1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10706
--------------------------------------
Comerica Incorporated
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(800) 521-1190
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of April 30, 2001: 178,472,000 shares
2
ITEM I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
March 31, December 31, March 31,
(in thousands, except share data) 2001 2000 2000
----------- ----------- -----------
ASSETS
Cash and due from banks $ 2,008,803 $ 1,930,682 $ 1,855,110
Short-term investments 1,990,563 1,730,158 1,912,380
Investment securities available
for sale 3,207,455 3,890,725 3,583,006
Commercial loans 26,373,429 26,009,336 24,519,861
International loans 2,653,902 2,571,156 2,565,966
Real estate construction loans 2,973,895 2,915,168 2,422,371
Commercial mortgage loans 5,570,134 5,360,601 5,078,245
Residential mortgage loans 793,075 807,064 849,912
Consumer loans 1,472,015 1,477,135 1,407,541
Lease financing 1,088,908 1,029,164 815,293
----------- ----------- -----------
Total loans 40,925,358 40,169,624 37,659,189
Less allowance for credit losses (644,556) (608,110) (581,482)
----------- ----------- -----------
Net loans 40,280,802 39,561,514 37,077,707
Premises and equipment 360,145 364,246 364,104
Customers' liability on acceptances
outstanding 26,917 26,668 17,179
Accrued income and other assets 2,395,541 2,030,063 1,852,333
----------- ----------- -----------
TOTAL ASSETS $50,270,226 $49,534,056 $46,661,819
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $11,530,699 $10,188,475 $ 9,538,966
Interest-bearing deposits 25,255,219 23,665,808 19,856,778
----------- ----------- -----------
Total deposits 36,785,918 33,854,283 29,395,744
Short-term borrowings 679,802 2,093,381 4,442,670
Acceptances outstanding 26,917 26,668 17,179
Accrued expenses and other
liabilities 819,774 800,386 675,561
Medium- and long-term debt 7,289,301 8,259,179 8,073,259
----------- ----------- -----------
Total liabilities 45,601,712 45,033,897 42,604,413
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
3/31/01, 12/31/00 and 3/31/00 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 178,337,648 shares at
3/31/01, 177,703,678 shares at
12/31/00 and 177,901,802
shares at 3/31/00 891,688 888,519 889,509
Capital surplus 326,134 301,414 313,493
Unearned employee stock ownership
plan - 176,462 shares at 3/31/01
and 12/31/00 and 64,993 shares
at 3/31/00 (6,750) (6,750) (3,000)
Accumulated other comprehensive income 127,490 12,097 (37,345)
Retained earnings 3,086,915 3,085,784 2,714,213
Deferred compensation (6,963) (14,494) (22,321)
Less cost of common stock in
treasury - 289,397 shares at
12/31/00 and 826,342 shares at
3/31/00 - (16,411) (47,143)
----------- ----------- -----------
Total shareholders' equity 4,668,514 4,500,159 4,057,406
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $50,270,226 $49,534,056 $46,661,819
=========== =========== ===========
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31,
-------------------------------
(In thousands, except per share data) 2001 2000
---------- ----------
INTEREST INCOME
Interest and fees on loans $ 865,333 $ 778,173
Interest on investment securities 64,625 61,447
Interest on short-term investments 10,502 31,799
---------- ----------
Total interest income 940,460 871,419
INTEREST EXPENSE
Interest on deposits 271,927 202,896
Interest on short-term borrowings 39,392 53,940
Interest on medium- and long-term debt 116,849 130,988
---------- ----------
Total interest expense 428,168 387,824
---------- ----------
Net interest income 512,292 483,595
Provision for credit losses 72,000 66,894
---------- ----------
Net interest income after
provision for credit losses 440,292 416,701
NONINTEREST INCOME
Fiduciary income 45,426 45,199
Investment advisory revenue, net (9,489) 33,829
Service charges on deposit accounts 49,914 45,752
Commercial lending fees 13,854 12,381
Letter of credit fees 12,776 12,857
Warrant income 3,122 7,374
Securities gains 23,744 5,437
Net gain on sales of business - 30,484
Equity in earnings of unconsolidated subsidiaries (53,300) 2,927
Other noninterest income 83,935 58,580
---------- ----------
Total noninterest income 169,982 254,820
NONINTEREST EXPENSES
Salaries and employee benefits 206,776 211,827
Net occupancy expense 28,316 27,798
Equipment expense 19,397 18,946
Outside processing fee expense 15,827 14,487
Restructuring charge 94,304 -
Customer services 9,258 8,176
Other noninterest expenses 76,099 85,561
---------- ----------
Total noninterest expenses 449,977 366,795
---------- ----------
Income before income taxes 160,297 304,726
Provision for income taxes 66,705 107,695
---------- ----------
NET INCOME $ 93,592 $ 197,031
========== ==========
Net income applicable to common stock $ 89,317 $ 192,756
========== ==========
Basic net income per common share $0.50 $1.09
Diluted net income per common share $0.50 $1.08
Cash dividends declared on common stock $ 78,389 $ 62,519
Dividends per common share $0.44 $0.40
4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Accumulated
Nonredeemable Other
(in thousands, except Preferred Common Capital Comprehensive Retained
share data) Stock Stock Surplus Income Earnings
--------- -------- -------- -------- ----------
BALANCES AT JANUARY 1, 2000 $250,000 $889,453 $226,001 $(21,704) $2,677,210
Net income for 2000 - - - - 197,031
Other comprehensive income,
net of tax - - - (15,641) -
Total comprehensive income - - - - -
Common stock dividend - - 84,906 - (84,927)
Cash dividends declared:
Preferred stock - - - - (4,275)
Common stock - - - - (62,519)
Purchase and retirement of
41,400 shares of common stock - (207) (1,902) - -
Purchase of 331,362 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 263 4,488 - (8,307)
Amortization of deferred
compensation - - - - -
-------- -------- -------- -------- ----------
BALANCES AT MARCH 31, 2000 $250,000 $889,509 $313,493 $(37,345) $2,714,213
======== ======== ======== ======== ==========
BALANCES AT JANUARY 1, 2001 $250,000 $888,519 $301,414 $ 12,097 $3,085,784
Net income for 2001 - - - - 93,592
Other comprehensive income,
net of tax - - - 115,393 -
Total comprehensive income - - - - -
Cash dividends declared:
Preferred stock - - - - (4,275)
Common stock - - - - (78,389)
Purchase of 45,000 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 3,169 24,720 - (9,797)
Amortization of deferred
compensation - - - - -
-------- -------- -------- -------- ----------
BALANCES AT MARCH 31, 2001 $250,000 $891,688 $326,134 $127,490 $3,086,915
======== ======== ======== ======== ==========
5
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Unearned
Employee
Stock Total
(in thousands, except Ownership Deferred Treasury Shareholders'
share data) Plan Shares Compensation Stock Equity
---------- ------------ --------- ----------
BALANCES AT JANUARY 1, 2000 $(3,750) $(21,998) $(47,161) $3,948,051
Net income for 2000 - - - 197,031
Other comprehensive income,
net of tax - - - (15,641)
----------
Total comprehensive income - - - 181,390
Common stock dividend - - - (21)
Cash dividends declared:
Preferred stock - - - (4,275)
Common stock - - - (62,519)
Purchase and retirement of
41,400 shares of common stock - - - (2,109)
Purchase of 331,362 shares
of common stock - - (13,112) (13,112)
Net issuance of common stock
under employee stock plans 750 (2,711) 13,130 7,613
Amortization of deferred
compensation - 2,388 - 2,388
------- -------- -------- ----------
BALANCES AT MARCH 31, 2000 $(3,000) $(22,321) $(47,143) $4,057,406
======= ======== ======== ==========
BALANCES AT JANUARY 1, 2001 $(6,750) $(14,494) $(16,411) $4,500,159
Net income for 2001 - - - 93,592
Other comprehensive income,
net of tax - - - 115,393
----------
Total comprehensive income - - - 208,985
Cash dividends declared:
Preferred stock - - - (4,275)
Common stock - - - (78,389)
Purchase of 45,000 shares
of common stock - - (2,760) (2,760)
Net issuance of common stock
under employee stock plans - (3,857) 19,171 33,406
Amortization of deferred
compensation - 11,388 - 11,388
------- ------- -------- ----------
BALANCES AT MARCH 31, 2001 $(6,750) $(6,963) $ - $4,668,514
======= ======= ======== ==========
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31
--------------------------------
(in thousands) 2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 93,592 $ 197,031
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 72,000 66,894
Depreciation 17,243 10,725
Restructuring charge 60,000 --
Net increase in trading
account securities (20,938) (47,068)
Net decrease in assets held for sale 43,808 23,295
Net (increase) decrease in accrued
income receivable 37,886 (27,043)
Net increase (decrease)in accrued expenses (33,526) 18,049
Net amortization of intangibles 8,685 8,516
Other, net (127,603) (98,466)
----------- -----------
Total adjustments 57,555 (45,098)
----------- -----------
Net cash provided by
operating activities 151,147 151,933
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits
with banks (24,313) (21,678)
Net (increase) decrease in federal funds
sold and securities purchased under agreements
to resell (258,962) 13,617
Proceeds from sale of investment securities
available for sale 1,543,633 1,859,507
Proceeds from maturity of investment
securities available for sale 385,727 290,622
Purchases of investment securities
available for sale (1,320,085) (1,967,607)
Net increase in loans
(other than loans purchased) (804,231) (1,380,219)
Fixed assets, net (13,142) (9,282)
Net (increase) decrease in customers' liability
on acceptances outstanding (249) 26,631
Net cash provided by acquisitions/sales -- 445,274
----------- -----------
Net cash used in investing activities (491,622) (743,135)
FINANCING ACTIVITIES:
Net increase in deposits 2,918,166 199,741
Net increase (decrease) in short-term borrowings (1,413,579) 1,514,386
Net increase (decrease) in acceptances
outstanding 249 (26,631)
Proceeds from issuance of medium- and
long-term debt 125,000 1,470,981
Repayments and purchases of medium- and
long-term debt (1,174,696) (2,150,985)
Proceeds from issuance of common stock
and other capital transactions 33,406 4,844
Purchase of common stock for treasury (2,760) (15,221)
Dividends paid (67,190) (60,563)
----------- -----------
Net cash provided by
financing activities 418,596 936,552
----------- -----------
Net increase in cash and due
from banks 78,121 345,350
Cash and due from banks at beginning of year 1,930,682 1,509,760
----------- -----------
Cash and due from banks at end of period $ 2,008,803 $ 1,855,110
=========== ===========
Interest paid $ 462,494 $ 396,023
=========== ===========
Income taxes paid $ 1,677 $ 91,823
=========== ===========
Noncash investing and financing activities:
Loan transfers to other real estate $ 1,399 $ 1,796
=========== ===========
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, the statements do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2001, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. Certain items in prior periods have been reclassified to conform to the
current presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Form 8-K of Comerica
Incorporated and Subsidiaries (the "Corporation") dated April 27, 2001.
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (Statement 133), requires
companies to recognize all of their derivative instruments as either assets or
liabilities on the balance sheet position at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
For derivative instruments that are designated and qualify as a fair
value hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
The net effect of these adjustments was immaterial. For
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change. For derivative instruments that are designated and
qualify as a hedge of a net investment in a foreign currency, the gain or loss
is reported in other comprehensive income as part of the cumulative translation
adjustment to the extent it is effective. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change. Foreign exchange futures and forward
contracts, foreign currency options, interest rate caps and interest rate swap
agreements executed as a service to customers are not designated as hedging
instruments.
The adoption of Statement No. 133 on January 1, 2001 resulted in a
cumulative effect of an accounting change, net of tax, of $42 million in other
comprehensive income.
Note 2 - Investment Securities
At March 31, 2001, investment securities having a carrying value of
$1.1 billion were pledged where permitted or required by law to secure
liabilities and public and other deposits, including deposits of the State of
Michigan of $78 million.
9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Credit Losses
The following analyzes the changes in the allowance for credit losses
included in the consolidated balance sheets:
(in thousands) 2001 2000
--------- ---------
Balance at January 1 $ 608,110 $ 548,147
Charge-offs (45,327) (37,121)
Recoveries 9,916 3,569
--------- ---------
Net charge-offs (35,411) (33,552)
Provision for credit losses 72,000 66,894
Foreign currency translation
adjustment (143) (7)
--------- ---------
Balance at March 31 $ 644,556 $ 581,482
========= =========
The provision for credit losses in 2001 included a $25 million merger-
related charge to conform the credit policies of Imperial with Comerica.
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," considers a loan impaired when it is
probable that interest and principal payments will not be made in accordance
with the contractual terms of the loan agreement. Consistent with this
definition, all nonaccrual and reduced-rate loans (with the exception of
residential mortgage and consumer loans) are impaired. Impaired loans averaged
$406 million for the quarter ended March 31, 2001, compared to $225 million for
the comparable period last year. The following are period-end balances:
(in thousands) March 31, 2001 December 31, 2000
-------------- -----------------
Total impaired loans $467,163 $364,895
Impaired loans requiring
an allowance 437,855 277,159
Impairment allowance 164,319 104,107
Those impaired loans not requiring an allowance represent loans for
which the fair value exceeded the recorded investment in the loan.
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at March 31, 2001
and December 31, 2000:
(in thousands) March 31, 2001 December 31, 2000
-------------- -----------------
Parent Company
7.25% subordinated notes due 2007 $157,136 $ 157,414
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 212,600 198,703
7.875% subordinated notes due 2026 179,261 172,346
8.375% subordinated notes due 2024 185,630 155,071
7.25% subordinated notes due 2002 155,026 149,719
6.875% subordinated notes due 2008 106,717 103,272
7.125% subordinated notes due 2013 167,691 154,486
6.00% subordinated notes due 2008 253,459 248,238
7.65% subordinated notes due 2010 265,392 248,385
8.50% subordinated notes due 2009 101,048 99,474
9.98% junior subordinated
debentures due 2026 67,805 63,690
---------- ----------
Total subordinated notes 1,694,629 1,593,384
Medium-term notes:
Floating rate based on
Treasury indices 125,000 125,000
Floating rate based on Prime indices 1,799,965 1,320,964
Floating rate based on LIBOR indices 3,499,840 5,048,972
---------- ----------
Total medium-term notes 5,424,805 6,494,936
Notes payable 12,731 13,445
---------- ---------
Total subsidiaries 7,132,165 8,101,765
---------- ----------
Total medium- and
long-term debt $7,289,301 $8,259,179
========== ==========
The balances of medium- and long-term debt at March 31, 2001 include
the fair values of risk management interest rate swap contracts modifying the
interest rate characteristics of the debt.
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory
federal income tax rates to income before income taxes as reported in the
financial statements after deducting non-taxable items, principally income on
bank-owned life insurance and interest income on state and municipal securities.
State and foreign taxes are then added to the federal provision. The effective
tax rate in the first quarter 2001 was affected by adjustments to Imperial
Bancorp's tax liabilities at merger date, partially offset by a $7 million tax
benefit related to the Imperial Bancorp acquisition that was recognizable
immediately, but only after Imperial became part of Comerica.
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts
March 31, 2001 December 31, 2000
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
Amount Gains Losses Value Amount Gains Losses Value
(in millions) (1) (2) (3) (1) (2) (3)
------------------------------ ------------------------------
RISK MANAGEMENT
Interest rate contracts:
Options, caps and floors
purchased $ 7 $ - $ - $ - $ 6,058 $ 10 $ (1) $ 9
Swaps 16,348 378 (1) 377 12,594 206 (33) 173
Foreign exchange contracts:
Spot, forward and options 595 7 (17) (10) 493 18 (6) 12
Swaps 115 - (18) (18) 115 1 (13) (12)
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 17,065 385 (36) 349 19,260 235 (53) 182
CUSTOMER-INITIATED AND OTHER
Interest rate contracts:
Caps and floors written 302 - (2) (2) 198 - (1) (1)
Caps and floors purchased 292 2 - 2 179 1 - 1
Swaps 555 9 (9) - 493 5 (4) 1
Foreign exchange contracts:
Spot, forward and options 1,658 33 (27) 6 1,827 26 (19) 7
Swaps 453 2 (5) (3) 50 - - -
------- ---- ----- ----- ------- ---- ----- -----
Total customer-initiated
and other 3,260 46 (43) 3 2,747 32 (24) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange
contracts $20,325 $431 $ (79) $ 352 $22,007 $267 $ (77) $ 190
======= ==== ===== ===== ======= ==== ===== =====
(1) Notional or contract amounts, which represent the extent of involvement in
the derivatives market, are generally used to determine the contractual cash
flows required in accordance with the terms of the agreement. These amounts are
typically not exchanged, significantly exceed amounts subject to credit or
market risk and are not reflected in the consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current
market rates, contracts in a profitable position. Credit risk is calculated
before consideration is given to bilateral collateral agreements or master
netting arrangements that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally
represent the estimated amounts the Corporation would receive or pay to
terminate or otherwise settle the contracts at the balance sheet date. In 2001,
the fair value of all derivatives and foreign exchange contracts are reflected
in the consolidated balance sheets, as required by SFAS No. 133. In 2000, only
the fair values of customer-initiated and other derivatives and foreign exchange
contracts are reflected in the consolidated balance sheets.
12
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
Risk Management
Interest rate risk arises in the normal course of business due to
differences in the repricing and maturity characteristics of interest-earning
assets and interest-bearing liabilities. This gap in the balance sheet structure
reflects the sensitivity of the Corporation's net interest income to a change in
interest rates. Foreign exchange rate risk arises from changes in the value of
certain assets and liabilities denominated in foreign currencies. The
Corporation employs cash instruments, such as investment securities, as well as
derivative financial instruments and foreign exchange contracts, to manage
exposure to these and other risks, including liquidity risk.
As an end-user, the Corporation mainly accesses the interest rate
markets to obtain derivative instruments for use principally in connection with
asset and liability management activities. As part of a fair value hedging
strategy, the Corporation has entered into interest rate swap agreements for
interest rate risk management purposes. The interest rate swap agreements
utilized, effectively modify the Corporation's exposure to interest rate risk by
converting fixed-rate deposits and debt to a floating rate. These agreements
involve the receipt of fixed rate of interest amounts in exchange for floating
rate interest payments over the life of the agreement, without an exchange of
the underlying principal amount. No ineffectiveness was required to be recorded
on these hedging instruments in the statement of income.
As part of a cash flow hedging strategy, the Corporation has entered
into interest rate swap agreements that effectively convert a portion of its
existing and forecasted floating-rate loans to a fixed-rate basis for the next 3
years, thus reducing the impact of interest rate changes on future interest
income. Approximately 30% ($12 billion) of the Corporation's outstanding loans
were designated as the hedged items to interest rate swap agreements at March
31, 2001. During the quarter ended March 31, 2001, interest rate swap agreements
designated as cash flow hedges increased interest and fees on loans by
approximately $3 million. No ineffectiveness was required to be recorded on
these hedging instruments in the statement of income. The Corporation expects to
reclassify
13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
$79 million of net gains on derivative instruments from accumulated other
comprehensive income to earnings during the next twelve months due to receipt of
variable interest associated with the existing and forecasted floating-rate
loans.
Management believes these strategies achieve an optimal match between
the rate maturities of assets and their funding sources which, in turn, reduces
the overall exposure of net interest income to interest rate risk, although
there can be no assurance that such strategies will be successful. In addition,
the Corporation uses forward foreign exchange contracts to protect the value of
its investments in foreign subsidiaries in Canada and the United Kingdom.
Realized and unrealized gains and losses from these hedges are not included in
the statement of income, but are shown in the accumulated foreign currency
translation adjustment account included in other comprehensive income, with the
related amounts due to or from counterparties included in other liabilities or
other assets. During the quarter ended March 31, 2001, the Corporation
recognized $2 million of net gains, included in the accumulated foreign currency
translation adjustment, related to the forward foreign exchange contracts.
The Corporation also uses various other types of financial instruments
to mitigate interest rate and foreign currency risks associated with specific
assets or liabilities, which are reflected in the table above. Such instruments
include interest rate caps and floors, foreign exchange forward contracts, and
foreign exchange cross-currency swaps.
The following table summarizes the expected maturity distribution of
the notional amount of interest rate swaps used for risk management purposes.
The table also indicates the weighted average interest rates associated with
amounts to be received or paid on interest rate swap agreements as of March 31,
2001. The swaps are grouped by the assets or liabilities to which they have been
designated.
14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
- -----------------------------------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
(dollar amounts 2006- Dec. 31,
in millions) 2001 2002 2003 2004 2005 2026 Total 2000
- -----------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET
DESIGNATION:
Receive fixed swaps
Generic $ 2,850 $ 2,860 $ 4,750 $ 900 $ 500 $ 500 $12,360 $ 9,277
Weighted average: (1)
Receive rate 5.64% 7.13% 8.31% 8.02% 8.13% 5.83% 7.29% 7.55%
Pay rate 5.48% 7.04% 7.36% 8.00% 8.00% 5.65% 6.86% 8.14%
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $ 16 $ - $ - $ - $ - $ - $ 16 $ 98
Amortizing - - 1 - - - 1 1
Weighted average: (2)
Receive rate 5.18% -% 5.17% -% -% -% 5.18% 6.70%
Pay rate 5.47% -% 6.05% -% -% -% 5.51% 6.79%
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive
fixed swaps $ 987 $ 1,039 $ - $ 20 $ - $ 150 $ 2,196 $ 1,378
Weighted average: (1)
Receive rate 7.17% 5.44% -% 7.10% -% 7.13% 6.35% 7.19%
Pay rate 5.17% 5.28% -% 5.31% -% 5.45% 5.24% 6.66%
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive
fixed swaps $ - $ 150 $ - $ - $ 250 $ 1,250 $ 1,650 $ 1,715
Weighted average: (1)
Receive rate -% 7.22% -% -% 7.04% 6.73% 6.82% 6.83%
Pay rate -% 6.76% -% -% 5.39% 5.99% 5.97% 6.76%
Floating/floating
swaps $ 125 $ - $ - $ - $ - $ - $ 125 $ 125
Weighted average: (3)
Receive rate 5.23% -% -% -% -% -% 5.23% 6.72%
Pay rate 5.03% -% -% -% -% -% 5.03% 6.59%
Total notional amount $ 3,978 $ 4,049 $ 4,751 $ 920 $ 750 $ 1,900 $16,348 $12,594
- -----------------------------------------------------------------------------------------------------------------
(1) Variable rates paid on receive fixed swaps are based on one-month and
three-month LIBOR or one-month CDOR rates in effect at March 31, 2001.
Variable rates received on pay fixed swaps are based on prime.
(2) Variable rate received is based on one-month CDOR at March 31, 2001.
(3) Variable rate paid is based on LIBOR at March 31, 2001, while variable rate
received is based on the three-month U.S. Treasury bill bond equivalent
rate.
- -------------------------------------------------------------------------------
15
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
The notional amounts of commitments to purchase and sell U.S. Treasury,
U.S. government agency and municipal bond securities related to the
Corporation's trading account and available for sale portfolio totaled $673
million and $3 million at March 31, 2001 and December 31, 2000, respectively.
These commitments, which are short-term and similar in nature to forward
contracts, are not reflected in the preceding table due to the immaterial impact
on the financial statements.
Customer-Initiated and Other
The Corporation earns additional income by executing various
transactions, primarily foreign exchange contracts and interest rate caps,
floors and swaps to accommodate the needs of customers requesting such services.
The Corporation minimizes market risk arising from customer-initiated foreign
exchange contracts by entering into offsetting transactions. Average fair values
and income from customer-initiated and other foreign exchange contracts were not
material for the three-month period ended March 31, 2001 and for the year ended
December 31, 2000.
Customer-initiated interest rate caps, floors and swaps generally are
not offset by other financial instruments; however, the Corporation has
established authority limits for engaging in these transactions in order to
minimize risk exposure. As a result, average fair values and income from this
activity were not material for the three-month period ended March 31, 2001 and
for the year ended December 31, 2000.
Derivative and Foreign Exchange Activity
The following table provides a reconciliation of the beginning and
ending notional amounts for interest rate derivatives and foreign exchange
contracts.
Customer-Initiated
Risk Management and Other
--------------------- ----------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
(in millions) Contracts Contracts Contracts Contracts
--------------------- ----------------------
Balances at December 31, 2000 $ 18,652 $ 608 $ 870 $ 1,877
Additions 5,865 2,338 524 13,194
Maturities/amortizations (6,762) (2,236) (245) (12,960)
Terminations (1,400) -- -- --
-------- ------- ------- --------
Balances at March 31, 2001 $ 16,355 $ 710 $ 1,149 $ 2,111
======== ======= ======= ========
16
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
Additional information regarding the nature, terms and associated risks
of the above derivatives and foreign exchange contracts, can be found in Note 19
to the consolidated financial statements included in the Form 8-K of the
Corporation dated April 27, 2001.
Note 7 - Business Segment Information
The Corporation has strategically aligned its operations into three
major lines of business: the Business Bank, the Individual Bank and the
Investment Bank. These lines of business are differentiated based on the
products and services provided. In addition to the three major lines of
business, the Finance Division is also reported as a segment. 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; information presented is not necessarily
comparable with any other financial institution. Lines of business/segment
financial results for the three months ended March 31, 2001 and 2000 are
presented below.
17
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 7 - Business Segment Information (continued)
Three Months Ended March 31
(dollar amounts in Business Individual Investment
millions) Bank Bank Bank*
- ----------------------------------------------------------------------------------
2001 2000 2001 2000*** 2001** 2000
- ----------------------------------------------------------------------------------
Average assets $ 37,785 $34,349 $ 7,319 $7,031 $ 455 $ 300
Total revenues (FTE) 432 387 252 293 (36) 65
Net income/(loss) 120 130 66 92 (56) 8
Return on average
assets 1.27% 1.51% 1.39% 2.02% (45.27)% 9.59%
Return on average
common equity 17.47% 21.36% 33.90% 49.73% (75.65)% 13.98%
Finance Other Total
- ----------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
- ----------------------------------------------------------------------------------
Average assets $ 4,227 $ 4,063 $ (455) $ (46) $49,331 $45,697
Total revenues (FTE) 35 (3) - (3) 683 739
Net income/(loss) 20 (2) (56) (31) 94 197
Return on average
assets 0.50% (0.05)% N/M N/M 0.76% 1.72%
Return on average
common equity 14.69% (2.08)% N/M N/M 8.11% 20.66%
* Net income was reduced by charges for fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded,
Investment Bank net income/(loss) would have been ($53) million and $9
million, and return on average common equity would have been (71.52%) and
17.13%, in 2001 and 2000, respectively.
** Net income in 2001 was reduced by a $26 million pre-tax deferred
distribution costs impairment charge and a $53 million pre-tax charge
related to long-term incentive plans at an unconsolidated subsidiary.
Excluding these charges, Investment Bank total revenues (FTE) and net loss
in 2001 would have been $47 million and ($5) million, respectively, while
return on average assets and return on average common equity would have
been (4.14%) and (6.91%), respectively.
*** Year-to-date March 31, 2000, financial results for the Individual Bank
include a $30 million gain on the sale of $457 million of revolving check
credit and bankcard loans. Excluding the $30 million gain, total revenues
(FTE) and net income would have been $263 million and $72 million,
respectively, while return on average assets and return on average common
equity would have been 1.58% and 38.76%, respectively.
N/M - Not Meaningful
For a description of the business activities of each line of business and
the methodologies which form the basis for these results, refer to Note 23 to
the consolidated financial statements in the Corporation's Form 8-K dated April
27, 2001.
18
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 8 - Accumulated Other Comprehensive Income
Other comprehensive income includes the change in net unrealized gains
and losses on investment securities available for sale, the change in the
accumulated foreign currency translation adjustment and the change in
accumulated gains and losses on cash flow hedges. The Consolidated Statements of
Changes in Shareholders' Equity present combined, net of tax, other
comprehensive income. The following presents reconciliations of the components
of accumulated other comprehensive income for the three months ended March 31,
2001 and 2000. Total comprehensive income for the three months ended March 31,
2001 and 2000, totaled $209 million and $181 million, respectively.
19
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 8 - Accumulated Other Comprehensive Income (continued)
Three Months Ended
March 31
------------------------
(in thousands) 2001 2000
--------- --------
Net unrealized gains/(losses) on investment
securities available for sale:
Balance at beginning of year $ 8,016 $(22,719)
Net unrealized holding gains/(losses)
arising during the period 14,269 (15,413)
Less: Reclassification adjustment for
gains/(losses) included in net income 23,744 5,437
--------- --------
Change in net unrealized gains/(losses)
before income taxes (9,475) (20,850)
Provision for income taxes (3,316) (7,990)
--------- --------
Change in net unrealized gains/(losses)
on investment securities available
for sale, net of tax (6,159) (12,860)
--------- --------
Balance at March 31 $ 1,857 $(35,579)
Accumulated foreign currency translation adjustment:
Balance at beginning of year $ 4,081 $ 1,015
Net translation gains/(losses) arising
during the period (5,073) (2,781)
Less: Reclassification adjustment for
gains/(losses) included in net income -- --
--------- --------
Change in translation adjustment before
income taxes (5,073) (2,781)
Provision for income taxes -- --
--------- --------
Change in foreign currency translation
adjustment, net of tax (5,073) (2,781)
--------- --------
Balance at March 31 $ (992) $ (1,766)
Accumulated net gains/(losses) on cash flow hedges:
Balance at beginning of period $ -- $ --
Transition adjustment upon adoption
of accounting standard 64,705 --
Net cash flow hedge gains/(losses)
arising during the period 133,099 --
Less: Reclassification adjustment for
gains/(losses) included in net income 2,996 --
--------- --------
Change in cash flow hedges before
income taxes 194,808 --
Provision for income taxes 68,183 --
--------- --------
Change in cash flow hedges, net of tax 126,625 --
--------- --------
Balance at March 31 $ 126,625 $ --
--------- --------
Accumulated other comprehensive income,
net of taxes, at March 31 $ 127,490 $(37,345)
========= ========
20
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 9 - Restructuring Charge
The Corporation recorded restructuring charges related to the
acquisition of Imperial Bancorp of $119 million for the first quarter of 2001.
The components of the charges, $25 million and $94 million of which were
recorded in the provision for credit losses and noninterest expenses,
respectively, are shown in the table below. The Corporation expects to incur
additional merger-related restructuring charges in 2001 in connection with the
combining of Comerica and Imperial Bancorp. Restructuring charges are expected
to total $169 million by the end of integration, which is currently targeted for
completion in the first quarter of 2002.
Restructuring Reserve Analysis
Imperial Merger
Other Facilities
Employee Employee Conforming and
(in thousands) Termination -Related Policies Operations Other Total
----------- ---------- ---------- ---------- ------- -------
Balance at January 1, 2001 $ - $ - $ - $ - $ - $ -
Provision charged to
operating expense 30,000 29,000 44,000 2,000 14,000 119,000
Cash outlays (8,000) (14,500) - - (12,000) (34,500)
Noncash write-downs
and other - (11,000) (34,500) - - (45,500)
------------------------------------------------------------------
Balance at March 31, 2001 $22,000 $ 3,500 $ 9,500 $2,000 $ 2,000 $ 39,000
==================================================================
Employee termination costs included the cost of severance, outplacement
and other benefits associated with the involuntary termination of employees,
primarily senior management and employees in corporate support and data
processing functions. Approximately 350 employees are expected to be terminated
as part of the restructuring plan, 4 of which occurred in the first quarter
2001. Other employee-related costs include cash payments related to change in
control provisions in employment contracts and retention bonuses. The charge
related to conforming policies represents costs associated with conforming the
credit and accounting policies of Imperial with those of the Corporation. Of the
$44 million charge associated with conforming policies in the first quarter
2001, $25 million was included in the provision for credit losses on the
statement of income. The remaining amounts applied against the liability for
conforming policies related primarily to the adjusting of commercial equipment
lease
21
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 9 - Restructuring Charge (continued)
residual values. The Corporation has yet to incur most of the facilities and
operations charges in 2001, which are associated with closing excess facilities,
replacing signage, lease and computer service contract termination costs and
disposal of computer hardware. Other merger-related restructuring costs were
primarily comprised of investment banking, accounting, consulting and legal
fees. The Corporation expects to realize annual noninterest expense savings
totaling $60 million upon completion of its integration effort, the full effect
of which will not begin to be realized until the second quarter of 2002.
22
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net income for the quarter ended March 31, 2001, was $94 million, down
$103 million, or 52 percent, from $197 million reported for the first quarter of
2000. Diluted net income per share decreased 54 percent to $0.50 from $1.08 a
year ago. Return on average common shareholders' equity was 8.11 percent and
return on average assets was 0.76 percent, compared to 20.66 percent and 1.72
percent, respectively, for the comparable quarter last year. Net income in the
first quarter 2001 included a $95 million after-tax restructuring charge related
to the Corporation's merger with Imperial Bancorp. Excluding the restructuring
charge, net income and diluted net income per share would have been $189 million
and $1.02, respectively, while return on average common shareholders' equity and
return on average assets would have been 16.74% and 1.53%, respectively.
Net Interest Income
The rate-volume analysis in Table I details the components of the
change in net interest income on a fully taxable equivalent (FTE) basis for the
quarter ended March 31, 2001. On a FTE basis, net interest income was $513
million for the three months ended March 31, 2001, an increase of $28 million,
or six percent, from the comparable quarter in 2000. This increase in net
interest income was primarily due to an eight percent increase in average
earning assets, as average business loans increased by $4 billion, or 11
percent, over last year's first quarter, as well as an increase in interest-free
sources of funds. Excluding the divestiture of consumer loans in the first
quarter 2000, net interest income (FTE) increased $37 million, or eight percent,
over the first quarter of 2000. The net interest margin for the three months
ended March 31, 2001, was 4.55 percent, a decrease of 5 basis points from 4.60
percent for the first quarter of 2000. Excluding the consumer loan divestiture,
the net interest margin decreased two basis points. The net interest margin was
negatively impacted by slower growth in core deposit balances than that of
earning assets, resulting in a greater reliance on higher cost certificates of
deposit in the mix of interest-bearing liabilities. This was partially offset by
an increase in the impact to the margin provided by interest-free sources of
funds. With core
23
deposit balances growing at rates slower than earning assets, a greater reliance
on market-priced sources of funding is expected, which will gradually reduce the
margin.
Interest rate swaps permit management to control the sensitivity of net
interest income to fluctuations in interest rates in a manner similar to
investment securities but without significant impact to capital or liquidity. In
addition to using interest rate swaps and other instruments to control exposure
to interest rate risk, management attempts to evaluate the effect of movements
in interest rates on net interest income by regularly performing interest
sensitivity gap and earnings simulation analyses. At March 31, 2001, the
Corporation was in an asset sensitive position of $628 million (on an elasticity
adjusted basis), or one percent of earning assets. The earnings simulation
analysis performed at the end of the quarter reflects changes to both interest
rates and loan, investment and deposit volumes. The measurement of risk exposure
at March 31, 2001, for a 200 basis point decline in short-term interest rates
identified approximately $51 million, or two percent, of forecasted net interest
income at risk during the next 12 months. If short-term interest rates rise 200
basis points, forecasted net interest income would be enhanced by approximately
$6 million, or less than one percent. The results of these simulations are
within established corporate policy guidelines.
24
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
- ---------------------------------------------------------------------------------------------
March 31, 2001 March 31, 2000
----------------------------- ----------------------------
(dollar amounts Average Average Average Average
in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------
Loans $41,100 $866 8.54% $37,243 $779 8.41%
Investment securities (1) 3,881 65 6.74 3,550 62 6.88
Short-term investments 634 10 6.74 1,519 32 8.41
- ---------------------------------------------------------------------------------------------
Total earning assets 45,615 941 8.36 42,312 873 8.28
Interest-bearing deposits 24,167 272 4.56 20,215 203 4.04
Short-term borrowings 2,573 39 6.21 3,589 54 6.05
Medium- and long-term debt 7,729 117 6.13 8,621 131 6.11
- ---------------------------------------------------------------------------------------------
Total interest-bearing
sources $34,469 428 5.04 $32,425 388 4.81
-------------- --------------
Net interest income/
Rate spread (FTE) $513 3.32 $485 3.47
==== ====
FTE adjustment $ 1 $ 1
==== ====
Impact of net noninterest-bearing
sources of funds 1.23 1.13
- ---------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.55% 4.60%
=============================================================================================
(1) The average rate for investment securities was computed using average
historical cost.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
Loans $ 6 $ 81 $ 87
Investment securities (3) 6 3
Short-term investments (11) (11) (22)
- ---------------------------------------------------------------------------
Total earning assets (8) 76 68
Interest-bearing deposits 18 51 69
Short-term borrowings 1 (16) (15)
Medium- and long-term debt (1) (13) (14)
- ---------------------------------------------------------------------------
Total interest-bearing sources 18 22 40
- ---------------------------------------------------------------------------
Net interest income/Rate spread (FTE) $(26) $ 54 $ 28
================================
* Rate/Volume variances are allocated to variances due to volume.
25
Provision for Credit Losses
The provision for credit losses was $72 million for the first quarter of
2001, compared to $67 million for the same period in 2001. The Corporation
establishes this provision to maintain an adequate allowance for credit losses,
which is discussed in the section entitled "Allowance for Credit Losses and
Nonperforming Assets." Included in the first quarter 2001 provision for credit
losses is a $25 million merger-related charge to conform the credit policies of
Imperial with Comerica.
Noninterest Income
Noninterest income was $170 million for the three months ended March 31,
2001, a decrease of $85 million, or 33 percent, over the same period in 2000.
Noninterest income in the first quarter of 2001 was reduced by a $26 million
deferred distribution costs impairment charge ($17 million after-tax) and a one-
time $53 million charge ($34 million after-tax) related to an unconsolidated
subsidiary, both of which are discussed more fully below. Noninterest income in
2001 also included gains of $24 million from securities sales and $11 million in
net gains resulting from the purchase and subsequent sale, all within the first
quarter, of interest rate derivative contracts which failed to meet the
Corporation's stringent risk-reduction criteria. Noninterest income in the first
quarter of 2000 included a $30 million gain associated with the sale of
revolving check credit and bankcard loans. Excluding the effect of securities
gains, warrant income and large, nonrecurring items, and the impact of last
year's revolving check credit and bankcard loan sale, noninterest income
increased three percent in the first quarter of 2001 from the first quarter of
2000.
The $26 million pre-tax deferred distribution costs impairment charge
related to the Corporation's Munder subsidiary resulted from the Corporation's
reassessment of its ability to recover the unamortized cost of the commissions
to brokers for selling certain shares, principally shares in its Munder
subsidiary's NetNet, International NetNet and Future Technology funds. Net asset
values in these technology funds suffered as market conditions weakened
significantly following the peak in the first half of 2000. After a fourth
quarter 2000 impairment charge of $7 million, this sector of the equity markets
declined another 26 percent in the first quarter 2001.
26
This prompted Comerica's current revaluation of expected future cash flows from
the funds, which are based on a percentage of assets under management and early
redemption fees. Net remaining deferred distribution costs at March 31, 2001,
were $54 million. Excluding the impairment charges, investment advisory revenues
totaled $17 million in the first quarter of 2001, a decrease of $8 million from
the fourth quarter 2000 and $17 million from the first quarter 2000. The
decrease is primarily attributable to the decline in the market values of
technology-related stocks from their record highs during the first quarter of
last year.
The $53 million pre-tax charge is related to long-term incentive plans
at a United Kingdom subsidiary, Framlington Holdings Limited, of which Munder is
a minority owner. In May 2000, the announcement that the majority owner of
Framlington was being acquired triggered a change-in-control provision which
fully vested all options and restricted shares held by employees of Framlington.
In March 2001, all outstanding options held by employees were exercised and
their shares mandatorily purchased by Framlington, requiring U.S. accounting
recognition of the expense. The pre-tax charge, included in equity in earnings
of unconsolidated subsidiaries, reflects Munder's portion of the resulting
expense.
Noninterest Expenses
Noninterest expenses, which included a merger-related restructuring
charge of $94 million, were $450 million for the first quarter ended March 31,
2001, an increase of $83 million, or 23 percent, from the first quarter of 2000.
Excluding the restructuring charge, noninterest expenses decreased $11 million,
or three percent, when compared to the same period in 2000, primarily due to a
decline in revenue-related incentives.
Provision for Income Taxes
The provision for income taxes for the first quarter of 2001 totaled
$67 million, a decrease of 38 percent compared to $108 million reported for the
same period a year ago. The effective tax rate was 42 percent for the first
quarter of 2001, compared to 35 percent for the same quarter of 2000. The
effective tax
27
rate in the first quarter 2001 was affected by adjustments to Imperial Bancorp's
tax liabilities at merger date, partially offset by a $7 million tax benefit
related to the Imperial Bancorp acquisition that was immediately recognizable,
but only after Imperial became part of Comerica.
Financial Condition
Total assets were $50.3 billion at March 31, 2001, compared with $49.5
billion at year-end 2000 and $46.7 billion at March 31, 2000. The Corporation
has experienced growth in all business loan categories since December 31, 2000,
with the most significant increases in the domestic commercial loan and
commercial mortgage categories, which increased $364 million and $210 million,
respectively.
Total liabilities increased $568 million, or one percent, since
December 31, 2000 to $45.6 billion. Total deposits increased $2.9 billion to
$36.8 billion at March 31, 2001 from $33.9 billion at December 31, 2000,
primarily due to growth in certificates of deposit issued in denominations in
excess of $100,000 through brokers or to institutional investors. The increase
in deposits was largely offset by declines in short-term borrowings, which
decreased $1.4 billion, or 67 percent, since year-end 2000, and medium- and
long-term debt, which decreased $1 billion, or 12 percent.
Allowance for Credit Losses and Nonperforming Assets
The allowance for credit losses represents management's assessment
of probable losses inherent in the Corporation's loan portfolio, including all
binding commitments to lend. The allowance provides for probable losses that
have been identified with specific customer relationships and for probable
losses believed to be inherent but that have not been specifically identified.
The Corporation allocates the allowance for credit losses to each loan category
based on a defined methodology which has been in use, without material change,
for several years. Internal risk ratings are assigned to each business loan at
the time of approval and are subject to subsequent periodic reviews by the
senior management of the Credit Policy Group. Business loans are defined as
those belonging to the commercial, international, real estate construction,
commercial mortgage and lease financing categories. A detailed credit quality
review is performed quarterly on large business loans which have deteriorated
below certain
28
levels of credit risk. A specific portion of the allowance is allocated to such
loans based upon this review. The portion of the allowance allocated to the
remaining business loans is determined by applying projected loss ratios to each
risk rating based on numerous factors identified below. The portion of the
allowance allocated to consumer loans is determined by applying projected loss
ratios to various segments of the loan portfolio. Projected loss ratios
incorporate factors such as recent charge-off experience, current economic
conditions and trends, geographic dispersion of borrowers, and trends with
respect to past due and nonaccrual amounts. The allocated reserve was $490
million at March 31, 2001, an increase of $47 million from year-end 2000. This
increase was attributable to the specific portion of the allowance associated
with the quarterly credit quality review of certain large business loans with
deteriorated credit risk at March 31, 2001.
Actual loss ratios experienced in the future could vary from those
projected. This uncertainty occurs because other factors affecting the
determination of probable losses inherent in the loan portfolio may exist which
are not necessarily captured by the application of historical loss ratios. To
ensure a higher degree of confidence, an unallocated allowance is also
maintained. The unallocated portion of the loss reserve reflects management's
view that the reserve should have a margin that recognizes the imprecision
underlying the process of estimating expected credit losses. Determination of
the probable losses inherent in the portfolio, which are not necessarily
captured by the allocated methodology discussed above, involves the exercise of
judgement. Factors which were considered in the evaluation of the adequacy of
the Corporation's unallocated reserve include portfolio exposures to the
healthcare, high technology and energy industries, customers engaged in
sub-prime lending, as well as Latin American transfer risks and the risk
associated with new customer relationships. The unallocated allowance was $155
million at March 31, 2001, a decrease of $10 million from December 31, 2000.
Management also considers industry norms and the expectations from
rating agencies and banking regulators in determining the adequacy of the
allowance. The total allowance, including the unallocated amount, is available
to absorb losses from any segment of the portfolio.
At March 31, 2001, the allowance for credit losses was $645 million, an
29
increase of $37 million since December 31, 2000. The allowance as a percentage
of total loans was 1.57 percent, compared to 1.51 percent at December 31, 2000.
As a percentage of nonperforming assets, the allowance was 135 percent at March
31, 2001, versus 179 percent at year-end 2000.
Net charge-offs for the first quarter of 2001 were $35 million, or
0.34 percent of average total loans, compared with $34 million, or 0.36 percent,
for the year-earlier quarter. Nonperforming assets increased $137 million, or 40
percent, since December 31, 2000, and were categorized as follows:
March 31, December 31,
(in thousands) 2001 2000
------------- ------------
Nonaccrual loans:
Commercial $ 389,206 $ 244,390
International 48,721 57,929
Real estate construction 6,942 4,542
Commercial mortgage 18,356 17,398
Residential mortgage 289 185
Consumer 3,147 3,080
Lease financing 3,817 3,837
------------- ------------
Total nonaccrual loans 470,478 331,361
Reduced-rate loans 275 2,306
------------- ------------
Total nonperforming loans 470,753 333,667
Other real estate 5,577 5,577
------------- ------------
Total nonperforming assets $ 476,330 $ 339,244
============= ============
Loans past due 90 days or more $ 55,260 $ 36,176
============= ============
Nonperforming assets as a percentage of total loans and other real
estate were 1.16 percent at March 31, 2001 and 0.84 percent at December 31,
2000.
Capital
Common shareholders' equity increased $53 million from December 31,
2000 to March 31, 2001, excluding other comprehensive income. The increase was
primarily due to employee stock plan activity, which increased common
shareholders' equity $45 million, and the retention of $11 million of current
year earnings.
Capital ratios exceed minimum regulatory requirements as follows:
March 31, December 31,
2001 2000
--------- -----------
Leverage ratio (3.00 - minimum) 8.76% 8.74%
Tier 1 risk-based capital ratio (4.0 - minimum) 7.46 7.35
Total risk-based capital ratio (8.0 - minimum) 11.26 11.11
At March 31, 2001, the capital ratios of all the Corporation's banking
subsidiaries exceeded the minimum ratios required of "well capitalized"
institutions as defined in the final rule under FDICIA.
30
Other Matters
This report includes forward-looking statements based on management's
current expectations and/or the assumptions made in the earnings simulation
analysis. Such statements reflect the view of Comerica's management, as of the
date of this report, with respect to future events and are subject to risks and
uncertainties, such as changes in Comerica's plans, objectives, expectations and
intentions and do not purport to speak as of any other date. Should one or more
of these risks materialize or should underlying beliefs or assumptions prove
incorrect, the Corporation's actual results could differ materially from those
discussed in this report. Factors that could cause or contribute to such
differences are changes in interest rates, changes in the industries in which
the Corporation has a concentration of loans, changes in the level of fee
revenues, changes in the accounting treatment of any particular item, the entry
of new competitors into the banking industry as a result of the enactment of the
Gramm-Leach-Bliley Act of 1999, changing economic conditions and related credit
and market conditions, difficulty integrating Imperial Bancorp or retaining key
personnel and other factors. Forward-looking statements speak only as of the
date they are made. Comerica does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.
31
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: Computation of Earnings Per Share
(b) Reports on Form 8-K
1. A report on Form 8-K, dated January 22, 2001, was filed under report
item number 9, concerning the announcement of Comerica Incorporated's
earnings for the fourth quarter and year ended December 31, 2000.
2. A report on Form 8-K, dated January 29, 2001, was filed under report
item numbers 5 and 7, concerning the announcement of the merger of
Imperial Bancorp and Comerica Holdings Incorporated, a wholly owned
subsidiary of Comerica Incorporated, as well as the announcement of
Imperial Bancorp's earnings for the fourth quarter and year ended
December 31, 2000.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMERICA INCORPORATED
(Registrant)
/s/ Ralph W. Babb Jr.
-----------------------------------------
Ralph W. Babb Jr.
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
/s/ Marvin J. Elenbaas
-----------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 15, 2001
33
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
11 Statement re: Computation of
Earnings Per Share