1
EXHIBIT 99.1
Consolidated Balance Sheets
Comerica Incorporated and Subsidiaries
December 31
(in thousands, except share data) 2000 1999
- --------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 1,930,682 $ 1,509,760
Short-term investments 1,730,158 2,337,543
Investment securities available
for sale 3,890,725 3,783,493
Commercial loans 26,009,336 23,629,117
International loans 2,571,156 2,573,003
Real estate construction loans 2,915,168 2,166,598
Commercial mortgage loans 5,360,582 4,873,478
Residential mortgage loans 807,083 870,615
Consumer loans 1,477,135 1,388,829
Lease financing 1,029,164 803,786
- --------------------------------------------------------------------------------------------------
Total loans 40,169,624 36,305,426
Less allowance for credit losses (608,110) (548,147)
- --------------------------------------------------------------------------------------------------
Net loans 39,561,514 35,757,279
Premises and equipment 364,246 371,973
Customers' liability on acceptances
outstanding 26,668 43,810
Accrued income and other assets 2,030,063 1,706,176
- --------------------------------------------------------------------------------------------------
Total assets $49,534,056 $ 45,510,034
==================================================================================================
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $10,188,475 $ 8,674,888
Interest-bearing deposits 23,665,808 20,521,115
- --------------------------------------------------------------------------------------------------
Total deposits 33,854,283 29,196,003
Short-term borrowings 2,093,381 2,924,694
Acceptances outstanding 26,668 43,810
Accrued expenses and other liabilities 800,386 640,653
Medium- and long-term debt 8,259,179 8,756,823
- --------------------------------------------------------------------------------------------------
Total liabilities 45,033,897 41,561,983
Nonredeemable preferred stock-$50
stated value
Authorized-5,000,000 shares
Issued-5,000,000 shares at 12/31/00
and 12/31/99 250,000 250,000
Common stock-$5 par value
Authorized-325,000,000 shares
Issued-177,527,216 shares at
12/31/00 and 177,888,918 shares at
12/31/99 888,519 889,453
Capital surplus 301,414 226,001
Unearned employee stock ownership plan
stock - 176,462 shares at 12/31/00
and 81,418 shares at 12/31/99 (6,750) (3,750)
Accumulated other comprehensive income 12,097 (21,704)
Retained earnings 3,085,784 2,677,210
Deferred compensation (14,494) (21,998)
Less cost of common stock in
treasury-289,397 shares at 12/31/00
and 715,496 shares at 12/31/99 (16,411) (47,161)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 4,500,159 3,948,051
- --------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 49,534,056 $45,510,034
==================================================================================================
See notes to consolidated financial statements.
2
Consolidated Statements of Income
Comerica Incorporated and Subsidiaries
Year Ended December 31
(in thousands, except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $ 3,436,066 $ 2,822,937 $ 2,679,979
Interest on investment securities
Taxable 256,469 194,254 256,090
Exempt from federal income tax 2,864 4,647 7,252
- ----------------------------------------------------------------------------------------------------------
Total interest on investment
securities 259,333 198,901 263,342
Interest on short-term investments 77,749 39,317 34,798
- ----------------------------------------------------------------------------------------------------------
Total interest income 3,773,148 3,061,155 2,978,119
Interest Expense
Interest on deposits 956,168 694,311 738,491
Interest on short-term borrowings 215,372 183,124 191,010
Interest on medium- and long-term debt 550,026 424,698 374,460
Net interest rate swap (income)/expense 47,413 (57,854) (45,810)
- ----------------------------------------------------------------------------------------------------------
Total interest expense 1,768,979 1,244,279 1,258,151
- ----------------------------------------------------------------------------------------------------------
Net interest income 2,004,169 1,816,876 1,719,968
Provision for credit losses 254,800 146,220 146,375
- ----------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 1,749,369 1,670,656 1,573,593
Noninterest Income
Fiduciary and investment management
income 306,119 243,956 192,962
Service charges on deposit accounts 188,828 176,639 164,121
Commercial lending fees 62,645 54,659 57,977
Letter of credit fees 51,960 46,116 31,127
Securities gains/(losses) 10,529 8,675 7,441
Net gain on sales of businesses 50,299 76,387 10,705
Other noninterest income 288,070 260,582 202,616
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 958,450 867,014 666,949
Noninterest Expenses
Salaries and employee benefits 851,456 777,539 679,902
Net occupancy expense 110,126 104,308 100,337
Equipment expense 76,532 73,217 69,939
Outside processing fee expense 63,289 60,207 52,754
Restructuring charge/(credit) - - (6,840)
Other noninterest expenses 384,889 343,637 340,878
- ----------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,486,292 1,358,908 1,236,970
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 1,221,527 1,178,762 1,003,572
Provision for income taxes 430,792 419,347 352,748
- ----------------------------------------------------------------------------------------------------------
Net Income $ 790,735 $ 759,415 $ 650,824
==========================================================================================================
Net income applicable to
common stock $ 773,635 $ 742,315 $ 633,724
==========================================================================================================
Basic net income per common share $ 4.38 $ 4.20 $ 3.58
Diluted net income per common share 4.31 4.13 3.51
Cash dividends declared on
common stock $ 250,277 $ 224,837 $ 199,403
Dividends per common share $ 1.60 $ 1.44 $ 1.28
- ----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
3
Consolidated Statements of Changes in Shareholders' Equity
Comerica Incorporated and Subsidiaries
Unearned
Employee
Non- Stock Accumulated
Redeemable Ownership Other
Preferred Common Capital Plan Comprehensive
(in thousands, except share data) Stock Stock Surplus Shares Income
------------ ----------- ----------- ----------- --------------
Balances at January 1, 1998
As originally reported $ 250,000 $ 784,077 $ -- $ -- $ (1,937)
Imperial balances at January 1, 1998 -- 236,186 -- -- 1,682
Pooling of interest adjustments -- (171,211) 171,211 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1998 250,000 849,052 171,211 -- (255)
Net income for 1998 -- -- -- -- --
Other comprehensive income, net of tax -- -- -- -- (6,715)
Total comprehensive income -- -- -- -- --
Cash dividend declared: -- -- -- -- --
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Purchase and retirement of
common stock -- (4,575) (26,150) -- --
Stock split -- 32,538 (32,538) -- --
Common stock issued for acquisition -- 922 3,000 -- --
Issuance of common stock under
employee stock plans -- 4,515 37,272 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1998 250,000 882,452 152,795 -- (6,970)
Net income for 1999 -- -- -- -- --
Other comprehensive income, net of tax -- -- -- -- (14,734)
Total comprehensive income -- -- -- -- --
Cash dividends declared:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Purchase of common stock -- (1,284) (8,069) -- --
Common stock dividend -- 7,712 44,993 -- --
Issuance of common stock under
employee stock plans -- 573 12,067 (3,750) --
Amortization of deferred compensation,
net of minority interest -- -- 24,215 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1999 250,000 889,453 226,001 (3,750) (21,704)
Net income for 2000 -- -- -- -- --
Other comprehensive income, net of tax -- -- -- -- 33,801
Total comprehensive income -- -- -- -- --
Cash dividends declared:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Purchase of common stock -- (4,651) (31,645) -- --
Common stock dividend -- -- 84,906 -- --
Issuance of common stock under
employee stock plans -- 3,717 22,152 (3,000) --
Amortization of deferred compensation,
net of minority interest -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2000 $ 250,000 $ 888,519 $ 301,414 $ (6,750) $ 12,097
===================================================================================================================================
Total
Retained Deferred Treasury Shareholders'
(in thousands, except share data) Earning Compensation Stock Equity
----------- ------------ ------------ -------------
Balances at January 1, 1998
As originally reported $ 1,731,419 $ (1,783) $ -- $ 2,761,776
Imperial balances at January 1, 1998 114,156 -- -- 352,024
Pooling of interest adjustments -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Balances at January 1, 1998 1,845,575 (1,783) -- 3,113,800
Net income for 1998 -- -- -- 650,824
Other comprehensive income, net of tax 650,824 -- -- (6,715)
-----------
Total comprehensive income -- -- -- 644,109
Cash dividend declared: -- -- -- --
Preferred stock (17,100) -- -- (17,100)
Common stock (199,403) -- -- (199,403)
Purchase and retirement of
common stock -- -- (145,202) (175,927)
Stock split -- -- -- --
Common stock issued for acquisition -- -- -- 3,922
Issuance of common stock under
employee stock plans (35,403) (3,419) 56,069 59,034
- ----------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1998 2,244,493 (5,202) (89,133) 3,428,435
Net income for 1999 759,415 -- -- 759,415
Other comprehensive income, net of tax -- -- -- (14,734)
-----------
Total comprehensive income -- -- -- 744,681
Cash dividends declared:
Preferred stock (17,100) -- -- (17,100)
Common stock (224,837) -- -- (224,837)
Purchase of common stock -- -- (2,885) (12,238)
Common stock dividend (52,724) -- -- (19)
Issuance of common stock under
employee stock plans (32,037) 4 44,857 21,714
Amortization of deferred compensation,
net of minority interest -- (16,800) -- 7,415
- ----------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1999 2,677,210 (21,998) (47,161) 3,948,051
Net income for 2000 790,735 -- -- 790,735
Other comprehensive income, net of tax -- -- -- 33,801
-----------
Total comprehensive income -- -- -- 824,536
Cash dividends declared:
Preferred stock (17,100) -- -- (17,100)
Common stock (250,277) -- -- (250,277)
Purchase of common stock -- -- (14,108) (50,404)
Common stock dividend (84,927) -- -- (21)
Issuance of common stock under
employee stock plans (29,857) (3,278) 44,858 34,592
Amortization of deferred compensation,
net of minority interest -- 10,782 -- 10,782
- ----------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2000 $ 3,085,784 $ (14,494) $ (16,411) $ 4,500,159
================================================================================================================
( ) Indicates deduction.
See notes to consolidated financial statements.
4
Consolidated Statements of Cash Flows
Comerica Incorporated and Subsidiaries
Year Ended December 31
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 790,735 $ 759,415 $ 650,824
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 254,800 146,220 146,375
Depreciation 70,988 74,768 60,913
Restructuring charge -- -- (21,923)
Net increase in securities (12,410) (46,854) (14,566)
Net (increase) decrease in assets held for sale (33,385) 53,568 (19,760)
Net (increase) decrease in accrued income receivable (80,923) (42,321) 16,417
Net increase in accrued expenses 110,273 138,459 2,973
Net change in equity investments (29,817) 16,031 (3,272)
Gain on the sale of businesses (50,299) (76,387) (10,705)
Net amortization of intangibles 36,643 33,921 30,414
Other, net (152,773) 30,368 (130,106)
- --------------------------------------------------------------------------------------------------------------------------
Total adjustments 113,097 327,773 56,760
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 903,832 1,087,188 707,584
Investing Activities
Net (increase) decrease in interest-bearing deposits with banks (2,846) (9,418) (1,184)
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell 176,527 (134,094) (584,059)
Proceeds from sale of investment securities
available for sale 6,298,862 1,921,554 992,271
Proceeds from maturity of investment securities
available for sale 827,426 3,965,212 5,502,573
Purchases of investment securities available for sale (7,200,262) (6,328,161) (5,324,039)
Net increase in loans (other than loans purchased) (4,032,060) (2,918,339) (4,417,160)
Purchase of loans -- -- (1,115)
Proceeds from exercise of warrants and sale of equity securities 23,155 17,658 10,572
Proceeds from sale of real estate and other assets owned 107 1,618 3,972
Fixed assets, net (62,187) (55,825) (50,259)
Net (increase) decrease in customers' liability on
acceptances outstanding 17,142 (31,475) 6,057
Net cash provided by acquisition/sale of businesses 442,426 69,512 1,878,907
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,511,710) (3,501,758) (1,983,464)
Financing Activities
Net increase (decrease) in deposits 4,658,280 (686,777) 3,121,865
Net increase (decrease) in short-term borrowings (831,313) (716,060) 391,938
Net increase (decrease) in acceptances outstanding (17,142) 31,475 (6,057)
Proceeds from issuance of medium- and long-term debt 6,103,664 6,373,364 3,200,000
Repayments and purchases of medium- and long-term debt (6,594,637) (2,981,672) (5,213,360)
Net proceeds from ESOP loans 6,000 5,985 --
Proceeds from exercise of employee stock options 10,648 1,446 2,855
Other (26) (1,352) 377
Redemption of capital securities (9,793) -- --
Proceeds from issuance of common stock 20,618 23,268 50,885
Purchase of common stock for treasury and retirement (56,403) (18,118) (175,927)
Dividends paid (261,096) (235,646) (211,966)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,028,800 1,795,913 1,160,610
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 420,922 (618,657) (115,270)
Cash and due from banks at beginning of year 1,509,760 2,128,417 2,243,687
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,930,682 $ 1,509,760 $ 2,128,417
==========================================================================================================================
Interest paid $ 1,718,365 $ 1,210,598 $ 1,291,024
==========================================================================================================================
Income taxes paid $ 379,250 $ 347,933 $ 288,783
==========================================================================================================================
Noncash investing and financing activities
Transfer from loans to loans held for sale $ -- $ 620,280 $ --
Loans made in conjunction with the sale of loans -- $ 7,210 $ --
Common stock issued for an acquisition $ -- $ -- $ 3,922
Loan transfers to other real estate 6,870 11,430 6,911
==========================================================================================================================
See notes to consolidated financial statements.
5
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
1 Accounting Policies
ORGANIZATION
Comerica Incorporated is a registered financial 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.
In addition to the three major lines of business, the Finance segment is also
significant. The Finance segment includes Comerica's securities portfolio and
asset and liability management activities. This segment is responsible for
managing Comerica's funding, liquidity and capital needs, performing interest
sensitivity gap and earnings simulation analysis and executing various
strategies to manage Comerica's exposure to interest rate risk.
The accounting and reporting policies of Comerica Incorporated and its
subsidiaries conform to accounting principles generally accepted in the United
States 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 have been 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 25 years (weighted average of 19
years). Core deposit intangible assets are amortized on an accelerated method
over 10 years.
IMPAIRMENT
The Corporation periodically evaluates long-lived assets, certain identifiable
intangibles, deferred costs and goodwill for indication of impairment in value.
When required, asset impairment is recorded.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or market. Market value is
determined in the aggregate.
6
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 assets. The estimated useful
lives are generally 10-33 years for premises that the company owns and 3-8 years
for furniture and equipment. Leasehold improvements are amortized over the terms
of their respective leases or 10 years, whichever is shorter.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents management's assessment of probable
losses inherent in the Corporation's on- and off-balance sheet credit portfolio.
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 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 loan loss experience, current economic conditions and
trends, geographic dispersion of borrowers, and trends with respect to past due
and nonaccrual amounts.
Management maintains an unallocated allowance to recognize the uncertainty and
imprecision underlying the process of estimating expected credit losses. This
uncertainty occurs because other factors affecting the determination of probable
losses inherent in the loan
7
portfolio may exist which are not necessarily captured by the application of
historical loss ratios. Loans which are deemed uncollectible are charged off and
deducted from the allowance. The provision for credit 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.
Loans which were restructured, but yield a rate equal to or greater than the
rate charged for new loans with comparable risk and have met the requirements
for accrual status, are generally not reported as nonperforming assets. Such
loans are evaluated for impairment in the calendar year of the modifications.
These loans may be excluded from the impairment assessment in the calendar years
subsequent to the restructuring if not impaired based on the modified terms. See
Note 4 for additional information on loan impairment.
Consumer loans are generally not placed on nonaccrual status and are 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. Generally, a loan may be returned to accrual status when all
delinquent principal and interest become current and the Corporation expects
repayment of the remaining contractual principal and interest or when the loan
is both well secured and in the process of collection. A nonaccrual loan that is
restructured will generally remain on nonaccrual for a period of six months to
demonstrate that the borrower can meet the restructured terms. However,
sustained payment performance prior to the restructuring, or significant events
that coincide with the restructuring, are included in assessing whether the
borrower can meet the restructured terms. These factors may result in the loan
being returned to an accrual basis at the time of restructuring or upon
satisfaction of a shorter performance period. If management is uncertain whether
the borrower has the ability to meet the revised payment schedule, the loan
remains classified as nonaccrual. 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 credit losses. Subsequent write-downs,
operating expenses and losses upon sale, if any, are charged to noninterest
expenses.
STOCK-BASED COMPENSATION
The Corporation elected to continue to apply the disclosure only method in
accounting for its stock-based compensation plans. Information on the
Corporation's stock-based compensation plans is included in Note 13.
PENSION COSTS
8
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 since
there is a high correlation with the on-balance sheet instrument being hedged.
If this correlation ceases to exist, the existing unrealized gain or loss is
amortized over the remaining term of the instrument, and future changes in fair
value are accounted for in noninterest income or expense. 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 fair value 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."
DEFERRED COSTS
Certain mutual fund costs are capitalized when paid and amortized over the
period that fees contractually recoup the deferred costs. The net of fees and
amortization is recorded in noninterest income.
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
9
adjustment. Loan fees on unused commitments and fees related to loans sold are
recognized currently as noninterest income.
OTHER COMPREHENSIVE INCOME
The Corporation has elected to present information on comprehensive income in
the Consolidated Statements of Changes in Shareholders' Equity and in Note 12.
2 Acquisitions
On November 1, 2000, the Corporation and Imperial Bancorp announced a definitive
agreement to merge through an exchange of shares. Under the terms of the
agreement, Imperial shareholders received 0.46 shares of Comerica common stock
for each share of Imperial common stock. The merger was completed in January
2001 and was accounted for as a pooling of interests. The Corporation
anticipates incurring a pre-tax, merger-related and restructuring charge of
approximately $169 million ($124 million after-tax) in 2001 in connection with
the acquisition.
The financial information presented in this form 8-K is for Comerica
Incorporated and is restated to include the accounts and results of operations
of the acquisition accounted for as a pooling of interests combination.
During 1998, Comerica purchased a majority interest in Munder Capital
Management, an investment advisory firm. Net income for the third and fourth
quarter of 1998 included the consolidated financial results of Munder. The
Corporation's minority interest in periods prior to the third quarter of 1998
was accounted for under the equity method. Intangible assets increased $133
million as a result of the consolidation. The fair market value of total assets
acquired and total liabilities assumed was not material.
At December 31, 2000 the Corporation owned 12 million shares, or approximately
56%, of the outstanding common stock of Official Payment Corporation
("OPAY")(Nasdaq: OPAY). OPAY completed an initial public offering ("IPO") on
November 23, 1999, of 5 million shares of common stock priced at $15 per share.
As a result of the offering, the Corporation's ownership percentage of OPAY's
common stock decreased from 80% to approximately 56% of total outstanding
shares. The Corporation recognized a $44 million pretax gain in 1999
representing the increase in its basis in OPAY stock due to the IPO. The gain is
reflected in "Net gain on sale of businesses" in the Consolidated Statements of
Income.
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, 2000
U.S. government and
agency securities $3,120,561 $ 22,476 $ 8,417 $3,134,620
10
State and municipal securities 44,920 1,417 40 46,297
Other securities 713,101 6,599 9,892 709,808
---------- ---------- -------- ----------
Total securities available
for sale $3,878,582 $ 30,492 $ 18,349 $3,890,725
========== ========== ======== ==========
December 31, 1999
U.S. government and
agency securities $2,995,992 $ 1,458 $ 47,781 $2,949,669
State and municipal securities 72,054 1,764 122 73,696
Other securities 748,576 24,153 12,601 760,128
---------- ---------- -------- ----------
Total securities available
for sale $3,816,622 $ 27,375 $ 60,504 $3,783,493
========== ========== ======== ==========
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, 2000 Estimated
(in thousands) Cost Fair Value
---------- ----------
Contractual maturity
Within one year $ 285,950 $ 288,331
Over one year to five years 450,154 451,471
Over five years to ten years 61,774 59,126
Over ten years 764,158 759,013
---------- ----------
Subtotal securities 1,562,036 1,557,941
Mortgage-backed securities 2,175,568 2,191,673
Equity and other nondebt securities 140,978 141,111
---------- ----------
Total securities available
for sale $3,878,582 $3,890,725
========== ==========
Sales, calls and write-downs of investment securities available for sale
resulted in realized gains and losses as follows:
Year Ended December 31
(in thousands) 2000 1999
------- ------
Securities gains $20,821 $8,869
Securities losses (3,826) (194)
Write-down of low income housing
investments (6,466) --
------- ------
Total $10,529 $8,675
======= ======
Assets, principally securities, carried at approximately $1.8 billion at
December 31, 2000, were pledged to secure public deposits (including State of
Michigan deposits of $73 million at December 31, 2000) and for other purposes as
required by law.
11
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) 2000 1999
-------- ---------
Nonaccrual loans
Commercial loans $244,390 $ 126,640
International loans 57,929 44,046
Real estate construction loans 4,542 249
Commercial mortgage loans 17,417 10,189
Residential mortgage loans 166 572
Consumer loans 3,080 5,356
Lease financing 3,837 5,630
-------- ---------
Total 331,361 192,682
Reduced-rate loans 2,306 9,348
-------- ---------
Total nonperforming loans 333,667 202,030
Other real estate 5,577 10,530
-------- ---------
Total nonperforming assets $339,244 $ 212,560
======== =========
Loans past due 90 days and
still accruing $ 35,820 $ 47,676
======== =========
Gross interest income that would
have been recorded
had the nonaccrual and reduced-rate
loans performed
in accordance with original terms $ 36,176 $ 19,692
-------- ---------
Interest income recognized $ 7,502 $ 2,327
======== =========
A loan is 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.
Impaired loans at December 31, 2000, were $365 million, $29 million of which
were formerly on nonaccrual status, but were restructured and met the
requirements to be restored to an accrual basis. These loans are performing in
accordance with their modified terms, but, in accordance with impaired loan
disclosures must continue to be disclosed as impaired for the remainder of the
calendar year of the restructuring.
12
December 31
(in thousands) 2000 1999 1998
-------- --------- --------
Average impaired loans for the year $292,665 $209,480 $164,141
Total period-end impaired loans 364,895 199,922 163,010
Period-end impaired loans requiring
an allowance 277,159 184,607 144,240
Impairment allowance 104,107 61,913 34,726
Those impaired loans not requiring an allowance represent loans for which the
fair value exceeded the recorded investment in the loan. Remaining loan
impairment is based on the present value of expected future cash flows
discounted at the loan's effective interest rate.
13
5 Allowance for Credit Losses
An analysis of changes in the allowance for credit losses follows:
(in thousands) 2000 1999 1998
-------- --------- ---------
Balance at January 1 $548,147 $ 515,058 $ 475,290
Loans charged off (223,527) (143,727) (149,420)
Recoveries on loans previously
charged off 28,745 34,563 42,813
-------- --------- ---------
Net loans charged off (194,782) (109,164) (106,607)
Provision for credit losses 254,800 146,220 146,375
Transfer to loans held for sale - (4,000) -
Foreign currency translation
adjustment (55) 33 -
-------- --------- ---------
Balance at December 31 $608,110 $ 548,147 $ 515,058
======== ========= =========
As a percent of total
loans 1.51% 1.51% 1.51%
======== ========= =========
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 financial 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, 2000 and 1999, exposure from loan commitments and guarantees to
companies related to the automotive industry totaled $10.6 billion and $8.9
billion, respectively. Additionally, commercial real estate loans, including
commercial mortgages and construction loans, totaled $8.5 billion in 2000 and
$6.5 billion in 1999. Approximately $3.5 billion of commercial real estate and
real estate construction loans at December 31, 2000, involved 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.
7 Premises and Equipment and Other Noncancellable Obligations
A summary of premises and equipment at December 31 by major category follows:
(in thousands) 2000 1999
---------- ---------
Land $ 54,878 $ 51,229
Buildings and improvements 356,012 355,483
Furniture and equipment 423,743 404,029
---------- ---------
Total cost 834,633 810,741
Less accumulated depreciation
and amortization (470,387) (438,768)
---------- ---------
Net book value $ 364,246 $ 371,973
========== =========
14
Rental expense for leased properties and equipment amounted to $51 million in
2000, $50 million in 1999 and $49 million in 1998. Future minimum payments under
noncancellable obligations are as follows:
(in thousands)
2001 $ 60,622
2002 55,240
2003 52,219
2004 46,930
2005 39,665
2006 and later 278,872
8 Deposits
A maturity distribution of domestic Certificates of Deposits of $100,000 and
over at December 31 follows:
(in millions) 2000 1999
---- ----
Three months of less $3,206 $2,752
Over three months to six months 2,028 662
Over six months to twelve months 2,061 637
Over twelve months 349 187
------ ------
Total $7,644 $4,238
====== ======
9 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 at December 31, 2000 and 1999.
Federal Funds Purchased and Other
Securities Sold Under Borrowed
(in thousands) Agreements to Repurchase Funds
December 31, 2000 --------------------------- ----------
Amount outstanding at year-end $1,640,006 $ 453,375
Weighted average interest
rate at year-end 6.37% 5.51%
December 31, 1999
Amount outstanding at year-end $1,387,536 $1,537,158
Weighted average interest
rate at year-end 4.43% 4.45%
At December 31, 2000, the parent company had available a $250 million commercial
paper facility of which $80 million was outstanding. This facility is supported
by a $200 million line of credit agreement. Under the current agreement the line
will expire in May of 2001.
15
At December 31, 2000, the Corporation's subsidiary banks had pledged loans
totaling $30.8 billion to secure a collateralized borrowing account with the
Federal Reserve Bank.
10 Medium- and Long-Term Debt
Medium- and long-term debt consisted of the following at December 31:
(in thousands) 2000 1999
---------- ----------
Parent Company
7.25% subordinated notes due 2007 $ 157,414 $ 158,543
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 198,703 198,502
8.375% subordinated notes due 2024 155,071 155,287
7.25% subordinated notes due 2002 149,719 149,561
6.875% subordinated notes due 2008 103,272 103,729
7.125% subordinated notes due 2013 154,486 154,834
7.875% subordinated notes due 2026 172,346 173,217
6.00% subordinated notes due 2008 248,238 248,010
7.65% subordinated notes due 2010 248,385 -
8.50% subordinated notes due 2009 99,474 99,411
9.98% junior subordinated debentures due 2026 63,690 73,430
---------- ----------
Total subordinated notes 1,593,384 1,355,981
Medium-term notes:
Floating rate based on LIBOR indices 5,048,972 5,766,070
Floating rate based on Treasury indices 125,000 37,000
Floating rate based on Prime indices 1,320,964 1,224,993
Fixed rate notes with interest rate
of 6.65% - 199,944
---------- ----------
Total medium-term notes 6,494,936 7,228,007
Notes payable 13,445 14,292
---------- ----------
Total subsidiaries 8,101,765 8,598,280
---------- ----------
Total medium- and long-term debt $8,259,179 $8,756,823
========== ==========
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 12/31/00
---------------- ------------- --------
Parent company
7.25% subordinated notes $150,000 6-month LIBOR 6.21%
Subsidiaries
Subordinated notes:
7.25% subordinated notes $200,000 6-month LIBOR 6.21%
8.375% subordinated notes 150,000 6-month LIBOR 6.21%
7.25% subordinated notes 150,000 6-month LIBOR 6.21%
6.875% subordinated notes 100,000 6-month LIBOR 6.21%
6.00% subordinated notes 250,000 6-month LIBOR 6.21%
7.125% subordinated notes 150,000 6-month LIBOR 6.21%
7.875% subordinated notes 150,000 6-month LIBOR 6.21%
16
7.65% subordinated notes 250,000 3-month LIBOR 6.44%
Medium-term notes:
Floating rate based on
Treasury indices 125,000 1-month LIBOR 6.64%
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 bank
subsidiaries may offer an aggregate principal amount of up to $17.0 billion. The
notes can be issued as fixed or floating rate notes and with terms from one
month to 15 years. The interest rates on the floating rate medium-term notes
based on LIBOR ranged from three-month LIBOR plus 0.07% to one-month LIBOR plus
0.20%. The notes are due from 2001 to 2005. The interest rate on the floating
rate medium-term notes based on U.S. Treasury indices is equal to the
three-month U.S. Treasury bill bond equivalent rate plus 0.67%. The notes are
due in 2001. 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)
2001 $5,257,051
2002 991,137
2003 132,309
2004 102,330
2005 187,366
2006 and later 1,588,986
11 Shareholders' Equity
The board of directors had authorized the repurchase of up to 40.5 million
shares of Comerica Incorporated common stock for general corporate purposes,
acquisitions and employee benefit plans. In connection with the Imperial Bancorp
acquisition, the board of directors of the Corporation rescinded its previous
authorization. On March 27, 2001, the Board of Directors of Comerica approved a
share repurchase program, authorizing the Corporation to repurchase up to one
million (1,000,000) shares of its outstanding common stock.
At December 31, 2000, the Corporation had reserved 11.3 million shares of common
stock for issuance to employees and directors under the long-term incentive
plans.
The Corporation issued 5 million shares of Fixed/Adjustable Rate Noncumulative
Preferred Stock, Series E, with a stated value of $50 per share in 1996.
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 Treasury Maturity
Rate and the Thirty Year Constant Treasury Maturity Rate (as defined in the
prospectus). The Corporation, at its option after regulatory approval, may
redeem all or part of the outstanding shares on or after July 1, 2001.
12 Other Comprehensive Income
Other comprehensive income includes the change in unrealized gains and losses on
investment securities available for sale and the change in the accumulated
foreign
17
currency translation adjustment. The Consolidated Statements of Changes in
Shareholders' Equity includes only combined, net of tax, other comprehensive
income. The following presents reconciliations of the components of accumulated
other comprehensive income for the years ended December 31, 2000, 1999 and 1998.
Year Ended December 31
(in thousands) 2000 1999 1998
Net unrealized gains (losses) on investment
securities available for sale:
Balance at beginning of year $(22,719) $ (8,203) $ 712
Net unrealized holding gains (losses)
arising during the period 56,230 (12,452) (6,301)
Less: Reclassification adjustment for gains
(losses) included in net income 10,529 8,675 7,441
-------- ---------- --------
Change in net unrealized gains (losses)
before income taxes 45,701 (21,127) (13,742)
Provision for income taxes 14,966 (6,611) (4,827)
-------- ---------- --------
Change in net unrealized gains (losses)
on investment securities
available for sale, net of tax 30,735 (14,516) (8,915)
-------- ---------- --------
Balance at December 31 $ 8,016 $ (22,719) $ (8,203)
Accumulated foreign currency translation adjustment:
Balance at beginning of year 1,015 1,233 (967)
Net translation gains (losses) arising
during the period 3,066 (218) 2,200
Less: Reclassification adjustment for gains
(losses) included in net income - - -
-------- ---------- --------
Change in translation adjustment before income taxes 3,066 (218) 2,200
Provision for income taxes - - -
-------- ---------- --------
Change in foreign currency translation adjustment,
net of tax 3,066 (218) 2,200
-------- ---------- --------
Balance at December 31 $ 4,081 $ 1,015 $ 1,233
-------- ---------- --------
Total accumulated other comprehensive income,
net of taxes, at December 31 $ 12,097 $ (21,704) $ (6,970)
======== ========== ========
13 Net Income per Common Share
Basic net income per common share is computed by dividing net income applicable
to common stock by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share is computed
by dividing net income applicable to common stock by the weighted average number
of shares, nonvested 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. A computation of earnings per
share follows:
Year Ended December 31
(in thousands, except per share data) 2000 1999 1998
-------- -------- --------
Basic
Average shares outstanding 176,827 176,771 177,016
======== ======== ========
18
Net income $790,735 $759,415 $650,824
Less preferred stock dividends 17,100 17,100 17,100
-------- -------- --------
Net income applicable to common stock $773,635 $742,315 $633,724
======== ======== ========
Basic net income per common share $ 4.38 $ 4.20 $ 3.58
======== ======== ========
Diluted
Average shares outstanding 176,827 176,771 177,016
Nonvested stock 159 167 191
Common stock equivalents
Net effect of the assumed
exercise of stock options 2,395 2,863 3,496
-------- -------- --------
Diluted average shares 179,381 179,801 180,703
======== ======== ========
Net income $790,735 $759,415 $650,824
Less preferred stock dividends 17,100 17,100 17,100
-------- -------- --------
Net income applicable to common stock $773,635 $742,315 $633,724
======== ======== ========
Diluted net income per common share $ 4.31 $ 4.13 $ 3.51
======== ======== ========
14 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, directors and key personnel of the Corporation and its
subsidiaries. The Corporation has elected to follow the disclosure only method
in accounting for the employee and director stock options when the exercise
price equals the market price of the underlying stock on the date of grant. 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 options may
have restrictions regarding exercisability. A majority of the Corporation's
options vest over a four-year period.
Pro forma information regarding net income and earnings per share was determined
as if the Corporation had accounted for its employee and director stock options
under the fair value method. The fair value of options was estimated at the date
of grant using a Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. The model may not necessarily provide a reliable single
measure of the fair value of employee and director stock options. The
Corporation's employee and director stock options have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate.
The fair value of the options was estimated using an option valuation model with
the following weighted-average assumptions:
2000 1999 1998
----- ----- -----
Risk-free interest rate 6.46% 5.15% 5.54%
Expected dividend yield 2.84% 3.24% 3.45%
Expected volatility factors of the
market price of Comerica common stock 28% 24% 21%
Expected option life (in years) 4.8 4.8 4.3
19
Had compensation cost for the Corporation's stock-based compensation plans been
determined in accordance with the fair value provisions, net income and earnings
per share would have been as follows:
(in thousands, except per share data) 2000 1999 1998
-------- -------- --------
Pro forma net income $747,700 $719,598 $619,569
Pro forma earnings per share:
Basic $4.23 $4.07 $3.50
Diluted 4.17 4.00 3.43
Average per Share
Exercise Market
Number Price Price
---------- ------ ------
Outstanding-December 31, 1997 9,702,927 $22.81 $60.17
Granted 3,334,915 54.95 71.37
Cancelled (1,095,827) 54.75 64.33
Exercised (1,707,059) 18.35 64.07
Expired - -
---------- ------ ------
Outstanding-December 31, 1998 10,234,956 $33.26 $68.19
Granted 2,388,392 64.86 66.63
Cancelled (259,697) 56.27 58.69
Exercised (801,136) 18.44 62.76
Expired - -
---------- ------ ------
Outstanding-December 31, 1999 11,562,515 $40.32 $46.69
Granted 2,781,847 42.53 41.95
Cancelled (261,986) 50.92 49.58
Exercised (1,522,564) 17.16 17.31
Expired - -
---------- ------ ------
Outstanding-December 31, 2000 12,559,812 $43.38 $59.38
========== ====== ======
Exercisable-December 31, 2000 8,026,508
Available for grant-December 31, 2000 142,316
The following table summarizes information about stock options outstanding at
December 31, 2000:
Outstanding Exercisable
Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (a) Price Shares Price
---------- -------- -------- --------- ----------
$ 6.30 -$19.00 1,359,931 3.8 $18.23 1,359,931 $18.23
19.83 - 35.33 3,405,229 4.9 26.26 3,401,479 26.26
40.09 - 58.44 3,854,534 8.1 41.33 1,213,527 40.98
60.31 - 66.81 2,155,613 8.2 66.61 959,260 66.41
68.44 - 71.58 1,784,505 7.2 71.58 1,092,311 71.58
---------- ----- ------ --------- -----
Total 12,559,812 6.7 43.38 8,026,508 38.09
========== ===== ====== ========= =====
20
(a) Average contractual life remaining in years.
15 Employee Benefit Plans
The Corporation has a defined benefit pension plan in effect for substantially
all full-time employees. Staff expense includes income of $7.9 million in 2000,
$0.8 million in 1999 and $3.0 million in 1998 for the plan. Benefits under the
plan are based primarily on years of service, age and compensation during the
five highest paid consecutive calendar years occurring during the last ten years
before retirement. The plan's assets primarily consist of units of certain
collective investment funds administered by Munder Capital Management, equity
securities, U.S. government and agency securities and corporate bonds and notes.
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. The Corporation has funded
the plan with a company-owned life insurance contract.
The tables below set forth reconciliations of the Corporation's pension and
postretirement plan obligations and plan assets:
Defined Benefit Postretirement
Pension Plan Benefit Plan
(in thousands) 2000 1999 2000 1999
-------- -------- ------- -------
Change in benefit obligation:
Benefit obligation at January 1 $509,686 $542,941 $74,562 $80,710
Service cost 13,531 15,387 79 256
Interest cost 42,839 38,118 5,541 5,308
Amendments 25,696 - - -
Actuarial (gain)/loss 22,294 (63,598) 2,892 (4,995)
Benefits paid (23,419) (23,162) (7,122) (6,717)
-------- -------- ------- -------
Benefit obligation
at December 31 $590,627 $509,686 $75,952 $74,562
======== ======== ======= =======
Change in plan assets:
Fair value of plan assets at
January 1 $651,782 $628,194 $84,391 $88,312
Actual return on plan assets 2,656 46,750 5,136 (1,475)
Employer contributions - - 3,306 4,271
Benefits paid (23,419) (23,162) (7,122) (6,717)
-------- -------- ------- -------
Fair value of plan assets at
December 31 $631,019 $651,782 $85,711 $84,391
======== ======== ======= =======
21
The following table sets forth the funded status of the defined benefit pension
and postretirement plan and amounts recognized on the Corporation's balance
sheet:
Defined Benefit Postretirement
Benefit Plan Pension Plan
(in thousands) 2000 1999 2000 1999
-------- --------- -------- -------
Funded status at December 31 $ 40,393 $ 142,096 $ 9,758 $ 9,829
Unrecognized net (gain)/loss (24,927) (106,068) 3,282 (4,701)
Unrecognized net transition
(asset)/obligation (856) (5,690) 51,388 59,850
Unrecognized prior service cost 21,597 (2,072) - -
-------- --------- -------- -------
Prepaid benefit cost $ 36,207 $ 28,266 $ 64,428 $64,978
======== ========= ======== =======
Components of net periodic benefit cost/(income):
Defined Benefit Pension Plan
(in thousands)
2000 1999 1998
-------- -------- --------
Service cost $ 13,531 $ 15,387 $ 13,924
Interest cost 42,839 38,118 36,039
Expected return on plan assets (60,920) (51,241) (48,887)
Amortization of unrecognized
transition asset (4,834) (4,834) (4,834)
Amortization of unrecognized
prior service cost 2,026 (322) (331)
Amortization of unrecognized
net (gain)/loss (584) 2,132 1,071
-------- -------- --------
Net periodic benefit income $ (7,942) $ (760) $ (3,018)
======== ======== ========
Postretirement Benefit Plan
(in thousands)
2000 1999 1998
-------- -------- -------
Service cost $ 79 $ 256 $ 262
Interest cost 5,541 5,308 5,509
Expected return on plan assets (6,069) (5,935) (5,829)
Amortization of unrecognized
transition obligation 4,305 4,628 4,628
Amortization of unrecognized net gain - - -
-------- -------- -------
Net periodic benefit cost $ 3,856 $ 4,257 $ 4,570
======== ======== =======
Actuarial assumptions were as follows:
Defined Benefit Pension Plan 2000 1999 1998
-------- -------- -------
Discount rate used in determining
benefit obligation 7.9% 8.0% 7.0%
Long-term rate of return on assets 10.0% 9.3% 9.0%
Rate of compensation increase 5.0% 5.0% 5.0%
Postretirement Benefit Plan
2000 1999 1998
-------- -------- -------
22
Discount rate used in determining
benefit obligation 7.9% 8.0% 7.0%
Long-term rate of return on assets 6.7% 6.7% 6.7%
The health care and prescription drug cost trend rates projected for 2000 were
nine percent and eleven percent, respectively. Each health care cost trend rate
is assumed to gradually decrease to five precent by the year 2007. Increasing
each health care rate by one percentage point would increase the accumulated
postretirement benefit obligation by $5 million at December 31, 2000, and the
aggregate of the service and interest cost components by $359 thousand for the
year ended December 31, 2000. Decreasing each health care rate by one percentage
point would decrease the accumulated postretirement benefit obligation by $5
million at December 31, 2000, and the aggregate of the service and interest cost
components by $317 thousand for the year ended December 31, 2000.
The Corporation also maintains defined contribution plans (including 401(k)
plans) for various groups of its employees. All of the Corporation's salaried
and regular part-time employees are eligible to participate in one or more of
the plans. The Corporation makes matching contributions, most of which are based
on a declining percentage of employee contributions (currently, maximum per
employee is $1,000) as well as a performance-based matching contribution based
on the Corporation's financial performance. Staff expense includes expense of
$35.1 million in 2000, $22.9 million in 1999 and $17.9 million in 1998 for the
plans.
The Corporation maintained an employee stock ownership plan ("ESOP") for certain
employees. The Corporation accounted for its ESOP in accordance with Statement
of Position 93-6. Accordingly, the Corporation recorded compensation expense
equal to the fair value of the shares allocated. The contributions to the plan
are discretionary. At December 31, 2000 the plan was externally leveraged. The
Corporation borrowed $6.0 million from a correspondent bank in 1999 and an
additional $6 million in 2000 to fund the purchase of 133,723 and 165,227 shares
of common stock, respectively, for future contributions to the ESOP. In 2001 the
plan was converted to an internally leveraged plan and merged into the
Corporation's 401(k) plan. Shares are deemed to be available for release to the
ESOP as principal and interest payments are made on the loans, however, shares
were released to the ESOP annually in 2000 and 1999. In 2000, a total of 70,183
shares of common stock, with a cost basis of $3.1 million, were released to the
ESOP. For 1999, a total of 52,305 shares, with a cost basis of $2.3 million,
were released to the ESOP. At December 31, 2000 and 1999, unearned compensation
related to the ESOP of $6.8 million and $3.8 million, respectively, is reflected
as a reduction of shareholders' equity.
The fair value of unallocated ESOP shares totaled $10.5 million and $3.8 million
at December 31, 2000 and 1999, respectively.
The Corporation also maintained a Deferred Compensation Plan ("DC Plan") to
provide specified benefits to certain employees and directors. The DC Plan
allowed participants to defer all or a portion of their salary and bonus. The
Corporation matched a percentage of certain participants' deferrals as
determined by a formula under the plan, which may range from 0% to 50% match.
The match percentage was 50% for 2000 and 1999 and 10% for 1998. The expense of
funding the deferred compensation plans totaled $8.1 million, $4.7 million and
$2.3 million for the years ended December 31, 2000, 1999 and 1998, respectively.
23
16 Income Taxes
The current and deferred components of income taxes were as follows:
(in thousands) 2000 1999 1998
-------- -------- --------
Currently payable
Federal $360,514 $337,127 $274,720
Foreign 16,120 22,797 27,263
State and local 20,464 31,019 24,209
-------- -------- --------
397,098 390,943 326,192
Deferred federal, state and local 45,709 35,453 16,249
-------- -------- --------
Total $442,807 $426,396 $342,441
======== ======== ========
There were $4.4 million, $3.8 million and $2.6 million of income tax
provision/(benefit) on securities transactions in 2000, 1999 and 1998,
respectively.
The principal components of deferred tax (assets)/liabilities at December 31
were as follows:
(in thousands) 2000 1999
--------- ---------
Deferred tax assets:
Allowance for credit losses $(199,371) $(182,697)
Allowance for depreciation (3,302) 2,871
Deferred loan origination fees and costs (30,598) (29,214)
Employee benefits (35,857) (24,636)
Other temporary differences, net (49,457) (44,007)
--------- ---------
Total deferred tax assets $(318,585) $(277,683)
Deferred tax liabilities:
Lease financing transactions $ 311,858 $ 229,086
Investment in Official Payments Corporation 17,065 19,404
Investment securities available for sale 4,486 (9,550)
--------- ---------
Total deferred tax liabilities 333,409 238,940
--------- ---------
Net deferred tax (asset)/liability $ 14,824 $ (38,743)
========= =========
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) 2000 1999 1998
Amount Rate Amount Rate Amount Rate
--------- ---- --------- ---- --------- ----
Tax based on federal
statutory rate $ 427,535 35.0% $ 412,567 35.0% $ 351,250 35.0%
Effect of tax-exempt
interest income (1,917) (0.2) (2,856) (0.2) (4,141) (0.4)
Bank owned life insurance (11,553) (0.9) (11,054) (0.9) (10,651) (1.1)
Goodwill 7,557 (0.6) 7,584 (0.6) 7,559 0.8
Other 9,170 0.8 13,106 (1.1) 8,731 0.8
--------- ---- --------- ---- --------- ----
Provision for income taxes $ 430,792 35.3% $ 419,347 35.6% $ 352,748 35.1%
========= ==== ========= ==== ========= ====
24
17 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, 2000, approximated $368 million at the beginning and $450 million
at the end of 2000. During 2000, new loans to related parties aggregated $710
million and repayments totaled $628 million.
18 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 $1,110 million at January 1, 2001, 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 $339
million in 2000, $261 million in 1999 and $442 million in 1998.
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,
2000 and 1999, 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- Imperial
(in thousands) (Consolidated) Bank Texas California Bank
-------------- ------------- -------------- --------------- -----------
December 31, 2000
Tier 1 capital $ 4,230,159 $ 2,923,331 $ 370,520 $ 482,292 $ 514,476
Total capital 6,398,904 4,600,732 519,976 695,433 683,474
Tier 1 capital to average assets
(minimum-3.0%) 8.74% 8.91% 9.95% 8.95% 7.55%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 7.35 7.09 9.43 7.26 8.34
Total capital to risk-weighted assets
(minimum-8.0%) 11.11 11.16 13.23 10.46 11.08
December 31, 1999
Tier 1 capital $ 3,746,973 $ 2,614,284 $ 358,200 $ 382,339 493,633
Total capital 5,636,708 4,046,166 452,678 576,282 659,214
Tier 1 capital to average assets
(minimum-3.0%) 8.50% 8.53% 9.59% 8.60% 8.11%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 7.34 7.00 10.12 7.48 9.33
Total capital to risk-weighted assets
(minimum-8.0%) 11.04 10.83 12.79 11.27 12.47
19 Financial Instruments with Off-Balance Sheet Risk
25
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 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 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 reflected 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.
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,
total return swaps, foreign exchange forward contracts and foreign exchange swap
agreements.
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, 2000 and 1999.
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.
26
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
--------- ---------- ---------- --------
December 31, 2000
Risk management
Interest rate contracts:
Swaps $12,594 $ 206 $ (33) $ 173
Options, caps and floors purchased 6,058 10 (1) 9
Foreign exchange contracts:
Spot and forwards 493 18 (6) 12
Swaps 115 1 (13) (12)
------- ------- ------- -------
Total foreign exchange contracts 608 19 (19) --
------- ------- ------- -------
Total risk management $19,260 $ 235 $ (53) $ 182
======= ======= ======= =======
December 31, 1999
Risk management
Interest rate contracts:
Swaps $ 8,974 $ 19 $ (184) $ (165)
Options, caps and floors purchased 8,022 -- -- --
Foreign exchange contracts:
Spot and forwards 1,098 33 (23) 10
Swaps 115 -- (5) (5)
------- ------- ------- -------
Total foreign exchange contracts 1,213 33 (28) 5
------- ------- ------- -------
Total risk management $18,209 $ 52 $ (212) $ (160)
======= ======= ======= =======
During 1999, the Corporation terminated a portion of its portfolio of index
amortizing interest rate swaps. The notional amount of these swaps totaled
$1,376 million. The gain resulting from early termination was deferred and is
being amortized over the remaining expected life of the swaps at time of
termination.
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.
Bilateral collateral agreements with counterparties covered 95 percent of the
notional amount of interest rate derivative contracts at December 31, 2000 and
1999. 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, 2000, 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 material
credit losses associated with derivative or foreign exchange contracts.
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, 2000, unrealized gains and unrealized losses on customer-initiated and other
foreign exchange contracts averaged $26 million and $19 million, respectively.
For the year ended December 31, 1999, unrealized gains and unrealized losses
averaged $19 million and $15 million, respectively. These contracts also
generated noninterest income of $9 million in 2000 and $10 million in 1999.
Average positive and negative fair values and income related to
customer-initiated and other interest rate contracts were not material for 2000
and 1999.
27
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, 2000 and
1999.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
---------- ---------- ---------- -------
December 31, 2000
Customer-initiated and other
Interest rate contracts:
Caps and floors written $ 198 $ -- $ (1) $ (1)
Caps and floors purchased 179 1 -- 1
Swaps 493 5 (4) 1
------ ------ ------ ------
Total interest rate contracts 870 6 (5) 1
Foreign exchange contracts:
Spot, forwards, futures and options 1,827 26 (19) 7
Swaps 50 -- -- --
------ ------ ------ ------
Total customer-initiated and other $2,747 $ 32 $ (24) $ 8
====== ====== ====== ======
December 31, 1999
Customer-initiated and other
Interest rate contracts:
Caps and floors written $ 166 $ -- $ (1) $ (1)
Caps and floors purchased 141 1 -- 1
Swaps 256 2 (2) --
------ ------ ------ ------
Total interest rate contracts 563 3 (3) --
Foreign exchange contracts:
Spot, forwards, futures and options 707 15 (11) 4
------ ------ ------ ------
Total customer-initiated and other $1,270 $ 18 $ (14) $ 4
====== ====== ====== ======
Detailed discussions of each class of derivative financial instruments and
foreign exchange contracts held or issued by the Corporation for both risk
management and customer-initiated and other activities are as follows.
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. The
Corporation's swap agreements are structured such that variable payments are
primarily based on prime, one-month LIBOR or 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
28
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.
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, 2000 and 1999. Commitments to
purchase and sell investment securities for the Corporation's trading account
totaled $3 million and $4 million at December 31, 2000 and 1999, respectively.
Outstanding commitments expose the Corporation to both credit and market risk.
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) 2000 1999
------- -------
Unused commitments to extend credit $28,625 $27,656
Standby letters of credit and
financial guarantees 4,692 4,282
Commercial letters of credit 305 291
Credit default swaps 44 44
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 included variable- and fixed-rate
bankcard, revolving check credit and equity access loan commitments of $1
billion at December 31, 2000 and $3 billion at December 31, 1999. The decline in
these commitments was attributable to forming a bankcard and revolving check
credit alliance. Other unused commitments, primarily variable rate, totaled $29
billion at December 31, 2000 and $28 billion at December 31, 1999.
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, defined as those maturing
beyond one year, expire in decreasing amounts through the year 2012, and were
$1,338 million and $1,475 million at December 31, 2000 and 1999, respectively.
The remaining standby letters of credit and financial guarantees, which
29
mature within one year, totaled $2,997 million and $2,589 million at December
31, 2000 and 1999, respectively. Commercial letters of credit are issued to
finance foreign or domestic trade transactions.
CREDIT DEFAULT SWAPS
Credit default swaps allow the Corporation to diversify its loan portfolio by
assuming credit exposure from different borrowers or industries without actually
extending credit in the form of a loan. Credit risk associated with credit
default swaps was $44 million at December 31, 2000 and 1999.
20 Contingent Liabilities
The Corporation and its subsidiaries are parties to litigation and claims
arising in the normal course of their activities. The amount of ultimate
liability, if any, with respect to such matters, or the likelihood or impact of
future claims that may be brought against the Corporation, cannot be determined
with reasonable certainty. Management, after consultation with legal counsel,
believes that the litigation and claims, some of which are substantial, will not
have a material adverse effect on the Corporation's consolidated financial
position.
21 Usage Restrictions
Cash and due from banks may include 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. The average amount of
these reserves was $201 million and $282 million for the years ended December
31, 2000 and 1999, respectively.
22 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 or estimated net selling price. The market value is determined on the
basis of existing forward commitments or the market values of similar loans.
30
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 business 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.
Customers' liability on acceptances outstanding: The carrying amount
approximates the estimated fair value.
Loan servicing rights: The estimated fair value is a 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 its 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
31
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 is based on quoted market
prices. The estimated fair value of interest rate and foreign currency options
(including interest rate caps and floors) is 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, 2000 and 1999 are as follows:
2000 1999
Carrying Estimated Carrying Estimated
(in millions) Amount Fair Value Amount Fair Value
Assets
Cash and short-term investments $ 2,017 $ 2,017 $ 1,602 $ 1,602
Trading account securities 104 104 103 103
Loans held for sale 152 159 588 619
Investment securities available for sale 3,891 3,891 3,783 3,783
Commercial loans 26,009 25,673 23,629 23,330
International loans 2,571 2,501 2,573 2,538
Real estate construction loans 2,915 2,926 2,167 2,168
Commercial mortgage loans 5,361 5,323 4,873 4,768
Residential mortgage loans 807 818 870 866
Consumer loans 1,477 1,500 1,389 1,359
Lease financing 1,029 1,086 804 796
-------- -------- -------- --------
Total loans 40,169 39,827 36,305 35,825
Less allowance for credit losses (608) -- (548) --
-------- -------- -------- --------
Net loans 39,561 39,827 35,757 35,825
Customers' liability on acceptances
Outstanding 27 27 44 44
Loan servicing rights 4 4 5 5
Liabilities
Demand deposits (noninterest-bearing) 10,189 10,189 8,675 8,675
Interest-bearing deposits 23,666 23,760 20,521 20,502
-------- -------- -------- --------
Total deposits 33,855 33,949 29,196 29,177
Short-term borrowings 2,094 2,094 2,925 2,925
Acceptances outstanding 27 27 44 44
Medium- and long-term debt 8,259 8,209 8,757 8,653
Off-Balance Sheet
Financial Instruments
Derivative financial instruments and
foreign exchange contracts
Risk management:
Unrealized gains 7 235 1 52
Unrealized losses -- (53) (1) (212)
Customer-initiated and other:
Unrealized gains 35 32 19 18
Unrealized losses (27) (24) (15) (14)
Credit-related financial instruments -- (89) -- (71)
32
23 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. 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 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, amounts in all periods are
based on methodologies in effect at December 31, 2000. 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. In addition to the three major lines
of business, the Finance Division is also reported as a segment.
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 credit loss provision is assigned based on
the amount necessary to maintain an allowance for credit 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 the activities of each line
of business.
The Business Bank is comprised of middle market lending, asset-based lending,
large corporate banking, venture capital investing, merchant banking and
international financial services. 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, capital market products, international trade
finance, letters of credit, foreign exchange management services and loan
syndication services.
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
and municipalities. Private lending and personal trust services are also
provided to meet the personal financial needs of affluent individuals (as
defined by individual net income or wealth).
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 institutional trust products, retirement
services and provides investment management and advisory services (including
Munder), investment banking and discount securities brokerage services.
The Finance segment includes the Corporation's securities portfolio and asset
and liability management activities. This segment is responsible for managing
the
33
Corporation's funding, liquidity and capital needs, performing interest
sensitivity gap and earnings simulation analysis and executing various
strategies to manage the Corporation's exposure to interest rate risk.
The Other category includes divested business lines, the income and expense
impact of cash and credit loss reserves not assigned to specific business lines,
miscellaneous other items of a corporate nature and certain direct expenses not
allocated to business lines.
Lines of business/segment financial results were as follows:
Business Bank Individual Bank Investment Bank*
(dollar amounts in millions) 2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Earnings Summary
Net interest income (FTE) $ 1306 $ 1123 $ 1005 $ 734 $ 699 $ 679 $ (10) $ (5) $ (3)
Provision for credit losses 291 181 112 1 (6) (14) -- -- --
Noninterest income 349 343 218 338 294 300 267 201 146
Noninterest expenses 653 581 525 588 593 586 234 176 128
Provision for income
taxes (FTE) 262 261 214 165 141 142 11 7 5
Net income (loss) 449 443 372 318 265 265 12 13 10
Selected Average
Balances
Assets $ 35,568 $ 31,822 $ 27,890 $ 6,938 $ 7,402 $ 7,651 $ 408 $ 247 $ 141
Loans 32,253 28,890 24,800 6,466 6,584 7,076 52 -- 1
Deposits 10,736 9,489 8,683 17,808 17,332 17,213 37 24 34
Common equity 2,551 2,014 1,718 742 715 736 282 197 121
Statistical Data
Return on average assets 1.26% 1.39% 1.33% 1.71% 1.47% 1.47% 2.70% 5.43% 6.68%
Return on average
common equity 17.60 22.00 21.65 42.78 37.08 35.96 4.26 6.80 7.79
Efficiency ratio 39.46 39.63 42.93 54.53 59.74 59.82 90.95 89.37 89.38
Finance Other Total
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Earnings Summary
Net interest income (FTE) $ (23) $ 7 $ 47 $ 1 $ (2) $ -- $ 2,008 $ 1,822 $ 1,728
Provision for credit losses -- -- -- (37) (29) 48 255 146 146
Noninterest income 6 8 7 (1) 21 (4) 959 867 667
Noninterest expenses 2 3 3 9 6 (5) 1,486 1,359 1,237
Provision for income
taxes (FTE) (7) 4 18 4 11 (18) 435 424 361
Net income (loss) (12) 8 33 24 31 (29) 791 760 651
Selected Average
Balances
Assets $ 3,898 $ 3,730 $ 4,320 $ 65 $ (179) $ (33) $ 46,877 $ 43,022 $ 39,969
Loans 544 481 280 (682) (526) (313) 38,633 35,429 31,844
Deposits 1,706 569 704 54 65 (30) 30,341 27,479 26,604
Common equity 372 315 333 (4) 168 87 3,943 3,409 2,995
Statistical Data
Return on average assets (0.08)% 0.06% 0.28% n/m% n/m% n/m% 1.69% 1.77% 1.63%
Return on average
common equity (3.32) 2.41 10.01 n/m n/m n/m 20.06 22.29 21.74
Efficiency ratio (12.43) 24.17 5.73 n/m n/m n/m 50.08 50.54 51.65
* Included in noninterest expenses are fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded, Investment
Bank net income would have been $26 million in 2000, $22 million in 1999 and $15
million in 1998. Return on average common equity would have been 9.32% in 2000,
11.38% in 1999 and 11.99% in 1998.
n/m - not meaningful
34
24 Parent Company Financial Statements
BALANCE SHEETS-Comerica Incorporated
December 31
(in thousands, except share data) 2000 1999
----------- -----------
Assets
Cash and due from banks $ 9,918 $ 80
Time deposits with banks 112,100 69,900
Investment securities available
for sale 47,262 27,505
Investment in subsidiaries,
principally banks 4,634,579 4,142,842
Premises and equipment 3,391 4,335
Other assets 66,009 55,900
----------- -----------
Total assets $ 4,873,259 $ 4,300,562
=========== ===========
Liabilities and Shareholders' Equity
Commercial paper $ 79,985 $ 74,877
Long-term debt 157,414 158,543
Advances from nonbanking subsidiaries 4,453 3,882
Other liabilities 131,248 115,209
----------- -----------
Total liabilities 373,100 352,511
Nonredeemable preferred stock-$50 stated value
Authorized-5,000,000 shares
Issued-5,000,000 shares in 2000 and 1999 250,000 250,000
Common stock-$5 par value
Authorized-3,250,000,000 shares
Issued-177,703,678 shares in 2000 and
177,890,503 in 1999 888,519 889,453
Capital surplus 301,414 226,001
Unearned employee stock ownership plan shares
176,462 shares at 12/31/00 and 81,418
Shares at 12/31/99 (6,750) (3,750)
Accumulated other comprehensive income 12,097 (21,704)
Retained earnings 3,085,784 2,677,210
Deferred compensation (14,494) (21,998)
Less cost of common stock in treasury-
289,397 shares in 2000 and 715,496 shares in 1999 (16,411) (47,161)
----------- -----------
Total shareholders' equity 4,500,159 3,948,051
----------- -----------
Total liabilities and shareholders' equity $ 4,873,259 $ 4,300,562
=========== ===========
35
STATEMENTS OF INCOME-Comerica Incorporated
Year Ended December 31 (in thousands) 2000 1999 1998
--------- --------- ---------
Income
Income from subsidiaries
Dividends from subsidiaries $ 339,060 $ 260,603 $ 442,495
Other interest income 6,464 808 3,899
Intercompany management fees 97,865 93,414 157,393
Other interest income 123 347 545
Other noninterest income 1,572 24,354 2,628
--------- --------- ---------
Total income 445,084 379,526 606,960
Expenses
Interest on long-term debt and other
borrowed funds 15,178 17,193 22,214
Net interest rate swap (income)/expense 394 (682) (1,648)
Salaries and employee benefits 63,258 64,580 61,583
Occupancy expense 4,238 5,840 6,630
Equipment expense 1,721 1,572 1,873
Other noninterest expenses 35,131 29,730 36,102
--------- --------- ---------
Total expenses 119,920 118,233 126,754
--------- --------- ---------
Income before income taxes and equity
in undistributed net income
of subsidiaries 325,164 261,293 480,206
Income tax expense/(credit) (4,528) 349 13,279
--------- --------- ---------
329,692 260,944 466,927
Equity in undistributed net income
of subsidiaries,
principally banks 461,043 498,471 183,897
--------- --------- ---------
Net Income $ 790,735 $ 759,415 $ 650,824
========= ========= =========
24 Parent Company Financial Statements (continued)
STATEMENTS OF CASH FLOWS-Comerica Incorporated
Year Ended December 31 (in thousands) 2000 1999 1998
--------- --------- ---------
Operating Activities
Net income $ 790,735 $ 759,415 $ 650,824
Adjustments to reconcile net income to
net cash provided by operating activities
Undistributed earnings of
subsidiaries, principally banks (461,043) (498,471) (183,897)
Depreciation 1,458 1,404 1,755
Restructuring charge -- -- (6,008)
Other, net 4,513 5,822 4,908
--------- --------- ---------
Total adjustments (455,072) (491,245) (183,242)
--------- --------- ---------
Net cash provided by operating
Activities 335,663 268,170 467,582
Investing Activities
Purchase of investment securities
36
available for sale (24,432) (7,687) (11,640)
Proceeds from sale of investment securities
available for sale 2,176 2,580 1,983
Proceeds from sales of fixed assets and
other real estate 30 115 136
Purchases of fixed assets (614) (316) (1,222)
Net (increase) decrease in bank time deposits (42,200) (47,300) 57,800
Capital transactions with subsidiaries (10,750) (5,610) (134,752)
--------- --------- ---------
Net cash used in investing activities (75,790) (58,218) (87,695)
Financing Activities
Net increase (decrease) in advances
from subsidiaries 571 3,882 (4,054)
Repayments and purchases of long-term debt (1,129) (76,096) (63,712)
Net increase in short-term borrowings 5,109 74,877 --
Proceeds from issuance of common stocks 20,618 23,268 50,885
Purchase of common stock for treasury
and retirement (14,108) (2,885) (148,684)
Dividends paid (261,096) (235,646) (211,966)
--------- --------- ---------
Net cash used in financing activities (250,035) (212,600) (377,531)
--------- --------- ---------
Net increase (decrease) in cash on deposit
at bank subsidiary 9,838 (2,648) 2,356
Cash on deposit at bank subsidiary
at beginning of year 80 2,728 372
--------- --------- ---------
Cash on deposit at bank subsidiary
at end of year $ 9,918 $ 80 $ 2,728
========= ========= =========
Interest paid $ 16,251 $ 19,184 $ 15,290
========= ========= =========
Income taxes recovered $ 5,990 $ 9,807 $ 975
========= ========= =========
25 Summary of Quarterly Financial Information
The following quarterly information is unaudited. However, in the opinion of
management, the information reflects all adjustments which are necessary for the
fair presentation of the results of operations for the periods presented.
2000 2000 2000 2000
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $1,005,596 $967,697 $922,178 $877,677
Interest expense 486,397 464,015 424,485 394,082
Net interest income 519,199 503,682 497,693 483,595
Provision for credit losses 88,006 43,300 56,600 66,894
Securities gains/(losses) (3,731) 1,566 7,256 5,438
Noninterest income
(excluding securities
gains/(losses)) 220,183 242,877 235,037 249,824
37
Noninterest expenses 376,524 375,846 366,685 367,237
Net income 172,596 215,058 206,050 197,031
Basic net income per
common share $ .95 $ 1.19 $ 1.14 $ 1.09
Diluted net income per
common share .94 1.17 1.12 1.08
1999 1999 1999 1999
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
---------- --------- --------- --------
Interest income $ 839,487 $771,083 $733,718 $716,867
Interest expense 358,221 312,267 288,583 285,208
Net interest income 481,266 458,816 445,135 431,659
Provision for credit losses 56,400 27,000 38,026 24,794
Securities gains 6,792 (63) 744 1,202
Noninterest income
(excluding securities gains) 262,841 187,309 230,509 177,680
Noninterest expenses 360,405 331,407 347,227 319,869
Net income 213,621 185,266 187,193 173,335
Basic net income per
common share $ 1.18 $ 1.02 $ 1.03 $ 0.96
Diluted net income per
common share 1.17 1.01 1.02 0.94
26 Pending Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued Statement No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as
amended by Statements No. 137 and 138, which the Corporation adopted effective
January 1, 2001. The Statement will require the Corporation to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value in net income. If the derivative is a hedge,
depending on the nature of the hedge, the change in the fair value of the
derivative will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through net income or recognized in
other comprehensive income until the hedged item is recognized in net income.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in net income.
The Corporation utilizes interest rate swaps predominantly as asset and
liability management tools with the overall objective of mitigating adverse
impacts to net interest income from changes in interest rates. Interest rate
swaps that are used to hedge the variable cash flows from loans will be
accounted for as cash flow hedges upon adoption of SFAS 133. The Corporation
also utilizes interest rate swaps to hedge fixed rate deposits and medium- and
long-term debt. These swaps will be accounted for as fair value hedges upon
adoption of SFAS 133.
The Corporation utilizes foreign exchange forward contracts and foreign exchange
swap agreements to manage risk associated with foreign denominated assets and
liabilities. The gains or losses recognized on foreign exchange contracts
related to foreign denominated assets and liabilities provide an offset to the
transaction gain or loss recognized from remeasurement of the asset or liability
in the Corporation's functional currency. The Corporation has foreign exchange
contracts hedging the foreign currency exposure of its net investment in foreign
operations. These qualify for hedge accounting treatment under SFAS 133 and the
effective portion of these hedges will continue to be recorded in other
38
comprehensive income as an offset to the currency translation adjustment that
arises upon consolidation of the foreign operation.
Based on the Corporation's derivative positions at the January 1, 2001 adoption
date, the Corporation will report a gain from the cumulative effect of adoption
of approximately $1 million and an increase in other comprehensive income of $42
million.
39
Report of Independent Auditors
Board of Directors
Comerica Incorporated
We have audited the supplemental consolidated balance sheets of Comerica
Incorporated and subsidiaries (formed as a result of the consolidation of
Comerica Incorporated and subsidiaries and Imperial Bancorp and subsidiaries) as
of December 31, 2000 and 1999 and the related supplemental consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. The supplemental consolidated
financial statements give retroactive effect to the merger of Comerica
Incorporated and subsidiaries and Imperial Bancorp and subsidiaries on January
29, 2001, which has been accounted for using the pooling of interests method as
described in the notes to the supplemental consolidated financial statements.
These supplemental financial statements are the responsibility of the management
of Comerica Incorporated. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits. We did not audit the
financial statements of Imperial Bancorp and subsidiaries which statements
reflect total assets constituting 15% for 2000 and 1999 of the related
supplemental consolidated financial statement totals, and which reflect net
income constituting approximately 5%, 11%, and 7% of the related supplemental
consolidated financial statement totals for the years ended December 31, 2000,
1999, and 1998, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
data included for Imperial Bancorp and subsidiaries is based solely on the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Comerica Incorporated
and subsidiaries at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, after giving retroactive effect to the merger of
Imperial Bancorp and subsidiaries as described in the notes to the supplemental
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States.
Detroit, Michigan
January 22, 2001, except for Notes 2 and 10,
as to which the date is April 27, 2001
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Imperial Bancorp:
We have audited the accompanying consolidated balance sheets of Imperial Bancorp
and subsidiaries as of December 31, 2000 and 1999 and the related consolidated
statements of income, changes in shareholders' equity and comprehensive income
and cash flows for each of the years in the three-year period ended December 31,
2000 (such consolidated financial statements are not included separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imperial Bancorp and
subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
Los Angeles, California
January 26, 2001