1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10706
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Comerica Incorporated
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(800) 521-1190
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of July 31, 2001: 177,975,000 shares
2
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
June 30, December 31, June 30,
(in thousands, except share data) 2001 2000 2000
----------- ------------ -----------
ASSETS
Cash and due from banks $ 1,763,867 $ 1,930,682 $ 2,241,928
Short-term investments 257,380 1,730,158 1,670,302
Investment securities available
for sale 4,025,903 3,890,725 3,693,395
Commercial loans 26,155,382 26,009,336 25,401,266
International loans 2,751,192 2,571,156 2,612,539
Real estate construction loans 3,117,988 2,915,168 2,576,986
Commercial mortgage loans 5,681,003 5,360,601 5,145,662
Residential mortgage loans 793,631 807,064 828,092
Consumer loans 1,490,809 1,477,135 1,438,371
Lease financing 1,123,408 1,029,164 858,065
----------- ----------- -----------
Total loans 41,113,413 40,169,624 38,860,981
Less allowance for credit losses (644,877) (608,110) (601,117)
----------- ----------- -----------
Net loans 40,468,536 39,561,514 38,259,864
Premises and equipment 356,328 364,246 365,650
Customers' liability on acceptances
outstanding 27,538 26,668 23,964
Accrued income and other assets 2,388,708 2,030,063 1,896,539
----------- ----------- -----------
TOTAL ASSETS $49,288,260 $49,534,056 $48,151,642
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $11,797,991 $10,188,475 $10,213,363
Interest-bearing deposits 25,247,662 23,665,808 21,332,018
----------- ----------- -----------
Total deposits 37,045,653 33,854,283 31,545,381
Short-term borrowings 1,427,333 2,093,381 3,368,570
Acceptances outstanding 27,538 26,668 23,964
Accrued expenses and other
liabilities 730,028 800,386 632,998
Medium- and long-term debt 5,306,843 8,259,179 8,377,915
----------- ----------- -----------
Total liabilities 44,537,395 45,033,897 43,948,828
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
6/30/01, 12/31/00 and 6/30/00 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at
6/30/01, 177,703,678 shares at
12/31/00, and 177,777,268 shares
at 6/30/00 893,746 888,519 888,886
Capital surplus 340,232 301,414 311,719
Unearned employee stock ownership
plan - 167,566 shares at 6/30/01,
176,462 at 12/31/00 and 48,568
shares at 6/30/00 (6,408) (6,750) (2,250)
Accumulated other comprehensive income 119,135 12,097 (32,617)
Retained earnings 3,211,460 3,085,784 2,850,981
Deferred compensation (11,251) (14,494) (20,467)
Less cost of common stock in
treasury - 855,492 shares at
6/30/01, 289,387 shares at 12/31/00
and 761,318 shares at 6/30/00 (46,049) (16,411) (43,438)
----------- ----------- -----------
Total shareholders' equity 4,750,865 4,500,159 4,202,814
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $49,288,260 $49,534,056 $48,151,642
=========== =========== ===========
3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended
---------------------------
June 30, June 30,
(in thousands, except per share data) 2001 2000
----------- -----------
INTEREST INCOME
Interest and fees on loans $ 813,970 $ 833,916
Interest on investment securities 55,717 62,102
Interest on short-term investments 4,967 14,711
----------- -----------
Total interest income 874,654 910,729
INTEREST EXPENSE
Interest on deposits 243,476 216,873
Interest on short-term borrowings 24,341 66,039
Interest on medium- and long-term debt 79,456 130,124
----------- -----------
Total interest expense 347,273 413,036
----------- -----------
Net interest income 527,381 497,693
Provision for credit losses 37,000 56,600
----------- -----------
Net interest income after provision
for credit losses 490,381 441,093
NONINTEREST INCOME
Fiduciary income 45,611 44,721
Investment advisory revenue, net 13,345 32,154
Service charges on deposit accounts 52,429 47,571
Commercial lending fees 14,316 12,578
Letter of credit fees 14,970 13,835
Warrant income 437 5,450
Securities gains/(losses) (747) 7,257
Net gain on sales of businesses - 2,631
Equity in earnings of unconsolidated subsidiaries 2,954 5,019
Other noninterest income 59,601 70,634
----------- -----------
Total noninterest income 202,916 241,850
NONINTEREST EXPENSES
Salaries and employee benefits 203,497 209,150
Net occupancy expense 29,299 27,066
Equipment expense 17,352 18,831
Outside processing fee expense 14,564 14,226
Restructuring charge 14,122 -
Customer services 10,660 8,824
Other noninterest expenses 83,318 88,145
----------- -----------
Total noninterest expenses 372,812 366,242
----------- -----------
Income before income taxes 320,485 316,701
Provision for income taxes 112,013 110,651
----------- -----------
NET INCOME $ 208,472 $ 206,050
=========== ===========
Net income applicable to common stock $ 204,197 $ 201,775
=========== ===========
Basic net income per common share $ 1.15 $ 1.14
Diluted net income per common share $ 1.13 $ 1.12
Cash dividends declared on common stock $ 78,420 $ 62,451
Dividends per common share $ 0.44 $ 0.40
4
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Six Months Ended
---------------------------
June 30, June 30,
(in thousands, except per share data) 2001 2000
----------- -----------
INTEREST INCOME
Interest and fees on loans $ 1,679,303 $ 1,612,089
Interest on investment securities 120,342 123,549
Interest on short-term investments 15,469 46,510
----------- -----------
Total interest income 1,815,114 1,782,148
INTEREST EXPENSE
Interest on deposits 515,403 419,769
Interest on short-term borrowings 63,733 119,979
Interest on medium- and long-term debt 196,305 261,112
----------- -----------
Total interest expense 775,441 800,860
----------- -----------
Net interest income 1,039,673 981,288
Provision for credit losses 109,000 123,494
----------- -----------
Net interest income after provision
for credit losses 930,673 857,794
NONINTEREST INCOME
Fiduciary income 91,037 89,920
Investment advisory revenue, net 3,856 65,983
Service charges on deposit accounts 102,343 93,323
Commercial lending fees 28,170 24,959
Letter of credit fees 27,746 26,692
Warrant income 3,559 12,824
Securities gains/(losses) 22,997 12,694
Net gain on sales of businesses - 33,115
Equity in earnings of unconsolidated subsidiaries (50,346) 7,946
Other noninterest income 143,536 129,214
----------- -----------
Total noninterest income 372,898 496,670
NONINTEREST EXPENSES
Salaries and employee benefits 410,273 420,977
Net occupancy expense 57,615 54,864
Equipment expense 36,749 37,777
Outside processing fee expense 30,391 28,713
Restructuring charge 108,426 -
Customer services 19,918 17,000
Other noninterest expenses 159,417 173,706
----------- -----------
Total noninterest expenses 822,789 733,037
----------- -----------
Income before income taxes 480,782 621,427
Provision for income taxes 178,718 218,346
----------- -----------
NET INCOME $ 302,064 $ 403,081
=========== ===========
Net income applicable to common stock $ 293,514 $ 394,531
=========== ===========
Basic net income per common share $ 1.65 $ 2.23
Diluted net income per common share $ 1.63 $ 2.20
Cash dividends declared on common stock $ 156,809 $ 124,970
Dividends per common share $ 0.88 $ 0.80
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
SIX MONTHS ENDED JUNE 30 (IN THOUSANDS) 2001 2000
- ---------------------------------------- -------------- -------------
OPERATING ACTIVITIES
Net income $ 302,064 $ 403,081
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 109,000 123,494
Depreciation 32,863 34,285
Restructuring charge 55,500 -
Net (increase) decrease in trading account securities 40,285 (107,725)
Net decrease in assets held for sale 30,666 64,181
Net (increase) decrease in accrued income receivable 63,733 (31,877)
Net decrease in accrued expenses (130,426) (45,030)
Net amortization of intangibles 17,304 17,935
Other, net (148,409) (158,377)
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Total adjustments 70,516 (103,114)
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Net cash provided by operating activities 372,580 299,967
INVESTING ACTIVITIES
Net increase in interest-bearing deposits with banks (28,892) (209)
Net decrease in federal funds sold and securities
purchased under agreements to resell 1,430,719 257,727
Proceeds from sale of investment securities available for sale 2,230,547 3,963,989
Proceeds from maturity of investment securities available for sale 612,192 439,539
Purchases of investment securities available for sale (3,098,715) (4,321,845)
Net increase in loans (other than loans purchased) (1,023,434) (2,615,411)
Fixed assets, net (24,945) (27,533)
Net (increase) decrease in customers' liability on acceptances outstanding (870) 19,846
Net cash provided by acquisitions/sales - 447,905
-------------- -------------
Net cash provided by (used in) investing activities 96,602 (1,835,992)
FINANCING ACTIVITIES
Net increase in deposits 3,180,644 2,349,378
Net increase (decrease) in short-term borrowings (666,048) 440,790
Net increase (decrease) in acceptances outstanding 870 (19,846)
Proceeds from issuance of medium- and long-term debt 225,000 3,590,873
Repayments and purchases of medium- and long-term debt (3,221,331) (3,956,945)
Proceeds from issuance of common stock and other
capital transactions 47,885 13,562
Purchase of common stock (53,238) (22,271)
Dividends paid (149,779) (127,348)
-------------- -------------
Net cash provided by (used in) financing activities (635,997) 2,268,193
-------------- -------------
Net increase (decrease) in cash and due from banks (166,815) 732,168
Cash and due from banks at beginning of year 1,930,682 1,509,760
-------------- -------------
Cash and due from banks at end of period $ 1,763,867 $ 2,241,928
============== =============
Interest paid $ 851,930 $ 810,492
============== =============
Income taxes paid $ 210,287 $ 217,126
============== =============
Noncash investing and financing activities:
Loan transfers to other real estate $ 6,329 $ 3,266
============== =============
6
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Accumulated
Nonredeemable Other
(in thousands, except Preferred Common Capital Comprehensive Retained
share data) Stock Stock Surplus Income Earnings
--------- -------- -------- ------------- ----------
BALANCES AT JANUARY 1, 2000 $250,000 $889,453 $226,001 $(21,704) $2,677,210
Net income for 2000 - - - - 403,081
Other comprehensive income,
net of tax - - - (10,913) -
Total comprehensive income - - - - -
Common stock dividend - - 84,906 - (84,927)
Cash dividends declared:
Preferred stock - - - - (8,550)
Common stock - - - - (124,970)
Purchase and retirement of
278,898 shares of common stock - (1,394) (7,765) - -
Purchase of 331,362 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 827 8,577 - (10,863)
Amortization of deferred
compensation - - - - -
-------- -------- -------- -------- ----------
BALANCES AT JUNE 30, 2000 $250,000 $888,886 $311,719 $(32,617) $2,850,981
======== ======== ======== ======== ==========
BALANCES AT JANUARY 1, 2001 $250,000 $888,519 $301,414 $ 12,097 $3,085,784
Net income for 2001 - - - - 302,064
Other comprehensive income,
net of tax - - - 107,038 -
Total comprehensive income - - - - -
Cash dividends declared:
Preferred stock - - - - (8,550)
Common stock - - - - (156,808)
Purchase of 958,200 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 5,227 38,818 - (11,030)
Amortization of deferred
compensation - - - - -
-------- -------- -------- -------- ----------
BALANCES AT JUNE 30, 2001 $250,000 $893,746 $340,232 $119,135 $3,211,460
======== ======== ======== ======== ==========
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Unearned
Employee
Stock Total
(in thousands, except Ownership Deferred Treasury Shareholders'
share data) Plan Shares Compensation Stock Equity
---------- ------------ --------- --------------
BALANCES AT JANUARY 1, 2000 $(3,750) $(21,998) $(47,161) $3,948,051
Net income for 2000 - - - 403,081
Other comprehensive income,
net of tax - - - (10,913)
----------
Total comprehensive income - - - 392,168
Common stock dividend - - - (21)
Cash dividends declared:
Preferred stock - - - (8,550)
Common stock - - - (124,970)
Purchase and retirement of
278,898 shares of common stock - - - (9,159)
Purchase of 331,362 shares
of common stock - - (13,112) (13,112)
Net issuance of common stock
under employee stock plans 1,500 (3,314) 16,835 13,562
Amortization of deferred
compensation - 4,845 - 4,845
------- -------- -------- ----------
BALANCES AT JUNE 30, 2000 $(2,250) $(20,467) $(43,438) $4,202,814
======= ======== ======== ==========
BALANCES AT JANUARY 1, 2001 $(6,750) $(14,494) $(16,411) $4,500,159
Net income for 2001 - - - 302,064
Other comprehensive income,
net of tax - - - 107,038
----------
Total comprehensive income - - - 409,102
Cash dividends declared:
Preferred stock - - - (8,550)
Common stock - - - (156,808)
Purchase of 958,200 shares
of common stock - - (53,238) (53,238)
Net issuance of common stock
under employee stock plans 342 (9,072) 23,600 47,885
Amortization of deferred
compensation - 12,315 - 12,315
------- -------- -------- ----------
BALANCES AT JUNE 30, 2001 $(6,408) $(11,251) $(46,049) $4,750,865
======= ======== ======== ==========
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, the statements do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2001, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001.
Certain items in prior periods have been reclassified to conform to the current
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Form 8-K/A of Comerica
Incorporated and Subsidiaries (the "Corporation") dated June 8, 2001.
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (Statement 133), requires
companies to recognize all of their derivative instruments as either assets or
liabilities on the balance sheet position at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
For derivative instruments that are designated and qualifying as a fair
value hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
The net effect of these adjustments was immaterial. For derivative instruments
that are designated and qualify as a cash flow hedge (i.e., hedging the exposure
to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current earnings during
the period of change. For derivative instruments that are designated and qualify
as a hedge of a net investment in a foreign currency, the gain or loss is
reported in other comprehensive income as part of the cumulative translation
adjustment to the extent it is effective. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change. Foreign exchange futures and forward
contracts, foreign currency options, interest rate caps and interest rate swap
agreements executed as a service to customers are not designated as hedging
instruments.
The adoption of Statement No. 133 on January 1, 2001 resulted in a
cumulative effect of an accounting change, net of tax, of $42 million in other
comprehensive income.
10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 2 - Investment Securities
At June 30, 2001, investment securities having a carrying value of $1.9
billion were pledged where permitted or required by law to secure liabilities
and public and other deposits, including deposits of the State of Michigan of
$76 million.
Note 3 - Allowance for Credit Losses
The following analyzes the changes in the allowance for credit losses
included in the consolidated balance sheets:
(in thousands) 2001 2000
--------- ---------
Balance at January 1 $ 608,110 $ 548,147
Charge-offs (91,871) (81,392)
Recoveries 19,667 10,908
--------- ---------
Net charge-offs (72,204) (70,484)
Provision for credit losses 109,000 123,494
Foreign currency translation
adjustment (29) (40)
--------- ---------
Balance at June 30 $ 644,877 $ 601,117
========= =========
The provision for credit losses in 2001 included a $25 million merger-
related charge to conform the credit policies of Imperial Bancorp (Imperial), a
$7 billion bank holding company acquired January 29, 2001, with Comerica.
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," considers a loan impaired when it is
probable that interest and principal payments will not be made in accordance
with the contractual terms of the loan agreements. Consistent with this
definition, all nonaccrual and reduced-rate loans (with the exception of
residential mortgage and consumer loans) are impaired. Impaired loans averaged
$471 million and $439 million for the quarter and six months ended June 30,
2001, compared to $254 million and $240 million for the comparable periods last
year. The following are period-end balances:
11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Credit Losses (continued)
(in thousands) June 30, 2001 December 31, 2000
------------- -----------------
Total impaired loans $466,826 $364,895
Impaired loans requiring
an allowance 401,400 277,159
Impairment allowance 164,477 104,107
Those impaired loans not requiring an allowance represent loans for
which the fair value exceeded the recorded investment in the loan.
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at June 30, 2001
and December 31, 2000:
(in thousands) June 30, 2001 December 31, 2000
------------- -----------------
Parent Company
7.25% subordinated notes due 2007 $ 156,856 $ 157,414
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 208,826 198,703
7.875% subordinated notes due 2026 174,261 172,346
8.375% subordinated notes due 2024 180,477 155,071
7.25% subordinated notes due 2002 154,724 149,719
6.875% subordinated notes due 2008 104,218 103,272
7.125% subordinated notes due 2013 162,327 154,486
6.00% subordinated notes due 2008 248,501 248,238
7.65% subordinated notes due 2010 263,374 248,385
8.50% subordinated notes due 2009 97,911 99,474
9.98% junior subordinated
debentures due 2026 57,255 63,690
---------- ----------
Total subordinated notes 1,651,874 1,593,384
Medium-term notes:
Floating rate based on Treasury indices -- 125,000
Floating rate based on Prime indices 1,199,986 1,320,964
Floating rate based on LIBOR indices 2,286,016 5,048,972
---------- ----------
Total medium-term notes 3,486,002 6,494,936
Notes payable 12,111 13,445
---------- ----------
Total subsidiaries 5,149,987 8,101,765
---------- ----------
Total medium- and long-term debt $5,306,843 $8,259,179
========== ==========
12
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 4 - Medium- and Long-term Debt (continued)
The balances of medium- and long-term debt at June 30, 2001 include the
fair values of risk management interest rate swap contracts modifying the
interest rate characteristics of the debt.
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory
federal income tax rates to income before income taxes as reported in the
financial statements after adjusting for non-taxable items, principally income
on bank- owned life insurance and goodwill. State and foreign taxes are then
added to the federal provision. The effective tax rate for the six months ended
June 30, 2001 was affected by adjustments in the first quarter 2001 to Imperial
Bancorp's tax liabilities at merger date, partially offset by a $7 million tax
benefit related to the Imperial Bancorp acquisition that was recognizable
immediately, but only after Imperial became part of Comerica.
13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts
June 30, 2001 December 31, 2000
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
Amount Gains Losses Value Amount Gains Losses Value
(in millions) (1) (2) (3) (1) (2) (3)
------------------------------ ------------------------------
RISK MANAGEMENT
Interest rate contracts:
Caps and floors purchased $ 7 $ - $ - $ - $ 6,058 $ 10 $ (1) $ 9
Swaps 14,540 329 (8) 321 12,594 206 (33) 173
Foreign exchange contracts:
Spot, forward and options 645 4 (16) (12) 493 18 (6) 12
Swaps 281 2 (22) (20) 115 1 (13) (12)
------- ---- ------ ----- ------- ---- ----- -----
Total risk management 15,473 335 (46) 289 19,260 235 (53) 182
CUSTOMER-INITIATED AND OTHER
Interest rate contracts:
Caps and floors written 405 - (2) (2) 198 - (1) (1)
Caps and floors purchased 394 2 - 2 179 1 - 1
Swaps 643 10 (10) - 493 5 (4) 1
Foreign exchange contracts:
Spot, forward and options 1,819 25 (22) 3 1,827 26 (19) 7
Swaps 427 2 (2) - 50 - - -
------- ---- ------ ---- ------- ---- ----- -----
Total customer-initiated
and other 3,688 39 (36) 3 2,747 32 (24) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange contracts $19,161 $374 $ (82) $ 292 $22,007 $267 $ (77) $ 190
======= ==== ====== ===== ======= ==== ===== =====
(1) Notional or contract amounts, which represent the extent of involvement in
the derivatives market, are generally used to determine the contractual cash
flows required in accordance with the terms of the agreement. These amounts are
typically not exchanged, significantly exceed amounts subject to credit or
market risk and are not reflected in the consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current
market rates, contracts in a profitable position. Credit risk is calculated
before consideration is given to bilateral collateral agreements or master
netting arrangements that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally
represent the estimated amounts the Corporation would receive or pay to
terminate or otherwise settle the contracts at the balance sheet date. In 2001,
the fair values of all derivatives and foreign exchange contracts are reflected
in the consolidated balance sheets, as required by SFAS No. 133. In 2000, only
the fair values of customer-initiated and other derivatives and foreign exchange
contracts are reflected in the consolidated balance sheets.
14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
Risk Management
Interest rate risk arises in the normal course of business due to
differences in the repricing and maturity characteristics of interest-earning
assets and interest-bearing liabilities. This gap in the balance sheet structure
reflects the sensitivity of the Corporation's net interest income to a change in
interest rates. Foreign exchange rate risk arises from changes in the value of
certain assets and liabilities denominated in foreign currencies. The
Corporation employs cash instruments, such as investment securities, as well as
derivative financial instruments and foreign exchange contracts, to manage
exposure to these and other risks, including liquidity risk.
As an end-user, the Corporation mainly accesses the interest rate
markets to obtain derivative instruments for use principally in connection with
asset and liability management activities. As part of a fair value hedging
strategy, the Corporation has entered into interest rate swap agreements for
interest rate risk management purposes. The interest rate swap agreements
utilized, effectively modify the Corporation's exposure to interest rate risk by
converting fixed-rate deposits and debt to a floating rate. These agreements
involve the receipt of fixed rate of interest amounts in exchange for floating
rate interest payments over the life of the agreement, without an exchange of
the underlying principal amount. No ineffectiveness was required to be recorded
on these hedging instruments in the statement of income for the quarter and six
month period ended June 30, 2001.
As part of a cash flow hedging strategy, the Corporation entered into
predominantly 3-year interest rate swap agreements that effectively convert a
portion of its existing and forecasted floating-rate loans to a fixed-rate
basis, thus reducing the impact of interest rate changes on future interest
income over
15
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
the next 3 years. Approximately 27% ($11 billion) of the Corporation's
outstanding loans were designated as the hedged items to interest rate swap
agreements at June 30, 2001. During the three and six month periods ended June
30, 2001, interest rate swap agreements designated as cash flow hedges increased
interest and fees on loans by $33 and $36 million, respectively. During the
second quarter 2001 the ineffectiveness of these hedging instruments was
insignificant to the Corporation's statement of income. If interest rates and
interest curves remain at their current levels, the Corporation expects to
reclassify $104 million of net gains on derivative instruments from accumulated
other comprehensive income to earnings during the next twelve months due to
receipt of variable interest associated with the existing and forecasted
floating-rate loans.
Management believes these strategies achieve an optimal match between
the rate maturities of assets and their funding sources which, in turn, reduces
the overall exposure of net interest income to interest rate risk, although
there can be no assurance that such strategies will be successful. In addition,
the Corporation uses forward foreign exchange contracts to protect the value of
its investments in a foreign subsidiaries in Canada and the United Kingdom.
Realized and unrealized gains and losses from these hedges are not included in
the statement of income, but are shown in the accumulated foreign currency
translation adjustment account included in other comprehensive income, with the
related amounts due to or from counterparties included in other liabilities or
other assets. During the three and six month periods ended June 30, 2001, the
Corporation recognized $1 million of net losses and $1 million of net gains,
respectively, in the accumulated foreign currency translation adjustment related
to the forward foreign exchange contracts.
16
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
The Corporation also uses various other types of financial instruments
to mitigate interest rate and foreign currency risks associated with specific
assets or liabilities, which are reflected in the table above. Such instruments
include interest rate caps and floors, foreign exchange forward contracts, and
foreign exchange cross-currency swaps.
The following table summarizes the expected maturity distribution of
the notional amount of interest rate swaps used for risk management purposes.
The table also indicates the weighted average interest rates associated with
amounts to be received or paid on interest rate swap agreements as of June 30,
2001. The swaps are grouped by the assets or liabilities to which they have been
designated.
17
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
(dollar amounts Dec. 31, in millions))
- -------------------------------------------------------------------------------------------------------------------------------
2006- Dec 31,
2001 2002 2003 2004 2005 2026 Total 2000
- -------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET
DESIGNATION:
Receive fixed swaps
Generic $ 1,625 $2,860 $4,750 $ 900 $ 500 $ 500 $11,135 $ 9,277
Weighted average: (1)
Receive rate 5.37% 7.13% 8.31% 8.02% 8.13% 5.83% 7.43% 7.55%
Pay rate 4.12% 5.77% 6.05% 6.93% 6.93% 4.57% 5.74% 8.14%
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $ 38 $ - $ - $ - $ - $ - $ 38 $ 98
Amortizing - 1 - - - - 1 1
Weighted average: (2)
Receive rate 4.44% 4.68% -% -% -% -% 4.41% 6.70%
Pay rate 4.43% 6.05% -% -% -% -% 4.47% 6.79%
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive
fixed swaps $ 378 $1,313 $ - $ - $ - $ 25 $ 1,716 $ 1,378
Weighted average: (1)
Receive rate 7.02% 5.14% -% -% -% 7.00% 5.58% 7.19%
Pay rate 3.92% 3.99% -% -% -% 4.24% 3.98% 6.66%
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive
fixed swaps $ - $ 150 $ - $ - $ 250 $1,250 $ 1,650 $ 1,715
Weighted average: (1)
Receive rate -% 7.22% -% -% 7.04% 6.73% 6.82% 6.83%
Pay rate -% 4.59% -% -% 5.39% 4.72% 4.81% 6.76%
Floating/floating
swaps $ - $ - $ - $ - $ - $ - $ - $ 125
Weighted average: (3)
Receive rate -% -% -% -% -% -% -% 6.72%
Pay rate -% -% -% -% -% -% -% 6.59%
Total notional amount $ 2,041 $4,324 $4,750 $ 900 $ 750 $1,775 $14,540 $12,594
(1) Variable rates paid on receive fixed swaps are based on one-month and
three-month LIBOR or one-month CDOR rates in effect at June 30, 2001. Variable
rates received on pay fixed swaps are based on prime.
(2) Variable rate received is based on one-month CDOR at June 30, 2001.
(3) Variable rate paid is based on LIBOR at June 30, 2001, while variable rate
received is based on the three-month U.S. Treasury bill bond equivalent rate.
18
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
The notional amounts of commitments to purchase and sell U.S. Treasury,
U.S. government agency and municipal bond securities related to the
Corporation's trading account and available for sale portfolio totaled $39
million and $3 million at June 30, 2001 and December 31, 2000, respectively.
These commitments, which are short-term and similar in nature to forward
contracts, are not reflected in the preceding table due to the immaterial impact
on the financial statements.
Customer-Initiated and Other
The Corporation earns additional income by executing various
transactions, primarily foreign exchange contracts and interest rate caps,
floors and swaps to accommodate the needs of customers requesting such services.
The Corporation minimizes market risk arising from customer-initiated foreign
exchange contracts by entering into offsetting transactions. Average fair values
and income from customer-initiated and other foreign exchange contracts were not
material for the six-month period ended June 30, 2001 and for the year ended
December 31, 2000.
Customer-initiated interest rate caps, floors and swaps generally are
not offset by other financial instruments; however, the Corporation has
established authority limits for engaging in these transactions in order to
minimize risk exposure. As a result, average fair values and income from this
activity were not material for the six-month period ended June 30, 2001 and for
the year ended December 31, 2000.
19
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Derivatives and Foreign Exchange Contracts (continued)
Derivative and Foreign Exchange Activity
The following table provides a reconciliation of the beginning and
ending notional amounts for interest rate derivatives and foreign exchange
contracts.
Customer-Initiated
Risk Management and Other
--------------------- ----------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
(in millions) Contracts Contracts Contracts Contracts
--------- --------- --------- ----------
Balances at December 31, 2000 $18,652 $ 608 $ 870 $ 1,877
Additions 6,195 5,952 846 24,746
Maturities/amortizations (8,770) (5,634) (274) (24,377)
Terminations (1,530) -- -- --
------- ------- ------ --------
Balances at June 30, 2001 $14,547 $ 926 $ 1,442 $ 2,246
======= ======= ======= =======
Additional information regarding the nature, terms and associated risks
of the above derivatives and foreign exchange contracts, can be found in Note 19
to the consolidated financial statements included in the Corporation's Form
8-K/A dated June 8, 2001.
Note 7 - Business Segment Information
The Corporation has strategically aligned its operations into three
major lines of business: the Business Bank, the Individual Bank and the
Investment Bank. These lines of business are differentiated based on the
products and services provided. In addition to the three major lines of
business, the Finance Division is also reported as a segment. Lines of business
results are produced by the Corporation's internal management accounting system.
This system measures financial results based on the internal organizational
structure of the Corporation; information presented is not necessarily
comparable with any other financial institution. Lines of business/segment
financial results for the six months ended June 30, 2001 and 2000 are presented
below.
20
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 7 - Business Segment Information (continued)
Six Months Ended June 30
(dollar amounts in Business Individual Investment
millions) Bank Bank Bank*
- -------------------------------------------------------------------------------------
2001 2000 2001 2000*** 2001** 2000
- -------------------------------------------------------------------------------------
Average assets $38,101 $34,854 $7,352 $6,909 $409 $363
Total revenues (FTE) 853 802 508 552 11 137
Net income 247 248 133 170 (57) 17
Return on average
assets 1.30% 1.43% 1.38% 1.84% (25.93) 8.68%
Return on average
common equity 17.41% 19.99% 33.69% 46.45% (40.91)% 12.87%
Finance Other Total
- -------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
- -------------------------------------------------------------------------------------
Average assets $ 4,594 $4,040 $(1,097) (66) $49,359 $46,100
Total revenues (FTE) 43 (9) -- (2) 1,415 1,480
Net income 23 (7) (44) (25) 302 403
Return on average
assets 0.28% (0.09)% N/M N/M 1.22% 1.75%
Return on average
common equity 7.84% (3.75)% N/M N/M 13.20% 20.73%
N/M - Not Meaningful
* Net income was reduced by charges for fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded,
Investment Bank net income/(loss) would have been ($54) million and $21
million, and return on average common equity would have been (38.57%) and
16.17%, in 2001 and 2000, respectively.
** Net income in 2001 was reduced by a $26 million pre-tax deferred distribution
costs impairment charge and a $53 million pre-tax charge related to long-term
incentive plans at an unconsolidated subsidiary. Excluding these charges,
Investment Bank total revenues (FTE) and net loss in 2001 would have been $94
million and ($6) million, respectively, while return on average assets and
return on common equity would have been (2.54%) and (4.01%), respectively.
***Year-to-date June 30, 2000, financial results for the Individual Bank include
a $30 million gain on the sale of $457 million of revolving check credit and
bankcard loans. Excluding the $30 million gain, total revenues (FTE) and net
income would have been $522 million and $150 million, respectively, while
return on average assets and return on average common equity would have been
1.62% and 40.89%, respectively.
For a description of the business activities of each line of business
and the methodologies which form the basis for these results, refer to Note 23
to the consolidated financial statements in the Corporation's Form 8-K/A dated
June 8, 2001.
21
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 8 - Accumulated Other Comprehensive Income
Other comprehensive income includes the change in net unrealized gains
and losses on investment securities available for sale, the change in the
accumulated foreign currency translation adjustment and the change in
accumulated gains and losses on cash flow hedges. The Consolidated Statements of
Changes in Shareholders' Equity present combined, net of tax, other
comprehensive income. The following presents reconciliations of the components
of accumulated other comprehensive income for the six months ended June 30, 2001
and 2000. Total comprehensive income for the six months ended June 30, 2001 and
2000, totaled $409 million and $392 million, respectively.
Six Months Ended
June 30
--------------------
(in thousands) 2001 2000
-------- --------
Net unrealized gains/(losses) on investment
securities available for sale:
Balance at beginning of year $ 8,016 $(22,719)
Net unrealized holding gains/(losses)
arising during the period 20,885 1,160
Less: Reclassification adjustment for
gains/(losses) included in net income 22,997 14,454
------- --------
Change in net unrealized gains/(losses)
before income taxes (2,112) (13,294)
Provision for income taxes (739) (5,565)
------- --------
Change in net unrealized gains/(losses)
on investment securities available
for sale, net of tax (1,373) (7,729)
------- --------
Balance at June 30 $ 6,643 $(30,448)
Accumulated foreign currency translation
adjustment:
Balance at beginning of year $ 4,081 $ 1,015
Net translation gains/(losses) arising
during the period (4,369) (3,184)
Less: Reclassification adjustment for
gains/(losses) included in net income -- --
------- --------
Change in translation adjustment before
income taxes (4,369) (3,184)
Provision for income taxes -- --
------- --------
Change in foreign currency translation
adjustment, net of tax (4,369) (3,184)
------- --------
Balance at June 30 $ (288) $(2,169)
22
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 8 - Accumulated Other Comprehensive Income (continued)
Six Months Ended
June 30
--------------------
(in thousands) 2001 2000
-------- --------
Accumulated net gains/(losses) on cash
flow hedges: $ -- $ --
Balance at beginning of period
Transition adjustment upon adoption
Of accounting standard 64,705 --
Net cash flow hedge gains/(losses)
Arising during the period 144,399 --
Less: Reclassification adjustment for
gains/(losses) included in net income 35,596 --
-------- --------
Change in cash flow hedges before
income taxes 173,508 --
Provision for income taxes 60,728 --
-------- --------
Change in cash flow hedges, net of tax
Balance at June 30 $112,780 $ --
-------- --------
Accumulated other comprehensive income,
net of taxes, at June 30 $119,135 $(32,617)
======== ========
Note 9 - Restructuring Charge
The Corporation recorded restructuring charges related to the
acquisition of Imperial Bancorp of $14 million and $134 million for the three
and six months ended June 30, 2001, respectively. The components of the charges,
$25 million and $109 million of which were recorded in the provision for credit
losses and noninterest expenses, respectively, are shown in the table below. The
Corporation expects to incur additional merger-related restructuring charges in
2001 in connection with the combining of Comerica and Imperial Bancorp.
Restructuring charges are expected to total $169 million by the end of
integration, which is currently targeted for completion in the first quarter of
2002.
23
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 9 - Restructuring Charge (continued)
Restructuring Reserve Analysis
Imperial Merger
Other Facilities
Employee Employee Conforming and
(in thousands) Termination -Related Policies Operations Other Total
----------- ---------- ---------- ---------- -------- --------
Balance at January 1, 2001 $ -- $ -- $ -- $ -- $ -- $ --
Provision charged to
operating expense 33,000 33,500 38,000 12,500 16,500 133,500
Cash outlays (18,000) (18,000) - (500) (16,500) (53,000)
Noncash write-downs
and other -- (11,000) (38,000) (10,000) -- (59,000)
--------------------------------------------------------------------
Balance at June 30, 2001 $ 15,000 $ 4,500 $ -- $ 2,000 $ -- $ 21,500
====================================================================
Employee termination costs included the cost of severance,
outplacement and other benefits associated with the involuntary termination of
employees, primarily senior management and employees in corporate support and
data processing functions. Approximately 350 employees are expected to be
terminated as part of the restructuring plan, 107 of which occurred in the six
month period ended June 30, 2001. Other employee-related costs include cash
payments related to change in control provisions in employment contracts and
retention bonuses. The charge related to conforming policies represents costs
associated with conforming the credit and accounting policies of Imperial with
those of the Corporation. Of the $38 million charge associated with conforming
policies, $25 million was included in the provision for credit losses on the
statement of income in the first quarter of 2001. The remaining amounts applied
against the liability for conforming policies related primarily to a gain on the
sale of Imperial's merchant bankcard business, as required under an existing
alliance agreement and adjusting commercial equipment lease residual values. The
Corporation incurred facilities and operations charges associated with closing
excess facilities and replacing signage. Other merger-related restructuring
24
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 9 - Restructuring Charge (continued)
costs were primarily comprised of investment banking, accounting, consulting and
legal fees. The Corporation expects to realize annual noninterest expense
savings totaling $60 million upon completion of its integration effort, the full
effect of which will not begin to be realized until the second quarter of 2002.
25
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net income for the quarter ended June 30, 2001, was $208 million, down
two million, or less than one percent, from $206 million reported for the second
quarter of 2000. Diluted net income per share increased to $1.13 from $1.12 a
year ago. Return on average common shareholders' equity was 18.21 percent and
return on average assets was 1.69 percent, compared to 20.80 percent and 1.77
percent, respectively, for the comparable quarter last year. Excluding
restructuring charges of $14 million ($8 million or $0.05 per share, net of
taxes) related to the Imperial acquisition, second quarter net income was $216
million or $1.18 per share. Return on average common equity and return on
assets, excluding the restructuring charges, were 18.94 percent and 1.75
percent, respectively.
Net income for the first six months of 2001 was $1.63 per share or $302
million, compared to $2.20 or $403 million for the same period in 2000,
decreases of 26 percent and 25 percent, respectively. Return on average common
shareholders' equity was 13.20% and return on average assets was 1.22% for the
first six months of 2001, compared to 20.73% and 1.75%, respectively, for the
first six months of 2000. Excluding restructuring charges of $103 million after
tax (0.57 per share) and the effect of a first quarter one-time $34 million
after tax (0.19 per share) charge related to long-term incentive plans at an
unconsolidated subsidiary of Munder Capital Management (the company's investment
management subsidiary), net income for the first half was $439 million or $2.39
per share, increases in both net income and earnings per share of nine percent
over the same period of 2000. Excluding these charges, Comerica's return on
common equity was 19.39 percent and return on assets was 1.78 percent for the
first six months of 2001.
26
Net Interest Income
The rate-volume analysis in Table I details the components of the
change in net interest income on a fully taxable equivalent (FTE) basis for the
quarter ended June 30, 2001. On a FTE basis, net interest income was $528
million for the three months ended June 30, 2001, an increase of $29 million, or
6 percent, from the comparable quarter in 2000. This increase was due to 6
percent increase in average earning assets and a stable net interest margin
supported by strong growth in interest-free sources of funds. The net interest
margin was 4.65 percent for the second quarter of 2001 and 2000, compared with
4.55 percent in the first quarter of 2001.
Table II provides an analysis of net interest income for the first six
months of 2001. On a FTE basis, net interest income for the first six months
ended June 30, 2001 was $1,042 million compared to $983 million for the same
period in 2000. This increase is primarily attributed to the same factors cited
in quarterly discussion. The net interest margin for the first six months ended
June 30, 2001, was 4.60 percent compared to 4.62 percent for the same period in
2000.
Interest rate swaps permit management to manage the sensitivity of net
interest income to fluctuations in interest rates in a manner similar to
investment securities but without significant impact to capital or liquidity. In
addition to using interest rate swaps and other instruments to manage exposure
to interest rate risk, management attempts to evaluate the effect of movements
in interest rates on net interest income by regularly performing interest
sensitivity gap and earnings simulation analyses. At June 30, 2001, the
Corporation was in a liability sensitive position of $43 million (on an
elasticity adjusted basis), or less than one percent of earning assets. The
earnings simulation analysis performed at the end of the quarter reflects
changes to both interest rates and loan, investment and deposit volumes. The
27
measurement of risk exposure at June 30, 2001, for a 200 basis point decline in
short-term interest rates identified approximately $28 million, or one percent,
of forecasted net interest income at risk during the next 12 months. If
short-term interest rates rise 200 basis points, forecasted net interest income
would be enhanced by approximately $24 million, or one percent. The results of
these simulations are within established corporate policy guidelines.
28
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
- ----------------------------------------------------------------------------------------------
June 30, 2001 June 30, 2000
----------------------------- -----------------------------
(dollar amounts Average Average Average Average
in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
Loans $41,751 $814 7.82% $38,487 $834 8.72%
Investment securities (1) 3,490 56 6.41 3,677 63 6.71
Short-term investments 299 5 6.71 863 15 6.87
- ----------------------------------------------------------------------------------------------
Total earning assets 45,540 875 7.71 43,027 912 8.51
Interest-bearing deposits 25,008 244 3.91 20,467 217 4.26
Short-term borrowings 2,213 24 4.41 4,148 66 6.40
Medium- and long-term debt 6,449 79 4.94 8,039 130 6.51
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $33,670 347 4.14 $32,654 413 5.09
-------------- ---------------
Net interest income/
Rate spread (FTE) $528 3.57 $499 3.42
==== ====
FTE adjustment $ 1 $ 1
==== ====
Impact of net noninterest-bearing
sources of funds 1.08 1.23
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.65% 4.65%
==============================================================================================
(1) The average rate for investment securities was computed using average
historical cost.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
Loans $(84) $ 64 $(20)
Investment securities (3) (4) (7)
Short-term investments - (10) (10)
- ---------------------------------------------------------------------------
Total earning assets (87) 50 (37)
Interest-bearing deposits (25) 52 27
Short-term borrowings (21) (21) (42)
Medium- and long-term debt (31) (20) (51)
- ---------------------------------------------------------------------------
Total interest-bearing sources (77) 11 (66)
- ---------------------------------------------------------------------------
Net interest income/Rate spread (FTE) $(10) $ 39 $ 29
==================================
* Rate/Volume variances are allocated to variances due to volume.
29
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Six Months Ended
- -------------------------------------------------------------------------------------------
June 30, 2001 June 30, 2000
---------------------------- --------------------------
(dollar amounts Average Average Average Average
in millions) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------
Loans $41,427 $1,680 8.18% $37,865 $1,613 8.56%
Investment securities(1) 3,685 121 6.59 3,614 124 6.79
Other earning assets 465 16 6.73 1,191 47 7.85
- -------------------------------------------------------------------------------------------
Total earning assets 45,577 1,817 8.03 42,670 1,784 8.39
Interest-bearing deposits 24,590 515 4.23 20,341 420 4.15
Short-term borrowings 2,392 64 5.37 3,869 120 6.24
Medium- and long-term debt 7,085 196 5.59 8,330 261 6.30
- -------------------------------------------------------------------------------------------
Total interest-bearing
sources $34,067 775 4.59 $32,540 801 4.95
---------------- --------------
Net interest income/
Rate spread (FTE) $1,042 3.44 $ 983 3.44
====== ======
FTE adjustment $ 2 $ 2
====== ======
Impact of net noninterest-bearing
sources of funds 1.16 1.18
- -------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.60% 4.62%
===========================================================================================
(1) The average rate for investment securities was computed using average
historical cost.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
Loans $ (77) $ 144 $ 67
Investment securities (6) 3 (3)
Other earning assets (10) (21) (31)
- ----------------------------------------------------------------------------
Total earning assets (93) 126 33
Interest-bearing deposits (8) 103 95
Short-term borrowings (17) (39) (56)
Medium- and long-term debt (30) (35) (65)
- ----------------------------------------------------------------------------
Total interest-bearing sources (55) 29 (26)
- ----------------------------------------------------------------------------
Net interest income/Rate spread (FTE) $ (38) $ 97 $ 59
=================================
* Rate/Volume variances are allocated to variances due to volume.
30
Provision for Credit Losses
The provision for credit losses was $37 million for the second quarter
of 2001, compared to $57 million for the same period in 2000. The provision for
the first six months of 2001 was $109 million compared to $123 million for the
same period in 2000. The Corporation establishes this provision to maintain an
adequate allowance for credit losses, which is discussed in the section entitled
"Allowance for Credit Losses and Nonperforming Assets." Included in the
provision for credit losses for the six months ended is a $25 million merger-
related charge to conform the credit policies of Imperial with Comerica.
Noninterest Income
Noninterest income was $203 million for the three months ended June 30,
2001, a decrease of $39 million, or 16 percent, over the same period in 2000.
The second quarter 2000 noninterest income included a $6 million nonrecurring
gain from the demutualization of an insurance carrier. Excluding the effects of
gains and losses on securities, warrant income, net gains on the sales of
businesses and the nonrecurring gain mentioned above, noninterest income
decreased 8 percent in the second quarter of 2001, compared with the second
quarter of 2000. This reflects a $19 million decrease in investment advisory
revenue from the Corporation's Munder Capital Management subsidiary, as the
market values of technology-related stocks declined from their record highs
during the first quarter of last year. Despite weakness in stock market-related
segments, strong gains were recorded in commercial lending fees (14 percent) and
service charges on deposit accounts (10 percent), when compared with the second
quarter of 2000. For the first six months of 2001, noninterest income was $373
million, a decrease of $124 million or 25 percent, from the first six months of
2000. In addition to the nonrecurring items identified in the quarterly
discussion, noninterest income in the first six months of 2001 was reduced by a
$26 million deferred distribution costs impairment charge ($17 million
after-tax)
31
and a one-time $53 million charge ($34 million after-tax) related to an
unconsolidated subsidiary, both of which are discussed more fully below.
Noninterest income for the first six months of 2001 also included gains of $23
million from securities sales and $11 million in net gains resulting from the
purchase and subsequent sale, all within the first quarter, of interest rate
derivative contracts which failed to meet the Corporation's stringent risk-
reduction criteria. Noninterest income in the first six months of 2000 included
a $30 million gain associated with the sale of revolving check credit and
bankcard loans. Excluding the effect of securities gains, warrant income and
large, nonrecurring items in both six month periods, noninterest income
decreased three percent in the first six months of 2001 compared to the first
six months of 2000. The decrease in year-to-date noninterest income after
excluding nonrecurring items was primarily attributable to a $36 million
decrease in investment advisory revenue from the Corporation's Munder Capital
Management subsidiary, cited above.
In the first quarter of 2001, the Corporation recorded a $26 million
pre-tax deferred distribution costs impairment charge related to the
Corporation's Munder subsidiary. This charge resulted from the Corporation's
reassessment of its ability to recover the unamortized cost of the commissions
to brokers for selling certain shares, principally shares in its Munder
subsidiaries NetNet, International NetNet and Future Technology funds. Net asset
values in these technology funds suffered as market conditions weakened
significantly following the peak in the first half of 2000. After a fourth
quarter 2000 impairment charge of $7 million, this sector of the equity markets
declined another 26 percent in the first quarter 2001. This prompted Comerica's
revaluation of expected future cash flows from the funds, which are based on a
percentage of assets under management and early redemption fees. Given net asset
values at June 30, 2001, it would take a decline of approximately 25 percent to
trigger further
32
impairment, which at that level would be approximately $8 million.
Also in the first quarter of 2001, the Corporation recorded a $53
million pre-tax charge related to long-term incentive plans at a United Kingdom
subsidiary, Framlington Holdings Limited, of which Munder is a minority owner.
In May 2000, the announcement that the majority owner of Framlington was being
acquired triggered a change-in-control provision which fully vested all options
and restricted shares held by employees of Framlington. In March 2001, all
outstanding options held by employees were exercised and their shares
mandatorily purchased by Framlington, requiring U.S. accounting recognition of
the expense. The pre-tax charge, included in equity in earnings of
unconsolidated subsidiaries, reflects Munder's portion of the resulting expense.
Noninterest Expenses
Noninterest expenses, which included a merger-related restructuring
charge of $14 million, were $373 million for the quarter ended June 30, 2001, an
increase of $7 million, or two percent, from the comparable quarter in 2000. For
the six months of 2001, noninterest expenses, which included $108 million of
merger related restructuring charges, were $823 million, an increase of $90
million, or 12 percent from the comparable 2000 period. Excluding the
restructuring charges and a $6 million contribution to Comerica's charitable
foundation in the second quarter of 2000, noninterest expenses decreased $2
million, or less than one percent for the quarter over the comparable period
last year and $13 million or two percent on a year to date basis when compared
to 2000. The declines in both periods reflect a decrease in revenue related
incentives.
Provision for Income Taxes
The provision for income taxes for the second quarter of 2001 totaled
$112 million, compared to $111 million reported for the same period a year ago.
The effective tax rate was 35 percent for the second quarter of 2001 and 2000.
The
33
provision for the first six months of 2001 was $179 million compared to $218
million for the same period in 2000. The effective tax rate was 37 percent for
the first six months of 2001 and 35 percent for the first six months of 2000.
The effective tax rate in the first six months of 2001 was affected by
adjustments in the first quarter to Imperial's tax liabilities at merger date,
partially offset by a $7 million tax benefit related to the Imperial Bancorp
acquisition that was immediately recognizable, but only after Imperial became
part of Comerica.
Financial Condition
Total assets were $49.3 billion at June 30, 2001, compared with $49.5
billion at year-end 2000 and $48.2 billion at June 30, 2000. The Corporation has
experienced two percent growth in total business loans since December 31, 2000,
with the most significant increases in the commercial mortgage and real estate
construction categories, which increased $320 million or six percent and $203
million or seven percent, respectively. Total loan growth of $944 million was
primarily funded by a reduction in short-term investments.
Total liabilities decreased $497 million, or one percent, since
December 31, 2000 to $44.5 billion. Total deposits increased $3.1 billion to
$37.0 billion at June 30, 2001 from $33.9 billion at December 31, 2000,
primarily due to strong growth in noninterest-bearing deposits and certificates
of deposit issued in denominations in excess of $100,000 through brokers or to
institutional investors. The growth in noninterest-bearing deposits resulted
primarily from increased title and escrow company deposits from home mortgage
financing and refinancing activity. The increase in deposits was largely offset
by declines in short-term borrowings, which decreased $666 million, or 32
percent, since year-end 2000, and medium- and long-term debt, which decreased
$3.0 billion, or 36 percent.
In July 2001, Comerica issued $350,000,000 of 7.60% Trust Preferred
Securities. The securities pay cumulative dividends each quarter beginning
34
October 1, 2001, and are callable any time after July 30, 2006. The Corporation
will use the proceeds from the issuance to retire in total the $250,000,000 of
preferred stock outstanding at June 30, 2001 and for other general corporate
purposes. On August 1, 2001, the Corporation provided notice to the holders of
the preferred stock that the preferred stock would be redeemed on August 31,
2001.
Allowance for Credit Losses and Nonperforming Assets
The allowance for credit losses represents management's assessment of
probable losses inherent in the Corporation's loan portfolio, including all
binding commitments to lend. The allowance provides for probable losses that
have been identified with specific customer relationships and for probable
losses believed to be inherent but that have not been specifically identified.
The Corporation allocates the allowance for credit losses to each loan category
based on a defined methodology which has been in use, without material change,
for several years. Internal risk ratings are assigned to each business loan at
the time of approval and are subject to subsequent periodic reviews by the
senior management of the Credit Policy Group. Business loans are defined as
those belonging to the commercial, international, real estate construction,
commercial mortgage and lease financing categories. A detailed credit quality
review is performed quarterly on large business loans which have deteriorated
below certain 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
35
respect to past due and nonaccrual amounts. The allocated reserve was $502
million at June 30, 2001, an increase of $59 million from year-end 2000. This
increase was attributable to the specific portion of the allowance associated
with the quarterly credit quality review of certain large business loans with
deteriorated credit risk at June 30, 2001, but not from any geographic or
industry concentration.
Actual loss ratios experienced in the future could vary from those
projected. This uncertainty occurs because other factors affecting the
determination of probable losses inherent in the loan portfolio may exist which
are not necessarily captured by the application of historical loss ratios. To
ensure a higher degree of confidence, an unallocated allowance is also
maintained. The unallocated portion of the loss reserve reflects management's
view that the reserve should have a margin that recognizes the imprecision
underlying the process of estimating expected credit losses. Determination of
the probable losses inherent in the portfolio, which are not necessarily
captured by the allocated methodology discussed above, involves the exercise of
judgement. Factors which were considered in the evaluation of the adequacy of
the Corporation's unallocated reserve include portfolio exposures to the
healthcare, high technology and energy industries, customers engaged in
sub-prime lending, as well as Latin American transfer risks and the risk
associated with new customer relationships. The unallocated allowance was $143
million at June 30, 2001, a decrease of $22 million from December 31, 2000.
Management also considers industry norms and the expectations from
rating agencies and banking regulators in determining the adequacy of the
allowance. The total allowance, including the unallocated amount, is available
to absorb losses from any segment of the portfolio.
At June 30, 2001, the allowance for credit losses was $645 million, an
increase of $37 million since December 31, 2000. The allowance as a percentage
36
of total loans was 1.57 percent, compared to 1.51 percent at December 31, 2000.
As a percentage of nonperforming assets, the allowance was 134 percent at June
30, 2001, versus 179 percent at year-end 2000.
Net charge-offs for the second quarter of 2001 were $37 million, or
0.35 percent of average total loans, compared with $37 million, or 0.38 percent,
for the year-earlier quarter. Nonperforming assets increased $141 million, or 42
percent, since December 31, 2000, and were categorized as follows:
June 30, December 31,
(in thousands) 2001 2000
------------- ------------
Nonaccrual loans:
Commercial $ 382,170 $ 244,390
International 42,855 57,929
Real estate construction 5,417 4,542
Commercial mortgage 32,955 17,398
Residential mortgage 285 185
Consumer 3,550 3,080
Lease financing 3,429 3,837
------------- ------------
Total nonaccrual loans 470,661 331,361
Reduced-rate loans 248 2,306
------------- ------------
Total nonperforming loans 470,909 333,667
Other real estate 9,579 5,577
------------- ------------
Total nonperforming assets $ 480,488 $ 339,244
============= ============
Loans past due 90 days or more $ 83,114 $ 36,176
============= ============
Nonperforming assets as a percentage of total loans and other real
estate were 1.17 percent at June 30, 2001 and 0.84 percent at December 31, 2000.
The increase in nonperforming assets was not significant to any geographic or
industry concentration.
Capital
Common shareholders' equity increased $144 million from December 31,
2000 to June 30, 2001, excluding other comprehensive income. The increase was
primarily due to the retention of $137 million of current year earnings. The
effect of employee stock plan activity, which increased common shareholders'
equity $48 million, was offset by repurchasing approximately 900,000 shares of
common stock in the second quarter of 2001. This repurchase nearly completes the
one million shares authorized for repurchase by the Board of Director's current
37
resolutions.
Capital ratios exceed minimum regulatory requirements as follows:
June 30, December 31,
2001 2000
----------- -----------
Leverage ratio (3.00 - minimum) 8.92% 8.74%
Tier 1 risk-based capital ratio (4.0 - minimum) 7.51 7.35
Total risk-based capital ratio (8.0 - minimum) 11.25 11.11
At June 30, 2001, the capital ratios of all the Corporation's banking
subsidiaries exceeded the minimum ratios required of "well capitalized"
institutions as defined in the final rule under FDICIA.
Other Matters
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Corporation will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. The Corporation
has not completed its analysis of the impact of the application of the
nonamortization provisions of the Statement to net income. Current goodwill
amortization approximates $27 million after tax ($0.15 per share) on an annual
basis. The Corporation will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
This report includes forward-looking statements based on management's
current expectations and/or the assumptions made in the earnings simulation
38
analysis. Such statements reflect the view of Comerica's management, as of the
date of this report, with respect to future events and are subject to risks and
uncertainties, such as changes in Comerica's plans, objectives, expectations and
intentions and do not purport to speak as of any other date. Should one or more
of these risks materialize or should underlying beliefs or assumptions prove
incorrect, the Corporation's actual results could differ materially from those
discussed in this report. Factors that could cause or contribute to such
differences are changes in interest rates, changes in the industries in which
the Corporation has a significant number or principal amount of loans, changes
in the level of fee revenues, changes in the accounting treatment of any
particular item, the entry of new competitors into the banking industry as a
result of the enactment of the Gramm-Leach-Bliley Act of 1999, changing economic
conditions and related credit and market conditions, difficulty integrating
Imperial Bancorp or retaining key personnel and other factors. Forward-looking
statements speak only as of the date they are made. Comerica does not undertake
to update forward-looking statements to reflect circumstances or events that
occur after the date the forward-looking statements are made.
39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Comerica's Annual Meeting of Stockholders was held on May 22, 2001.
At the meeting, shareholders of Comerica:
1. Elected seven Class II Directors for three-year terms expiring in 2004
or upon the election and qualification of their successors;
2. Approved amendments to the Amended and Restated Comerica Incorporated
1997 Long-Term Incentive Plan (the "LTIP"); and
3. Approved amendments to the Amended and Restated Comerica Incorporated
Management Incentive Plan (the "MIP").
The number of votes cast for, against or withheld, and the number of abstentions
with respect to each such matter is set forth below, as are the number of broker
non-votes, where applicable.
For Against/Withheld Abstained Broker Non-Votes
1. ELECTION OF DIRECTORS
James F. Cordes 150,648,062 2,030,408
Peter D. Cummings 150,622,467 2,056,003
Todd W. Herrick 149,707,864 2,970,606
Eugene A. Miller 151,025,232 1,653,238
William P. Vititoe 150,604,275 2,074,195
Martin D. Walker 150,548,190 2,130,280
Kenneth L. Way 150,684,943 1,993,527
2. AMENDMENT OF THE LTIP 111,863,763 1,993,527 1,439,481 19,582,779
3. AMENDMENT OF THE MIP 138,829,309 12,418,619 1,430,542 -0-
40
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(11) Statement re: Computation of Earnings Per Share
(b) Reports on Form 8-K
1. A report on Form 8-K dated April 27, 2001, was filed under report
item number 9 to file the press release announcing the company's
earnings for the period ended March 31, 2001.
2. A report on Form 8-K/A dated June 8, 2001, was filed under report
item number 5 to file the Company's restated financial statements
and management's discussion and analysis reflecting the merger of
Imperial Bancorp and Comerica Holdings Incorporated, a wholly
owned subsidiary of Comerica Incorporated.
41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMERICA INCORPORATED
(Registrant)
/s/ Ralph W. Babb Jr.
-----------------------------------------
Ralph W. Babb Jr.
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
/s/ Marvin J. Elenbaas
-----------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: August 13, 2001
42
Exhibit Index
-------------
<Table>
<Caption>
Exhibit No. Description
- ----------- -----------
11 Statement re:
Computation of Earnings Per Share
</Table>