1996 HIGHLIGHTS
FOCUSED ON PERFORMANCE
- - Initiated a major corporate program to improve efficiency, revenue and
customer service. Comerica expects to ultimately realize annual pre-tax
benefits of approximately $110 million. As a result of the program,
Comerica recorded a pre-tax restructuring charge in 1996 of $90 million
($60 million after tax, or $0.53 per share).
- - Earned 15.98 percent on average common shareholders' equity (18.33 percent
excluding the restructuring charge), compared to 16.46 percent in 1995.
- - Returned 1.22 percent on average assets (1.40 percent excluding the
restructuring charge), compared to 1.21 percent in 1995.
REPORTED RECORD EARNINGS
- - Recorded net income of $417 million, or $3.55 per share (excluding the
restructuring charge, net income for 1996 increased $60 million to $477
million, or $4.08 per share), compared with $413 million, or $3.54 per
share for 1995.
SUSTAINED GROWTH
- - Maintained average total assets at $34 billion (increased 2 percent
excluding the sale of Comerica Bank-Illinois).
- - Reached $25 billion in average total loans, an 8 percent increase (10
percent increase excluding the sale of Comerica Bank-Illinois).
- - Reached $22 billion in average total deposits, a 3 percent increase (5
percent increase excluding the sale of Comerica Bank-Illinois).
- - Increased average shareholders' equity $176 million to $2.7 billion.
ENHANCED SHAREHOLDERS' RETURN
- - Announced a share buyback program for 15 million shares and repurchased 13
million shares in 1996.
- - Raised the quarterly cash dividend 11 percent to $0.39 per share.
- - Declared annual cash dividends of $1.52 per share.
IMPLEMENTED KEY STRATEGIES
- - Completed the acquisition of the $1.1 billion Metrobank in California for
$125 million of common stock.
- - Divested the following businesses after determining that the investment in
these companies did not provide a superior return to shareholders.
- Sold the $1.4 billion Illinois bank subsidiary for approximately $160
million in cash and recorded a $6 million pre-tax gain.
- Sold the business and certain assets of John V. Carr & Son, Inc., the
wholly owned customs brokerage and freight forwarding subsidiary,
which resulted in a $9 million pre-tax charge.
- Announced the sale of the bond indenture services business, which
closed in the first quarter of 1997.
- Completed a merchant services strategic alliance with National Data
Corporation (NDC) to enhance services to customers and gain
operational efficiencies using NDC's technical expertise and recorded
a gain of $13 million.
- - Issued 5 million shares of Fixed/Adjustable Rate Noncumulative Preferred
Stock, Series E, with a stated value of $50 per share, to economically
support capital ratios during the share repurchase program.
RETURN ON AVERAGE ASSETS
(IN PERCENTAGES)
[EDGAR REPRESENTATION OF GRAPHIC]
Bar graph depicting the Corporation's return on average assets (in
percentages) from 1992 to 1996 compared to an industry average.
1992 1993 1994 1995 1996
--------------------------------------
Comerica 0.91 1.25 1.23 1.21 1.22
Excluding Restructuring Charge 1.25 1.40
Industry Average 0.83 1.15 1.11 1.12 1.26
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent (FTE) basis, is the
difference between interest earned on assets, including certain yield related
fees, and interest paid on liabilities. Adjustments are made to the yields on
tax-exempt assets in order to present tax-exempt income and fully taxable income
on a comparable basis. Net interest income (FTE) comprised 74 percent of net
revenues, compared to 73 percent in 1995 and 74 percent in 1994.
NET INTEREST INCOME
[EDGAR REPRESENTATION OF GRAPHIC]
Bar graph depicting the Corporation's net interest income -- FTE (in
millions), with a line showing net interest margin -- FTE (percent of earning
assets), from 1992 to 1996.
1992 1993 1994 1995 1996
--------------------------------------
Net Interest Income (FTE) 1,159 1,163 1,254 1,321 1,427
Net Interest Margin (FTE) 4.73 4.65 4.32 4.19 4.54
14
TABLE 2: ANALYSIS OF NET INTEREST INCOME-FTE
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(dollar amounts in millions) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial loans $12,686 $1,041 8.21% $11,302 $ 989 8.75% $ 9,598 $ 709 7.38%
International loans 1,541 102 6.64 1,257 89 7.06 1,107 62 5.58
Real estate construction loans 707 65 9.22 541 52 9.52 403 32 7.85
Commercial mortgage loans 3,483 324 9.29 3,157 297 9.40 2,916 248 8.52
Residential mortgage loans 1,960 153 7.83 2,450 191 7.80 2,175 162 7.46
Consumer loans 4,624 457 9.88 4,569 461 10.10 3,795 358 9.44
Lease financing 351 24 6.82 285 19 6.65 217 14 6.48
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans (1) 25,352 2,166 8.54 23,561 2,098 8.90 20,211 1,585 7.84
Taxable securities 5,528 371 6.63 7,226 473 6.52 7,542 444 5.89
Securities exempt from federal
income taxes 295 28 9.96 399 41 10.43 462 49 10.51
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 5,823 399 6.79 7,625 514 6.72 8,004 493 6.15
Interest-bearing deposits with banks 32 2 5.71 126 8 6.39 552 22 3.96
Federal funds sold and securities
purchased under agreements to resell 95 5 5.35 124 7 5.97 116 5 4.06
Trading account securities 4 1 7.94 5 -- 6.51 5 -- 1.67
Loans held for sale 64 5 7.68 96 8 7.75 150 11 7.31
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 31,370 2,578 8.20 31,537 2,635 8.35 29,038 2,116 7.28
Cash and due from banks 1,576 1,500 1,532
Allowance for loan losses (361) (340) (322)
Accrued income and other assets 1,610 1,432 1,203
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $34,195 $34,129 $31,451
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Money market and NOW accounts $ 6,913 231 3.33 $ 6,411 217 3.39 $ 6,592 173 2.62
Savings deposits 2,026 44 2.18 2,277 48 2.14 2,536 53 2.08
Certificates of deposit 6,887 365 5.30 6,358 344 5.41 5,681 239 4.21
Foreign office deposits (2) 843 46 5.46 1,842 112 6.07 1,816 78 4.28
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 16,669 686 4.11 16,888 721 4.27 16,625 543 3.26
Federal funds purchased and securities
sold under agreements to repurchase 2,106 112 5.31 2,816 166 5.88 2,817 121 4.31
Other borrowed funds 1,999 107 5.36 2,313 136 5.87 2,002 79 3.92
Medium- and long-term debt 4,745 295 6.22 4,510 289 6.41 2,708 148 5.46
Other (3) -- (49) -- -- 2 -- -- (29) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing sources 25,519 1,151 4.51 26,527 1,314 4.95 24,152 862 3.57
Noninterest-bearing deposits 5,589 4,767 4,700
Accrued expenses and other liabilities 400 324 286
Preferred stock 133 -- --
Common shareholders' equity 2,554 2,511 2,313
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $34,195 $34,129 $31,451
------- ------- -------
------- ------- -------
Net interest income/rate spread (FTE) $1,427 3.69 $1,321 3.40 $1,254 3.71
------ ------ ------
------ ------ ------
FTE adjustment (4) $ 15 $ 21 $ 24
------ ------ ------
------ ------ ------
Impact of net noninterest-bearing
sources of funds 0.85 0.79 0.61
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin (as a percent of
average earning assets) (FTE) 4.54% 4.19% 4.32%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Nonaccrual loans are included in average balances reported and are used to
calculate rates.
(2) Includes substantially all deposits by foreign depositors; deposits are in
excess of $100,000.
(3) Net interest rate swap (income)/expense. If swap (income)/expense were
allocated, average rates on total loans would have been 8.66% in 1996,
8.84% in 1995 and 7.75% in 1994; average rates on medium- and long-term
debt would have been 5.80% in 1996, 6.14% in 1995 and 5.10% in 1994.
(4) The FTE adjustment is computed using a federal income tax rate of 35%.
15
Net interest income (FTE) rose 8 percent to $1,427 million in 1996. The primary
cause was an improvement in net interest margin due to a favorable change in the
mix of earning assets, the basis for which was a 12 percent increase in average
commercial loans.
The net interest margin for 1996 increased 35 basis points to 4.54 percent
from 4.19 percent last year, principally due to a favorable shift in the mix
of earning assets. The Corporation primarily funded the growth in higher
yielding loans with sales of thin margin, floating rate investment securities
and runoff of fixed rate investment securities. This shifted the structure of
the balance sheet, placing a heavier emphasis on higher spread loans and
reducing the reliance on investment securities.
TABLE 3: RATE-VOLUME ANALYSIS-FTE
1996 / 1995 1995 / 1994
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE INCREASE NET INCREASE INCREASE NET
(DECREASE) (DECREASE) INCREASE (DECREASE) (DECREASE) INCREASE
(in millions) DUE TO RATE DUE TO VOLUME* (DECREASE) DUE TO RATE DUE TO VOLUME* (DECREASE)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest income (FTE)
Commercial loans $ (62) $114 $ 52 $131 $149 $280
International loans (6) 19 13 16 11 27
Real estate construction loans (2) 15 13 7 13 20
Commercial mortgage loans (3) 30 27 26 23 49
Residential mortgage loans 1 (39) (38) 7 22 29
Consumer loans (10) 6 (4) 25 78 103
Lease financing -- 5 5 -- 5 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans (82) 150 68 212 301 513
Taxable securities 12 (114) (102) 48 (19) 29
Securities exempt from federal income
taxes (3) (10) (13) (1) (7) (8)
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 9 (124) (115) 47 (26) 21
Interest-bearing deposits with banks (1) (5) (6) 13 (27) (14)
Federal funds sold and securities
purchased under agreements to resell (1) (1) (2) 2 -- 2
Trading account securities 1 -- 1 -- -- --
Loans held for sale -- (3) (3) 1 (4) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income (FTE) (74) 17 (57) 275 244 519
Interest expense
Money market and NOW accounts (3) 17 14 50 (6) 44
Savings deposits 1 (5) (4) 1 (6) (5)
Certificates of deposit (7) 28 21 68 37 105
Foreign office deposits (11) (55) (66) 32 2 34
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (20) (15) (35) 151 27 178
Federal funds purchased and securities
sold under agreements to repurchase (16) (38) (54) 45 -- 45
Other borrowed funds (12) (17) (29) 39 18 57
Medium- and long-term debt (9) 15 6 26 115 141
Other (1) (51) -- (51) 31 -- 31
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense (108) (55) (163) 292 160 452
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) $ 34 $ 72 $106 $(17) $ 84 $ 67
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
* Rate/volume variances are allocated to variances due to volume.
(1) Net interest rate swap income.
16
The Corporation implemented various asset and liability management strategies in
1996 to minimize exposure to net interest margin risk, which represents the
potential reduction in net interest income that may result from rate spread
compression between, for example, prime and market rates or core deposit and
money market rates. Such strategies included permitting investment securities to
run off in order to facilitate growth in higher-yielding loans. Off-balance
sheet interest rate swaps were also entered into during the first half of the
year to effectively fix the high yields on certain variable rate loans and alter
the interest rate characteristics of debt issued throughout the year. Refer to
page 26 of this financial review for additional information regarding the
Corporation's asset and liability management policies.
In 1995, net interest income (FTE) increased 5 percent over 1994, benefiting
from strong growth in average earning assets, primarily commercial and consumer
loans. However, the net interest margin for 1995 declined 13 basis points from
1994, principally from competition in asset pricing and continued compression in
rate spreads caused by higher funding costs. In addition, significant loan
growth coupled with runoff in investment securities and temporary investments
shifted the balance sheet structure to an asset sensitive position for most of
1995.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's assessment of possible
losses inherent in the Corporation's loan portfolio and is determined based on
the application of projected loss ratios to risk-rated loans, both individually
and by category. Projected loss ratios incorporate factors such as recent loan
loss experience, current economic conditions and trends, geographic dispersion
of borrowers, trends with respect to past due and nonaccrual amounts, risk
characteristics of various categories and concentrations of loans, and transfer
risks. The provision for loan losses reflects management's evaluation of the
adequacy of the allowance for loan losses. This evaluation is performed on a
quarterly basis.
The provision for loan losses was $114 million in 1996, compared to $87 million
in 1995 and $56 million in 1994. The provision increase in 1996 primarily
reflects higher net charge-offs related to bankcard portfolios, mostly generated
with early 1995 promotions. Management took steps in 1995 to reduce potential
losses in the consumer loan portfolio by tightening the credit criteria used for
bank-card marketing purposes. In late 1995, the Corporation sold $333 million of
the bankcard portfolio. Net charge-offs related to the sold portfolio accounted
for $27 million of the $28 million increase in total net charge-offs between
1994 and 1995.
Total net charge-offs increased to $85 million in 1996, compared to $76 million
and $48 million in 1995 and 1994, respectively. The ratio of net loans charged
off to average total loans increased to 0.33 percent in 1996 from 0.32 percent
in 1995. Commercial loan net charge-offs as a percentage of average commercial
loans were 0.12 percent for 1996, the same as in 1995. Consumer loan net charge-
offs as a percentage of average consumer loans were 1.57 percent and 1.31
percent for 1996 and 1995, respectively. The rise in net consumer loan charge-
offs was primarily the result of bankcard charge-offs.
NET LOANS CHARGED OFF TO AVERAGE LOANS
(IN PERCENTAGES)
[EDGAR REPRESENTATION OF GRAPHIC]
Bar graph depicting the Corporation's net loans charged off to average loans
(in percentages) from 1992 to 1996 compared to an industry average.
1992 1993 1994 1995 1996
--------------------------------------
Comerica 0.57 0.43 0.24 0.32 0.33
Industry Average 1.42 0.96 0.51 0.53 0.51
At December 31, 1996, the allowance for loan losses was $367 million, an
increase of $26 million since year-end 1995. Due to the magnitude of loan
growth during 1996, the allowance as a percentage of total loans remained at
1.40 percent, the same as December 31, 1995. However, the allowance as a
percentage of total nonperforming assets increased significantly to 263
percent at December 31, 1996 from 209 percent at year-end 1995.
An estimated allocation of the allowance for loan losses is provided in Table 8
on page 23. The increase in the allowance allocated to consumer loans primarily
reflects a higher level of past due bankcard accounts similar to that
experienced by the industry as a whole.
NONINTEREST INCOME
Year Ended December 31
(in millions) 1996 1995 1994
- ------------------------------------------------------------------------------
Income from fiduciary activities $133 $125 $122
Service charges on deposit accounts 140 130 124
Revolving credit fees 23 36 24
Securities gains 14 12 3
Other 186 160 136
- ------------------------------------------------------------------------------
Subtotal 496 463 409
Customhouse broker fees 11 36 41
- ------------------------------------------------------------------------------
Total noninterest income $507 $499 $450
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
17
TABLE 4: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Year Ended December 31
(dollar amounts in millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $341 $326 $299 $308 $279
Allowance of institutions and loans purchased/sold (3) 4 19 -- 17
Loans charged off
Domestic
Commercial 33 33 25 36 47
Real estate construction 1 3 1 1 4
Commercial mortgage 5 8 17 20 8
Residential mortgage 1 2 -- 1 1
Consumer 86 73 40 52 60
Lease financing -- -- -- -- 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans charged off 126 119 83 110 121
Recoveries
Domestic
Commercial 18 19 15 18 9
Real estate construction 1 3 -- -- 1
Commercial mortgage 9 8 5 2 1
Residential mortgage -- -- -- -- 1
Consumer 13 13 14 12 10
International -- -- 1 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 41 43 35 32 22
- ----------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 85 76 48 78 99
Provision for loan losses 114 87 56 69 111
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $367 $341 $326 $299 $308
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to total loans
at end of period 1.40% 1.40% 1.47% 1.56% 1.69%
Ratio of net loans charged off during the period
to average loans outstanding during the period 0.33% 0.32% 0.24% 0.43% 0.57%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest income increased $8 million, or 2 percent, to $507 million in 1996,
compared to $499 million and $450 million in 1995 and 1994, respectively. After
adjusting for acquisitions, divestitures and the large nonrecurring items
discussed below, noninterest income rose $13 million, or 3 percent, in 1996.
Income from fiduciary activities increased $8 million, or 7 percent, in 1996,
compared to an increase of $3 million, or 3 percent, in 1995. The increase in
1996 reflects comparable rates of increase for both Personal Trust and
Institutional Trust income. The increase in both Personal Trust and
Institutional Trust income, from the prior year, was primarily due to an
expanded customer base and improved market values of assets under management
resulting from market performance. Total trust assets under management increased
to $107 billion at December 31, 1996 from $91 billion at year-end 1995.
Discretionary funds, which represent trust assets over which the Corporation has
investment management authority, increased $4 billion to $26 billion from $22
billion in 1995. This increase resulted primarily from increases in the
Institutional Trust category.
Service charges on deposit accounts rose $10 million, or 8 percent, in 1996
compared to an increase of $6 million, or 5 percent, in 1995. The increase was
comparable for both retail and commercial accounts. The increases were primarily
the result of revised fees, growth in demand deposit activity, and lower earning
credit allowances.
Customhouse broker fees were down $25 million in 1996 reflecting the sale of
John V. Carr & Son, Inc. in the second quarter of 1996.
Revolving credit fee income decreased $13 million, or 37 percent, in 1996
compared to a $12 million, or 47 percent, increase in 1995. The lower fees were
primarily due to transfer of fees and associated costs to a merchant services
joint venture with National Data Corporation and decline in the bankcard
portfolio from the sale of $333 million of receivables at the end of 1995.
Securities gains increased slightly between 1996 and 1995 as both years included
gains on the sale of Latin American debt (principally Brady bonds) and U.S.
government agency securities.
18
Other noninterest income grew $26 million, or 17 percent, in 1996. Excluding the
impact of acquisitions and divestitures, other noninterest income rose 13
percent. This increase was primarily due to significant nonrecurring items in
1996 which included a $13 million gain on the merchant services joint venture,
$9 million of interest on a State of Michigan tax refund and a $6 million gain
on the sale of Comerica Bank- Illinois; offset by a $9 million write-off related
to the sale of John V. Carr & Son, Inc. Other noninterest income also increased
due to management's continued emphasis on revenue growth through sales of
nontraditional bank products such as life insurance, annuities and mutual funds.
Commissions and fees related to these products increased $7 million, or
53 percent, in 1996 from $13 million in 1995.
NONINTEREST INCOME
(in millions)
[EDGAR REPRESENTATION OF GRAPHIC]
Bar graph depicting the Corporation's noninterest income (in millions) from
1992 to 1996.
1992 1993 1994 1995 1996
--------------------------------------
399 449 450 499 507
There were no significant nonrecurring items included in other noninterest
income in 1995. In 1994, other noninterest income included a $7 million gain on
bulk sales of originated mortgage servicing rights and $7 million in gains on
international loan sales.
NONINTEREST EXPENSES
Year Ended December 31
(in millions) 1996 1995 1994
- ------------------------------------------------------------------------------
Salaries $475 $466 $455
Employee benefits 86 96 94
- ------------------------------------------------------------------------------
Total salaries and employee benefits 561 562 549
Net occupancy expense 99 99 99
Equipment expense 69 68 68
FDIC insurance expense 8 24 44
Telecommunications expense 29 29 27
Other 303 304 248
- ------------------------------------------------------------------------------
Subtotal 1,069 1,086 1,035
Restructuring charge 90 -- 7
- ------------------------------------------------------------------------------
Total noninterest expenses $1,159 $1,086 $1,042
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Noninterest expenses increased 7 percent to $1,159 million in 1996 (decreased 2
percent to $1,069 million, excluding the restructuring charge), compared to
$1,086 million in 1995 and $1,042 million in 1994. Excluding the effect of
acquisitions, divestitures, the restructuring charge and the large nonrecurring
items discussed later, noninterest expenses declined 1 percent in 1996.
A pre-tax restructuring charge of $90 million was recorded in 1996 in connection
with a major program to improve efficiency, revenue and customer service. The
charge included $48 million for termination benefits, $21 million for occupancy
and equipment write-offs and $21 million for other costs. Estimated annual
benefits of $110 million (cost savings of $85 million and revenue enhancements
of $25 million) are anticipated from the program. Projected completion of the
implementation plan is the middle of 1998, so a substantial portion of the
estimated benefits will not impact annual results until 1998 and full, annual
realization is not expected until 1999. As a result of the program, nearly 1,900
employee positions, about 15 percent of total positions, are being eliminated.
Total salaries expense increased $9 million, or 2 percent, in 1996 versus $11
million, or 3 percent, in 1995. Excluding the effect of acquisitions and
divestitures, salaries declined slightly during the year reflecting a decline in
staff levels offset by increased incentives tied to performance and annual merit
increases. The number of full-time equivalent employees decreased 896, or 7
percent, from year-end 1995, excluding acquisitions and divestitures. SFAS No.
123, "Accounting for Stock-Based Compensation," was issued by the Financial
Accounting Standards Board (FASB) and is effective for 1996 financial
statements. The Corporation adopted the disclosure-only provisions of SFAS No.
123 and so will continue determining compensation expense for stock options in
accordance with APB Opinion No. 25,"Accounting for Stock Issued to Employees" as
permitted by the new standard. If the recognition provisions of SFAS No. 123 had
been adopted as of the beginning of 1996, the effect on 1996 net income would
have been immaterial.
Employee benefits expense decreased $10 million, or 10 percent, in 1996 versus
an increase of $2 million, or 2 percent, in 1995. After adjusting for
acquisitions and divestitures, employee benefits decreased 9 percent largely due
to expense reductions derived from company-owned life insurance contracts.
Net occupancy and equipment expenses, on a combined basis, remained relatively
flat in 1996 compared to 1995, as costs from acquisitions were offset by cost
reductions relative to divestitures.
The Federal Deposit Insurance Corporation (FDIC) expenses decreased
significantly by $16 million, or 66 percent, in 1996, primarily due to the FDIC
adopting a new assessment rate schedule for Bank Insurance Fund (BIF) members in
the third quarter of 1995. The new rate schedule, which continues to determine
assessments based on a bank's risk-based capital levels, virtually eliminated
each subsidiary bank's BIF annual deposit insurance premium as of January 1,
1996. The Corporation's Savings Association Insurance Fund (SAIF) insured
deposits continued to be assessed at a rate of 23 cents per $100 of insured
deposits through September 30, 1996. This BIF rate reduction translated into a
$21 million savings in FDIC insurance expense for the Corporation in 1996.
Offsetting this savings was a one-time charge of $5 million representing the
Corporation's portion of an assessment, levied on banks with SAIF-insured
deposits in order to recapitalize the SAIF. Beginning in 1997, deposit insurance
expense will approximate $3 million based on current deposit levels and current
deposit assessment rates.
19
NONINTEREST EXPENSES
(in millions)
[EDGAR REPRESENTATION OF GRAPHIC]
Bar graph depicting the Corporation's noninterest expenses (in millions) from
1992 to 1996.
1992 1993 1994 1995 1996
--------------------------------------
Excluding Restructuring Charge 952 1,025 1,042 1,086 1,069
Restructuring Charge 128 90
Other noninterest expenses decreased $1 million in 1996, compared to a $56
million increase in 1995. Other noninterest expenses in 1996 and 1995 included
losses of $18 million and $15 million (excluding $1 million of costs to sell),
respectively, on the sale of a portion of the bankcard portfolio. Loss-sharing
provisions in the sales agreement expose the Corporation to maximum losses of
$50 million over the first 42 months following the sale (December 1995). Loss
rates in 1996 exceeded initial estimates, resulting in the additional charge for
projected losses over the remaining 30 months. Excluding acquisitions,
divestitures, and the above large nonrecurring item, other noninterest expenses
decreased $13 million, or 4 percent. The decrease reflects management's
continued efforts to control expenses.
The Corporation's efficiency ratio is defined as total noninterest expenses
divided by the sum of net interest revenue (FTE) and noninterest income,
excluding securities gains/losses. The ratio was 60.36 percent in 1996 (55.67
percent excluding the restructuring charge), compared to 60.09 percent in 1995
and 61.28 percent in 1994.
INCOME TAXES
The provision for income taxes was $229 million in 1996, compared to $212
million in 1995 and $195 million in 1994. The effective tax rate, computed by
dividing the provision for income taxes by income before income taxes, was 35.4
percent for 1996, compared to 33.9 percent in 1995 and 33.5 percent in 1994. The
increase in the effective tax rate over prior years reflects relatively lower
levels of tax-exempt interest income.
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.
Table 5 on page 21 presents the financial results of these business lines for
the years ended December 31, 1996 and 1995.
Lines of business results are produced by the Corporation's internal management
accounting system. This system measures financial results based on the internal
organizational structure of the Corporation; therefore, the information
presented is not necessarily comparable with similar information for any other
financial institution. The management accounting system assigns balance sheet
and income statement items to each line of business using certain methodologies
which are constantly being refined. For comparability purposes, both 1996 and
1995 amounts are based on methodologies in effect at December 31, 1996. These
methodologies, which are briefly summarized in the following paragraph, may be
modified as management accounting systems are enhanced and changes occur in the
organizational structure or product lines.
The Corporation's internal funds transfer pricing system records cost of funds
or credit for funds using a combination of matched maturity funding for certain
assets and liabilities and a blended rate based on various maturities for the
remaining assets and liabilities. The loan loss provision is assigned based on
the amount necessary to maintain an allowance for loan losses adequate for that
line of business. Noninterest income and expenses directly attributable to
a line of business are assigned to that business. Direct expenses incurred by
areas whose services support the overall Corporation are allocated to the
business lines as follows: Product processing expenditures are allocated based
on standard unit costs applied to actual volume measurements; administrative
expenses are allocated based on estimated time expended; and corporate overhead
is assigned based on the ratio of a line of business' noninterest expenses to
total noninterest expenses incurred by all business lines. Common equity is
allocated based on credit, operational and business risks.
The following discussion provides information about each line of business, along
with an explanation of factors impacting 1996 performance.
The Business Bank is comprised of middle market lending, asset-based lending,
large corporate banking, international financial services and institutional
trust. This line of business meets the needs of medium-size businesses,
multinational corporations, and governmental entities by offering various
products and services, including commercial loans and lines of credit, deposits,
cash management, institutional trust, international trade finance, letters of
credit and foreign exchange management services.
Net income increased $57 million, or 26 percent, in 1996, principally due to
additional net interest income resulting from 13 percent average loan growth,
excluding the sale of the Corporation's Illinois subsidiary, and a lower
provision for loan losses. The sale of the Illinois subsidiary and the
Corporation's customhouse brokerage subsidiary during 1996 did not have a
material impact on net income.
20
TABLE 5: STRATEGIC LINES OF BUSINESS FINANCIAL RESULTS
Business Bank Individual Bank Investment Bank* Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net interest income (FTE) $ 632 $ 518 $ 777 $ 759 $ (1) $ (2) $ 19 $ 46 $ 1,427 $ 1,321
Provision for loan losses 1 34 111 92 n/a n/a 2 (39) 114 87
Noninterest income 178 204 277 255 42 30 10 10 507 499
Noninterest expenses 370 341 658 658 44 27 87 60 1,159 1,086
Provision for income taxes 160 125 101 92 (1) -- (16) 17 244 234
Net income (loss) 279 222 184 172 (2) 1 (44) 18 417 413
SELECTED AVERAGE BALANCES
Assets $17,460 $15,357 $ 9,821 $ 9,481 $ 9 $ 10 $6,905 $9,281 $34,195 $34,129
Loans 16,211 14,594 9,147 8,746 n/a n/a (6) 221 25,352 23,561
Deposits 4,061 2,867 17,229 16,551 n/a n/a 968 2,237 22,258 21,655
Common equity 972 847 703 848 3 3 876 813 2,554 2,511
STATISTICAL DATA
Return on average assets 1.60% 1.45% 1.03% 0.99% (22.81)% 5.70% (0.27)% 0.09% 1.22% 1.21%
Return on average common
equity 28.74 26.27 26.13 20.30 (68.43) 19.00 (5.02) 2.23 15.98 16.46
Efficiency ratio 46.05 47.89 62.46 64.83 107.78 96.91 384.04 116.69 60.36 60.09
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
* Revenues and associated expenses resulting from Investment Bank activities
are distributed to the business line which manages the customer
relationship.
n/a Not applicable
The Individual Bank includes consumer lending, consumer deposit gathering,
mortgage loan origination and servicing, small business banking (annual sales
under $5 million) and private banking. This line of business offers a variety of
consumer products, including deposit accounts, direct and indirect installment
loans, credit cards, home equity lines of credit and residential mortgage loans.
In addition, a full range of financial services is provided to small businesses,
area merchants and municipalities. Private lending and personal trust services
also are provided to meet the personal financial needs of affluent individuals
(as defined by individual net income or wealth).
Net income increased $12 million, or 7 percent, in 1996, as higher revenues were
partially offset by an increase in the provision for loan losses.
The Investment Bank is responsible for the sale of mutual fund and annuity
products, as well as life, disability and long-term care insurance products.
This line of business also offers capital market products, manages loan
syndications and provides investment management and advisory services,
investment banking and discount securities brokerage services.
Operating results remained relatively flat from 1995 to 1996 as revenues were
reinvested in training and the development of products and services.
The Other category includes the income and expense impact of cash and loan loss
reserves not assigned to specific business lines, miscellaneous other items of a
corporate nature, and certain direct expenses not allocated to business lines.
The Corporation's securities portfolio and asset and liability management
activities are also reflected in these amounts.
Net income decreased $62 million in 1996 as a result of the restructuring
charge.
BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
Total assets were $34.2 billion at year-end 1996, representing a $1.3 billion
decrease from $35.5 billion on December 31, 1995. On an average basis, total
assets remained relatively flat with $34.2 billion in 1996 compared to $34.1
billion in 1995.
EARNING ASSETS
Total earning assets were $31.1 billion at year-end 1996, representing a $1.0
billion decrease from $32.1 billion on December 31, 1995. On an average basis,
total earning assets were $31.4 billion in 1996 compared to $31.5 billion in
1995. Earning assets were relatively flat as $2.1 billion of investment
securities were either sold or allowed to mature to fund the $1.8 billion or 7
percent increase in loans; and $1.2 billion of earning assets were divested with
the sale of the Illinois subsidiary.
The average balance of domestic commercial loans, which is comprised of
commercial and commercial mortgage loans, increased $1.7 billion, or 12 percent,
from 1995. Real estate construction loans also rose an average $166 million, or
31 percent, in 1996. The commercial portfolio, especially small business and
middle market loans, continues to grow in all the Corporation's markets. This
growth, along with an increase of approximately 30 percent in commercial loan
commitments to extend credit, is attributable to effective marketing efforts,
strong customer relationships and continued economic strength in the commercial
loan markets.
21
TABLE 6: ANALYSIS OF INVESTMENT SECURITIES AND LOANS
December 31
(in millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale
U.S. government and agency securities $ 3,968 $ 6,038 $ 2,674 $ 2,164 $ n/a
State and municipal securities 228 371 -- -- n/a
Other securities 604 450 232 158 n/a
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 4,800 6,859 2,906 2,322 n/a
Investment securities held to maturity
U.S. government and agency securities -- -- 4,462 3,232 3,824
State and municipal securities -- -- 422 513 693
Other securities -- -- 86 233 646
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity -- -- 4,970 3,978 5,163
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 4,800 $ 6,859 $ 7,876 $ 6,300 $ 5,163
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial loans $13,520 $12,041 $10,634 $ 9,087 $ 8,213
International loans
Government and official institutions 11 6 18 143 156
Banks and other financial institutions 323 583 660 671 323
Other 1,372 796 517 322 257
- ----------------------------------------------------------------------------------------------------------------------------------
Total international loans 1,706 1,385 1,195 1,136 736
Real estate construction loans 751 641 414 437 471
Commercial mortgage loans 3,446 3,254 3,056 2,700 2,666
Residential mortgage loans 1,744 2,221 2,436 1,857 2,126
Consumer loans 4,634 4,570 4,215 3,674 3,836
Lease financing 406 330 259 209 167
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans $26,207 $24,442 $22,209 $19,100 $18,215
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
n/a Not applicable
Average international loans increased $284 million, consisting largely of loans
originated to facilitate trade with limited cross-border risk. The growth also
reflects the increasing global activity of the Corporation's traditional
customer base. Risk management practices in international lending include
structuring bilateral arrangements or participating in bank facilities which
secure repayment from sources external to the borrower's country. Accordingly,
such international outstandings are excluded from cross-border risk of that
country. Mexican cross-border risk of $268 million, 0.78 percent of assets, was
the only country exposure exceeding 0.75 percent of assets at December 31, 1996.
No country exceeded 0.75 percent of assets at December 31, 1995 or 1994.
Average residential mortgage loans decreased $490 million primarily due to
management's decision to sell the majority of mortgage originations. Average
consumer loans rose $55 million representing increases in average installment
loans offset by decreases in revolving credit and bankcard loans. Average
installment loan balances increased $356 million, while average bankcard loans
and revolving credit loans decreased $241 million and $60 million, respectively.
The bankcard portfolio declined largely as a result of selling $333 million of
the bankcard portfolio in late 1995 along with a temporary curtailment of credit
card promotions through much of 1996. Increases in average installment loans
reflect continued expansion in California and Texas markets related to marine
and recreational vehicle loan products, as well as growth in fixed rate home
equity loans.
Average investment securities declined to $5.8 billion in 1996, compared to $7.6
billion in 1995, reflecting sales and runoff of securities primarily to fund
growth in higher-yielding loans and to divest lower earning variable rate
assets. Average U.S. government and agency securities decreased $1,988 million
and average state and municipal securities decreased $105 million, while average
other securities increased $291 million. The Corporation shifted away from
purchasing on-balance-sheet securities to balance interest rate sensitivity and
preserve net interest margin to purchasing off-balance sheet interest rate swaps
that accomplish the same interest risk reduction objective. The decline in U.S.
government and agency securities principally resulted from sales and pay downs,
while the tax-exempt portfolio of state and municipal securities continued to
decrease as reduced tax advantages for these types of securities deterred
additional investment. Other securities consist primarily of collateralized
mortgage obligations (CMOs), Brady bonds and Eurobonds. The increase in other
securities during the year was largely a result of Eurobond purchases.
22
TABLE 7: LOAN MATURITIES AND INTEREST RATE SENSITIVITY
After One
December 31, 1996 Within But Within After
(in millions) One Year* Five Years Five Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 9,990 $2,840 $ 690 $13,520
Commercial mortgage loans 1,123 1,790 533 3,446
International loans 1,598 105 3 1,706
Real estate construction loans 494 200 57 751
- ----------------------------------------------------------------------------------------------------------------------------------
Total $13,205 $4,935 $1,283 $19,423
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Loans maturing after one year
Predetermined interest rates $2,199 $ 728
Floating interest rates 2,736 555
- ----------------------------------------------------------------------------------------------------------------------------------
Total $4,935 $1,283
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
* Includes demand loans, loans having no stated repayment schedule or
maturity and overdrafts.
TABLE 8: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 Percent Percent Percent Percent Percent
(dollar amounts in Allocated of Total Allocated of Total Allocated of Total Allocated of Total Allocated of Total
millions) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ----------------------------------------------------------------------------------------------------------------------------------
Domestic
Commercial $ 98 52% $118 49% $119 48% $123 48% $120 45%
Real estate
construction 6 3 5 3 6 2 4 2 9 2
Commercial mortgage 27 13 33 13 35 14 26 14 37 15
Residential mortgage 2 7 2 9 2 11 3 10 6 12
Consumer 120 18 84 19 60 19 60 19 59 21
Lease financing 1 1 1 1 1 1 1 1 2 1
International 3 6 2 6 3 5 18 6 39 4
Unallocated 110 -- 96 -- 100 -- 64 -- 36 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total $367 100% $341 100% $326 100% $299 100% $308 100%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER EARNING ASSETS
Short-term investments in interest-bearing deposits with banks, federal funds
sold, and securities purchased under agreements to resell provide a range of
maturities under one year to supplement corporate liquidity. Interest-bearing
deposits with banks are investments with banks in developed countries or foreign
banks' international banking facilities located in the United States. Federal
funds sold provide a vehicle to control the reserve position and serve
correspondent banks, as well as offer supplemental earnings opportunities. As a
result of the emphasis on higher yielding loans, short-term investments declined
on average $124 million during 1996.
Loans held for sale totaled $38 million at the end of 1996, down from $512
million in 1995. This decrease represents the bankcard portfolio sold in late
1995, which settled in early 1996.
TABLE 9: MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000
AND OVER
December 31
(in millions) 1996
- ------------------------------------------------------------------------------
Three months or less $1,391
Over three months to six months 279
Over six months to twelve months 255
Over twelve months 279
- ------------------------------------------------------------------------------
Total $2,204
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DEPOSITS AND BORROWED FUNDS
Average deposits rose $603 million, or 3 percent, from 1995. Excluding the
impact of acquisitions and divestitures, deposits would have decreased 2
percent, reflecting a managed decline in foreign deposits due to more attractive
funding alternatives such as medium-term notes, along with the continued trend
of interest-sensitive customers investing in higher yielding deposit
alternatives, including mutual funds. Total deposits increased less than 1
percent during 1995, excluding acquisitions and divestitures.
23
Average demand deposits grew $822 million, or 17 percent, from 1995 largely due
to the growth in related commercial loan business and the acquisition of
Metrobank. Average certificates of deposit increased $529 million or 8 percent,
from 1995 largely due to various deposit promotions and the acquisition of
Metrobank. Growth in these categories was offset by a decrease in average
foreign office deposits of $999 million, or 54 percent, reflecting a managed
decline due to more attractive funding alternatives such as medium-term notes.
While deposit balances increased slightly, there was continued reliance on
medium-term debt (both domestic and European), and long-term debt to provide the
necessary funding to support expanding loan volumes. The interest rates
associated with medium-term debt create a funding source with maturities ranging
from one month to 15 years and durations that are similar to deposit
liabilities. Long-term subordinated notes help maintain the bank's total capital
ratio at the level that qualifies for the lowest FDIC risk-based insurance
premium and supports acquisition activity. The Corporation issued $150 million
of long-term notes during the year. Medium-term debt decreased $550 million,
representing the net result of the issuance of $2.1 billion and the maturity of
$2.6 billion of notes during 1996. Further information on the Corporation's
medium- and long-term debt is included in Note 9 to the consolidated financial
statements on page 40.
CAPITAL
Shareholders' equity was $2.6 billion at December 31, 1996, the same as December
31, 1995. During the year, the Corporation authorized the repurchase of up to 15
million shares of Comerica common stock. Coupled with other authorizations to
acquire shares, Comerica repurchased 13 million shares equaling more than $600
million of capital during 1996. The combination of a nonredeemable preferred
stock issue, the sale of Comerica Bank-Illinois and retained earnings were the
principal sources of capital and liquidity that enabled the Corporation to
accomplish this initiative. Comerica continues to maintain its capital ratios
beyond the limits established by the Federal Reserve Board for a "well
capitalized" bank.
The remaining change in capital is the net effect of increases in capital from
retained earnings of $238 million, $129 million of common stock issued for
acquisitions, $35 million of common stock for employee stock plans, the issuance
of $250 million in nonredeemable preferred stock, and a change of $19 million in
the value of the Corporation's available for sale securities.
At December 31, 1996, the Corporation and all of its banking subsidiaries
exceeded the ratios required for an institution to be considered "well
capitalized" by the standards developed under the Federal Deposit Insurance
Corporation Improvement Act of 1991. See Note 17 of the consolidated financial
statements on page 45 for the capital ratios.
The Corporation declared common dividends totaling $170 million on net income
applicable to common stock of $408 million, representing a dividend payout ratio
of 43 percent (37 percent excluding the after-tax impact of the restructuring
charge). The payout ratio in 1995 was 39 percent. The board of directors has
targeted a payout ratio of between 30 to 40 percent, although this target is
constantly reassessed by the board in light of changing market and industry
conditions.
ASSET QUALITY
NONPERFORMING ASSETS
The Corporation's policies regarding nonaccrual loans reflect the importance of
identifying troubled loans early. Consumer loans are directly charged off no
later than 180 days past due, or earlier if deemed uncollectible. Loans other
than consumer are generally placed on nonaccrual status when management
determines that principal or interest may not be fully collectible, but no later
than when the loan is 90 days past due on principal or interest unless it is
fully collateralized and in the process of collection. Loan amounts in excess of
probable future cash collections are charged off at the time the loan is placed
on nonaccrual status to an amount that represents management's assessment of the
ultimate collectibility of the loan. Interest previously accrued but not
collected on nonaccrual loans is charged against current income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable.
NONPERFORMING ASSETS TO LOANS AND OTHER REAL ESTATE
(IN PERCENTAGES)
[EDGAR REPRESENTATION OF GRAPHIC]
Bar graph depicting the Corporation's nonperforming assets to loans and other
real estate (in percentages) from 1992 to 1996 compared to an industry
average.
1992 1993 1994 1995 1996
--------------------------------------
Comerica 1.50 1.09 0.92 0.67 0.53
Industry Average 4.62 2.81 1.67 1.23 0.79
Nonperforming assets as a percent of total loans and other real estate were 0.53
percent and 0.67 percent at year-end 1996 and 1995, respectively. This decline
reflects the continued improvement in the quality of the loan portfolio and
favorable economic conditions in the Corporation's markets. Nonaccrual loans at
December 31, 1996 decreased 21 percent to $103 million from year-end 1995. The
nonaccrual loan table on page 26 indicates the percentage of nonaccrual loan
value to original contractual value and demonstrates the conservative and prompt
nature of the corporate charge-off and payment application policy.
24
TABLE 10: ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO-FTE
Maturity+
------------------------------------------------------------------------------------------------ Weighted
December 31, 1996 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Average
(dollar amounts ------------------------------------------------------------------------------------------------ Maturity
in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Yrs./Mos.
- ----------------------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury $119 5.59% $123 5.50% $ -- --% $ -- --% $ 242 5.54% 1/6
U.S. government
and agency 140 5.51 323 6.47 153 7.14 3,110 6.57 3,726 6.55 11/4
State and municipal
securities 41 9.51 127 9.20 45 9.70 15 9.89 228 9.40 3/9
Other bonds, notes
and debentures 240 7.66 111 7.57 61 8.27 110 7.33 522 7.64 6/5
Federal Reserve
Bank stock and
other -- -- -- -- -- -- -- -- 82 -- --
investments*
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment
securities
available
for sale $540 6.79% $684 6.98% $259 7.85% $3,235 6.61% $4,800 6.75% 9/11
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
* Balances are excluded in the calculation of total yield.
+ Based on final contractual maturity.
TABLE 11: SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
December 31
(dollar amounts in millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets
Nonaccrual loans
Commercial loans $ 72 $ 87 $ 89 $ 71 $ 75
Real estate construction loans 3 7 17 19 28
Real estate mortgage loans (principally commercial) 28 37 56 64 120
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 103 131 162 154 223
Reduced-rate loans 8 3 2 5 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 111 134 164 159 224
Other real estate 29 29 40 50 49
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 140 $ 163 $204 $ 209 $ 273
- ----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans 0.42% 0.55% 0.74% 0.83% 1.23%
Nonperforming assets as a percentage of total loans
and other real estate 0.53% 0.67% 0.92% 1.09% 1.50%
Allowance for loan losses as a percentage of total
nonperforming assets 263% 209% 160% 143% 113%
Loans past due 90 days--domestic $ 52 $ 57 $ 39 $ 46 $ 100
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
25
NONACCRUAL LOANS
December 31
(dollar amounts in millions) 1996 1995
- --------------------------------------------------------------------------------
Carrying value $103 $131
Contractual value 147 181
Carrying value as a percentage
of contractual value 70% 72%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other real estate owned (ORE) remained at $29 million as sales and write-downs
of properties offset ORE additions. The largest addition in 1996 was a $10
million property from an acquisition.
CONCENTRATION OF CREDIT
Loans to companies and individuals involved with the automotive industry,
including suppliers, manufacturers and dealers, represented the largest
significant industry concentration at December 31, 1996. These loans totaled
$4.3 billion, or 16 percent of total loans at December 31, 1996, and included
floor plan loans to automobile dealers of $1,209 million and $1,083 million at
December 31, 1996 and 1995, respectively. All other industry concentrations
individually represented less than 5 percent of total loans at year-end 1996.
Automotive industry loans at year-end 1995 totaled approximately $4.5 billion,
or 18 percent of total loans.
The Corporation has successfully operated in the Michigan economy in spite of a
loan concentration and several downturns in the auto industry. There were no
automotive industry-related loans larger than $3 million on nonaccrual status as
of year-end 1996. In addition, there were no significant automotive industry-
related charge-offs during the year.
COMMERCIAL REAL ESTATE LENDING
The real estate construction loan portfolio contains loans made to long-time
customers in local markets with satisfactory project completion experience. The
portfolio has approximately 1,025 loans, of which 80 percent have balances of
less than $1 million. The largest real estate construction loan has a balance of
approximately $20 million.
The commercial mortgage loan portfolio, 52 percent of which relates to owner-
occupied properties, also consists of loans to long-time customers. Of the
approximately 7,309 loans in the portfolio, 89 percent have balances under $1
million, and the largest loan is less than $20 million. Additionally, the
Corporation's policy requires a 75 percent or less loan-to-value (LTV) ratio for
all commercial mortgage and real estate construction loans. This policy is well
within bank regulatory limits.
The geographic distribution of the real estate construction and commercial
mortgage loan portfolios is also an important determinant in evaluating credit
risk. The following table indicates the diversification of the portfolios
throughout the markets served by the Corporation.
GEOGRAPHIC DISTRIBUTION
December 31, 1996 Real Estate Commercial
(in millions) Construction Mortgage
- --------------------------------------------------------------------------------
Michigan $288 $2,043
California 110 523
Texas 258 358
Florida 39 124
Other 56 398
- --------------------------------------------------------------------------------
Total $751 $3,446
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT
The principal objective of asset and liability management
is to maximize net interest income while operating within acceptable limits
established for interest rate risk and maintaining adequate levels of funding
and liquidity. The Corporation utilizes various on- and off-balance sheet
financial instruments to manage the extent to which net interest income may be
affected by fluctuations in interest rates. Corporate policies and risk limits
pertaining to asset and liability management activities are established by the
Asset Liability Policy Committee (ALPC) and approved by the board of directors.
Adherence to these policies is governed by the ALPC, which is comprised of
executive and senior management from various areas of the Corporation, including
finance, lending, investments, and deposit gathering, who meet regularly to
execute asset and liability management strategies.
INTEREST RATE SENSITIVITY
Interest rate risk arises in the normal course of business due to differences in
the repricing and maturity characteristics of assets and liabilities. Since no
single measurement system satisfies all management objectives, a combination of
techniques are used to manage interest rate risk, including simulation analysis,
asset and liability repricing schedules and duration of equity. The results of
these interest rate risk measurement systems are reviewed regularly by the ALPC.
Net interest income is frequently evaluated under various balance sheet and
interest rate scenarios. The results of this analysis provide the information
needed to assess the proper balance sheet structure. An unexpected change in the
pace of economic activity, whether domestically or internationally, could
translate into a materially different interest rate environment than currently
expected. A process is maintained where management evaluates "base" net interest
income under what is believed to be the most likely balance sheet structure and
interest rate environment. This "base" net interest income is then evaluated
against interest rate scenarios that are taken up and down 200 basis points from
the most likely rate environment. In addition, adjustments to asset prepayment
levels, yield curves, and overall balance sheet mix and growth assumptions are
made to be consistent with each interest rate environment. The measurement of
risk exposure at year-end 1996 for a 200 basis point decline in short-term
interest rates identified approximately $9 million of net interest income at
risk during 1997. If short-
26
term interest rates rise 200 basis points, the Corporation would have
approximately $15 million of net interest income at risk. Corporate policy
limits adverse change to no more than 5 percent of management's most likely net
interest income forecast. In either case, the Corporation is within the policy
guideline.
While most assets and liabilities reprice either at maturity or in accordance
with their contractual terms, several balance sheet components demonstrate
characteristics that require adjustments to more accurately reflect repricing
and cash flow behavior. Assumptions based on historical pricing relationships
and anticipated market reactions are made to certain core deposit categories to
reflect the elasticity of the changes in the related interest rates relative to
the changes in market interest rates. In addition, estimates are made concerning
early loan and security repayments. Prepayment assumptions are based on the
expertise of portfolio managers along with input from financial markets.
Consideration is given to current and future interest rate levels. While
management recognizes the limited ability of a traditional gap schedule to
accurately portray interest rate risk, adjustments are made to provide a more
accurate picture of the Corporation's interest rate risk profile. This
additional interest rate risk measurement tool provides a directional outlook on
the impact of changes in interest rates.
As market rates approach expected turning points, management adjusts the
interest rate sensitivity of the Corporation. This sensitivity is measured as a
percentage of earning assets. The operating range for interest rate sensitivity,
on an elasticity-adjusted basis, is between an asset sensitive position of 10
percent of earning assets and a liability sensitive position of 10 percent of
earning assets.
The table on page 28 shows the interest sensitivity gap as of year-end 1996 and
1995. The report reflects the contractual repricing and payment schedules of
assets and liabilities, including an estimate of all early loan and security
repayments which adds $1.2 billion of rate sensitivity to the 1996 year-end gap.
In addition, the schedule identifies the adjustment for the price elasticity on
certain core deposits.
The Corporation was liability sensitive for the first half of 1996, due to gap
reduction initiatives put in place in the fourth quarter of 1995 and the first
quarter of 1996. Deposit growth and investment security runoff moved the
Corporation to an asset sensitive position in the latter half of 1996. The
Corporation had a one-year asset sensitive gap of $547 million, or 2 percent of
earning assets, as of December 31, 1996. This compares to a $215 million
liability sensitive gap, or 1 percent of earning assets, on December 31, 1995.
Management anticipates material growth in asset sensitivity throughout 1997, and
will continue to look at both on- and off-balance sheet alternatives to hedge
this increased asset sensitivity and achieve the desired interest rate risk
profile for the Corporation.
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
RISK MANAGEMENT NOTIONAL ACTIVITY
Interest Foreign
Rate Exchange
(in millions) Contracts Contracts Totals
- --------------------------------------------------------------------------------
Balances at December 31, 1994 $3,891 $ 123 $4,014
Additions 3,673 3,160 6,833
Maturities/amortizations (1,445) (3,004) (4,449)
- --------------------------------------------------------------------------------
Balances at December 31, 1995 $6,119 $ 279 $6,398
Additions 4,026 4,762 8,788
Maturities/amortizations (1,925) (4,559) (6,484)
- --------------------------------------------------------------------------------
Balances at December 31, 1996 $8,220 $ 482 $8,702
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Corporation utilizes interest rate swaps predominantly as asset and
liability management tools with the overall objectives of managing the
sensitivity of net interest income to changes in interest rates. To accomplish
this objective, interest rate swaps are used primarily to modify the interest
rate characteristics of certain assets and liabilities (e.g., from a floating
rate to a fixed rate, a fixed rate to a floating rate, or from one floating rate
index to another). This strategy assists management in achieving interest rate
risk objectives.
At December 31, 1996 and 1995, the notional amount of risk management interest
rate swaps totaled $8,015 million and $5,925 million, respectively. The fair
value of risk management interest rate swaps at December 31, 1996 was a negative
$55 million, compared to a positive $68 million at December 31, 1995. For the
year ended December 31, 1996, risk management interest rate swaps generated $49
million of net interest income, compared to $2 million in net interest expense
for the year ended December 31, 1995. These off-balance sheet instruments
represented 82 percent and 83 percent of total derivative financial instruments
and foreign exchange contracts, including commitments, at year-end 1996 and
1995, respectively.
Table 13 summarizes the expected maturity distribution of the notional amount of
risk management interest rate swaps and provides the weighted average interest
rates associated with amounts to be received or paid as of December 31, 1996.
The swaps have been grouped by the assets and liabilities to which they have
been designated.
In addition to interest rate swaps, the Corporation employs various other types
of off-balance sheet derivative and foreign exchange contracts to mitigate
exposures to interest rate and foreign currency risks associated with specific
assets and liabilities (e.g., loans or deposits denominated in foreign
currencies, mortgages held for sale, and originated mortgage servicing rights).
Such instruments include interest rate caps and floors, purchased put options,
foreign exchange forward contracts, foreign exchange generic swap agreements,
and cross-currency swaps. The aggregate notional amounts of these risk
management derivative and foreign exchange contracts at December 31, 1996 and
1995, were $687 million and $473 million, respectively.
27
TABLE 12: SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 1996 December 31, 1995
Interest Sensitivity Period Interest Sensitivity Period
- ----------------------------------------------------------------------------------------------------------------------------------
Within Over Within Over
(dollar amounts in millions) One Year One Year Total One Year One Year Total
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ -- $ 1,902 $ 1,902 $ -- $ 2,028 $ 2,028
Short-term investments 98 5 103 736 14 750
Investment securities 1,428 3,372 4,800 2,678 4,181 6,859
Commercial loans
(including lease financing) 12,489 1,437 13,926 11,050 1,321 12,371
International loans 1,706 -- 1,706 1,385 -- 1,385
Real estate related loans 3,662 2,279 5,941 3,611 2,505 6,116
Consumer loans 2,201 2,433 4,634 2,591 1,979 4,570
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 20,058 6,149 26,207 18,637 5,805 24,442
Other assets 615 579 1,194 711 680 1,391
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $22,199 $12,007 $34,206 $22,762 $12,708 $35,470
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest-bearing $ 570 $ 6,143 $ 6,713 $ 521 $ 5,059 $ 5,580
Savings -- 1,770 1,770 -- 2,204 2,204
Money market and NOW 5,351 1,631 6,982 4,798 1,770 6,568
Certificates of deposit 5,056 1,550 6,606 5,289 1,400 6,689
Foreign office 295 1 296 2,125 1 2,126
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 11,272 11,095 22,367 12,733 10,434 23,167
Short-term borrowings 4,489 -- 4,489 4,674 -- 4,674
Medium- and long-term debt 2,842 1,400 4,242 3,044 1,600 4,644
Other liabilities 177 315 492 62 315 377
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 18,780 12,810 31,590 20,513 12,349 32,862
Shareholders' equity (23) 2,639 2,616 (4) 2,612 2,608
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $18,757 $15,449 $34,206 $20,509 $14,961 $35,470
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Sensitivity impact of interest rate swaps $(4,676) $ 4,676 -- $(3,875) $ 3,875 --
Sensitivity impact of unsettled swap
and security purchases (43) 43 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap (1,277) 1,277 -- (1,622) 1,622 --
Gap as a percentage of earning assets (4)% 4% -- (5)% 5% --
Sensitivity impact from elasticity
adjustments (1) 1,824 (1,824) -- 1,407 (1,407) --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap with elasticity
adjustments $ 547 $ (547) -- $ (215) $ 215 --
Gap as a percentage of earning assets 2% (2)% -- (1)% 1% --
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Elasticity adjustments for NOW, savings and money market deposit accounts
are based on historical pricing relationships dating back to 1985 as well as
expected future pricing relationships.
28
TABLE 13: REMAINING EXPECTED MATURITY OF RISK MANAGEMENT INTEREST RATE SWAPS
2002- Dec. 31
(amounts in millions) 1997 1998 1999 2000 2001 2023 Total 1995
- ----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET DESIGNATION:
Receive fixed swaps
Generic $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 50
Amortizing 84 100 -- -- -- -- 184 200
Index amortizing 1,465 861 1,083 690 328 587 5,014 3,688
Weighted average: (1)
Receive rate 5.65% 6.25% 6.40% 6.14% 6.45% 6.33% 6.11% 6.02%
Pay rate 5.56% 5.55% 5.53% 5.59% 5.55% 5.60% 5.56% 5.84%
Floating/floating swaps (3) $ -- $ -- $ 25 $ -- $ -- $ -- $ 25 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE ASSET DESIGNATION:
Pay fixed swaps
Generic $ -- $ -- $ 2 $ -- $ -- $ -- $ 2 $ 37
Index amortizing 23 3 3 11 -- -- 40 --
Weighted average: (1)
Receive rate 5.56% 5.67% 5.65% 5.67% --% --% 5.60% 5.76%
Pay rate 5.07% 5.34% 6.70% 5.34% --% --% 5.35% 7.14%
- ----------------------------------------------------------------------------------------------------------------------------------
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive fixed swaps $1,300 $ -- $ -- $ 200 $ -- $ 850 $2,350 $1,375
Weighted average: (1)
Receive rate 5.82% --% --% 6.91% --% 7.78% 6.62% 7.01%
Pay rate 5.40% --% --% 5.50% --% 5.74% 5.53% 5.80%
Generic pay fixed swaps $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 25
Weighted average: (1)
Receive rate --% --% --% --% --% --% --% 5.70%
Pay rate --% --% --% --% --% --% --% 8.28%
Floating/floating swaps $ 400 $ -- $ -- $ -- $ -- $ -- $ 400 $ 550
Weighted average: (2)
Receive rate 5.32% --% --% --% --% --% 5.32% 5.76%
Pay rate 5.39% --% --% --% --% --% 5.39% 5.75%
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $3,272 $ 964 $1,113 $ 901 $ 328 $1,437 $8,015 $5,925
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Variable rates paid or received are based primarily on one-month and three-
month LIBOR rates paid or received at December 31, 1996.
(2) Variable rates paid are based on LIBOR at December 31, 1996, while variable
rates received are based on prime.
(3) Variable rate paid was 5.68%, based on LIBOR at December 31, 1996, while
variable rate received represents the return on a principal only total return
swap. This return is based on principal paydowns of the referenced security as
well as changes in market value.
29
In 1996, the FASB issued an Exposure Draft on accounting for derivative and
similar financial instruments and for hedging activities. This Exposure Draft
would introduce significant volatility in earnings and could affect how the
Corporation balances interest rate sensitivity in the future. Management does
not believe the proposed accounting model will accurately account for and report
Comerica's use of derivatives and has expressed this opinion to the FASB.
Further information regarding risk management derivative financial instruments
and foreign exchange contracts is provided in Notes 8, 9 and 18 to the
consolidated financial statements.
LIQUIDITY
Liquidity is the ability to meet financial obligations through the maturity or
sale of existing assets or acquisition of additional funds. Liquidity
requirements are satisfied with various funding sources, including a $7.5
billion medium-term note program which allows the Michigan, California and Texas
banks to issue debt with maturities ranging between one month and 15 years. The
Michigan bank has an additional $2 billion European note program. At year-end
1996, unissued debt related to the two programs totaled $5.6 billion.
In addition, liquid assets totaled $6.8 billion, at December 31, 1996. The
Corporation also had available $1.2 billion from a collateralized borrowing
account with the Federal Reserve Bank at year-end 1996. Purchased funds at
December 31, 1996, excluding certificates of deposit with maturities beyond one
year, approximated $6.7 billion.
Another source of liquidity for the parent company is dividends from its
subsidiaries. As discussed in Note 17 to the consolidated financial statements
on page 45, subsidiary banks are subject to regulation and may be limited in
their ability to pay dividends or transfer funds to the holding
company. During 1997, the subsidiary banks can pay dividends of up to $371
million plus current net profits without prior regulatory approval. One measure
of current parent company liquidity is investment in subsidiaries, as a percent
of shareholders' equity. An amount over 100 percent represents the reliance on
subsidiary dividends to repay liabilities. As of December 31, 1996, the ratio
was 108 percent.
CUSTOMER INITIATED AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN
EXCHANGE CONTRACTS
CUSTOMER INITIATED AND OTHER NOTIONAL ACTIVITY
Interest Foreign
Rate Exchange
(in millions) Contracts Contracts Totals
- --------------------------------------------------------------------------------
Balances at December 31, 1994 $ 328 $ 503 $ 831
Additions 375 32,642 33,017
Maturities/amortizations (290) (32,825) (33,115)
Terminations (50) -- (50)
- --------------------------------------------------------------------------------
Balances at December 31, 1995 $ 363 $ 320 $ 683
Additions 237 37,571 37,808
Maturities/amortizations (210) (37,247) (37,457)
- --------------------------------------------------------------------------------
Balances at December 31, 1996 $ 390 $ 644 $ 1,034
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
On a limited basis, the Corporation writes interest rate caps and enters into
foreign exchange contracts and interest rate swaps to accommodate the needs of
customers requesting such services. At December 31, 1996 and 1995, customer
initiated activity represented 11 percent and 10 percent, respectively of total
derivative and foreign exchange contracts, including commitments. Refer to Note
18 to the consolidated financial statements on page 45 for further information
regarding customer initiated and other derivative financial instruments and
foreign exchange contracts.
OTHER MATTERS
In June 1996, the FASB issued Statement on Financial Accounting Standards No.
125 on "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The statement changes the accounting for
transfers and extinguishments occurring after December 31, 1996. SFAS No. 125 is
not expected to materially impact the Corporation.
As disclosed in Note 19 to the consolidated financial statements on page 48, a
lawsuit was filed on July 24, 1990, by the State of Michigan against a
subsidiary bank involving hazardous waste issues. The Corporation's motion for
summary judgment was granted, and the Circuit Court of Appeals, on December 19,
1996, upheld that judgment.
Many of the Corporation's computer systems contain programming code that will
not function properly on January 1, 2000. The Corporation is working to ensure
all systems will function properly at that date. Current estimates of costs to
remedy potential problems are not expected to be material to the years 1997-9.
Forward-looking statements in the preceding financial review are based on
current expectations, but there are numerous factors that could cause variances
in these factors as economic, industry and competitive positions change.
30
CONSOLIDATED BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
December 31
(in thousands, except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,901,760 $ 2,028,375
Interest-bearing deposits with banks 27,329 23,568
Federal funds sold and securities purchased under agreements to resell 32,200 203,798
Trading account securities 6,009 10,668
Loans held for sale 38,069 511,562
Investment securities available for sale 4,800,034 6,859,310
Commercial loans 13,520,246 12,041,009
International loans 1,706,388 1,384,814
Real estate construction loans 750,760 641,432
Commercial mortgage loans 3,445,562 3,254,041
Residential mortgage loans 1,743,876 2,221,359
Consumer loans 4,634,258 4,570,015
Lease financing 405,618 329,608
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 26,206,708 24,442,278
Less allowance for loan losses (367,165) (341,344)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loans 25,839,543 24,100,934
Premises and equipment 407,663 455,002
Customers' liability on acceptances outstanding 33,102 21,135
Accrued income and other assets 1,120,362 1,255,522
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $34,206,071 $35,469,874
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-bearing) $ 6,712,985 $ 5,579,536
Interest-bearing deposits 15,357,840 15,461,213
Deposits in foreign offices 296,348 2,126,466
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 22,367,173 23,167,215
Federal funds purchased and securities sold
under agreements to repurchase 1,395,540 3,206,612
Other borrowed funds 3,093,651 1,467,550
Acceptances outstanding 33,102 21,135
Accrued expenses and other liabilities 459,267 355,219
Medium- and long-term debt 4,241,769 4,644,416
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 31,590,502 32,862,147
Nonredeemable preferred stock--$50 stated value
Authorized--5,000,000 shares
Issued--5,000,000 shares in 1996 250,000 --
Common stock--$5 par value
Authorized--250,000,000 shares
Issued--107,297,345 shares in 1996 and 115,094,531 shares in 1995 536,487 575,473
Capital surplus -- 410,618
Unrealized gains and losses on investment securities available for sale (22,789) (4,141)
Retained earnings 1,854,116 1,640,980
Deferred compensation (2,245) (1,974)
Less cost of common stock in treasury--490,704 shares in 1995 -- (13,229)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,615,569 2,607,727
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $34,206,071 $35,469,874
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31
(in thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $2,160,981 $2,090,854 $1,577,329
Interest on investment securities
Taxable 372,331 473,759 446,307
Exempt from federal income tax 17,443 26,189 30,645
- -------------------------------------------------------------------------------------------------------
Total interest on investment securities 389,774 499,948 476,952
Trading account interest 210 227 70
Interest on federal funds sold and securities
purchased under agreements to resell 5,068 7,402 4,717
Interest on time deposits with banks 1,827 8,032 21,858
Interest on loans held for sale 4,920 7,461 10,998
- -------------------------------------------------------------------------------------------------------
Total interest income 2,562,780 2,613,924 2,091,924
INTEREST EXPENSE
Interest on deposits 685,539 721,475 542,727
Interest on short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 111,729 165,544 121,390
Other borrowed funds 107,155 135,667 78,546
Interest on medium- and long-term debt 294,990 288,990 147,942
Net interest rate swap (income)/expense (48,911) 2,365 (28,808)
- -------------------------------------------------------------------------------------------------------
Total interest expense 1,150,502 1,314,041 861,797
- -------------------------------------------------------------------------------------------------------
Net interest income 1,412,278 1,299,883 1,230,127
Provision for loan losses 114,000 86,500 56,000
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,298,278 1,213,383 1,174,127
NONINTEREST INCOME
Income from fiduciary activities 133,482 125,038 121,755
Service charges on deposit accounts 140,436 130,249 123,626
Customhouse broker fees 10,764 36,086 40,662
Revolving credit fees 22,670 36,248 24,743
Securities gains 13,588 11,748 3,461
Other noninterest income 186,014 159,356 135,943
- -------------------------------------------------------------------------------------------------------
Total noninterest income 506,954 498,725 450,190
NONINTEREST EXPENSES
Salaries and employee benefits 560,784 562,159 548,607
Net occupancy expense 99,211 98,945 98,885
Equipment expense 68,827 67,872 67,319
FDIC insurance expense 8,139 23,817 44,276
Telecommunications expense 29,092 29,644 27,304
Restructuring charge (including merger and integration in 1994) 90,000 - 7,000
Other noninterest expenses 302,973 303,977 248,831
- -------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,159,026 1,086,414 1,042,222
- -------------------------------------------------------------------------------------------------------
Income before income taxes 646,206 625,694 582,095
Provision for income taxes 229,045 212,328 194,853
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 417,161 $ 413,366 $ 387,242
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 408,136 $ 413,366 $ 387,242
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Net income per common share $ 3.55 $ 3.54 $ 3.28
Average common and common equivalent shares 114,854 116,894 118,160
Cash dividends declared on common stock $ 170,067 $ 158,309 $ 145,098
Dividends per common share $ 1.52 $ 1.37 $ 1.24
- -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
32 Comerica Incorporated
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMERICA INCORPORATED AND SUBSIDIARIES
Non-
redeemable Unrealized Total
Preferred Common Capital Gains Retained Deferred Treasury Shareholders'
(in thousands, except share data) Stock Stock Surplus and (Losses) Earnings Compensation Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 1994 $ -- $596,473 $525,668 $ 27,473 $1,155,280 $ (1,482) $(121,754) $2,181,658
Net income for 1994 -- -- -- -- 387,242 -- -- 387,242
Cash dividends declared
on common stock -- -- -- -- (145,098) -- -- (145,098)
Purchase of 2,810,564 shares
of common stock -- -- -- -- -- -- (76,280) (76,280)
Issuance of common stock:
Employee stock plans -- -- 1,170 -- (3,161) (797) 7,702 4,914
Acquisition of Pacific Western -- -- -- -- (3,858) -- 125,221 121,363
Amortization of deferred
compensation -- -- -- -- -- 493 -- 493
Change in unrealized
gains/(losses) on investment
securities available for sale -- -- -- (82,512) -- -- -- (82,512)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 $ -- $596,473 $526,838 $(55,039) $1,390,405 $ (1,786) $ (65,111) $2,391,780
Net income for 1995 -- -- -- -- 413,366 -- -- 413,366
Cash dividends declared
on common stock -- -- -- -- (158,309) -- -- (158,309)
Purchase of 1,405,500
shares of common stock -- -- -- -- -- -- (38,725) (38,725)
Purchase and retirement
of 4,200,000 shares
of common stock -- (21,000) (118,931) -- -- -- -- (139,931)
Issuance of common stock:
Employee stock plans -- -- 1,261 -- (4,482) (1,034) 14,957 10,702
Acquisitions -- -- 1,450 -- -- -- 75,650 77,100
Amortization of deferred
compensation -- -- -- -- -- 846 -- 846
Change in unrealized
gains/(losses) on investment
securities available for sale -- -- -- 50,898 -- -- -- 50,898
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 $ -- $575,473 $410,618 $ (4,141) $1,640,980 $ (1,974) $ (13,229) $2,607,727
Net income for 1996 -- -- -- -- 417,161 -- -- 417,161
Issuance of preferred stock 250,000 -- (3,256) -- -- -- -- 246,744
Cash dividends declared:
Preferred stock -- -- -- -- (9,025) -- -- (9,025)
Common stock -- -- -- -- (170,067) -- -- (170,067)
Purchase and retirement
of 12,176,496 shares
of common stock -- (60,883) (519,924) -- (5,065) -- (36,324) (622,196)
Issuance of common stock:
Employee stock plans -- 897 14,090 -- (20,076) (1,197) 40,295 34,009
Acquisitions -- 21,000 98,472 -- 208 -- 9,258 128,938
Amortization of deferred
compensation -- -- -- -- -- 926 -- 926
Change in unrealized
gains/(losses) on investment
securities available for sale -- -- -- (18,648) -- -- -- (18,648)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $250,000 $536,487 $ -- $(22,789) $1,854,116 $ (2,245) $ -- $2,615,569
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
( ) Indicates deduction.
See notes to consolidated financial statements.
Comerica Incorporated 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31
(in thousands)
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 417,161 $ 413,366 $ 387,242
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 114,000 86,500 56,000
Depreciation 66,776 64,014 59,819
Restructuring charge 90,000 (6,127) (19,733)
Net (increase) decrease in trading account securities 4,659 (6,336) (732)
Net (increase) decrease in loans held for sale 473,493 (420,015) 239,120
Net (increase) decrease in accrued income receivable 924 (26,749) (43,495)
Net increase (decrease) in accrued expenses (39,720) 96,645 (31,845)
Net amortization of intangibles 30,803 29,016 25,597
Funding for employee benefit plans (25,000) (200,000) (59,719)
Other, net 187,438 (178,874) 91,433
- --------------------------------------------------------------------------------------------------------------------
Total adjustments 903,373 (561,926) 316,445
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,320,534 (148,560) 703,687
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks (3,705) 363,870 647,600
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell 4,898 (122,498) 1,045,789
Proceeds from sale of investment securities available for sale 1,211,250 103,531 3,001
Proceeds from maturity of investment securities available for sale 1,531,012 837,412 565,445
Purchases of investment securities available for sale (643,796) (211,222) (1,150,178)
Proceeds from maturity of investment securities held to maturity -- 788,620 1,429,966
Purchases of investment securities held to maturity -- (223,579) (2,197,840)
Net increase in loans (other than loans purchased) (1,852,199) (1,908,266) (2,224,057)
Purchase of loans (77,805) (48,349) (257,043)
Fixed assets, net (46,038) (62,334) (78,454)
Net (increase) decrease in customers' liability on acceptances outstanding (12,341) 13,097 4,580
Net cash provided by acquisitions/sales 200,459 19,224 58,626
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 311,735 (450,494) (2,152,565)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (825,859) 130,276 304,768
Net increase (decrease) in short-term borrowings (129,056) 468,754 (1,056,522)
Net increase (decrease) in acceptances outstanding 12,341 (13,097) (4,580)
Proceeds from issuance of medium- and long-term debt 2,251,000 2,960,000 3,550,000
Repayments and purchases of medium- and long-term debt (2,553,650) (2,418,171) (912,613)
Proceeds from issuance of preferred stock 246,744 -- --
Proceeds from issuance of common stock 35,206 11,736 5,711
Purchase of common stock for treasury and retirement (622,196) (178,656) (76,280)
Dividends paid (173,414) (155,726) (139,988)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,758,884) 805,116 1,670,496
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (126,615) 206,062 221,618
Cash and due from banks at beginning of year 2,028,375 1,822,313 1,600,695
- --------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $1,901,760 $2,028,375 $1,822,313
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Interest paid $1,201,146 $1,274,101 $ 862,563
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 212,530 $ 180,134 $ 171,851
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Noncash investing and financing activities
Loan transfers to other real estate $ 10,534 $ 23,908 $ 26,598
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Stock issued for acquisitions $ 128,938 $ 77,100 $ 121,363
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Loan transfers to investment securities $ -- $ -- $ 91,538
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
34 Comerica Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 1
- --------------------------------------------------------------------------------
ACCOUNTING POLICIES
ORGANIZATION
Comerica Incorporated is a registered bank holding company headquartered in
Detroit, Michigan. The Corporation's principal lines of business are the
Business Bank, the Individual Bank and the Investment Bank. The core businesses
are tailored to each of the Corporation's four primary geographic markets:
Michigan, Texas, California and Florida.
The accounting and reporting policies of Comerica Incorporated and its
subsidiaries conform to generally accepted accounting principles and prevailing
practices within the banking industry. Management makes estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying footnotes. Actual results could differ from these estimates.
The following is a summary of the more significant accounting and reporting
policies.
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries after elimination of all significant intercompany accounts
and transactions. Prior years' financial statements are reclassified to conform
with current financial statement presentation.
For acquisitions accounted for as pooling-of-interests combinations, the
historical consolidated financial statements are restated to include the
accounts and results of operations. For acquisitions using the purchase method
of accounting, the assets acquired and liabilities assumed are adjusted to fair
market values at the date of acquisition, and the resulting net discount or
premium is accreted or amortized into income over the remaining lives of the
relevant assets and liabilities. Goodwill representing the excess of cost over
the net book value of identifiable assets acquired is amortized on a straight-
line basis over periods ranging from 10 to 30 years (weighted average of 17
years). Core deposit intangible assets are amortized on an accelerated method
over 10 years.
LOANS HELD FOR SALE
Loans, normally mortgages, held for sale are carried at the lower of cost or
market. Market value is determined in the aggregate.
SECURITIES
Investment securities held to maturity are those securities which management has
the ability and positive intent to hold to maturity. Investment securities held
to maturity are stated at cost, adjusted for amortization of premium and
accretion of discount.
Investment securities that fail to meet the ability and positive intent criteria
are accounted for as securities available for sale, and stated at fair value
with unrealized gains and losses, net of income taxes, reported as a component
of shareholders' equity.
Trading account securities are carried at market value. Realized and unrealized
gains or losses on trading securities are included in noninterest income.
Gains or losses on the sale of securities are computed based on the adjusted
cost of the specific security.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation, computed on the straight-line method, is charged to
operations over the estimated useful lives of the properties. Leasehold
improvements are amortized over the terms of their respective leases or the
estimated useful lives of the improvements, whichever is shorter.
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb losses inherent in the
loan portfolio. Management determines the adequacy of the allowance 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 loss
experience, current economic conditions, the risk characteristics of the various
categories and concentrations of loans, transfer risk and other pertinent
factors. Loans which are deemed uncollectible are charged off and deducted from
the allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the terms have been renegotiated to less
than market rates due to a serious weakening of the borrower's financial
condition, and other real estate which has been acquired primarily through
foreclosure and is awaiting disposition.
Consumer loans are generally not placed on nonaccrual status and are directly
charged off no later than 180 days past due, or earlier if deemed uncollectible.
Loans other than consumer are generally placed on nonaccrual status when
principal or interest is past due 90 days or more and/or when, in the opinion of
management, full collection of principal or interest is unlikely. At the time a
loan is placed on nonaccrual status, interest previously accrued but not
collected is charged against current income. Income on such loans is then
recognized only to the extent that cash is received and where future collection
of principal is probable.
Comerica Incorporated 35
NOTE 1 (CONTINUED)
- --------------------------------------------------------------------------------
ACCOUNTING POLICIES
Other real estate acquired is carried at the lower of cost or fair value, minus
estimated costs to sell. When the property is acquired through foreclosure, any
excess of the related loan balance over fair value is charged to the allowance
for loan losses. Subsequent write-downs, operating expenses, and losses upon
sale, if any, are charged to noninterest expenses.
PENSION COSTS
Pension costs are charged to salaries and employee benefits expense and funded
consistent with the requirements of federal law and regulations.
POSTRETIREMENT BENEFITS
Postretirement benefits are recognized in the financial statements during the
employee's active service period.
DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
Interest rate and foreign exchange swaps, interest rate caps and floors, and
futures and forward contracts may be used to manage the Corporation's exposure
to interest rate and foreign currency risks. These instruments, with the
exception of futures and forwards, are accounted for on an accrual basis. Net
interest income or expense, including premiums paid or received, is recognized
over the life of the contract and reported as an adjustment to interest expense.
Realized gains and losses on futures and forwards are generally deferred and
amortized over the life of the contract as an adjustment to net interest income.
Gains or losses on early termination of risk management derivative financial
instruments are deferred and amortized as an adjustment to the yields of the
related assets or liabilities over their remaining contractual life. If the
designated asset or liability matures, or is disposed of or extinguished, any
unrealized gains or losses on the related derivative instrument are recognized
currently and reported as an adjustment to interest expense.
Foreign exchange futures and forward contracts, foreign currency options,
interest rate caps, and interest rate swap agreements executed as a service to
customers are accounted for on a mark-to-market basis. As a result, the fair
values of these instruments are recorded in the consolidated balance sheet with
both realized and unrealized gains and losses recognized currently in
noninterest income.
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of nontaxable income such as interest on state and
municipal securities) and include deferred income taxes on temporary differences
between the tax basis and financial reporting basis of assets and liabilities.
STATEMENTS OF CASH FLOWS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption,
"Cash and due from banks."
LOAN ORIGINATION FEES AND COSTS
Loan origination and commitment fees are deferred and recognized over the life
of the related loan or over the commitment period as a yield adjustment. Loan
fees on unused commitments and fees related to loans sold are recognized
currently as other noninterest income.
NOTE 2
- --------------------------------------------------------------------------------
ACQUISITIONS
During the years ended December 31, 1996, 1995 and 1994, Comerica made the
following acquisitions, which were accounted for as purchases:
FMV of FMV of
Assets Liabilities Purchase Intangibles
(in millions) Acquired Assumed Price Recorded
- --------------------------------------------------------------------------
During 1996
Metrobank $1,083 $1,020 $125 $62
During 1995
University Bank & Trust 456 422 69 35
QuestStar Bank, N.A. 205 193 25 13
During 1994
Pacific Western Bancshares 959 908 121 70
Lockwood Banc Group 305 288 44 27
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
36 Comerica Incorporated
NOTE 3
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
Information concerning investment securities as shown in the consolidated
balance sheets of the Corporation was as follows:
Gross Gross
Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------
December 31, 1996
U.S. government and
agency securities $4,011,022 $ 22,702 $ 65,375 $3,968,349
State and municipal
securities 220,173 7,866 196 227,843
Other securities 603,873 654 685 603,842
- -------------------------------------------------------------------------------------
Total securities
available for sale $4,835,068 $ 31,222 $ 66,256 $4,800,034
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
December 31, 1995
U.S. government and
agency securities $6,052,184 $ 41,585 $ 55,429 $6,038,340
State and municipal
securities 353,612 17,618 389 370,841
Other securities 459,887 12,682 22,440 450,129
- -------------------------------------------------------------------------------------
Total securities
available for sale $6,865,683 $ 71,885 $ 78,258 $6,859,310
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
The cost and estimated fair values of debt securities by contractual maturity
were as follows (securities with multiple maturity dates are classified in the
period of final maturity). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
December 31, 1996 Estimated
(in thousands) Cost Fair Value
- -----------------------------------------------------------------
Contractual maturity
Within one year $ 423,356 $ 424,047
Over one year to
five years 356,382 359,436
Over five years to
ten years 105,318 107,610
Over ten years 75,113 75,777
- -----------------------------------------------------------------
Subtotal securities 960,169 966,870
Mortgage-backed
securities 3,792,782 3,751,125
Equity and other
nondebt securities 82,117 82,039
- -----------------------------------------------------------------
Total securities
available for sale $4,835,068 $4,800,034
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Sales and calls of investment securities available for sale and calls of
investment securities held to maturity resulted in realized gains and losses as
follows:
Year Ended December 31 Available for Sale Held to Maturity
- ----------------------------------------------------------------------------
(in thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------
Securities gains $14,945 $11,729 $ -- $ 456
Securities losses (1,357) (350) -- (87)
- ----------------------------------------------------------------------------
Total $13,588 $11,379 $ -- $ 369
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Assets, principally securities, carried at approximately $3.5 billion at
December 31, 1996, were pledged to secure public deposits (including State of
Michigan deposits of $62 million at December 31, 1996), and for other purposes
as required by law.
All held to maturity securities were redesignated to the available for sale
category in December 1995 in accordance with the one-time provisions issued in
conjunction with the FASB's Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." At the date of transfer the amortized cost of the held to maturity
securities was $4.6 billion. The net unrealized loss related to the redesignated
securities totaled $9 million.
Comerica Incorporated 37
NOTE 4
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
The following table summarizes nonperforming assets and loans which are
contractually past due 90 days or more as to interest or principal payments.
Nonperforming assets consist of nonaccrual loans, reduced-rate loans and other
real estate. Nonaccrual loans are those on which interest is not being
recognized. Reduced-rate loans are those on which interest has been renegotiated
to lower than market rates because of the weakened financial condition of the
borrower.
Nonaccrual and reduced-rate loans are included in loans on the consolidated
balance sheet.
December 31
(in thousands) 1996 1995
- -------------------------------------------------------------
Nonaccrual loans
Commercial loans $ 71,991 $ 87,195
Real estate construction loans 3,576 6,578
Commercial mortgage loans 22,567 31,123
Residential mortgage loans 5,160 5,507
- -------------------------------------------------------------
Total 103,294 130,403
Reduced-rate loans 8,009 3,244
- -------------------------------------------------------------
Total nonperforming loans 111,303 133,647
Other real estate 28,398 29,384
- -------------------------------------------------------------
Total nonperforming assets $139,701 $163,031
- -------------------------------------------------------------
- -------------------------------------------------------------
Loans past due 90 days $ 51,748 $ 57,134
- -------------------------------------------------------------
- -------------------------------------------------------------
Gross interest income that would
have been recorded had the
nonaccrual and reduced-rate
loans performed in accordance
with original terms $ 11,119 $ 18,925
- -------------------------------------------------------------
- -------------------------------------------------------------
Interest income recognized $ 2,681 $ 3,427
- -------------------------------------------------------------
- -------------------------------------------------------------
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118, was adopted January 1, 1995. The statements consider a loan
impaired when it is probable that payment of interest and principal 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. The adoption of these
accounting standards had no effect on the financial position or results of
operations of the Corporation.
December 31
(in thousands) 1996 1995
- -------------------------------------------------------------
Average impaired loans for the year $114,253 $148,087
Total period-end impaired loans 98,050 135,034
Period-end impaired loans
requiring an allowance 59,960 89,209
Impairment allowance 19,528 26,578
- -------------------------------------------------------------
- -------------------------------------------------------------
Those impaired loans not requiring an allowance represent loans for which the
fair value exceeded the recorded investment in the loan. Fifty percent of the
total impaired loans at December 31, 1996 are evaluated based on fair value of
related collateral. Remaining loan impairment is based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
NOTE 5
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Balance at January 1 $341,344 $326,195 $298,685
Allowance of institutions and
loans purchased/sold (3,630) 4,668 19,467
Loans charged off (125,912) (119,028) (83,086)
Recoveries on loans previously
charged off 41,363 43,009 35,129
- --------------------------------------------------------------------------
Net loans charged off (84,549) (76,019) (47,957)
Provision for loan losses 114,000 86,500 56,000
- --------------------------------------------------------------------------
Balance at December 31 $367,165 $341,344 $326,195
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
As a percent of total loans 1.40% 1.40% 1.47%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
38 Comerica Incorporated
NOTE 6
- --------------------------------------------------------------------------------
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Concentrations of both on-balance sheet and off-balance sheet credit risk are
controlled and monitored as part of credit policies. The Corporation is a
regional bank holding company with a geographic concentration of its on-balance
sheet and off-balance sheet activities centered in Michigan. In addition, the
Corporation has an industry concentration with the automotive industry, which
includes manufacturers and their finance subsidiaries, suppliers, dealers and
company executives.
At December 31, 1996 and 1995, exposure from loan commitments and guarantees to
companies related to the automotive industry totaled $8.2 billion and $8.0
billion, respectively. Additionally, commercial real estate loans, including
commercial mortgages and construction loans, totaled $4.2 billion in 1996 and
$3.9 billion in 1995. Approximately $1.9 billion of commercial real estate loans
at December 31, 1996 involved mortgages on owner-occupied properties. Those
borrowers are involved in business activities other than real estate, and the
sources of repayment are not dependent on the performance of the real estate
market.
NOTE 7
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 by major category follows:
(in thousands) 1996 1995
- --------------------------------------------------------------------------
Land $ 54,635 $ 61,144
Buildings and improvements 366,618 402,569
Furniture and equipment 436,133 479,099
- --------------------------------------------------------------------------
Total cost 857,386 942,812
Less accumulated depreciation and amortization (449,723) (487,810)
- --------------------------------------------------------------------------
Net book value $ 407,663 $ 455,002
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Rental expense for leased properties and equipment amounted to $44 million in
1996, 1995 and 1994. Future minimum lease rentals under noncancelable operating
lease obligations are as follows:
(in thousands)
- -------------------------------------------------------------
1997 $ 40,211
1998 38,575
1999 35,518
2000 32,256
2001 28,735
2002 and later 138,414
- -------------------------------------------------------------
- -------------------------------------------------------------
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," was adopted in 1995. The statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used. The adoption of this standard had no significant effect on the financial
position or results of operations of the Corporation.
NOTE 8
- --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds, consisting of commercial paper, borrowed securities, term
federal funds purchased, short-term notes and treasury tax and loan deposits,
generally mature within one to 120 days from the transaction date. The following
is a summary of short-term borrowings for the two years ended December 31, 1996:
Federal Funds Purchased
and Securities Sold Other
Under Agreements Borrowed
(in thousands) to Repurchase Funds
- -------------------------------------------------------------------------------
December 31, 1996
Amount outstanding at year-end $1,395,540 $3,093,651
Weighted average interest rate at year-end 5.80% 5.14%
December 31, 1995
Amount outstanding at year-end $3,206,612 $1,467,550
Weighted average interest rate at year-end 5.39% 5.18%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The Corporation entered into interest rate swap contracts that convert $700
million of short-term notes based on the bank prime rate minus 2.96% and the
one-month London Interbank Offered Rate (LIBOR) (5.29% and 5.53% at December 31,
1996, respectively) to a three-month LIBOR (5.56% at December 31, 1996) based
rate.
At December 31, 1996, the parent company had available additional credit
totaling $100 million under a line of credit agreement, all of which was unused.
Under the current agreement, the line will expire in April of 2000.
Comerica Incorporated 39
NOTE 9
- --------------------------------------------------------------------------------
MEDIUM- AND LONG-TERM DEBT
Medium- and long-term debt consisted of the following at December 31:
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
Parent Company
7.25% subordinated notes due 2007 $ 148,548 $ 148,584
9.75% subordinated notes due 1999 74,782 74,692
10.125% subordinated debentures due 1998 74,880 74,800
- -------------------------------------------------------------------------------
Total parent company 298,210 298,076
Subsidiaries
Subordinated notes:
8.375% subordinated notes due 2024 147,860 147,782
7.25% subordinated notes due 2002 149,089 148,931
6.875% subordinated notes due 2008 99,143 99,066
7.125% subordinated notes due 2013 148,112 148,000
7.875% subordinated notes due 2026 146,814 --
- -------------------------------------------------------------------------------
Total subordinated notes 691,018 543,779
Medium-term notes:
Floating rate based on Treasury bill indices 399,955 1,099,701
Floating rate based on Prime indices -- 550,000
Floating rate based on LIBOR indices 1,448,947 624,937
Fixed rate notes with interest rates ranging
from 5.75% to 6.875% 1,399,040 1,523,433
- -------------------------------------------------------------------------------
Total medium-term notes 3,247,942 3,798,071
Notes payable maturing on dates ranging
from 1997 through 2015 4,599 4,490
- -------------------------------------------------------------------------------
Total subsidiaries 3,943,559 4,346,340
- -------------------------------------------------------------------------------
Total medium- and long-term debt $4,241,769 $4,644,416
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Concurrent with the issuance of certain of the medium- and long-term debt
presented above, the Corporation entered into interest rate swap agreements to
convert the stated rate of the debt to a rate based on the indices identified in
the following table:
Principal
Amount Base
of Debt Rate at
(in thousands) Converted Base Rate 12/31/96
- ----------------------------------------------------------------------------
Parent Company
7.25% subordinated notes $150,000 6-month LIBOR 5.63%
9.75% subordinated notes 50,000 3-month LIBOR 5.56
- ----------------------------------------------------------------------------
Subsidiaries
Subordinated notes:
8.375% subordinated notes 150,000 6-month LIBOR 5.63
7.25% subordinated notes 150,000 6-month LIBOR 5.63
6.875% subordinated notes 100,000 6-month LIBOR 5.63
7.125% subordinated notes 150,000 6-month LIBOR 5.63
7.875% subordinated notes 150,000 6-month LIBOR 5.63
Medium-term notes:
Floating based on LIBOR
indices 200,000 3-month LIBOR 5.56
Fixed rate notes with interest
rates ranging from 5.75%
to 6.65% 850,000 3-month LIBOR 5.56
5.95% fixed rate note 150,000 5.63% 5.63
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
All subordinated notes and debentures with maturities greater than one year
qualify as Tier 2 capital.
The Corporation currently has two medium-term note programs: a senior note
program and a European note program. Under these programs, certain of the bank
subsidiaries may offer an aggregate principal amount of up to $9.5 billion. The
notes can be issued as fixed or floating rate notes and with terms from one
month to 15 years. The interest rate on the floating rate medium-term notes
based on LIBOR ranged from three-month LIBOR minus 0.13% to three-month LIBOR
plus 0.10%. The notes are due from 1997 to 2001. The interest rates on the
floating medium-term notes based on the three-month U.S. Treasury bill bond
equivalent rate (5.22% at December 31, 1996) were the rate plus 0.30% for notes
maturing in 1997. The maturities of the fixed rate notes range from 1997 to
2000. The medium-term notes do not qualify as Tier 2 capital and are not insured
by the FDIC. The principal maturities of medium- and long-term debt are as
follows:
(in thousands)
- -------------------------------------------------------------
1997 $2,549,030
1998 274,095
1999 74,290
2000 199,431
2001 299,315
2002 and later 845,608
- -------------------------------------------------------------
- -------------------------------------------------------------
40 Comerica Incorporated
NOTE 10
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
During 1996, the board of directors authorized the repurchase of up to 15
million shares of Comerica Incorporated common stock for general corporate
purposes, acquisitions and employee benefit plans. At December 31, 1996, 8.6
million shares had been repurchased under this program.
At December 31, 1996, the Corporation had reserved 4.8 million shares of common
stock for issuance to employees under the long-term incentive plans.
During 1996, the Corporation issued 5 million shares of Fixed/ Adjustable Rate
Noncumulative Preferred Stock, Series E, with a stated value of $50 per share.
Dividends are payable quarterly, at a rate of 6.84% per annum through July 1,
2001. Thereafter, the rate will be equal to 0.625% plus an effective rate, but
not less than 7.34% nor greater than 13.34%. The effective rate will be equal to
the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Thirty Year Constant Maturity Rate (as defined in the prospectus). The
Corporation, at its option, may redeem all or part of the outstanding shares on
or after July 1, 2001.
NOTE 11
- --------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Primary net income per common share is computed by dividing adjusted net income
by the weighted average number of shares of common stock and dilutive common
stock equivalents outstanding during the period. Common stock equivalents
consist of common stock issuable under the assumed exercise of stock options
granted under the Corporation's stock plans, using the treasury stock method.
Fully diluted net income per share of common stock differs from primary to the
extent the treasury stock method affects the assumed conversion of common stock
equivalents. A computation of earnings per share follows:
Year Ended December 31
(in thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------
Primary
Average shares outstanding 112,847 115,797 117,264
Common stock equivalent
Net effect of the assumed
exercise of stock options 2,007 1,097 896
- -------------------------------------------------------------------------------
Primary average shares 114,854 116,894 118,160
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income $417,161 $413,366 $387,242
Less preferred stock dividends 9,025 -- --
- -------------------------------------------------------------------------------
Net income applicable to
common stock $408,136 $413,366 $387,242
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Primary net income per share $ 3.55 $ 3.54 $ 3.28
Fully diluted
Average shares outstanding 112,847 115,797 117,264
Common stock equivalents
Net effect of the assumed
exercise of stock options 2,411 1,783 899
- -------------------------------------------------------------------------------
Fully diluted average shares 115,258 117,580 118,163
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income $417,161 $413,366 $387,242
Less preferred stock dividends 9,025 -- --
- -------------------------------------------------------------------------------
Net income applicable to
common stock $408,136 $413,366 $387,242
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fully diluted net income per share $ 3.54 $ 3.52 $3.28
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Comerica Incorporated 41
NOTE 12
- --------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLANS
The Corporation has long-term incentive plans under which it has awarded both
shares of restricted stock to key executive officers and stock options to
executive officers and key personnel of the Corporation and its subsidiaries.
The exercise price of the stock options is equal to the fair market value at the
time the options are granted and the options may have restrictions regarding
exercisability. The maturity of each option is determined at the date of grant;
however, no options may be exercised later than ten years from the date of
grant. The Corporation adopted the disclosure-only option under SFAS No. 123,
"Accounting for Stock-Based Compensation," as of December 31, 1996. If the
recognition provisions of the new statement had been adopted as of the beginning
of 1996, the effect on 1996 net income would have been immaterial.
Average per Share
- -------------------------------------------------------------------------------
Exercise Market
Number Price Price
- -------------------------------------------------------------------------------
Outstanding--December 31, 1993 3,441,273 $21.68 $26.63
Granted 887,350 27.03 27.03
Cancelled (92,877) 29.30 27.78
Exercised (247,726) 14.67 28.94
Expired --
- -------------------------------------------------------------------------------
Outstanding--December 31, 1994 3,988,020 23.13 24.38
Granted 1,106,180 27.96 27.96
Cancelled (220,741) 29.15 31.88
Exercised (514,247) 16.11 31.56
Expired --
Acquisition of
University Bank & Trust 153,119 16.05 27.50
- -------------------------------------------------------------------------------
Outstanding--December 31, 1995 4,512,331 24.58 40.00
Granted 1,262,762 38.42 38.42
Cancelled (214,079) 28.43 43.42
Exercised (1,183,742) 19.17 44.01
Expired --
Acquisition of Metrobank 397,145 12.74 39.63
- -------------------------------------------------------------------------------
Outstanding--December 31, 1996 4,774,417 $28.43 $52.38
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Exercisable--December 31, 1996 2,389,945
Available for grant--
December 31, 1996 58,238
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31,1996:
Outstanding Exercisable
- -------------------------------------------------------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (a) Price Shares Price
- -------------------------------------------------------------------------
$ 9.48 - $15.44 793,185 3.2 $14.17 793,185 $14.17
15.55 - 27.00 817,617 6.2 24.56 504,918 23.05
27.88 - 29.25 927,230 8.2 27.90 236,058 27.91
29.75 - 37.75 1,024,398 5.9 31.20 855,784 30.96
38.13 - 52.38 1,211,987 9.2 38.43 -- --
- -------------------------------------------------------------------------
Total 4,774,417 6.8 $28.43 2,389,945 $23.41
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
(a) Average contractual life remaining in years.
42 Comerica Incorporated
NOTE 13
- --------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS
The Corporation has a defined benefit pension plan in effect for substantially
all full-time employees. Staff expense includes income of $1.4 million in 1996,
$1.0 million in 1995 and $2.3 million in 1994 for the plan. Benefits under the
plan are based primarily on years of service and the levels of compensation
during the five highest paid consecutive calendar years occurring during the
last ten years before retirement. The plan's assets primarily consist of U.S.
government and agency securities, corporate bonds and notes, equity securities
and units of certain collective investment funds administered by Comerica Bank.
Net periodic pension cost/(income) consisted of the following:
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
Service cost--benefits earned
during the period $11,675 $ 8,857 $ 9,273
Interest cost on projected
benefit obligation 31,572 29,231 27,043
Actual return on plan assets (62,710) (93,650) 15,323
Net amortization and (deferral) 18,072 54,585 (53,926)
- -----------------------------------------------------------------------
Net pension income $(1,391) $ (977) $(2,287)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
The following table sets forth the funded status of the defined benefit pension
plans and amounts recognized on the Corporation's balance sheet:
December 31
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
Accumulated benefit obligation
Vested $367,376 $336,411
Nonvested 16,483 16,970
- -------------------------------------------------------------------------------
Accumulated benefit obligation 383,859 353,381
Effect of projected future compensation levels 78,917 71,597
- -------------------------------------------------------------------------------
Projected benefit obligation 462,776 424,978
Plan assets at fair value 515,164 466,845
- -------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 52,388 41,867
Unrecognized net gain due to past experience
different from that assumed and effects of
changes in assumptions (17,672) (13,397)
Unrecognized net assets being amortized
over 15 years (20,191) (25,026)
- -------------------------------------------------------------------------------
Prepaid pension $ 14,525 $ 3,444
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Actuarial assumptions were as follows:
1996 1995 1994
- --------------------------------------------------------------------------
Discount rate used in determining
projected benefit obligation 7.5% 7.5% 8.5%
Rate of increase in compensation levels 5% 5% 5%
Long-term rate of return on assets 9% 8% 8%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
The Corporation has a savings ("401(k)") plan which is a defined contribution
plan. All of the Corporation's salaried and regular part-time employees are
eligible to participate in the plan. The Corporation makes matching
contributions based on a declining percentage of employee contributions
(currently, maximum per employee is $800) as well as a performance-based
matching contribution based on the Corporation's financial performance. Staff
expense includes expense of $10.4 million in 1996, $7.1 million in 1995 and $7.6
million in 1994 for the plan.
The Corporation's postretirement benefits plan continues postretirement health
care and life insurance benefits for retirees as of December 31, 1992, provides
a phase-out for employees over 50 as of that date, and substantially
reduces all benefits for remaining employees. The Corporation has funded the
plan with a company-owned life insurance contract purchased in 1995.
Net periodic postretirement benefit cost included the following components:
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------
Service cost $ 402 $ 383 $ 467
Interest cost on accumulated
postretirement benefit obligation 5,597 6,652 6,698
Return on plan assets (3,094) (2,453) --
Amortization of transition obligation 4,628 4,628 4,628
Net amortization and (deferral) (2,488) (1,511) --
- ----------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 5,045 $ 7,699 $11,793
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
The following table sets forth the status of the postretirement plan at
December 31:
(in thousands) 1996 1995
- ----------------------------------------------------------------------------
Retirees $65,711 $68,477
Other fully eligible plan participants 4,910 4,568
Other active plan participants 5,799 4,993
- ----------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 76,420 78,038
Plan assets at fair value 80,547 77,453
- ----------------------------------------------------------------------------
Funded status 4,127 (585)
Unrecognized net gain (11,800) (13,039)
Unrecognized transition obligation 73,733 78,360
- ----------------------------------------------------------------------------
Prepaid postretirement benefit $66,060 $64,736
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Actuarial assumptions were as follows:
1996 1995 1994
- ----------------------------------------------------------------------------
Discount rate used in determining
accumulated postretirement
benefit obligation 7.5% 7.5% 8.5%
Long-term rate of return on assets 6.7% 6.7% --
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
An 11 percent health care cost trend rate was projected for 1996 and is assumed
to decrease gradually to 6 percent by 2002, remaining constant thereafter.
Increasing each health care rate by one percentage point would increase the
accumulated postretirement benefit obligation by $5 million at December 31, 1996
and the aggregate of the service and interest cost components by $420 thousand
for the year ended December 31, 1996.
Comerica Incorporated 43
NOTE 14
- -------------------------------------------------------------------------------
INCOME TAXES
The current and deferred components of income taxes were as follows:
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Currently payable
Federal $225,863 $192,899 $176,322
State, local and foreign 16,951 8,610 6,676
- --------------------------------------------------------------------------
242,814 201,509 182,998
Deferred federal, state and local (13,769) 10,819 11,855
- --------------------------------------------------------------------------
Total $229,045 $212,328 $194,853
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
There were $4.8 million, $4.1 million and $1.2 million of income taxes provided
on securities transactions in 1996, 1995 and 1994, respectively.
The principal components of deferred tax (assets) liabilities at December 31
were as follows:
(in thousands) 1996 1995
- ---------------------------------------------------------------------------
Allowance for loan losses $(116,816) $(99,660)
Lease financing transactions 105,805 96,735
Allowance for depreciation 18,972 11,017
Deferred loan origination fees and costs (11,408) (13,604)
Investment securities available for sale (11,562) (2,242)
Employee benefits (3,132) (8,514)
Restructuring charge (15,178) --
Other temporary differences, net (35,825) (23,728)
- ---------------------------------------------------------------------------
Total $ (69,144) $(39,996)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The provision for income taxes differs from that computed by applying the
federal statutory rate of 35 percent for the reasons in the following analysis:
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Tax based on federal statutory rate $226,172 $218,993 $203,733
Effect of tax-exempt interest income (8,842) (12,538) (16,153)
Other 11,715 5,873 7,273
- -------------------------------------------------------------------------------
Provision for income taxes $229,045 $212,328 $194,853
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 15
- --------------------------------------------------------------------------------
RESTRUCTURING
The Corporation recorded a restructuring charge of $90 million in 1996 in
connection with a program to improve efficiency, revenue and customer service.
The charge includes only identified direct and incremental costs associated with
the program. The components of the restructuring charge are as follows:
(in thousands)
- -----------------------------------------------------
Termination benefits $48,000
Occupancy and equipment 21,000
Other 21,000
- -----------------------------------------------------
Total restructuring charge $90,000
- -----------------------------------------------------
- -----------------------------------------------------
Termination benefits primarily include severance payments. The occupancy and
equipment portion consists of lease termination costs, space consolidation and
estimated losses on the disposal of vacated properties. Other charges consist
primarily of the project costs incurred during the assessment phase of the
program.
NOTE 16
- --------------------------------------------------------------------------------
TRANSACTIONS WITH RELATED PARTIES
The bank subsidiaries have had, and expect to have in the future, transactions
with the Corporation's directors and their affiliates. Such transactions were
made in the ordinary course of business and included extensions of credit, all
of which were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers and did not, in management's opinion, involve more than
normal risk of collectibility or present other unfavorable features. The
aggregate amount of loans attributable to persons who were related parties at
December 31, 1996, approximated $145 million at the beginning and $193 million
at the end of 1996. During 1996, new loans to related parties aggregated $92
million and repayments totaled $44 million.
44 Comerica Incorporated
NOTE 17
- --------------------------------------------------------------------------------
REGULATORY CAPITAL AND BANKING SUBSIDIARIES
Banking regulations limit the transfer of assets in the form of dividends, loans
or advances from the bank subsidiaries to the Corporation. Under the most
restrictive of these regulations, the aggregate amount of dividends which can be
paid to the Corporation without obtaining prior approval from bank regulatory
agencies approximated $371 million at January 1, 1997, plus current year's
earnings. Substantially all the assets of the Corporation's subsidiaries are
restricted from transfer to the Corporation in the form of loans or advances.
Dividends paid to the Corporation by its banking subsidiaries amounted to $322
million in 1996, $184 million in 1995, and $293 million in 1994.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios of Tier 1 and total capital (as
defined in the regulations) to average and risk-weighted assets. At December 31,
1996, the Corporation and all of its banking subsidiaries exceeded the ratios
required for an institution to be considered "well capitalized" (total capital
ratio greater than 10 percent). The following is a summary of the capital
position of the Corporation and its significant banking subsidiaries:
Comerica, Inc. Comerica Comerica Bank- Comerica Bank-
(in thousands) (Consolidated) Bank Texas California
- -------------------------------------------------------------------------------------------------------------
December 31,1996
Tier 1 capital $2,366,342 $1,930,830 $275,895 $282,108
Total capital 3,617,961 2,914,832 309,627 319,109
Tier 1 capital to average assets
(minimum-3.0%) 7.07% 7.23% 8.42% 7.40%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 7.18 7.12 9.49 8.95
Total capital to risk-weighted assets
(minimum-8.0%) 10.99 10.75 10.65 10.12
December 31,1995
Tier 1 capital $2,361,785 $1,799,266 $267,306 $170,038
Total capital 3,470,229 2,601,900 301,753 192,326
Tier 1 capital to average assets
(minimum-3.0%) 6.87% 6.52% 7.73% 7.86%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 7.63 7.25 9.23 9.56
Total capital to risk-weighted assets
(minimum-8.0%) 11.21 10.48 10.42 10.81
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
NOTE 18
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Corporation enters into various off-
balance sheet transactions involving derivative financial instruments, foreign
exchange contracts, and credit-related financial instruments to manage exposure
to fluctuations in interest rate, foreign currency and other market risks and to
meet the financing needs of customers. These financial instruments involve, to
varying degrees, elements of credit and market risk in excess of the amount
reflected in the consolidated balance sheets.
Credit risk is the possible loss that may occur in the event of nonperformance
by the counterparty to a financial instrument. The Corporation attempts to
minimize credit risk arising from off-balance sheet financial instruments by
evaluating the creditworthiness of each counterparty adhering to the same credit
approval process used for traditional lending activities. Counterparty risk
limits and monitoring procedures have also been established to facilitate the
management of credit risk. Collateral is obtained, if deemed necessary, based on
the results of management's credit evaluation. Collateral varies but may include
cash, investment securities, accounts receivable, inventory, property, plant and
equipment, or real estate.
Derivative financial instruments and foreign exchange contracts are traded over
an organized exchange or negotiated over-the-counter. Credit risk associated
with exchange-traded contracts is typically assumed by the organized exchange.
Over-the-counter contracts are tailored to meet the needs of the counterparties
involved and, therefore, contain a greater degree of credit risk and liquidity
risk than exchange-traded contracts which have standardized terms
Comerica Incorporated 45
NOTE 18 (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
and readily available price information. The Corporation reduces exposure to
credit and liquidity risks from over-the-counter derivative and foreign exchange
contracts by conducting such transactions with investment-grade domestic and
foreign investment banks or commercial banks.
Market risk is the potential loss that may result from movements in interest or
foreign currency rates which cause an unfavorable change in the value of a
financial instrument. The Corporation manages this risk by establishing
counterparty and monetary exposure limits and monitoring compliance with those
limits. Market risk arising from derivative and foreign exchange positions
entered into on behalf of customers is relected in the consolidated financial
statements and may be mitigated by entering into offsetting transactions. Market
risk inherent in off-balance sheet derivative and foreign exchange contracts
held or issued for risk management purposes is generally offset by changes in
the value of rate sensitive on-balance sheet assets or liabilities. Termination
of derivative contracts, other than by a counterparty, is unlikely as a
particular instrument can be offset by entering into an opposite-effect
derivative product to facilitate risk management strategies.
DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
The Corporation, as an end-user, employs a variety of off-balance sheet
financial instruments for risk management purposes. Activity related to these
instruments is centered predominantly in the interest rate markets and mainly
involves interest rate swaps. Various other types of instruments are also used
to manage exposures to market risks, including interest rate caps and floors,
foreign exchange forward contracts, and foreign exchange swap agreements. Refer
to the section entitled "Risk Management Derivative Financial Instruments and
Foreign Exchange Contracts" in Management's Discussion and Analysis on page 27
for further information about the Corporation's objectives for using such
instruments.
The following table presents the composition of off-balance sheet derivative
financial instruments and foreign exchange contracts, excluding commitments,
held or issued for risk management purposes at December 31, 1996 and 1995.
Notional 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.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
- -------------------------------------------------------------------------------
December 31, 1996
Risk management
Interest rate contracts:
Swaps $8,015 $ 42 $(97) $(55)
Options, caps and
floors purchased 53 -- -- --
Caps written 152 -- -- --
- -------------------------------------------------------------------------------
Total interest rate
contracts 8,220 42 (97) (55)
Foreign exchange
contracts:
Spot and forwards 444 26 (4) 22
Swaps 38 -- (1) (1)
- -------------------------------------------------------------------------------
Total foreign
exchange contracts 482 26 (5) 21
- -------------------------------------------------------------------------------
Total risk management $8,702 $ 68 $(102) $(34)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
December 31, 1995
Risk management
Interest rate contracts:
Swaps $5,925 $ 88 $(20) $ 68
Options, caps and
floors purchased 40 19 (21) (2)
Caps written 154 -- -- --
- -------------------------------------------------------------------------------
Total interest rate
contracts 6,119 107 (41) 66
Foreign exchange
contracts:
Spot and forwards 229 2 (1) 1
Swaps 50 8 -- 8
- -------------------------------------------------------------------------------
Total foreign
exchange contracts 279 10 (1) 9
- -------------------------------------------------------------------------------
Total risk management $6,398 $117 $(42) $ 75
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Credit risk, which excludes the effects of any collateral or netting
arrangements, is measured as the cost to replace, at current market rates,
contracts in a profitable position. The amount of this exposure is represented
by the gross unrealized gains on derivative and foreign exchange contracts. At
December 31, 1996 and 1995, bilateral collateral agreements with counterparties
covered 93 percent and 82 percent, respectively, of the notional amount of
interest rate derivative contracts. These agreements reduce credit risk by
providing for the exchange of marketable investment securities to secure amounts
due on contracts in an unrealized gain position. In addition, at December 31,
1996 master netting arrangements had been established with all interest rate
swap counterparties and certain foreign exchange counterparties. These
arrangements effectively reduce credit risk by permitting settlement, on a net
basis, of contracts entered into with the same counterparty. The Corporation has
not experienced any credit losses associated with derivative or foreign exchange
contracts.
46 Comerica Incorporated
NOTE 18 (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
On a limited scale, fee income is earned from entering into various
transactions, principally foreign exchange contracts and interest rate caps, at
the request of customers. The Corporation does not speculate in derivative
financial instruments for the purpose of profiting in the short-term from
favorable movements in market rates.
Fair values for customer initiated and other derivative and foreign exchange
contracts represent the net unrealized gains or losses on such contracts and are
recorded in the consolidated balance sheets. Changes in fair value are
recognized in the consolidated income statements. For the year ended
December 31, 1996, unrealized gains and unrealized losses on customer initiated
and other foreign exchange contracts averaged $10 million and $9 million,
respectively. For the year ended December 31, 1995, unrealized gains and
unrealized losses averaged $6 million and $5 million, respectively. These
contracts also generated $7 million of noninterest income for both years ended
December 31, 1996 and 1995. Average positive and negative fair values and income
related to customer initiated and other interest rate contracts were not
material for 1996 and 1995.
The following table presents the composition of off-balance sheet derivative
financial instruments and foreign exchange contracts held or issued in
connection with customer initiated and other activities at December 31, 1996 and
1995.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
- -------------------------------------------------------------------------------
December 31, 1996
Customer initiated and other
interest rate contracts:
Caps written $ 358 $ -- $ -- $ --
Floors purchased 2 -- -- --
Swaps 30 5 (5) --
- -------------------------------------------------------------------------------
Total interest rate
contracts 390 5 (5) --
Foreign exchange
contracts:
Spot, forwards, futures
and options 644 19 (18) 1
- -------------------------------------------------------------------------------
Total customer
initiated and other $1,034 $ 24 $(23) $ 1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
December 31, 1995
Customer initiated and other
interest rate contracts:
Caps written $ 360 $ -- $ -- $ --
Swaps 3 -- -- --
- -------------------------------------------------------------------------------
Total interest rate
contracts 363 -- -- --
Foreign exchange
contracts:
Spot, forwards, futures
and options 320 5 (5) --
- -------------------------------------------------------------------------------
Total customer
initiated and other $ 683 $ 5 $ (5) $ --
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Detailed discussions of each class of derivative financial instrument and
foreign exchange contract held or issued by the Corporation for both risk
management and customer initiated and other activities are provided below.
INTEREST RATE SWAPS
Interest rate swaps are agreements in which two parties periodically exchange
fixed cash payments for variable payments based on a designated market rate or
index (or variable payments based on two different rates or indices for basis
swaps), applied to a specified notional amount until a stated maturity. In some
cases, the payments may be based on the change in the value of an underlying
security. The Corporation's swap agreements are structured such that variable
payments are primarily based on one-month and three-month LIBOR. These
instruments are principally negotiated over-the-counter and are subject to
credit risk, market risk and liquidity risk.
INTEREST RATE OPTIONS, INCLUDING CAPS AND FLOORS
Option contracts grant the option holder the right to buy or sell an underlying
financial instrument for a predetermined price before the contract expires.
Interest rate caps and floors are option-based contracts which entitle the buyer
to receive cash payments based on the difference between a designated reference
rate and the strike price, applied to a notional amount. Written options,
primarily caps, expose the Corporation to market risk but not credit risk. A fee
is received at inception for assuming the risk of unfavorable changes in
interest rates. Purchased options contain both credit and market risk; however,
market risk is limited to the fee paid. Options are either exchange-traded or
negotiated over-the-counter. All interest rate caps and floors are over-the-
counter agreements.
FOREIGN EXCHANGE CONTRACTS
The Corporation uses foreign exchange rate swaps, including generic receive
variable swaps and cross-currency swaps, for risk management purposes. Generic
receive variable swaps involve payment, in a foreign currency, of the difference
between a contractually fixed exchange rate and an average exchange rate
determined at settlement, applied to a notional amount. Cross-currency swaps
involve the exchange of both interest and principal amounts in two different
currencies. Other foreign exchange contracts such as futures, forwards and
options are primarily entered into as a service to customers and to offset
market risk arising from such positions. Futures and forward contracts require
the delivery or receipt of foreign currency at a specified date and exchange
rate. Foreign currency options allow the holder to purchase or sell a foreign
currency at a specified date and price. Foreign exchange futures are exchange-
traded, while forwards, swaps and most options are negotiated over-the-counter.
Foreign exchange contracts expose the Corporation to both market risk and credit
risk.
Comerica Incorporated 47
NOTE 18 (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
COMMITMENTS
The Corporation also enters into commitments to purchase or sell earning assets
for risk management purposes. These transactions, which are similar in nature to
forward contracts, did not have a material impact on the consolidated financial
statements for the years ended December 31, 1996 and 1995. Commitments to
purchase investment securities are executed to secure certain rates on primarily
U.S. government and agency securities, and totaled $50 million at year-end 1996.
No such commitments were outstanding at year-end 1995. Commitments to purchase
and sell municipal bond securities totaled $18 million and $30 million at
December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, $23
million and $147 million, respectively, of commitments with settlement terms of
up to 120 days had been initiated to reduce interest rate risk on fixed rate
residential mortgage loans originated or held for sale. Outstanding commitments
expose the Corporation to both credit risk and market risk.
Available credit lines on fixed rate credit card and check product accounts,
which have characteristics similar to option contracts, totaled $2.0 billion at
December 31, 1996, the same as 1995. These commitments expose the Corporation to
the risk of a reduction in net interest income as interest rates increase.
Market risk exposure arising from fixed rate 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. Additional information concerning unused commitments to
extend credit is provided in the "Credit-Related Financial Instruments" section
below.
CREDIT-RELATED FINANCIAL INSTRUMENTS
The Corporation issues off-balance sheet financial instruments in connection
with commercial and consumer lending activities. Credit risk associated with
these instruments is represented by the contractual amounts indicated in the
following table:
(in millions) 1996 1995
- -------------------------------------------------------------------------------
Unused commitments to extend credit $22,118 $18,622
Standby letters of credit and financial guarantees 2,684 1,925
Commercial letters of credit 335 167
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNUSED COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding agreements to lend to a
customer, provided there is no violation of any condition established in the
contract. These commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many commitments
expire without being drawn upon, the total contractual amount of commitments
does not necessarily represent future cash requirements of the Corporation.
Total unused commitments to extend credit at December 31, 1996 and 1995,
included $4 billion of variable and fixed rate revolving credit commitments.
Other unused loan commitments, primarily variable rate, totaled $18 billion at
December 31, 1996 and $15 billion at December 31, 1995.
STANDBY AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES
Standby and commercial letters of credit and financial guarantees represent
conditional obligations of the Corporation which guarantee the performance of a
customer to a third party. Standby letters of credit and financial guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. Long-term
standby letters of credit and financial guarantees, which generally extend for
five or more years and expire in decreasing amounts through the year 2010, were
$1,192 million and $758 million at December 31, 1996 and 1995, respectively.
The remaining standby letters of credit and financial guarantees, which mature
within one year, totaled $1,492 million and $1,167 million at December 31, 1996
and 1995, respectively. Commercial letters of credit are issued to finance
foreign or domestic trade transactions.
NOTE 19
- --------------------------------------------------------------------------------
CONTINGENT LIABILITIES
The State of Michigan filed a lawsuit in District Court on July 24, 1990,
against a subsidiary bank and certain former officers, directors and
shareholders of a lending customer seeking recovery of amounts expended by the
State (past and future) to clean up hazardous waste at two former plant sites,
compensation for damages to natural resources, civil penalties for claimed
violation of State Acts and attorney's fees. Plaintiff seeks cleanup costs and
damages and has expressed the opinion that the claim will be well in excess of
$30 million. In January 1993, the court granted the bank's motion for summary
judgment and the Circuit Court of Appeals upheld the judgment on December 19,
1996.
The Corporation and its subsidiaries are parties to other litigation and claims
arising in the normal course of their activities. Although the amount of
ultimate liability, if any, with respect to such matters cannot be determined,
management, after consultation with legal counsel, believes that the litigation
and claims, some of which are substantial, including the matter described above,
will not have a materially adverse effect on the Corporation's consolidated
financial position.
48 Comerica Incorporated
NOTE 20
- --------------------------------------------------------------------------------
USAGE RESTRICTIONS
Included in cash and due from banks are amounts required to be deposited with
the Federal Reserve Bank. These reserve balances vary, depending on the level of
customer deposits in the Corporation's subsidiary banks. At December 31, 1996
and 1995, the Federal Reserve balances were $534 million and $575 million,
respectively.
NOTE 21
- --------------------------------------------------------------------------------
ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair values of financial instruments, which differ
from carrying values, often requires the use of estimates. In cases where quoted
market values are not available, the Corporation uses present value techniques
and other valuation methods to estimate the fair values of its financial
instruments. These valuation methods require considerable judgment, and the
resulting estimates of fair value can be significantly affected by the
assumptions made and methods used. Accordingly, the estimates provided herein do
not necessarily indicate amounts which could be realized in a current exchange.
Furthermore, as the Corporation normally intends to hold the majority of its
financial instruments until maturity, it does not expect to realize many of the
estimated amounts disclosed. The disclosures also do not include estimated fair
value amounts for items which are not defined as financial instruments, but
which have significant value. These include such items as core deposit
intangibles, the future earnings potential of significant customer
relationships, and the value of trust operations and other fee generating
businesses. The Corporation does not believe that it would be practicable to
estimate a representational fair value for these types of items.
The Corporation used the following methods and assumptions:
Cash and short-term investments: The carrying amount approximates the estimated
fair value of these instruments, which consist of cash and due from banks,
interest-bearing deposits with banks, and federal funds sold.
Trading account securities: These securities are carried at quoted market value
or the market value for comparable securities, which represents estimated fair
value.
Loans held for sale: The market value of these loans represents estimated fair
value. The market value is determined on the basis of existing forward
commitments or the market values of similar loans.
Investment securities: The market value of investment securities, which is based
on quoted market values or the market values for comparable securities,
represents estimated fair value.
Domestic commercial loans: These consist of commercial, real estate
construction, commercial mortgage and equipment lease financing loans. The
estimated fair value of the Corporation's variable rate commercial loans is
represented by their carrying value, adjusted by an amount which estimates the
change in fair value caused by changes in the credit quality of borrowers since
the loans were originated. The estimated fair value of fixed rate commercial
loans is calculated by discounting the contractual cash flows of the loans using
year-end origination rates derived from the Treasury yield curve or other
representative bases. The resulting amounts are adjusted to estimate the effect
of changes in the credit quality of borrowers since the loans were originated.
International loans: The estimated fair value of the Corporation's short-term
international loans which consist of trade-related loans, or loans which have no
cross-border risk due to the existence of domestic guarantors or liquid
collateral, is represented by their carrying value, adjusted by an amount which
estimates the effect on fair value of changes in the credit quality of borrowers
or guarantors. The estimated fair value of long-term international loans is
based on the quoted market values of these loans or on the market values of
international loans with similar characteristics.
Retail loans: This category consists of residential mortgage, consumer and
auto lease financing loans. The estimated fair value of residential mortgage
loans is based on discounted contractual cash flows or market values of
similar loans sold in conjunction with securitized transactions. For consumer
loans, the estimated fair values are calculated by discounting the
contractual cash flows of the loans using rates representative of year-end
origination rates. The resulting amounts are adjusted to estimate the effect
of changes in the credit quality of borrowers since the loans were originated.
Comerica Incorporated 49
NOTE 21 (CONTINUED)
- --------------------------------------------------------------------------------
ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Customers' liability on acceptances outstanding: The carrying amount
approximates the estimated fair value.
Loan servicing rights: The estimated fair value is computed using discounted
cash flow analyses, using interest rates and prepayment speed assumptions
currently quoted for comparable instruments.
Deposit liabilities: The estimated fair value of demand deposits, consisting of
checking, savings and certain money market deposit accounts, is represented by
the amounts payable on demand. The carrying amount of deposits in foreign
offices approximates their estimated fair value, while the estimated fair value
of term deposits is calculated by discounting the scheduled cash flows using the
year-end rates offered on these instruments.
Short-term borrowings: The carrying amount of federal funds purchased,
securities sold under agreements to repurchase, and other borrowings
approximates estimated fair value.
Acceptances outstanding: The carrying amount approximates the estimated fair
value.
Medium- and long-term debt: The estimated fair value of the Corporation's
variable rate medium- and long-term debt is represented by their carrying value.
The estimated fair value of the fixed rate medium- and long-term debt is based
on quoted market values. If quoted market values are not available, the
estimated fair value is based on the market values of debt with similar
characteristics.
Derivative financial instruments and foreign exchange contracts: The estimated
fair value of interest rate swaps represents the amount the Corporation would
receive or pay to terminate or otherwise settle the contracts at the balance
sheet date, taking into consideration current unrealized gains and losses on
open contracts. The estimated fair value of foreign exchange futures and forward
contracts and commitments to purchase or sell financial instruments are based on
quoted market prices. The estimated fair value of interest rate and foreign
currency options (including interest rate caps and floors) are determined using
option pricing models.
Credit-related financial instruments: The estimated fair value of unused
commitments to extend credit and standby and commercial letters of credit is
represented by the estimated cost to terminate or otherwise settle the
obligations with the counterparties. This amount is approximated by the fees
currently charged to enter into similar arrangements, considering the remaining
terms of the agreements and any changes in the credit quality of counterparties
since the agreements were entered into. This estimate of fair value does not
take into account the significant value of the customer relationships and the
future earnings potential involved in such arrangements as the Corporation does
not believe that it would be practicable to estimate a representational fair
value for these items.
The estimated fair values of the Corporation's financial instruments at
December 31, 1996 and 1995 are as follows:
1996 1995
- -------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(in millions) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------
ASSETS
Cash and short-term
investments $ 1,961 $1,961 $2,255 $2,255
Trading account securities 6 6 11 11
Loans held for sale 38 38 512 513
Investment securities
available for sale 4,800 4,800 6,859 6,859
Commercial loans 13,520 13,445 12,041 11,957
International loans 1,706 1,704 1,385 1,383
Real estate construction
loans 751 744 641 637
Commercial mortgage
loans 3,446 3,413 3,254 3,233
Residential mortgage
loans 1,744 1,771 2,221 2,261
Consumer loans 4,634 4,498 4,570 4,468
Lease financing 406 406 330 333
- -------------------------------------------------------------------------------
Total loans 26,207 25,981 24,442 24,272
Less allowance for
loan losses (367) -- (341) --
- -------------------------------------------------------------------------------
Net loans 25,840 25,981 24,101 24,272
Customers' liability on
acceptances outstanding 33 33 21 21
Loan servicing rights 23 25 16 17
Liabilities
Demand deposits
(noninterest-bearing) 6,713 6,713 5,580 5,580
Interest-bearing deposits 15,358 15,368 15,461 15,487
Deposits in foreign offices 296 296 2,126 2,126
- -------------------------------------------------------------------------------
Total deposits 22,367 22,377 23,167 23,193
Short-term borrowings 4,489 4,489 4,674 4,674
Acceptances outstanding 33 33 21 21
Medium- and
long-term debt 4,242 4,268 4,644 4,724
Off-balance Sheet
Financial Instruments
Derivative financial
instruments and foreign
exchange contracts
Risk management:
Unrealized gains -- 68 -- 117
Unrealized losses -- (102) -- (42)
Customer initiated
and other:
Unrealized gains 24 24 5 5
Unrealized losses (23) (23) (5) (5)
Credit-related financial
instruments -- (10) -- (9)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
50 Comerica Incorporated
NOTE 22
- -------------------------------------------------------------------------------
PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS--Comerica Incorporated
December 31 (in thousands, except share data) 1996 1995
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 263 $ 292
Time deposits with subsidiary bank 105,700 130,800
Investment securities available for sale 17,074 13,231
Investment in subsidiaries, principally banks 2,829,906 2,754,395
Premises and equipment 53,347 54,566
Other assets 31,345 49,873
- ---------------------------------------------------------------------------------------------------------
Total assets $3,037,635 $3,003,157
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Long-term debt $ 298,210 $ 298,076
Other borrowed funds 842 1,101
Advances from nonbanking subsidiaries 236 3,759
Other liabilities 122,778 92,494
- ---------------------------------------------------------------------------------------------------------
Total liabilities 422,066 395,430
Nonredeemable preferred stock--$50 stated value
Authorized--5,000,000 shares
Issued--5,000,000 shares in 1996 250,000 --
Common stock--$5 par value
Authorized--250,000,000 shares
Issued--107,297,345 shares in 1996 and 115,094,531 shares in 1995 536,487 575,473
Capital surplus -- 410,618
Unrealized gains and losses on investment securities available for sale (22,789) (4,141)
Retained earnings 1,854,116 1,640,980
Deferred compensation (2,245) (1,974)
Less cost of common stock in treasury--490,704 shares in 1995 -- (13,229)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,615,569 2,607,727
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,037,635 $3,003,157
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME--Comerica Incorporated
Year Ended December 31 (in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
INCOME
Income from subsidiaries
Dividends from subsidiaries $322,000 $183,700 $293,390
Other interest income 3,372 7,113 8,127
Intercompany management fees 264,368 293,292 267,123
Other interest income 1,773 -- 171
Other noninterest income 5,278 2,680 779
- ---------------------------------------------------------------------------------------------------------
Total income 596,791 486,785 569,590
EXPENSES
Interest on long-term debt and other borrowed funds 26,328 19,948 15,076
Net interest rate swap income (2,794) (785) --
Interest on advances from subsidiaries 86 243 198
Salaries and employee benefits 123,271 127,261 123,924
Occupancy expense 22,483 22,778 18,570
Equipment expense 24,806 25,600 25,649
Restructuring charge 27,000 -- 2,363
Other noninterest expenses 63,224 76,319 68,185
- ---------------------------------------------------------------------------------------------------------
Total expenses 284,404 271,364 253,965
- ---------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed net income of subsidiaries 312,387 215,421 315,625
Income tax expense (credit) (1,931) 10,705 7,058
- ---------------------------------------------------------------------------------------------------------
314,318 204,716 308,567
Equity in undistributed net income of
subsidiaries, principally banks 102,843 208,650 78,675
- ---------------------------------------------------------------------------------------------------------
Net Income $417,161 $413,366 $387,242
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Comerica Incorporated 51
NOTE 22 (CONTINUED)
- --------------------------------------------------------------------------------
PARENT COMPANY FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS--Comerica Incorporated
Year Ended December 31 (in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 417,161 $ 413,366 $ 387,242
Adjustments to reconcile net income to
net cash provided by operating activities
Undistributed earnings of
subsidiaries, principally banks (102,843) (208,650) (78,675)
Depreciation 20,595 20,447 19,784
Restructuring charge 27,000 (6,078) (12,380)
Other, net 23,091 16,694 10,759
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments (32,157) (177,587) (60,512)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 385,004 235,779 326,730
Investing Activities
Proceeds from maturities of investment securities available for sale -- -- 15,157
Purchase of investment securities available for sale (4,820) (6,097) (22,818)
Proceeds from maturity of investment securities
held to maturity -- -- 7,507
Proceeds from sales of fixed assets and other real estate 603 3,439 1,638
Purchases of fixed assets (20,345) (16,413) (30,226)
Net (increase) decrease in bank time deposits 25,100 (41,200) 7,600
Capital transactions with subsidiaries 131,871 (1,400) (97,647)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 132,409 (61,671) (118,789)
Financing Activities
Net increase (decrease) in advances from subsidiaries (3,523) (4,064) 3,546
Proceeds from issuance of long-term debt -- 210,000 --
Repayments and purchases of long-term debt (259) (59,147) --
Proceeds from issuance of preferred stock 246,744 -- --
Proceeds from issuance of common stock 35,206 11,736 5,711
Purchase of common stock for treasury and retirement (622,196) (178,656) (76,280)
Dividends paid (173,414) (155,726) (139,988)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (517,442) (175,857) (207,011)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash on deposit at bank subsidiary (29) (1,749) 930
Cash on deposit at bank subsidiary at beginning of year 292 2,041 1,111
- -----------------------------------------------------------------------------------------------------------------------------
Cash on deposit at bank subsidiary at end of year $ 263 $ 292 $ 2,041
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Interest paid $ 25,942 $ 15,623 $ 15,104
- -----------------------------------------------------------------------------------------------------------------------------
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Income taxes recovered $ 11,150 $ 3,275 $ 4,743
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Noncash investing and financing activities
Stock issued for acquisitions $ 128,938 $ 77,100 $ 121,363
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52 Comerica Incorporated
NOTE 23
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SUMMARY OF QUARTERLY FINANCIAL INFORMATION
The following quarterly information is unaudited. However, in the opinion of
management, the information furnished reflects all adjustments which are
necessary for the fair presentation of the results of operations for the periods
presented.
1996
- --------------------------------------------------------------------------------
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $632,737 $633,421 $642,192 $654,430
Interest expense 279,476 280,154 285,703 305,169
Net interest income 353,261 353,267 356,489 349,261
Provision for loan losses 32,000 28,500 25,000 28,500
Securities gains/(losses) 10,194 (276) 3,310 360
Noninterest income
(excluding securities gains) 122,214 116,604 117,480 137,068
Restructuring charge 90,000 -- -- --
Noninterest expenses
(excluding restructuring charge) 266,220 253,635 270,196 278,975
Net income 60,816 121,518 118,221 116,606
Net income per share $0.52 $1.04 $1.00 $0.98
1995
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(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $670,632 $661,678 $659,992 $621,622
Interest expense 329,610 338,354 336,941 309,136
Net interest income 341,022 323,324 323,051 312,486
Provision for loan losses 33,000 26,000 15,500 12,000
Securities gains 10,960 516 71 201
Noninterest income
(excluding securities gains) 129,605 123,873 118,361 115,138
Noninterest expenses 288,445 261,171 272,582 264,216
Net income 106,510 105,302 101,532 100,022
Net income per share $0.92 $0.91 $0.86 $0.85
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Comerica Incorporated 53
REPORT OF MANAGEMENT
Management is responsible for the accompanying financial statements and all
other financial information in this Annual Report. The financial statements have
been prepared in conformity with generally accepted accounting principles and
include amounts which of necessity are based on management's best estimates and
judgments and give due consideration to materiality. The other financial
information herein is consistent with that in the financial statements.
In meeting its responsibility for the reliability of the financial statements,
management develops and maintains systems of internal accounting controls. These
controls are designed to provide reasonable assurance that assets are
safeguarded and transactions are executed and recorded in accordance with
management's authorization. The concept of reasonable assurance is based on the
recognition that the cost of internal accounting control systems should not
exceed the related benefits. The systems of control are continually monitored by
the internal auditors whose work is closely coordinated with and supplements in
many instances the work of independent auditors.
The financial statements have been audited by independent auditors Ernst & Young
LLP. Their role is to render an independent professional opinion on management's
financial statements based upon performance of procedures they deem appropriate
under generally accepted auditing standards.
The Corporation's Board of Directors oversees management's internal control and
financial reporting responsibilities through its Audit Committee as well as
various other committees. The Audit Committee, which consists of directors who
are not officers or employees of the Corporation, meets periodically with
management and internal and independent auditors to assure that they and the
Committee are carrying out their responsibilities and to review auditing,
internal control and financial reporting matters.
Eugene A. Miller
Chairman and Chief Executive Officer
Ralph W. Babb Jr.
Executive Vice President and Chief Financial Officer
Arthur W. Hermann
Senior Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
Board of Directors,
Comerica Incorporated
We have audited the accompanying consolidated balance sheets of Comerica
Incorporated and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Comerica
Incorporated and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Detroit, Michigan
January 22, 1997
54 Comerica Incorporated
HISTORICAL REVIEW-AVERAGE BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information
(in millions) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,576 $ 1,500 $ 1,532 $ 1,490 $ 1,322
Interest-bearing deposits with banks 32 126 552 814 1,017
Federal funds sold and securities
purchased under agreements to resell 95 124 116 135 399
Trading account securities 4 5 5 12 78
Loans held for sale 64 96 150 232 196
Investment securities 5,823 7,625 8,004 5,512 5,373
Commercial loans 12,686 11,302 9,598 8,473 7,753
International loans 1,541 1,257 1,107 897 710
Real estate construction loans 707 541 403 441 503
Commercial mortgage loans 3,483 3,157 2,916 2,629 2,368
Residential mortgage loans 1,960 2,450 2,175 1,979 2,297
Consumer loans 4,624 4,569 3,795 3,697 3,625
Lease financing 351 285 217 191 191
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Total loans 25,352 23,561 20,211 18,307 17,447
Less allowance for loan losses (361) (340) (322) (311) (291)
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Net loans 24,991 23,221 19,889 17,996 17,156
Accrued income and other assets 1,610 1,432 1,203 1,045 969
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Total assets $34,195 $34,129 $31,451 $27,236 $26,510
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Liabilities and Shareholders' Equity
Demand deposits (noninterest-bearing) $ 5,589 $ 4,767 $ 4,700 $ 4,380 $ 3,796
Interest-bearing deposits 15,826 15,046 14,809 15,035 15,449
Deposits in foreign offices 843 1,842 1,816 1,306 1,668
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Total deposits 22,258 21,655 21,325 20,721 20,913
Federal funds purchased and securities sold
under agreements to repurchase 2,106 2,816 2,817 1,586 1,553
Other borrowed funds 1,999 2,313 2,002 1,432 1,308
Accrued expenses and other liabilities 400 324 286 274 327
Medium- and long-term debt 4,745 4,510 2,708 1,087 414
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Total liabilities 31,508 31,618 29,138 25,100 24,515
Shareholders' equity 2,687 2,511 2,313 2,136 1,995
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Total liabilities and shareholders' equity $34,195 $34,129 $31,451 $27,236 $26,510
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Comerica Incorporated 55
HISTORICAL REVIEW-STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information
(in millions, except per share data) 1996 1995 1994 1993 1992
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INTEREST INCOME
Interest and fees on loans $ 2,161 $ 2,091 $ 1,577 $ 1,388 $ 1,445
Interest on investment securities
Taxable 372 474 446 307 356
Exempt from federal income tax 18 26 31 40 55
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Total interest on investment securities 390 500 477 347 411
Trading account interest -- -- -- 1 3
Interest on federal funds sold and securities
purchased under agreements to resell 5 7 5 4 15
Interest on time deposits with banks 2 8 22 28 45
Interest on loans held for sale 5 8 11 15 14
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Total interest income 2,563 2,614 2,092 1,783 1,933
INTEREST EXPENSE
Interest on deposits 686 721 543 530 707
Interest on short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 112 166 121 47 53
Other borrowed funds 107 136 79 41 46
Interest on medium- and long-term debt 295 289 148 63 30
Net interest rate swap (income)/expense (49) 2 (29) (32) (24)
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Total interest expense 1,151 1,314 862 649 812
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Net interest income 1,412 1,300 1,230 1,134 1,121
Provision for loan losses 114 87 56 69 111
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Net interest income after provision for loan losses 1,298 1,213 1,174 1,065 1,010
NONINTEREST INCOME
Income from fiduciary activities 133 125 122 122 114
Service charges on deposit accounts 140 130 124 120 113
Customhouse broker fees 11 36 41 40 38
Revolving credit fees 23 36 24 23 22
Securities gains 14 12 3 2 6
Other noninterest income 186 160 136 142 106
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Total noninterest income 507 499 450 449 399
NONINTEREST EXPENSES
Salaries and employee benefits 561 562 549 529 516
Net occupancy expense 99 99 99 96 86
Equipment expense 69 68 68 62 57
FDIC insurance expense 8 24 44 44 45
Telecommunications expense 29 29 27 21 17
Restructuring charge 90 -- 7 22 128
Other noninterest expenses 303 304 248 251 231
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Total noninterest expenses 1,159 1,086 1,042 1,025 1,080
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Income before income taxes 646 626 582 489 329
Provision for income taxes 229 213 195 148 89
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Net Income $ 417 $ 413 $ 387 $ 341 $ 240
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Net income applicable to common stock $ 408 $ 413 $ 387 $ 341 $ 237
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Net income per common share $ 3.55 $ 3.54 $ 3.28 $ 2.85 $ 1.99
Average common and common equivalent
shares (in thousands) 114,854 116,894 118,160 119,569 119,113
Cash dividends declared on common stock $ 170 $ 158 $ 145 $ 125 $ 108
Dividends per common share $ 1.52 $ 1.37 $ 1.24 $ 1.07 $ 0.96
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56 Comerica Incorporated
HISTORICAL REVIEW-STATISTICAL DATA
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
AVERAGE RATES (FULLY TAXABLE EQUIVALENT BASIS)
Interest-bearing deposits with banks 5.71% 6.39% 3.96% 3.41% 4.43%
Federal funds sold and securities purchased
under agreements to resell 5.35 5.97 4.06 2.99 3.67
Trading account securities 7.94 6.51 1.67 6.76 3.99
Loans held for sale 7.68 7.75 7.31 6.38 7.34
Investment securities 6.79 6.72 6.15 6.70 8.16
Commercial loans 8.21 8.75 7.38 6.56 6.98
International loans 6.64 7.06 5.58 5.04 5.70
Real estate construction loans 9.22 9.52 7.85 6.63 7.00
Commercial mortgage loans 9.29 9.40 8.52 8.10 8.54
Residential mortgage loans 7.83 7.80 7.46 8.57 9.53
Consumer loans 9.88 10.10 9.44 9.98 11.03
Lease financing 6.82 6.65 6.48 7.34 8.89
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Total loans 8.54 8.90 7.84 7.62 8.34
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Interest income as a percent of earning assets 8.20 8.35 7.28 7.25 8.04
Domestic deposits 4.04 4.05 3.14 3.24 4.13
Deposits in foreign offices 5.46 6.07 4.28 3.29 4.11
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Total interest-bearing deposits 4.11 4.27 3.26 3.24 4.13
Federal funds purchased and securities sold
under agreements to repurchase 5.31 5.88 4.31 3.01 3.44
Other borrowed funds 5.36 5.87 3.92 2.88 3.52
Medium- and long-term debt 6.22 6.41 5.46 5.77 7.18
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Interest expense as a percent of
interest-bearing sources 4.51 4.95 3.57 3.18 3.98
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Interest rate spread 3.69 3.40 3.71 4.07 4.06
Impact of net noninterest-bearing
sources of funds 0.85 0.79 0.61 0.58 0.67
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Net interest margin as a percent of
earning assets 4.54 4.19 4.32 4.65 4.73
Return on Average Common
Shareholders' Equity 15.98 16.46 16.74 15.94 12.10
Return on Average Assets 1.22 1.21 1.23 1.25 0.91
Efficiency Ratio 60.36 60.09 61.28 63.68 69.61
PER SHARE DATA
Book value at year-end $22.05 $22.75 $20.46 $18.99 $17.38
Market value at year-end 52.38 40.00 24.38 26.63 32.00
Market value--high and low for year 59-36 43-24 31-24 35-25 33-26
OTHER DATA
Number of banking offices 358 395 398 385 427
Number of employees (full-time equivalent) 11,079 12,876 13,077 12,670 13,322
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Comerica Incorporated 57