FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-10706
--------------------------------------
Comerica Incorporated
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(800) 521-1190
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of April 30, 2002: 176,219,000 shares
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
March 31, December 31, March 31,
(in millions, except share data) 2002 2001 2001
----------- ----------- -----------
ASSETS
Cash and due from banks $ 1,806 $ 1,925 $ 2,009
Short-term investments 953 1,079 1,991
Investment securities available
for sale 4,506 4,291 3,207
Commercial loans 24,389 25,176 26,373
International loans 3,016 3,015 2,654
Real estate construction loans 3,266 3,258 2,974
Commercial mortgage loans 6,626 6,267 5,570
Residential mortgage loans 763 779 793
Consumer loans 1,485 1,484 1,472
Lease financing 1,191 1,217 1,089
----------- ----------- -----------
Total loans 40,736 41,196 40,925
Less allowance for credit losses (670) (655) (645)
----------- ----------- -----------
Net loans 40,066 40,541 40,280
Premises and equipment 353 353 360
Customers' liability on acceptances
outstanding 23 29 27
Accrued income and other assets 2,500 2,514 2,396
----------- ----------- -----------
TOTAL ASSETS $ 50,207 $ 50,732 $ 50,270
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 12,585 $ 12,596 $ 11,531
Interest-bearing deposits 24,876 24,974 25,255
----------- ----------- -----------
Total deposits 37,461 37,570 36,786
Short-term borrowings 786 1,986 680
Acceptances outstanding 23 29 27
Accrued expenses and other
liabilities 887 837 820
Medium- and long-term debt 6,261 5,503 7,289
----------- ----------- -----------
Total liabilities 45,418 45,925 45,602
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
3/31/01 - - 250
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at
3/31/02 and 12/31/01 and
178,337,648 shares at 3/31/01 894 894 892
Capital surplus 353 345 326
Unearned employee stock ownership
plan - 131,954 shares at 12/31/01
and 176,462 shares at 3/31/01 - (5) (7)
Accumulated other comprehensive income 142 225 127
Retained earnings 3,563 3,448 3,087
Deferred compensation (8) (9) (7)
Less cost of common stock in
treasury - 2,759,361 shares at 3/31/02
and 1,674,659 shares at 12/31/01 (155) (91) -
----------- ----------- -----------
Total shareholders' equity 4,789 4,807 4,668
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 50,207 $ 50,732 $ 50,270
=========== =========== ===========
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended
------------------------
March 31, March 31,
(in millions, except per share data) 2002 2001
-------- ----------
INTEREST INCOME
Interest and fees on loans $ 645 $ 865
Interest on investment securities 61 65
Interest on short-term investments 6 10
-------- --------
Total interest income 712 940
INTEREST EXPENSE
Interest on deposits 122 272
Interest on short-term borrowings 11 39
Interest on medium- and long-term debt 39 117
-------- --------
Total interest expense 172 428
-------- --------
Net interest income 540 512
Provision for credit losses 75 72
-------- --------
Net interest income after provision
for credit losses 465 440
NONINTEREST INCOME
Service charges on deposit accounts 56 50
Fiduciary income 44 45
Commercial lending fees 13 14
Letter of credit fees 14 13
Brokerage fees 10 10
Investment advisory revenue, net 10 (10)
Equity in earnings of unconsolidated subsidiaries 3 (53)
Warrant income 2 3
Securities gains/(losses) (1) 24
Other noninterest income 46 74
-------- --------
Total noninterest income 197 170
NONINTEREST EXPENSES
Salaries and employee benefits 197 207
Net occupancy expense 30 28
Equipment expense 16 20
Outside processing fee expense 15 16
Customer services 11 9
Restructuring charge - 94
Other noninterest expenses 67 76
-------- --------
Total noninterest expenses 336 450
-------- --------
Income before income taxes 326 160
Provision for income taxes 112 66
-------- --------
NET INCOME $ 214 $ 94
======== ========
Net income applicable to common stock $ 214 $ 89
======== ========
Basic net income per common share $ 1.22 $ 0.50
Diluted net income per common share $ 1.20 $ 0.50
Cash dividends declared on common stock $ 84 $ 79
Dividends per common share $ 0.48 $ 0.44
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Accumulated
Nonredeemable Other
(in millions, except Preferred Common Capital Comprehensive Retained
share data) Stock Stock Surplus Income Earnings
--------- -------- -------- -------- ----------
BALANCE AT JANUARY 1, 2001 $ 250 $ 888 $ 301 $ 12 $ 3,086
Net income - - - - 94
Other comprehensive income,
net of tax - - - 115 -
Total comprehensive income - - - - -
Cash dividends declared:
Preferred stock - - - - (4)
Common stock - - - - (79)
Purchase of 45,000 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 4 25 - (10)
Amortization of deferred
compensation - - - - -
-------- -------- -------- -------- ----------
BALANCE AT MARCH 31, 2001 $ 250 $ 892 $ 326 $ 127 $ 3,087
======== ======== ======== ======== ==========
BALANCE AT JANUARY 1, 2002 $ - $ 894 $ 345 $ 225 $ 3,448
Net income - - - - 214
Other comprehensive loss
net of tax - - - (83) -
Total comprehensive income - - - - -
Cash dividends declared
on common stock - - - - (84)
Purchase of 1,643,700 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - - 8 - (15)
Amortization of deferred
compensation - - - - -
-------- -------- -------- -------- ----------
BALANCE AT MARCH 31, 2002 $ - $ 894 $ 353 $ 142 $ 3,563
======== ======== ======== ======== ==========
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
Comerica Incorporated and Subsidiaries
Unearned
Employee
Stock Total
(in millions, except Ownership Deferred Treasury Shareholders'
share data) Plan Shares Compensation Stock Equity
---------- ------------ --------- ----------
BALANCE AT JANUARY 1, 2001 $ (7) $ (14) $ (16) $ 4,500
Net income - - - 94
Other comprehensive income,
net of tax - - - 115
----------
Total comprehensive income - - - 209
Cash dividends declared:
Preferred stock - - - (4)
Common stock - - - (79)
Purchase of 45,000 shares
of common stock - - (3) (3)
Net issuance of common stock
under employee stock plans - (4) 19 34
Amortization of deferred
compensation - 11 - 11
------- -------- -------- ----------
BALANCE AT MARCH 31, 2001 $ (7) $ (7) $ - $ 4,668
======= ======== ======== ==========
BALANCE AT JANUARY 1, 2002 $ (5) $ (9) $ (91) $ 4,807
Net income - - - 214
Other comprehensive loss,
net of tax - - - (83)
----------
Total comprehensive income - - - 131
Cash dividends declared
on common stock - - - (84)
Purchase of 1,643,700 shares
of common stock - - (95) (95)
Net issuance of common stock
under employee stock plans 5 - 31 29
Amortization of deferred
compensation - 1 - 1
------- ------- -------- ----------
BALANCE AT MARCH 31, 2002 $ - $ (8) $ (155) $ 4,789
======= ======= ======== ==========
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Three Months Ended
March 31,
---------------------------------
(in millions) 2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income $ 214 $ 94
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 75 72
Depreciation 14 17
Net amortization of intangibles 1 9
Merger-related and restructuring charges 6 60
Increase in cash value of company-owned life
insurance (8) (8)
(Gain)/loss on investment securities available
for sale 1 (24)
Net increase in trading account securities (24) (21)
Net decrease in assets held for sale 40 44
Net decrease in accrued
income receivable 6 38
Net decrease in accrued expenses (15) (34)
Other, net 78 11
------------ ------------
Total adjustments 174 164
------------ ------------
Net cash provided by
operating activities 388 258
INVESTING ACTIVITIES:
Net decrease (increase)in interest-bearing
deposits with banks 23 (25)
Net decrease (increase) in federal funds
sold and securities purchased under agreements
to resell 87 (259)
Proceeds from sale of investment securities
available for sale 149 1,543
Proceeds from maturity of investment
securities available for sale 478 386
Purchases of investment securities
available for sale (833) (1,320)
Net decrease (increase) in loans 396 (804)
Fixed assets, net (14) (13)
Purchase of company-owned life insurance (8) (107)
Net decrease in customers' liability on
acceptances outstanding 6 -
------------ ------------
Net cash provided by (used in)
investing activities 284 (599)
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (111) 2,918
Net decrease in short-term borrowings (1,200) (1,413)
Net decrease in acceptances outstanding (6) -
Proceeds from issuance of medium- and
long-term debt 866 125
Repayments and purchases of medium- and
long-term debt (196) (1,175)
Proceeds from issuance of common stock
and other capital transactions 29 34
Purchase of common stock (95) (3)
Dividends paid (78) (67)
------------ ------------
Net cash (used in) provided by
financing activities (791) 419
------------ ------------
Net (decrease) increase in cash and due from banks (119) 78
Cash and due from banks at beginning of period 1,925 1,931
------------ ------------
Cash and due from banks at end of period $ 1,806 $ 2,009
============ ============
Interest paid $ 182 $ 462
============ ============
Income taxes paid $ - $ 2
============ ============
Noncash investing and financing activities:
Loans transferred to other real estate $ 3 $ 1
============ ============
See notes to consolidated financial statements.
6
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for the three months
ended March 31, 2002, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. Certain items in prior periods
have been reclassified to conform to the current presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report of Comerica Incorporated and Subsidiaries
(the "Corporation") on Form 10-K for the year ended December 31, 2001.
The Corporation uses derivative financial instruments, including
foreign exchange contracts, to manage the Corporation's exposure to interest
rate and foreign currency risks. All derivative instruments are carried at fair
value as either 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 further information, refer to the Note 1
- - Basis of Presentation and Accounting Policies (continued) Accounting Policies
footnote in the Corporation's 2001 annual report.
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized, but is subject to annual
impairment tests. Other intangible assets that do not have an indefinite life
continue to be amortized over their useful lives. For further information on the
adoption of SFAS No. 142, see Note 4.
7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 2 - Investment Securities
At March 31, 2002, investment securities having a carrying value of
$2.0 billion were pledged where permitted or required by law to secure
liabilities and public and other deposits, including deposits of the State of
Michigan of $97 million.
Note 3 - Allowance for Credit Losses
The following analyzes the changes in the allowance for credit losses
included in the consolidated balance sheets:
Three Months Ended
March 31
-----------------------
(in millions) 2002 2001
-------- --------
Balance at beginning of period $ 655 $ 608
Charge-offs (69) (45)
Recoveries 9 10
-------- --------
Net charge-offs (60) (35)
Provision for credit losses 75 72
-------- --------
Balance at end of period $ 670 $ 645
======== ========
The provision for credit losses in 2001 included a $25 million merger-
related charge to conform the credit policies of Imperial Bancorp (Imperial), a
$7 billion bank holding company acquired January 29, 2001, with Comerica.
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," considers a loan impaired
when it is probable that interest and principal payments will not be made in
accordance with the contractual terms of the loan agreements. Consistent with
this definition, all nonaccrual and reduced-rate loans (with the exception of
residential mortgage and consumer loans) are impaired. Impaired loans include $9
million of loans 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.
8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance For Credit Losses (continued)
Impaired loans averaged $655 million for the quarter ended March 31, 2002,
compared to $406 million for the comparable period last year. The following
presents information about the period-end balances of impaired loans:
(in millions) March 31, 2002 December 31, 2001
-------------- -----------------
Total period-end impaired loans $659 $674
Less: Loans returned to accrual status
during the period 9 62
---- ----
Total period-end nonaccrual business loans $650 $612
Impaired loans requiring an allowance $627 $562
Impairment allowance $189 $228
Those impaired loans not requiring an allowance represent loans for
which the fair value exceeded the recorded investment in the loan.
Note 4 - Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." The Corporation adopted SFAS No. 142 on January 1, 2002.
Under SFAS No. 142, goodwill is no longer amortized, but is subject to annual
impairment tests. Other intangible assets that do not have an indefinite life
continue to be amortized over their useful lives. 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 was not
required to record a transition adjustment upon adoption.
Three Months Ended
March 31
-----------------------
(in millions, 2002 2001
except per share amounts) ---------- ----------
Reported net income $ 214 $ 94
Add back: Goodwill amortization, net of tax - 7
---------- ----------
Adjusted net income $ 214 $ 101
========== ==========
Basic earnings per share
Reported net income $1.22 $0.50
Goodwill amortization - 0.04
---------- ----------
Adjusted net income $1.22 $0.54
========== ==========
Diluted earnings per share
Reported net income $1.20 $0.50
Goodwill amortization - 0.04
---------- ----------
Adjusted net income $1.20 $0.54
========== ==========
The carrying amount of goodwill at March 31, 2002 was $333 million and was
allocated to the Corporation's business segments as follows:
(in millions)
Business Bank $ 90
Individual Bank 54
Investment Bank 189
----
Total $333
====
-9-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 4 - Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
(continued)
There were no changes in the carrying amount of goodwill during the
quarter ended March 31, 2002.
Note 5 - Acquired Intangible Assets
(in millions) March 31, 2002 December 31, 2001 March 31, 2001
---------------------- ---------------------- ----------------------
Amortized Intangible Gross Gross Gross
Assets Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
---------------------- ---------------------- ----------------------
Core deposit intangibles $ 27 $ 23 $ 27 $ 22 $ 27 $ 20
Other 6 5 6 5 6 5
------------------- ------------------- -------------------
Total $ 33 $ 28 $ 33 $ 27 $ 33 $ 25
=================== =================== ===================
Aggregate amortization expense for the:
Quarter ended March 31, 2002 $ 1
=====
Year ended December 31, 2001 $ 3
=====
Quarter ended March 31, 2001 $ 1
=====
Estimated amortization expense for the:
Year ended December 31, 2002 $ 3
Year ended December 31, 2003 2
Year ended December 31, 2004 1
Year ended December 31, 2005 -
Year ended December 31, 2006 -
-10-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at March 31, 2002
and December 31, 2001:
(dollar amounts in millions) March 31, 2002 December 31, 2001
-------------- -----------------
Parent Company
7.25% subordinated notes due 2007 $ 162 $ 157
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 212 216
8.375% subordinated notes due 2024 180 187
7.25% subordinated notes due 2002 154 155
6.875% subordinated notes due 2008 106 108
7.125% subordinated notes due 2013 160 168
7.875% subordinated notes due 2026 177 179
6.00% subordinated notes due 2008 254 256
7.65% subordinated notes due 2010 265 268
8.50% subordinated notes due 2009 100 102
------ ------
Total subordinated notes 1,608 1,639
Medium-term notes:
Floating rate based on LIBOR indices 3,134 2,356
Variable rate secured debt financings
due 2007 961 956
9.98% trust preferred securities due 2026 56 56
7.60% trust preferred securities due 2050 340 339
------ ------
Total subsidiaries 6,099 5,346
------ ------
Total medium- and long-term debt $6,261 $5,503
====== ======
The carrying value of medium- and long-term debt 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.
Note 7 - Income Taxes
The provision for income taxes is computed by applying statutory
federal income tax rates to income before income taxes as reported in the
financial statements after deducting non-taxable items, principally income on
company-owned life insurance and interest income on state and municipal
securities. State and foreign taxes are then added to the federal provision. The
effective tax rate for the three months ended March 31, 2001 was affected by
adjustments to Imperial Bancorp's tax liabilities at merger date, partially
offset by a $7 million tax benefit related to the Imperial Bancorp acquisition
that was recognizable immediately, but only after Imperial became part of
Comerica.
Note 8 - Accumulated Other Comprehensive Income
Other comprehensive income includes the change in net unrealized gains
and losses on investment securities available for sale, the change in the
accumulated foreign currency translation adjustment, the change in accumulated
gains and losses on cash flow hedges and the change in accumulated minimum
pension liability. 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 three months ended March 31, 2002 and 2001. Total
comprehensive income for the three months ended March 31, 2002 and 2001, totaled
$131 million and $209 million, respectively.
-11-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 8 - Accumulated Other Comprehensive Income (continued)
Three Months Ended
March 31
--------------------
(in millions) 2002 2001
-------- --------
Net unrealized gains/(losses) on investment
securities available for sale:
Balance at beginning of period $ 16 $ 8
Net unrealized holding gains/(losses)
arising during the period 1 14
Less: Reclassification adjustment for
gains/(losses) included in net income (1) 24
---- ----
Change in net unrealized gains/(losses)
before income taxes 2 (10)
Less: Provision for income taxes 1 (4)
---- ----
Change in net unrealized gains/(losses)
on investment securities available
for sale, net of tax 1 (6)
---- ----
Balance at end of period $ 17 $ 2
---- ----
Accumulated foreign currency translation adjustment:
Balance at beginning of period $ - $ 4
Net translation gains/(losses) arising
during the period - (5)
Less: Reclassification adjustment for
gains/(losses) included in net income - -
---- ----
Change in translation adjustment before
income taxes - (5)
Less: Provision for income taxes - -
---- ----
Change in foreign currency translation
adjustment, net of tax - (5)
---- ----
Balance at end of period $ - $ (1)
---- ----
Accumulated net gains/(losses) on cash flow hedges:
Balance at beginning of period $210 $ -
Transition adjustment upon adoption
of accounting standard - 65
Net cash flow hedge gains/(losses)
arising during the period (12) 133
Less: Reclassification adjustment for
gains/(losses) included in net income 102 3
---- ----
Change in cash flow hedges before
income taxes (114) 195
Less: Provision for income taxes (40) 69
---- ----
Change in cash flow hedges, net of tax (74) 126
---- ----
Balance at end of period $136 $126
---- ----
Accumulated minimum pension liability adjustment:
Balance at beginning of period $ - $ -
Minimum pension liability adjustment
arising during the period (17) -
----
Minimum pension liability before taxes (17) -
Less: Provision for income taxes (6) -
---- ----
Change in minimum pension liability,
net of tax (11) -
---- ----
Balance at end of period $(11) $ -
---- ----
Accumulated other comprehensive income,
net of taxes, at end of period $142 $127
==== ====
-12-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 9 - Merger-Related and Restructuring Charges
The Corporation recorded merger-related and restructuring charges of
$173 million in 2001 related to the acquisition of Imperial Bancorp, of which
$25 million was recorded in the provision for credit losses. The remaining $148
million of charges were recorded in noninterest expenses. The Corporation also
recorded a 2001 restructuring charge of $4 million related to its subsidiary,
Official Payments Corporation (OPAY). The OPAY restructuring charge was recorded
net of the portion of the charge attributable to the minority shareholders in
OPAY.
2001 Imperial Bancorp Restructuring
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 included cash payments
related to change in control provisions in employment contracts and retention
bonuses. The charge related to conforming policies represented costs associated
with conforming the credit and accounting policies of Imperial with those of the
Corporation. The Corporation also 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. The Imperial restructuring is expected to
result in a decrease in the Corporation's annual operating expenses of $60
million, beginning in 2002.
2001 OPAY Restructuring
The OPAY restructuring charge included employee termination costs of $1
million which covered the cost of severance, outplacement and other benefits
-13-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 9 - Merger-Related and Restructuring Charges (continued)
associated with the involuntary termination of 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 2001
with the remainder expected to be severed in the second quarter of 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. The OPAY
restructuring is expected to result in a decrease in OPAY's annual operating
expenses of $9 million, beginning in 2002.
The remaining liability related to the Imperial and OPAY charges is
shown in the table below. No additional Imperial or OPAY related restructuring
charges are expected.
Restructuring Reserve Analysis
<Caption>
(in millions) Imperial OPAY Total
-------- ------- -------
Balance at December 31, 2001 $ 8 $ 2 $ 10
Cash outlays (4) - (4)
-------- ------- -------
Balance at March 31, 2002 $ 4 $ 2 $ 6
======== ======= =======
-14-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 10 - Derivatives and Foreign Exchange Contracts
March 31, 2002 December 31, 2001
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
Amount Gains Losses Value Amount Gains Losses Value
(in millions) (1) (2) (2) (3) (1) (2) (2) (3)
------------------------------ ------------------------------
RISK MANAGEMENT
Interest rate contracts:
Swaps $13,616 $398 $ (11) $ 387 $14,497 $573 $ (2) $ 571
Foreign exchange contracts:
Spot, forward and options 430 7 (2) 5 535 10 (4) 6
Swaps 331 3 (19) (16) 285 2 (17) (15)
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 761 10 (21) (11) 820 12 (21) (9)
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 14,377 408 (32) 376 15,317 585 (23) 562
CUSTOMER-INITIATED AND OTHER
Interest rate contracts:
Caps and floors written 354 - (3) (3) 365 - (4) (4)
Caps and floors purchased 340 3 - 3 352 4 - 4
Swaps 1,051 11 (10) 1 981 14 (13) 1
------- ---- ----- ----- ------- ---- ----- -----
Total interest rate
contracts 1,745 14 (13) 1 1,698 18 (17) 1
------- ---- ----- ----- ------- ---- ----- -----
Foreign exchange contracts:
Spot, forward and options 2,137 31 (25) 6 2,323 35 (29) 6
Swaps 318 1 (1) - 366 2 (1) 1
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 2,455 32 (26) 6 2,689 37 (30) 7
------- ---- ----- ----- ------- ---- ----- -----
Total customer-initiated
and other 4,200 46 (39) 7 4,387 55 (47) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange contracts $18,577 $454 $ (71) $ 383 $19,704 $640 $ (70) $ 570
======= ==== ===== ===== ======= ==== ===== =====
(1) Notional or contract amounts, which represent the extent of involvement in
the derivatives market, are generally used to determine the contractual cash
flows required in accordance with the terms of the agreement. These amounts are
typically not exchanged, significantly exceed amounts subject to credit or
market risk and are not reflected in the consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current
market rates, contracts in a profitable position. Credit risk is calculated
before consideration is given to bilateral collateral agreements or master
netting arrangements that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally
represent the estimated amounts the Corporation would receive or pay to
terminate or otherwise settle the contracts at the balance sheet date. The fair
values of all derivatives and foreign exchange contracts are reflected in the
consolidated balance sheets.
-15-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 10 - Derivatives and Foreign Exchange Contracts (continued)
Risk Management
Fluctuations in net interest income due to interest rate risk result
from the composition of assets and liabilities and the mismatches in the timing
of the repricing of these assets and liabilities. In addition, external factors
such as interest rates, and the dynamics of yield curve and spread relationships
can affect net interest income. Comerica utilizes simulation analyses to project
the sensitivity of the Corporation's net interest income to changes in interest
rates. Foreign exchange rate risk arises from changes in the value of certain
assets and liabilities denominated in foreign currencies. The Corporation
employs cash instruments, such as investment securities, as well as derivative
financial instruments and foreign exchange contracts, to manage exposure to
these and other risks, including liquidity risk.
As an end-user, the Corporation accesses the interest rate markets to
obtain derivative instruments for use principally in connection with asset and
liability management activities. As part of a fair value hedging strategy, the
Corporation has entered into interest rate swap agreements for interest rate
risk management purposes. The interest rate swap agreements 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. For instruments that support a fair value hedging strategy, no
ineffectiveness was required to be recorded in the statement of income.
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 3 years. Approximately 26 percent ($11 billion) of the
Corporation's outstanding loans were designated as the hedged items to interest
rate swap agreements at March 31, 2002. During the quarter ended March 31, 2002,
interest rate swap agreements designated as cash flow hedges increased interest
and fees on loans by $101 million compared to $3 million for the quarter ended
March 31, 2001. The ineffectiveness associated with these hedging instruments
was not significant to the Corporation's statement of income in the first
quarter of
-16-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 10 - Derivatives and Foreign Exchange Contracts (continued)
2002. If interest rates and interest curves remain at their current levels, the
Corporation expects to reclassify $178 million of net gains on derivative
instruments from accumulated other comprehensive income to earnings during the
next twelve months due to receipt of variable interest associated with the
existing and forecasted floating-rate loans.
Management believes these strategies achieve an optimal relationship
between the rate maturities of assets and their funding sources which, in turn,
reduces the overall exposure of net interest income to interest rate risk,
although there can be no assurance that such strategies will be successful.
The Corporation also uses various other types of financial instruments
to mitigate interest rate and foreign currency risks associated with specific
assets or liabilities, which are reflected in the table above. Such instruments
include interest rate caps and floors, foreign exchange forward contracts, and
foreign exchange cross-currency swaps.
The following table summarizes the expected maturity distribution of
the notional amount of interest rate swaps used for risk management purposes.
The table also indicates the weighted average interest rates associated with
amounts to be received or paid on interest rate swap agreements as of March 31,
2002. The swaps are grouped by the assets or liabilities to which they have been
designated.
-17-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 10 - Derivatives and Foreign Exchange Contracts (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps as of March 31, 2002:
(dollar amounts 2007- Dec. 31,
in millions) 2002 2003 2004 2005 2006 2026 Total 2001
- ------------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET
DESIGNATION:
Generic receive
fixed swaps $1,991 $4,750 $2,000 $1,300 $ 500 $ - $10,541 $11,069
Weighted average: (1)
Receive rate 7.82% 8.31% 7.57% 7.66% 5.83% -% 7.60% 7.68%
Pay rate 4.21% 3.79% 4.75% 4.75% 1.79% -% 3.99% 4.07%
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $ 7 $ - $ - $ - $ - $ - $ 7 $ 34
Amortizing 1 - - - - - 1 1
Weighted average: (2)
Receive rate 3.47% -% -% -% -% -% 3.47% 2.22%
Pay rate 2.81% -% -% -% -% -% 2.81% 2.56%
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive
fixed swaps $ 777 $ 640 $ - $ - $ - $ - $ 1,417 $ 1,743
Weighted average: (1)
Receive rate 4.35% 2.72% -% -% -% -% 3.61% 4.87%
Pay rate 1.90% 2.11% -% -% -% -% 1.99% 2.00%
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive
fixed swaps $ 150 $ - $ - $ 250 $ - $ 1,250 $ 1,650 $ 1,650
Weighted average: (1)
Receive rate 7.22% -% -% 7.04% -% 6.73% 6.82% 6.82%
Pay rate 2.37% -% -% 1.90% -% 2.12% 2.11% 2.66%
Total notional amount $2,926 $5,390 $2,000 $1,550 $ 500 $ 1,250 $13,616 $14,497
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Variable rates paid on receive fixed swaps are based on one-month and
three-month LIBOR or one-month Canadian Dollar Offered Rate (CDOR) rates in
effect at March 31, 2002. Variable rates received on pay fixed swaps are based
on prime at March 31, 2002.
(2) Variable rate received is based on one-month CDOR rates in effect at March
31, 2002.
-18-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 10 - Derivatives and Foreign Exchange Contracts (continued)
Commitments to purchase and sell investment securities for the
Corporation's trading account and available for sale portfolio totaled $16
million and $15 million, respectively, at March 31, 2002, and $11 million and
$10 million, respectively, at December 31, 2001. Outstanding commitments expose
the Corporation to both credit and market risk.
Customer-Initiated and Other
The Corporation earns additional income by executing various derivative
transactions, primarily foreign exchange contracts and interest rate contracts,
at the request of customers. Market risk inherent in customer-initiated
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. Average
fair values and income from customer-initiated and other foreign exchange
contracts and interest rate contracts were not material for the three-month
periods ended March 31, 2002 and 2001 and for the year ended December 31, 2001.
Derivative and Foreign Exchange Activity
The following table provides a reconciliation of the beginning and
ending notional amounts for interest rate derivatives and foreign exchange
contracts for the three months ended March 31, 2002.
Customer-Initiated
Risk Management and Other
--------------------- ----------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
(in millions) Contracts Contracts Contracts Contracts
--------- --------- --------- ---------
Balances at December 31, 2001 $14,497 $ 820 $ 1,698 $ 2,689
Additions 1,075 5,149 186 12,988
Maturities/amortizations (1,956) (5,208) (139) (13,222)
------- ------- ------- --------
Balances at March 31, 2002 $13,616 $ 761 $ 1,745 $ 2,455
======= ======= ======= ========
-19-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 10 - Derivative and Foreign Exchange Contracts (continued)
Additional information regarding the nature, terms and associated risks
of the above derivatives and foreign exchange contracts, can be found in the
Corporation's 2001 annual report on page 40 and in Notes 1 and 20 to the
consolidated financial statements.
Note 11 - Business Segment Information
The Corporation has strategically aligned its operations into three
major lines of business: the Business Bank, the Individual Bank and the
Investment Bank. These lines of business are differentiated based on the
products and services provided. In addition to the three major lines of
business, the Finance Division is also reported as a segment. Lines of business
results are produced by the Corporation's internal management accounting system.
This system measures financial results based on the internal organizational
structure of the Corporation; information presented is not necessarily
comparable with any other financial institution. Lines of business/segment
financial results for the three months ended March 31, 2002 and 2001 are
presented below.
-20-
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 11 - Business Segment Information (continued)
Three Months Ended March 31,
(dollar amounts in Business Individual Investment
millions) Bank Bank Bank*
- ----------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001**
- ----------------------------------------------------------------------------
Average assets $34,774 $35,545 $ 8,335 $7,769 $ 306 $ 455
Total revenues (FTE) 442 403 260 264 46 (36)
Net income (loss) 130 122 69 69 (1) (56)
Return on average
assets 1.50% 1.37% 1.41% 1.45% (1.00)% (45.27)%
Return on average
common equity 17.00% 19.33% 28.35% 30.59% (1.59)% (75.65)%
Finance Other Total
- ----------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
- ----------------------------------------------------------------------------
Average assets $ 4,612 $ 4,122 $ 1,848 $1,440 $49,875 $49,331
Total revenues (FTE) (12) 50 1 2 737 683
Net income (loss) (9) 29 25 (70) 214 94
Return on average
assets (0.20)% 0.72% N/M N/M 1.72% 0.76%
Return on average
common equity (3.93)% 19.53% N/M N/M 17.84% 8.11%
N/M - Not Meaningful
* Net income was reduced by charges for fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded,
Investment Bank net income/(loss) would have been $2 million and ($53)
million, and return on average common equity would have been 4.48% and
(71.52)%, in 2002 and 2001, respectively.
** Net income in 2001 was reduced by a $26 million pre-tax deferred
distribution costs impairment charge and a $53 million pre-tax charge
related to long-term incentive plans at an unconsolidated subsidiary.
Excluding these charges, Investment Bank total revenues (FTE) and net loss
in 2001 would have been $47 million and ($5) million, respectively, while
return on average assets and return on common equity would have been
(4.14)% and (6.91)%, respectively.
For a description of the business activities of each line of business and
the methodologies, which form the basis for these results, refer to Note 24 to
the consolidated financial statements in the Corporation's 2001 annual report.
-21-
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net income for the quarter ended March 31, 2002 was $214 million, up
$120 million, or 129 percent, from $94 million reported for the first quarter of
2001. Quarterly diluted net income per share increased to $1.20 from $0.50 a
year ago. Return on average common shareholders' equity was 17.84 percent and
return on average assets was 1.72 percent, compared to 8.11 percent and 0.76
percent, respectively, for the comparable quarter last year. Excluding
restructuring charges in the first quarter of 2001, net income was $189 million,
or $1.02 per share. Return on average common equity and return on average assets
for the quarter ended March 31, 2001, excluding restructuring charges, were
16.74 percent and 1.53 percent, respectively.
Net Interest Income
The rate-volume analysis in Table I details the components of the
change in net interest income on a fully taxable equivalent (FTE) basis for the
quarter ended March 31, 2002. On a FTE basis, net interest income was $541
million for the three months ended March 31, 2002, an increase of $28 million,
or five percent, from the comparable quarter in 2001. Average earnings assets
increased less than one percent when compared to the first quarter of last year,
while the net interest margin expanded to 4.77 percent for the three months
ended March 31, 2002, from 4.55 percent for the comparable three months of 2001.
The margin increase reflects a favorable interest rate environment and the
impact of the Corporation's interest rate risk management efforts. Also
contributing to the increase in margin was strong growth in average
noninterest-bearing deposits, up 16 percent over last year's first quarter. This
growth was primarily the result of increased Title and Escrow deposits in the
California-based Financial Services business.
-22-
Interest rate swaps permit management to manage the sensitivity of net
interest income to fluctuations in interest rates in a manner similar to
investment securities, but without significant impact to capital or liquidity.
In addition to using interest rate swaps and other instruments to manage
exposure to interest rate risk, management attempts to evaluate the effect of
movements in interest rates on net interest income. The primary tool used by the
Corporation in determining its exposure to interest rate risk is net interest
income simulation analysis. The net interest income simulation analysis
performed at the end of the quarter reflects changes to both interest rates and
loan, investment and deposit volumes. The measurement of risk exposure at March
31, 2002 for a 200 basis point decline in short-term interest rates identified
approximately $96 million, or four percent, of forecasted net interest income at
risk over the next 12 months. If short-term interest rates rise 200 basis
points, forecasted net interest income would be enhanced by approximately $19
million, or one percent.
Secondarily, the Corporation utilizes a traditional interest
sensitivity gap measure and economic value of equity analysis to help identify
interest rate risk exposure. At March 31, 2002, all three measures of interest
rate risk were within established corporate policy guidelines.
-23-
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
- ---------------------------------------------------------------------------------------------
March 31, 2002 March 31, 2001
---------------------------- ----------------------------
(dollar amounts Average Average Average Average
in millions) Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------
Loans $41,241 $646 6.35% $41,100 $866 8.54%
Investment securities (1) 4,199 61 5.88 3,881 65 6.74
Short-term investments 461 6 5.62 634 10 6.74
- ---------------------------------------------------------------------------------------------
Total earning assets 45,901 713 6.30 45,615 941 8.36
Interest-bearing deposits 25,149 122 1.97 24,167 272 4.56
Short-term borrowings 2,511 11 1.86 2,573 39 6.21
Medium- and long-term debt 5,723 39 2.74 7,729 117 6.13
- ---------------------------------------------------------------------------------------------
Total interest-bearing
sources $33,383 172 2.10 $34,469 428 5.04
-------------- --------------
Net interest income/
rate spread (FTE) $541 4.20 $513 3.32
==== ====
FTE adjustment $ 1 $ 1
==== ====
Impact of net interest-free
sources of funds 0.57 1.23
- ---------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.77% 4.55%
=============================================================================================
(1) The average rate for investment securities was computed using average
historical cost.
Three Months Ended
March 31, 2002/March 31, 2001
--------------------------------------
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
Loans $(219) $ (1) $(220)
Investment securities (9) 5 (4)
Short-term investments (4) - (4)
- ---------------------------------------------------------------------------
Total earning assets (232) 4 (228)
Interest-bearing deposits (150) - (150)
Short-term borrowings (28) - (28)
Medium- and long-term debt (65) (13) (78)
- ---------------------------------------------------------------------------
Total interest-bearing sources (243) (13) (256)
- ---------------------------------------------------------------------------
Net interest income/rate spread (FTE) $ 11 $ 17 $ 28
===================================
* Rate/Volume variances are allocated to variances due to volume.
-24-
Provision for Credit Losses
The provision for credit losses was $75 million for the first quarter
of 2002, compared to $72 million for the same period in 2001. The Corporation
establishes this provision to maintain an adequate allowance for credit losses,
which is discussed in the section entitled "Allowance for Credit Losses and
Nonperforming Assets." Included in the first quarter 2001 provision for credit
losses is a $25 million merger-related charge to conform the credit policies of
Imperial with Comerica.
Noninterest Income
Noninterest income was $197 million for the three months ended March
31, 2002, an increase of $27 million, or 16 percent, over the same period in
2001. Noninterest income in the first quarter of 2001 included an $11 million
gain associated with the purchase and subsequent sale of interest rate
derivative contracts and $24 million in gains on securities sales, and was
reduced by a $26 million deferred distribution costs impairment charge and a
one-time $57 million charge related to long-term incentive plans at an
unconsolidated subsidiary. Excluding the effects of the large unusual items
noted above, gains and losses on securities, warrant income and divestitures,
noninterest income decreased $15 million, or seven percent over the same period
last year. Non-investment market-related fees, consisting of service charges,
commercial lending fees and letters of credit fees increased $6 million, or
eight percent, on a combined basis when compared with the first quarter of 2001.
Investment advisory revenue from the Corporation's Munder Capital Management
subsidiary decreased $6 million from the comparable quarter last year, excluding
the $26 million deferred distribution costs impairment charge in the first
quarter of 2001. This decrease was primarily due to the decline in the market
values of technology-related stocks from the first quarter of last year.
The Corporation's deferred distribution cost asset was $31 million at
March 31, 2002. Given net asset values at March 31, 2002, it would take a
decline of approximately 27 percent in the assets under management at Munder
associated with those costs to trigger further impairment, which at that level
would be approximately $4 million.
-25-
Noninterest Expenses
Noninterest expenses were $336 million for the quarter ended March 31,
2002, a decrease of $114 million, or 25 percent, from the comparable quarter in
2001. Noninterest expenses in the first quarter of 2001 included goodwill
amortization of $8 million. Goodwill amortization was discontinued January 1,
2002, as a result of new accounting rules. Also affecting the first quarter of
2001 were merger-related and restructuring charges related to the Imperial
Bancorp acquisition of $94 million and $5 million of minority interest income
that resulted from recording the minority interest holders' share of the long-
term incentive plan charge discussed in noninterest income above. Excluding
these items and the impact of divestitures, noninterest expenses declined by $11
million, or three percent. Contributing to this decline were savings in salaries
and benefits of $10 million, primarily from staff reductions as a result of
integrating Imperial Bancorp and reduced revenue-related incentives.
Provision for Income Taxes
The provision for income taxes for the first quarter of 2002 totaled
$112 million, compared to $66 million reported for the same period a year ago.
The effective tax rate was 34 percent for the first quarter of 2002, compared to
42 percent for the same quarter of 2001. The effective tax rate in the first
quarter of 2001 was affected by adjustments to Imperial's tax liabilities at
merger date, partially offset by a $7 million tax benefit related to the
Imperial Bancorp acquisition that was immediately recognizable, but only after
Imperial became part of Comerica.
-26-
Financial Condition
Total assets were $50.2 billion at March 31, 2002, compared with $50.7
billion at year-end 2001 and $50.3 billion at March 31, 2001. The Corporation
has experienced a decline of $460 million, or one percent, in total loans since
December 31, 2001. This slight decline reflects the cautiousness of borrowers in
an uncertain economy.
Total liabilities decreased $507 million, or one percent, since
December 31, 2001, to $45.4 billion. Total deposits remained relatively flat at
$37.5 billion at March 31, 2002, from $37.6 billion at year-end 2001. Medium-
and long-term debt increased $758 million to $6.3 billion at March 31, 2002.
This increase was offset in short-term borrowings, which decreased $1.2 billion
since December 31, 2001, to $786 million at March 31, 2002.
Allowance for Credit Losses and Nonperforming Assets
The allowance for credit losses represents management's assessment of
probable losses inherent in the Corporation's loan portfolio, including all
binding commitments to lend. The allowance provides for probable losses that
have been identified with specific customer relationships and for probable
losses believed to be inherent but that have not been specifically identified.
The Corporation allocates the allowance for credit losses to each loan category
based on a defined methodology which has been in use, without material change,
for several years. Internal risk ratings are assigned to each business loan at
the time of approval and are subject to subsequent periodic reviews by the
senior management of the Credit Policy Group. 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.
-27-
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 $573 million at March 31, 2002,
an increase of $27 million from year-end 2001. This increase was attributable to
business loans, both from an increased specific allocation allowance as a result
of the quarterly credit quality review and an increase in allocation to loans
not individually evaluated for impairment at March 31, 2002.
Actual loss ratios experienced in the future could vary from those
projected. This uncertainty occurs because other factors affecting the
determination of probable losses inherent in the loan portfolio may exist which
are not necessarily captured by the application of historical loss ratios. An
unallocated allowance is maintained to capture these probable losses. The
unallocated portion of the loss reserve reflects management's view that the
reserve should have a margin that recognizes the imprecision underlying the
process of estimating expected credit losses. Determination of the probable
losses inherent in the portfolio, which are not necessarily captured by the
allocated methodology discussed above, involves the exercise of judgement.
Factors which were considered in the evaluation of the adequacy of the
Corporation's unallocated reserve include portfolio exposures to the healthcare,
high technology and energy industries, as well as Latin American transfer risks
and the risk associated with new customer relationships. The unallocated
allowance was $97 million at March 31, 2002, a decrease of $12 million from
December 31, 2001.
-28-
Management also considers industry norms and the expectations from
rating agencies and banking regulators in determining the adequacy of the
allowance. The total allowance, including the unallocated amount, is available
to absorb losses from any segment of the portfolio. Unanticipated economic
events, including political, economic and regulatory stability in countries
where Comerica has a concentration of loans, 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 Corporation is closely monitoring its Argentine exposure as a
result of recent political and economic events in that country. The total
Argentine exposure at March 31, 2002, was $156 million and consisted of $112
million of loans, $25 million of securities and $19 million of unfunded
commitments. Nonperforming loans include $5 million of Argentine loans at March
31, 2002.
At March 31, 2002, the allowance for credit losses was $670 million, an
increase of $15 million since December 31, 2001. The allowance as a percentage
of total loans was 1.64 percent, compared to 1.59 percent at December 31, 2001.
As a percentage of nonperforming assets, the allowance was 100 percent at March
31, 2002, versus 105 percent at year-end 2001.
-29-
Net charge-offs for the first quarter of 2002 were $60 million, or 0.58
percent of average total loans, compared with $35 million, or 0.34 percent, for
the first quarter of 2001. Nonperforming assets increased $40 million, or six
percent, since December 31, 2001, and were categorized as follows:
March 31, December 31,
(in millions) 2002 2001
------------ ------------
Nonaccrual loans:
Commercial $ 497 $ 467
International 120 109
Real estate construction 9 10
Commercial mortgage 18 18
Residential mortgage 1 -
Consumer 5 5
Lease financing 6 8
------------ ------------
Total nonaccrual loans 656 617
Reduced-rate loans - -
------------ ------------
Total nonperforming loans 656 617
Other real estate 11 10
------------ ------------
Total nonperforming assets $ 667 $ 627
============ ============
Loans past due 90 days or more $ 94 $ 44
============ ============
Loans to customers in the entertainment industry comprised 12 percent
of nonperforming loans at March 31, 2002, and was the only industry
classification comprising more than 10% of nonperforming loans. Four credits in
excess of $10 million were added to nonperforming loans during the first quarter
2002, the largest of which was a retailing customer totaling $45 million.
Approximately 37 percent of total nonperforming loans at March 31, 2002 were
Shared National Credit Program (SNC) loans. SNC loans are large credits shared
by multiple financial institutions and reviewed by regulatory authorities at the
lead or agent bank level. These loans comprised approximately 20 percent of
total loans at March 31, 2002. Nonperforming assets as a percentage of total
loans and other real estate were 1.64 percent at March 31, 2002 and 1.52 percent
at December 31, 2001.
-30-
Capital
Common shareholders' equity increased $65 million from December 31,
2001 to March 31, 2002, excluding other comprehensive income. The increase was
primarily due to the retention of $130 million of current year earnings. The
effect of employee stock plan activity, which increased common shareholders'
equity $29 million, partially offset by the decrease in equity of $95 million
that resulted from repurchasing approximately 1.6 million shares of common stock
during the first quarter of 2002.
Capital ratios exceed minimum regulatory requirements as follows:
March 31, December 31,
2002 2001
--------- ------------
Tier 1 risk-based capital ratio (4.00% - minimum) 8.22% 7.98%
Total risk-based capital ratio (8.00% - minimum) 12.04 11.70
Leverage ratio (3.00% - minimum) 9.55 9.36
At March 31, 2002, the capital ratios of all the Corporation's banking
subsidiaries exceeded the minimum ratios required of "well capitalized"
institutions as defined in the final rule under FDICIA.
Other Matters
In June 2001, the 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.
-31-
Forward-looking statements
This report includes forward-looking statements as that term is used in
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
the accounting treatment of any particular item, changes in industries, or the
political, economic and regulatory stability in countries where Comerica has a
concentration of loans, changes in the level of fee income, changes in general
economic conditions and related credit and market conditions, continuing
consolidations in the banking industry and the impact of regulatory responses to
any of the foregoing. 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.
-32-
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: Computation of Earnings Per Share
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended March 31, 2002.
-33-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMERICA INCORPORATED
(Registrant)
/s/ Ralph W. Babb Jr.
-----------------------------------------
Ralph W. Babb Jr.
President and Chief Executive Officer
/s/ Marvin J. Elenbaas
-----------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 14, 2002
-34-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------
11 Computation of Net Earnings Per Share