EXHIBIT 13
TABLE 1: SELECTED FINANCIAL DATA
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Total interest income $ 3,393 $ 3,716 $ 3,097 $ 3,004 $ 2,959
Net interest income 2,102 2,004 1,817 1,720 1,645
Provision for credit losses 236 255 146 146 169
Securities gains 20 16 9 7 6
Noninterest income (excluding securities gains) 784 941 858 660 603
Noninterest expenses 1,559 1,484 1,359 1,237 1,177
Net income 710 791 759 651 586
--excluding 2001 merger-related and restructuring charges 842
PER SHARE OF COMMON STOCK
Basic net income $ 3.93 $ 4.38 $ 4.20 $ 3.58 $ 3.17
Diluted net income 3.88 4.31 4.13 3.51 3.11
--excluding 2001 merger-related and restructuring charges 4.61
Cash dividends declared 1.76 1.60 1.44 1.28 1.15
Common shareholders' equity 27.17 23.98 20.87 17.99 16.10
Market value 57.30 59.38 46.69 68.19 60.17
YEAR-END BALANCES
Total assets $50,732 $49,534 $45,510 $42,785 $41,018
Total earning assets 46,566 45,791 42,426 39,090 37,370
Total loans 41,196 40,170 36,305 34,053 31,681
Total deposits 37,570 33,854 29,196 29,883 26,761
Total borrowings 7,489 10,353 11,682 8,999 10,612
Medium- and long-term debt 5,503 8,259 8,757 5,358 7,363
Common shareholders' equity 4,807 4,250 3,698 3,178 2,864
DAILY AVERAGE BALANCES
Total assets $49,688 $46,877 $42,662 $39,969 $38,521
Total earning assets 45,722 43,364 39,247 36,599 35,275
Total loans 41,371 38,698 35,490 31,916 29,609
Total deposits 35,312 30,340 27,478 26,604 25,082
Total borrowings 8,782 11,621 11,003 9,626 9,929
Medium- and long-term debt 6,198 8,298 7,441 6,109 6,034
Common shareholders' equity 4,605 3,963 3,409 2,995 2,723
RATIOS
Return on average assets 1.43% 1.69% 1.78% 1.63% 1.52%
--excluding 2001 merger-related and restructuring charges 1.69
Return on average common shareholders' equity 15.16 19.52 21.78 21.16 20.88
--excluding 2001 merger-related and restructuring charges 18.03
Efficiency ratio 53.95 50.35 50.70 51.84 52.15
--excluding 2001 merger-related and restructuring charges 48.70
Dividend payout ratio 45 37 35 36 37
--excluding 2001 merger-related and restructuring charges 38
Average common shareholders' equity as a percentage
of average assets 9.27 8.45 7.99 7.49 7.07
23
2001 FINANCIAL HIGHLIGHTS
CENTERED ON PERFORMANCE
- - Earned 15.16 percent on average common shareholders' equity (18.03 percent
excluding merger-related and restructuring charges), compared to 19.52 percent
in 2000.
- - Returned 1.43 percent on average assets (1.69 percent excluding merger-related
and restructuring charges), compared to 1.69 percent in 2000.
- - Generated an efficiency ratio of 53.95 percent (48.70 percent excluding
merger-related and restructuring charges), compared to 50.35 percent in 2000,
evidence of Comerica's ongoing cost discipline.
REPORTED EARNINGS
- - Reported net income of $710 million, or $3.88 per common share, compared to
$791 million, or $4.31 per common share for 2000.
- - Excluding merger-related and restructuring charges, net income increased $51
million to $842 million, or $4.61 per common share, an increase of seven
percent per common share compared to 2000.
SUSTAINED GROWTH
- - Generated a seven percent increase in average business loans.
- - Averaged $50 billion in total assets, a six percent increase from 2000.
- - Increased average shareholders' equity to $4.8 billion.
ENHANCED SHAREHOLDERS' RETURN
- - Raised the quarterly cash dividend 10 percent to $0.44 per share, an annual
rate of $1.76 per share.
- - Strengthened core capital, as evidenced by Tier 1 common capital ratio
increasing from 6.80 percent to 7.30 percent, after repurchasing 2.2 million
shares in 2001.
IMPLEMENTED KEY STRATEGIES
- - Completed the acquisition of Imperial Bancorp, a $7.4 billion banking company
acquired in 2001, creating one of the largest banking companies in California,
with assets of $14.8 billion.
- - Integrated the operations and converted all systems of Imperial Bancorp into
Comerica within nine months of closing.
RETURN ON AVERAGE ASSETS
(IN PERCENTAGES)
[BAR GRAPH]
YEAR
01 1.43%, 1.69%*
00 1.69%
99 1.78%
98 1.63%
97 1.52%
* EXCLUDING 2001 MERGER-RELATED
AND RESTRUCTURING CHARGES
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.
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. Gains and
losses related to the effective portion of risk management interest rate swaps
that qualify as hedges are included with the interest income or expense of the
hedged asset when classified in earnings. Net interest income on a fully taxable
equivalent basis (FTE) comprised 72 percent when classified in earnings of net
revenues in 2001, compared to 68 percent in 2000 and 1999.
NET INTEREST INCOME
[BAR GRAPH]
YEAR NET INTEREST INCOME (FTE) NET INTEREST MARGIN (FTE)
01 $2,106 4.61%
00 $2,008 4.63%
99 $1,822 4.64%
98 $1,727 4.72%
97 $1,654 4.68%
24
TABLE 2: ANALYSIS OF NET INTEREST INCOME --
FULLY TAXABLE EQUIVALENT
(DOLLAR AMOUNTS IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------
Commercial loans $26,401 $1,807 6.85% $25,313 $2,244 8.87%
International loans 2,800 207 7.38 2,552 235 9.21
Real estate construction loans 3,090 246 7.95 2,554 257 10.09
Commercial mortgage loans 5,695 435 7.65 5,142 453 8.80
Residential mortgage loans 795 60 7.59 833 64 7.64
Consumer loans 1,479 124 8.39 1,434 131 9.09
Lease financing 1,111 69 6.25 870 54 6.24
Business loan swap income (expense) -- 175 -- -- (57) --
- ---------------------------------------------------------------------------------------------------------------
Total loans (1) 41,371 3,123 7.55 38,698 3,381 8.74
Investment securities (2) 3,909 247 6.37 3,688 261 6.99
Short-term investments 442 27 6.02 978 78 7.97
- ---------------------------------------------------------------------------------------------------------------
Total earning assets 45,722 3,397 7.44 43,364 3,720 8.57
Cash and due from banks 1,835 1,842
Allowance for credit losses (654) (595)
Accrued income and other assets 2,785 2,266
- -------------------------------------- ------- -------
Total assets $49,688 $46,877
====================================== ======= =======
Money market and NOW deposits $ 9,902 249 2.51 $ 9,188 295 3.21
Savings deposits 1,380 19 1.36 1,403 23 1.65
Certificates of deposit (3) 13,149 583 4.44 9,867 570 5.78
Foreign office time deposits (4) 628 37 5.97 814 63 7.75
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 25,059 888 3.54 21,272 951 4.47
Short-term borrowings 2,584 105 4.08 3,323 215 6.48
Medium- and long-term debt (3) 6,198 298 4.80 8,298 546 6.57
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing sources 33,841 1,291 3.82 32,893 1,712 5.20
Noninterest-bearing deposits 10,253 9,068
Accrued expenses and other liabilities 823 703
Preferred stock 166 250
Common shareholders' equity 4,605 3,963
- -------------------------------------- ------- -----
Total liabilities and
shareholders' equity $49,688 $46,877
====================================== ======= =======
Net interest income/rate spread (FTE) $2,106 3.62 $2,008 3.37
====== ======
FTE adjustment (5) $ 4 $ 4
====== ======
Impact of net noninterest-bearing
sources of funds 0.99 1.26
- --------------------------------------------------------------------------------------------------------------
Net interest margin (as a percentage
of average earning assets)(FTE) 4.61% 4.63%
===============================================================================================================
(DOLLAR AMOUNT IN MILLIONS)
- ------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------
AVERAGE AVERAGE
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
Business loan swap income (expense) -- 36 --
- ------------------------------------------------------------------------------
Total loans (1) 35,490 2,861 8.06
Investment securities (2) 3,107 201 6.42
Short-term investments 650 40 6.06
- ------------------------------------------------------------------------------
Total earning assets 39,247 3,102 7.90
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 deposits $ 8,815 241 2.73
Savings deposits 1,541 25 1.59
Certificates of deposit (3) 7,773 379 4.88
Foreign office time deposits (4) 688 48 7.05
- ------------------------------------------------------------------------------
Total interest-bearing deposits 18,817 693 3.68
Short-term borrowings 3,562 183 5.14
Medium- and long-term debt (3) 7,441 404 5.44
- ------------------------------------------------------------------------------
Total interest-bearing sources 29,820 1,280 4.29
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 3.61
======
FTE adjustment (5) $ 5
======
Impact of net noninterest-bearing
sources of funds 1.03
- --------------------------------------------------------------------------------
Net interest margin (as a percentage
of average earning assets)(FTE) 4.64%
================================================================================
(1) Nonaccrual loans are included in average balances reported and are used to
calculate rates.
(2) Average rate based on average historical cost.
(3) Certificates of deposit and medium- and long-term debt averages have been
adjusted to reflect the gain or loss attributable to the risk hedged by risk
management swaps that qualify as a fair value hedge.
(4) Includes substantially all deposits by foreign depositors; deposits are
primarily in excess of $100,000.
(5) The FTE adjustment is computed using a federal income tax rate of 35%.
25
TABLE 3: RATE-VOLUME ANALYSIS -- FULLY TAXABLE
EQUIVALENT
(IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------------
2001/2000 2000/1999
- -------------------------------------------------------------------------------------------------------------------------
INCREASE INCREASE NET INCREASE INCREASE NET
(DECREASE) (DECREASE) INCREASE (DECREASE) (DECREASE) INCREASE
DUE TO RATE DUE TO VOLUME* (DECREASE) DUE TO RATE DUE TO VOLUME* (DECREASE)
- -------------------------------------------------------------------------------------------------------------------------
Interest income (FTE):
Loans:
Commercial loans $(511) $ 74 $(437) $ 267 $ 199 $ 466
International loans (47) 19 (28) 36 (7) 29
Real estate construction loans (54) 43 (11) 15 83 98
Commercial mortgage loans (60) 42 (18) 25 49 74
Residential mortgage loans (1) (3) (4) 2 (8) (6)
Consumer loans (10) 3 (7) (15) (38) (53)
Lease financing -- 15 15 (5) 10 5
Business loan swap
income (expense) 232 -- 232 (93) -- (93)
- -------------------------------------------------------------------------------------------------------------------------
Total loans (451) 193 (258) 232 288 520
Investment securities (27) 13 (14) 19 41 60
Short-term investments (19) (32) (51) 8 30 38
- -------------------------------------------------------------------------------------------------------------------------
Total interest income (FTE) (497) 174 (323) 259 359 618
Interest expense:
Money market and NOW deposits (64) 18 (46) 42 12 54
Savings deposits (4) -- (4) 1 (3) (2)
Certificates of deposit (132) 145 13 70 121 191
Foreign office time deposits (15) (11) (26) 5 10 15
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (215) 152 (63) 118 140 258
Short -term borrowings (80) (30) (110) 48 (16) 32
Medium- and long-term debt (147) (101) (248) 85 57 142
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense (442) 21 (421) 251 181 432
- -------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) $ (55) $ 153 $ 98 $ 8 $ 178 $ 186
=========================================================================================================================
*Rate/volume variances are allocated to variances due to volume.
26
Net interest income (FTE) increased five percent to $2,106 million in 2001.
Contributing to this increase was a five percent increase in average earning
assets and a 13 percent increase in average interest-free sources of funds.
Comerica (the "Corporation") continued to generate growth in business loans in
2001. Business loans averaged $39.1 billion in 2001, an increase of seven
percent from 2000. The increase in interest-free sources of funds was primarily
due to a $1.2 billion increase in average noninterest-bearing deposits and a
$558 million increase in average shareholders' equity.
Net interest income (FTE) expressed as a percentage of average earning assets is
referred to as the net interest margin. For 2001, the net interest margin was
4.61 percent, remaining relatively stable when compared to 4.63 percent in 2000,
despite the rapidly changing interest rate environment in 2000 and 2001. The net
interest margin was negatively impacted by slower growth in lower cost core
deposit balances than that of earning assets, resulting in a greater reliance on
higher cost certificates of deposits in the mix of interest-bearing liabilities.
Core deposits are defined as total deposits excluding brokered and institutional
certificates of deposit and foreign office time deposits. Also contributing to
the decline was a decrease in the benefit to the net interest margin provided by
interest-free sources of funds. This rate-related decrease was partially offset
by the increase in the average balances of interest-free sources of funds
mentioned in the paragraph above.
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, interest rate swap contracts are employed, effectively fixing the
yields on certain variable rate loans and altering the interest rate
characteristics of deposits and debt issued throughout the year. Refer to the
"Interest Rate Risk" section on page 37 of this financial review for additional
information regarding the Corporation's asset and liability management policies.
In 2000, net interest income (FTE) increased 10 percent to $2,008 million.
Contributing to the increase over 1999 was a 10 percent increase in average
earning assets and an increase in interest-free sources of funds. The
Corporation generated 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 interest-free 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. The net interest margin decreased one
basis point to 4.63 percent from 4.64 percent in 1999. The net interest margin
in 2000 was negatively impacted by slower growth in lower cost 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. This was primarily offset by an increase in the
benefit to the net interest margin provided by interest-free sources of funds.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
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 in the loan portfolio, 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.
The Corporation defines business loans as those belonging to the commercial,
international, real estate construction, commercial mortgage and lease financing
categories. The Corporation performs a detailed credit quality review quarterly
on large business loans which have deteriorated below certain levels of credit
risk and allocates a specific portion of the allowance 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, and
trends with respect to past due and nonaccrual amounts. The allocated allowance
was $546 million at December 31, 2001, an increase of $103 million from year-end
2000. Allocations to business loans, as shown in Table 7 on page 33, increased
due to an increase in the specific portion of the allowance required as a result
of the quarterly credit quality review of certain large business loans with
deteriorated credit risk at December 31, 2001.
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. An
unallocated allowance is maintained to capture these probable losses. The
unallocated portion of the allowance reflects management's view that the
allowance should recognize 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
allowance include portfolio exposures to the healthcare, high technology and
energy industries, as well as Latin American transfer risks and the risk
associated with new customer relationships. The unallocated
NET LOANS CHARGED OFF
TO AVERAGE LOANS
(IN PERCENTAGES)
[BAR GRAPH]
01 0.46%
00 0.50%
99 0.31%
98 0.34%
97 0.33%
27
TABLE 4: ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
(DOLLAR AMOUNTS IN MILLIONS)
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Balance at beginning of period $ 608 $ 548 $ 515 $ 475 $ 403
Transfer to loans held for sale -- -- (4) -- --
Loans charged off:
Domestic
Commercial 200 200 101 70 42
Real estate construction 2 -- -- 2 2
Commercial mortgage 3 1 2 1 4
Consumer 5 11 31 65 92
Lease financing 7 1 -- 4 --
International 15 11 10 7 1
- -----------------------------------------------------------------------------------------------
Total loans charged off 232 224 144 149 141
Recoveries:
Domestic
Commercial 35 21 21 21 20
Real estate construction -- -- -- -- 2
Commercial mortgage 1 1 3 9 10
Residential mortgage 1 -- -- -- --
Consumer 5 7 10 13 12
Lease financing 1 -- 1 -- --
- -----------------------------------------------------------------------------------------------
Total recoveries 43 29 35 43 44
- -----------------------------------------------------------------------------------------------
Net loans charged off 189 195 109 106 97
Provision for credit losses 236 255 146 146 169
- -----------------------------------------------------------------------------------------------
Balance at end of period $ 655 $ 608 $ 548 $ 515 $ 475
===============================================================================================
Ratio of allowance for credit losses to total
loans at end of period 1.59% 1.51% 1.51% 1.51% 1.50%
Ratio of net loans charged off during the period
to average loans outstanding during the period 0.46% 0.50% 0.31% 0.34% 0.33%
===============================================================================================
allowance was $109 million at December 31, 2001, a decrease of $56 million from
2000. The unallocated allowance declined as some of the uncertainties in the
portfolios noted above became clearer and resulted in allocations to specific
credits.
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. Unanticipated economic events
could cause changes in the credit characteristics of the portfolio and result in
an unanticipated increase in the allocated allowance. Inclusion of other
portfolio exposures in the unallocated allowance, as well as significant
increases in the current portfolio exposures could increase the amount of the
unallocated allowance. Either of these events, or some combination, may result
in the need for additional provision for credit losses in order to maintain an
allowance that complies with credit risk and accounting policies.
The provision for credit losses was $236 million in 2001, compared to $255
million and $146 million in 2000 and 1999, respectively. Included in the
provision for credit losses in 2001 is a $25 million merger-related charge to
conform the credit policies of Imperial with Comerica. Net charge-offs in 2001
were $189 million, or 0.46 percent of average total loans, compared to $195
million, or 0.50 percent, in 2000 and $109 million, or 0.31 percent, in 1999.
Comparisons were affected by additional charge-offs taken in 2000 to align
charge-off policies of Imperial with the Corporation. An analysis of the changes
in the allowance for credit losses, including charge-offs and recoveries by loan
category, is presented in Table 4. Charge-offs on business loans increased in
part as a result of the slowing economy and its impact on the manufacturing
sector. Consumer charge-offs declined as a result of the sale of $457 million of
loans in the first quarter of 2000.
At December 31, 2001, the allowance for credit losses was $655 million, an
increase of $47 million from year-end 2000. The allowance as a percentage of
total loans was 1.59 percent at December 31, 2001 compared to 1.51 percent at
December 31, 2000. As a percentage of nonperforming assets, the allowance was
105 percent at December 31, 2001, compared to 179 percent at year-end 2000. The
allowance was 3.5 times and 3.1 times annual net charge-offs at December 31,
2001 and 2000, respectively.
28
NONINTEREST INCOME
(IN MILLIONS)
- ----------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------
Service charges on deposit $ 211 $ 189 $ 177
accounts
Fiduciary income 180 181 183
Commercial lending fees 67 61 55
Letter of credit fees 58 52 46
Brokerage fees 44 44 36
Investment advisory revenue, net 12 119 61
Equity in earnings
of unconsolidated subsidiaries 14 21 15
Other noninterest income 203 201 176
- ----------------------------------------------------------
Subtotal 789 868 749
Warrant income 5 30 33
Securities gains 20 16 9
Net gain on sales of businesses 31 50 76
Significant unusual items (41) (7) --
Total noninterest income $804 $957 $867
==========================================================
Noninterest income decreased $153 million, or 16 percent, to $804 million in
2001, compared to $957 million in 2000 and $867 million in 1999. Comparisons to
1999 for certain noninterest income and expense line items were impacted by the
sale of $457 million of consumer loans in the first quarter 2000. Excluding the
effects of gains and losses on securities, warrant income, divestitures and the
net gains on the sales of businesses, deferred distribution cost impairment
charges and other unusual items mentioned below, noninterest income decreased
four percent in 2001.
Service charges on deposit accounts increased $22 million, or 12 percent, in
2001 compared to an increase of $12 million, or seven percent, in 2000. This
increase was attributable to continued strong growth in the sale of new and
existing cash management services to business customers and the positive impact
of lower earnings credit allowances provided to business customers in 2001. The
increase in 2000 was net of the negative impact of higher earnings credit
allowances provided to business customers.
Fiduciary income was relatively flat from 1999 to 2001. Personal and
institutional trust fees are the two major components of this category.
Comparisons to 1999 for fiduciary income were impacted by the sale of Imperial's
trust business in the second quarter of 1999. Fiduciary income is based on
services provided and assets managed. Fluctuations in the market values of the
underlying assets, particularly equity securities, impact fiduciary income.
NONINTEREST INCOME
(IN MILLIONS)
[BAR GRAPH]
01 $804
00 $957
99 $867
98 $667
97 $609
Commercial lending fees increased $6 million, or 10 percent, in 2001 compared to
an increase of $6 million, or 11 percent, in 2000. Continued commercial loan
growth contributed to increases in loan commitment fees and loan syndication and
participation agent fees, the two major components of this category.
Letter of credit fees increased $6 million, or 11 percent, in 2001 compared to
an increase of $6 million, or 13 percent, in 2000. 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.
Brokerage fees remained flat at $44 million in 2001, compared to an increase of
$8 million, or 23 percent in 2000. Brokerage fees include commissions from
retail broker transactions and mutual fund sales.
Investment advisory income, which includes revenue generated by the
Corporation's Munder Capital Management subsidiary ("Munder"), decreased $107
million, or 90 percent, in 2001, compared to an increase of $58 million, or 94
percent, in 2000. The 2001 decline reflects deferred distribution cost
impairment charges totaling $40 million discussed more fully below and a $74
million decrease in investment advisory revenue, as the market values of
technology-related stocks continued declining from record highs during the first
quarter of 2000. The 2000 increase, excluding the $7 million deferred
distribution cost impairment charge discussed below, was primarily due to higher
investment advisory fees, which increased $65 million, or 105 percent, over
1999. Stock market performance, including the significant decline in the
technology sector, resulted in a continued decrease in assets under management
at Munder to $35 billion at December 31, 2001, from $40 billion at December 31,
2000, and $49 billion at year-end 1999.
The Corporation recorded deferred distribution cost impairment charges of $40
million in 2001 and $7 million in 2000. These charges resulted from a
reassessment of the recoverability of unamortized commission costs paid to
brokers for selling certain mutual fund shares, principally shares in the
Corporation's Munder subsidiary's NetNet, International NetNet and Future
Technology funds. Net asset values in these technology funds suffered
significantly as market conditions weakened, declining 26 percent in the first
quarter 2001 and over 45 percent during the third quarter 2001; the quarters in
2001 when impairment was recorded. These declines prompted a revaluation of
expected future cash flows from the funds, which are based on a percentage of
assets under management and early redemption fees over a prescribed number of
years. Net remaining deferred distribution costs at December 31, 2001 were $33
million. The changes in deferred distribution costs are reflected in the table
below. Given net asset values at December 31, 2001, it would take a decline in
total assets under
DEFERRED DISTRIBUTION COSTS
(IN MILLIONS)
- -------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- -------------------------------------------------------------------
Balances at beginning of period $ 86 $ 21 $--*
Commissions paid to brokers 11 118 21
Redemption fees received (10) (12) --
Amortization of costs (14) (34) --
Impairment charge (40) (7) --
- -------------------------------------------------------------------
Balances at end of period $ 33 $ 86 $ 21
===================================================================
* Deferred distribution costs prior to December 1999 were sold to a third party.
29
management at Munder of approximately 30 percent to trigger further impairment,
which at that level would be approximately $4 million. Each additional five
percent decline results in a further impairment of $2 million.
Equity in earnings of unconsolidated subsidiaries decreased $57 million in 2001,
after remaining relatively flat in 2000. Excluding the impact of divestitures
and significant unusual items from 2001 and 2000, equity in earnings of
unconsolidated subsidiaries decreased $7 million, or 32 percent. Significant
unusual items in equity in earnings of unconsolidated subsidiaries in 2001
included a $57 million charge related to long-term incentive plans at a United
Kingdom subsidiary, Framlington (a London, England based investment manager), 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. In 2000, significant
unusual items in equity in earnings of unconsolidated subsidiaries included a $7
million write-down of low-income housing investments which are being accounted
for under the equity method.
Other noninterest income increased $18 million, or nine percent, in 2001
compared to an increase of $25 million, or 14 percent, in 2000. Significant
unusual items in other noninterest income in 2001 included $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 risk-reduction criteria and a $5 million gain from the
demutualization of an insurance carrier. In 2000, significant unusual items in
other noninterest income included a $6 million gain from the demutualization of
an insurance carrier, offset by a $6 million write-down of low-income housing
investments which are being accounted for under the cost method. Comparisons of
other noninterest income with prior years were impacted by the divestiture of
Imperial's merchant bankcard business in the second quarter of 2001. The gain
that resulted from the sale of Imperial's merchant bankcard business was
included in merger-related and restructuring charges as the sale was required by
an existing Comerica alliance agreement. Excluding the significant unusual items
from 2001 and 2000 noted above, and the impact of divestitures, which resulted
in a year over year decrease in other noninterest income of $14 million,
noninterest income increased nine percent in 2001. The adoption of Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," on January 1, 2001, resulted in a
transition adjustment that was insignificant. Hedge ineffectiveness on cash flow
hedges of variable rate loans was not material. Refer to Note 1 and 20 of the
financial statements for a further discussion of hedge ineffectiveness.
Warrant income was $5 million in 2001, $30 million in 2000, and $33 million in
1999. At December 31, 2001 the Corporation owned over 900 warrant positions
compared to over 800 warrant positions at December 31, 2000. Unrealized gains
for both periods were insignificant. The decrease in warrant income resulted
from a reduction in the number of warrants that became marketable in 2001 as a
result of a decrease in public offerings.
The Corporation recognized a net gain related to its investment securities
portfolio of $20 million, $16 million, and $9 million in 2001, 2000 and 1999,
respectively.
In 2001, net gain on the sales of businesses included a $21 million gain on the
sale of Comerica's ownership in an automated teller machine (ATM) network
provider and an $8 million gain from the sale of substantially all of the assets
of a deposit-servicing subsidiary. In 2000, the sale of consumer loans resulted
in a gain of $48 million. The net gain on sales of businesses in 1999 is
principally comprised of a gain of $44 million from an initial public offering
of the Corporation's majority-owned subsidiary, Official Payments Corporation
("OPAY") (Nasdaq: OPAY), a gain of $21 million on the sale of ownership in an
ATM network provider and a $9 million gain on the sale of certain trust
businesses.
NONINTEREST EXPENSES
(IN MILLIONS)
- -------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- -------------------------------------------------------------------------
Salaries $ 707 $ 748 $ 679
Employee benefits 102 103 99
- -------------------------------------------------------------------------
Total salaries and employee benefits 809 851 778
Net occupancy expense 115 110 104
Equipment expense 70 76 73
Outside processing fee expense 61 59 60
Customer services 41 37 40
Other 316 327 299
- -------------------------------------------------------------------------
Subtotal 1,412 1,460 1,354
Merger-related and restructuring 152 -- --
charges
Other significant unusual items (5) 24 5
- -------------------------------------------------------------------------
Total noninterest expenses $1,559 $1,484 $1,359
=========================================================================
Noninterest expenses increased five percent to $1,559 million in 2001, compared
to $1,484 million in 2000 and $1,359 million in 1999. Excluding the effect of
divestitures and the significant unusual items discussed below, noninterest
expenses decreased two percent in 2001.
Total salaries expense decreased $41 million, or five percent, in 2001 versus an
increase of $69 million, or 10 percent, in 2000. The decrease in 2001 was
primarily due to lower levels of business unit incentives, which are tied to
revenue growth. The increase in 2000 was primarily due to higher levels of
incentives, which are tied to revenue growth and investments in staff in growth
businesses.
Employee benefits expense decreased $1 million, or one percent in 2001 compared
to a benefit level increase of $4 million, or four percent, in 2000. The
decrease in 2001 was primarily due to increased earnings on company owned life
insurance, partially offset by an increase in employee healthcare costs. The
increase between 2000 and 1999 was primarily attributable to higher payroll
taxes offset by lower levels of pension expense due to favorable changes in
defined benefit plan assumptions as well as a reduction in long-term disability
expense.
Net occupancy and equipment expenses, on a combined basis, decreased $1 million,
or less than one percent, to $185 million in 2001, compared to the increase of
$9 million, or five percent, in 2000.
Outside processing fees increased to $61 million in 2001, from $59 million in
2000 and $60 million in 1999. The impact of the divestiture of Imperial's
merchant bankcard business in the second quarter of 2001 and the integration of
Imperial's systems partially offset growth in this expense in 2001.
Customer service fees increased 11 percent to $41 million in 2001, from $37
million in 2000 and $40 million in 1999. Customer service fees represent
expenses paid on behalf of customers to attract and retain certain
noninterest-bearing deposit balances. The increase in 2001 resulted from larger
balances in these noninterest-bearing deposits.
30
NONINTEREST EXPENSES
(IN MILLIONS)
[ ] EXCLUDING 2001 MERGER-RELATED AND
RESTRUCTURING CHARGES
01 $1,407, $1,559
00 $1,484
99 $1,359
98 $1,237
97 $1,177
The Corporation recorded merger-related and restructuring charges of $152
million in 2001. The restructuring charges included $148 million related to the
first quarter 2001 acquisition of Imperial and $4 million at the Corporation's
OPAY subsidiary. The OPAY restructuring charge is shown net of the portion of
the charge attributable to the minority shareholders in OPAY. In addition to the
above, the Corporation recorded a $25 million merger-related charge in 2001 that
is included in the provision for credit losses to conform the credit policies of
Imperial with Comerica. The integration with Imperial was completed in fourth
quarter of 2001 and all merger-related and restructuring charges have been
expensed. The Corporation expects to realize annual noninterest expense savings
totaling $60 million from the integration, the full effect of which will begin
to be realized in the first quarter of 2002. The OPAY restructuring is expected
to significantly reduce the company's operating expenses and use of cash by
incorporating newly developed technology; reduce marketing, administrative and
communications costs; and reduce workforce. The restructuring is expected to
result in a decrease in OPAY's operating expenses of $9 million dollars
annually, beginning in 2002. For additional information on both restructuring
charges, including their components, see Note 17 to the financial statements on
page 56.
Other noninterest expenses decreased $40 million, or 11 percent, in 2001
compared to a $47 million increase, or 16 percent in 2000. Significant unusual
items in other noninterest expenses in 2001 included $5 million in minority
interest income in 2001 due to recording Munder's minority interest holders'
share of the Framlington long-term incentive plans charge discussed in
noninterest income. Minority interest income represented the portion of losses
on consolidated subsidiaries that was allocated to minority shareholders.
Significant unusual items in 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 marketing costs to launch a new closed-end fund.
Excluding divestitures and significant unusual items described above, other
noninterest expenses decreased two percent in 2001.
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 decreased to 48.70 percent (excluding
merger-related and restructuring charges) in 2001, compared to 50.35 percent in
2000 and 50.70 percent in 1999.
INCOME TAXES
The provision for income taxes was $401 million in 2001, compared to $431
million in 2000 and $420 million in 1999. The effective tax rate, computed by
dividing the provision for income taxes by income before taxes, was 36.1 percent
in 2001 and 35.3 percent in 2000 and 35.6 percent in 1999. Excluding the
merger-related and restructuring charges, which included an adjustment of
Imperial's tax liabilities and was not fully deductible, the effective tax rate
was 34.6 percent. The rate in 2001 was affected by a $7 million tax benefit
related to the Imperial Bancorp acquisition that was immediately recognizable,
but only after Imperial became part of Comerica.
STRATEGIC LINES OF BUSINESS
The Corporation's operations are strategically aligned into three major lines of
business: the Business Bank, the Individual Bank and the Investment Bank. These
lines of business were 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 or the Finance Division. Note 24 on page
63 describes how these segments were identified and presents financial results
of these businesses for the years ended December 31, 2001, 2000 and 1999.
The Business Bank's net income increased $71 million, or 16 percent, in 2001.
Net interest income increased $58 million, the provision for credit losses
decreased $44 million and noninterest expenses decreased $30 million; offset by
a $24 million decrease in noninterest income. The increase in net interest
income was primarily due to loan growth, offset by a decrease in the spread
between earning assets and the related funding costs. Loan growth of 6.5 percent
was primarily driven by significant increases in middle-market lending and
commercial real estate loans. Smaller increases in national dealer services,
international, and asset based/specialty lending were offset by a decline in
loans to large business customers. The decline in the provision for credit
losses was affected by additional charge-offs in 2000 to align Imperial's
charge-off policy with the Corporation's. The decrease in noninterest income was
primarily due to lower warrant income, partially offset by an $8 million gain
from the sale of substantially all of the assets of a deposit-servicing
subsidiary. The decrease in noninterest expenses was primarily due to
efficiencies realized from the Imperial merger.
Individual Bank net income decreased $38 million, or 12 percent, in 2001, a
substantial decrease from 2000. Comparisons were affected by the sale of $457
million of consumer loans in early 2000. Net interest income decreased $13
million, or two percent, principally from a narrowing of spreads in certain
deposit categories. The provision for credit losses increased $19 million,
primarily from increases in the small business, indirect lending, revolving
credit and private banking sectors, as the economy weakened loan quality.
Noninterest income decreased $28 million, or eight percent, primarily due to the
$48 million gain in 2000 from the sale of consumer loans. Partially offsetting
this was a $9 million increase in service charges on deposit accounts.
Noninterest expenses remained relatively flat. Excluding the $48 million gain
and the impact of the sale of loans in 2000, total revenues (FTE) in 2001 would
have increased $7 million, or one percent over 2000, while net income in 2001
would have decreased $7 million, or two percent. Return on average assets and
return on average common equity in 2001 would have been 1.56 percent and 35.90
percent, respectively.
31
TABLE 5: ANALYSIS OF INVESTMENT SECURITIES AND LOANS
(IN MILLIONS)
- -------------------------------------------------------------------------------------------------------
DECEMBER 31 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Investment securities available for sale
U.S. government and agency securities $ 3,920 $ 3,135 $ 2,950 $ 2,882 $ 3,892
State and municipal securities 32 46 73 115 170
Other securities 339 710 760 410 613
- -------------------------------------------------------------------------------------------------------
Total investment securities available for sale $ 4,291 $ 3,891 $ 3,783 $ 3,407 $ 4,675
=======================================================================================================
Commercial loans $25,176 $26,009 $23,629 $22,097 $18,152
International loans
Government and official institutions 9 2 10 12 6
Banks and other financial institutions 427 402 391 433 339
Commercial and industrial 2,579 2,167 2,172 2,268 1,740
- -------------------------------------------------------------------------------------------------------
Total international loans 3,015 2,571 2,573 2,713 2,085
Real estate construction loans 3,258 2,915 2,167 1,339 1,116
Commercial mortgage loans 6,267 5,361 4,873 4,322 3,867
Residential mortgage loans 779 808 871 1,038 1,565
Consumer loans 1,484 1,477 1,389 1,897 4,379
Lease financing 1,217 1,029 803 647 517
- -------------------------------------------------------------------------------------------------------
Total loans $41,196 $40,170 $36,305 $34,053 $31,681
=======================================================================================================
The net loss for the Investment Bank was $70 million in 2001, a decrease of $82
million from net income of $12 million in 2000. Noninterest income declined $171
million, or 64 percent, from last year. The 2001 decline reflected deferred
distribution cost impairment charges totaling $40 million; a $74 million
decrease in investment advisory revenue, as the market values of
technology-related stocks continued declining from their record highs during the
first quarter of 2000; and a $57 million charge related to long-term incentive
plans at Framlington. Noninterest expenses decreased $36 million from lower
revenue-related incentives for investment advisory fees and lower advertising
costs.
The Finance Division's net income increased $58 million in 2001, primarily due
to a $55 million increase in net interest income and a $48 million increase in
noninterest income. Net interest income in the Finance Division increased due to
improved spreads on securities from lower average funding costs in 2001, as well
as centralization of interest risk management for Imperial into Finance in 2001.
The increase in noninterest income was primarily due to $19 million in gains
recorded in 2001, the majority of which resulted from the purchase and
subsequent sale of interest rate derivatives contracts which failed to meet the
Corporation's risk-reduction criteria, and a $9 million increase in gains from
the sale of securities.
Net income for the Other category decreased $90 million in 2001. The 2001
decrease was primarily a result of the $148 million merger-related and
restructuring charges related to the first quarter 2001 acquisition of Imperial
included in noninterest expenses and the $25 million merger-related charge to
conform the credit policies of Imperial with Comerica recorded in the provision
for credit losses. Offsetting these charges was a $21 million gain from the sale
of Comerica's ownership in an ATM network provider recorded in noninterest
income in 2001.
BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
Total assets were $50.7 billion at year-end 2001, an increase of $1.2 billion
from $49.5 billion at December 31, 2000. On an average basis, total assets
increased to $49.7 billion in 2001 from $46.9 billion in 2000. This increase was
funded primarily by deposits, which rose on average $5.0 billion, partially
offset by a reduction of medium- and long-term debt, which declined on average
$2.1 billion.
EARNING ASSETS
Total earning assets were $46.6 billion at December 31, 2001, representing a
$0.8 billion increase from $45.8 billion at year-end 2000. On an average basis,
total earning assets were $45.7 billion in 2001, compared to $43.4 billion in
2000. As a result of the weakening economy, business loan growth slowed in 2001,
increasing on an average basis by $2.7 billion, or seven percent, from 2000.
Certain business loan categories continued to show significant growth in 2001.
Average commercial loans increased $1.1 billion, or four percent, average
commercial mortgage loans increased $553 million, or 11 percent and real estate
construction increased $536 million, or 21 percent. These increases are
attributable to successful execution of the Corporation's core lending strategy
and strong customer relationships.
International loans averaged $2.8 billion in 2001, an increase of $248 million,
or 10 percent, from 2000. International loan growth in 2001 was primarily in
North America. 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 $858 million, or 1.69 percent of total assets, was the only
country with exposure exceeding 1.00 percent of total assets at December 31,
2001. Additional information on the Corporation's Mexican cross-border risk is
provided in Table 8 on page 33.
32
TABLE 6: LOAN MATURITIES AND INTEREST RATE SENSITIVITY
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 2001 ONE YEAR* FIVE YEARS FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------
Commercial loans $19,411 $4,444 $1,321 $25,176
Commercial mortgage loans 2,132 2,887 1,248 6,267
International loans 2,666 326 23 3,015
Real estate construction loans 2,507 623 128 3,258
- ----------------------------------------------------------------------------------------------------------
Total $26,716 $8,280 $2,720 $37,716
==========================================================================================================
Loans maturing after one year
Predetermined interest rates $3,852 $2,442
Floating interest rates 4,428 278
- ----------------------------------------------------------------------------------------------------------
Total $8,280 $2,720
==========================================================================================================
</Table>
* Includes demand loans, loans having no stated repayment schedule or maturity
and overdrafts.
TABLE 7: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(DOLLAR AMOUNTS IN MILLIONS)
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- -------------------------------------------------------------------------------------------------------------------------------
Commercial $384 61% $290 65% $226 65% $182 65% $117 57%
Real estate construction 17 8 11 7 12 6 9 4 20 4
Commercial mortgage 61 15 59 13 35 14 21 13 18 12
Residential mortgage -- 2 -- 2 -- 2 -- 3 1 5
Consumer 11 4 8 4 18 4 48 5 116 14
Lease financing 9 3 5 3 8 2 6 2 1 2
International 64 7 70 6 35 7 17 8 5 6
Unallocated 109 165 214 232 197
- ------------------------------------------------------------------------------------------------------------------------------
Total $655 100% $608 100% $548 100% $515 100% $475 100%
==============================================================================================================================
</Table>
Amount - allocated allowance
%- loans outstanding as a percent of total loans
TABLE 8: MEXICAN CROSS-BORDER RISK
(IN MILLIONS)
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENTS BANKS AND
AND OFFICIAL OTHER FINANCIAL COMMERCIAL
DECEMBER 31 INSTITUTIONS INSTITUTIONS AND INDUSTRIAL TOTAL
- -------------------------------------------------------------------------------------------------------------------
2001 $ 6 $ 54 $798 $858
2000 9 114 503 626
1999 15 150 426 591
==================================================================================================================
33
TABLE 9: ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO--FULLY TAXABLE EQUIVALENT
(DOLLAR AMOUNTS IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------------------
MATURITY+
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 WITHIN 1 YEAR 1 - 5 YEARS 5 - 10 YEARS AFTER 10 YEARS TOTAL WEIGHTED
- ---------------------------------------------------------------------------------------------------------------------- AVERAGE
MATURITY
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD YRS./MOS.
- ----------------------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 69 4.86% $-- --% $ -- --% $ -- --% $ 69 4.86% 0/5
U.S. government
and agency 92 6.72 385 6.21 693 6.16 2,681 6.26 3,851 6.25 18/7
State and municipal
securities 5 6.15 20 6.35 6 6.17 1 6.39 32 6.28 3/2
Other bonds, notes
and debentures 25 5.34 169 6.58 28 8.20 27 4.89 249 6.45 3/9
Other investments* -- -- -- -- -- -- 90 -- 90 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available for sale $191 5.86% $574 6.32% $727 6.24% $2,799 6.25% $4,291 6.24% 17/3
===============================================================================================================================
* Balances are excluded in the calculation of total yield.
+ Based on final contractual maturity.
Average residential mortgage loans decreased $38 million, or five percent, from
2000, reflecting management's decision to sell the majority of mortgage
originations. Growth in home equity lending generated a $45 million, or three
percent, increase in consumer loans.
Average investment securities rose to $3.9 billion in 2001, compared to $3.7
billion in 2000. Average U.S. government and agency securities increased $399
million, while average state and municipal securities decreased $21 million.
Increases in U.S. government and agency securities resulted from interest risk
and balance sheet management decisions 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 decreased $157 million in 2001. Other securities at December 31,
2001, consist primarily of collateralized mortgage obligations (CMOs), Brady
bonds and Eurobonds.
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 Small Business Administration loans
that have been originated and which management has decided to sell. Loans held
for sale in 2000 also included consumer loans which were sold during the year.
Average short-term investments decreased to $442 million during 2001, from $978
million in 2000, due to the sale of consumer loans and a reduction in federal
funds sold.
DEPOSITS AND BORROWED FUNDS
Average deposits were $35.3 billion during 2001, an increase of $5.0 billion, or
16 percent, from 2000. Average noninterest-bearing deposits grew $1.2 billion,
or 13 percent, from 2000, from increased title and escrow company deposits,
which benefit from high home mortgage financing and refinancing activity.
Average interest-bearing transaction, savings and money market deposits
increased seven percent during 2001, to $11.3 billion. Average certificates of
deposit increased $3.3 billion, or 33 percent, from 2000. This increase was
primarily from certificates of deposits issued in denominations in excess of
$100,000 through brokers or to institutional investors. Average foreign office
time deposits decreased $186 million from the 2000 level, due to the use of
other more attractive sources of funding.
Average short-term borrowings decreased $739 million, as deposit growth 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 Corporation's and subsidiary banks'
total capital ratio at a level that qualifies for the lowest FDIC risk-based
insurance premium. Medium- and long-term debt decreased on an average basis by
$2.1 billion as deposit growth and slowing loan growth reduced the need for
these funding sources.
34
In July 2001, Comerica issued $350 million of 7.60% Trust Preferred Securities
which are classified in medium- and long-term debt. The securities pay
cumulative dividends each quarter beginning October 1, 2001, and are callable
any time after July 30, 2006. These trust preferred securities qualify as tier
one capital for regulatory purposes. The Corporation used the proceeds from the
issuance to redeem and retire in total the $250 million of preferred stock that
was outstanding, and for other general corporate purposes.
Additionally, in December 2001, the Corporation, issued approximately $1 billion
of medium-term debt as part of a privately placed secured financing transaction.
As part of the transaction, the Corporation used a portfolio of approximately
$1.2 billion of auto dealer floor plan loans as collateral. The
overcollateralization of the issuance provided for a preferred credit rating
status. The debt issuance provided an additional source of funding for the
Corporation, and the proceeds were used to replace other sources of funding and
for general corporate purposes. Further information on medium-and long-term debt
is included in Note 10 on page 51 to the consolidated financial statements.
CAPITAL
Shareholders' equity was $4.8 billion at December 31, 2001, up $307 million, or
seven percent from December 31, 2000. This increase was primarily due to $385
million of retained earnings, $80 million of common stock issued for employee
stock plans and $214 million in other comprehensive income, offset by a
reduction in equity of $121 million from repurchasing 2,198,700 shares of common
stock. The Corporation has approximately 8.8 million additional shares
authorized for repurchase by the Board of Directors' current resolutions.
Shareholders' equity was also reduced in 2001 by the retirement of $250 million
of preferred stock discussed above. Further information on the change in other
comprehensive income is provided in Note 12 to the consolidated financial
statements on page 44.
The Corporation declared common dividends totaling $313 million, or $1.76 per
share, on net income applicable to common stock of $698 million. The dividend
payout ratio, excluding merger-related and restructuring charges and calculated
on a per share basis, was 38 percent in 2001 versus 37 percent in 2000 and 35
percent in 1999.
At December 31, 2001, 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 19 to the consolidated financial
statements on page 57 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,
market and operations. 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 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 or customer, selling participations to third parties,
syndicating loans and requiring collateral.
NONPERFORMING ASSETS
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.
NONPERFORMING ASSETS TO LOANS AND OTHER REAL ESTATE
(IN PERCENTAGES)
[BAR GRAPH]
1.52% 01
0.84% 00
0.59% 99
0.48% 98
0.44% 97
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. Refer to Note 4 of the financial
statements on page 49 for a further discussion of impaired loans.
Nonperforming assets as a percent of total loans and other real estate were 1.52
percent and 0.84 percent at year-end 2001 and 2000, respectively.
35
TABLE 10: SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
(DOLLAR AMOUNTS IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Nonperforming assets
Nonaccrual loans
Commercial loans $467 $233 $116 $ 97 $ 62
International loans 109 69 55 20 1
Real estate construction loans 10 5 -- 2 5
Commercial mortgage loans 18 17 10 7 11
Residential mortgage loans -- -- 1 3 4
Consumer loans 5 3 5 3 5
Lease financing 8 4 6 7 1
- -------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 617 331 193 139 89
Reduced-rate loans -- 2 9 18 32
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 617 333 202 157 121
Other real estate 10 6 11 7 20
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $627 $339 $213 $164 $141
=========================================================================================================================
Nonperforming loans as a percentage of total loans 1.50% 0.83% 0.56% 0.46% 0.38%
Nonperforming assets as a percentage of total loans
and other real estate 1.52% 0.84% 0.59% 0.48% 0.44%
Allowance for credit losses as a percentage of total
nonperforming assets 105% 179% 257% 314% 337%
Loans past due 90 days or more and still accruing $ 44 $ 36 $ 48 $ 44 $ 56
=========================================================================================================================
Nonaccrual loans at December 31, 2001, increased 86 percent to $617 million from
$331 million at year-end 2000. Other real estate owned (ORE) increased $4
million. Loans past due 90 days or more and still on accrual status increased $8
million from year-end 2000. Table 10 provides additional detail on nonperforming
assets.
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.
NONACCRUAL LOANS
(DOLLAR AMOUNTS IN MILLIONS)
- ------------------------------------------------------------------------------
DECEMBER 31 2001 2000
- ------------------------------------------------------------------------------
Carrying value $617 $331
Contractual value 826 499
Carrying value as a percentage of contractual value 75% 66%
==============================================================================
CONCENTRATION OF CREDIT
Loans to companies and individuals involved with the automotive industry
represented the largest significant industry concentration at December 31, 2001.
These loans totaled $6.1 billion, or 15 percent, of total loans at December 31,
2001, compared to $5.7 billion, or 14 percent, at December 31, 2000. Included in
these totals are floor plan loans to automotive dealers of $1.9 billion and $2.1
billion at December 31, 2001 and 2000, respectively. All other industry
concentrations individually represented less than 10 percent of total loans at
year-end 2001.
Nonperforming assets to companies and individuals involved with the automotive
industry comprised approximately seven percent of total nonperforming assets at
December 31, 2001. The largest automotive industry loan on nonaccrual status at
December 31, 2001, was $11 million. The largest automotive industry-related
charge-off during the year was $6 million. The Corporation has successfully
operated in the Michigan economy despite a loan concentration and several
downturns in the auto industry.
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 1,680 loans, of which 42 percent had balances less than $1 million
at December 31, 2001. The largest real estate construction loan had a balance of
approximately $29 million.
Total commercial mortgage loans totaled $6.3 billion at December 31, 2001. This
portfolio had 7,715 loans, of which 81 percent had balances of less than $1
million at December 31, 2001. The largest loan in this portfolio had a balance
of approximately $30 million. Of the $9.5 billion in total commercial mortgage
and real estate construction loans at December 31, 2001, 45 percent involved
owner-occupied properties. Additionally, the Corporation's policy requires a 75
percent or less loan-to-value ratio for all commercial mortgage and real estate
construction loans.
The geographic distribution of real estate construction and commercial mortgage
loan borrowers is an important factor in evaluating credit risk. The following
table indicates, by address of borrower, the diversification of the
Corporation's real estate construction and commercial mortgage loan portfolio.
36
GEOGRAPHIC DISTRIBUTION OF BORROWERS
(IN MILLIONS)
- ------------------------------------------------------------
REAL ESTATE COMMERCIAL
DECEMBER 31, 2001 CONSTRUCTION MORTGAGE
- ------------------------------------------------------------
Michigan $1,364 $3,787
California 1,139 1,107
Texas 445 591
Florida 166 243
Other 144 539
- -----------------------------------------------------------
Total $3,258 $6,267
===========================================================
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 types of financial instruments to manage the extent to which net
interest income may be affected by fluctuations in interest rates. The Board of
Directors, upon recommendations of the Risk Asset Quality Review Committee,
establishes policies and risk limits pertaining to asset and liability
management activities. The Board, with the assistance of the Risk Asset Quality
Review Committee and the Asset and Liability Policy Committee (ALPC), monitors
compliance with these policies. The ALPC meets regularly to discuss and review
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, using simulation analysis as its principal
risk management technique. 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, at year-end 2001,
for a 200 basis-point decline in short-term interest rates identified
approximately $80 million, or four percent, of net interest income at risk
during 2002. If short-term interest rates rise 200 basis points, net interest
income would be enhanced during 2002 by approximately $39 million, or two
percent. Corresponding measures of risk exposure for year end 2000 were $51
million of net interest income at risk for a 200 basis-point decline in rates
and a $6 million enhancement of net interest income for a 200 basis-point rise
in rates. 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 rudimentary
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 11 on page 38 shows the interest sensitivity gap as of year-end 2001 and
2000. 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 $800 million of rate sensitivity to the 2001 year-end gap.
In addition, the schedule includes an adjustment for the price elasticity on
certain core deposits.
Using this methodology, the Corporation was in a liability sensitive position
throughout most of 2001. The Corporation had a one-year liability sensitive gap
of $1,502 million, or three percent of earning assets, as of December 31, 2001.
This compares to a $1,370 million asset sensitive gap, or three percent of
earning assets, at December 31, 2000. Management anticipates growth in asset
sensitivity throughout 2002, which will reduce and/or eliminate the current
liability sensitive position.
The Corporation utilizes investment securities and derivative instruments,
predominantly interest rate swaps, as asset and liability management tools with
the overall objective of mitigating the adverse impact to net interest income
from changes in interest rates. These swaps primarily 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.
37
TABLE 11: SCHEDULE OF RATE SENSITIVE ASSETS AND
LIABILITIES
(DOLLAR AMOUNTS IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 DECEMBER 31, 2000
INTEREST SENSITIVITY PERIOD INTEREST SENSITIVITY PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
WITHIN OVER WITHIN OVER
ONE YEAR ONE YEAR TOTAL ONE YEAR ONE YEAR TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ -- $ 1,925 $ 1,925 $ -- $ 1,931 $ 1,931
Short-term investments 1,072 7 1,079 1,727 3 1,730
Investment securities 1,343 2,948 4,291 1,863 2,028 3,891
Commercial loans (including lease financing) 24,104 2,289 26,393 24,947 2,091 27,038
International loans 2,889 126 3,015 2,440 131 2,571
Real estate related loans 7,044 3,260 10,304 6,217 2,867 9,084
Consumer loans 1,018 466 1,484 989 488 1,477
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 35,055 6,141 41,196 34,593 5,577 40,170
Other assets 1,275 966 2,241 888 924 1,812
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 38,745 $ 11,987 $ 50,732 $ 39,071 $ 10,463 $ 49,534
==================================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing deposits $ 5,596 $ 7,000 $ 12,596 $ 3,772 $ 6,417 $ 10,189
Savings deposits 414 1,298 1,712 -- 1,340 1,340
Money market and NOW deposits 8,214 2,208 10,422 7,618 2,303 9,921
Certificates of deposit 11,430 882 12,312 10,698 1,282 11,980
Foreign office time deposits 528 -- 528 424 -- 424
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 26,182 11,388 37,570 22,512 11,342 33,854
Short-term borrowings 1,986 -- 1,986 2,093 -- 2,093
Medium- and long-term debt 3,598 1,905 5,503 6,546 1,713 8,259
Other liabilities 450 416 866 329 499 828
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 32,216 13,709 45,925 31,480 13,554 45,034
Shareholders' equity 226 4,581 4,807 10 4,490 4,500
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 32,442 $ 18,290 $ 50,732 $ 31,490 $ 18,044 $ 49,534
==================================================================================================================================
Sensitivity impact of interest rate swaps $ (9,654) $ 9,654 -- $ (7,946) $ 7,946 --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (3,351) $ 3,351 -- $ (365) $ 365 --
Gap as a percentage of earning assets (7)% 7% -- (1)% 1% --
Sensitivity impact from elasticity
adjustments (1) 1,849 (1,849) -- 1,735 (1,735) --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap with elasticity
adjustments(1) $ (1,502) $ 1,502 -- $ 1,370 $ (1,370) --
Gap as a percentage of earning assets (3)% 3% -- 3% (3)% --
==================================================================================================================================
(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.
38
TABLE 12: REMAINING EXPECTED MATURITY
OF RISK MANAGEMENT INTEREST RATE SWAPS
(DOLLAR AMOUNTS IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------------
2007- DEC. 31,
2002 2003 2004 2005 2006 2026 Total 2000
- -----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET DESIGNATION:
Generic receive fixed swaps $ 2,919 $4,750 $2,000 $ 900 $ 500 $ -- $ 11,069 $ 9,277
Weighted average: (1)
Receive rate 7.03% 8.31% 7.57% 7.76% 5.83% --% 7.68% 7.55%
Pay rate 3.65% 4.09% 4.76% 4.77% 2.38% --% 4.07% 8.14%
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE ASSET DESIGNATION:
Pay fixed swaps
Generic $ 34 $ -- $ -- $ -- $ -- $ -- $ 34 $ 98
Amortizing 1 -- -- -- -- -- 1 1
Weighted average: (2)
Receive rate 2.22% --% --% --% --% --% 2.22% 6.70%
Pay rate 2.56% --% --% --% --% --% 2.56% 6.79%
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE DEPOSIT DESIGNATION:
Generic receive fixed swaps $ 1,743 $ -- $ -- $ -- $ -- $ -- $ 1,743 $ 1,378
Weighted average: (1)
Receive rate 4.87% --% --% --% --% --% 4.87% 7.19%
Pay rate 2.00% --% --% --% --% --% 2.00% 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 2.37% --% --% 2.01% --% 2.82% 2.66% 6.76%
Floating/floating swaps $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 125
Weighted average:
Receive rate --% --% --% --% --% --% --% 6.72%
Pay rate --% --% --% --% --% --% --% 6.59%
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 4,847 $4,750 $2,000 $1,150 $ 500 $1,250 $ 14,497 $12,594
===================================================================================================================================
(1) Variable rates paid on receive fixed swaps are based on one-month and
three-month LIBOR or one-month Canadian Deposit Offer Rate (CDOR) effective
December 31, 2001. Variable rates received on pay fixed swaps are based on
prime.
(2) Variable rate received is based on one-month CDOR at December 31, 2001.
39
RISK MANAGEMENT DERIVATIVE FINANCIAL
INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
RISK MANAGEMENT NOTIONAL ACTIVITY
(IN MILLIONS)
- -----------------------------------------------------------------------
INTEREST FOREIGN
RATE EXCHANGE
CONTRACTS CONTRACTS TOTALS
- -----------------------------------------------------------------------
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)
- -----------------------------------------------------------------------
Balances at December 31, 2000 18,652 608 19,260
Additions 8,255 13,797 22,052
Maturities/amortizations (6,330) (13,585) (19,915)
Terminations (6,080) -- (6,080)
- -----------------------------------------------------------------------
Balances at December 31, 2001 $ 14,497 $ 820 $ 15,317
=======================================================================
The notional amount of risk management interest rate swaps totaled $14.5 billion
at December 31, 2001, and $12.6 billion at December 31, 2000. The fair value of
risk management interest rate swaps was an asset of $571 million at December 31,
2001, compared to an asset of $173 million at December 31, 2000. For the year
ended December 31, 2001, risk management interest rate swaps generated $238
million of net interest income, compared to $48 million of net interest expense
for the year ended December 31, 2000.
Table 12 on page 39 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, 2001. Swaps have been grouped by the asset and liability
designation.
In addition to interest rate swaps, the Corporation employs various other types
of 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, 2001 and 2000, were $820 million and $6.7 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 at December 31,
2000. These interest rate floor contracts were terminated in the first quarter
of 2001 because these Imperial contracts did not meet the Corporation's policies
for risk management hedges.
Further information regarding risk management financial instruments and foreign
currency exchange contracts is provided in Notes 1, 10, and 20.
CUSTOMER-INITIATED AND OTHER DERIVATIVE FINANCIAL
INSTRUMENTS AND FOREIGN
EXCHANGE CONTRACTS
CUSTOMER-INITIATED AND OTHER NOTIONAL ACTIVITY
(IN MILLIONS)
- -----------------------------------------------------------------------
INTEREST FOREIGN
RATE EXCHANGE
CONTRACTS CONTRACTS TOTALS
- -----------------------------------------------------------------------
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
Additions 1,485 48,426 49,911
Maturities/amortizations (471) (47,614) (48,085)
Terminations (186) -- (186)
- -----------------------------------------------------------------------
Balances at December 31, 2001 $ 1,698 $ 2,689 $ 4,387
=======================================================================
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 22 percent at
December 31, 2001 and 12 percent at December 31, 2000, of total derivative and
foreign exchange contracts, including commitments to purchase and sell
securities. Refer to Note 20 of the financial statements on page 58 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. The Corporation has
various financial obligations, including contractual obligations and commercial
commitments.
The Corporation has contractual obligations that require future cash payments.
The amount of payments required under medium- and long-term debt obligations,
noncancellable property and equipment leases and other significant
noncancellable contractual obligations in 2002 is $1.6 billion. Refer to Notes 7
and 10 of the financial statements on pages 50 and 51 for a further discussion
of these contractual obligations.
The Corporation also has other commercial commitments that may impact liquidity.
These commitments include commitments to purchase earning assets, commitments to
fund venture capital investments, unused commitments to extend credit, standby
letters of credit and financial guarantees, commercial letters of credit and
credit default swaps. The total amount of these commercial commitments at
December 31, 2001 was $34 billion. Since many of these commitments expire
without being drawn upon, the total amount of these commercial commitments does
not necessarily represent the future cash requirements of the Corporation. Refer
to Note 20 and the Market Risk section of the Financial Review on page 41 for a
further discussion of these commercial commitments.
40
Liquidity requirements are satisfied with various funding sources. First, the
Corporation accesses the purchased funds market each day to meet funding needs.
Purchased funds at December 31, 2001, comprised of certificates of deposits
$100,000 and over that mature in less than one year, foreign office time
deposits and short-term borrowings, approximated $10.4 billion. Second, a $15
billion medium-term note program 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 2001, unissued
debt relating to the two programs totaled $14.6 billion. A third source was
liquid assets, which totaled $7.3 billion at December 31, 2001. Additionally,
the Corporation also had available $16 billion from a collaterized borrowing
account with the Federal Reserve Bank at year-end 2001.
The parent company had available a $250 million commercial paper facility at
December 31, 2001, $110 million of which was unused. Another source of liquidity
for the parent company is dividends from its subsidiaries. As discussed in Note
19 to the financial statements on page 57, subsidiary banks are subject to
regulation and may be limited in their ability to pay dividends or transfer
funds to the holding company. During 2002, the subsidiary banks can pay
dividends up to $641 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
100 percent represents the reliance on subsidiary dividends to repay
liabilities. As of December 31, 2001, the ratio was 112 percent.
MARKET RISK
The Corporation's market risk related to trading instruments is not significant
as trading activities are limited. Certain of the Corporation's noninterest
income, including fiduciary income, investment advisory revenue and brokerage
fees are at risk to changes in equity markets and to fluctuations in the market
value of assets managed.
The Corporation also has a portfolio of direct and indirect (through funds)
private equity and venture capital investments, and has made commitments to fund
additional investments in future periods. These investments are at risk to
changes in equity markets, general economic conditions and many other factors.
The majority of these investments are not marketable, and are included in other
assets. The investments are reviewed for impairment on a quarterly basis, by
comparing the carrying value to the estimated fair value. Fair value is
generally estimated by reviewing information provided by the investee, and
obtained through other public sources where available. The lack of an
independent source to validate fair value estimates is an inherent limitation in
the valuation process. The amount by which the carrying value exceeds the fair
value, that is determined to be other than temporary impairment, is charged to
current earnings and the carrying value of the investment is written down
accordingly. At December 31, the Corporation had approximately $114 million of
direct and indirect private equity and venture capital investments and had made
commitments to fund an additional $140 million of such investments in future
periods.
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 in 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, including unknown risks
and uncertainties, 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, changes in accounting treatment affecting the value of
assets, Comerica's ability to implement its strategic initiatives, the impact of
the September 11, 2001, terrorist attacks or of any subsequent terrorist
activities or of any actions taken in response to or as a result of those
attacks or activities, 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 facts,
circumstances, assumptions or events which may have changed after the date the
forward-looking statements are made.
41
CONSOLIDATED BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,925,262 $ 1,930,682
Short-term investments 1,078,799 1,730,158
Investment securities available for sale 4,290,724 3,890,725
Commercial loans 25,176,000 26,009,336
International loans 3,015,463 2,571,156
Real estate construction loans 3,257,549 2,915,168
Commercial mortgage loans 6,266,939 5,360,601
Residential mortgage loans 779,116 807,064
Consumer loans 1,483,961 1,477,135
Lease financing 1,217,314 1,029,164
- ----------------------------------------------------------------------------------------------------------------
Total loans 41,196,342 40,169,624
Less allowance for credit losses (655,094) (608,110)
- ----------------------------------------------------------------------------------------------------------------
Net loans 40,541,248 39,561,514
Premises and equipment 352,814 347,962
Customers' liability on acceptances outstanding 28,589 26,668
Accrued income and other assets 2,514,537 2,046,347
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 50,731,973 $ 49,534,056
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 12,596,255 $ 10,188,475
Interest-bearing deposits 24,974,124 23,665,808
- ----------------------------------------------------------------------------------------------------------------
Total deposits 37,570,379 33,854,283
Short-term borrowings 1,986,263 2,093,381
Acceptances outstanding 28,589 26,668
Accrued expenses and other liabilities 836,767 800,386
Medium- and long-term debt 5,502,511 8,259,179
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 45,924,509 45,033,897
Nonredeemable preferred stock - $50 stated value
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at 12/31/00 -- 250,000
Common stock - $5 par value
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at 12/31/01 and 177,703,678 shares at 12/31/00 893,746 888,519
Capital surplus 345,156 301,414
Unearned employee stock ownership plan stock - 131,954 shares at 12/31/01
and 176,462 shares at 12/31/00 (5,037) (6,750)
Accumulated other comprehensive income 225,617 12,097
Retained earnings 3,447,974 3,085,784
Deferred compensation (9,205) (14,494)
Less cost of common stock in treasury - 1,674,659 shares at 12/31/01
and 289,397 shares at 12/31/00 (90,787) (16,411)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,807,464 4,500,159
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 50,731,973 $ 49,534,056
================================================================================================================
See notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 3,120,806 $ 3,379,271 $ 2,859,053
Interest on investment securities 246,288 259,333 198,901
Interest on short-term investments 26,453 77,749 39,317
- ------------------------------------------------------------------------------------------------------------
Total interest income 3,393,547 3,716,353 3,097,271
INTEREST EXPENSE
Interest on deposits 888,262 951,281 692,808
Interest on short-term borrowings 105,336 215,372 183,124
Interest on medium- and long-term debt 297,611 545,531 404,463
- ------------------------------------------------------------------------------------------------------------
Total interest expense 1,291,209 1,712,184 1,280,395
- ------------------------------------------------------------------------------------------------------------
Net interest income 2,102,338 2,004,169 1,816,876
Provision for credit losses 236,000 254,800 146,220
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,866,338 1,749,369 1,670,656
NONINTEREST INCOME
Service charges on deposit accounts 210,780 188,828 176,639
Fiduciary income 180,123 180,860 182,754
Commercial lending fees 67,022 60,682 54,659
Letter of credit fees 57,424 51,960 46,116
Brokerage fees 44,422 44,055 35,942
Investment advisory revenue, net 11,848 118,511 61,202
Equity in earnings of unconsolidated subsidiaries (43,057) 14,021 14,716
Warrant income 4,552 29,861 33,033
Securities gains 19,763 16,295 8,675
Net gain on sales of businesses 31,233 50,299 76,387
Other noninterest income 219,222 201,309 176,891
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 803,332 956,681 867,014
NONINTEREST EXPENSES
Salaries and employee benefits 809,483 851,456 777,539
Net occupancy expense 114,548 110,126 104,308
Equipment expense 70,278 76,532 73,217
Outside processing fee expense 61,034 58,541 60,207
Customer services 40,985 36,882 40,263
Merger-related and restructuring charges 151,715 -- --
Other noninterest expenses 310,990 350,986 303,374
- ------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,559,033 1,484,523 1,358,908
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 1,110,637 1,221,527 1,178,762
Provision for income taxes 401,059 430,792 419,347
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 709,578 $ 790,735 $ 759,415
============================================================================================================
Net income applicable to common stock $ 697,970 $ 773,635 $ 742,315
============================================================================================================
Basic net income per common share $ 3.93 $ 4.38 $ 4.20
Diluted net income per common share 3.88 4.31 4.13
Cash dividends declared on common stock $ 313,202 $ 250,277 $ 224,837
Dividends per common share $ 1.76 $ 1.60 $ 1.44
============================================================================================================
See notes to consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY -- COMERICA INCORPORATED AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------
UNEARNED
NON- EMPLOYEE
REDEEMABLE STOCK
PREFERRED COMMON CAPITAL OWNERSHIP
STOCK STOCK SURPLUS PLAN SHARES
- ------------------------------------------------------------------------------------------
BALANCES AT
JANUARY 1, 1999 $ 250,000 $ 882,452 $ 152,795 $ --
Net income for 1999 -- -- -- --
Other comprehensive
income, net of tax -- -- -- --
Total comprehensive income -- -- -- --
Cash dividends declared:
Preferred stock -- -- -- --
Common stock -- -- -- --
Purchase and retirement
of 254,213 shares
of common stock -- (1,284) (8,069) --
Purchase of 44,082 shares
of common stock -- -- -- --
Common stock dividend -- 7,712 44,993 --
Issuance of common stock
under employee stock plans -- 573 12,067 (3,750)
Amortization of
deferred compensation,
net of minority interest -- -- 24,215 --
- ------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1999 250,000 889,453 226,001 (3,750)
Net income for 2000 -- -- -- --
Other comprehensive
income, net of tax -- -- -- --
Total comprehensive income -- -- -- --
Cash dividends declared:
Preferred stock -- -- -- --
Common stock -- -- -- --
Purchase and retirement
of 930,212 shares
of common stock -- (4,651) (31,645) --
Purchase of 353,547 shares
of common stock -- -- -- --
Common stock dividend -- -- 84,906 --
Issuance of common stock
under employee stock plans -- 3,717 22,152 (3,000)
Amortization of
deferred compensation,
net of minority interest -- -- -- --
- ------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 2000 250,000 888,519 301,414 (6,750)
Net income for 2001 -- -- -- --
Other comprehensive
income, net of tax -- -- -- --
Total comprehensive income -- -- -- --
Redemption of preferred stock (250,000) -- -- --
Cash dividends declared:
Preferred stock -- -- -- --
Common stock -- -- -- --
Purchase of 2,198,700 shares
of common stock -- -- -- --
Issuance of common stock
under employee stock plans -- 5,227 43,742 1,713
Amortization of
deferred compensation,
net of minority interest -- -- -- --
- ------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 2001 $ -- $ 893,746 $ 345,156 $ (5,037)
==========================================================================================
- -------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED DEFERRED TREASURY SHAREHOLDERS'
INCOME EARNINGS COMPENSATION STOCK EQUITY
- -------------------------------------------------------------------------------------------------------------
BALANCES AT
JANUARY 1, 1999 $ (6,970) $ 2,244,493 $ (5,202) $ (89,133) $ 3,428,435
Net income for 1999 -- 759,415 -- -- 759,415
Other comprehensive
income, net of tax (14,734) -- -- -- (14,734)
---------------
Total comprehensive income -- -- -- -- 744,681
Cash dividends declared:
Preferred stock -- (17,100) -- -- (17,100)
Common stock -- (224,837) -- -- (224,837)
Purchase and retirement
of 254,213 shares
of common stock -- -- -- -- (9,353)
Purchase of 44,082 shares
of common stock -- -- -- (2,885) (2,885)
Common stock dividend -- (52,724) -- -- (19)
Issuance of common stock
under employee stock plans -- (32,037) 4 44,857 21,714
Amortization of
deferred compensation,
net of minority interest -- -- (16,800) -- 7,415
- ------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1999 (21,704) 2,677,210 (21,998) (47,161) 3,948,051
Net income for 2000 -- 790,735 -- -- 790,735
Other comprehensive
income, net of tax 33,801 -- -- -- 33,801
---------------
Total comprehensive income -- -- -- -- 824,536
Cash dividends declared:
Preferred stock -- (17,100) -- -- (17,100)
Common stock -- (250,277) -- -- (250,277)
Purchase and retirement
of 930,212 shares
of common stock -- -- -- -- (36,296)
Purchase of 353,547 shares
of common stock -- -- -- (14,108) (14,108)
Common stock dividend -- (84,927) -- -- (21)
Issuance of common stock
under employee stock plans -- (29,857) (3,278) 44,858 34,592
Amortization of
deferred compensation,
net of minority interest -- -- 10,782 -- 10,782
- ------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 2000 12,097 3,085,784 (14,494) (16,411) 4,500,159
Net income for 2001 -- 709,578 -- -- 709,578
Other comprehensive
income, net of tax 213,520 -- -- -- 213,520
---------------
Total comprehensive income -- -- -- -- 923,098
Redemption of preferred stock -- -- -- -- (250,000)
Cash dividends declared:
Preferred stock -- (11,608) -- -- (11,608)
Common stock -- (313,202) -- -- (313,202)
Purchase of 2,198,700 shares
of common stock -- -- -- (120,630) (120,630)
Issuance of common stock
under employee stock plans -- (22,578) (9,072) 46,254 65,286
Amortization of
deferred compensation,
net of minority interest -- -- 14,361 -- 14,361
- ------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 2001 $ 225,617 $ 3,447,974 $ (9,205) $ (90,787) $ 4,807,464
============================================================================================================
( ) Indicates deduction.
See notes to consolidated financial statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMERICA INCORPORATED AND SUBSIDIARIES
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 709,578 $ 790,735 $ 759,415
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses 236,000 254,800 146,220
Depreciation 63,354 70,988 74,768
Merger-related and restructuring charges 54,634 -- --
Net (increase) decrease in trading account securities 3,436 (12,410) (46,854)
Net (increase) decrease in assets held for sale (130,352) (33,385) 53,568
Net (increase) decrease in accrued income receivable 134,233 (80,923) (42,321)
Net increase in accrued expenses 34,734 110,273 138,459
Gain on the sale of businesses (31,233) (50,299) (76,387)
Net amortization of intangibles 34,491 36,643 33,921
Other, net (107,845) (146,594) 112,196
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments 291,452 149,093 393,570
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,001,030 939,828 1,152,985
INVESTING ACTIVITIES
Net increase in interest-bearing deposits with banks (27,222) (2,846) (9,418)
Net (increase) decrease in federal funds sold and securities purchased
under agreements to resell 805,497 176,527 (134,094)
Proceeds from sale of investment securities available for sale 2,386,202 6,298,862 1,921,554
Proceeds from maturity of investment securities available for sale 1,303,982 827,426 3,965,212
Purchases of investment securities available for sale (4,188,934) (7,200,262) (6,328,161)
Net increase in loans (1,221,673) (4,032,060) (2,918,339)
Fixed assets, net (68,206) (45,903) (55,825)
Net increase in company owned life insurance (167,677) (29,018) (46,521)
Net (increase) decrease in customers' liability on acceptances outstanding (1,921) 17,142 (31,475)
Net cash provided by acquisition/sale of businesses 45,463 442,426 69,512
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,134,489) (3,547,706) (3,567,555)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 3,703,865 4,658,280 (686,777)
Net decrease in short-term borrowings (107,118) (831,313) (716,060)
Net increase (decrease) in acceptances outstanding 1,921 (17,142) 31,475
Proceeds from issuance of medium- and long-term debt 2,081,233 6,103,664 6,373,364
Repayments and purchases of medium- and long-term debt (4,932,466) (6,604,430) (2,981,672)
Redemption of preferred stock (250,000) -- --
Proceeds from issuance of common stock and other capital transactions 65,286 37,240 29,347
Purchase of common stock for treasury and retirement (120,630) (56,403) (18,118)
Dividends paid (314,052) (261,096) (235,646)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 128,039 3,028,800 1,795,913
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (5,420) 420,922 (618,657)
Cash and due from banks at beginning of year 1,930,682 1,509,760 2,128,417
- ----------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,925,262 $ 1,930,682 $ 1,509,760
======================================================================================================================
Interest paid $ 1,419,884 $ 1,718,365 $ 1,210,598
======================================================================================================================
Income taxes paid $ 344,249 $ 379,250 $ 347,933
======================================================================================================================
Noncash investing and financing activities
Loan transfers to other real estate $ 12,505 $ 6,870 $ 11,430
Transfer from loans to loans held for sale -- -- 620,280
======================================================================================================================
See notes to consolidated financial statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMERICA INCORPORATED AND SUBSIDIARIES
1 ACCOUNTING POLICIES
ORGANIZATION
Comerica Incorporated is a registered financial holding company headquartered in
Detroit, Michigan. The Corporation's principal lines of business are the
Business Bank, the Individual Bank and the Investment Bank. The core businesses
are tailored to each of the Corporation's four primary geographic markets:
Michigan, Texas, California and Florida.
The accounting and reporting policies of Comerica Incorporated and its
subsidiaries conform to accounting principles generally accepted in the United
States and prevailing practices within the banking industry. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying footnotes. Actual results could differ from these
estimates.
The following is a summary of the more significant accounting and reporting
policies.
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries after elimination of all significant intercompany accounts
and transactions. Prior years' financial statements are reclassified to conform
with current financial statement presentation.
For acquisitions accounted for as pooling-of-interests combinations, the
historical consolidated financial statements are restated to include the
accounts and results of operations. Statement of Financial Accounting Standards
(SFAS) No. 141 "Business Combinations" (issued June 2001), eliminated the
pooling-of-interests method for acquisitions initiated after June 30, 2001. For
acquisitions using the purchase method of accounting, the assets acquired and
liabilities assumed are adjusted to fair market values at the date of
acquisition, and the resulting net discount or premium is accreted or amortized
into income over the remaining lives of the relevant assets and liabilities.
Goodwill representing the excess of cost over the net book value of identifiable
assets acquired is amortized on a straight-line basis over periods ranging from
10 to 25 years (weighted average of 19 years). Beginning in 2002, as required by
SFAS No. 142 "Goodwill and Other Intangible Assets" (issued June 2001), goodwill
will no longer be amortized, but will be subject to annual impairment tests.
Other intangible assets that do not have an indefinite life will continue to be
amortized over its useful lives. Core deposit intangible assets are amortized on
an accelerated method over 10 years.
IMPAIRMENT
The Corporation periodically evaluates long-lived assets, certain identifiable
intangibles, deferred costs and goodwill for indication of impairment in value.
When required, asset impairment is recorded.
LOANS HELD FOR SALE
Loans held for sale, normally mortgages and Small Business Administration loans,
are carried at the lower of cost or market. Market value is determined in the
aggregate.
SECURITIES
Investment securities held to maturity are those securities which management has
the ability and positive intent to hold to maturity. Investment securities held
to maturity are stated at cost, adjusted for amortization of premium and
accretion of discount.
Investment securities that fail to meet the ability and positive intent criteria
are accounted for as securities available for sale, and stated at fair value
with unrealized gains and losses, net of income taxes, reported as a component
of shareholders' equity.
Trading account securities are carried at market value. Realized and unrealized
gains or losses on trading securities are included in non-interest income.
Gains or losses on the sale of securities are computed based on the adjusted
cost of the specific security.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation, computed on the straight-line method, is charged to
operations over the estimated useful lives of the assets. The estimated useful
lives are generally 10-33 years for premises that the company owns and 3-8 years
for furniture and equipment. Leasehold improvements are amortized over the terms
of their respective leases or 10 years, whichever is shorter.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents management's assessment of probable
losses inherent in the Corporation's credit portfolio. The allowance provides
for probable losses that have been identified with specific customer
relationships and for probable losses believed to be inherent in the loan
portfolio, but that have not been specifically identified. The Corporation
allocates the allowance for credit losses to each loan category based on a
defined methodology, which has been in use, without material change, for several
years. Internal risk ratings are assigned to each business loan at the time of
approval and are subject to subsequent periodic reviews by the senior management
of the Credit Policy Group. Business loans are defined as those belonging to the
commercial, international, real estate construction, commercial mortgage and
lease financing categories. A detailed credit quality review is performed
quarterly on large business loans which have deteriorated below certain levels
of credit risk. A specific portion of the allowance is allocated to such loans
based upon this review. The portion of the allowance allocated to the remaining
business loans is determined by applying projected loss ratios to each risk
rating based on numerous factors identified below. The portion of the allowance
allocated to consumer loans is determined by applying projected loss ratios to
various segments of the loan portfolio. Projected loss ratios incorporate
factors such as recent loan loss experience, current economic conditions and
trends, and trends with respect to past due and nonaccrual amounts.
Management maintains an unallocated allowance to recognize the uncertainty and
imprecision underlying the process of estimating expected credit losses. This
uncertainty occurs because other factors affecting the determination of probable
losses inherent in the loan portfolio may exist which are not necessarily
captured by the application of historical loss ratios. Loans which are deemed
uncollectible are charged off and deducted from the allowance. The provision for
credit losses and recoveries on loans previously charged off are added to the
allowance.
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.
46
1 ACCOUNTING POLICIES (CONTINUED)
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the terms have been renegotiated to less
than market rates due to a serious weakening of the borrower's financial
condition and other real estate which has been acquired primarily through
foreclosure and is awaiting disposition.
Loans which were restructured, but yield a rate equal to or greater than the
rate charged for new loans with comparable risk and have met the requirements
for accrual status, are generally not reported as nonperforming assets. Such
loans continue to be evaluated for impairment for the remainder of the calendar
year of the modifications. These loans may be excluded from the impairment
assessment in the calendar years subsequent to the restructuring if not impaired
based on the modified terms. See Note 4 on page 49 for additional information on
loan impairment.
Consumer loans are generally not placed on nonaccrual status and are charged off
no later than 180 days past due, or earlier if deemed uncollectible. Loans other
than consumer are generally placed on nonaccrual status when principal or
interest is past due 90 days or more and/or when, in the opinion of management,
full collection of principal or interest is unlikely. At the time a loan is
placed on nonaccrual status, interest previously accrued but not collected is
charged against current income. Income on such loans is then recognized only to
the extent that cash is received and where future collection of principal is
probable. Generally, a loan may be returned to accrual status when all
delinquent principal and interest have been received and the Corporation expects
repayment of the remaining contractual principal and interest or when the loan
is both well secured and in the process of collection. A nonaccrual loan that is
restructured will generally remain on nonaccrual for a period of six months to
demonstrate that the borrower can meet the restructured terms. However,
sustained payment performance prior to the restructuring, or significant events
that coincide with the restructuring, are included in assessing whether the
borrower can meet the restructured terms. These factors may result in the loan
being returned to an accrual basis at the time of restructuring or upon
satisfaction of a shorter performance period. If management is uncertain whether
the borrower has the ability to meet the revised payment schedule, the loan
remains classified as nonaccrual. Other real estate acquired is carried at the
lower of cost or fair value, minus estimated costs to sell. When the property is
acquired through foreclosure, any excess of the related loan balance over fair
value is charged to the allowance for credit losses. Subsequent write-downs,
operating expenses and losses upon sale, if any, are charged to noninterest
expenses.
STOCK-BASED COMPENSATION
The Corporation elected to continue to apply the intrinsic value method in
accounting for its stock-based compensation plans. Information on the
Corporation's stock-based compensation plans is included in Note 14 on page 53.
PENSION COSTS
Pension costs are charged to salaries and employee benefits expense and funded
consistent with the requirements of federal law and regulations.
POSTRETIREMENT BENEFITS
Postretirement benefits are recognized in the financial statements during the
employee's active service period.
DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
Beginning January 1, 2001, derivative instruments are carried at fair value as
either other assets or liabilities on the balance sheet. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative instrument is
determined by 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,
the Corporation designates the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation. For derivative instruments 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. 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 (i.e. the ineffective portion), 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.
In 2000, the fair value of interest rate and foreign exchange swaps, interest
rate caps and floors and futures and forward contracts used to hedge the
Corporation's interest rate and foreign currency risk was not reflected on the
balance sheet. These instruments, with the exception of futures and forward
contracts, were accounted for on an accrual basis since there was a high
correlation with the on-balance sheet instrument being hedged.
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 and both the realized and
unrealized gains and losses on these instruments are recognized currently in
noninterest income.
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of nontaxable income such as interest on state and
municipal securities) and include deferred income taxes on temporary differences
between the tax basis and financial reporting basis of assets and liabilities.
Deferred taxes are reduced, if necessary, by the amount of such benefits that
are not expected to be realized based on available evidence.
47
1 ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption,
"Cash and due from banks."
DEFERRED DISTRIBUTION COSTS
Certain mutual fund distribution costs are capitalized when paid and amortized
over six years. Fees that contractually recoup the deferred costs are received
over a 6 - 8 year period. The net of fees and amortization is recorded in
noninterest income.
LOAN ORIGINATION FEES AND COSTS
Loan origination and commitment fees are deferred and recognized over the life
of the related loan or over the commitment period as a yield adjustment. Loan
fees on unused commitments and fees related to loans sold are recognized
currently as noninterest income.
OTHER COMPREHENSIVE INCOME
The Corporation has elected to present information on comprehensive income in
the Consolidated Statements of Changes in Shareholders' Equity on page 44 and in
Note 12 on page 52.
2 ACQUISITIONS
In January 2001, the Corporation merged with Imperial Bancorp (Imperial), a $7
billion (assets) bank holding company, through an exchange of 0.46 shares of
Comerica common stock for each share of Imperial common stock. The Corporation
issued 21 million shares of common stock as part of the transaction. The
financial information presented in this annual report is restated to include the
accounts and results of operations of Imperial, which was accounted for as a
pooling-of-interests combination. The Corporation incurred a pre-tax,
merger-related and restructuring charge of $173 million ($128 million after-tax)
in 2001 in connection with the acquisition. As of December 31, 2001, all
merger-related expenses have been incurred.
At December 31, 2001, the Corporation owned 12 million shares, or approximately
55%, of the outstanding common stock of Official Payment Corporation
("OPAY")(Nasdaq: OPAY). OPAY completed an initial public offering ("IPO") on
November 23, 1999, of 5 million shares of common stock priced at $15 per share.
As a result of the offering, the Corporation's ownership percentage of OPAY's
common stock decreased from 80% to approximately 56% of total outstanding
shares. The Corporation recognized a $44 million pre-tax gain in 1999
representing the increase in its basis in OPAY stock due to the IPO. The gain is
reflected in "Net gain on sale of businesses" in the Consolidated Statements of
Income.
3 INVESTMENT SECURITIES
Information concerning investment securities as shown in the consolidated
balance sheets of the Corporation was as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 2001 COST GAINS LOSSES FAIR VALUE
- --------------------------------------------------------------------------------
U.S. government and
agency securities $3,879,206 $ 47,535 $ 6,903 $3,919,838
State and municipal
securities 30,935 1,200 4 32,131
Other securities 355,344 1,141 17,730 338,755
- --------------------------------------------------------------------------------
Total securities
available for sale $4,265,485 $ 49,876 $ 24,637 $4,290,724
================================================================================
DECEMBER 31, 2000
U.S. government and
agency securities $3,120,561 $ 22,476 $ 8,417 $3,134,620
State and municipal
securities 44,920 1,417 40 46,297
Other securities 713,101 6,599 9,892 709,808
- --------------------------------------------------------------------------------
Total securities
available for sale $3,878,582 $ 30,492 $ 18,349 $3,890,725
================================================================================
The cost and estimated fair values of debt securities by contractual maturity
were as follows (securities with multiple maturity dates are classified in the
period of final maturity). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
ESTIMATED
DECEMBER 31, 2001 COST FAIR VALUE
- --------------------------------------------------------------------------------
Contractual maturity
Within one year $ 188,685 $ 191,044
Over one year to five years 193,067 189,032
Over five years to ten years 36,527 33,502
Over ten years 35,824 27,366
- --------------------------------------------------------------------------------
Subtotal securities 454,103 440,944
Mortgage-backed securities 3,721,019 3,759,379
Equity and other nondebt securities 90,363 90,401
- --------------------------------------------------------------------------------
Total securities available for sale $4,265,485 $4,290,724
================================================================================
Sales, calls and write-downs of investment securities available for sale
resulted in realized gains and losses as follows:
(IN THOUSANDS)
- --------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000
- --------------------------------------------------------
Securities gains $29,453 $20,152
Securities losses (9,690) (3,857)
- --------------------------------------------------------
Total $19,763 $16,295
========================================================
Assets, principally securities, carried at approximately $1.9 billion at
December 31, 2001, were pledged to secure public deposits (including State of
Michigan deposits of $122 million at December 31, 2001) and for other purposes
as required by law.
48
4 NONPERFORMING ASSETS
The following table summarizes nonperforming assets and loans which are
contractually past due 90 days or more as to interest or principal payments.
Nonperforming assets consist of nonaccrual loans, reduced-rate loans and other
real estate. Nonaccrual loans are those on which interest is not being
recognized. Reduced-rate loans are those on which interest has been renegotiated
to lower than market rates because of the weakened financial condition of the
borrower.
Nonaccrual and reduced-rate loans are included in loans on the consolidated
balance sheet.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31 2001 2000
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial loans $467,078 $233,408
International loans 109,349 68,911
Real estate construction loans 9,751 4,542
Commercial mortgage loans 17,891 17,398
Residential mortgage loans 323 185
Consumer loans 4,727 3,080
Lease financing 7,349 3,837
- --------------------------------------------------------------------------------
Total 616,468 331,361
Reduced-rate loans 219 2,306
- --------------------------------------------------------------------------------
Total nonperforming loans 616,687 333,667
Other real estate 10,104 5,577
- --------------------------------------------------------------------------------
Total nonperforming assets $626,791 $339,244
================================================================================
Loans past due 90 days and still accruing $ 44,089 $ 36,176
================================================================================
Gross interest income that would have been
recorded had the nonaccrual and reduced-rate
loans performed in accordance with original terms $ 60,867 $ 41,733
================================================================================
Interest income recognized $ 16,958 $ 7,934
================================================================================
A loan is impaired when it is probable that payment of interest and principal
will not be made in accordance with the contractual terms of the loan agreement.
Consistent with this definition, all nonaccrual and reduced-rate loans (with the
exception of residential mortgage and consumer loans) are impaired.
Impaired loans at December 31, 2001, were $674 million, $62 million of which
were formerly on nonaccrual status, but were restructured and met the
requirements to be restored to an accrual basis. These restructured loans are
performing in accordance with their modified terms, but, in accordance with
impaired loan disclosures must continue to be disclosed as impaired for the
remainder of the calendar year of the restructuring. Excluding these
restructured loans, impaired loans related to business loans remaining on
nonaccrual status totaled $611 million at December 31, 2001.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31 2001 2000 1999
- --------------------------------------------------------------------------------
Average impaired loans for the year $548,662 $292,665 $209,480
================================================================================
Total period-end impaired loans $673,812 $364,895 $199,922
Less: Loans returned to accrual status
during the year (62,394) (36,799) (13,168)
- --------------------------------------------------------------------------------
Total period-end nonaccrual
business loans $611,418 $328,096 $186,754
================================================================================
Period-end impaired loans requiring
an allowance $561,681 $277,159 $184,607
================================================================================
Impairment allowance $228,417 $104,107 $ 61,913
================================================================================
Those impaired loans not requiring an allowance represent loans for which the
fair value exceeded the recorded investment in the loan. Thirty-one percent of
the total impaired loans at December 31, 2001, are evaluated based on fair value
of related collateral. Remaining loan impairment is based on the present value
of expected future cash flows discounted at the loan's effective interest rate.
5 ALLOWANCE FOR CREDIT LOSSES
An analysis of changes in the allowance for credit losses follows:
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Balance at January 1 $ 608,110 $ 548,147 $ 515,058
Loans charged off (231,600) (223,527) (143,727)
Recoveries on loans previously
charged off 42,764 28,745 34,563
- --------------------------------------------------------------------------------
Net loans charged off (188,836) (194,782) (109,164)
Provision for credit losses 236,000 254,800 146,220
Transfer to loans held for sale -- -- (4,000)
Foreign currency translation
adjustment (180) (55) 33
- --------------------------------------------------------------------------------
Balance at December 31 $ 655,094 $ 608,110 $ 548,147
================================================================================
As a percent of total loans 1.59% 1.51% 1.51%
================================================================================
The provision for credit losses in 2001 included a $25 million merger-related
charge to conform the credit policies of Imperial with Comerica.
49
6 SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Concentrations of both on-balance sheet and off-balance sheet credit risk are
controlled and monitored as part of credit policies. The Corporation is a
regional financial holding company with a geographic concentration of its
on-balance sheet and off-balance sheet activities in Michigan. In addition, the
Corporation has an industry concentration with the automotive industry.
At December 31, 2001 and 2000, exposure from loan commitments and guarantees to
companies related to the automotive industry totaled $11.2 billion and $10.6
billion, respectively. Additionally, commercial real estate loans, including
commercial mortgages and construction loans, totaled $9.5 billion at December
31, 2001 and $8.3 billion at year-end 2000. Approximately $4.3 billion of
commercial real estate and real estate construction loans at December 31, 2001,
involved owner-occupied properties. Those borrowers are involved in business
activities other than real estate, and the sources of repayment are not
dependent on the performance of the real estate market.
7 PREMISES & EQUIPMENT & OTHER NONCANCELLABLE OBLIGATIONS
A summary of premises and equipment at December 31 by major category follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Land $ 55,565 $ 54,878
Buildings and improvements 391,059 379,019
Furniture and equipment 383,299 384,452
- --------------------------------------------------------------------------------
Total cost 829,923 818,349
Less accumulated depreciation and amortization (477,109) (470,387)
- --------------------------------------------------------------------------------
Net book value $352,814 $ 347,962
================================================================================
Rental expense for leased properties and equipment amounted to $55 million in
2001, $51 million in 2000 and $50 million in 1999. Future minimum payments under
noncancellable obligations are as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2002 $69,453
2003 67,848
2004 58,210
2005 50,467
2006 38,384
2007 and later 255,401
================================================================================
8 DEPOSITS
A maturity distribution of domestic certificates of deposits of $100,000 and
over at December 31 follows:
(IN MILLIONS)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Three months or less $4,387 $3,206
Over three months to six months 1,513 2,028
Over six months to twelve months 1,946 2,061
Over twelve months 501 349
- --------------------------------------------------------------------------------
Total $8,347 $7,644
================================================================================
9 SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds, consisting of commercial
(IN THOUSANDS)
- --------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND OTHER
SECURITIES SOLD UNDER BORROWED
DECEMBER 31, 2001 AGREEMENTS TO REPURCHASE FUNDS
- --------------------------------------------------------------------------------
Amount outstanding at year-end $1,693,447 $ 292,816
Weighted average interest rate at year-end 1.64% 1.81%
DECEMBER 31, 2000
Amount outstanding at year-end $1,640,006 $453,375
Weighted average interest rate at year-end 6.37% 5.51%
DECEMBER 31, 1999
Amount outstanding at year-end $1,387,536 $1,537,158
Weighted average interest rate at year-end 4.43% 4.45%
================================================================================
paper, borrowed securities, term federal funds purchased, short-term notes and
treasury tax and loan deposits, generally mature within one to 120 days from the
transaction date. The table at left provides a summary of short-term borrowings
at December 31, 2001 and 2000.
At December 31, 2001, the parent company had available a $250 million commercial
paper facility of which $140 million was outstanding. This facility is supported
by a $200 million line of credit agreement. Under the current agreement, the
line will expire in May 2002.
At December 31, 2001, the Corporation's subsidiary banks had pledged loans
totaling $21.8 billion to secure a $16 billion collateralized borrowing account
with the Federal Reserve Bank.
50
10 MEDIUM- & LONG- TERM DEBT
Medium- and long-term debt consisted of the following at December 31:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Parent Company
7.25% subordinated notes due 2007 $ 156,288 $ 157,414
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 215,747 198,703
8.375% subordinated notes due 2024 179,152 155,071
7.25% subordinated notes due 2002 186,774 149,719
6.875% subordinated notes due 2008 107,642 103,272
7.125% subordinated notes due 2013 155,490 154,486
7.875% subordinated notes due 2026 168,029 172,346
6.00% subordinated notes due 2008 256,031 248,238
7.65% subordinated notes due 2010 267,661 248,385
8.50% subordinated notes due 2009 102,234 99,474
- --------------------------------------------------------------------------------
Total subordinated notes 1,638,760 1,529,694
Medium-term notes:
Floating rate based on LIBOR indices 2,355,618 5,048,972
Floating rate based on Treasury indices -- 125,000
Floating rate based on Prime indices -- 1,320,964
- --------------------------------------------------------------------------------
Total medium-term notes 2,355,618 6,494,936
Variable rate secured debt financings
due 2007 956,260 --
Notes payable -- 13,445
9.98% trust preferred securities due 2026 56,234 63,690
7.60% trust preferred securities due 2050 339,351 --
- --------------------------------------------------------------------------------
Total subsidiaries 5,346,223 8,101,765
- --------------------------------------------------------------------------------
Total medium- and long-term debt $5,502,511 $8,259,179
================================================================================
The carrying value of medium- and long-term debt in 2001 has been adjusted to
reflect the gain or loss attributable to the risk hedged by risk management
interest rate swaps that qualify as fair value hedges. Concurrent with the
issuance of certain of the medium- and long-term debt presented above, the
Corporation entered into interest rate swap agreements to convert the stated
rate of the debt to a rate based on the indices identified in the following
table.
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT BASE
OF DEBT RATE AT
CONVERTED BASE RATE 12/31/01
- --------------------------------------------------------------------------------
Parent company
7.25% subordinated notes $150,000 6-month LIBOR 2.01%
Subsidiaries
Subordinated notes:
7.25% subordinated notes $200,000 6-month LIBOR 2.01%
8.375% subordinated notes 150,000 6-month LIBOR 2.01%
7.25% subordinated notes 150,000 6-month LIBOR 2.01%
6.875% subordinated notes 100,000 6-month LIBOR 2.01%
6.00% subordinated notes 250,000 6-month LIBOR 2.01%
7.125% subordinated notes 150,000 6-month LIBOR 2.01%
7.875% subordinated notes 150,000 6-month LIBOR 2.01%
7.65% subordinated notes 250,000 3-month LIBOR 1.91%
8.50% subordinated notes 100,000 3-month LIBOR 1.91%
================================================================================
All subordinated notes with maturities greater than one year qualify as Tier 2
capital.
The Corporation currently has two medium-term note programs: a senior note
program and a European note program. Under these programs, certain bank
subsidiaries may offer an aggregate principal amount of up to $17 billion. The
notes can be issued as fixed or floating rate notes and with terms from one
month to 15 years. The interest rates on the floating rate medium-term notes
based on LIBOR ranged from three-month LIBOR plus 0.07% to one-month LIBOR plus
0.20%. The notes are due from 2002 to 2005. There are no floating rate notes
outstanding based on Treasury or Prime indices at December 31, 2001. The
medium-term notes do not qualify as Tier 2 capital and are not insured by the
FDIC. In July 2001, Comerica issued $350 million of 7.60% Trust Preferred
Securities which are classified in medium- and long-term debt. The securities
pay interest each quarter beginning October 1, 2001, and are callable any time
after July 30, 2006. The Corporation used the proceeds from the issuance to
redeem and retire in total the $250 million of preferred stock that was
outstanding and for other general corporate purposes. The Corporation also has
$55 million of 9.98% trust preferred securities classified in medium- and
long-term debt at December 31, 2001. The securities pay interest semi-annually
in June and December, and are callable anytime after June 30, 2007. The
Corporation purchased and retired $10 million of these securities in 2001.
In December 2001, the Corporation privately placed approximately $1 billion of
variable rate notes as part of a secured financing transaction. The Corporation
utilized approximately $1.2 billion of dealer floor plan loans as collateral in
conjunction with this transaction. The over-collateralization of the issuance
provided for a preferred credit rating status. The secured financing includes
$904 million of deferred payment notes bearing interest at the rate of 30 basis
points plus a commercial paper reference rate, and $60 million of deferred
payment notes based on one-month LIBOR. The interest rate on each of these note
issuances is reset monthly. The $904 deferred payment notes, which may be
redeemed upon the occurence of certain conditions, mature in December 2007.
Interest will accrue on the $60 million deferred payment notes until January
2007, at which time the notes become redeemable by the holder. These notes do
not qualify as Tier 2 capital and are not insured by the FDIC. The principal
maturities of medium- and long-term debt are as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2002 $1,558,000
2003 680,000
2004 100,000
2005 185,000
2006 --
2007 and later 2,879,000
================================================================================
51
11 SHAREHOLDERS' EQUITY
In October 2000, in connection with the Imperial acquisition, the Board of
Directors of the Corporation rescinded the then existing share repurchase
program. In March 2001, the Board approved a one million (1,000,000) share
repurchase program, which was completed in the third quarter 2001. In August
2001, the Board authorized the repurchase of up to an additional ten million
(10,000,000) shares of Comerica Incorporated outstanding common stock. At
December 31, 2001, 1.2 million shares had been repurchased under this program.
At December 31, 2001, the Corporation had reserved 29.0 million shares of common
stock for issuance to employees and directors under the long-term incentive
plans.
In August 2001, the Corporation retired 5 million shares of Fixed/Adjustable
Rate Noncumulative Preferred Stock, Series E, with a stated value of $50 per
share.
12 OTHER COMPREHENSIVE INCOME
Other comprehensive income includes the change in unrealized gains and losses on
investment securities available for sale, the change in accumulated net gains
and losses on cash flow hedges and the change in the accumulated foreign
currency translation adjustment. The Consolidated Statements of Changes in
Shareholders' Equity includes only combined, net of tax, other comprehensive
income. The following presents reconciliations of the components of accumulated
other comprehensive income for the years ended December 31, 2001, 2000 and 1999.
The adoption of Statement No. 133 on January 1, 2001 resulted in a cumulative
effect of an accounting change of $65 million, $42 million net of tax, included
in other comprehensive income. For a further discussion of the effect of
derivative instruments on other comprehensive income see Notes 1 and 20 to the
consolidated financial statements.
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investment securities available for sale:
Balance at beginning of year $ 8,016 $ (22,719) $ (8,203)
Net unrealized holding gains (losses) arising during the period 31,901 61,996 (12,452)
Less: Reclassification adjustment for gains (losses) included
in net income 19,763 16,295 8,675
- --------------------------------------------------------------------------------------------------------------------
Change in net unrealized gains (losses) before income taxes 12,138 45,701 (21,127)
Provision for income taxes 4,248 14,966 (6,611)
- --------------------------------------------------------------------------------------------------------------------
Change in net unrealized gains (losses) on investment securities
available for sale, net of tax 7,890 30,735 (14,516)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 15,906 $ 8,016 $ (22,719)
Accumulated net gains (losses) on cash flow hedges:
Balance at beginning of year $ -- $ -- $ --
Transition adjustment upon adoption of accounting standard 64,705 -- --
Net cash flow hedge gains (losses) arising during the period 432,744 -- --
Less: Reclassification adjustment for gains (losses) included
in net income 174,618 -- --
- --------------------------------------------------------------------------------------------------------------------
Change in cash flow hedges before income taxes 322,831 -- --
Provision for income taxes 112,991 -- --
- --------------------------------------------------------------------------------------------------------------------
Change in cash flow hedges, net of tax 209,840 -- --
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 209,840 $ -- $ --
Accumulated foreign currency translation adjustment:
Balance at beginning of year $ 4,081 $ 1,015 $ 1,233
Net translation gains (losses) arising during the period (4,853) 3,066 (218)
Less: Reclassification adjustment for gains (losses) included
in net income (643) -- --
- --------------------------------------------------------------------------------------------------------------------
Change in translation adjustment before income taxes (4,210) 3,066 (218)
Provision for income taxes -- -- --
- --------------------------------------------------------------------------------------------------------------------
Change in foreign currency translation adjustment, net of tax (4,210) 3,066 (218)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ (129) $ 4,081 $ 1,015
- --------------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income, net of taxes,
at December 31 $ 225,617 $ 12,097 $ (21,704)
====================================================================================================================
52
13 NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income applicable
to common stock by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share is computed
by dividing net income applicable to common stock by the weighted average number
of shares, nonvested stock and dilutive common stock equivalents outstanding
during the period. Common stock equivalents consist of common stock issuable
under the assumed exercise of stock options granted under the Corporation's
stock plans, using the treasury stock method. Unallocated employee stock
ownership plan shares are not included in average shares outstanding. A
computation of earnings per share is presented at right.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Basic
Average shares outstanding 177,665 176,826 176,771
==============================================================================================
Net income $709,578 $790,735 $759,415
Less preferred stock dividends 11,608 17,100 17,100
- ----------------------------------------------------------------------------------------------
Net income applicable to common stock $697,970 $773,635 $742,315
==============================================================================================
Basic net income per common share $ 3.93 $ 4.38 $ 4.20
==============================================================================================
Diluted
Average shares outstanding 177,665 176,826 176,771
Nonvested stock 238 159 167
Common stock equivalents
Net effect of the assumed
exercise of stock options 2,121 2,395 2,863
- ----------------------------------------------------------------------------------------------
Diluted average shares 180,024 179,380 179,801
==============================================================================================
Net income $709,578 $790,735 $759,415
Less preferred stock dividends 11,608 17,100 17,100
- ----------------------------------------------------------------------------------------------
Net income applicable to common stock $697,970 $773,635 $742,315
==============================================================================================
Diluted net income per common share $ 3.88 $ 4.31 $ 4.13
==============================================================================================
14 LONG-TERM INCENTIVE PLANS
The Corporation has long-term incentive plans under which it has awarded both
shares of restricted stock to key executive officers and stock options to
executive officers, directors and key personnel of the Corporation and its
subsidiaries. The Corporation has elected to follow the intrinsic value method
in accounting for its employee and director stock options when the exercise
price equals the market price of the underlying stock on the date of grant. The
maturity of each option is determined at the date of grant; however, no options
may be exercised later than ten years from the date of grant. The options may
have restrictions regarding exercisability. A majority of the Corporation's
options vest over a four-year period.
Pro forma information regarding net income and earnings per share was determined
as if the Corporation had accounted for its employee and director stock options
under the fair value method. The fair value of options was estimated at the date
of grant using a Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. The model may not necessarily provide a reliable single
measure of the fair value of employee and director stock options. The
Corporation's employee and director stock options have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate.
The fair value of the options was estimated using an option valuation model with
the following weighted-average assumptions:
- ---------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------
Risk-free interest rate 4.88% 6.46% 5.15%
Expected dividend yield 2.66% 2.84% 3.24%
Expected volatility factors of the market
price of Comerica common stock 31% 28% 24%
Expected option life (in years) 4.8 4.8 4.8
============================================================================
- --------------------------------------------------------------------------------
AVERAGE PER SHARE
EXERCISE MARKET
NUMBER PRICE PRICE
- --------------------------------------------------------------------------------
Outstanding - December 31, 1998 10,234,956 $ 33.26 $68.19
Granted 2,388,392 64.86 66.63
Cancelled (259,697) 56.27 58.69
Exercised (801,136) 18.44 62.76
Expired --
- --------------------------------------------------------------------------------
Outstanding - December 31, 1999 11,562,515 $ 40.32 $46.69
Granted 2,781,847 42.53 41.95
Cancelled (261,986) 50.92 49.58
Exercised (1,522,564) 17.16 17.31
Expired --
- --------------------------------------------------------------------------------
Outstanding - December 31, 2000 12,559,812 $ 43.38 $59.38
Granted 2,566,441 52.00 52.00
Cancelled (269,735) 54.32 64.74
Exercised (1,757,074) 28.71 59.70
Expired --
- --------------------------------------------------------------------------------
Outstanding - December 31, 2001 13,099,444 $ 46.81 $57.30
================================================================================
Exercisable - December 31, 2000 8,026,508 $ 39.09
Exercisable - December 31, 2001 8,159,135 43.13
Available for grant - December 31, 2001 15,893,000
================================================================================
Had compensation cost for the Corporation's stock-based compensation plans been
determined in accordance with the fair value provisions, net income and earnings
per share would have been as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Pro forma net income applicable
to common stock $653,266 $747,700 $719,598
Pro forma earnings per share:
Basic $ 3.68 $ 4.23 $ 4.07
Diluted 3.63 4.17 4.00
================================================================================
53
14 LONG-TERM INCENTIVE PLANS (CONTINUED)
The pro forma net income and earnings per share presented on the previous page
includes the compensation cost associated with options to acquire OPAY stock
granted to employees of the Corporation's OPAY subsidiary. Other disclosures
provided in this note do not include information related to the OPAY stock
option plan. Pro forma net income applicable to common and earnings per share in
2001 was affected by the accelerated vesting of former Imperial and OPAY stock
options as a result of the Imperial acquisition.
The table to the right summarizes information about stock options outstanding at
December 31, 2001:
- ----------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
- ----------------------------------------------------------------------------
AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE RANGE SHARES LIFE (A) PRICE SHARES PRICE
- ----------------------------------------------------------------------------
$ 5.87 - $18.75 1,272,196 2.9 $17.75 1,272,196 $17.75
19.83 - 37.74 1,893,037 3.7 24.84 1,893,037 24.84
40.09 - 49.81 3,520,206 7.2 41.42 2,213,548 41.36
50.17 - 59.24 2,606,273 9.3 54.58 88,863 53.16
60.31 - 66.81 2,076,506 7.2 66.59 1,300,885 66.52
68.44 - 71.58 1,731,226 6.2 71.58 1,390,606 71.58
- ----------------------------------------------------------------------------
Total 13,099,444 6.6 46.81 8,159,135 43.13
============================================================================
(a) Average contractual life remaining in years.
In 2001, the Corporation awarded 162 thousand shares of restricted stock. The
fair value of these shares at grant date was $9 million.
15 EMPLOYEE BENEFIT PLANS
The Corporation has a defined benefit pension plan in effect for substantially
all full-time employees. Staff expense includes income of $1.4 million in 2001,
$7.9 million in 2000 and $0.8 million in 1999 for the plan. Benefits under the
plan are based primarily on years of service, age and compensation during the
five highest paid consecutive calendar years occurring during the last ten years
before retirement. The plan's assets primarily consist of units of certain
collective investment funds administered by Munder Capital Management, equity
securities, U.S. government and agency securities and corporate bonds and notes.
The Corporation's postretirement benefits plan continues postretirement health
care and life insurance benefits for retirees as of December 31, 1992, and life
insurance only for retirees after that date. The Corporation has funded the plan
with a company-owned life insurance contract.
The tables below set forth reconciliations of the Corporation's pension and
postretirement plan obligations and plan assets:
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------
DEFINED BENEFIT POSTRETIREMENT
PENSION PLAN BENEFIT PLAN
- ---------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $ 590,627 $ 509,686 $ 75,952 $ 74,562
Service cost 15,548 13,531 88 79
Interest cost 46,998 42,839 5,708 5,541
Amendments -- 25,696 -- --
Actuarial (gain) loss 65,164 22,294 1,853 2,892
Benefits paid (25,042) (23,419) (6,112) (7,122)
- ---------------------------------------------------------------------------------------------------
Benefit obligation at
December 31 $ 693,295 $ 590,627 $ 77,489 $ 75,952
===================================================================================================
Change in plan assets:
Fair value of plan assets at
January 1 $ 631,019 $ 651,782 $ 85,711 $ 84,391
Actual return on plan assets (33,829) 2,656 637 5,136
Employer contributions 36,600 -- 3,089 3,306
Benefits paid (25,042) (23,419) (6,112) (7,122)
- ---------------------------------------------------------------------------------------------------
Fair value of plan assets at
December 31 $ 608,748 $ 631,019 $ 83,325 $ 85,711
===================================================================================================
The following table sets forth the funded status of the defined benefit pension
and postretirement plan and amounts recognized on the Corporation's balance
sheet:
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------
DEFINED BENEFIT POSTRETIREMENT
PENSION PLAN BENEFIT PLAN
- -----------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Funded status at
December 31 $ (84,547) $ 40,393 $ 5,836 $ 9,758
Unrecognized net (gain) loss 139,142 (24,927) 10,606 3,282
Unrecognized net transition
(asset) obligation 19,576 (856) 47,083 51,388
Unrecognized prior service
cost -- 21,597 -- --
- -----------------------------------------------------------------------------------------------
Prepaid benefit cost $ 74,171 $ 36,207 $ 63,525 $ 64,428
===============================================================================================
The change in funding status of the defined benefit pension plan from 2000 to
2001 is a result of lower than expected investment performance in 2001. Future
contributions to the plan and improved earnings performance of the plan is
expected to return the plan to a fully funded status. The Corporation has met or
exceeded all minimum funding standards for the defined benefit pension plan.
Components of net periodic benefit cost (income):
DEFINED BENEFIT PENSION PLAN
(IN THOUSANDS)
- ----------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------
Service cost $ 15,548 $ 13,531 $ 15,387
Interest cost 46,999 42,839 38,118
Expected return on plan assets (67,145) (60,920) (51,241)
Amortization of unrecognized
transition asset 2,069 (4,834) (4,834)
Amortization of unrecognized prior
service cost 2,021 2,026 (322)
Amortization of unrecognized net
(gain) loss (856) (584) 2,132
- ----------------------------------------------------------------------------------
Net periodic benefit income $ (1,364) $ (7,942) $ (760)
==================================================================================
54
The following table sets forth the funded status of the defined benefit pension
and postretirement plan and amounts recognized on the Corporation's balance
sheet:
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------
DEFINED BENEFIT POSTRETIREMENT
PENSION PLAN BENEFIT PLAN
- -----------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Funded status at
December 31 $ (84,547) $ 40,393 $ 5,836 $ 9,758
Unrecognized net (gain) loss 139,142 (24,927) 10,606 3,282
Unrecognized net transition
(asset) obligation 19,576 (856) 47,083 51,388
Unrecognized prior service
cost -- 21,597 -- --
- -----------------------------------------------------------------------------------------------
Prepaid benefit cost $ 74,171 $ 36,207 $ 63,525 $ 64,428
===============================================================================================
The change in funding status of the defined benefit pension plan from 2000 to
2001 is a result of lower than expected investment performance in 2001. Future
contributions to the plan and improved earnings performance of the plan is
expected to return the plan to a fully funded status. The Corporation has met or
exceeded all minimum funding standards for the defined benefit pension plan.
Components of net periodic benefit cost (income):
DEFINED BENEFIT PENSION PLAN
(IN THOUSANDS)
- ----------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------
Service cost $ 15,548 $ 13,531 $ 15,387
Interest cost 46,999 42,839 38,118
Expected return on plan assets (67,145) (60,920) (51,241)
Amortization of unrecognized
transition asset 2,069 (4,834) (4,834)
Amortization of unrecognized prior
service cost 2,021 2,026 (322)
Amortization of unrecognized net
(gain) loss (856) (584) 2,132
- ----------------------------------------------------------------------------------
Net periodic benefit income $ (1,364) $ (7,942) $ (760)
==================================================================================
15 EMPLOYEE BENEFIT PLANS (CONTINUED)
POSTRETIREMENT BENEFIT PLAN
(IN THOUSANDS)
- --------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------
Service cost $ 88 $ 79 $ 256
Interest cost 5,708 5,541 5,308
Expected return on plan assets (6,109) (6,069) (5,935)
Amortization of unrecognized
transition obligation 4,306 4,305 4,628
- --------------------------------------------------------------------------
Net periodic benefit cost $ 3,993 $ 3,856 $ 4,257
Actuarial assumptions were as follows:
DEFINED BENEFIT PENSION PLAN
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Discount rate used in determining
benefit obligation 7.4% 7.9% 8.0%
Long-term rate of return on assets 10.0% 10.0% 9.3%
Rate of compensation increase 5.0% 5.0% 5.0%
POSTRETIREMENT BENEFIT PLAN
- -----------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------
Discount rate used in determining
benefit obligation 7.4% 7.9% 8.0%
Long-term rate of return on assets 6.7% 6.7% 6.7%
=======================================================================
The health care and prescription drug cost trend rates projected for 2001 were
eight percent and 10 percent, respectively. Each health care cost trend rate is
assumed to gradually decrease to five percent by the year 2007. Increasing each
health care rate by one percentage point would increase the accumulated
postretirement benefit obligation by $6 million at December 31, 2001, and the
aggregate of the service and interest cost components by $418 thousand for the
year ended December 31, 2001. Decreasing each health care rate by one percentage
point would decrease the accumulated postretirement benefit obligation by $5
million at December 31, 2001, and the aggregate of the service and interest cost
components by $367 thousand for the year ended December 31, 2001.
The Corporation also maintains defined contribution plans (including 401(k)
plans) for various groups of its employees. All of the Corporation's employees
are eligible to participate in one or more of the plans. The Corporation makes
matching contributions, most of which are based on a declining percentage of
employee contributions (currently, maximum per employee is $1,000) as well as a
performance-based matching contribution based on the Corporation's financial
performance. Staff expense includes expense of $16.6 million in 2001, $18.7
million in 2000 and $16.7 million in 1999 for the plans.
Prior to the merger, Imperial maintained an employee stock ownership plan
("ESOP") for certain employees. Imperial recorded compensation expense equal to
the fair value of the shares allocated under the plan. The contributions to the
plan are discretionary. At December 31, 2000 the plan was externally leveraged.
Imperial borrowed $6 million from a correspondent bank in 1999 and an additional
$6 million in 2000 to fund the purchase of 133,723 and 165,227 shares of common
stock, respectively, for contribution to the ESOP. In 2001 the plan was
converted to an internally leveraged plan and merged into the Corporation's
401(k) plan. Shares are released to the ESOP as principal and interest payments
are made on the loans. In 2001, a total of 44,508 shares of common stock, with a
cost basis of $1.7 million, were released to the ESOP. For 2000, a total of
70,183 shares, with a cost basis of $3.0 million, were released to the ESOP. At
December 31, 2001 and 2000, unearned compensation related to the ESOP of $5.0
million and $6.8 million, respectively, was reflected as a reduction of
shareholders' equity. The fair value of unallocated ESOP shares totaled $7.6
million and $10.5 million at December 31, 2001 and 2000, respectively.
Prior to the merger, Imperial also maintained a Deferred Compensation Plan ("DC
Plan") to provide specified benefits to certain employees and directors. The DC
Plan allowed participants to defer all or a portion of their salary and bonus.
Imperial matched from 0% to 50% of certain participants' deferrals under the
plan. The match percentage was 25% for 2001 and 50% for 2000 and 1999. The
expense related to funding the deferred compensation match totaled $0.6 million,
$5.1 million and $3.0 million for the years ended December 31, 2001, 2000 and
1999, respectively. The plan was merged into the Corporation's deferred
compensation plan at June 30, 2001. No additional matching contributions are
paid to participants under the terms of the merged plan.
16 INCOME TAXES
The current and deferred components of income taxes were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Currently payable
Federal $305,153 $360,514 $337,127
Foreign 17,570 16,120 22,797
State and local 33,723 20,809 31,019
- --------------------------------------------------------------------------------
356,446 397,443 390,943
Deferred federal, state and local 44,613 33,349 28,404
- --------------------------------------------------------------------------------
Total $401,059 $430,792 $419,347
================================================================================
There were $6.9 million, $4.4 million and $3.8 million of income tax provision
on securities transactions in 2001, 2000 and 1999, respectively.
The principal components of deferred tax assets and liabilities at December 31
is presented at right:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1001 2000
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $214,307 $195,425
Allowance for depreciation 9,642 3,302
Deferred loan origination fees and costs 33,413 31,617
Employee benefits 37,712 30,627
Other temporary differences, net 85,217 52,109
- --------------------------------------------------------------------------------
Total deferred tax assets $380,291 $313,080
Deferred tax liabilities:
Lease financing transactions $423,456 $310,624
OPAY 11,919 13,029
Other comprehensive income 122,324 4,251
- --------------------------------------------------------------------------------
Total deferred tax liabilities 557,699 327,904
- --------------------------------------------------------------------------------
Net deferred tax liability $177,408 $ 14,824
================================================================================
55
16 INCOME TAXES (CONTINUED)
The provision for income taxes differs from that computed by applying the
federal statutory rate of 35 percent for the reasons in the following analysis:
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
2001 2000 1999
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -------------------------------------------------------------------------------------------------------------
Tax based on federal statutory rate $ 388,723 35.0% $ 427,535 35.0% $ 412,567 35.0%
Effect of tax-exempt interest income (1,807) (0.2) (1,917) (0.2) (2,856) (0.2)
State income taxes 24,275 2.2 18,419 1.5 15,561 1.3
Company owned life insurance (13,475) (1.2) (11,553) (0.9) (11,054) (0.9)
Goodwill 7,189 0.6 7,557 0.6 7,584 0.6
Merger-related tax liability adjustment (6,853) (0.6) -- -- -- --
Other 3,007 0.3 (9,249) (0.7) (2,455) (0.2)
- -------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 401,059 36.1% $ 430,792 35.3% $ 419,347 35.6%
=============================================================================================================
17 MERGER-RELATED AND RESTRUCTURING CHARGES
IMPERIAL BANCORP RESTRUCTURING
The Corporation recorded a restructuring charge of $173 million in 2001 related
to the acquisition of Imperial Bancorp. The components of this charge, which
included $25 million recorded in the provision for credit losses and $148
million recorded in noninterest expenses, are shown in the table below. The
integration with Imperial was completed in the fourth quarter of 2001. No
additional Imperial-related restructuring charges are expected.
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. A total of 352 employees were terminated in 2001 as part
of the restructuring plan. 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 $36 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 amount related primarily to a
gain on the sale of Imperial's merchant bankcard business, required under an
existing Comerica alliance agreement, and conforming commercial equipment lease
residual values policies.
The Corporation incurred facilities and operations charges associated with
closing excess facilities and replacing signage.
Other merger-related restructuring costs were primarily comprised of investment
banking, accounting, consulting and legal fees.
OFFICIAL PAYMENTS CORPORATION (OPAY) RESTRUCTURING
The Corporation recorded a restructuring charge of $4 million in the fourth
quarter of 2001 related to its subsidiary, Official Payments Corporation (OPAY),
designed to significantly reduce operating expenses and its use of cash. The
OPAY restructuring charge is shown net of the portion of the charge attributable
to the minority shareholders in OPAY. As part of the restructuring program, OPAY
will incorporate newly developed technology into its operations resulting in
reductions in salaries and benefits, marketing, administrative and
telecommunications costs. No additional restructuring charges are expected as
part of this plan.
The restructuring charge included employee termination costs of $1 million which
covered the cost of severance, outplacement and other benefits associated with
the involuntary termination of
RESTRUCTURING RESERVE ANALYSIS
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER FACILITIES
EMPLOYEE EMPLOYEE- CONFORMING AND IMPERIAL OPAY COMBINED
TERMINATION RELATED POLICIES OPERATIONS OTHER TOTAL TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Provision expense charged to
operating expense 35,200 49,200 35,900 23,500 28,900 172,700 4,000 176,700
Cash outlays (29,900) (36,000) -- (2,500) (28,400) (96,800) (300) (97,100)
Noncash write-downs and other -- (11,100) (35,900) (21,000) -- (68,000) (1,500) (69,500)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 5,300 $ 2,100 $ -- $ -- $ 500 $ 7,900 $ 2,200 $ 10,100
====================================================================================================================================
56
17 MERGER-RELATED AND RESTRUCTURING CHARGES (CONTINUED)
employees, primarily in corporate support and product development areas. A total
of 44 employees are expected to be severed as part of the restructuring plan, 33
of which occurred during the fourth quarter. The remaining employee severances
will occur during 2002.
The remainder of the charge was for facilities and operations charges of $3
million associated with asset write-downs and lease terminations for excess
facilities and equipment disposed of as part of the restructuring effort.
18 TRANSACTIONS WITH RELATED PARTIES
The bank subsidiaries have had, and expect to have in the future, transactions
with the Corporation's directors and their affiliates. Such transactions were
made in the ordinary course of business and included extensions of credit, all
of which were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers and did not, in management's opinion, involve more than
normal risk of collectibility or present other unfavorable features. The
aggregate amount of loans attributable to persons who were related parties at
December 31, 2001, totaled $401 million at the beginning and $406 million at the
end of 2001. During 2001, new loans to related parties aggregated $448 million
and repayments totaled $443 million.
19 REGULATORY CAPITAL & BANKING SUBSIDIARIES
Banking regulations limit the transfer of assets in the form of dividends, loans
or advances from the bank subsidiaries to the Corporation. Under the most
restrictive of these regulations, the aggregate amount of dividends which can be
paid to the Corporation without obtaining prior approval from bank regulatory
agencies approximated $641 million at January 1, 2002, plus current year's
earnings. Substantially all the assets of the Corporation's subsidiaries are
restricted from transfer to the Corporation in the form of loans or advances.
Dividends paid to the Corporation by its banking subsidiaries amounted to $580
million in 2001, $339 million in 2000 and $261 million in 1999.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios of Tier 1 and total capital (as
defined in the regulations) to average and risk-weighted assets. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. At December
31, 2001 and 2000, the Corporation and all of its banking subsidiaries exceeded
the ratios required for an institution to be considered "well capitalized"
(total capital ratio greater than 10 percent). The following is a summary of the
capital position of the Corporation and its significant banking subsidiaries.
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
COMERICA INC. COMERICA COMERICA BANK- COMERICA BANK-
DECEMBER 31, 2001 (CONSOLIDATED) BANK TEXAS CALIFORNIA
- --------------------------------------------------------------------------------------------------------------------------
Tier 1 common capital $4,282,890 $2,946,887 $401,797 $1,174,524
Tier 1 capital 4,678,475 3,166,887 401,797 1,174,524
Total capital 6,860,542 4,880,733 548,680 1,570,924
Tier 1 common capital to risk-weighted assets 7.30% 6.99% 9.02% 8.94%
Tier 1 capital to risk-weighted assets (minimum-4.0%) 7.98 7.52 9.02 8.94
Total capital to risk-weighted assets (minimum-8.0%) 11.70 11.58 12.31 11.96
Tier 1 capital to average assets (minimum-3.0%) 9.36 8.90 10.42 8.66
DECEMBER 31, 2000
Tier 1 common capital $3,914,196 $2,923,331 $370,520 $ 980,768
Tier 1 capital 4,230,159 2,923,331 370,520 996,768
Total capital 6,398,904 4,600,732 519,976 1,378,907
Tier 1 common capital to risk-weighted assets 6.80% 7.09% 9.43% 7.65%
Tier 1 capital to risk-weighted assets (minimum-4.0%) 7.35 7.09 9.43 7.78
Total capital to risk-weighted assets (minimum-8.0%) 11.11 11.16 13.23 10.76
Tier 1 capital to average assets (minimum-3.0%) 8.74 8.91 9.95 8.17
57
20 DERIVATIVE AND CREDIT-RELATED FINANCIAL INSTRUMENTS AND
FOREIGN EXCHANGE CONTRACTS
In the normal course of business, the Corporation enters into various
transactions involving derivative financial instruments, foreign exchange
contracts and credit-related financial instruments to manage exposure to
fluctuations in interest rate, foreign currency and other market risks and to
meet the financing needs of customers. These financial instruments involve, to
varying degrees, elements of credit and market risk.
Credit risk is the possible loss that may occur in the event of non-performance
by the counterparty to a financial instrument. The Corporation attempts to
minimize credit risk arising from financial instruments by evaluating the
creditworthiness of each counterparty, adhering to the same credit approval
process used for traditional lending activities. Counterparty risk limits and
monitoring procedures have also been established to facilitate the management of
credit risk. Collateral is obtained, if deemed necessary, based on the results
of management's credit evaluation. Collateral varies, but may include cash,
investment securities, accounts receivable, inventory, property, plant and
equipment or real estate.
Derivative financial instruments and foreign exchange contracts are traded over
an organized exchange or negotiated over-the-counter. Credit risk associated
with exchange-traded contracts is typically assumed by the organized exchange.
Over-the-counter contracts are tailored to meet the needs of the counterparties
involved and, therefore, contain a greater degree of credit risk and liquidity
risk than exchange-traded contracts which have standardized terms and readily
available price information. The Corporation reduces exposure to credit and
liquidity risks from over-the-counter derivative and foreign exchange contracts
by conducting such transactions with investment-grade domestic and foreign
investment banks or commercial banks.
Market risk is the potential loss that may result from movements in interest or
foreign currency rates which cause an unfavorable change in the value of a
financial instrument. The Corporation manages this risk by establishing monetary
exposure limits and monitoring compliance with those limits. Market risk arising
from derivative and foreign exchange positions entered into on behalf of
customers is reflected in the consolidated financial statements and may be
mitigated by entering into offsetting transactions. Market risk inherent in
derivative and foreign exchange contracts held or issued for risk management
purposes is generally offset by changes in the value of rate sensitive assets or
liabilities.
DERIVATIVE FINANCIAL INSTRUMENTS AND
FOREIGN EXCHANGE CONTRACTS
The Corporation, as an end-user, employs a variety of financial instruments for
risk management purposes. Activity related to these instruments is centered
predominantly in the interest rate markets and mainly involves interest rate
swaps. Various other types of instruments are also used to manage exposures to
market risks, including interest rate caps and floors, total return swaps,
foreign exchange forward contracts and foreign exchange swap agreements. 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 year ended December 31, 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 the next three years. Approximately 27% ($11
billion) of the Corporation's outstanding loans were designated as the hedged
items to interest rate swap agreements at December 31, 2001. For the year ended
December 31, 2001, interest rate swap agreements designated as cash flow hedges
increased interest and fees on loans by $175 million. Hedge ineffectiveness that
resulted from cash flow hedges of variable rate loans was not material. If
interest rates and interest curves remain at their current levels, the
Corporation expects to reclassify $198 million of net gains on derivative
instruments, that are designated as cash flow hedges, 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. In addition, the Corporation uses forward foreign exchange contracts to
protect the value of its foreign subsidiaries. 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 year
ended December 31, 2001 and 2000, the Corporation recognized immaterial amounts
of net gains in accumulated foreign currency translation adjustment, related to
the forward foreign exchange contracts.
The Corporation also uses various other types of financial instruments to
mitigate interest rate and foreign currency risks associated with specific
assets or liabilities. Such instruments include interest rate caps and floors,
foreign exchange forward contracts, and foreign exchange cross-currency swaps.
The following table presents the composition of derivative financial instruments
and foreign exchange contracts, excluding commitments, held or issued for risk
management purposes at December 31, 2001 and 2000. 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.
58
20 DERIVATIVE AND CREDIT-RELATED FINANCIAL INSTRUMENTS AND
FOREIGN EXCHANGE CONTRACTS (CONTINUED)
(IN MILLIONS)
- -----------------------------------------------------------------------------------
NOTIONAL/
CONTRACT UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001 AMOUNT GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------
Risk management
Interest rate contracts:
Swaps $14,497 $573 $ (2) $571
Foreign exchange contracts:
Spot and forwards 535 10 (4) 6
Swaps 285 2 (17) (15)
- -----------------------------------------------------------------------------------
Total foreign
exchange contracts 820 12 (21) (9)
- -----------------------------------------------------------------------------------
Total risk management $15,317 $585 $(23) $562
===================================================================================
DECEMBER 31, 2000
Risk management
Interest rate contracts:
Swaps $12,594 $ 206 $(33) $173
Options, caps and
floors purchased 6,058 10 (1) 9
- -----------------------------------------------------------------------------------
Total interest rate
contracts 18,652 216 (34) 182
Foreign exchange contracts:
Spot and forwards 493 18 (6) 12
Swaps 115 1 (13) (12)
- -----------------------------------------------------------------------------------
Total foreign
exchange contracts 608 19 (19) --
- -----------------------------------------------------------------------------------
Total risk management $19,260 $ 235 $(53) $182
===================================================================================
Notional amounts, which represent the extent of involvement in the derivatives
market, are generally used to determine the contractual cash flows required in
accordance with the terms of the agreement. These amounts are typically not
exchanged, significantly exceed amounts subject to credit or market risk and are
not reflected in the consolidated balance sheets.
Credit risk, which excludes the effects of any collateral or netting
arrangements, is measured as the cost to replace, at current market rates,
contracts in a profitable position. The amount of this exposure is represented
by the gross unrealized gains on derivative and foreign exchange contracts.
Bilateral collateral agreements with counterparties covered 92 percent and 95
percent of the notional amount of interest rate derivative contracts at December
31, 2001 and 2000, respectively. These agreements reduce credit risk by
providing for the exchange of marketable investment securities to secure amounts
due on contracts in an unrealized gain position. In addition, at December 31,
2001, master netting arrangements had been established with all interest rate
swap counterparties and certain foreign exchange counterparties. These
arrangements effectively reduce credit risk by permitting settlement, on a net
basis, of contracts entered into with the same counterparty. The Corporation has
not experienced any material credit losses associated with derivative or foreign
exchange contracts.
On a limited scale, fee income is earned from entering into various
transactions, principally foreign exchange contracts and interest rate contracts
at the request of customers. Market risk inherent in customer contracts is often
mitigated by taking offsetting positions. The Corporation generally does not
speculate in derivative financial instruments for the purpose of profiting in
the short-term from favorable movements in market rates.
Fair values for customer-initiated and other derivative and foreign exchange
contracts represent the net unrealized gains or losses on such contracts and are
recorded in the consolidated balance sheets. Changes in fair value are
recognized in the consolidated income statements. For the year ended December
31, 2001, unrealized gains and unrealized losses on customer-initiated and other
foreign exchange contracts averaged $43 million and $39 million, respectively.
For the year ended December 31, 2000, unrealized gains and unrealized losses
averaged $26 million and $19 million, respectively. These contracts also
generated noninterest income of $21 million in 2001 and $9 million in 2000.
Average positive and negative fair values and income related to
customer-initiated and other interest rate contracts were not material for 2001
and 2000.
The following table presents the composition of derivative financial instruments
and foreign exchange contracts held or issued in connection with
customer-initiated and other activities at December 31, 2001 and 2000.
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------
NOTIONAL/
CONTRACT UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001 AMOUNT GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------
Customer-initiated and other
Interest rate contracts:
Caps and floors written $ 365 $ -- $ (4) $ (4)
Caps and floors
purchased 352 4 -- 4
Swaps 981 14 (13) 1
- -----------------------------------------------------------------------------------------------------
Total interest rate
contracts 1,698 18 (17) 1
Foreign exchange contracts:
Spot, forwards, futures
and options 2,323 35 (29) 6
Swaps 366 2 (1) 1
- -----------------------------------------------------------------------------------------------------
Total foreign
exchange contracts 2,689 37 (30) 7
- -----------------------------------------------------------------------------------------------------
Total customer-initiated
and other $4,387 $ 55 $ (47) $ 8
=====================================================================================================
DECEMBER 31, 2000
Customer-initiated and other
Interest rate contracts:
Caps and floors written $ 198 $ -- $ (1) $ (1)
Caps and floors
purchased 179 1 -- 1
Swaps 493 5 (4) 1
- -----------------------------------------------------------------------------------------------------
Total interest rate
contracts 870 6 (5) 1
Foreign exchange contracts:
Spot, forwards, futures
and options 1,827 26 (19) 7
Swaps 50 -- -- --
- -----------------------------------------------------------------------------------------------------
Total foreign
exchange contracts 1,877 26 (19) 7
- -----------------------------------------------------------------------------------------------------
Total customer-initiated
and other $2,747 $ 32 $ (24) $ 8
=====================================================================================================
59
20 DERIVATIVE AND CREDIT-RELATED FINANCIAL INSTRUMENTS AND
FOREIGN EXCHANGE CONTRACTS (CONTINUED)
Detailed discussions of each class of derivative financial instruments and
foreign exchange contracts held or issued by the Corporation for both risk
management and customer-initiated and other activities are as follows.
INTEREST RATE SWAPS
Interest rate swaps are agreements in which two parties periodically exchange
fixed cash payments for variable payments based on a designated market rate or
index (or variable payments based on two different rates or indices for basis
swaps), applied to a specified notional amount until a stated maturity. The
Corporation's swap agreements are structured such that variable payments are
primarily based on prime, one-month LIBOR or three-month LIBOR. These
instruments are principally negotiated over-the-counter and are subject to
credit risk, market risk and liquidity risk.
INTEREST RATE OPTIONS, INCLUDING CAPS AND FLOORS
Option contracts grant the option holder the right to buy or sell an underlying
financial instrument for a predetermined price before the contract expires.
Interest rate caps and floors are option-based contracts which entitle the buyer
to receive cash payments based on the difference between a designated reference
rate and the strike price, applied to a notional amount. Written options,
primarily caps, expose the Corporation to market risk but not credit risk. A fee
is received at inception for assuming the risk of unfavorable changes in
interest rates. Purchased options contain both credit and market risk; however,
market risk is limited to the fee paid. Options are either exchange-traded or
negotiated over-the-counter. All interest rate caps and floors are
over-the-counter agreements.
FOREIGN EXCHANGE CONTRACTS
The Corporation uses foreign exchange rate swaps, including generic receive
variable swaps and cross-currency swaps, for risk management purposes. Generic
receive variable swaps involve payment, in a foreign currency, of the difference
between a contractually fixed exchange rate and an average exchange rate
determined at settlement, applied to a notional amount. Cross-currency swaps
involve the exchange of both interest and principal amounts in two different
currencies. Other foreign exchange contracts such as futures, forwards and
options are primarily entered into as a service to customers and to offset
market risk arising from such positions. Futures and forward contracts require
the delivery or receipt of foreign currency at a specified date and exchange
rate. Foreign currency options allow the holder to purchase or sell a foreign
currency at a specified date and price. Foreign exchange futures are
exchange-traded, while forwards, swaps and most options are negotiated
over-the-counter. Foreign exchange contracts expose the Corporation to both
market risk and credit risk.
COMMITMENTS
The Corporation also enters into commitments to purchase or sell earning assets
for risk management purposes. These transactions, which are similar in nature to
forward contracts, did not have a material impact on the consolidated financial
statements for the years ended December 31, 2001 and 2000. Commitments to
purchase and sell investment securities for the Corporation's trading account
totaled $11 million and $10 million, respectively, at December 31, 2001 and $1
million and $2 million, respectively, at December 31, 2000. Outstanding
commitments expose the Corporation to both credit and market risk.
CREDIT-RELATED FINANCIAL INSTRUMENTS
The Corporation issues off-balance sheet financial instruments in connection
with commercial and consumer lending activities.
Credit risk associated with these instruments is represented by the contractual
amounts indicated in the following table:
(IN MILLIONS)
- -------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------
Unused commitments to extend credit $28,695 $28,625
Standby letters of credit and financial guarantees 5,118 4,692
Commercial letters of credit 258 305
Credit default swaps 7 44
UNUSED COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are legally binding agreements to lend to a
customer, provided there is no violation of any condition established in the
contract. These commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many commitments
expire without being drawn upon, the total contractual amount of commitments
does not necessarily represent future cash requirements of the Corporation.
Total unused commitments to extend credit included bankcard, revolving check
credit and equity access loan commitments of $1 billion at December 31, 2001 and
2000. Other unused commitments, primarily variable rate, totaled $28 billion at
December 31, 2001 and 2000.
STANDBY AND COMMERCIAL LETTERS OF CREDIT AND
FINANCIAL GUARANTEES
Standby and commercial letters of credit and financial guarantees represent
conditional obligations of the Corporation which guarantee the performance of a
customer to a third party. Standby letters of credit and financial guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. Long-term
standby letters of credit and financial guarantees, defined as those maturing
beyond one year, expire in decreasing amounts through the year 2012, and were
$1,562 million and $1,338 million at December 31, 2001 and 2000, respectively.
The remaining standby letters of credit and financial guarantees, which mature
within one year, totaled $3,556 million and $2,997 million at December 31, 2001
and 2000, respectively. Commercial letters of credit are issued to finance
foreign or domestic trade transactions.
CREDIT DEFAULT SWAPS
Credit default swaps allow the Corporation to diversify its loan portfolio by
assuming credit exposure from different borrowers or industries without actually
extending credit in the form of a loan. Credit risk associated with credit
default swaps was $7 million and $44 million at December 31, 2001 and 2000,
respectively.
60
21 CONTINGENT LIABILITIES
The Corporation and its subsidiaries are parties to litigation and claims
arising in the normal course of their activities. The amount of ultimate
liability, if any, with respect to such matters, or the likelihood or impact of
future claims that may be brought against the Corporation, cannot be determined
with reasonable certainty. Management, after consultation with legal counsel,
believes that the litigation and claims, some of which are substantial, will not
have a material adverse effect on the Corporation's consolidated financial
position.
22 USAGE RESTRICTIONS
Cash and due from banks may include amounts required to be deposited with the
Federal Reserve Bank. These reserve balances vary, depending on the level of
customer deposits in the Corporation's subsidiary banks. The average amount of
these reserves was $212 million and $201 million for the years ended December
31, 2001 and 2000, respectively.
23 ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair values of financial instruments, which differ
from carrying values, often requires the use of estimates. In cases where quoted
market values are not available, the Corporation uses present value techniques
and other valuation methods to estimate the fair values of its financial
instruments. These valuation methods require considerable judgment, and the
resulting estimates of fair value can be significantly affected by the
assumptions made and methods used. Accordingly, the estimates provided herein do
not necessarily indicate amounts which could be realized in a current exchange.
Furthermore, as the Corporation normally intends to hold the majority of its
financial instruments until maturity, it does not expect to realize many of the
estimated amounts disclosed. The disclosures also do not include estimated fair
value amounts for items which are not defined as financial instruments, but
which have significant value. These include such items as core deposit
intangibles, the future earnings potential of significant customer relationships
and the value of trust operations and other fee generating businesses. The
Corporation believes the imprecision of an estimate could be significant.
The Corporation used the following methods and assumptions:
Cash and short-term investments: The carrying amount approximates the estimated
fair value of these instruments, which consist of cash and due from banks,
interest-bearing deposits with banks and federal funds sold.
Trading account securities: These securities are carried at quoted market value
or the market value for comparable securities, which represents estimated fair
value.
Loans held for sale: The market value of these loans represents estimated fair
value or estimated net selling price. The market value is determined on the
basis of existing forward commitments or the market values of similar loans.
Investment securities: The market value of investment securities, which is based
on quoted market values or the market values for comparable securities,
represents estimated fair value.
Domestic business loans: These consist of commercial, real estate construction,
commercial mortgage and equipment lease financing loans. The estimated fair
value of the Corporation's variable rate commercial loans is represented by
their carrying value, adjusted by an amount which estimates the change in fair
value caused by changes in the credit quality of borrowers since the loans were
originated. The estimated fair value of fixed rate commercial loans is
calculated by discounting the contractual cash flows of the loans using year-end
origination rates derived from the Treasury yield curve or other representative
bases. The resulting amounts are adjusted to estimate the effect of changes in
the credit quality of borrowers since the loans were originated.
International loans: The estimated fair value of the Corporation's short-term
international loans which consist of trade-related loans, or loans which have no
cross-border risk due to the existence of domestic guarantors or liquid
collateral, is represented by their carrying value, adjusted by an amount which
estimates the effect on fair value of changes in the credit quality of borrowers
or guarantors. The estimated fair value of long-term international loans is
based on the quoted market values of these loans or on the market values of
international loans with similar characteristics.
Retail loans: This category consists of residential mortgage and consumer loans.
The estimated fair value of residential mortgage loans is based on discounted
contractual cash flows or market values of similar loans sold in conjunction
with securitized transactions. For consumer loans, the estimated fair values are
calculated by discounting the contractual cash flows of the loans using rates
representative of year-end origination rates. The resulting amounts are adjusted
to estimate the effect of changes in the credit quality of borrowers since the
loans were originated.
Customers' liability on acceptances outstanding and acceptances outstanding: The
carrying amount approximates the estimated fair value.
Loan servicing rights: The estimated fair value is a discounted cash flow
analyses, using interest rates and prepayment speed assumptions currently quoted
for comparable instruments.
Deposit liabilities: The estimated fair value of demand deposits, consisting of
checking, savings and certain money market deposit accounts, is represented by
the amounts payable on demand. The carrying amount of deposits in foreign
offices approximates their estimated fair value, while the estimated fair value
of term deposits is calculated by discounting the scheduled cash flows using the
year-end rates offered on these instruments.
61
23 ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Short-term borrowings: The carrying amount of federal funds purchased,
securities sold under agreements to repurchase and other borrowings approximates
estimated fair value.
Medium- and long-term debt: The estimated fair value of the Corporation's
variable rate medium- and long-term debt is represented by its carrying value.
The estimated fair value of the fixed rate medium- and long-term debt is based
on quoted market values. If quoted market values are not available, the
estimated fair value is based on the market values of debt with similar
characteristics.
Derivative financial instruments and foreign exchange contracts: The estimated
fair value of interest rate swaps represents the amount the Corporation would
receive or pay to terminate or otherwise settle the contracts at the balance
sheet date, taking into consideration current unrealized gains and losses on
open contracts. The estimated fair value of foreign exchange futures and forward
contracts and commitments to purchase or sell financial instruments is based on
quoted market prices. The estimated fair value of interest rate and foreign
currency options (including interest rate caps and floors) is determined using
option pricing models. Beginning January 1, 2001, all derivative financial
instruments and foreign exchange contracts are carried at fair value on the
balance sheet.
Credit-related financial instruments: The estimated fair value of unused
commitments to extend credit and standby and commercial letters of credit is
represented by the estimated cost to terminate or otherwise settle the
obligations with the counterparties. This amount is approximated by the fees
currently charged to enter into similar arrangements, considering the remaining
terms of the agreements and any changes in the credit quality of counterparties
since the agreements were entered into.
This estimate of fair value does not take into account the significant value of
the customer relationships and the future earnings potential involved in such
arrangements as the Corporation does not believe that it would be practicable to
estimate a representational fair value for these items. The estimated fair
values of the Corporation's financial instruments at December 31, 2001 and 2000
are as follows:
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term
investments $ 2,620 $ 2,620 $ 3,404 $ 3,404
Trading account
securities 101 101 104 104
Loans held for sale 283 284 153 158
Investment securities
available for sale 4,291 4,291 3,891 3,891
Commercial loans 25,176 24,897 26,009 25,673
International loans 3,015 2,952 2,571 2,501
Real estate construction loans 3,258 3,262 2,915 2,926
Commercial mortgage loans 6,267 6,285 5,361 5,323
Residential mortgage loans 779 785 808 818
Consumer loans 1,484 1,468 1,477 1,500
Lease financing 1,217 1,208 1,029 1,086
- ---------------------------------------------------------------------------------------------------
Total loans 41,196 40,857 40,170 39,827
Less allowance for credit losses (655) -- (608) --
- ---------------------------------------------------------------------------------------------------
Net loans 40,541 40,857 39,562 39,827
Customers' liability on
acceptances outstanding 29 29 27 27
Loan servicing rights 9 9 7 7
LIABILITIES
Demand deposits
(noninterest-bearing) 12,596 12,596 10,188 10,188
Interest-bearing deposits 24,974 25,070 23,666 23,760
- ---------------------------------------------------------------------------------------------------
Total deposits 37,570 37,666 33,854 33,948
Short-term borrowings 1,986 1,986 2,093 2,093
Acceptances outstanding 29 29 27 27
Medium- and long-term
debt 5,503 5,490 8,259 8,209
DERIVATIVE
FINANCIAL
INSTRUMENTS
AND FOREIGN
EXCHANGE
CONTRACTS
Risk management:
Unrealized gains 585 585 7 235
Unrealized losses (23) (23) -- (53)
Customer-initiated and other:
Unrealized gains 55 55 35 32
Unrealized losses (47) (47) (27) (24)
CREDIT-RELATED
FINANCIAL
INSTRUMENTS -- (28) -- (89)
===================================================================================================
62
24 BUSINESS SEGMENT INFORMATION
The Corporation has strategically aligned its operations into three major lines
of business: the Business Bank, the Individual Bank and the Investment Bank.
These lines of business are differentiated based on the products and services
provided. Lines of business results are produced by the Corporation's internal
management accounting system. This system measures financial results based on
the internal organizational structure of the Corporation. Information presented
is not necessarily comparable with similar information for any other financial
institution. The management accounting system assigns balance sheet and income
statement items to each line of business using certain methodologies which are
constantly being refined. For comparability purposes, amounts in all periods are
based on methodologies in effect at December 31, 2001. These methodologies,
which are briefly summarized in the following paragraph, may be modified as
management accounting systems are enhanced and changes occur in the
organizational structure or product lines. In addition to the three major lines
of business, the Finance Division is also reported as a segment.
The Corporation's internal funds transfer pricing system records cost of funds
or credit for funds using a combination of matched maturity funding for certain
assets and liabilities and a blended rate based on various maturities for the
remaining assets and liabilities. The credit loss provision is assigned based on
the amount necessary to maintain an allowance for credit losses adequate for
that line of business. Noninterest income and expenses directly attributable to
a line of business are assigned to that business. Direct expenses incurred by
areas whose services support the overall Corporation are allocated to the
business lines as follows: Product processing expenditures are allocated based
on standard unit costs applied to actual volume measurements; administrative
expenses are allocated based on estimated time expended; and corporate overhead
is assigned based on the ratio of a line of business' noninterest expenses to
total noninterest expenses incurred by all business lines. Equity, (common
equity plus Tier 1 qualifying trust preferred securities) is allocated based on
credit, operational and business risks.
The following discussion provides information about the activities of each line
of business. A discussion of the financial results and the factors impacting
2001 performance can be found in the section entitled "Strategic Lines of
Business" in the financial review on page 31.
The Business Bank is comprised of middle market lending, asset-based lending,
large corporate banking, international financial services and specialty deposit
gathering. This line of business meets the needs of medium-size businesses,
multinational corporations and governmental entities by offering various
products and services, including commercial loans and lines of credit, deposits,
cash management, capital market products, international trade finance, letters
of credit, foreign exchange management services and loan syndication services.
The Individual Bank includes consumer lending, consumer deposit gathering,
mortgage loan origination, small business banking (annual sales under $10
million) and private banking. This line of business offers a variety of consumer
products, including deposit accounts, installment loans, credit cards, student
loans, home equity lines of credit and residential mortgage loans. In addition,
a full range of financial services is provided to small businesses and
municipalities. Private lending and personal trust services are also provided to
meet the personal financial needs of affluent individuals (as defined by
individual net income or wealth).
The Investment Bank is responsible for institutional trust products, retirement
services and provides investment management and advisory services (including
Munder), investment banking and discount securities brokerage services. This
line of business also offers the sale of mutual fund and annuity products, as
well as life, disability and long-term care insurance products.
The Finance segment includes the Corporation's securities portfolio and asset
and liability management activities. This segment is responsible for managing
the Corporation's funding, liquidity and capital needs, performing interest
sensitivity gap and earnings simulation analysis and executing various
strategies to manage the Corporation's exposure to interest rate risk.
The Other category includes divested business lines, the income and expense
impact of cash and credit loss reserves not assigned to specific business lines
and miscellaneous other items of a corporate nature.
63
24 BUSINESS SEGMENT INFORMATION (CONTINUED)
Lines of business/segment financial results were as follows:
(DOLLAR AMOUNTS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
BUSINESS BANK INDIVIDUAL BANK INVESTMENT BANK*
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net interest income (FTE) $ 1,333 $ 1,275 $ 1,120 $ 738 $ 751 $ 707 $ (6) $ (10) $ (4)
Provision for credit losses 245 289 180 22 3 (5) -- -- --
Noninterest income 293 317 330 324 352 300 96 267 202
Noninterest expenses 572 602 559 616 612 604 197 233 176
Provision for income taxes (FTE) 294 257 265 141 167 141 (37) 12 9
Net income (loss) 515 444 446 283 321 267 (70) 12 13
SELECTED AVERAGE
BALANCES
Assets $ 35,648 $ 33,458 $ 30,424 $ 7,881 $ 7,202 $ 7,163 $ 398 $ 408 $ 247
Loans 34,080 31,987 28,800 7,269 6,658 6,690 22 53 --
Deposits 11,171 9,629 8,631 18,405 17,959 17,418 72 37 24
Allocated equity 2,798 2,428 1,958 894 809 745 267 282 197
STATISTICAL DATA
Return on average assets 1.44% 1.33% 1.47% 1.46% 1.71% 1.46% (17.28)% 2.70% 5.43%
Return on average allocated equity 18.40 18.29 22.80 31.63 39.72 35.78 (26.27) 4.26 6.80
Efficiency ratio 35.06 37.86 38.64 57.94 55.46 59.97 220.28 90.95 89.37
(DOLLAR AMOUNTS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCE OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net interest income (FTE) $ 42 $ (13) $ 2 $ (1) $ 5 $ (3) $ 2,106 $ 2,008 $ 1,822
Provision for credit losses -- -- -- (31) (37) (29) 236 255 146
Noninterest income 66 18 11 25 3 24 804 957 867
Noninterest expenses 8 4 4 166 33 16 1,559 1,484 1,359
Provision for income taxes (FTE) 42 1 2 (35) (2) 8 405 435 425
Net income (loss) 58 -- 7 (76) 14 26 710 791 759
SELECTED AVERAGE
BALANCES
Assets $ 4,230 $ 4,312 $ 3,615 $ 1,531 $ 1,497 $ 1,213 $49,688 $46,877 $42,662
Loans -- -- -- -- -- -- 41,371 38,698 35,490
Deposits 5,564 2,596 1,296 100 119 109 35,312 30,340 27,478
Allocated equity 752 399 335 (106) 45 174 4,605 3,963 3,409
STATISTICAL DATA
Return on average assets 0.33% (0.01)% 0.05% n/m% n/m% n/m% 1.43% 1.69% 1.78%
Return on average allocated equity 7.70 (0.21) 1.95 n/m n/m n/m 15.16 19.52 21.78
Efficiency ratio 9.10 (35.72) 49.18 n/m n/m n/m 53.95 50.35 50.70
* Included in noninterest expenses are fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded,
Investment Bank net income would have been $(63) million in 2001, $26 million
in 2000 and $22 million in 1999. Return on average allocated equity would have
been (23.39)% in 2001, 9.31% in 2000 and 11.38% in 1999.
n/m - not meaningful
64
25 PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS - COMERICA INCORPORATED
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 2001 2000
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from subsidiary bank $ 101,117 $ 9,918
Time deposits with banks 100 100
Short-term investments with subsidiary bank 12,000 112,000
Investment securities available for sale -- 47,262
Investment in subsidiaries, principally banks 5,371,101 4,634,579
Premises and equipment 3,052 3,391
Other assets 187,974 66,009
- ---------------------------------------------------------------------------------------------------------
Total assets $ 5,675,344 $ 4,873,259
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper $ 139,909 $ 79,985
Long-term debt 156,288 157,414
Subordinated debt issued to and advances from subsidiaries 359,670 4,453
Other liabilities 212,013 131,248
- ---------------------------------------------------------------------------------------------------------
Total liabilities 867,880 373,100
Nonredeemable preferred stock - $50 stated value
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at 12/31/00 -- 250,000
Common stock - $5 par value
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at 12/31/01 and 177,703,678 shares at 12/31/00 893,746 888,519
Capital surplus 345,156 301,414
Unearned employee stock ownership plan shares - 131,954 shares at 12/31/01
and 176,462 shares at 12/31/00 (5,037) (6,750)
Accumulated other comprehensive income 225,617 12,097
Retained earnings 3,447,974 3,085,784
Deferred compensation (9,205) (14,494)
Less cost of common stock in treasury - 1,674,659 shares at 12/31/01
and 289,397 shares at 12/31/00 (90,787) (16,411)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,807,464 4,500,159
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,675,344 $ 4,873,259
=========================================================================================================
STATEMENTS OF INCOME - COMERICA INCORPORATED
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
INCOME
Income from subsidiaries
Dividends from subsidiaries $ 579,719 $ 339,060 $ 260,603
Other interest income 2,121 6,464 808
Intercompany management fees 131,901 97,865 93,414
Other interest income -- 123 347
Other noninterest income 23,520 1,572 24,354
- ------------------------------------------------------------------------------------------------------
Total income 737,261 445,084 379,526
EXPENSES
Interest on commercial paper 3,940 5,432 4,976
Interest on long-term debt 7,590 10,140 11,535
Interest on subordinated debt issued to subsidiaries 12,671 -- --
Salaries and employee benefits 69,442 63,258 64,580
Occupancy expense 4,132 4,238 5,840
Equipment expense 1,175 1,721 1,572
Other noninterest expenses 22,003 35,131 29,730
- ------------------------------------------------------------------------------------------------------
Total expenses 120,953 119,920 118,233
- ------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed net income
of subsidiaries 616,308 325,164 261,293
Provision for income taxes 12,219 (4,528) 349
- ------------------------------------------------------------------------------------------------------
604,089 329,692 260,944
Equity in undistributed net income of subsidiaries, principally
banks 105,489 461,043 498,471
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 709,578 $ 790,735 $ 759,415
======================================================================================================
65
25 PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS - COMERICA INCORPORATED
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 709,578 $ 790,735 $ 759,415
Adjustments to reconcile net income to net cash provided
by operating activities
Undistributed earnings of subsidiaries, principally banks (105,489) (461,043) (498,471)
Gain on the sale of business (21,420) -- (21,339)
Depreciation 1,264 1,458 1,404
Other, net 18,348 4,513 12,729
- ------------------------------------------------------------------------------------------------------
Total adjustments (107,297) (455,072) (505,677)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 602,281 335,663 253,738
INVESTING ACTIVITIES
Purchase of investment securities available for sale -- (24,432) (7,687)
Proceeds from sale of investment securities available for sale -- 2,176 2,580
Proceeds from sales of fixed assets and other real estate 35 30 115
Purchases of fixed assets (909) (614) (316)
Net (increase) decrease in short-term investment with
subsidiary bank 100,000 (42,200) (47,300)
Net increase in private equity and venture capital investments (23,345) -- --
Net cash provided by sale of business 33,463 -- 14,432
Capital transactions with subsidiaries (421,190) (10,750) (5,610)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (311,946) (75,790) (43,786)
FINANCING ACTIVITIES
Net increase in subordinated debt issued to and advances
from subsidiaries 360,260 571 3,882
Repayments and purchases of long-term debt -- (1,129) (76,096)
Net increase in commercial paper 60,000 5,109 74,877
Proceeds from issuance of common stocks 65,286 20,618 23,268
Purchase of common stock for treasury and retirement (120,630) (14,108) (2,885)
Redemption of preferred stock (250,000) -- --
Dividends paid (314,052) (261,096) (235,646)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (199,136) (250,035) (212,600)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash on deposit at bank subsidiary 91,199 9,838 (2,648)
Cash on deposit at bank subsidiary at beginning of year 9,918 80 2,728
- ------------------------------------------------------------------------------------------------------
Cash on deposit at bank subsidiary at end of year $ 101,117 $ 9,918 $ 80
======================================================================================================
Interest paid $ 19,428 $ 16,251 $ 19,184
======================================================================================================
Income taxes paid (recovered) $ 16,815 $ (5,990) $ (9,807)
======================================================================================================
66
26 SUMMARY OF QUARTERLY FINANCIAL STATEMENTS
The following quarterly information is unaudited. However, in the opinion of
management, the information reflects all adjustments which are necessary for the
fair presentation of the results of operations for the periods presented.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------------
2001
- ----------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 755,012 $ 823,421 $ 874,654 $ 940,460
Interest expense 218,886 296,882 347,273 428,168
Net interest income 536,126 526,539 527,381 512,292
Provision for credit losses (1) 69,000 58,000 37,000 72,000
Securities gains (losses) (2,766) (468) (747) 23,744
Noninterest income (excluding securities gains (losses)) 218,058 215,610 203,663 146,238
Merger-related and restructuring charges 25,043 18,246 14,122 94,304
Noninterest expenses, excluding merger-related and
restructuring charges 346,387 346,568 358,690 355,673
Net income 198,979 208,535 208,472 93,592
-- excluding merger-related and restructuring charges 217,222 219,118 216,663 188,703
Basic net income per common share $ 1.12 $ 1.16 $ 1.15 $ 0.50
Diluted net income per common share 1.11 1.14 1.13 0.50
-- excluding merger-related and restructuring charges 1.21 1.20 1.18 1.02
- ----------------------------------------------------------------------------------------------------------------------------
2000
- ----------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 985,231 $ 948,974 $ 910,729 $ 871,419
Interest expense 466,032 445,292 413,036 387,824
Net interest income 519,199 503,682 497,693 483,595
Provision for credit losses 88,006 43,300 56,600 66,894
Securities gains (losses) 2,285 1,316 7,257 5,437
Noninterest income (excluding securities gains (losses)) 213,725 242,685 234,593 249,383
Noninterest expenses 376,082 375,404 366,242 366,795
Net income 172,596 215,058 206,050 197,031
Basic net income per common share $ 0.95 $ 1.19 $ 1.14 $ 1.09
Diluted net income per common share 0.94 1.17 1.12 1.08
============================================================================================================================
(1) First quarter 2001 includes a $25 million merger-related charge to conform
the credit policies of Imperial with Comerica.
27 PENDING ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets". The Corporation adopted SFAS
141 in 2001 and will adopt SFAS 142 in 2002. Under the new rules, the
pooling-of-interest method of accounting was eliminated for all business
combinations initiated after June 30, 2001. In addition, beginning in 2002,
goodwill will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets that do not
have an indefinite life will continue to be amortized over their useful lives.
The Corporation's application of the nonamortization provisions of the Statement
is expected to result in an annual increase in net income of $28 million, or
approximately $0.16 per share. The Corporation performed the first required
impairment test of goodwill and indefinite lived intangible assets, as of
January 1, 2002. Based on this test, the Corporation will not be required to
record a transition adjustment upon adoption.
In addition, in July 2001 the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" The Statement covers legal obligations that are
identifiable by the entity upon acquisition and construction, and during the
operating life of a long-lived asset. Identified retirement obligations would be
recorded as a liability with a corresponding amount capitalized as part of the
asset's carrying amount. The capitalized retirement cost asset would be
amortized to expense over the asset's useful life. The Statement is effective
January 1, 2003 for calendar year companies. The Corporation does not believe
that the impact of adoption of SFAS No. 143 will have a material impact on the
Corporation's financial position or results of operations.
67
REPORT OF MANAGEMENT
Management is responsible for the accompanying financial statements and all
other financial information in this Annual Report. The financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States and include amounts which of necessity are based on management's
best estimates and judgments and give due consideration to materiality. The
other financial information herein is consistent with that in the financial
statements.
In meeting its responsibility for the reliability of the financial statements,
management develops and maintains systems of internal accounting controls. These
controls are designed to provide reasonable assurance that assets are
safeguarded and transactions are executed and recorded in accordance with
management's authorization. The concept of reasonable assurance is based on the
recognition that the cost of internal accounting control systems should not
exceed the related benefits. The systems of control are continually monitored by
the internal auditors whose work is closely coordinated with and supplements in
many instances the work of independent auditors.
The financial statements have been audited by independent auditors Ernst & Young
LLP. Their role is to render an independent professional opinion on management's
financial statements based upon performance of procedures they deem appropriate
under auditing standards generally accepted in the United States.
The Corporation's Board of Directors oversees management's internal control and
financial reporting responsibilities through its Audit & Legal Committee as well
as various other committees. The Audit & Legal Committee, which consists of
directors who are not officers or employees of the Corporation, meets
periodically with management and internal and independent auditors to assure
that they and the Committee are carrying out their responsibilities, and to
review auditing, internal control and financial reporting matters.
/s/ Eugene A. Miller
Eugene A. Miller
Chairman
/s/ Ralph W. Babb Jr.
Ralph W. Babb Jr.
President and Chief Executive Officer
Chief Financial Officer
/s/ Marvin J. Elenbaas
Marvin J. Elenbaas
Senior Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Comerica Incorporated
We have audited the accompanying consolidated balance sheets of Comerica
Incorporated and subsidiaries as of December 31, 2001 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Comerica
Incorporated and subsidiaries at December 31, 2001 and the consolidated results
of their operations and their cash flows for the year then ended in conformity
accounting principles generally accepted in the United States.
We previously audited and reported on the consolidated balance sheet of Comerica
Incorporated and subsidiaries as of December 31, 2000 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 2000 and 1999, prior to their restatement
for the 2001 pooling of interests as described in Note 2 to the consolidated
financial statements. The contribution of Comerica Incorporated to total assets,
revenues, and net income represented 85%, 86%, and 95% of the respective 2000
restated totals and the contribution to revenue and net income represented 86%
and 89% of the respective 1999 restated totals. Financial statements of the
other pooled company included in the 2000 and 1999 restated consolidated
statements were audited and reported on separately by other auditors. We also
have audited, as to combination only, the accompanying consolidated balance
sheet as of December 31, 2000 and the related consolidated statements of income,
shareholders' equity, and cash flows for the years ended December 31, 2000 and
1999, after restatement for the 2001 pooling of interests; in our opinion, such
consolidated financial statements have been properly combined on the basis
described in Note 2 to the consolidated financial statements.
/s/ Ernst & Young LLP
Detroit, Michigan
January 16, 2002
68
HISTORICAL REVIEW -- AVERAGE BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS)
- --------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,835 $ 1,842 $ 1,896 $ 1,963 $ 1,956
Short-term investments 442 978 650 642 410
Investment securities 3,909 3,688 3,107 4,041 5,256
Commercial loans 26,401 25,313 23,069 19,850 16,143
International loans 2,800 2,552 2,627 2,342 1,952
Real estate construction loans 3,090 2,554 1,729 1,200 997
Commercial mortgage loans 5,695 5,142 4,583 4,011 3,883
Residential mortgage loans 795 833 930 1,331 1,676
Consumer loans 1,479 1,434 1,853 2,606 4,510
Lease financing 1,111 870 699 576 448
- --------------------------------------------------------------------------------------------------------
Total loans 41,371 38,698 35,490 31,916 29,609
Less allowance for credit losses (654) (595) (531) (498) (447)
- --------------------------------------------------------------------------------------------------------
Net loans 40,717 38,103 34,959 31,418 29,162
Accrued income and other assets 2,785 2,266 2,050 1,905 1,737
- --------------------------------------------------------------------------------------------------------
Total assets $ 49,688 $ 46,877 $ 42,662 $ 39,969 $ 38,521
========================================================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 10,253 $ 9,068 $ 8,661 $ 8,445 $ 7,306
Interest-bearing deposits 25,059 21,272 18,817 18,159 17,776
- --------------------------------------------------------------------------------------------------------
Total deposits 35,312 30,340 27,478 26,604 25,082
Short-term borrowings 2,584 3,323 3,562 3,517 3,895
Accrued expenses and other liabilities 823 703 522 494 537
Medium- and long-term debt 6,198 8,298 7,441 6,109 6,034
- --------------------------------------------------------------------------------------------------------
Total liabilities 44,917 42,664 39,003 36,724 35,548
Shareholders' equity 4,771 4,213 3,659 3,245 2,973
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 49,688 $ 46,877 $ 42,662 $ 39,969 $ 38,521
========================================================================================================
69
HISTORICAL REVIEW -- STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 3,121 $ 3,379 $ 2,859 $ 2,706 $ 2,579
Interest on investment securities 246 259 199 263 355
Interest on short-term investments 26 78 39 35 25
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 3,393 3,716 3,097 3,004 2,959
INTEREST EXPENSE
Interest on deposits 888 951 693 739 746
Interest on short-term borrowings 105 215 183 191 213
Interest on medium- and long-term debt 298 546 404 354 355
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 1,291 1,712 1,280 1,284 1,314
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 2,102 2,004 1,817 1,720 1,645
Provision for credit losses 236 255 146 146 169
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,866 1,749 1,671 1,574 1,476
NONINTEREST INCOME
Service charges on deposit accounts 211 189 177 164 147
Fiduciary income 180 181 183 175 155
Commercial lending fees 67 61 55 58 34
Letter of credit fees 58 52 46 31 34
Brokerage fees 44 44 36 46 20
Investment advisory revenue, net 12 119 61 18 --
Equity in earnings of unconsolidated subsidiaries (43) 14 15 (6) 30
Warrant income 5 30 33 22 4
Securities gains 20 16 9 7 6
Net gain on sales of businesses 31 50 76 11 25
Other noninterest income 219 201 176 141 154
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 804 957 867 667 609
NONINTEREST EXPENSES
Salaries and employee benefits 809 851 778 680 624
Net occupancy expense 115 110 104 100 98
Equipment expense 70 76 73 70 71
Outside processing fee expense 61 59 60 53 48
Customer services 41 37 40 50 38
Merger-related and restructuring charges 152 -- -- (7) --
Other noninterest expenses 311 351 304 291 298
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,559 1,484 1,359 1,237 1,177
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,111 1,222 1,179 1,004 908
Provision for income taxes 401 431 420 353 322
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 710 $ 791 $ 759 $ 651 $ 586
======================================================================================================================
Net income applicable to common stock $ 698 $ 774 $ 742 $ 634 $ 568
======================================================================================================================
Basic net income per common share $ 3.93 $ 4.38 $ 4.20 $ 3.58 $ 3.17
Diluted net income per common share $ 3.88 $ 4.31 $ 4.13 $ 3.51 $ 3.11
Cash dividends declared on common stock $ 313 $ 250 $ 225 $ 199 $ 181
Dividends per common share $ 1.76 $ 1.60 $ 1.44 $ 1.28 $ 1.15
======================================================================================================================
70
HISTORICAL REVIEW -- STATISTICAL DATA
COMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE RATES
(FULLY TAXABLE EQUIVALENT BASIS)
Short-term investments 6.02% 7.97% 6.06% 5.61% 6.05%
Investment securities 6.37 6.99 6.42 6.61 6.83
Commercial loans 6.85 8.87 7.71 8.12 8.41
International loans 7.38 9.21 7.86 7.97 7.07
Real estate construction loans 7.95 10.09 9.21 9.94 10.00
Commercial mortgage loans 7.65 8.80 8.27 8.76 9.05
Residential mortgage loans 7.59 7.64 7.47 7.70 7.90
Consumer loans 8.39 9.09 9.95 10.19 9.81
Lease financing 6.25 6.24 6.91 7.65 7.49
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Total loans 7.55 8.74 8.06 8.48 8.72
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Interest income as a percent of earning assets 7.44 8.57 7.90 8.23 8.40
Domestic deposits 3.48 4.34 3.55 3.97 4.13
Deposits in foreign offices 5.97 7.75 7.05 6.71 5.68
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Total interest-bearing deposits 3.54 4.47 3.68 4.07 4.20
Short-term borrowings 4.08 6.48 5.14 5.43 5.47
Medium- and long-term debt 4.80 6.57 5.44 5.80 5.88
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Interest expense as a percent of interest-bearing sources 3.82 5.20 4.29 4.62 4.74
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Interest rate spread 3.62 3.37 3.61 3.61 3.66
Impact of net noninterest-bearing sources of funds 0.99 1.26 1.03 1.11 1.02
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Net interest margin as a percent of earning assets 4.61 4.63 4.64 4.72 4.68
RETURN ON AVERAGE COMMON
SHAREHOLDERS' EQUITY 15.16 19.52 21.78 21.16 20.88
RETURN ON AVERAGE ASSETS 1.43 1.69 1.78 1.63 1.52
EFFICIENCY RATIO 53.95 50.35 50.70 51.84 52.15
PER SHARE DATA
Book value at year-end $ 27.17 $ 23.98 $ 20.87 $ 17.99 $ 16.10
Market value at year-end 57.30 59.38 46.69 68.19 60.17
Market value - high and low for year 65-44 61-33 70-44 73-47 62-34
OTHER DATA
Number of banking offices 342 354 348 348 362
Number of employees (full-time equivalent) 11,406 11,444 11,484 11,363 10,972
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