1
EXHIBIT 99.2
TABLE 1: SELECTED FINANCIAL DATA
Year ended December 31
(dollar amounts in millions, except per share data) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Total interest income $3,773 $3,061 $2,978 $2,930 $2,772
Net interest income 2,004 1,817 1,720 1,645 1,553
Provision for credit losses 255 146 146 169 121
Securities gains 11 9 7 6 14
Noninterest income (excluding securities gains) 948 858 660 603 593
Noninterest expenses 1,486 1,359 1,237 1,177 1,287
Net income 791 759 651 586 471
PER SHARE OF COMMON STOCK
Basic net income $4.38 $4.20 $3.58 $3.17 $2.44
Diluted net income 4.31 4.13 3.51 3.11 2.40
Cash dividends declared 1.60 1.44 1.28 1.15 1.01
Common shareholders' equity 23.98 20.87 17.99 16.10 14.77
Market value 59.38 46.69 68.19 60.17 34.92
YEAR-END BALANCES
Total assets $49,534 $45,510 $42,785 $41,018 $37,556
Total earning assets 45,791 42,426 39,090 37,370 34,031
Total loans 40,170 36,305 34,053 31,681 28,270
Total deposits 33,854 29,196 29,883 26,761 25,317
Total borrowings 10,353 11,682 8,999 10,612 8,780
Medium- and long-term debt 8,259 8,757 5,358 7,363 4,246
Common shareholders' equity 4,250 3,698 3,178 2,864 2,652
DAILY AVERAGE BALANCES
Total assets $46,877 $42,662 $39,969 $38,521 $36,980
Total earning assets 43,364 39,247 36,599 35,275 33,819
Total loans 38,698 35,490 31,916 29,609 27,189
Total deposits 30,340 27,478 26,604 25,082 24,670
Total borrowings 11,621 11,003 9,626 9,929 8,917
Medium- and long-term debt 8,298 7,441 6,109 6,035 4,750
Common shareholders' equity 3,963 3,409 2,995 2,723 2,814
RATIOS
Return on average assets 1.69% 1.78% 1.63% 1.52% 1.27%
Return on average common shareholders' equity 19.52 21.78 21.16 20.88 16.43
Efficiency ratio 50.28 50.70 51.84 52.15 59.57
Dividend payout ratio 37 35 36 37 42
Average common shareholders' equity as
a percentage of average assets 8.45 7.99 7.49 7.07 7.61
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
Restated for Pooling with Imperial
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets,
including certain yield related fees, and interest paid on liabilities. Interest
expense includes the net interest income or expense associated with risk
management interest rate swaps. Adjustments are made to the yields on tax-exempt
assets in order to present tax-exempt income and fully taxable income on a
comparable basis. Net interest income on a fully taxable equivalent basis (FTE)
comprised 68 percent of net revenues in 2000 and 1999, compared 72 percent in
1998.
3
TABLE 2: ANALYSIS OF NET INTEREST INCOME --- FULLY TAXABLE EQUIVALENT
2000
-----------------------------
Average Average
(dollar amounts in millions) Balance Interest Rate
- -----------------------------------------------------------------------------------
Commercial loans $ 25,313 $2,244 8.87%
International loans 2,552 235 9.21
Real estate construction loans 2,554 257 10.09
Commercial mortgage loans 5,142 453 8.80
Residential mortgage loans 833 64 7.64
Consumer loans 1,434 131 9.09
Lease financing 870 54 6.24
-----------------------------
Total loans (1) 38,698 3,438 8.88
Taxable securities 3,627 256 7.06
Securities exempt from
Federal income taxes 61 5 8.20
-----------------------------
Total investment securities 3,688 261 6.99
Short term investments 978 78 7.97
-----------------------------
Total earning assets 43,364 3,777 8.71
Cash and due from banks 1,842
Allowance for credit losses (595)
Accrued income and other assets 2,266
--------
Total assets $ 46,877
========
Money market and NOW accounts $9,188 295 3.21
Savings deposits 1,403 23 1.65
Certificates of deposit 9,867 575 5.81
Foreign office deposits (2) 814 63 7.75
-----------------------------
Total interest-bearing deposits 21,272 4.48
956
Short-term borrowings 3,323 215 6.48
Medium- and long-term debt 8,298 550 6.63
Other (3) - 48 -
-----------------------------
Total interest-bearing sources 32,893 1,769 5.38
Noninterest-bearing deposits 9,068
Accrued expenses and other liabilities 703
Preferred stock 250
Common shareholders' equity 3,963
--------
Total liabilities and
shareholders' equity $ 46,877
========
Net interest income/rate spread (FTE) $2,008 3.33
======
FTE adjustment (4) $ 4
======
Impact of net noninterest-bearing
sources of funds 1.30
------
Net interest margin (as a percentage of
average earning assets)(FTE) 4.63%
======
4
1999
---------------------------------
Average Average
(dollar amounts in millions) Balance Interest Rate
- --------------------------------------------------------------------------------------
Commercial loans $23,069 $1,778 7.71%
International loans 2,627 206 7.86
Real estate construction loans 1,729 159 9.21
Commercial mortgage loans 4,583 379 8.27
Residential mortgage loans 930 70 7.47
Consumer loans 1,853 184 9.95
Lease financing 699 49 6.91
-------------------------------
Total loans (1) 35,490 2,825 7.96
Taxable securities 3,009 193 6.34
Securities exempt from
federal income taxes 98 8 9.02
-------------------------------
Total investment securities 3,107 201 6.42
Short term investments 650 40 6.06
-------------------------------
Total earning assets 39,247 3,066 7.81
Cash and due from banks 1,896
Allowance for credit losses (531)
Accrued income and other assets 2,050
---------
Total assets $42,662
=========
Money market and NOW accounts $ 8,815 241 2.73
Savings deposits 1,541 24 1.59
Certificates of deposit 7,773 381 4.90
Foreign office deposits (2) 688 48 7.05
-------------------------------
Total interest-bearing deposits 18,817 694 3.69
Short-term borrowings 3,562 183 5.14
Medium- and long-term debt 7,441 425 5.71
Other (3) - (58) -
-------------------------------
Total interest-bearing sources 29,820 1,244 4.17
Noninterest-bearing deposits 8,661
Accrued expenses and other liabilities 522
Preferred stock 250
Common shareholders' equity 3,409
---------
Total liabilities and
shareholders' equity $42,662
=========
Net interest income/rate spread (FTE) $1,822 3.64
======
FTE adjustment (4) $ 5
======
Impact of net noninterest-bearing
sources of funds 1.00
-----
Net interest margin (as a percentage of
average earning assets)(FTE) 4.64%
=====
5
1998
--------------------------------
Average Average
(dollar amounts in millions) Balance Interest Rate
- --------------------------------------------------------------------------------------
Commercial loans $19,850 $1,613 8.12%
International loans 2,342 187 7.97
Real estate construction loans 1,200 119 9.94
Commercial mortgage loans 4,011 351 8.76
Residential mortgage loans 1,331 102 7.70
Consumer loans 2,606 266 10.19
Lease financing 576 44 7.65
-------------------------------
Total loans (1) 31,916 2,682 8.40
Taxable securities 3,898 255 6.52
Securities exempt from
Federal income taxes 143 12 9.10
-------------------------------
Total investment securities 4,041 267 6.61
Short term investments 642 36 5.61
-------------------------------
Total earning assets 36,599 2,985 8.16
Cash and due from banks 1,963
Allowance for credit losses (498)
Accrued income and other assets 1,905
----------
Total assets $39,969
==========
Money market and NOW accounts $8,296 263 3.17
Savings deposits 1,611 29 1.80
Certificates of deposit 7,601 403 5.30
Foreign office deposits (2) 651 44 6.71
-------------------------------
Total interest-bearing deposits 18,159 739 4.07
Short-term borrowings 3,517 191 5.43
Medium- and long-term debt 6,109 374 6.13
Other (3) - (46) -
-------------------------------
Total interest-bearing sources 27,785 1,258 4.53
Noninterest-bearing deposits 8,445
Accrued expenses and other liabilities 494
Preferred stock 250
Common shareholders' equity 2,995
----------
Total liabilities and
shareholders' equity $39,969
==========
Net interest income/rate spread (FTE) $1,727 3.63
======
FTE adjustment (4) $ 7
======
Impact of net noninterest-bearing
sources of funds 1.09
------
Net interest margin (as a percentage of
average earning assets)(FTE) 4.72%
======
6
(1) Nonaccrual loans are included in average balances reported and are used to
calculate rates.
(2) Includes substantially all deposits by foreign depositors; deposits are
primarily in excess of $100,000.
(3) Net interest rate swap (income)/expense. If swap (income)/expense were
allocated, average rates on total loans would have been 8.74% in 2000, 8.06% in
1999, and 8.49% in 1998; average rates on medium- and long-term debt would have
been 6.55% in 2000, 5.37% in 1999, and 5.76% in 1998; the average rate on
certificates of deposit would have been 5.78% in 2000.
(4) The FTE adjustment is computed using a federal income tax rate of 35%.
7
TABLE 3 - RATE VOLUME ANALYSIS - FULLY TAXABLE EQUIVALENT BASIS
2000/1999 1999/1998
----------------------------------------- -----------------------------------------
Increase Increase Net Increase Increase Net
(Decrease) (Decrease) Increase (Decrease) (Decrease) Increase
(in millions) Due to Rate Due to Volume* (Decrease) Due to Rate Due to Volume* (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income (FTE):
Loans:
Commercial loans $ 267 $ 199 $ 466 $ (84) $ 249 $ 165
International loans 36 (7) 29 (3) 22 19
Real estate construction loans 15 83 98 (10) 50 40
Commercial mortgage loans 25 49 74 (19) 47 28
Residential mortgage loans 2 (8) (6) (3) (29) (32)
Consumer loans (15) (38) (53) (6) (76) (82)
Lease financing (7) 12 5 (4) 9 5
----- ----- ----- ----- ----- -----
Total loans 323 290 613 (129) 272 143
Taxable securities 21 42 63 (1) (61) (62)
Securities exempt from federal income taxes - (3) (3) - (4) (4)
----- ----- ----- ----- ----- -----
Total investment securities 21 39 60 (1) (65) (66)
Short-term investments 7 31 38 5 (1) 4
----- ----- ----- ----- ----- -----
Total interest income (FTE) 351 360 711 (125) 206 81
Interest expense:
Money market and NOW accounts 43 11 54 (37) 15 (22)
Savings deposits 1 - 1 (3) (2) (5)
Certificates of deposit 74 118 192 (33) 11 (22)
Foreign office deposits 5 10 15 2 2 4
----- ----- ----- ----- ----- -----
Total interest-bearing deposits 123 139 262 (71) 26 (45)
Federal funds purchased and securities
8
sold under agreements to repurchase 1 (1) - (7) 15 8
Other borrowed funds 49 (17) 32 (3) (13) (16)
Medium- and long-term debt 69 56 125 (28) 79 51
Other (1) 106 - 106 (12) - (12)
----- ----- ----- ----- ----- -----
Total interest expense 348 177 525 (121) 107 (14)
----- ----- ----- ----- ----- -----
Net interest income (FTE) $ 3 $ 183 $ 186 $ (4) $ 99 $ 95
===== ===== ===== ===== ===== =====
* Rate/volume variances are allocated to variances due to volume
(1) Net interest rate swap (income)/expense
9
Net interest income (FTE) increased 10 percent to $2,008 million in 2000.
Contributing to this increase was a 10 percent increase in average earning
assets and an increase in noninterest-bearing sources of funds. Comerica (the
"Corporation") continued to generate strong growth in business loans in 2000.
Business loans averaged $36.4 billion in 2000, a significant increase of 11
percent from 1999. The increase in noninterest-bearing sources of funds was
primarily due to a $554 million increase in average shareholders' equity and a
$407 million increase in average noninterest-bearing deposits.
Net interest income (FTE) expressed as a percentage of average earning assets is
referred to as the net interest margin. For 2000, the net interest margin was
4.63 percent, a decline of one basis point from 4.64 percent in 1999. The net
interest margin was negatively impacted by slower growth in core deposit
balances than that of earning assets, resulting in a greater reliance on higher
cost certificates of deposits and medium- and long-term debt in the mix of
interest-bearing liabilities. Core deposits are defined as total deposits
excluding certificates of deposit greater than $100 thousand and foreign office
time deposits. This was primarily offset by an increase in the benefit to the
net interest margin provided by interest-free sources of funds. Although not
experienced in 2000, a greater reliance on market-priced sources of funding to
support loan growth is expected to put downward pressure on the net interest
margin.
Comerica implements various asset and liability management tactics to minimize
exposure to net interest income risk. This risk represents the potential
reduction in net interest income that may result from a fluctuating economic
environment including changes to interest rates and portfolio growth rates. Such
actions include the management of earning assets, funding and capital. In
addition, off-balance sheet interest rate swap contracts are employed,
effectively fixing the yields on certain variable rate loans and altering the
interest rate characteristics of debt issued throughout the year. Refer to the
"Interest Rate Risk" section of this financial review for additional information
regarding the Corporation's asset and liability management policies.
In 1999, net interest income (FTE) increased five percent to $1,822 million.
Contributing to the increase over 1998 was an 11 percent increase in average
total loans and an increase in noninterest-bearing sources of funds, primarily
shareholders' equity. A significant increase in average commercial loans was
partially offset by planned reductions of investment securities, which decreased
on average by $934 million, or 23 percent, from 1998, and planned runoff of
residential mortgage and consumer loans, which declined on an average basis by a
combined $1.2 billion from 1998. The net interest margin decreased eight basis
points to 4.64 percent from 4.72 percent in 1998. The decrease in net interest
margin in 1999 was partially due to a nine basis point decline in the impact of
net noninterest-bearing sources of funds resulting from an average rate
environment which was lower in 1999 than 1998, as well as changes in the mix of
interest-bearing liabilities. This was offset by a strategic repositioning
within the earning assets portfolio, whereby investment securities and
residential mortgage and consumer loans were replaced with commercial loans.
10
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
TABLE 4: ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
Year Ended December 31
(dollar amounts in millions) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of period $548 $515 $475 $403 $378
Allowance of institutions purchased/sold - - - - (3)
Transfer to loans held for sale - (4) - - -
Loans charged off:
Domestic
Commercial 200 101 70 42 40
Real estate construction - - 2 2 5
Commercial mortgage 1 2 1 4 5
Residential mortgage - - - - 1
Consumer 11 31 65 92 86
Lease financing 1 - 4 - -
International 11 10 7 1 -
---------------------------------------------------------
Total loans charged off 224 144 149 141 137
Recoveries:
Domestic
Commercial 21 21 21 20 21
Real estate construction - - - 2 1
Commercial mortgage 1 3 9 10 9
Residential mortgage - - - - -
Consumer 7 10 13 12 13
Lease financing - 1 - - -
International - - - - -
---------------------------------------------------------
Total recoveries 29 35 43 44 44
---------------------------------------------------------
Net loans charged off 195 109 106 97 93
Provision for credit losses 255 146 146 169 121
---------------------------------------------------------
Balance at end of period $608 $548 $515 $475 $403
==== ==== ==== ==== ====
Ratio of allowance for credit losses
to total loans at end of period 1.51% 1.51% 1.51% 1.50% 1.43%
Ratio of net loans charged off during
the period to average loans
outstanding during the period 0.50% 0.31% 0.34% 0.33% 0.34%
11
The provision for credit losses reflects management's evaluation of the adequacy
of the allowance for credit losses. The allowance for credit losses represents
management's assessment of probable losses inherent in the Corporation's loan
portfolio, including all binding commitments to lend. The allowance provides for
probable losses that have been identified with specific customer relationships
and for probable losses believed to be inherent but that have not been
specifically identified. The Corporation allocates the allowance for credit
losses to each loan category based on a defined methodology which has been in
use, without material change, for several years. Internal risk ratings are
assigned to each business loan at the time of approval and are subject to
subsequent periodic reviews by the senior management of the Credit Policy Group.
Business loans are defined as those belonging to the commercial, international,
real estate construction, commercial mortgage and lease financing categories. A
detailed credit quality review is performed quarterly on large business loans
which have deteriorated below certain levels of credit risk. A specific portion
of the allowance is allocated to such loans based upon this review. The portion
of the allowance allocated to the remaining business loans is determined by
applying projected loss ratios to each risk rating based on numerous factors
identified below. The portion of the allowance allocated to consumer loans is
determined by applying projected loss ratios to various segments of the loan
portfolio. Projected loss ratios incorporate factors such as recent charge-off
experience, current economic conditions and trends, geographic dispersion of
borrowers, and trends with respect to past due and nonaccrual amounts. The
allocated reserve was $443 million at December 31, 2000, an increase of $109
million from year-end 1999. This increase was attributable to an increase in the
specific portion of the allowance for certain large business loans with
deteriorated credit risk at December 31, 2000. Allocations to business loans, as
shown in Table 7, increase due to loan growth and changing credit
characteristics of the portfolio.
Actual loss ratios experienced in the future could vary from those projected.
The uncertainty occurs because other factors affecting the determination of
probable losses inherent in the loan portfolio may exist which are not
necessarily captured by the application of historical loss ratios. To ensure a
higher degree of confidence, an unallocated allowance is also maintained. The
unallocated portion of the loss reserve reflects management's view that the
reserve should have a margin that recognizes the imprecision underlying the
process of estimating expected credit losses. Determination of the probable
losses inherent in the portfolio, which are not necessarily captured by the
allocation methodology discussed above, involves the exercise of judgment.
Factors which were considered in the evaluation of the adequacy of the
Corporation's unallocated reserve include portfolio exposures to the healthcare,
high technology and energy industries, customers engaged in sub-prime lending,
as well as Latin American transfer risks and the risk associated with new
customer relationships. The unallocated reserve was $165 million at December 31,
2000, a decrease of $49 million from 1999. An increase in allocated reserves for
healthcare and Indonesian customers resulted in a lesser need for unallocated
reserves for these customers and was the primary reason for the decline in
unallocated reserve.
Management also considers industry norms and the expectations from rating
agencies and banking regulators in determining the adequacy of the allowance.
The total allowance, including the unallocated amount, is available to absorb
losses from any segment within the portfolio.
The provision for credit losses was $255 million in 2000, compared to $146
million in 1999 and 1998. Net charge-offs in 2000 were $195 million, or 0.50
percent of average total loans, compared to $109 million, or 0.31 percent, in
1999 and $106 million, or 0.34 percent, in 1998. An analysis of the changes in
the allowance for credit losses, including charge-offs and recoveries by loan
category, is presented in Table 4. Consumer net charge-offs decreased from 1999
levels, primarily due to the sale of $457 million of revolving check credit and
bankcard loans in the first quarter of 2000. Charge-offs on business loans
increased, in part, as a result of Imperial Bank adopting a more conservative
charge-off policy to conform with that of the Corporation.
At December 31, 2000, the allowance for credit losses was $608 million, an
increase of $60 million from year-end 1999. The allowance as a percentage of
total loans remained the same at 1.51 percent at December 31, 2000 and 1999. As
a percentage of nonperforming assets, the allowance was 179 percent at December
31, 2000, versus 258 percent at year-end 1999.
12
NONINTEREST INCOME
Year ended December 31
(in millions) 2000 1999 1998
- ----------------------------------------------------------------------------
Fiduciary and investment management income $306 $244 $193
Service charges on deposit accounts 189 177 164
Commercial lending fees 63 55 58
Letter of credit fees 52 46 31
Securities gains 11 9 7
Net gain on sales of businesses 50 76 11
Other noninterest income 287 260 203
---- ---- ----
Total noninterest income $958 $867 $667
==== ==== ====
Noninterest income increased $91 million, or 10 percent, to $958 million in
2000, compared to $867 million in 1999 and $667 million in 1998. In 2000, the
Corporation announced an alliance to provide third party bankcard and revolving
check credit services to the Corporation's customers and sold $457 million of
loans in connection with forming the alliance. Comparisons between 2000 and 1999
for certain noninterest income and expense line items were impacted by the sale.
Also the comparisons of noninterest income and expense line items were impacted
by the Corporation obtaining a majority interest in Munder Capital Management
("Munder"), an investment advisory subsidiary in 1998. Prior to the third
quarter of 1998, the Corporation accounted for its minority interest in Munder
under the equity method, recording the Corporation's pro-rata share of Munder
net income in other noninterest income.
The alliance discussed above resulted in a gain of $48 million in 2000. In 1999,
the Corporation's majority-owned subsidiary, Official Payments Corporation
("OPAY") (Nasdaq: OPAY), completed an initial public offering of common stock to
the public. The net gain on sales of businesses in 1999 is principally comprised
of $44 million from this initial public offering, a gain of $21 million on the
sale of ownership in an automated teller machine network provider, and a $9
million gain on the sale of certain trust businesses. The $11 million gain in
1998 was the result of the sale of the mortgage servicing business and consumer
loans.
Fiduciary and investment management income, which includes investment advisory
revenue generated by Munder, increased $62 million, or 25 percent, in 2000,
compared to an increase of $51 million, or 26 percent, in 1999. After adjusting
for the Munder consolidation and the sale of certain trust businesses, the
increase in 1999 over 1998 was 16 percent. The increase in 2000 was primarily
due to higher investment advisory fees at Munder, which increased $64 million,
or 105 percent, over 1999. The increase in Munder revenue was principally due to
growth, early in 2000, of average assets in Munder's Internet and technology
focused mutual funds. Munder's investment advisory revenue in the fourth quarter
2000, was well below the amount recorded during each of the first three quarters
of the year, primarily due to a decline in the technology sector of the stock
market. Stock market performance resulted in a decrease in assets under
management at Munder to $48 billion at December 31, 2000, from $56 billion at
year-end 1999. Personal and institutional trust fees, on a combined basis, were
stable when compared to 1999.
Service charges on deposit accounts increased $12 million, or seven percent, in
2000 compared to an increase of $13 million, or eight percent, in 1999. This
increase was primarily attributable to continued strong growth in the sale of
new and existing cash management services to business customers during 2000. The
increase in 2000 was net of the negative impact of higher earnings credit
allowances provided to business customers.
Commercial lending fees increased $8 million, or 15 percent, in 2000 compared to
a decrease of $3 million, or five percent, in 1999. Commitment fees and loan
syndication and participation agent fees, the two major components of this
category were the primary sources of the overall increase.
Letter of credit fees increased $6 million, or 13 percent, in 2000 compared to
an increase of $15 million, or 48 percent, in 1999. These increases were
primarily related to growth in middle-market commercial lending relationships
and strong demand for international trade services from new and existing
customers.
13
The Corporation recognized a net gain related to its investment securities
portfolio of $11 million, $9 million, and $7 million in 2000, 1999 and 1998,
respectively. Securities gains in 2000 were net of a $6 million write-down of
low-income housing investments where the underlying investment is accounted for
under the cost method.
Other noninterest income increased $27 million, or 11 percent, in 2000. Higher
levels of income from Munder's equity investment in Framlington (a London,
England based investment manager) and an increase in brokerage service fees and
foreign exchange income accounted for the majority of this increase. Significant
nonrecurring items in other noninterest income in 2000 included a $6 million
gain from the demutualization of an insurance carrier. Offsetting these gains
was a $7 million write-down of low-income housing investments which are being
accounted for under the equity method and a $7 million impairment on
technology-related mutual fund deferred distribution costs. Warrant income was
$30 million in 2000, $33 million in 1999 and $22 million in 1998. At December
31, 2000 the corporation owned over 800 warrant positions which had an
unrealized gain of approximately $3 million.
NONINTEREST EXPENSES
Year Ended December 31
(in millions) 2000 1999 1998
- ------------------------------------------------------------------------------------
Salaries $ 752 $ 679 $ 597
Employee benefits 99 99 83
------ ------ ------
Total salaries and employee benefits 851 778 680
Net occupancy expense 110 104 100
Equipment expense 77 73 70
Outside processing fee expense 63 60 53
Other 361 339 341
------ ------ ------
Subtotal 1,462 1,354 1,244
Restructuring charge/(credit) - - (7)
Other significant nonrecurring items 24 5 -
------ ------ ------
Total noninterest expenses $1,486 $1,359 $1,237
====== ====== ======
Noninterest expenses increased nine percent to $1,486 million in 2000, compared
to $1,359 million in 1999 and $1,237 million in 1998. Excluding the effect of
divestitures and the significant nonrecurring items discussed below, noninterest
expenses increased eight percent in 2000.
Total salaries expense increased $73 million, or 11 percent, in 2000 versus an
increase of $82 million, or 14 percent, in 1999. The increase in 2000 was
primarily due to annual merit increases, investments in staff in growth
businesses and higher levels of incentives, which are tied to revenue growth.
The number of full-time equivalent employees at December 31, 2000, decreased by
40, or less than one percent, from year-end 1999, primarily due to forming the
bankcard and revolving check credit alliance.
Employee benefits expense remained at the same level in 2000 versus an increase
of $16 million, or 19 percent, in 1999. The constant amount in 2000 was
primarily attributable to lower levels of pension expense due to favorable
changes in defined benefit plan assumptions as well as a reduction in long-term
disability expense, partially offset by higher payroll tax expense.
Net occupancy and equipment expenses, on a combined basis, increased $10
million, or six percent, to $187 million in 2000, slightly more than the
increase of $7 million, or four percent, in 1999.
Outside processing fees increased slightly to $63 million in 2000 from $60
million in 1999 and $53 million in 1998.
Other noninterest expenses increased $41 million, or 12 percent, in 2000
compared to a $3 million increase in 1999. Other noninterest expenses in 2000
included $12 million of interest associated with a preliminary settlement of
Federal tax years prior to 1993, a $6 million contribution to Comerica's
charitable foundation and $6 million of
14
marketing costs to launch a new closed-end fund. A $5 million contribution to
Comerica's charitable foundation was included in 1999 other noninterest
expenses. Higher levels of advertising expense, due principally to marketing
costs for mutual funds, were incurred in 2000.
The Corporation's efficiency ratio is defined as total noninterest expenses
divided by the sum of net interest revenue (FTE) and noninterest income,
excluding securities gains. The ratio improved 42 basis points to 50.28 percent
in 2000, compared to 50.70 percent in 1999 and 51.84 percent in 1998.
INCOME TAXES
The provision for income taxes was $431 million in 2000, compared to $419
million in 1999 and $353 million in 1998. The effective tax rate, computed by
dividing the provision for income taxes by income before taxes, was 35.3 percent
in 2000 and 35.6 percent in 1999 and 35.1 percent in 1998.
TABLE 5 : ANALYSIS OF INVESTMENT SECURITIES AND LOANS
December 31
(in millions) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Investment securities available for sale
U.S. government and agency securities $ 3,135 $ 2,950 $ 2,882 $ 3,892 $ 4,387
State and municipal securities 46 73 115 170 228
Other securities 710 760 410 613 611
--------------------------------------------------------
Total investment securities available for sale $ 3,891 $ 3,783 $ 3,407 $ 4,675 $ 5,226
====== ======= ======= ======= =======
Commercial loans $26,009 $23,629 $22,097 $18,152 $15,115
International loans
Government and official institutions 2 10 12 6 11
Banks and other financial institutions 402 391 433 339 323
Other 2,167 2,172 2,268 1,740 1,372
--------------------------------------------------------
Total international loans 2,571 2,573 2,713 2,085 1,706
Real estate construction loans 2,915 2,167 1,339 1,116 837
Commercial mortgage loans 5,361 4,873 4,322 3,867 3,808
Residential mortgage loans 808 871 1,038 1,565 1,744
Consumer loans 1,477 1,389 1,897 4,379 4,654
Lease financing 1,029 803 647 517 406
--------------------------------------------------------
Total loans $40,170 $36,305 $34,053 $31,681 $28,270
======= ======= ======= ======= =======
STRATEGIC LINES OF BUSINESS
The Corporation has strategically aligned its operations into three major lines
of business: the Business Bank, the Individual Bank and the Investment Bank.
These lines of business are differentiated based upon the products and services
provided. In addition to the three major lines of business, the Finance Division
is also reported as a segment. The Other category included items not directly
associated with these lines of business. Business Bank results were restated to
include Imperial Bank, acquired in January 2001, and accounted for as a pooling
of interest. Note 23 describes how these segments were identified and presents
financial results of these businesses for the years ended December 31, 2000,
1999 and 1998.
The Business Bank's net income increased $6 million, or one percent, in 2000.
Comparisons with 1999 were affected by additional charge-offs in 2000 recorded
by the merged bank to align charge-off policies with the Corporation. The
increase of $183 million in net interest income (FTE) was substantially offset
by increases of $110 million in the provision for credit losses and $72 million
in noninterest expenses. Loan growth of 12 percent
15
was primarily in middle market lending, asset based/specialty lending,
commercial real estate and national dealer services. Growth in average loans to
large business customers was moderate, while average international loans were
flat. The increase in noninterest income was primarily due to higher commercial
deposit service charge income, commercial lending fees and letter of credit
fees. Noninterest expenses increased 12 percent primarily due to an increase in
salary and benefits expense resulting from merit increases, higher levels of
revenue-related incentives and an increase of staff in growth businesses.
Individual Bank net income increased $53 million, or 20 percent, in 2000, a
substantial increase over 1999. Comparisons with 1999 were affected by forming
an alliance to offer bankcard and revolving check credit services to the
Corporation's customers. Net interest income increased $35 million, or five
percent, and was generated principally from a three percent growth in deposit
balances coupled with smaller rate increases in core deposits compared to
earning assets. Noninterest income increased $44 million, or 15 percent, and was
primarily due to a $48 million gain on the sale of $457 million of revolving
check credit and bankcard loans associated with forming the alliance mentioned
above. Noninterest expenses decreased $5 million, or one percent, primarily due
to reduced salaries expense also attributable to forming the alliance. Excluding
the $48 million gain and the impact of forming the alliance, total revenues
(FTE) in 2000 would have been $1,023 million, a three percent increase over
1999, while net income in 2000 would have increased eight percent to $287
million. Return on average assets and return on average common equity in 2000
would have been 1.61 percent and 38.57 percent, respectively.
Net income for the Investment Bank was $12 million in 2000, a decrease of 10
percent from 1999. Noninterest income rose $66 million, or 32 percent, from last
year. Significant growth in investment advisory and brokerage fees was reduced
by declines in institutional trust and retirement services fees. Noninterest
expense growth from revenue-related incentives for investment advisory fees and
inter-segment referrals, advertising and start-up expenses for new funds offset
much of the revenue increase.
The Finance Division's net income decreased $20 million in 2000, primarily due
to a $30 million decrease in net interest income. As interest rates increased
throughout 2000, interest income declined from swaps Finance used to hedge
interest rate risk in other business segments.
Net income for the Other category decreased $7 million in 2000. Noninterest
income in 1999 included a $21 million gain on the sale of the Corporation's
ownership in an ATM network provider. Partially offsetting the decline in
noninterest income was an $8 million decrease in the allowance for credit losses
not assigned to specific business lines.
BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
Total assets were $49.5 billion at year-end 2000, an increase of $4.0 billion
from $45.5 billion at December 31, 1999. On an average basis, total assets
increased to $46.9 billion in 2000 from $42.7 billion in 1999. This increase was
funded primarily by deposits, which rose on average $2.9 billion and medium- and
long-term debt, which grew on average $857 million.
EARNING ASSETS
Total earning assets were $45.8 billion at December 31, 2000, representing a
$3.4 billion increase from $42.4 billion at year-end 1999. On an average basis,
total earning assets were $43.4 billion in 2000, compared to $39.2 billion in
1999. Commercial loans grew significantly in 2000, increasing on an average
basis by $2.2 billion, or 10 percent, from 1999. Average real estate
construction increased $825 million, or 48 percent, while average commercial
mortgage loans increased $559 million, or 12 percent. These increases are
attributable to successful execution of our core lending strategy, strong
customer relationships and continued economic strength in the commercial loans
markets.
16
TABLE 6: LOAN MATURITIES AND INTEREST RATE SENSITIVITY
After One
December 31, 2000 Within But Within After
(in millions) One Year* Five Years Five Years Total
Commercial loans $20,987 $3,988 $1,034 $26,009
Commercial mortgage loans 1,868 2,418 1,075 5,361
International loans 2,217 319 35 2,571
Real estate construction loans 2,323 479 113 2,915
---------------------------------------------------
Total $27,395 $7,204 $2,257 $36,856
======= ====== ====== =======
Loans maturing after one year
Predetermined interest rates $3,333 $1,902
Floating interest rates 3,871 355
-------------------
Total $7,204 $2,257
====== ======
* Includes demand loans, loans having no stated repayment schedule or maturity
and overdrafts.
TABLE 7: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
December 31
(in millions) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------
Commercial $290 $226 $182 $117 $116
Real estate construction 11 12 9 20 22
Commercial mortgage 59 35 21 18 27
Residential mortgage 0 0 0 1 2
Consumer 8 18 48 116 120
Lease financing 5 8 6 1 1
International 70 35 17 5 3
Unallocated 165 214 232 197 112
------------------------------------------------------
Total $608 $548 $515 $475 $403
==== ==== ==== ==== ====
Loans by category as a percent of total loans
2000 1999 1998 1997 1996
------------------------------------------------------
Commercial 65% 65% 65% 57 54%
Real estate construction 7 6 4 4 3
Commercial mortgage 13 14 13 12 14
Residential mortgage 2 2 3 5 6
Consumer 4 4 5 14 16
Lease financing 3 2 2 2 1
International 6 7 8 6 6
-----------------------------------------------------
TOTAL LOANS 100% 100% 100% 100% 100%
=== === === === ===
17
International loans averaged $2.6 billion in 2000, a decline of $75 million, or
three percent, from 1999, as international economies were generally weaker than
the United States. Active risk management practices minimize risk inherent in
international lending arrangements. These practices include structuring
bilateral agreements or participating in bank facilities, which secure repayment
from sources external to the borrower's country. Accordingly, such international
outstandings are excluded from cross-border risk of that country. Mexican cross
border risk of $626 million, or 1.26 percent of total assets, was the only
country with exposure exceeding 1.00 percent of total assets at December 31,
2000. Additional information on the Corporation's Mexican cross-broader risk is
provided in Table 8.
TABLE 8: INTERNATIONAL CROSS-BORDER RISK
Governments Banks and
December 31 And Official Other Financial Commercial
(in millions) Institutions Institutions and Industrial Total
- -----------------------------------------------------------------------------------------------
Mexico 2000 $ 9 $114 $503 $626
1999 15 150 426 591
1998 15 214 347 576
- ----------------------------------------------------------------------------------------------
Canada 1998 $ - $ - $380 $380
- ----------------------------------------------------------------------------------------------
Average residential mortgage loans decreased $97 million, reflecting
management's decision to sell the majority of mortgage originations. Excluding
the decline in consumer loans attributable to the sale of $457 million of
bankcard and revolving check credit loans mentioned earlier, consumer loans
increased from growth in home equity lending.
Average investment securities rose to $3.7 billion in 2000, compared to $3.1
billion in 1999. Average U.S. government and agency securities increased $565
million, while average state and municipal securities decreased $37 million.
Increases in U.S. government and agency securities resulted from purchasing
investment securities to maintain the relative size of that portfolio, while the
tax exempt portfolio of state and municipal securities continued to decrease as
reduced tax advantages for these type of securities discouraged additional
investment. Average other securities increased $53 million, and consist
primarily of collateralized mortgage obligations (CMOs), Brady bonds, Eurobonds
and Small Business Administration (SBA) securities.
18
TABLE 9: ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO - FULLY TAXABLE EQUIVALENT
Maturity**
--------------------------------------------------------------------------------------------
Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total Weighted
December 31, 2000 Average
-------------------------------------------------------------------------------------------- Maturity
(dollar amounts in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Yrs./Mos.
- -----------------------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 18 6.11% $ 40 6.16% $ - -% $ - -% $ 58 6.14% 1/0
U.S. government
and agency 104 5.32 214 6.65 1,202 6.49 1,557 7.12 3,077 6.77 13/2
State and municipal
Securities 12 5.78 24 6.29 9 6.08 1 6.38 46 6.12 3/3
Other bonds, notes
and debentures 256 6.76 183 9.41 50 8.34 57 7.29 546 7.85 3/4
Federal Reserve
Bank stock and
Other investments* - - - - - - - - 164 - -
---------------------------------------------------------------------------------------------------
Total investment securities
available for sale $ 390 6.32% $ 461 7.68% $1,261 6.55% $1,615 7.13% $3,891 6.92% 11/4
====== ==== ====== ===== ====== ==== ====== ==== ====== ==== ====
* Balances are excluded in the calculation of total yield.
** Based on final contractual maturity.
19
OTHER EARNING ASSETS
Short-term investments include interest-bearing deposits with banks, federal
funds sold and securities purchased under agreements to resell, trading
securities and loans held for sale. These investments provide a range of
maturities under one year to manage short-term investment requirements of the
Corporation. Interest-bearing deposits with banks are investments with banks in
developed countries or foreign banks' international banking facilities located
in the United States. Federal funds sold offer supplemental earning
opportunities and serve correspondent banks. Loans held for sale typically
represent residential mortgage loans and SBA loans that have been originated and
which management has decided to sell. Loans held for sale in 2000 also included
the revolving credit and bankcard loans, which were sold during the year. These
loans had been reclassified to loans held for sale at the end of 1999 and
remained there until the date of sale. Average short-term investments increased
to $978 million during 2000, from $650 million in 1999, due to this
reclassification.
TABLE 10: MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT $100,000 AND
OVER
December 31
(in millions) 2000 1999
- --------------------------------------------------------------------------------------------------------
Three months or 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
======= ========
DEPOSITS AND BORROWED FUNDS
Average deposits increased $2.9 billion, or 10 percent, from 1999. Average
noninterest-bearing deposits grew $407 million, or five percent, from 1999,
primarily from the growth in commercial loan relationships. Average
interest-bearing transaction, savings and money market deposits increased two
percent during 2000, to $10.6 billion. Average certificates of deposit increased
$2.1 billion, or 27 percent, from 1999, the increase was primarily issued in
denominations in excess of $100,000 through brokers or to institutional
investors. Average foreign office time deposits increased $126 million over the
1999 level, mostly from deposits at Mexican and Canadian subsidiaries.
Average short-term borrowings decreased $239 million as deposit growth and an
increase in medium- and long-term debt reduced the need for these funding
sources. Short-term borrowings include federal funds purchased, securities sold
under agreement to repurchase, commercial paper and treasury tax and loan notes.
The Corporation uses medium-term debt (both domestic and European) and long-term
debt to provide funding to support expanding earning assets while providing
liquidity which mirrors the estimated duration of deposits. Long-term
subordinated notes further help maintain the subsidiary banks' total capital
ratio at a level that qualifies for the lowest FDIC risk-based insurance
premium. Medium- and long-term debt increased on an average basis by $857
million to fund earning asset growth. Average long-term debt increased primarily
due to the issuance of $250 million of subordinated notes during the year.
Further information on medium- and long-term debt is included in Note 10 to the
consolidated financial statements.
CAPITAL
Shareholders' equity was $4.5 billion at December 31, 2000, up $552 million, or
14 percent from December 31, 1999. This increase was primarily due to $409
million of retained earnings, $35 million of common stock issued for employee
stock plans and $34 million in other comprehensive income, offset by a reduction
in equity of $50 million from the repurchase of common stock. Further
information on the change in other comprehensive income is provided in Note 12
to the consolidated financial statements.
20
The Corporation declared common dividends totaling $250 million, or $1.60 per
share, on net income applicable to common stock of $774 million. The dividend
payout ratio, calculated on a per share basis, was 37 percent in 2000 versus 35
percent in 1999 and 36 percent in 1998.
At December 31, 2000, the Corporation and all of its banking subsidiaries
exceeded the capital ratios required for an institution to be considered "well
capitalized" by the standards developed under the Federal Deposit Insurance
Corporation Improvement Act of 1991. See Note 18 to the consolidated financial
statements for the capital ratios.
RISK MANAGEMENT
The Corporation assumes various types of risk in the normal course of business.
The most significant risk exposures are from credit, interest rate, liquidity
and operations. The other commonly identified exposure, market risk, is not
significant as trading activities are limited. Comerica employs risk management
processes to identify, measure, monitor and control these risks.
CREDIT RISK
Credit represents the risk that a customer or counterparty may not perform in
accordance to contractual terms. Credit risk is inherent in the financial
services business and results from extending credit to customers, purchasing
securities and entering into off-balance sheet financial derivative instruments.
Policies and procedures for measuring and managing this risk are formulated,
approved and communicated throughout the Corporation. Credit executives,
independent from lending officers, are involved in the origination and
underwriting process to ensure adherence to risk policies and underwriting
standards. The Corporation also manages credit risk through diversification,
limiting exposure to any single industry environment or customer, selling
participations to third parties and requiring collateral.
21
NONPERFORMING ASSETS
TABLE 11: SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
December 31
(dollar amounts in millions) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Nonperforming assets
Nonaccrual loans
Commercial loans $244 $127 $97 $62 $76
International loans 58 44 20 1 -
Real estate construction loans 5 - 2 5 14
Commercial mortgage loans 17 10 7 11 23
Residential mortgage loans - 1 3 4 5
Consumer loans 3 5 3 5 5
Lease financing 4 6 7 1 -
----------------------------------------------------------
Total nonaccrual loans 331 193 139 89 123
Reduced-rate loans 2 9 18 32 37
----------------------------------------------------------
Total nonperforming loans 333 202 157 121 160
Other real estate 6 11 7 20 31
----------------------------------------------------------
Total nonperforming assets $339 $213 $164 $141 $191
======= ======= ======== ======== =======
Nonperforming loans as a percentage of
Total loans 0.83% 0.56% 0.46% 0.38% 0.57%
Nonperforming assets as a percentage of
total loans and other real estate 0.84% 0.59% 0.48% 0.44% 0.67%
Allowance for credit losses as a percentage
of total nonperforming assets 179% 257% 314% 337% 211%
Loans past due 90 days or more and
still accruing $36 $48 $44 $56 $52
Nonperforming assets include loans on nonaccrual status, loans which 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. The Corporation's
policies regarding nonaccrual loans reflect the importance of identifying
troubled loans early.
Consumer loans 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 management determines that principal or interest may not
be fully collectible, but no later than 90 days past due on principal or
interest unless it is fully collateralized and in the process of collection.
Loan amounts in excess of probable future cash collections are charged off to an
amount that management ultimately expects to collect. Interest previously
accrued but not collected on nonaccrual loans is charged against current income
at the time the loan is placed on nonaccrual. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable. Loans which have been restructured to yield
a rate that was equal to or greater than the rate charged for new loans with
comparable risk and have met the requirements for a return to accrual status are
generally not included in nonperforming assets. However, such loans may be
required to be evaluated for impairment.
22
Nonperforming assets as a percent of total loans and other real estate were 0.84
percent and 0.59 percent at year-end 2000 and 1999, respectively.
Nonaccrual loans at December 31, 2000, increased 72 percent to $331 million from
$193 million at year-end 1999. Table 11 provides additional detail on
nonperforming assets. The 1999 decline in reduced-rate loans, which consisted
primarily of below-market yield bankcard loans, resulted from the sale of
bankcard and revolving credit loans discussed previously. Loans past due 90 days
or more and still on accrual status decreased $12 million from year-end 1999.
The nonaccrual loan table below indicates the percentage of nonaccrual loan
value to original contract value which exhibits the degree to which loans
reported as nonaccrual have been charged off.
Other real estate owned (ORE) decreased $5 million.
Nonaccrual Loans
December 31
(dollar amounts in millions) 2000 1999
- ---------------------------------------------------------------
Carrying value $331 $193
Contractual value 499 279
Carrying value as a percentage
of contractual value 66% 69%
====== ======
CONCENTRATION OF CREDIT
Loans to companies and individuals involved with the automotive industry,
including suppliers, manufacturers and dealers, represented the largest
significant industry concentration at December 31, 2000. These loans totaled
$5.7 billion, or 14 percent of total loans at December 31, 2000, compared to
$4.8 billion, or 13 percent, at December 31, 1999. Included in these totals are
floor plan loans to automotive dealers of $2.1 billion and $1.7 billion at
December 31, 2000 and 1999, respectively. All other industry concentrations
individually represented less than 10 percent of total loans at year-end 2000.
The Corporation has successfully operated in the Michigan economy despite a loan
concentration and several downturns in the auto industry. The largest automotive
industry loan on nonaccrual status at December 31, 2000, was $6 million. The
largest automotive industry-related charge-off during the year was $5 million.
COMMERCIAL REAL ESTATE LENDING
The real estate construction loan portfolio contains loans primarily made to
long-time customers with satisfactory completion experience. The portfolio has
approximately 1,579 loans, of which 57 percent have balances less than $1
million. The largest real estate construction loan has a balance of
approximately $34 million.
Total commercial mortgage loans totaled $5.4 billion at December 31, 2000. The
largest loan in this portfolio had a balance of approximately $30 million. The
Corporation's policy requires a 75 percent or less loan-to-value ratio for all
commercial mortgage and real estate construction loans.
INTEREST RATE RISK
Interest rate risk arises primarily through the Corporation's core business
activities of extending loans and accepting deposits. The Corporation actively
manages its material exposure to interest rate risk. The principal objective of
asset and liability management is to maximize net interest income while
operating within acceptable limits established for interest rate risk and
maintaining adequate levels of funding and liquidity. The Corporation utilizes
various on- and off-balance sheet financial instruments to manage the extent to
which net interest income may be
23
affected by fluctuations in interest rates. The board of directors authorizes
the Asset Liability Policy Committee (ALPC) to establish policies and risk
limits pertaining to asset and liability management activities. The ALPC, in
addition to the board, monitors compliance with these policies. The ALPC meets
regularly to discuss asset and liability management strategies and is comprised
of executive and senior management from various areas of the Corporation,
including finance, lending, investments and deposit gathering.
INTEREST RATE SENSITIVITY
Interest rate risk arises in the normal course of business due to differences in
the repricing and maturity characteristics of assets and liabilities. Since no
single measurement system satisfies all management objectives, a combination of
techniques is used to manage interest rate risk, including simulation analysis,
asset and liability repricing schedules and economic value of equity. The ALPC
regularly reviews the results of these interest rate risk measurements.
The Corporation frequently evaluates net interest income under various balance
sheet and interest rate scenarios. The results of these analyses provide the
information needed to assess the proper balance sheet structure. An unexpected
change in economic activity, whether domestically or internationally, could
translate into a materially different interest rate environment than currently
expected. Management evaluates "base" net interest income under what is believed
to be the most likely balance sheet structure and interest rate environment.
This "base" net interest income is then evaluated against interest rate
scenarios that increase and decrease 200 basis points from the most likely rate
environment. In addition, adjustments to asset prepayment levels, yield curves
and overall balance sheet mix and growth assumptions are made to be consistent
with each interest rate environment. These assumptions are inherently uncertain
and, as a result, the model cannot precisely predict the impact of higher or
lower interest rates on net interest income. Actual results may differ from
simulated results due to timing, magnitude and frequency of interest rate
changes and changes in market conditions and management strategies, among other
factors. Derivative financial instruments entered into for risk management
purposes are included in these analyses. The measurement of risk exposure for a
200-basis-point decline in short-term interest rates identified approximately
$51 million, or two percent, of net interest income at risk during 2001. If
short-term interest rates rise 200 basis points, net interest income would be
enhanced during 2001 by approximately $6 million, or less than one percent.
Corporate policy limits adverse change to no more than five percent of
management's most likely net interest income forecast and the Corporation is
operating within this policy guideline.
Most assets and liabilities reprice either at maturity or in accordance with
their contractual terms. However, several balance sheet components demonstrate
characteristics that require adjustments to more accurately reflect repricing
and cash flow behavior. Assumptions based on historical pricing relationships
and anticipated market reactions are made to certain core deposit categories to
reflect the elasticity of the changes in the related interest rates relative to
changes in market interest rates. In addition, estimates are made concerning
early loan and security repayments. Prepayment assumptions are based on the
expertise of portfolio managers along with input from financial markets.
Consideration is given to current and future interest rate levels. While
management recognizes the limited ability of a traditional gap schedule to
accurately portray interest rate risk, adjustments are made to provide a more
accurate picture of the Corporation's interest rate risk profile. This
additional interest rate risk measurement tool provides a directional outlook on
the impact of changes in interest rates.
Interest rate sensitivity is measured as a percentage of earning assets. The
operating range for interest rate sensitivity, on an elasticity-adjusted basis,
is between an asset sensitive position of 10 percent of earning assets and a
liability sensitive position of 10 percent of earning assets.
Table 12 shows the interest sensitivity gap as of year-end 2000 and 1999. The
report reflects the contractual repricing and payment schedules of assets and
liabilities, including an estimate of all early loan and security repayments
which adds $585 million of rate sensitivity to the 2000 year-end gap. In
addition, the schedule includes an adjustment for the price elasticity on
certain core deposits.
24
TABLE 12: SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 2000 December 31, 1999
Interest Sensitivity Period Interest Sensitivity Period
------------------------------------- ----------------------------------
Within Over Within Over
(dollar amounts in millions) One Year One Year Total One Year One Year Total
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ - $ 1,931 $ 1,931 $ - $1,510 $ 1,510
Short-term investments 1,727 3 1,730 2,337 1 2,338
Investment securities 1,863 2,028 3,891 1,696 2,087 3,783
Commercial loans (including lease financing) 24,947 2,091 27,038 22,443 1,990 24,433
International loans 2,440 131 2,571 2,523 50 2,573
Real estate related loans 6,217 2,867 9,084 5,022 2,888 7,910
Consumer loans 989 488 1,477 896 493 1,389
--------------------------------------------------------------------------
Total loans 34,593 5,577 40,170 30,884 5,421 36,305
Other assets 888 924 1,812 647 927 1,574
--------------------------------------------------------------------------
Total assets $39,071 $10,463 $49,534 $35,564 $9,946 $45,510
======= ======= ======= ======= ====== =======
LIABILITIES
Deposits
Noninterest-bearing $3,772 $6,417 $10,189 $2,780 $5,895 $8,675
Savings - 1,340 1,340 - 1,441 1,441
Money market and NOW 7,618 2,303 9,921 6,861 2,442 9,303
Certificates of deposit 10,698 1,282 11,980 7,396 1,034 8,430
Foreign office 424 - 424 1,347 - 1,347
--------------------------------------------------------------------------
Total deposits 22,512 11,342 33,854 18,384 10,812 29,196
Short-term borrowings 2,093 - 2,093 2,925 - 2,925
Medium- and long-term debt 6,546 1,713 8,259 7,273 1,484 8,757
Other liabilities 329 499 828 224 460 684
--------------------------------------------------------------------------
Total liabilities 31,480 13,554 45,034 28,806 12,756 41,562
Shareholders' equity 10 4,490 4,500 (31) 3,979 3,948
--------------------------------------------------------------------------
Total liabilities and shareholders' equity $31,490 $18,044 $49,534 $28,775 $16,735 $45,510
======= ======= ======= ======= ======= =======
25
Sensitivity impact of interest rate swaps (7,946) 7,946 - (7,409) 7,409 -
--------------------------------------------------------------------------
Interest sensitivity gap (365) 365 - (620) 620 -
Gap as a percentage of earning assets (1)% 1% - (1)% 1% -
Sensitivity impact from elasticity adjustments (1) 1,735 (1,735) - 2,386 (2,386) -
--------------------------------------------------------------------------
Interest sensitivity gap with elasticity adjustments(1) 1,370 (1,370) - 1,766 (1,766) -
Gap as a percentage of earning assets 3% (3)% - 4% (4)% -
(1) Elasticity adjustments for NOW, savings and money market deposit accounts
are based on expected future pricing relationships as well as historical pricing
relationships dating back to 1985.
26
The Corporation was in an asset sensitive position throughout most of 2000. The
Corporation had a one-year asset sensitive gap of $1,370 million, or three
percent of earning assets, as of December 31, 2000. This compares to a $1,766
million asset sensitive gap, or four percent of earning assets, at December 31,
1999. Management anticipates continued growth in asset sensitivity throughout
2001, and will analyze both on- and off-balance sheet alternatives to hedge this
increased asset sensitivity to achieve the desired interest rate risk profile
for the Corporation.
The Corporation utilizes interest rate swaps predominantly as asset and
liability management tools with the overall objective of mitigating adverse
impact to net interest income from changes in interest rates. To accomplish this
objective, the Corporation uses interest rate swaps primarily to modify the
interest rate characteristics of certain assets and liabilities (e.g., from a
floating rate to a fixed rate, from a fixed rate to a floating rate, or from one
floating rate index to another). This strategy assists management in achieving
interest rate objectives.
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS AND
FOREIGN EXCHANGE CONTRACTS
RISK MANAGEMENT NOTIONAL ACTIVITY
Interest Foreign
Rate Exchange
($ in millions) Contracts Contracts Totals
- -------------------------------------------------------------------------------
Balances at December 31, 1998 $12,744 $ 1,055 $13,799
Additions 11,069 12,123 23,192
Maturities/amortizations (5,441) (11,965) (17,406)
Terminations (1,376) - (1,376)
-------------------------------------
Balances at December 31, 1999 16,996 1,213 18,209
Additions 10,886 8,850 19,736
Maturities/amortizations (9,230) (9,455) (18,685)
Terminations - - -
-------------------------------------
Balances at December 31, 2000 $18,652 $ 608 $19,260
======= ======== =======
The notional amount of risk management interest rate swaps totaled $12.6 billion
at December 31, 2000, and $9.0 billion at December 31, 1999. The fair value of
risk management interest swaps at December 31, 2000, was an asset of $173
million, compared to a liability of $165 million at December 31, 1999. For the
year ended December 31, 2000, risk management interest rate swaps generated $48
million of net interest expense, compared to $58 million of net interest income
for the year ended December 31, 1999. These off balance sheet instruments
represented 57 percent of total derivative financial instruments and foreign
exchange contracts, including commitments to purchase and sell investment
securities, at year-end 2000 and 46 percent at year-end 1999.
Table 13 summarizes the expected maturity distribution of the notional amount of
risk management interest rate swaps and provides the weighted average interest
rates associated with amounts to be received or paid as of December 31, 2000.
The swaps have been grouped by the assets and liabilities to which they have
been designated.
27
TABLE 13: REMAINING EXPECTED MATURITY OF RISK MANAGEMENT INTEREST RATE SWAPS
2006- Dec. 31,
(dollar amounts in millions) 2001 2002 2003 2004 2005 2026 Total 1999
- -----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET
DESIGNATION:
Receive fixed swaps
Generic $3,276 $2,868 $3,173 $34 $9 $15 $9,375 $6,851
Index amortizing - - - - - - - 149
Weighted average:(1)
Receive rate 5.68% 7.14% 9.82% 6.71% 6.76% 6.70% 7.54% 6.36%
Pay rate 6.72% 8.27% 9.48% 6.79% 7.16% 7.00% 8.13% 6.71%
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $- $- $- $- $- $- $- $13
Index amortizing - - - - - - - 7
Amortizing - 1 - - - - 1 2
Weighted average:(2)
Receive rate -% 5.94% -% -% -% -% 5.94% 6.37%
Pay rate -% 6.05% -% -% -% -% 6.05% 5.93%
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive fixed swaps $1,065 $73 $- $20 $- $220 $1,378 240
Weighted average:(1)
Receive rate 7.15% 7.58% -% 7.10% -% 7.22% 7.19% 7.12%
Pay rate 6.68% 6.71% -% 6.60% -% 6.59% 6.66% 6.00%
- -----------------------------------------------------------------------------------------------------------------------------------
28
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive fixed swaps $- $ 150 $- $- $ 250 $1,315 $ 1,715 $1,675
Weighted average:(1)
Receive rate -% 7.22% -% -% 7.04% 6.75% 6.83% 6.83%
Pay rate -% 6.76% -% -% 6.76% 6.75% 6.76% 5.98%
Floating/floating swaps $125 $- $- $- $- $- $125 $37
Weighted average:(3)
Receive rate 6.72% -% -% -% -% -% 6.72% 5.93%
Pay rate 6.59% -% -% -% -% -% 6.59% 6.19%
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $4,466 $3,092 $3,173 $54 $ 259 $1,550 $12,594 $8,974
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Variable rates paid on receive fixed swaps are on one-month and three-month
LIBOR or one-month CDOR rates effective December 31, 2000. Variable rates
received on pay fixed swaps are based on prime.
(2) Variable rate received is based on one-month CDOR at December 31, 2000.
(3) Variable rate paid is based on LIBOR at December 31, 2000, while variable
rate received is based on the three-month U.S. Treasury bill bond
equivalent rate.
29
In addition to interest rate swaps, the Corporation employs various other types
of off-balance sheet derivatives and foreign exchange contracts to mitigate
exposures to interest rate and foreign currency risks associated with specific
assets and liabilities (e.g., loans or deposits denominated in foreign
currencies). Such instruments include interest rate caps and floors, purchased
put options, foreign exchange forward contracts and foreign exchange swap
agreements. The aggregate notional amounts of these risk management derivatives
and foreign exchange contracts at December 31, 2000 and 1999, were $6.7 billion
and $9.2 billion, respectively. Interest rate floor contracts with a weighted
average strike price of 5.73% represent $5.0 billion of the $6.7 billion of
notional amounts. The interest rate floors expire $2.0 billion in March 2001,
$2.0 billion in June 2001, $0.5 billion in September 2001 and $0.5 billion in
October 2002.
Further information regarding risk management financial instruments and foreign
currency exchange contracts is provided in Notes 1, 10, 19 and 26.
CUSTOMER-INITIATED AND OTHER DERIVATIVE FINANCIAL
INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
CUSTOMER-INITIATED AND OTHER NOTIONAL ACTIVITY
Interest Foreign
Rate Exchange
(in millions) Contracts Contracts Totals
------------------------------------
Balances at December 31, 1998 $711 $815 $1,526
Additions 186 32,636 32,822
Maturities/amortizations (334) (32,744) (33,078)
----------------------------------
Balances at December 31, 1999 563 707 1,270
Additions 488 50,643 51,131
Maturities/amortizations (181) (49,473) (49,654)
----------------------------------
Balances at December 31, 2000 $870 $1,877 $2,747
==== ====== ======
On a limited basis, the Corporation writes interest rate caps and enters into
foreign exchange contracts and interest rate swaps to accommodate the needs of
customers requesting such services. Customer-initiated activity represented 12
percent at December 31, 2000 and seven percent at December 31, 1999, of total
derivative and foreign exchange contracts, including commitments to purchase and
sell securities. Refer to Note 19 of the financial statements for further
information regarding customer-initiated and other derivative financial
instruments and foreign exchange contracts.
LIQUIDITY RISK
Liquidity is the ability to meet financial obligations through the maturity or
sale of existing assets or acquisition of additional funds. Liquidity
requirements are satisfied with various funding sources, including a $15 billion
medium-term note program which allows the Michigan, California and Texas banks
to issue debt with maturities between one month and 15 years. The Michigan bank
has an additional $2 billion European note program. At year-end 2000, unissued
debt relating to the two programs totaled $10.5 billion. In addition, liquid
assets totaled $7.5 billion at December 31, 2000. The Corporation also had
available $23 billion from a collaterized borrowing account with the Federal
Reserve Bank at year-end 2000. Purchased funds at December 31, 2000, excluding
certificates of deposit with maturities beyond one year and medium- and
long-term debt, approximated $9.8 billion.
The parent company had available a $250 million commercial paper facility at
December 31, 2000, $170 million of which was unused. Another source of liquidity
for the parent company is dividends from its subsidiaries. As discussed in Note
18 to the financial statements, subsidiary banks are subject to regulation and
may be limited in their ability to pay dividends or transfer funds to the
holding company. During 2001, the subsidiary banks can pay dividends up to
$1,110 million plus current year net profits without prior regulatory approval.
One measure of current parent company liquidity is investment in subsidiaries as
a percent of shareholders' equity. An amount over
30
100 percent represents the reliance on subsidiary dividends to repay
liabilities. As of December 31, 2000, the ratio was 103 percent.
OPERATIONAL RISK
Operational risk is the risk of unexpected losses attributable to human error,
system failures, fraud, unauthorized transactions and inadequate controls and
procedures. The Corporation mitigates this risk through a system of internal
controls that are designed to keep operating risks at appropriate levels. The
Corporation's internal audit and financial staff monitors and assesses the
overall effectiveness of the system of internal controls on an ongoing basis and
internal audit provides an opinion on the environment to management and the
Audit Committee. Operational losses are experienced by all companies and are
routinely incurred in business operations.
The internal audit staff independently supports an active Audit Committee
oversight process. The Audit Committee serves as an independent extension of the
Board of Directors. Routine and special meetings are scheduled periodically to
provide more detail on relevant operations risks.
OTHER MATTERS
This annual report and other documents filed by Comerica with the Securities and
Exchange Commission (SEC) include forward-looking statements as that term is
used in the securities laws. All statements regarding Comerica's expected
financial position, strategies and growth prospects and general economic
conditions expected to exist in the future are forward-looking statements. The
words, "anticipates", "believes", "estimates", "seeks", "plans", "intends" and
similar expressions, as they relate to Comerica or its management, are intended
to identify forward-looking statements. Although Comerica believes that the
expectations reflected these forward-looking statements are reasonable and has
based these expectations on Comerica's beliefs and assumptions it has made, such
expectations may prove incorrect. Numerous factors could cause variances in
these projections and their underlying assumptions. Such factors are changes in
interest rates, changes in industries where Comerica has a significant
concentration of loans, changes in the level of fee income, the impact of
Internet banking, the entry of new competitors into the banking industry as a
result of the enactment of the Gramm-Leach-Bliley Act of 1999, changes in
general economic conditions and related credit conditions and continuing
consolidations in the banking industry. Forward-looking statements speak only as
of the date they are made. Comerica does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.