329,471
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 27,605 27,068 58,202 55,518
Other borrowed funds 17,563 29,597 30,812 56,586
Interest on medium- and long-term debt 93,879 86,501 203,707 162,182
Net interest rate swap income (13,222) (13,173) (25,780) (28,501)
-------- -------- ---------- ----------
Total interest expense 286,752 299,798 595,005 575,256
-------- -------- ---------- ----------
Net interest income 364,478 363,528 730,086 715,313
Provision for credit losses 28,000 34,000 56,000 75,000
-------- -------- ---------- ----------
Net interest income after
provision for credit losses 336,478 329,528 674,086 640,313
NONINTEREST INCOME
Income from fiduciary activities 42,009 36,173 82,744 69,249
Service charges on deposit accounts 39,517 34,995 77,967 69,949
Securities gains/(losses) 11 (234) (139) 263
Other noninterest income 67,258 50,513 123,075 111,380
-------- -------- ---------- ----------
Total noninterest income 148,795 121,447 283,647 250,841
NONINTEREST EXPENSES
Salaries and employee benefits 137,994 135,443 272,761 268,358
Net occupancy expense 21,579 22,096 44,340 45,388
Equipment expense 15,167 15,165 30,291 31,233
Telecommunications expense 6,361 6,927 12,983 14,071
Other noninterest expenses 72,198 69,628 142,797 138,946
-------- -------- ---------- ----------
Total noninterest expenses 253,299 249,259 503,172 497,996
-------- -------- ---------- ----------
Income before income taxes 231,974 201,716 454,561 393,158
Provision for income taxes 81,591 72,006 159,795 139,676
-------- -------- ---------- ----------
NET INCOME $150,383 $129,710 $ 294,766 $ 253,482
======== ======== ========== ==========
Net income applicable to common stock $146,108 $125,435 $ 286,216 $ 244,932
======== ======== ========== ==========
Basic net income per common share $0.94 $0.79 $1.83 $1.54
Diluted net income per common share $0.92 $0.78 $1.80 $1.52
Cash dividends declared on common stock $49,792 $45,341 $99,965 $91,023
Dividends per common share $0.32 $0.29 $0.64 $0.57
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, 1997 $250,000 $536,487 $ - $ (22,789) $1,854,116 $ (2,245) $ - $2,615,569
Net income for 1997 - - - - 253,482 - - 253,482
Nonowner changes in equity:
Unrealized holding
gains/(losses) arising
during the period - - - 13,795 - - - 13,795
Less: Reclassification
adjustment for gains/
(losses) included in
net income - - - 263 - - - 263
Nonowner changes in equity
before income taxes - - - 13,532 - - - 13,532
Provision for income taxes
related to nonowner changes
in equity - - - 4,736 - - - 4,736
Nonowner changes in equity,
net of tax - - - 8,796 - - - 8,796
Net income and nonowner changes
in equity - - - - - - - 262,278
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
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT JUNE 30, 1997 $250,000 $528,102 $ - $ (13,993) $1,906,324 $ (2,265) $ - $2,668,168
======== ======== ========= ========= ========== ========= ========= ==========
BALANCES AT JANUARY 1, 1998 $250,000 $784,077 $ - $ (1,937) $1,731,419 $ (1,783) $ - $2,761,776
Net income for 1998 - - - - 294,766 - - 294,766
Nonowner changes in equity:
Unrealized holding gains/
(losses) arising during
the period - - - (5,168) - - - (5,168)
Less: Reclassification
adjustment for gains/
(losses) included in net
income - - - (139) - - - (139)
Nonowner changes in equity
before income taxes - - - (5,029) - - - (5,029)
Provision for income taxes
related to nonowner changes
in equity - - - (1,760) - - - (1,760)
Nonowner changes in equity,
net of tax - - - (3,269) - - - (3,269)
Net income and nonowner changes
in equity - - - - - - - 291,497
Cash dividends declared:
Preferred stock - - - - (8,550) - - (8,550)
Common stock - - - - (99,965) - - (99,965)
Purchase of 2,136,450 shares
of common stock - - - - - - (141,070) (141,070)
Purchase and retirement of
60,000 shares of common stock - (300) (3,182) - - - - (3,482)
Issuance of common stock under
employee stock plans - 2,161 18,071 - (13,447) (1,794) 21,101 26,092
Amortization of deferred
compensation - - - - - 506 - 506
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT JUNE 30, 1998 $250,000 $785,938 $ 14,889 $ (5,206) $1,904,223 $ (3,071) $(119,969) $2,826,804
======== ======== ========= ========= ========== ========== ========= ==========
/TABLE
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Six Months Ended
June 30
---------------------------
(in thousands) 1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income $ 294,766 $ 253,482
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 56,000 75,000
Depreciation 28,332 29,850
Restructuring charge (13,974) (33,944)
Net (increase) decrease in trading
account securities 3,979 (114)
Net increase in assets held for sale (22,464) (383)
Net (increase) decrease in accrued
income receivable 19,127 (6,403)
Net decrease in accrued expenses (194,383) (40,250)
Net amortization of intangibles 13,464 14,069
Other, net 154,483 (23,243)
------------ ------------
Total adjustments 44,564 14,582
------------ ------------
Net cash provided by operating
activities 339,330 268,064
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks (20,473) 19,313
Net increase in federal funds sold
and securities purchased under agreements
to resell (22,862) (92,600)
Proceeds from sale of investment securities
available for sale 36,295 155,183
Proceeds from maturity of investment
securities available for sale 611,325 522,543
Purchases of investment securities
available for sale (100,105) (735,033)
Net increase in loans (other
than purchased loans) (1,122,522) (1,507,761)
Purchase of loans (1,115) (47,909)
Net proceeds from sale of consumer
businesses 2,006,091 -
Fixed assets, net (16,776) (11,014)
Net (increase) decrease in customers'
liability on acceptances outstanding (7,860) 2,365
------------ ------------
Net cash provided by (used in)
investing activities 1,361,998 (1,694,913)
FINANCING ACTIVITIES:
Net increase in deposits 32,316 309,368
Net increase (decrease) in short-term
borrowings 398,617 (454,625)
Net increase (decrease) in acceptances
outstanding 7,862 (2,365)
Proceeds from issuance of medium- and
long-term debt 1,500,000 3,230,000
Repayments and purchases of medium- and
long-term debt (3,124,207) (1,401,226)
Proceeds from issuance of common stock
and other capital transactions 27,886 21,747
Purchase of common stock for treasury
and retirement (144,552) (131,833)
Dividends paid (103,874) (96,126)
------------ ------------
Net cash provided by (used in)
financing activities (1,405,952) 1,474,940
------------ ------------
Net increase in cash and due from banks 295,367 48,091
Cash and due from banks at beginning of year 1,927,087 1,901,760
------------ ------------
Cash and due from banks at end of period $ 2,222,463 $ 1,949,851
============ ============
Interest paid $ 658,920 $ 572,773
============ ============
Income taxes paid $ 150,107 $ 152,185
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 2,355 $ 3,705
============ ============
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, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
The Corporation may use derivative financial instruments, including
foreign exchange contracts, 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 1997 annual report.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June
15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter. The Corporation expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Corporation to
recognize all derivatives on the balance sheet at fair value. Derivatives
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The
Corporation has not yet determined what the effect of Statement 133 will
be on the earnings and financial position of the Corporation.
Note 2 - Investment Securities
At June 30, 1998, investment securities having a carrying value of
$2.3 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 $21 million.
Note 3 - Allowance for Credit Losses
The following analyzes the changes in the allowance for credit
losses included in the consolidated balance sheets:
(in thousands) 1998 1997
--------- ---------
Balance at January 1 $ 424,147 $ 367,165
Charge offs (66,630) (59,537)
Recoveries 25,358 21,897
--------- ---------
Net charge offs (41,272) (37,640)
Provision for credit losses 56,000 75,000
--------- ---------
Balance at June 30 $ 438,875 $ 404,525
========= =========
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 $79 million and $74 million for the
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Credit Losses (continued)
quarter and six months ended June 30, 1998, compared to $52 million and
$65 million for the comparable periods last year. The following are
period-end balances:
(in thousands) June 30, 1998 December 31, 1997
------------- -----------------
Total impaired loans $72,650 $70,470
Impaired loans requiring
an allowance 38,561 60,376
Impairment allowance 7,087 20,358
Those impaired loans not requiring an allowance represent loans for which
the fair value exceeded the recorded investment in the loan.
9
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,
1998 and December 31, 1997:
(in thousands) June 30, 1998 December 31, 1997
------------- -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,923 $ 74,877
10.125% subordinated debentures
due 1998 - 74,965
7.25% subordinated notes due
2007 148,586 148,509
---------- ----------
Total parent company 223,509 298,351
Subsidiaries
Subordinated notes:
7.25% subordinated notes due
2007 198,200 198,100
7.875% subordinated notes due
2026 146,967 146,914
8.375% subordinated notes due
2024 147,976 147,938
7.25% subordinated notes due
2002 149,324 149,246
6.875% subordinated notes due
2008 99,258 99,220
7.125% subordinated notes due
2013 148,279 148,224
---------- ----------
Total subordinated notes 890,004 889,642
Medium-term notes:
Floating rate based on Treasury
bill indices 486,998 487,000
Floating rate based on Prime
indices 350,000 1,100,007
Floating rate based on LIBOR
indices 3,311,926 2,811,793
Floating rate based on Federal
Funds indices - 349,998
Fixed rate notes with interest
rates ranging from 5.97%
to 6.65% 399,743 1,349,596
---------- ----------
Total medium-term notes 4,548,667 6,098,394
Total subsidiaries 5,438,671 6,988,036
---------- ----------
Total medium- and long-term
debt $5,662,180 $7,286,387
========== ==========
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory
federal income tax rates to income before income taxes as reported in the
financial statements after deducting non-taxable items, principally
interest income on state and municipal securities. State and foreign
taxes are then added to the federal provision.
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
June 30, 1998 December 31, 1997
------------------------------ ------------------------------
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) $ 7,465 $159 $ (3) $ 156 $ 8,515 $137 $ (14) $ 123
Floors purchased 50 - - - 52 - - -
Foreign exchange contracts
Spot and forward 779 11 (14) (3) 445 12 (9) 3
Swaps 127 5 - 5 154 5 - 5
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 8,421 175 (17) 158 9,166 154 (23) 131
Customer Initiated and
Other
Interest rate contracts
Caps and floors
written 277 - - - 314 - - -
Caps and floors
purchased 160 - - - 32 - - -
Swaps 160 4 (4) - 150 6 (6) -
Foreign exchange contracts
Spot, forward and
options 596 6 (2) 4 1,837 37 (33) 4
------- ---- ----- ----- ------- ---- ----- -----
Total customer
initiated and other 1,193 10 (6) 4 2,333 43 (39) 4
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange
contracts $ 9,614 $185 $ (23) $ 162 $11,499 $197 $ (62) $ 135
======= ==== ===== ===== ======= ==== ===== =====
(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 $2,851 million and $3,521
million at June 30, 1998 and December 31, 1997, respectively. These swaps had net unrealized
gains of $9 million and net unrealized losses of $4 million at June 30, 1998 and December 31,
1997, respectively. As of June 30, 1998 index amortizing swaps had an average expected life
of approximately 2 years with a stated maturity that averaged 4 years.
/TABLE
12
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.
The Corporation principally utilizes interest rate swaps with the
objective of managing the sensitivity of net interest income to interest
rate fluctuations. To accomplish this objective, the Corporation
primarily uses interest rate swaps 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 June 30, 1998. The swaps are grouped by the assets or
liabilities to which they have been designated.
13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
- -----------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
2003- Dec. 31,
(dollar amounts in millions) 1998 1999 2000 2001 2002 2026 Total 1997
-----------------------------------------------------------------------------------------
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ - $ 700 $1,625 $ - $ - $2,325 $ 700
Amortizing - - - - - - - 100
Index amortizing 507 919 652 302 321 136 2,837 3,504
Weighted average: (1)
Receive rate 6.34% 6.36% 6.35% 6.06% 6.42% 6.20% 6.24% 6.33%
Pay rate 5.68% 5.69% 5.69% 5.69% 5.68% 5.66% 5.69% 5.90%
Floating/floating swaps $ - $ - $ - $ - $ - $ - $ - $ 55
Fixed rate asset designation:
Pay fixed swaps
Generic $ - $ 2 $ - $ - $ - $ - $ 2 $ 2
Index amortizing 3 2 9 - - - 14 17
Weighted average: (1)
Receive rate 5.66% 5.70% 5.66% -% -% -% 5.67% 5.97%
Pay rate 5.34% 7.21% 5.34% -% -% -% 5.76% 5.85%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ 200 $ - $ 200 $ - $150 $ 900 $1,450 $2,200
Weighted average: (1)
Receive rate 5.97% -% 6.91% -% 7.37% 7.66% 7.29% 6.84%
Pay rate 5.56% -% 5.69% -% 5.69% 5.69% 5.67% 5.83%
Floating/floating swaps $ 800 $ - $ 37 $ - $ - $ - $ 837 $1,937
Weighted average: (2)
Receive rate 5.67% -% 5.55% -% -% -% 5.67% 5.73%
Pay rate 5.59% -% 5.68% -% -% -% 5.59% 5.77%
Total notional amount $1,510 $ 923 $1,598 $1,927 $471 $1,036 $7,465 $8,515
- -----------------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR rates paid or received at June 30, 1998.
(2) Variable rates paid are based on LIBOR at June 30, 1998, while variable rates
received are based on prime.
- -----------------------------------------------------------------------------------------
/TABLE
14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
The Corporation also uses various other types of off-balance sheet
financial instruments 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 June 30, 1998 and December 31, 1997, the notional amounts
of commitments to purchase and sell U.S. Treasury and municipal bond
securities related to the Corporation's trading account totaled $78
million and $2 million, respectively. The notional amounts of commitments
to sell mortgage loans totaled $30 million at December 31, 1997. No such
commitments were outstanding at June 30, 1998. 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. The Corporation
minimizes market risk arising from customer initiated foreign exchange
contracts and forward rate agreements by entering into offsetting
transactions. Average fair values and income from customer initiated and
other foreign exchange contracts were not material for the six-month
period ended June 30, 1998 and for the year ended December 31, 1997.
Customer initiated interest rate caps generally are not offset by
other on- or off-balance sheet financial instruments; however, the
Corporation has established authority limits for engaging in these
transactions in order to minimize risk exposure. As a result, average
fair values and income from this activity were not material for the six-
month period ended June 30, 1998 and for the year ended December 31, 1997.
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 $1.4 billion at
15
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
June 30, 1998 and $1.8 billion at December 31, 1997. Management believes
that market risk exposure arising from these revolving credit commitments
is very limited, however, since it is unlikely that a significant number
of customers with these accounts will simultaneously borrow up to their
maximum available credit lines.
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, 1997 $ 8,567 $ 599 $ 496 $ 1,837
Additions 1,627 3,241 281 18,940
Maturities/amortizations (2,624) (2,934) (180) (20,181)
Terminations (55) - - -
------- ------- ----- --------
Balances at June 30, 1998 $ 7,515 $ 906 $ 597 $ 596
======= ======= ===== ========
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 1997 annual report on page 33 and in Notes
1 and 18 to the consolidated financial statements.
16
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
-----------------------
Results of Operations
- ---------------------
Net income for the second quarter ended June 30, 1998 was $150
million, up $20 million, or 16 percent, from $130 million reported for the
second quarter of 1997. Diluted net income per share increased 18 percent
to $0.92 from $0.78 a year ago. Return on average common shareholders'
equity was 22.57 percent and return on average assets was 1.74 percent,
compared to 21.31 percent and 1.49 percent, respectively, for the
comparable quarter last year.
Net income for the first six months of 1998 was $1.80 per share or
$295 million, compared to $1.52 or $253 million for the same period in
1997, increases of 18 percent and 16 percent, respectively. Return on
average common shareholders' equity was 22.33 percent and return on assets
was 1.67 percent for the first six months of 1998, compared to 20.86
percent and 1.48 percent, respectively, for the first six months of 1997.
On January 15, 1998, the Corporation's board of directors declared
a three-for-two stock split, effected in the form of a 50 percent stock
dividend paid on April 1, 1998, as well as increased the quarterly cash
dividend 12 percent to $0.32 per share. All per share data included in
the financial statements and managements discussion and analysis have been
retroactively adjusted to reflect the split.
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 (FTE) basis
for the quarter ended June 30, 1998. On a FTE basis, net interest income
was $366 million for the three months ended June 30, 1998, unchanged from
the comparable quarter in 1997. Net interest income and the net interest
margin were both affected by the sale of $2.0 billion of indirect consumer
loans and non-relationship credit card receivables. Excluding the impact
of the consumer sale, net interest income would have increased 4 percent,
primarily due to a 20 percent increase in average commercial loans. The
net interest margin for the three months ended June 30, 1998, was 4.62
17
percent, an increase of 5 basis points from 4.57 percent for the second
quarter of 1997.
Table II provides an analysis of net interest income for the first
six months of 1998. On a FTE basis, net interest income for the six
months ended June 30, 1998, was $734 million compared to $720 million for
the same period in 1997. This increase is primarily attributed to the
growth in commercial loans cited in the quarterly discussion. The net
interest margin for the six months ended June 30, 1998, was 4.56 percent
compared to 4.58 percent for the same period in 1997.
Net income generated by the risk management interest rate swap
portfolio resulted in a contribution of 17 basis points to the net
interest margin in the second quarter of 1998, compared to a 16 basis-
point contribution in the year-earlier quarter. The contribution for the
first six months of 1998 was 16 basis points compared to an 18 basis-point
contribution in 1997. 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, 1998, the Corporation was
in an asset sensitive position of $2.6 billion (on an elasticity adjusted
basis), or 8 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, 1998 for a 200 basis point decline in short-term
interest rates identified approximately $35 million, or 2 percent, of net
interest income at risk during the next 12 months. If short-term interest
18
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $28,143 $591 8.42% $27,046 $579 8.59%
Investment securities 3,500 60 6.81 4,806 84 6.90
Other earning assets 160 2 5.92 157 3 6.24
- ----------------------------------------------------------------------------------------------
Total earning assets 31,803 653 8.23 32,009 666 8.32
Interest-bearing deposits 15,931 161 4.05 16,412 170 4.15
Short-term borrowings 3,223 45 5.62 4,140 57 5.49
Medium- and long-term debt 6,087 94 6.18 5,525 86 6.28
Net interest rate swap (income)/
expense (1) - (13) - - (13) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,241 287 4.56 $26,077 300 4.61
-------------- ---------------
Net interest income/
Rate spread (FTE) $366 3.67 $366 3.71
==== ====
FTE adjustment $ 2 $ 2
==== ====
Impact of net noninterest-bearing
sources of funds 0.95 0.86
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.62% 4.57%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended June 30, 1998, to the related assets and liabilities, the average yield on total loans
was 8.52 percent as of June 30, 1998, compared to 8.68 percent a year ago. The average cost of
funds for medium- and long-term debt was 5.73 percent as of June 30, 1998, compared to 5.80 percent
a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 1 $ 11 $ 12
Investment securities (1) (23) (24)
Other earning assets (1) - (1)
------------------------------
Total earning assets (1) (12) (13)
Interest-bearing deposits 1 (10) (9)
Short-term borrowings 1 (13) (12)
Medium- and long-term debt (1) 9 8
Net interest rate swap
(income)/expense - - -
------------------------------
Total interest-bearing sources 1 (14) (13)
------------------------------
Net interest income/Rate spread (FTE) $ (2) $ 2 $ -
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
19
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Six Months Ended
-------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $28,530 $1,199 8.46% $26,640 $1,126 8.51%
Investment securities 3,673 125 6.83 4,776 165 6.86
Other earning assets 164 5 5.94 149 4 6.20
- ----------------------------------------------------------------------------------------------
Total earning assets 32,367 1,329 8.27 31,565 1,295 8.24
Interest-bearing deposits 16,116 328 4.11 16,186 329 4.10
Short-term borrowings 3,214 89 5.58 4,195 112 5.39
Medium- and long-term debt 6,618 204 6.20 5,189 162 6.29
Net interest rate swap
(income)/expense (1) - (26) - - (28) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,948 595 4.62 $25,570 575 4.53
----------------- ------------------
Net interest income/
Rate spread (FTE) $ 734 3.65 $ 720 3.71
====== ======
FTE adjustment $ 4 $ 5
====== ======
Impact of net noninterest-bearing
sources of funds 0.91 0.87
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.56% 4.58%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the six
months ended June 30, 1998, to the related assets and liabilities, the average yield on total
loans was 8.55 percent as of June 30, 1998, compared to 8.63 percent a year ago. The average
cost of funds for medium- and long-term debt was 5.79 percent as of June 30, 1998 and 1997.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 9 $ 64 $ 73
Investment securities (3) (37) (40)
Other earning assets - 1 1
------------------------------
Total earning assets 6 28 34
Interest-bearing deposits 3 (4) (1)
Short-term borrowings 4 (27) (23)
Medium- and long-term debt (2) 44 42
Net interest rate swap
(income)/expense 2 - 2
------------------------------
Total interest-bearing sources 7 13 20
------------------------------
Net interest income/Rate spread (FTE) $ (1) $ 15 $ 14
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
20
rates rise 200 basis points, net interest income would be enhanced by
approximately $18 million, or 1 percent. The results of these simulations
are within established corporate policy guidelines.
Provision for Credit Losses
- ---------------------------
The provision for credit losses for the second quarter of 1998 was
$28 million, a decrease of $6 million from the second quarter of 1997.
The provision for the first six months of 1998 was $56 million compared to
$75 million for the same period in 1997. The Corporation establishes this
provision to maintain an adequate allowance for credit losses, which is
discussed in the section entitled "Allowance for Credit Losses and
Nonperforming Assets."
Noninterest Income
- ------------------
Noninterest income was $149 million for the three months ended June
30, 1998, an increase of $28 million, or 23 percent over the same period
in 1997. Included in second quarter 1998 noninterest income is a $9
million gain on the aforementioned sale of consumer loans and the mortgage
servicing business. Excluding the effect of certain nonrecurring items and
divestitures in both periods, noninterest income increased 15 percent in
the second quarter of 1998 compared to the second quarter of 1997.
Accounting for the majority of this increase were higher levels of
fiduciary income, service charges, brokerage fees and commercial fee
income. For the first six months of 1998, noninterest income was $284
million, an increase of $33 million, or 13 percent, from the first six
months of 1997.
Noninterest Expenses
- --------------------
Noninterest expenses were $253 million for the second quarter ended
June 30, 1998, an increase of $4 million, or 2 percent, from the second
quarter of 1997. For the first six months of 1998, noninterest expenses
were $503 million, an increase of $5 million, or 1 percent, from the first
21
six months of 1997. These nominal increases reflect management's
continued focus on efficiency and recognition of the positive effects of
the Corporation's Direction 2000: Phase III program to improve
efficiency, revenue and customer service.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the second quarter of 1998
totaled $82 million, an increase of 13 percent compared to $72 million
reported for the same period a year ago. The provision for the first six
months of 1998 was $160 million compared to $140 million for the same
period in 1997. The effective tax rate was 35 percent for the second
quarter and the first six months of 1998 compared to 36 percent for the
comparable periods in 1997.
Strategic Lines of Business
- ---------------------------
The Corporation has strategically aligned its operations into three
major lines of business: the Business Bank, the Individual Bank and the
Investment Bank. The following table presents the financial results of
these business lines for the six months ended June 30, 1998 and 1997. For
a description of the business activities of each line of business and the
methodologies which form the basis for these results, refer to the
discussion entitled "Strategic Lines of Business" on page 26 of the
Corporation's 1997 annual report.
22
Table III - Strategic Lines of Business Financial Results
Six Months Ended June 30
Business Individual Investment
Bank Bank Bank* Other Total
- -----------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1998** 1997 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Average assets $22,129 $19,113 $8,320 $9,518 $ 41 $ 24 $4,780 $5,691 $35,270 $34,346
Total revenues (FTE) 430 378 503 505 61 50 24 38 1,018 971
Net income 175 158 143 122 3 2 (26) (29) 295 253
Return on average
assets 1.60% 1.67% 1.59% 1.39% 5.40% 4.48% -0.47% -0.51% 1.67% 1.48%
Return on average
common equity 27.66% 30.68% 37.34% 32.07% 21.61% 16.49% -10.92% -11.34% 22.33% 20.86%
* Net income was reduced by charges for fees internally transferred to other lines of business for referrals to
the Investment Bank. If excluded, Investment Bank net income would have been $5 million and $3 million, and
return on average common equity would have been 39.99% and 23.68%, in 1998 and 1997, respectively.
** Financial results for the Individual Bank for 1998 were affected by the sale of $2.0 billion of indirect
consumer loans and non-relationship credit card receivables and the mortgage servicing business. Net income
includes a $9 million gain and reflects the reduction of the Individual Bank's allowance for loan losses as
a result of the sale.
23
Financial Condition
- -------------------
Total assets were $35.1 billion at June 30, 1998, compared with $36.3
billion at December 31, 1997. The Corporation has continued to generate
commercial loan growth in 1998. Since December 31, 1997, commercial loans
have increased $1.1 billion, or 7 percent. Total loans decreased $892
million, or 3 percent, since year-end 1997 as a result of the sale of $2.0
billion of indirect consumer loans and certain credit card receivables in
the Individual Bank. The increase in commercial loans was partially
funded by runoff of investment securities, which declined $609 million, or
15 percent, since December 31, 1997.
Total liabilities decreased $1.3 billion, or 4 percent, to $32.2
billion since December 31, 1997. Medium- and long-term debt decreased
$1.6 billion, or 22 percent, primarily as a result of the consumer loan
sales. This decrease was partially offset by a $456 million increase in
federal funds purchased and securities sold under agreements to
repurchase.
Allowance for Credit Losses and Nonperforming Assets
- ----------------------------------------------------
The Corporation maintains the allowance for credit losses at a level
that in management's judgement is adequate to provide for estimated
probable credit losses inherent in on- and off-balance sheet credit
exposure. The allowance for credit losses attributable to off-balance
sheet exposure is not material. Management determines the adequacy of the
allowance for credit 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 credit 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, the
Corporation cannot assure that the actual loss ratios will not vary from
those projected.
24
At June 30, 1998, the allowance for credit losses was $439 million,
an increase of $15 million, or 3 percent, since December 31, 1997. The
allowance as a percentage of total loans increased to 1.57 percent,
compared to 1.47 percent at December 31, 1997. As a percentage of total
nonperforming assets, the allowance increased from 413 percent at year-end
1997 to 458 percent at June 30, 1998.
Net charge-offs for the second quarter of 1998 were $19 million, or
0.27 percent of average total loans, compared with $21 million, or 0.31
percent, for the year-earlier quarter. Net charge-offs for the first six
months of 1998 were $41 million, or 0.29 percent of average total loans,
compared with $38 million, or 0.28 percent, for the same period last year.
An analysis of the allowance for credit losses is presented in Note 5 to
the consolidated financial statements.
Nonperforming assets decreased $7 million, or 7 percent, since
December 31, 1997, and were categorized as follows:
June 30, December 31,
(in thousands) 1998 1997
------------- ------------
Nonaccrual loans:
Commercial $ 64,273 $ 58,914
International 4,500 1,000
Real estate construction 2,092 3,438
Commercial mortgage 6,405 11,088
Residential mortgage 3,744 3,719
------------- ------------
Total nonaccrual loans 81,014 78,159
Reduced-rate loans 8,260 7,583
------------- ------------
Total nonperforming loans 89,274 85,742
Other real estate 6,591 17,046
------------- ------------
Total nonperforming assets $ 95,865 $ 102,788
============= ============
Loans past due 90 days or more $ 37,423 $ 52,805
============= ============
Nonperforming assets as a percentage of total loans and other real
estate at June 30, 1998 and December 31, 1997, were 0.34 percent and 0.36
percent, respectively.
25
Capital
- -------
Common shareholders' equity was up $68 million from December 31,
1997 to June 30, 1998, excluding the change in unrealized gains/(losses)
on investment securities available for sale. The increase was primarily
due to the retention of $186 million in earnings, offset by the repurchase
of 2.2 million shares of common stock under various corporate programs.
Capital ratios exceed minimum regulatory requirements. Previously
reported risk-based capital ratios were revised as a result of corrections
to the data used to determine risk-based assets. The revised ratios at
June 30, 1998 were as follows:
June 30, 1998
-------------
Leverage ratio (3.00 - minimum) 7.52%
Tier 1 risk-based capital ratio (4.0 - minimum) 6.47
Total risk-based capital ratio (8.0 - minimum) 10.09
At June 30, 1998, the capital ratios of all the Corporation's
banking subsidiaries exceeded the minimum ratios required of "well
capitalized" institutions as defined in the final rule under FDICIA.
Other Matters
- -------------
Included in this report are forward-looking statements based on
management's current expectations and/or the assumptions made in the
earnings simulation analyses, but numerous factors could cause variances
in these projections, and their underlying assumptions, such as changes in
interest rates, the industries where the Corporation has a concentration
of loans, changes in the level of fee income, economic conditions and
continuing consolidations in the banking industry.
26
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(10.1)* Employment Agreement dated May 29, 1998 between the
Corporation and Ralph W. Babb.
(10.2)* Supplemental Pension and Retiree Medical Agreement dated May
29, 1998 between the Corporation and Ralph W. Babb.
(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 six
months ended June 30, 1998.
* Management compensation arrangement
27
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
Senior Vice President and Controller
(Principal Accounting Officer)
Date: August 6, 1998