1
EXHIBIT 13
Financial Review
and Reports
1997 Financial
Highlights 20
Earnings
Performance 20
Strategic Lines
of Business 26
Balance Sheet
and Capital Funds
Analysis 28
Asset Quality 30
Asset and
Liability Management 32
Consolidated
Financial Statements 37
Notes to Consolidated
Financial Statements 41
Report of Management 60
Report of
Independent Auditors 60
Historical Review 61
18 Comerica Incorporated
2
TABLE 1: SELECTED FINANCIAL DATA
Year Ended December 31
(dollar amounts in millions, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Total interest income $ 2,648 $ 2,563 $ 2,614 $ 2,092 $ 1,783
Net interest income 1,443 1,412 1,300 1,230 1,134
Provision for loan losses 146 114 87 56 69
Securities gains 6 14 12 3 2
Noninterest income
(excluding securities gains) 522 493 487 447 447
Restructuring charge -- 90 -- 7 22
Noninterest expenses
(excluding restructuring charge) 1,008 1,069 1,086 1,035 1,003
Net income 530 417 413 387 341
PER SHARE OF COMMON STOCK
Basic net income* $ 3.24 $ 2.41 $ 2.38 $ 2.20 $ 1.92
Diluted net income* 3.19 2.38 2.37 2.19 1.90
Cash dividends declared 1.15 1.01 0.91 0.83 0.71
Common shareholders' equity 16.02 14.70 15.17 13.64 12.66
Market value 60.17 34.92 26.67 16.25 17.75
YEAR-END BALANCES
Total assets $ 36,292 $ 34,206 $ 35,470 $ 33,430 $30,295
Total earning assets 33,104 31,110 32,051 30,606 27,852
Total loans 28,895 26,207 24,442 22,209 19,100
Total deposits 22,586 22,367 23,167 22,432 20,950
Total borrowings 10,479 8,731 9,319 8,303 6,861
Medium- and long-term debt 7,286 4,242 4,644 4,098 1,461
Common shareholders' equity 2,512 2,366 2,608 2,392 2,182
DAILY AVERAGE BALANCES
Total assets $ 34,869 $ 34,195 $ 34,129 $ 31,451 $27,236
Total earning assets 32,025 31,370 31,537 29,038 25,012
Total loans 27,209 25,352 23,561 20,211 18,307
Total deposits 21,946 22,258 21,655 21,325 20,721
Total borrowings 9,798 8,850 9,639 7,527 4,105
Medium- and long-term debt 5,980 4,745 4,510 2,708 1,087
Common shareholders' equity 2,408 2,554 2,511 2,313 2,136
RATIOS
Return on average assets 1.52% 1.22% 1.21% 1.23% 1.25%
Return on average common shareholders' equity 21.32 15.98 16.46 16.74 15.94
Efficiency ratio 51.05 60.36 60.09 61.28 63.68
Dividend payout ratio 36 42 38 38 37
Common shareholders' equity as
a percent of average assets 6.91 7.47 7.36 7.35 7.84
EXCLUDING 1996 RESTRUCTURING CHARGE
Net income $ 477
Basic net income per share of common stock 2.77
Diluted net income per share of common stock 2.73
Return on average assets 1.40%
Return on average common shareholders' equity 18.33
Efficiency ratio 55.67
Dividend payout ratio 37
================================================================================
*Net income per share in this annual report is calculated in accordance with
FASB Statement 128, "Earnings Per Share." All prior period amounts have been
restated.
Comerica Incorporated 19
3
1997 FINANCIAL HIGHLIGHTS
FOCUSED ON PERFORMANCE
- - Earned 21.32 percent on average common shareholders' equity, compared to
15.98 percent (18.33 percent excluding the restructuring charge) in 1996.
- - Returned 1.52 percent on average assets, compared to 1.22 percent (1.40
percent excluding the restructuring charge) in 1996.
REPORTED RECORD EARNINGS
- - Reported net income of $530 million, or $3.19 per share, compared with
$417 million, or $2.38 per share (excluding the restructuring charge, net
income increased $53 million from $477 million, or $2.73 per share) in
1996.
- - On January 15, 1998, the Corporation declared a three-for-two stock split
to be effected in the form of a stock dividend on April 1, 1998. All per
share amounts have been adjusted to reflect the split.
SUSTAINED GROWTH
- - Grew average total assets slightly to $35 billion (increased 4 percent
excluding the sale of Comerica Bank-Illinois).
- - Reached $21 billion in average non-consumer loans, a 12 percent increase
(15 percent increase excluding the sale of Comerica Bank-Illinois).
- - Averaged $22 billion in total deposits, in both 1997 and 1996 (1 percent
increase excluding the sale of Comerica Bank-Illinois).
- - Maintained average shareholders' equity of $2.7 billion.
ENHANCED SHAREHOLDERS' RETURN
- - Repurchased 3.6 million shares (or 5.4 million shares on a post-split
basis) in 1997.
- - Raised the quarterly cash dividend 12 percent to $0.29 per share.
- - Declared annual cash dividends of $1.15 per share.
IMPLEMENTED KEY STRATEGIES
- - Sold the bond indenture services business and recorded a $23 million
pre-tax gain.
- - Maintained revenue momentum while implementing
Phase III of Direction 2000.
RETURN ON AVERAGE ASSETS
(in percentages)
[BAR GRAPH]
93 94 95 96 97
Comerica
Excluding restructuring charge
Industry average
(based on 50 largest U.S.
bank holding companies)
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent (FTE) basis, 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. Net interest income (FTE) comprised 73 percent of
net revenues, compared to 74 percent in 1996 and 73 percent in 1995.
NET INTEREST INCOME
[BAR GRAPH]
93 94 95 96 97
Net Interest Income (FTE)
(in millions)
Net Interest Margin (FTE)
(percent of earning assets)
20 Comerica Incorporated
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TABLE 2: ANALYSIS OF NET INTEREST INCOME-FULLY TAXABLE EQUIVALENT
1997 1996
- ---------------------------------------------------------------------------------------------------------------
Average Average Average Average
(dollar amounts in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------
Commercial loans $14,234 $ 1,174 8.25% $12,686 $1,041 8.21%
International loans 1,953 138 7.07 1,541 102 6.64
Real estate construction loans 866 81 9.38 707 65 9.22
Commercial mortgage loans 3,547 322 9.08 3,483 324 9.29
Residential mortgage loans 1,676 133 7.90 1,960 153 7.83
Consumer loans 4,486 440 9.81 4,624 457 9.88
Lease financing 447 33 7.48 351 24 6.82
- ---------------------------------------------------------------------------------------------------------------
Total loans (1) 27,209 2,321 8.53 25,352 2,166 8.54
Taxable securities 4,490 309 6.84 5,528 371 6.63
Securities exempt from federal income taxes 197 18 9.32 295 28 9.96
- ---------------------------------------------------------------------------------------------------------------
Total investment securities 4,687 327 6.94 5,823 399 6.79
Short-term investments 129 9 6.59 195 13 6.23
- ---------------------------------------------------------------------------------------------------------------
Total earning assets 32,025 2,657 8.29 31,370 2,578 8.20
Cash and due from banks 1,686 1,576
Allowance for loan losses (402) (361)
Accrued income and other assets 1,560 1,610
- ---------------------------------------------------------------------------------------------------------------
Total assets $34,869 $34,195
================================================================================================================
Money market and NOW accounts $ 6,926 232 3.35 $ 6,913 231 3.33
Savings deposits 1,701 34 2.02 2,026 44 2.18
Certificates of deposit 6,699 361 5.39 6,887 365 5.30
Foreign office deposits (2) 805 46 5.68 843 46 5.46
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 16,131 673 4.17 16,669 686 4.11
Federal funds purchased and securities
sold under agreements to repurchase 2,017 111 5.49 2,106 112 5.31
Other borrowed funds 1,801 98 5.45 1,999 107 5.36
Medium- and long-term debt 5,980 374 6.26 4,745 295 6.22
Other (3) -- (51) -- -- (49) --
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing sources 25,929 1,205 4.65 25,519 1,151 4.51
Noninterest-bearing deposits 5,815 5,589
Accrued expenses and other liabilities 467 400
Preferred stock 250 133
Common shareholders' equity 2,408 2,554
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $34,869 $34,195
======= =======
Net interest income/rate spread (FTE) $ 1,452 3.64 $ 1,427 3.69
======== =======
FTE adjustment (4) $ 9 $ 15
Impact of net noninterest-bearing ======== =======
sources of funds 0.89 0.85
- ---------------------------------------------------------------------------------------------------------------
Net interest margin (as a percent of
average earning assets) (FTE) 4.53% 4.54%
===============================================================================================================
1995
- --------------------------------------------------------------------------------------
Average Average
(dollar amounts in millions) Balance Interest Rate
- --------------------------------------------------------------------------------------
Commercial loans $11,302 $ 989 8.75%
International loans 1,257 89 7.06
Real estate construction loans 541 52 9.52
Commercial mortgage loans 3,157 297 9.40
Residential mortgage loans 2,450 191 7.80
Consumer loans 4,569 461 10.10
Lease financing 285 19 6.65
- --------------------------------------------------------------------------------------
Total loans (1) 23,561 2,098 8.90
Taxable securities 7,226 473 6.52
Securities exempt from federal income taxes 399 41 10.43
- --------------------------------------------------------------------------------------
Total investment securities 7,625 514 6.72
Short-term investments 351 23 6.61
- --------------------------------------------------------------------------------------
Total earning assets 31,537 2,635 8.35
Cash and due from banks 1,500
Allowance for loan losses (340)
Accrued income and other assets 1,432
- --------------------------------------------------------------------------------------
Total assets $34,129
======================================================================================
Money market and NOW accounts $ 6,411 217 3.39
Savings deposits 2,277 48 2.14
Certificates of deposit 6,358 344 5.41
Foreign office deposits (2) 1,842 112 6.07
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 16,888 721 4.27
Federal funds purchased and securities
sold under agreements to repurchase 2,816 166 5.88
Other borrowed funds 2,313 136 5.87
Medium- and long-term debt 4,510 289 6.41
Other (3) -- 2 --
- --------------------------------------------------------------------------------------
Total interest-bearing sources 26,527 1,314 4.95
Noninterest-bearing deposits 4,767
Accrued expenses and other liabilities 324
Preferred stock --
Common shareholders' equity 2,511
- --------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $34,129
=======
Net interest income/rate spread (FTE) $1,321 3.40
======
FTE adjustment (4) $ 21
Impact of net noninterest-bearing ======
sources of funds 0.79
- --------------------------------------------------------------------------------------
Net interest margin (as a percent of
average earning assets) (FTE) 4.19%
======================================================================================
(1) Nonaccrual loans are included in average balances reported and are used to
calculate rates.
(2) Includes substantially all deposits by foreign depositors; deposits are in
excess of $100,000.
(3) Net interest rate swap (income)/expense. If swap (income)/expense were
allocated, average rates on total loans would have been 8.63% in 1997, 8.66% in
1996 and 8.84% in 1995; average rates on medium- and long-term debt would have
been 5.85% in 1997, 5.80% in 1996 and 6.14% in 1995.
(4) The FTE adjustment is computed using a federal income tax rate of 35%.
Comerica Incorporated 21
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Net interest income (FTE) rose 2 percent to $1,452 million in 1997. This
increase was due primarily to a 2 percent increase in average earning assets,
which was concentrated in commercial loans. The significant increase in
commercial loans was offset by consumer loan runoff and sales and runoff of
investment securities.
Net interest margin for 1997 declined slightly to 4.53 percent from 4.54
percent last year. Comerica (the "Corporation") experienced higher funding
costs in 1997 as a result of a greater reliance on purchased funds in the mix
of interest-bearing liabilities. This was offset by a favorable shift in
earning assets to higher spread loans funded by the sales
and runoff of lower yielding investment securities.
TABLE 3: RATE-VOLUME ANALYSIS-FULLY TAXABLE EQUIVALENT
1997 / 1996 1996 / 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Increase Increase Net Increase Increase Net
(Decrease) (Decrease) Increase (Decrease) (Decrease) Increase
(in millions) Due to Rate Due to Volume* (Decrease) Due to Rate Due to Volume* (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income (FTE)
Commercial loans $ 5 $128 $ 133 $ (62) $ 114 $ 52
International loans 7 29 36 (6) 19 13
Real estate construction loans 1 15 16 (2) 15 13
Commercial mortgage loans (7) 5 (2) (3) 30 27
Residential mortgage loans 2 (22) (20) 1 (39) (38)
Consumer loans (3) (14) (17) (10) 6 (4)
Lease financing 2 7 9 -- 5 5
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 7 148 155 (82) 150 68
Taxable securities 10 (72) (62) 12 (114) (102)
Securities exempt from federal income taxes (1) (9) (10) (3) (10) (13)
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 9 (81) (72) 9 (124) (115)
Short-term investments 1 (5) (4) (1) (9) (10)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income (FTE) 17 62 79 (74) 17 (57)
Interest expense
Money market and NOW accounts 1 -- 1 (3) 17 14
Savings deposits (3) (7) (10) 1 (5) (4)
Certificates of deposit 6 (10) (4) (7) 28 21
Foreign office deposits 2 (2) -- (11) (55) (66)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6 (19) (13) (20) (15) (35)
Federal funds purchased and securities
sold under agreements to repurchase 4 (5) (1) (16) (38) (54)
Other borrowed funds 2 (11) (9) (12) (17) (29)
Medium- and long-term debt 2 77 79 (9) 15 6
Other (1) (2) -- (2) (51) -- (51)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 12 42 54 (108) (55) (163)
----------------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) $ 5 $ 20 $ 25 $ 34 $ 72 $ 106
===================================================================================================================================
*Rate/volume variances are allocated to variances due to volume.
(1) Net interest rate swap income.
22 Comerica Incorporated
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The Corporation implemented various asset and liability management strategies
in 1997 to minimize exposure to net interest margin risk, which represents the
potential reduction in net interest income that may result from rate spread
compression between, for example, prime and market rates or core deposit and
money market rates. Such strategies included permitting investment securities
to run off in order to facilitate growth in higher yielding loans. Off-balance
sheet interest rate swaps were also entered into during the year to effectively
fix the high yields on certain variable rate loans and alter the interest rate
characteristics of debt issued throughout the year. Refer to page 32 of this
financial review for additional information regarding the Corporation's asset
and liability management policies.
In 1996, net interest income (FTE) increased 8 percent over 1995, benefiting
from strong growth in average earning assets, primarily commercial loans. The
net interest margin for 1996 increased 35 basis points from 1995, principally
due to a favorable shift in the mix of earning assets. The Corporation
primarily funded the growth in higher yielding loans with sales of thin margin,
floating rate investment securities and runoff of fixed rate investment
securities. This shifted the structure of the balance sheet, placing a greater
emphasis on higher spread loans and reducing the reliance on investment
securities.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's assessment of possible
losses inherent in the Corporation's loan portfolio and is determined based on
the application of projected loss ratios to risk-rated loans, both individually
and by category. Projected loss ratios incorporate factors such as recent loan
loss experience, current economic conditions and trends, geographic dispersion
of borrowers, trends with respect to past due and nonaccrual amounts, risk
characteristics of various categories and concentrations of loans and transfer
risks. However, there can be no assurance that the actual loss ratios will not
vary from those projected. The provision for loan losses reflects management's
evaluation of the adequacy of the allowance for loan losses. This evaluation is
performed on a quarterly basis.
The provision for loan losses was $146 million in 1997, compared to $114
million in 1996 and $87 million in 1995. The provision increase in 1997
primarily reflected loan growth and management's intention to increase reserve
ratios.
Total net charge-offs increased to $89 million in 1997, compared to $85 million
and $76 million in 1996 and 1995, respectively. The ratio of net loans
charged off to average total loans was 0.33 percent in both 1997 and 1996.
Commercial loan net charge-offs as a percentage of average commercial loans
were 0.10 percent and 0.12 percent for 1997 and 1996, respectively. Consumer
loan net charge-offs as a percentage of average consumer loans were 1.79
percent and 1.57 percent for 1997 and 1996, respectively.
At December 31, 1997, the allowance for loan losses was $424 million, an
increase of $57 million since year-end 1996. The allowance as a percentage of
total loans increased to 1.47 percent from 1.40 percent at December 31, 1996.
The allowance as a percentage of total nonperforming assets increased
significantly to 413 percent at December 31, 1997, from 263 percent at year-end
1996.
An estimated allocation of the allowance for loan losses is provided in Table 9
on page 29. The allocations are made for analytical purposes. The total
allowance is available to absorb losses from any segment of the portfolio.
NET LOANS CHARGED OFF
TO AVERAGE LOANS
(in percentages)
[BAR GRAPH]
93 94 95 96 97
Comerica
Industry average
(based on 50 largest U.S.
bank holding companies)
Comerica Incorporated 23
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TABLE 4: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Year Ended December 31
(dollar amounts in millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $367 $341 $326 $299 $308
Allowance of institutions and loans purchased/sold -- (3) 4 19 --
Loans charged off
Domestic
Commercial 33 33 33 25 36
Real estate construction 1 1 3 1 1
Commercial mortgage 4 5 8 17 20
Residential mortgage -- 1 2 -- 1
Consumer 92 86 73 40 52
International 1 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total loans charged off 131 126 119 83 110
Recoveries
Domestic
Commercial 19 18 19 15 18
Real estate construction 1 1 3 -- --
Commercial mortgage 10 9 8 5 2
Consumer 12 13 13 14 12
International -- -- -- 1 --
- -------------------------------------------------------------------------------------------------------------------------
Total recoveries 42 41 43 35 32
- -------------------------------------------------------------------------------------------------------------------------
Net loans charged off 89 85 76 48 78
Provision for loan losses 146 114 87 56 69
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of period $424 $367 $341 $326 $299
=========================================================================================================================
Ratio of allowance for loan losses to total loans
at end of period 1.47% 1.40% 1.40% 1.47% 1.56%
Ratio of net loans charged off during the period
to average loans outstanding during the period 0.33% 0.33% 0.32% 0.24% 0.43%
=========================================================================================================================
NONINTEREST INCOME
Year Ended December 31
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------
Income from fiduciary activities $147 $126 $119
Service charges on deposit accounts 141 140 130
Revolving credit fees 20 23 36
Securities gains 6 14 12
Other 191 186 160
- ---------------------------------------------------------------------------
Subtotal 505 489 457
Bond indenture income 23 7 6
Customhouse broker fees -- 11 36
- ---------------------------------------------------------------------------
Total noninterest income $528 $507 $499
===========================================================================
Noninterest income increased $21 million, or 4 percent, to $528 million in 1997,
compared to $507 million and $499 million in 1996 and 1995, respectively. After
adjusting for divestitures, securities gains and the large nonrecurring items
discussed below, noninterest income rose $53 million, or 12 percent, in 1997.
Income from fiduciary activities increased $14 million, or 10 percent, in 1997,
compared to an increase of $8 million, or 7 percent, in 1996. The increase in
1997 reflects a significant increase in both personal trust and institutional
trust income due to an expanded customer base and market performance of assets
under management. Total trust assets under management increased to $117 billion
at December 31, 1997, from $107 billion at year-end 1996. Discretionary funds,
which represent trust assets over which the Corporation has investment
management authority, increased $4 billion to $30 billion from $26 billion in
1996. This increase resulted primarily from increases in the institutional
trust category.
Service charges on deposit accounts rose $1 million, or 1 percent, in 1997
compared to an increase of $10 million, or 8 percent, in 1996. This increase is
net of a $3 million reduction in service charges resulting from the divestiture
of the Illinois subsidiary in 1996. The majority of the 1997 increase related to
revisions of the commercial account fee structure, growth in demand deposit
activity and lower earnings credit allowances.
24 Comerica Incorporated
8
NONINTEREST INCOME
(in millions)
[BAR GRAPH]
93 94 95 96 97
Customhouse brokerage fees decreased $11 million in 1997, due to the sale of
John V. Carr & Son, Inc. in the second quarter of 1996.
Revolving credit fee income decreased $3 million, or 14 percent, in 1997
compared to a $13 million, or 37 percent decrease in 1996. The lower fees in
1997 were primarily due to the transfer of fees and associated costs to a
merchant services joint venture in early 1996.
Income from securities gains/(losses) decreased $8 million between 1997 and
1996, primarily representing decreases in gains on the sale of Latin American
debt (principally Brady bonds) and U.S. government agency securities.
Other noninterest income grew $28 million, or 15 percent, in 1997. Excluding the
impact of divestitures and large nonrecurring items in both periods, other
noninterest income rose 17 percent. Accounting for the majority of this increase
were higher levels of security trading and commercial fee income, as well as the
implementation of new retail fees. Other noninterest income also increased due
to management's continued emphasis on revenue growth through sales of
nontraditional bank products. Commissions and fees related to these products
increased $3 million, or 19 percent, in 1997 from $20 million in 1996.
Significant nonrecurring items in other noninterest income include a $23 million
gain on the sale of the Corporation's bond indentures services business in 1997.
Significant nonrecurring items in 1996 include a $13 million gain on the
transfer of merchant services to a joint venture, $9 million of interest on a
state tax refund and a $6 million gain on the sale of Comerica Bank-Illinois;
offset by a $9 million write-off related to the sale of John V. Carr & Son, Inc.
There were no significant nonrecurring items included in other noninterest
income in 1995.
NONINTEREST EXPENSES
Year Ended December 31
(in millions) 1997 1996 1995
- ------------------------------------------------------------------------
Salaries $464 $475 $466
Employee benefits 75 86 96
- ------------------------------------------------------------------------
Total salaries and
employee benefits 539 561 562
Net occupancy expense 89 99 99
Equipment expense 62 69 68
FDIC insurance expense 3 8 24
Telecommunications expense 28 29 29
Other 287 303 304
- ------------------------------------------------------------------------
Subtotal 1,008 1,069 1,086
Restructuring charge -- 90 --
- ------------------------------------------------------------------------
Total noninterest expenses $1,008 $1,159 $1,086
========================================================================
Noninterest expenses decreased 13 percent to $1,008 million in 1997 (decreased 6
percent from $1,069 million, excluding the 1996 restructuring charge), compared
to $1,159 million in 1996 and $1,086 million in 1995. Excluding the effect of
divestitures and the large nonrecurring items discussed later, noninterest
expenses remained essentially unchanged in 1997.
A pre-tax restructuring charge of $90 million was recorded in 1996 in connection
with a major program to improve efficiency, revenue and customer service. The
charge included $48 million for termination benefits, $21 million for occupancy
and equipment write-offs and $21 million for other costs. Estimated annual
benefits of $110 million (cost savings of $85 million and revenue enhancements
of $25 million) are anticipated from the program. Projected completion of the
implementation plan is the end of the first quarter of 1998, so a substantial
portion of the estimated benefits will not impact annual results until 1998, and
full annual realization is not expected until 1999. As a result of the program,
1,890 employee positions, about 15 percent of total positions at year-end 1996,
were identified to be eliminated by the end of Direction 2000. As of December
31, 1997, all but approximately 300 of the positions have been eliminated.
Reinvestment opportunities during the implementation phase have created 300
new positions. Implementation of the major components of the program are
progressing as anticipated. During 1997, $61 million of termination benefits,
occupancy and equipment write-offs and other costs were incurred and charged
against the restructuring reserve. Additional information regarding the
Corporation's restructuring reserve can be found in Note 15 on page 50.
Total salaries expense decreased $11 million, or 2 percent, in 1997 versus an
increase of $9 million, or 2 percent, in 1996. Excluding the effect of
divestitures, salaries increased slightly during the year reflecting increased
incentives tied to performance and annual merit increases. The number of
full-time equivalent employees decreased 1,078, or 10 percent, from year-end
1996, excluding divestitures.
Comerica Incorporated 25
9
NONINTEREST EXPENSES
(in millions)
[BAR GRAPH]
93 94 95 96 97
Restructuring charge
Employee benefits expense decreased $11 million, or 12 percent, in 1997 versus
an increase of $10 million, or 10 percent, in 1996. After adjusting for
divestitures, employee benefits decreased 7 percent, largely due to the
reduction in full-time equivalent staff levels.
Net occupancy and equipment expenses, on a combined basis, decreased $17
million, or 10 percent, in 1997 versus virtually no change in 1996. After
adjusting for divestitures, net occupancy and equipment expenses declined 6
percent.
The Federal Deposit Insurance Corporation (FDIC) expenses decreased
significantly, by $5 million, or 63 percent, in 1997, and $16 million, or 66
percent, in 1996, primarily due to the FDIC adopting a new assessment rate
schedule for Bank Insurance Fund (BIF) members in the third quarter of 1995.
The new rate schedule, which continues to determine assessments based on a
bank's risk-based capital levels, virtually eliminated each bank's 1996 BIF
annual deposit insurance premium. Beginning in 1997, each subsidiary bank's
deposit insurance assessment rate is predicated upon the level of insurance
premiums necessary to maintain the bank insurance fund ratio at a level of 1.25
percent of insured deposits, plus an amount representing interest due on the
Financing Corporation bonds issued during the savings and loan crisis. The BIF
rate reduction described above translated into a $21 million reduction in FDIC
insurance expense for the Corporation in 1996. Offsetting this savings in 1996
was a one-time charge of $5 million, representing the Corporation's portion of
an assessment levied on banks with Savings Association Insurance Fund (SAIF)
insured deposits in order to recapitalize the SAIF. Deposit insurance expense
will approximate $3 million in 1998 based on current deposit levels and current
deposit assessment rates.
Other noninterest expenses decreased $16 million in 1997, compared to a $1
million decrease in 1996. Included in other noninterest expenses in 1997 were $5
million of incremental litigation accruals. Other noninterest expenses in 1997,
1996 and 1995, included losses of $2 million, $18 million and $15 million
(excluding $1 million of costs to sell), respectively, on the sale of a portion
of the bankcard portfolio. Loss-sharing provisions in the sales agreement expose
the Corporation to maximum losses of $50 million over the first 42 months
following the sale (December 1995). Loss rates in 1996 and 1997 exceeded
estimates, resulting in the additional charge for projected losses. Excluding
divestitures and the above large nonrecurring items, other noninterest expenses
increased $3 million, or less than 1 percent. The minimal increase reflects
management's continued efforts to control expenses.
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/(losses). The ratio was 51.05 percent in 1997,
compared to 60.36 percent in 1996 (55.67 percent excluding the restructuring
charge) and 60.09 percent in 1995.
INCOME TAXES
The provision for income taxes was $287 million in 1997, compared to $229
million in 1996 and $213 million in 1995. The effective tax rate, computed
by dividing the provision for income taxes by income before taxes, was 35.0
percent for 1997, compared to 35.4 percent in 1996 and 33.9 percent in 1995.
The decrease in the effective tax over the prior year reflects greater levels
of low-income housing credits.
STRATEGIC LINES OF BUSINESS
The Corporation has strategically aligned its operations into three major lines
of business: the Business Bank, the Individual Bank and the Investment Bank.
Table 5 on page 27 presents the financial results of these business lines
for the years ended December 31, 1997 and 1996.
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; therefore, the 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, both 1997 and
1996 amounts are based on methodologies in effect at December 31, 1997. 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.
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 loan loss provision is assigned based on
the amount necessary to maintain an allowance for loan 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 over-
head is assigned based on the ratio of a line of business' noninter-
26 Comerica Incorporated
10
TABLE 5: STRATEGIC LINES OF BUSINESS FINANCIAL RESULTS
Business Bank Individual Bank Investment Bank* Other Total
- --------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Earnings Summary
Net interest income (FTE) $ 653 $ 621 $ 759 $ 776 $ (2) $ (1) $ 42 $ 31 $ 1,452 $ 1,427
Provision for loan losses (11) 2 82 109 n/a n/a 75 3 146 114
Noninterest income 129 122 268 277 107 94 24 14 528 507
Noninterest expenses 298 293 602 655 101 95 7 116 1,008 1,159
Provision for income taxes 180 163 120 102 1 (1) (5) (20) 296 244
Net income (loss) 315 285 223 187 3 (1) (11) (54) 530 417
Selected Average Balances
Assets $19,781 $17,397 $9,644 $9,881 $ 27 $22 $5,417 $6,895 $34,869 $34,195
Loans 18,172 16,156 9,042 9,201 -- -- (5) (5) 27,209 25,352
Deposits 3,911 3,914 17,084 17,262 40 48 911 1,034 21,946 22,258
Common equity 1,057 941 774 707 23 17 554 889 2,408 2,554
Statistical Data
Return on average assets 1.59% 1.64% 1.24% 1.04% 4.21% (1.78)% (0.09)% (0.49)% 1.52% 1.22%
Return on
average common equity 29.85 30.24 28.76 26.45 12.62 (7.34) (1.90) (5.98) 21.32 15.98
Efficiency ratio 38.27 39.58 58.55 62.12 n/m n/m n/m n/m 51.05 60.36
==========================================================================================================================
*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 $6 million and $2 million and return on average
common equity would have been 27.89% and 11.01%, in 1997 and 1996,
respectively.
n/m Not meaningful
n/a Not applicable
est expenses to total noninterest expenses incurred by all business lines.
Common equity is allocated based on credit, operational and business risks.
The following discussion provides information about each line of business,
along with an explanation of factors impacting 1997 performance. Overall
comparability of results is impacted because of the inclusion of the results of
Comerica Bank-Illinois for the first seven months of 1996.
The Business Bank is comprised of middle market lending, asset-based lending,
large corporate banking and international financial services. This line of
business meets the needs of medium-size businesses, multinational corporations
and governmental entities by offering various products and services, including
commercial loans and lines of credit, deposits, cash management, capital market
products, international trade finance, letters of credit, foreign exchange
management services and loan syndication services.
Net income increased $30 million, or 11 percent, in 1997, principally due to
additional net interest income resulting from 12 percent average loan growth,
and a lower provision for loan losses.
The Individual Bank includes consumer lending, consumer deposit gathering,
mortgage loan origination and servicing, small business banking (annual sales
under $5 million) and private banking. This line of business offers a variety
of consumer products, including deposit accounts, direct and indirect
installment loans, credit cards, home equity lines of credit and residential
mortgage loans. In addition, a full range of financial services is provided to
small businesses and municipalities. Private lending and personal trust
services are also provided to meet the personal financial needs of affluent
individuals (as defined by individual net income or wealth).
Net income increased $36 million, or 19 percent, in 1997, principally due to
lower noninterest expenses resulting from the sale of the Corporation's
Illinois subsidiary, a one-time loss on a bankcard portfolio sale and a
one-time SAIF assessment charge for thrift bailout in 1996. Lower net interest
income and noninterest income are offset by a lower provision for loan losses.
Noninterest income in 1996 includes a $13 million gain on the sale of the
merchant services business.
The Investment Bank is responsible for the sale of mutual fund and annuity
products, as well as life, disability and long-term care insurance products.
This line of business also offers institutional trust products, retirement
services and provides investment management and advisory services, investment
banking and discount securities brokerage services.
Net income increased $4 million in 1997, principally due to higher levels of
institutional trust and discount brokerage fees.
The Other category includes divested business lines, the income and expense
impact of cash and loan loss reserves not assigned to specific business lines,
miscellaneous other items of a corporate nature and certain direct expenses not
allocated to business lines. The Corporation's securities portfolio and asset
and liability management activities are also reflected in these amounts.
Noninterest income for 1997 includes a $23 million gain on the sale of the
Corporation's bond indenture services business. Noninterest expenses in 1996
include a $90 million restructuring charge.
Comerica Incorporated 27
11
TABLE 6: ANALYSIS OF INVESTMENT SECURITIES AND LOANS
December 31
(in millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale
U.S. government and agency securities $ 3,239 $ 3,968 $ 6,038 $2,674 $ 2,164
State and municipal securities 170 228 371 -- --
Other securities 597 604 450 232 158
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 4,006 4,800 6,859 2,906 2,322
Investment securities held to maturity
U.S. government and agency securities -- -- -- 4,462 3,232
State and municipal securities -- -- -- 422 513
Other securities -- -- -- 86 233
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity -- -- -- 4,970 3,978
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 4,006 $ 4,800 $ 6,859 $ 7,876 $ 6,300
=============================================================================================================================
Commercial loans $15,805 $13,520 $12,041 $10,634 $ 9,087
International loans
Government and official institutions 6 11 6 18 143
Banks and other financial institutions 339 323 583 660 671
Other 1,740 1,372 796 517 322
- -----------------------------------------------------------------------------------------------------------------------------
Total international loans 2,085 1,706 1,385 1,195 1,136
Real estate construction loans 941 751 641 414 437
Commercial mortgage loans 3,634 3,446 3,254 3,056 2,700
Residential mortgage loans 1,565 1,744 2,221 2,436 1,857
Consumer loans 4,348 4,634 4,570 4,215 3,674
Lease fnancing 517 406 330 259 209
- -----------------------------------------------------------------------------------------------------------------------------
Total loans $28,895 $26,207 $24,442 $22,209 $19,100
=============================================================================================================================
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
on Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The statement establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The statement is effective for fiscal years
beginning after December 15, 1997, but need not be applied to interim financial
statements in the initial year of application. Subsequent adoption of SFAS No.
131 will not have a material impact to the Corporation.
BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
Total assets were $36.3 billion at year-end 1997, representing a $2.1 billion
increase from $34.2 billion on December 31, 1996. On an average basis, total
assets remained relatively flat with $34.9 billion in 1997, compared to $34.2
billion in 1996.
EARNING ASSETS
Total earning assets were $33.1 billion at year-end 1997, representing a $2.0
billion increase from $31.1 billion at December 31, 1996. On an average
basis, total earning assets were $32.0 billion in 1997, compared to $31.4
billion in 1996.
The average balance of domestic commercial loans, which is comprised of
commercial and commercial mortgage loans, increased $1.6 billion, or 10
percent, from 1996. Real estate construction loans also rose an average $159
million, or 22 percent, in 1997. The commercial portfolio, especially small
business and middle market loans, continues to grow in all the Corporation's
markets. This growth, along with an increase of approximately 30 percent in
commercial loan commitments to extend credit, is attributable to effective
marketing efforts, strong customer relationships and continued economic
strength in the commercial loan markets.
Average international loans increased $412 million, consisting largely of loans
originated to facilitate trade with limited cross-border risk. The growth also
reflects the increasing global activity of the Corporation's traditional
customer base. Risk management practices in international lending include
structuring bilateral arrangements 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 $414 million, or 1.14 percent of assets,
was the only country exposure exceeding 1.00 percent of assets at December 31,
1997. There were no countries with exposure between 0.75 percent and 1.00
percent of total assets at year-end 1997. Table 7 on page 29 provides
additional information on the Corporation's Mexican cross-border risk.
28 Comerica Incorporated
12
TABLE 7: MEXICAN CROSS-BORDER RISK
December 31
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Governments and official institutions $ 41 $192 $142
Banks and other financial institutions 78 26 42
Commercial and industrial 295 50 32
- --------------------------------------------------------------------------------
Total $414 $268 $216
================================================================================
TABLE 8: LOAN MATURITIES AND INTEREST RATE SENSITIVITY
After One
December 31, 1997 Within But Within After
(in millions) One Year* Five Years Five Years Total
- -----------------------------------------------------------------------------------------
Commercial loans $12,059 $ 3,043 $ 703 $15,805
Commercial mortgage loans 1,281 1,701 652 3,634
International loans 1,993 90 2 2,085
Real estate construction loans 650 213 78 941
- -----------------------------------------------------------------------------------------
Total $15,983 $ 5,047 $ 1,435 $22,465
=========================================================================================
Loans maturing after one year
Predetermined interest rates $ 2,064 $ 863
Floating interest rates 2,983 572
- -----------------------------------------------------------------------------------------
Total $ 5,047 $ 1,435
=========================================================================================
* Includes demand loans, loans having no stated repayment schedule or maturity
and overdrafts.
TABLE 9: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
December 31 Allocated of Total Allocated of Total Allocated of Total Allocated of Total Allocated of Total
(dollar amounts in millions) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic
Commercial $ 94 55% $ 98 52% $118 49% $119 48% $123 48%
Real estate construction 7 3 6 3 5 3 6 2 4 2
Commercial mortgage 18 13 27 13 33 13 35 14 26 14
Residential mortgage 1 5 2 7 2 9 2 11 3 10
Consumer 116 15 120 18 84 19 60 19 60 19
Lease financing 1 2 1 1 1 1 1 1 1 1
International 5 7 3 6 2 6 3 5 18 6
Unallocated 182 -- 110 -- 96 -- 100 -- 64 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $424 100% $367 100% $341 100% $326 100% $299 100%
====================================================================================================================================
Average residential mortgage loans decreased $284 million primarily due to
management's decision to sell the majority of mortgage originations. Average
consumer loans, comprised of installment, revolving credit and bankcard loans,
declined $138 million. Average installment loan balances decreased $106 million,
while average revolving credit loans decreased $39 million. Average bankcard
loans were relatively unchanged during the period.
Average investment securities declined to $4.7 billion in 1997, compared to $5.8
billion in 1996, reflecting sales and runoff of securities primarily to fund
growth in higher-yielding loans and to divest lower earning variable rate
assets. Average U.S. government and agency securities decreased $1.2 billion and
average state and municipal securities decreased $97 million, while average
other securities increased $194 million. The Corporation shifted away from
purchasing on-balance sheet securities to balance interest rate sensitivity and
preserve net interest margin to purchasing off-balance sheet interest rate swaps
that accomplish the same interest risk reduction objective. The decline in U.S.
government and agency securities principally resulted from sales and paydowns,
while the tax-
Comerica Incorporated 29
13
exempt portfolio of state and municipal securities continued to decrease as
reduced tax advantages for these types of securities deterred additional
investment. Other securities consist primarily of collateralized mortgage
obligations (CMOs), Brady bonds and Eurobonds. The increase in other securities
during the year was largely a result of Eurobonds.
OTHER EARNING ASSETS
Short-term investments in interest-bearing deposits with banks, federal funds
sold and securities purchased under agreements to resell provide a range of
maturities under one year to supplement corporate liquidity. 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 provide a vehicle to control the reserve position and serve
correspondent banks, as well as offer supplemental earnings opportunities. As a
result of the emphasis on higher-yielding loans, short-term investments declined
on average $37 million during 1997.
Loans held for sale totaled $41 million at the end of 1997, up slightly from $38
million in 1996.
TABLE 10: MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000
AND OVER
December 31
(in millions) 1997
- ----------------------------------------------------------
Three months or less $1,380
Over three months to six months 395
Over six months to twelve months 350
Over twelve months 171
- ----------------------------------------------------------
Total $2,296
==========================================================
DEPOSITS AND BORROWED FUNDS
Average deposits declined $312 million, or 1 percent, from 1996. Excluding the
impact of divestitures, deposits increased 1 percent.
Average demand deposits grew $226 million, or 4 percent, from 1996, largely due
to the growth in related commercial loan business. Average certificates of
deposit decreased $188 million, or 3 percent, from 1996.
With deposit balances declining slightly, there was increased reliance on
medium-term debt (both domestic and European), and long-term debt to provide the
necessary funding to support expanding loan volumes. Medium-term debt provides
the Corporation a funding source with maturities ranging from one month to 15
years and durations that are similar to deposit liabilities. Long-term
subordinated notes help maintain the bank's total capital ratio at the level
that qualifies for the lowest FDIC risk-based insurance premium and allow the
Corporation to take advantage of acquisition activity. Medium-term debt
increased $2.8 billion representing the net result of the issuance of $5.4
billion and the maturity of $2.6 billion of notes during 1997. Long-term debt
increased $200 million from the issuance of subordinated notes during 1997.
Further information on the Corporation's medium- and long-term debt is included
in Note 9 of the consolidated financial statements on page 46.
CAPITAL
Shareholders' equity was $2.8 billion at December 31, 1997. During the year, the
Corporation authorized the repurchase of up to 12 million shares (or 18 million
shares on a post-split basis) of Comerica common stock. Coupled with other
authorizations to acquire shares, Comerica repurchased 4 million shares equaling
more than $242 million of capital during 1997. At December 31, 1997, the
Corporation had remaining authorization to purchase 15 million shares (or 22
million shares on a post-split basis) of common stock.
The remaining change in capital is the net effect of increases in capital from
retained earnings of $332 million, $36 million of common stock for employee
stock plans and a change of $21 million in nonowner equity, principally a change
in value of available for sale securities.
The Corporation declared common dividends totaling $181 million on net income
applicable to common stock of $513 million, representing a dividend payout ratio
of 36 percent. The payout ratio in 1996 was 42 percent (37 percent excluding the
after-tax impact of the restructuring charge). The Corporation has targeted a
payout ratio of between 30 to 40 percent, although this target is constantly
reassessed by the board of directors in light of changing market and industry
conditions.
On January 15, 1998, the Corporation's board of directors declared a
three-for-two stock split, effected in the form of a 50 percent stock dividend
to be paid April 1, 1998, as well as increased the quarterly cash dividend 10
percent to $0.32 per share.
At December 31, 1997, 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 17 of the consolidated financial
statements on page 51 for the capital ratios.
ASSET QUALITY
NONPERFORMING ASSETS
The Corporation's policies regarding nonaccrual loans reflect the importance of
identifying troubled loans early. Consumer loans are directly charged off no
later than 180 days past due,
NONPERFORMING ASSETS TO
LOANS AND OTHER REAL ESTATE
(in percentages)
[BAR GRAPH]
93 94 95 96 97
Comerica
Industry average
(based on 50 largest U.S.
bank holding companies)
30 Comerica Incorporated
14
TABLE 11: ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO-FULLY TAXABLE EQUIVALENT
Maturity+
--------------------------------------------------------------------- Weighted
Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total Average
December 31, 1997 --------------------------------------------------------------------------------------- Maturity
(dollar amounts in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Yrs./Mos.
- ------------------------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 46 6.09% $ 27 5.54% $ -- --% $ -- --% $ 73 5.90% 1/1
U.S. government
and agency 125 7.08 194 7.10 185 7.02 2,662 6.57 3,166 6.65 10/8
State and municipal
securities 43 5.90 87 6.41 32 6.23 8 6.40 170 6.25 3/3
Other bonds, notes
and debentures 108 9.36 177 7.71 127 7.43 84 8.85 496 8.19 6/3
Federal Reserve
Bank stock and
other investments* -- -- -- -- 2 -- 99 -- 101 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment
securities available
for sale $322 7.55% $485 7.08% $ 346 7.10% $2,853 6.64% $4,006 6.81% 9/8
====================================================================================================================================
* Balances are excluded in the calculation of total yield.
+ Based on final contractual maturity.
TABLE 12: SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
December 31
(dollar amounts in millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Nonperforming assets
Nonaccrual loans
Commercial loans $ 59 $ 72 $ 87 $ 89 $ 71
International loans 1 -- -- -- --
Real estate construction loans 3 3 7 17 19
Real estate mortgage loans (principally commercial) 15 28 37 56 64
- -----------------------------------------------------------------------------------------------
Total nonaccrual loans 78 103 131 162 154
Reduced-rate loans 8 8 3 2 5
- -----------------------------------------------------------------------------------------------
Total nonperforming loans 86 111 134 164 159
Other real estate 17 29 29 40 50
- -----------------------------------------------------------------------------------------------
Total nonperforming assets $103 $140 $163 $204 $209
===============================================================================================
Nonperforming loans as a percentage of total loans 0.30% 0.42% 0.55% 0.74% 0.83%
Nonperforming assets as a percentage of total loans
and other real estate 0.36% 0.53% 0.67% 0.92% 1.09%
Allowance for loan losses as a percentage of total
nonperforming assets 413% 263% 209% 160% 143%
Loans past due 90 days--domestic $ 53 $ 52 $ 57 $ 39 $ 46
===============================================================================================
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 when the loan is 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 at the time the loan is placed on nonaccrual status
to an amount that represents management's assessment of the ultimate
collectibility of the loan.
Interest previously accrued but not collected on nonaccrual loans is charged
against current income. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of principal is
probable.
Nonperforming assets as a percent of total loans and other real estate
were 0.36 percent and 0.53 percent at year-end 1997 and 1996, respectively. This
decline reflects the continued improvement in the quality of the loan portfolio,
favorable economic conditions in the Corporation's markets, and other real
estate sales.
Comerica Incorporated 31
15
Nonaccrual loans at December 31, 1997, decreased 24 percent to $78 million from
year-end 1996.
The nonaccrual loan table below indicates the percentage of nonaccrual loan
value to original contractual value and demonstrates the conservative and prompt
nature of the corporate charge-off and payment application policy.
Other real estate owned (ORE) declined significantly to $17 million, as two
large sales more than offset ORE additions.
NONACCRUAL LOANS
December 31
(dollar amounts in millions) 1997 1996
- --------------------------------------------------------
Carrying value $ 78 $103
Contractual value 119 147
Carrying value as a percentage
of contractual value 66% 70%
=======================================================
CONCENTRATION OF CREDIT
Loans to companies and individuals involved with the automotive industry,
including suppliers, manufacturers and dealers, represented the largest
significant industry concentration at December 31, 1997. These loans totaled
$4.3 billion, or 15 percent of total loans at December 31, 1997, and included
floor plan loans to automobile dealers of $1,408 million and $1,209 million at
December 31, 1997 and 1996, respectively. All other industry concentrations
individually represented less than 5 percent of total loans at year-end 1997.
Automotive industry loans at year-end 1996 totaled approximately $4.3 billion,
or 16 percent, of total loans.
The Corporation has successfully operated in the Michigan economy in spite of a
loan concentration and several downturns in the auto industry. There were no
automotive industry-related loans larger than $6 million on nonaccrual status as
of year-end 1997. In addition, there were no significant automotive
industry-related charge-offs during the year.
COMMERCIAL REAL ESTATE LENDING
The real estate construction loan portfolio contains loans made to long-time
customers in local markets with satisfactory project completion experience. The
portfolio has approximately 922 loans, of which 72 percent have balances of less
than $1 million. The largest real estate construction loan has a balance of
approximately $28 million.
The commercial mortgage loan portfolio, 45 percent of which relates to
owner-occupied properties, also consists of loans to long-time customers. Of the
approximately 7,229 loans in the portfolio, 89 percent have balances under $1
million and the largest loan has a balance of approximately $28 million.
Additionally, the Corporation's policy requires a 75 percent or less
loan-to-value (LTV) ratio for all commercial mortgage and real estate
construction loans. This policy is within bank regulatory limits.
The geographic distribution of the real estate construction and commercial
mortgage loan portfolios is also an important determinant in evaluating credit
risk. The following table indicates the diversification of the portfolios
throughout the markets served by the Corporation.
GEOGRAPHIC DISTRIBUTION
December 31, 1997 Real Estate Commercial
(in millions) Construction Mortgage
- ------------------------------------------------------------------------------
Michigan $396 $2,189
California 160 565
Texas 303 375
Florida 19 150
Other 63 355
- ------------------------------------------------------------------------------
Total $941 $3,634
==============================================================================
ASSET AND LIABILITY MANAGEMENT
The Corporation has a material exposure to interest rate risk, which it actively
manages. The principle objective of asset and liability management is to
maximize net interest income while operating within acceptable limits
established for interest rate risk and maintaining adequate levels of funding
and liquidity. The Corporation utilizes various on- and off-balance sheet
financial instruments to manage the extent to which net interest income may be
affected by fluctuations in interest rates. Corporate policies and risk limits
pertaining to asset and liability management activities are established by the
Asset Liability Policy Committee (ALPC) and approved by the board of directors.
Adherence to these policies is governed by the ALPC, which is comprised of
executive and senior management from various areas of the Corporation, including
finance, lending, investments and deposit gathering, who meet regularly to
execute asset and liability management strategies.
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 are used to manage interest rate risk, including simulation analysis,
asset and liability repricing schedules and duration of equity. The results of
these interest rate risk measurement systems are reviewed regularly by the ALPC.
Net interest income is frequently evaluated under various balance sheet and
interest rate scenarios. The results of this analysis provide the information
needed to assess the proper balance sheet structure. An unexpected change in the
pace of economic activity, whether domestically or internationally, could
translate into a materially different interest rate environment than currently
expected. A process is maintained where 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 are taken up and down 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
32 Comerica Incorporated
16
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 and other financial instruments used for purposes other than trading
are included in this analysis. The measurement of risk exposure at year-end 1997
for a 200-basis-point decline in short-term interest rates identified
approximately $35 million of net interest income at risk during 1998. If
short-term interest rates rise 200 basis points, the Corporation would have
approximately $22 million of net interest income at risk. Year-end 1996 net
interest income at risk was measured at $9 million and $15 million,
respectively, for a 200-basis-point decline and rise in interest rates. The
change in exposure is the result of differences in the economic scenarios in the
shocked environments, and therefore differences in the timing and magnitude of
rate changes. Further, yield curve differences create faster amortization on
certain loans, securities and interest rate swaps in the 1997 rate shock.
Corporate policy limits adverse change to no more than 5 percent of management's
most likely net interest income forecast. In either case, the Corporation is
within the policy guideline.
While most assets and liabilities reprice either at maturity or in accordance
with their contractual terms, several balance sheet components demonstrate
characteristics that require adjustments to more accurately reflect repricing
and cash flow behavior. Assumptions based on historical pricing relationships
and anticipated market reactions are made to certain core deposit categories to
reflect the elasticity of the changes in the related interest rates relative to
changes in market interest rates. In addition, estimates are made concerning
early loan and security repayments. Prepayment assumptions are based on the
expertise of portfolio managers along with input from financial markets.
Consideration is given to current and future interest rate levels. While
management recognizes the limited ability of a traditional gap schedule to
accurately portray interest rate risk, adjustments are made to provide a more
accurate picture of the Corporation's interest rate risk profile. This
additional interest rate risk measurement tool provides a directional outlook on
the impact of changes in interest rates.
As market rates approach expected turning points, management adjusts the
interest rate sensitivity of the Corporation. This 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.
The table on page 34 shows the interest sensitivity gap as of year-end 1997 and
1996. 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 $1.0 billion of rate sensitivity to the 1997 year-end gap.
In addition, the schedule identifies the adjustment for the price elasticity on
certain core deposits.
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
RISK MANAGEMENT NOTIONAL ACTIVITY
Interest Foreign
Rate Exchange
(in millions) Contracts Contracts Totals
- ------------------------------------------------------------------------------------
Balances at December 31, 1995 $ 6,119 $ 279 $ 6,398
Additions 4,026 4,762 8,788
Maturities/amortizations (1,925) (4,559) (6,484)
- ------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 8,220 $ 482 $ 8,702
Additions 3,857 5,715 9,572
Maturities/amortizations (3,510) (5,598) (9,108)
- ------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 8,567 $ 599 $ 9,166
====================================================================================
The Corporation remained modestly asset sensitive throughout 1997, as asset
sensitivity generated by continued investment security amortization was offset
by a shortening in the average maturity of the certificate of deposit portfolio.
The Corporation had a one-year asset sensitive gap of $1,156 million, or 3
percent of earning assets, as of December 31, 1997. This compares to a $547
million asset sensitive gap, or 2 percent of earning assets, on December 31,
1996. Management anticipates material growth in asset sensitivity throughout
1998, and will continue to look at both on- and off-balance sheet alternatives
to hedge this increased asset sensitivity and achieve the desired interest rate
risk profile for the Corporation.
The Corporation utilizes interest rate swaps predominantly as asset and
liability management tools with the overall objectives of managing the
sensitivity of net interest income to changes in interest rates. To accomplish
this objective, interest rate swaps are used primarily to modify the interest
rate characteristics of certain assets and liabilities (e.g., from a floating
rate to a fixed rate, a fixed rate to a floating rate, or from one floating rate
index to another). This strategy assists management in achieving interest rate
risk objectives.
At December 31, 1997 and 1996, the notional amount of risk management interest
rate swaps totaled $8,515 million and $8,015 million, respectively. The fair
value of risk management interest rate swaps at December 31, 1997, was a
positive $123 million, compared to a negative $55 million at December 31, 1996.
For the year ended December 31, 1997, risk management interest rate swaps
generated $52 million in net interest income, compared to $49 million in net
interest income for the year ended December 31, 1996. These off-balance sheet
instruments represented 74 percent and 82 percent of total derivative financial
instruments and foreign exchange contracts, including commitments, at year-end
1997 and 1996, respectively.
Table 14 on page 35 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, 1997. The swaps have been grouped by the assets and liabilities to
which they have been designated.
Comerica Incorporated 33
17
TABLE 13: SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 1997 December 31, 1996
Interest Sensitivity Period Interest Sensitivity Period
- ------------------------------------------------------------------------------------------------------------------------------------
Within Over Within Over
(dollar amounts in millions) One Year One Year Total One Year One Year Total
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ -- $ 1,927 $ 1,927 $ -- $ 1,902 $ 1,902
Short-term investments 196 7 203 98 5 103
Investment securities 1,223 2,783 4,006 1,428 3,372 4,800
Commercial loans
(including lease financing) 14,742 1,580 16,322 12,489 1,437 13,926
International loans 2,085 -- 2,085 1,706 -- 1,706
Real estate related loans 3,907 2,233 6,140 3,662 2,279 5,941
Consumer loans 2,100 2,248 4,348 2,201 2,433 4,634
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 22,834 6,061 28,895 20,058 6,149 26,207
Other assets 742 519 1,261 615 579 1,194
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 24,995 $ 11,297 $ 36,292 $22,199 $ 12,007 $ 34,206
===================================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $ 459 $ 6,302 $ 6,761 $ 570 $ 6,143 $ 6,713
Savings -- 1,601 1,601 -- 1,770 1,770
Money market and NOW 5,570 1,724 7,294 5,351 1,631 6,982
Certificates of deposit 5,562 1,059 6,621 5,056 1,550 6,606
Foreign office 309 -- 309 295 1 296
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 11,900 10,686 22,586 11,272 11,095 22,367
Short-term borrowings 3,193 -- 3,193 4,489 -- 4,489
Medium- and long-term debt 5,961 1,325 7,286 2,842 1,400 4,242
Other liabilities 149 316 465 177 315 492
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 21,203 12,327 33,530 18,780 12,810 31,590
Shareholders' equity (1) 2,763 2,762 (23) 2,639 2,616
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 21,202 $ 15,090 $ 36,292 $18,757 $ 15,449 $ 34,206
===================================================================================================================================
Sesitivity impact of interest rate swaps $ (4,377) $ 4,377 -- $(4,676) $ 4,676 --
Sensitivity impact of unsettled swap
and security purchases -- -- -- (43) 43 --
- -----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap (584) 584 -- (1,277) 1,277 --
Gap as a percentage of earning assets (2)% 2% -- (4)% 4% --
Sensitivity impact from elasticity adjustments (1) 1,740 (1,740) -- 1,824 (1,824) --
- -----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap with elasticity adjustments $ 1,156 $ (1,156) -- $ 547 $ (547) --
Gap as a percentage of earning assets 3% (3)% -- 2% (2)% --
===================================================================================================================================
(1) Elasticity adjustments for NOW, savings and money market deposit accounts
are based on historical pricing relationships dating back to 1985 as well as
expected future pricing relationships.
34 Comerica Incorporated
18
TABLE 14: REMAINING EXPECTED MATURITY OF RISK MANAGEMENT INTEREST RATE SWAPS
2003- Dec.31
(amounts in millions) 1998 1999 2000 2001 2002 2026 Total 1996
- -----------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET DESIGNATION:
Receive fixed swaps
Generic $ -- $ -- $ 700 $ -- $ -- $ -- $ 700 $ --
Amortizing 100 -- -- -- -- -- 100 184
Index amortizing 1,054 1,054 736 300 235 125 3,504 5,014
Weighted average: (1)
Receive rate 6.27% 6.36% 6.33% 6.42% 6.49% 6.22% 6.33% 6.11%
Pay rate 5.88% 5.88% 5.91% 5.86% 5.93% 5.99% 5.90% 5.56%
Floating/floating
swaps(3) $ -- $ -- $ 55 $ -- $ -- $ -- $ 55 $ 25
- ----------------------------------------------------------------------------------------------------------------------------
FIXED RATE ASSET DESIGNATION:
Pay fixed swaps
Generic $ -- $ 2 $ -- $ -- $ -- $ -- $ 2 $ 2
Index amortizing 5 3 9 -- -- -- 17 40
Weighted average:(1)
Receive rate 5.97% 5.95% 5.97% --% --% --% 5.97% 5.60%
Pay rate 5.34% 6.70% 5.34% --% --% --% 5.85% 5.35%
- ----------------------------------------------------------------------------------------------------------------------------
MEDIUM-AND LONG-TERM
DEBT DESIGNATION:
Generic receive
fixed swaps $ 950 $ -- $ 200 $ -- $ 150 $ 900 $ 2,200 $ 2,350
Weighted average:(1)
Receive rate 5.97% --% 6.91% --% 7.37% 7.66% 6.84% 6.62%
Pay rate 5.75% --% 5.88% --% 5.85% 5.89% 5.83% 5.53%
Floating/floating
swaps $ 1,900 $ -- $ 37 $ -- $ -- $ -- $ 1,937 $ 400
Weighted average:(2)
Receive rate 5.73% --% 5.92% --% --% --% 5.73% 5.32%
Pay rate 5.77% --% 5.77% --% --% --% 5.77% 5.39%
- ----------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 4,009 $ 1,059 $ 1,737 $ 300 $ 385 $1,025 $ 8,515 $ 8,015
============================================================================================================================
(1) Variable rates paid or received are based primarily on one-month and
three-month LIBOR rates paid or received at December 31, 1997.
(2) Variable rates paid are based on LIBOR at December 31, 1997, while variable
rates received are based on prime.
(3) Variable rate paid was 5.85%, based on LIBOR at December 31, 1997, while
variable rate received represents the return on a principal only total
return swap. This return is based on principal paydowns of the referenced
security as well as changes in market value.
Comerica Incorporated 35
19
In addition to interest rate swaps, the Corporation employs various other types
of off-balance sheet derivative 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, mortgages held for sale and originated mortgage servicing rights).
Such instruments include interest rate caps and floors, purchased put options,
foreign exchange forward contracts, foreign exchange generic swap agreements
and cross-currency swaps. The aggregate notional amounts of these risk
management derivative and foreign exchange contracts at December 31, 1997 and
1996, were $651 million and $687 million, respectively.
In 1997, the FASB issued a revised Exposure Draft on accounting for derivative
and similar financial instruments and for hedging activities. This Exposure
Draft would introduce significant volatility in earnings and could affect how
the Corporation balances interest rate sensitivity in the future. Management
has expressed concern to the FASB of the potential adverse impact on managing
interest rate risk and earnings from this Exposure Draft. Further information
regarding risk management derivative financial instruments and foreign currency
exchange contracts is provided in Notes 1, 8, 9 and 18 to the consolidated
financial statements.
LIQUIDITY
Liquidity is the ability to meet financial obligations through the maturity or
sale of existing assets or acquisition of additional funds. Liquidity
requirements are satisfied with various funding sources, including a $7.5
billion medium-term note program which allows the Michigan, California and
Texas banks to issue debt between one month and 15 years. The Michigan bank has
an additional $2 billion European note program. At year-end 1997, unissued debt
related to the two programs totaled $3.1 billion. In addition, liquid assets
totaled $6.1 billion, at December 31, 1997. The Corporation also had available
$1.1 billion from a collateralized borrowing account with the Federal Reserve
Bank at year-end 1997. Purchased funds at December 31, 1997, excluding
certificates of deposit with maturities beyond one year and medium- and
long-term debt, approximated $5.6 billion.
Another source of liquidity for the parent company is dividends from its
subsidiaries. As discussed in Note 17 to the consolidated financial statements
on page 51, subsidiary banks are subject to regulation and may be limited in
their ability to pay dividends or transfer funds to the holding company. During
1998, the subsidiary banks can pay dividends up to $361 million plus current
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, 1997, the ratio was 109
percent.
CUSTOMER INITIATED AND OTHER DERIVATIVE FINANCIAL
INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS
On a limited basis, the Corporation writes interest rate caps and enters into
foreign exchange contracts and interest rate swaps to accommodate the needs of
customers requesting
CUSTOMER INITIATED AND OTHER NOTIONAL ACTIVITY
Interest Foreign
Rate Exchange
(in millions) Contracts Contracts Totals
- -------------------------------------------------------------------------------
Balances at December 31, 1995 $ 363 $ 320 $ 683
Additions 237 37,571 37,808
Maturities/amortizations (210) (37,247) (37,457)
- -------------------------------------------------------------------------------
Balances at December 31, 1996 $ 390 $ 644 $ 1,034
Additions 464 43,462 43,926
Maturities/amortizations (358) (42,269) (42,627)
- -------------------------------------------------------------------------------
Balances at December 31, 1997 $ 496 $ 1,837 $ 2,333
===============================================================================
such services. At December 31, 1997 and 1996, customer-initiated activity
represented 20 percent and 11 percent, respectively, of total derivative and
foreign exchange contracts, including commitments. Refer to Note 18 to the
consolidated financial statements on page 51 for further information regarding
customer-initiated and other derivative financial instruments and foreign
exchange contracts.
OTHER MATTERS
In February, 1997, the FASB issued Statement on Financial Accounting Standards
(SFAS) No. 128 on "Earnings Per Share." The statement changes the computation,
presentation and disclosure requirements for earnings per share and is
effective for the 1997 financial statements. The Corporation has adopted the
statement and all prior period earnings per share presented have been restated
in accordance with the new disclosure requirements.
The Corporation recognizes the need to manage its operations so that year 2000
software failures, miscalculations or errors will not adversely impact its
business. The Corporation, with the assistance of outside consultants, is
working to identify, evaluate, implement and test changes to computer systems
and applications necessary to achieve a year 2000 date conversion with no
impact on customers or disruption to business operations. The Corporation
expects to conclude remediation of the majority of its systems by the end of
1998, with completion of the remaining systems in the first half of 1999.
Testing, which is ongoing, will be completed on these last systems in the
second half of 1999. The Corporation projects the amount of year 2000 expense
to be in the range of $25-$30 million, of which approximately 25 percent was
expensed in 1996 and 1997. The problem caused by the year 2000 creates risk
for the Corporation from unforeseen problems in its own computer systems and
from third parties such as customers or vendors. Such failures of the
Corporation and/or third parties' computer systems could have a material impact
on the Corporation's ability to conduct its business.
Forward looking statements in this annual report to shareholders are based on
current expectations and/or the assumptions made in the earnings simulation
analyses, but numerous factors could cause variances in these projections, and
their underlying assumptions, such as changes in interest rates, year 2000
expenses and changes in industries where the Corporation has a concentration in
loans.
36 Comerica Incorporated
20
CONSOLIDATED BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
December 31
(in thousands, except share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,927,087 $ 1,901,760
Short-term investments 202,957 103,607
Investment securities available for sale 4,005,962 4,800,034
Commercial loans 15,805,549 13,520,246
International loans 2,085,090 1,706,388
Real estate construction loans 940,910 750,760
Commercial mortgage loans 3,633,785 3,445,562
Residential mortgage loans 1,565,445 1,743,876
Consumer loans 4,347,665 4,634,258
Lease financing 516,600 405,618
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 28,895,044 26,206,708
Less allowance for loan losses (424,147) (367,165)
- --------------------------------------------------------------------------------------------------------------------------------
Net loans 28,470,897 25,839,543
Premises and equipment 380,157 407,663
Customers' liability on acceptances outstanding 18,392 33,102
Accrued income and other assets 1,286,946 1,120,362
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 36,292,398 $ 34,206,071
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-bearing) $ 6,761,202 $ 6,712,985
Interest-bearing deposits 15,825,115 15,654,188
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 22,586,317 22,367,173
Federal funds purchased and securities sold
under agreements to repurchase 592,860 1,395,540
Other borrowed funds 2,600,041 3,093,651
Acceptances outstanding 18,392 33,102
Accrued expenses and other liabilities 446,625 459,267
Medium- and long-term debt 7,286,387 4,241,769
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 33,530,622 31,590,502
Nonredeemable preferred stock-$50 stated value
Authorized-5,000,000 shares
Issued-5,000,000 shares in 1997 and 1996 250,000 250,000
Common stock-$5 par value
Authorized-250,000,000 shares
Issued- 156,815,367 shares in 1997 and 107,297,345 shares in 1996 784,077 536,487
Capital surplus -- --
Unrealized gains and losses on investment securities available for sale (1,937) (22,789)
Retained earnings 1,731,419 1,854,116
Deferred compensation (1,783) (2,245)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,761,776 2,615,569
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 36,292,398 $ 34,206,071
================================================================================================================================
See notes to consolidated financial statements.
Comerica Incorporated 37
21
CONSOLIDATED STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31
(in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,317,844 $ 2,160,981 $ 2,090,854
Interest on investment securities
Taxable 310,399 372,331 473,759
Exempt from federal income tax 10,797 17,443 26,189
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest on investment securities 321,196 389,774 499,948
Interest on short-term investments 8,363 12,025 23,122
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,647,403 2,562,780 2,613,924
INTEREST EXPENSE
Interest on deposits 673,265 685,539 721,475
Interest on short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 110,752 111,729 165,544
Other borrowed funds 98,258 107,155 135,667
Interest on medium- and long-term debt 374,022 294,990 288,990
Net interest rate swap (income)/expense (51,670) (48,911) 2,365
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,204,627 1,150,502 1,314,041
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,442,776 1,412,278 1,299,883
Provision for loan losses 146,000 114,000 86,500
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,296,776 1,298,278 1,213,383
NONINTEREST INCOME
Income from fiduciary activities 147,336 133,482 125,038
Service charges on deposit accounts 141,078 140,436 130,249
Customhouse broker fees -- 10,764 36,086
Revolving credit fees 19,439 22,670 36,248
Securities gains 5,695 13,588 11,748
Other noninterest income 214,404 186,014 159,356
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 527,952 506,954 498,725
NONINTEREST EXPENSES
Salaries and employee benefits 538,926 560,784 562,159
Net occupancy expense 89,380 99,211 98,945
Equipment expense 61,759 68,827 67,872
FDIC insurance expense 3,029 8,139 23,817
Telecommunications expense 28,010 29,092 29,644
Restructuring charge -- 90,000 --
Other noninterest expenses 286,882 302,973 303,977
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,007,986 1,159,026 1,086,414
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 816,742 646,206 625,694
Provision for income taxes 286,266 229,045 212,328
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 530,476 $ 417,161 $ 413,366
===================================================================================================================================
Net income applicable to common stock $ 513,376 $ 408,136 $ 413,366
===================================================================================================================================
Basic net income per common share $3.24 $2.41 $2.38
Diluted net income per common share 3.19 2.38 2.37
Cash dividends declared on common stock $ 181,272 $ 170,067 $ 158,309
Dividends per common share $1.15 $1.01 $0.91
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
38 Comerica Incorporated
22
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMERICA INCORPORATED AND SUBSIDIARIES
Non- Unrealized Gains
redeemable and (Losses) on
Preferred Common Capital Investment Securities Retained Deferred
(in thousands, except share data) Stock Stock Surplus Available for Sale Earnings Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 1995 $ -- $596,473 $526,838 $ (55,039) $1,390,405 $(1,786)
Net income for 1995 -- -- -- -- 413,366 --
Nonowner changes in equity:
Unrealized holding gains/(losses) arising
during the period -- -- -- 90,053 -- --
Less: Reclassification adjustment for
gains/(losses) included in net income -- -- -- 11,748 -- --
Nonowner changes in equity before ---------
income taxes -- -- -- 78,305 -- --
Provision for income taxes related to
nonowner changes in equity -- -- -- 27,407 -- --
---------
Nonowner changes in equity, net of tax -- -- -- 50,898 -- --
Net income and nonowner changes in equity -- -- -- -- -- --
Cash dividends declared on common stock -- -- -- -- (158,309) --
Purchase of 1,405,500 shares of
common stock -- -- -- -- -- --
Purchase and retirement of 4,200,000
shares of common stock -- (21,000) (118,931) -- -- --
Issuance of common stock for:
Employee stock plans -- -- 1,261 -- (4,482) (1,034)
Acquisitions -- -- 1,450 -- -- --
Amortization of deferred compensation -- -- -- -- -- 846
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 $ -- $575,473 $410,618 $ (4,141) $1,640,980 $(1,974)
Net income for 1996 -- -- -- -- 417,161 --
Nonowner changes in equity:
Unrealized holding gains/(losses) arising
during the period -- -- -- (15,101) -- --
Less: Reclassification adjustment for
gains/(losses) included in net income -- -- -- 13,588 -- --
Nonowner changes in equity before ---------
income taxes -- -- -- (28,689) -- --
Provision for income taxes related to
nonowner changes in equity -- -- -- (10,041) -- --
---------
Nonowner changes in equity, net of tax -- -- -- (18,648) -- --
Net income and nonowner changes in equity -- -- -- -- -- --
Issuance of preferred stock 250,000 -- (3,256) -- -- --
Cash dividends declared:
Preferred stock -- -- -- -- (9,025) --
Common stock -- -- -- -- (170,067) --
Purchase and retirement of 12,176,496
shares of common stock -- (60,883) (519,924) -- (5,065) --
Issuance of common stock for:
Employee stock plans -- 897 14,090 -- (20,076) (1,197)
Acquisitions -- 21,000 98,472 -- 208 --
Amortization of deferred compensation -- -- -- -- -- 926
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $250,000 $536,487 $ -- $ (22,789) $1,854,116 $(2,245)
Net income for 1997 -- -- -- -- 530,476 --
Nonowner changes in equity:
Unrealized holding gains/(losses) arising
during the period -- -- -- 37,775 -- --
Less: Reclassification adjustment for
gains/(losses) included in net income -- -- -- 5,695 -- --
Nonowner changes in equity before ---------
income taxes -- -- -- 32,080 -- --
Provision for income taxes related to
nonowner changes in equity -- -- -- 11,228 -- --
---------
Nonowner changes in equity, net of tax -- -- -- 20,852 -- --
Net income and nonowner changes in equity -- -- -- -- -- --
Cash dividends declared:
Preferred stock -- -- -- -- (17,100) --
Common stock -- -- -- -- (181,273) --
Purchase and retirement of 3,618,479
shares of common stock -- (18,092) (30,750) -- (193,450) --
Issuance of common stock under
Employee stock plans -- 4,323 30,750 -- 9 (531)
Amortization of deferred compensation -- -- -- -- -- 993
Stock split (three-for-two) -- 261,359 -- -- (261,359) --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 $250,000 $ 784,077 $ -- $ (1,937) $1,731,419 $(1,783)
===============================================================================================================================
Total
Treasury Shareholders'
(in thousands, except share data) Stock Equity
- ------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 1995 $(65,111) $2,391,780
Net income for 1995 -- 413,366
Nonowner changes in equity:
Unrealized holding gains/(losses) arising
during the period -- 90,053
Less: Reclassification adjustment for
gains/(losses) included in net income -- 11,748
Nonowner changes in equity before ----------
income taxes -- 78,305
Provision for income taxes related to
nonowner changes in equity -- 27,407
----------
Nonowner changes in equity, net of tax -- 50,898
----------
Net income and nonowner changes in equity -- 464,264
Cash dividends declared on common stock -- (158,309)
Purchase of 1,405,500 shares of
common stock (38,725) (38,725)
Purchase and retirement of 4,200,000
shares of common stock -- (139,931)
Issuance of common stock for:
Employee stock plans 14,957 10,702
Acquisitions 75,650 77,100
Amortization of deferred compensation -- 846
- ------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 $(13,229) $2,607,727
Net income for 1996 -- 417,161
Nonowner changes in equity:
Unrealized holding gains/(losses) arising
during the period -- (15,101)
Less: Reclassification adjustment for
gains/(losses) included in net income -- 13,588
Nonowner changes in equity before ----------
income taxes -- (28,689)
Provision for income taxes related to
nonowner changes in equity -- (10,041)
----------
Nonowner changes in equity, net of tax -- (18,648)
----------
Net income and nonowner changes in equity -- 398,513
Issuance of preferred stock -- 246,744
Cash dividends declared:
Preferred stock -- (9,025)
Common stock -- (170,067)
Purchase and retirement of 12,176,496
shares of common stock (36,324) (622,196)
Issuance of common stock for:
Employee stock plans 40,295 34,009
Acquisitions 9,258 128,938
Amortization of deferred compensation -- 926
- ------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $ -- $2,615,569
Net income for 1997 -- 530,476
Nonowner changes in equity:
Unrealized holding gains/(losses) arising
during the period -- 37,775
Less: Reclassification adjustment for
gains/(losses) included in net income -- 5,695
Nonowner changes in equity before ----------
income taxes -- 32,080
Provision for income taxes related to
nonowner changes in equity -- 11,228
----------
Nonowner changes in equity, net of tax -- 20,852
----------
Net income and nonowner changes in equity -- 551,328
Cash dividends declared:
Preferred stock -- (17,100)
Common stock -- (181,273)
Purchase and retirement of 3,618,479
shares of common stock -- (242,292)
Issuance of common stock under
Employee stock plans -- 34,551
Amortization of deferred compensation -- 993
Stock split (three-for-two) -- --
- ------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 $ -- $2,761,776
==========================================================================================
( ) Indicates deduction.
See notes to consolidated financial statements.
Comerica Incorporated 39
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 530,476 $ 417,161 $ 413,366
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 146,000 114,000 86,500
Depreciation 58,529 66,776 64,014
Restructuring charge (61,237) 90,000 (6,127)
Net (increase) decrease in trading account securities (3,093) 4,659 (6,336)
Net (increase) decrease in loans held for sale (2,666) 473,493 (420,015)
Net (increase) decrease in accrued income receivable (23,730) 924 (26,749)
Net increase (decrease) in accrued expenses 54,330 (39,720) 96,645
Net amortization of intangibles 28,375 30,803 29,016
Funding for employee benefit plans -- (25,000) (200,000)
Other, net (121,519) 187,438 (178,874)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 74,989 903,373 (561,926)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 605,465 1,320,534 (148,560)
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks 24,010 (3,705) 363,870
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell (117,601) 4,898 (122,498)
Proceeds from sale of investment securities available for sale 238,506 1,211,250 103,531
Proceeds from maturity of investment securities available for sale 1,456,447 1,531,012 837,412
Purchases of investment securities available for sale (924,509) (643,796) (211,222)
Proceeds from maturity of investment securities held to maturity -- -- 788,620
Purchases of investment securities held to maturity -- -- (223,579)
Net increase in loans (other than loans purchased) (2,615,226) (1,852,199) (1,908,266)
Purchase of loans (162,128) (77,805) (48,349)
Fixed assets, net (31,023) (46,038) (62,334)
Net (increase) decrease in customers' liability on acceptances outstanding 14,710 (12,341) 13,097
Net cash provided by acquisitions/sales -- 200,459 19,224
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,116,814) 311,735 (450,494)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 219,144 (825,859) 130,276
Net increase (decrease) in short-term borrowings (1,296,290) (129,056) 468,754
Net increase (decrease) in acceptances outstanding (14,710) 12,341 (13,097)
Proceeds from issuance of medium- and long-term debt 5,600,000 2,251,000 2,960,000
Repayments and purchases of medium- and long-term debt (2,555,382) (2,553,650) (2,418,171)
Proceeds from issuance of preferred stock -- 246,744 --
Proceeds from issuance of common stock 22,584 35,206 11,736
Purchase of common stock for treasury and retirement (243,258) (622,196) (178,656)
Dividends paid (195,412) (173,414) (155,726)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,536,676 (1,758,884) 805,116
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 25,327 (126,615) 206,062
Cash and due from banks at beginning of year 1,901,760 2,028,375 1,822,313
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,927,087 $ 1,901,760 $ 2,028,375
===============================================================================================================================
Interest paid $ 1,161,812 $ 1,201,146 $ 1,274,101
===============================================================================================================================
Income taxes paid $ 266,428 $ 212,530 $ 180,134
===============================================================================================================================
Noncash investing and financing activities
Loan transfers to other real estate $ 7,076 $ 10,534 $ 23,908
===============================================================================================================================
Stock issued for acquisitions $ -- $ 128,938 $ 77,100
===============================================================================================================================
See notes to consolidated financial statements.
40 Comerica Incorporated
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMERICA INCORPORATED AND SUBSIDIARIES
1
ACCOUNTING POLICIES
ORGANIZATION
Comerica Incorporated is a registered bank 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 generally accepted accounting principles 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. 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 30 years (weighted average
of 17 years). Core deposit intangible assets are amortized on an accelerated
method over 10 years.
LOANS HELD FOR SALE
Loans held for sale, normally mortgages, 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 noninterest
income.
Gains or losses on the sale of securities are computed based on the
adjusted cost of the specific security.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation, computed on the straight-line
method, is charged to operations over the estimated useful lives of the
properties. Leasehold improvements are amortized over the terms of their
respective leases or the estimated useful lives of the improvements, whichever
is shorter.
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb losses
inherent in the loan portfolio. Management determines the adequacy of the
allowance by applying projected loss ratios to the risk ratings of loans both
individually and by category. The projected loss ratios incorporate such
factors as recent loss experience, current economic conditions, the risk
characteristics of the various categories and concentrations of loans, transfer
risk and other pertinent factors. However, there can be no assurance that the
actual loss ratios will not vary from those projected. Loans which are deemed
uncollectible are charged off and deducted from the allowance. The provision
for loan losses and recoveries on loans previously charged off are added to the
allowance.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, loans for which the terms have been
renegotiated to less than market rates due to a serious weakening of the
borrower's financial condition and other real estate which has been acquired
primarily through foreclosure and is awaiting disposition.
Consumer loans are generally not placed on nonaccrual status and are
directly 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.
Comerica Incorporated 41
25
1
ACCOUNTING POLICIES (CONTINUED)
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 loan losses. Subsequent write-downs, operating expenses and losses upon
sale, if any, are charged to noninterest expenses.
STOCK-BASED COMPENSATION
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of this statement, the Corporation elected
to continue to apply Accounting Principles Board (APB) opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
measuring and recognizing compensation expense for its stock-based compensation
plans, and to disclose the pro forma effect of applying the fair value method
contained in SFAS No. 123. Information on the Corporation's stock-based
compensation plans is included in Note 12.
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
Interest rate and foreign exchange swaps, interest rate caps and floors, and
futures and forward contracts may be used to manage the Corporation's exposure
to interest rate and foreign currency risks. These instruments, with the
exception of futures and forwards, are accounted for on an accrual basis since
there is a high correlation with the on-balance sheet instrument being hedged.
If this correlation ceases to exist, the existing unrealized gain or loss is
amortized over the remaining term of the instrument, and future changes in fair
value are accounted for in other income or expense. Net interest income or
expense, including premiums paid or received, is recognized over the life of
the contract and reported as an adjustment to interest expense. Realized gains
and losses on futures and forwards are generally deferred and amortized over
the life of the contract as an adjustment to net interest income. Gains or
losses on early termination of risk management derivative financial instruments
are deferred and amortized as an adjustment to the yields of the related assets
or liabilities over their remaining contractual life. If the designated asset
or liability matures, or is disposed of or extinguished, any unrealized gains
or losses on the related derivative instrument are recognized currently and
reported as an adjustment to interest expense.
Foreign exchange futures and forward contracts, foreign currency options,
interest rate caps and interest rate swap agreements executed as a service to
customers are accounted for on a fair value basis. As a result, the fair values
of these instruments are recorded in the consolidated balance sheet with both
realized and unrealized gains and losses recognized currently in noninterest
income.
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of nontaxable income such as interest on state and
municipal securities) and include deferred income taxes on temporary
differences between the tax basis and financial reporting basis of assets and
liabilities.
STATEMENTS OF CASH FLOWS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption,
"Cash and due from banks."
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 other noninterest income.
NONOWNER CHANGES IN EQUITY
In 1997, the Corporation adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
net income and nonowner changes in equity and its components in a full set of
general-purpose financial statements. The Corporation has elected to
present information regarding this statement in the Consolidated Statements of
Changes in Shareholders' Equity on page 39. The caption "Net income and
nonowner changes in equity,"represents total comprehensive income as defined in
the statement.
2
ACQUISITIONS
During the years ended December 31, 1996 and 1995, Comerica made the following
acquisitions, which were accounted for as purchases:
FMV of FMV of
Assets Liabilities Purchase Intangibles
(in millions) Acquired Assumed Price Recorded
---------------------------------------------------------------------
During 1996
Metrobank $1,083 $1,020 $125 $62
During 1995
University Bank & Trust 456 422 69 35
QuestStar Bank, N.A. 205 193 25 13
=====================================================================
42 Comerica Incorporated
26
3
INVESTMENT SECURITIES
Information concerning investment securities as shown in the consolidated
balance sheets of the Corporation was as follows:
Gross Gross
Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
---------------------------------------------------------------------------
December 31, 1997
U.S. government and
agency securities $3,239,423 $24,223 $24,994 $3,238,652
State and municipal
securities 164,394 5,902 244 170,052
Other securities 603,176 7,584 13,502 597,258
---------------------------------------------------------------------------
Total securities
available for sale $4,006,993 $37,709 $38,740 $4,005,962
===========================================================================
December 31, 1996
U.S. government and
agency securities $4,011,022 $22,702 $65,375 $3,968,349
State and municipal
securities 220,173 7,866 196 227,843
Other securities 603,873 654 685 603,842
---------------------------------------------------------------------------
Total securities
available for sale $4,835,068 $31,222 $66,256 $4,800,034
===========================================================================
The cost and estimated fair values of debt securities by contractual maturity
were as follows (securities with multiple maturity dates are classified in the
period of final maturity). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
December 31, 1997 Estimated
(in thousands) Cost Fair Value
- -----------------------------------------------------------------------
Contractual maturity
Within one year $ 205,857 $ 206,165
Over one year to
five years 284,387 283,331
Over five years to
ten years 162,991 159,140
Over ten years 61,554 66,350
- -----------------------------------------------------------------------
Subtotal securities 714,789 714,986
Mortgage-backed
securities 3,190,530 3,189,879
Equity and other
nondebt securities 101,674 101,097
- -----------------------------------------------------------------------
Total securities
available for sale $ 4,006,993 $ 4,005,962
=======================================================================
Sales and calls of investment securities available for sale resulted in
realized gains and losses as follows:
Year Ended December 31
(in thousands) 1997 1996
- ----------------------------------------------------------------------
Securities gains $ 8,890 $ 14,945
Securities losses (3,195) (1,357)
- ----------------------------------------------------------------------
Total $ 5,695 $ 13,588
======================================================================
Assets, principally securities, carried at approximately $2.7 billion at
December 31, 1997, were pledged to secure public deposits (including State of
Michigan deposits of $40 million at December 31, 1997) and for other purposes
as required by law.
All held to maturity securities were redesignated to the available for sale
category in December 1995 in accordance with the one-time provisions issued in
conjunction with the FASB's Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." At the date of transfer the amortized cost of the held to maturity
securities was $4.6 billion. The net unrealized loss related to the
redesignated securities totaled $9 million.
Comerica Incorporated 43
27
4
NONPERFORMING ASSETS
The following table summarizes nonperforming assets and loans which are
contractually past due 90 days or more as to interest or principal payments.
Nonperforming assets consist of nonaccrual loans, reduced-rate loans and other
real estate. Nonaccrual loans are those on which interest is not being
recognized. Reduced-rate loans are those on which interest has been
renegotiated to lower than market rates because of the weakened financial
condition of the borrower.
Nonaccrual and reduced-rate loans are included in loans on the consolidated
balance sheet.
December 31
(in thousands) 1997 1996
- --------------------------------------------------------------------
Nonaccrual loans
Commercial loans $ 58,914 $ 71,991
International loans 1,000 --
Real estate construction loans 3,438 3,576
Commercial mortgage loans 11,088 22,567
Residential mortgage loans 3,719 5,160
- --------------------------------------------------------------------
Total 78,159 103,294
Reduced-rate loans 7,583 8,009
- --------------------------------------------------------------------
Total nonperforming loans 85,742 111,303
Other real estate 17,046 28,398
- --------------------------------------------------------------------
Total nonperforming assets $102,788 $139,701
====================================================================
Loans past due 90 days $ 52,805 $ 51,748
====================================================================
Gross interest income that would
have been recorded had the
nonaccrual and reduced-rate
loans performed in accordance
with original terms $ 10,088 $ 11,119
====================================================================
Interest income recognized $ 2,399 $ 2,681
====================================================================
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.
December 31
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------
Average impaired loans for the year $73,502 $114,253 $148,087
Total period-end impaired loans 70,470 98,050 135,034
Period-end impaired loans
requiring an allowance 60,376 59,960 89,209
Impairment allowance 20,358 19,528 26,578
================================================================
Those impaired loans not requiring an allowance represent loans for which the
fair value exceeded the recorded investment in the loan. Sixty-four percent of
the total impaired loans at December 31, 1997, 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 LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
(in thousands) 1997 1996 1995
-----------------------------------------------------------------
Balance at January 1 $ 367,165 $ 341,344 $ 326,195
Allowance of institutions and
loans purchased/sold -- (3,630) 4,668
Loans charged off (131,140) (125,912) (119,028)
Recoveries on loans previously
charged off 42,122 41,363 43,009
-----------------------------------------------------------------
Net loans charged off (89,018) (84,549) (76,019)
Provision for loan losses 146,000 114,000 86,500
-----------------------------------------------------------------
Balance at December 31 $ 424,147 $ 367,165 $ 341,344
=================================================================
As a percent of total loans 1.47% 1.40% 1.40%
=================================================================
44 Comerica Incorporated
28
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 bank holding company with a geographic concentration of its on-balance
sheet and off-balance sheet activities centered in Michigan. In addition, the
Corporation has an industry concentration with the automotive industry, which
includes manufacturers and their finance subsidiaries, suppliers, dealers and
company executives.
At December 31, 1997 and 1996, exposure from loan commitments and guarantees to
companies related to the automotive industry totaled $8.3 billion and $8.2
billion, respectively. Additionally, commercial real estate loans, including
commercial mortgages and construction loans, totaled $4.6 billion in 1997 and
$4.2 billion in 1996. Approximately $2.0 billion of commercial real estate
loans at December 31, 1997, involved mortgages on owner-occupied properties.
Those borrowers are involved in business activities other than real estate, and
the sources of repayment are not dependent on the performance of the real
estate market.
7
PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 by major category follows:
(in thousands) 1997 1996
---------------------------------------------------------------------
Land $ 52,934 $ 54,635
Buildings and improvements 353,308 366,618
Furniture and equipment 344,681 436,133
---------------------------------------------------------------------
Total cost 750,923 857,386
Less accumulated depreciation and amortization (370,766) (449,723)
---------------------------------------------------------------------
Net book value $ 380,157 $ 407,663
=====================================================================
Rental expense for leased properties and equipment amounted to $41 million in
1997 and $44 million in 1996 and 1995. Future minimum lease rentals under
noncancelable operating lease obligations are as follows:
(in thousands)
------------------------
1998 $ 41,189
1999 38,379
2000 35,429
2001 31,649
2002 26,333
2003 and later 117,813
========================
8
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds, consisting of commercial paper, borrowed securities, term
federal funds purchased, short-term notes and treasury tax and loan deposits,
generally mature within one to 120 days from the transaction date. The
following is a summary of short-term borrowings at December 31, 1997 and 1996:
Federal Funds Purchased
and Securities Sold Other
Under Agreements Borrowed
(in thousands) to Repurchase Funds
-----------------------------------------------------------------------------
December 31, 1997
Amount outstanding at year-end $ 592,860 $2,600,041
Weighted average interest rate at year-end 5.26% 5.30%
December 31, 1996
Amount outstanding at year-end $1,395,540 $3,093,651
Weighted average interest rate at year-end 5.80% 5.14%
============================================================================
The 1996 amounts outstanding include $700 million of short-term notes. The
Corporation entered into interest rate swap contracts that converted the rates
paid on notes from the bank prime rate minus 2.96% and the one-month London
Interbank Offered Rate (LIBOR) (5.29% and 5.53% at December 31, 1996,
respectively) to a three-month LIBOR (5.56% at December 31, 1996) based rate.
At December 31, 1997, the parent company had available additional credit
totaling $100 million under a line of credit agreement, all of which was
unused. Under the current agreement the line will expire in April of 2000.
Comerica Incorporated 45
29
9
MEDIUM- AND LONG-TERM DEBT
Medium- and long-term debt consisted of the following at December 31:
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Parent Company
7.25% subordinated notes due 2007 $ 148,509 $ 148,548
9.75% subordinated notes due 1999 74,877 74,782
10.125% subordinated debentures due 1998 74,965 74,880
- -------------------------------------------------------------------------------------------------
Total parent company 298,351 298,210
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 198,100 --
8.375% subordinated notes due 2024 147,938 147,860
7.25% subordinated notes due 2002 149,246 149,089
6.875% subordinated notes due 2008 99,220 99,143
7.125% subordinated notes due 2013 148,224 148,112
7.875% subordinated notes due 2026 146,914 146,814
- -------------------------------------------------------------------------------------------------
Total subordinated notes 889,642 691,018
Medium-term notes:
Floating rate based on LIBOR indices 2,811,793 1,448,947
Floating rate based on Treasury bill indices 487,000 399,955
Floating rate based on Prime indices 1,100,007 --
Floating rate based on Federal Funds indices 349,998 --
Fixed rate notes with interest rates ranging
from 5.75% to 6.875% 1,349,596 1,399,040
- -------------------------------------------------------------------------------------------------
Total medium-term notes 6,098,394 3,247,942
Notes payable -- 4,599
- -------------------------------------------------------------------------------------------------
Total subsidiaries 6,988,036 3,943,559
- -------------------------------------------------------------------------------------------------
Total medium- and long-term debt $7,286,387 $4,241,769
=================================================================================================
Concurrent with the issuance of certain of the medium- and long-term debt
presented above, the Corporation entered into interest rate swap agreements to
convert the stated rate of the debt to a rate based on the indices identified
in the following table:
Principal
Amount Base
of Debt Rate at
(in thousands) Converted Base Rate 12/31/97
- -----------------------------------------------------------------------
Parent Company
7.25% subordinated notes $ 150,000 6-month LIBOR 5.91%
9.75% subordinated notes 50,000 3-month LIBOR 5.91
- -----------------------------------------------------------------------
Subsidiaries
Subordinated notes:
7.25% subordinated notes 200,000 6-month LIBOR 5.91
8.375% subordinated notes 150,000 6-month LIBOR 5.91
7.25% subordinated notes 150,000 6-month LIBOR 5.91
6.875% subordinated notes 100,000 6-month LIBOR 5.91
7.125% subordinated notes 150,000 6-month LIBOR 5.91
7.875% subordinated notes 150,000 6-month LIBOR 5.91
Medium-term notes:
Floating rate based on
LIBOR indices 600,000 1-month LIBOR 5.94
1,895,000 3-month LIBOR 5.91
Fixed rate notes with interest
rates ranging from 5.80%
to 6.65% 100,000 1-month LIBOR 5.94
1,050,000 3-month LIBOR 5.91
=======================================================================
All subordinated notes and debentures with maturities greater than one year
qualify as Tier 2 capital.
The Corporation currently has two medium-term note programs: a senior note
program and a European note program. Under these programs, certain of the bank
subsidiaries may offer an aggregate principal amount of up to $9.5 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 minus 0.14% to three-month LIBOR
plus 0.10%. The notes are due from 1998 to 2002. The interest rates on the
floating rate medium-term notes based on U.S. Treasury indices ranged from the
three-month U.S. Treasury bill bond equivalent rate plus 0.54% to the two-year
Constant Treasury Maturity Rate plus 0.01%. The notes are due from 1998 to
2000. The interest rates on the floating rate medium-term notes based on prime
ranged from prime minus 2.87% to prime minus 2.82% and are due in 1998.
The interest rates on the floating rate medium-term notes based on the federal
funds rate ranged from the federal funds rate plus 0.055% to the federal funds
rate plus 0.0625% and are also due in 1998. The maturities of the fixed rate
notes range from 1998 to 2000. The medium-term notes do not qualify as Tier 2
capital and are not insured by the FDIC. The principal maturities of medium-
and long-term debt are as follows:
(in thousands)
- ------------------------------------------
1998 $5,273,441
1999 73,636
2000 265,744
2001 298,958
2002 482,135
2003 and later 892,473
==========================================
46 Comerica Incorporated
30
10
SHAREHOLDERS' EQUITY
The board of directors has authorized the repurchase of up to 27 million shares
(or 40.5 million shares on a post-split basis) of Comerica Incorporated common
stock for general corporate purposes, acquisitions and employee benefit plans.
At December 31, 1997, 12.2 million shares (or 18.3 million shares on a
post-split basis) had been repurchased under this program.
At December 31, 1997, the Corporation had reserved 7.7 million shares of common
stock for issuance to employees and directors under the long-term incentive
plans.
In January 1998, the Corporation declared a three-for-two stock split, effected
in the form of a 50 percent stock dividend to be paid April 1, 1998. All per
share data included in the consolidated financial statements and in the related
notes thereto have been retroactively adjusted to reflect the split.
During 1996, the Corporation issued 5 million shares of Fixed/Adjustable Rate
Noncumulative Preferred Stock, Series E, with a stated value of $50 per share.
Dividends are payable quarterly, at a rate of 6.84% per annum through July 1,
2001. Thereafter, the rate will be equal to 0.625% plus an effective rate, but
not less than 7.34% nor greater than 13.34%. The effective rate will be equal
to the highest of the Treasury Bill Rate, the Ten Year Constant Treasury
Maturity Rate and the Thirty Year Constant Treasury Maturity Rate
(as defined in the prospectus). The Corporation, at its option, may redeem all
or part of the outstanding shares on or after July 1, 2001.
11
NET INCOME PER COMMON SHARE
SFAS No. 128, "Earnings per Share," was adopted in 1997. The statement
simplifies the standards for computing earnings per share. Basic net income per
common share is computed by dividing net income applicable to common stock by
the weighted average number of shares of common stock outstanding during the
period. Diluted net income per common share is computed by dividing net income
applicable to common stock by the weighted average number of shares, nonvested
stock and dilutive common stock equivalents outstanding during the period.
Common stock equivalents consist of common stock issuable under the assumed
exercise of stock options granted under the Corporation's stock plans, using
the treasury stock method. A computation of earnings per share follows:
<Capiton>
Year Ended December 31
(in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------
Basic
Average shares outstanding 158,333 169,076 173,532
====================================================================
Net income $530,476 $417,161 $413,366
Less preferred stock dividends 17,100 9,025 --
- --------------------------------------------------------------------
Net income applicable to
common stock $513,376 $408,136 $413,366
====================================================================
Basic net income per share $3.24 $2.41 $2.38
Diluted
Average shares outstanding 158,333 169,076 173,532
Nonvested stock 204 195 163
Common stock equivalents
Net effect of the assumed
exercise of stock options 2,503 1,956 1,070
- --------------------------------------------------------------------
Diluted average shares 161,040 171,227 174,765
====================================================================
Net income $530,476 $417,161 $413,366
Less preferred stock dividends 17,100 9,025 --
- --------------------------------------------------------------------
Net income applicable to
common stock $513,376 $408,136 $413,366
====================================================================
Diluted net income per share $3.19 $2.38 $2.37
====================================================================
Comerica Incorporated 47
31
12
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 exercise price of the stock options is equal to the fair
market value at the time the options are granted and the options may have
restrictions regarding exercisability. 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 Corporation adopted the
disclosure-only option under SFAS No. 123, "Accounting for Stock-Based
Compensation," as of December 31, 1996. If the recognition provisions of
the new statement had been adopted as of the beginning of 1997, the effect on
1997 net income would have been immaterial.
- -----------------------------------------------------------------------------------------
Average per Share
Exercise Market
Number Price Price
- -----------------------------------------------------------------------------------------
Outstanding--December 31, 1994 5,982,030 $15.42 $16.25
Granted 1,659,270 18.64 18.64
Cancelled (331,112) 19.43 21.25
Exercised (771,370) 10.74 21.04
Expired --
Acquisition of
University Bank & Trust 229,679 10.70 18.33
- -----------------------------------------------------------------------------------------
Outstanding--December 31, 1995 6,768,497 $16.39 $26.67
Granted 1,894,143 25.61 25.61
Cancelled (321,119) 18.95 28.95
Exercised (1,775,613) 12.78 29.34
Expired --
Acquisition of Metrobank 595,718 8.49 26.42
- -----------------------------------------------------------------------------------------
Outstanding--December 31, 1996 7,161,626 $18.95 $34.92
Granted 1,994,182 40.28 40.28
Cancelled (266,295) 26.00 43.07
Exercised (1,252,170) 15.93 44.81
Expired --
- -----------------------------------------------------------------------------------------
Outstanding--December 31, 1997 7,637,343 $24.77 $60.17
=========================================================================================
Exercisable--December 31, 1997 3,599,513
Available for grant--
December 31, 1997 98,393
=========================================================================================
The following table summarizes information about stock options
outstanding at December 31, 1997:
Exercisable
- -------------------------------------------------------------------------------
Outstanding
Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (a) Price Shares Price
- -------------------------------------------------------------------------------
$ 7.66 - $10.29 772,229 2.4 $ 9.57 772,229 $ 9.57
10.37 - 18.00 953,303 5.3 16.65 722,615 16.22
18.59 - 18.75 1,161,279 7.2 18.59 521,637 18.59
19.00 - 25.17 1,205,404 4.9 20.79 1,173,154 20.75
25.42 - 40.09 1,688,751 8.2 26.29 409,278 26.05
40.25 - 52.67 1,856,377 9.2 40.33 600 40.25
- -------------------------------------------------------------------------------
Total 7,637,343 6.8 $24.77 3,599,513 $17.73
===============================================================================
(a) Average contractual life remaining in years.
48 Comerica Incorporated
32
13
EMPLOYEE BENEFIT PLANS
The Corporation has a defined benefit pension plan in effect for substantially
all full-time employees. Staff expense includes income of $0.3 million in 1997,
$1.4 million in 1996 and $1.0 million in 1995 for the plan. Benefits under the
plan are based primarily on years of service and the levels of 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.
Net periodic pension cost/(income) consisted of the following:
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Service cost--benefits earned
during the period $ 12,400 $ 11,675 $ 8,857
Interest cost on projected
benefit obligation 33,823 31,572 29,231
Actual return on plan assets (89,528) (62,710) (93,650)
Net amortization and (deferral) 43,006 18,072 54,585
- -----------------------------------------------------------------------------
Net pension income $ (299) $ (1,391) $ (977)
=============================================================================
The following table sets forth the funded status of the defined benefit
pension plans and amounts recognized on the Corporation's balance sheet:
December 31
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
Accumulated benefit obligation
Vested $411,688 $367,376
Nonvested 17,797 16,483
- ----------------------------------------------------------------------------------------
Accumulated benefit obligation 429,485 383,859
Effect of projected future compensation levels 95,844 78,917
- ----------------------------------------------------------------------------------------
Projected benefit obligation 525,329 462,776
Plan assets at fair value 585,215 515,164
- ----------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 59,886 52,388
Unrecognized net gain due to past experience
different from that assumed and effects of
changes in assumptions (25,790) (17,672)
Unrecognized net assets being amortized
over 15 years (15,358) (20,191)
- ----------------------------------------------------------------------------------------
Prepaid pension $ 18,738 $ 14,525
========================================================================================
Actuarial assumptions were as follows:
1997 1996 1995
- ---------------------------------------------------------------------------------------
Discount rate used in determining
projected benefit obligation 7% 7.5% 7.5%
Rate of increase in compensation levels 5% 5% 5%
Long-term rate of return on assets 9% 9% 8%
======================================================================================
The Corporation has a savings ("401(k)") plan which is a defined contribution
plan. All of the Corporation's salaried and regular part-time employees are
eligible to participate in the plan. The Corporation makes matching
contributions 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 $9.7 million in 1997, $10.4 million in 1996 and
$7.1 million in 1995 for the plan.
The Corporation's postretirement benefits plan continues postretirement health
care and life insurance benefits for retirees as of December 31, 1992, provides
a phase-out for employees over 50 as of that date and substantially reduces
all benefits for remaining employees. The Corporation has funded the plan with
a company-owned life insurance contract purchased in 1995.
Net periodic postretirement benefit cost included the following components:
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
Service cost $ 273 $ 402 $ 383
Interest cost on accumulated
postretirement benefit obligation 5,710 5,597 6,652
Return on plan assets (7,941) (3,094) (2,453)
Amortization of transition obligation 4,628 4,628 4,628
Net amortization and (deferral) 2,472 (2,488) (1,511)
- ----------------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 5,142 $ 5,045 $ 7,699
========================================================================================
The following table sets forth the status of the postretirement plan at
December 31:
(in thousands) 1997 1996
- ----------------------------------------------------------------------
Retirees $72,175 $65,711
Other fully eligible plan participants 5,543 4,910
Other active plan participants 3,866 5,799
- ----------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 81,584 76,420
Plan assets at fair value 86,727 80,547
- ----------------------------------------------------------------------
Funded status 5,143 4,127
Unrecognized net gain (8,294) (11,800)
Unrecognized transition obligation 69,105 73,733
- ----------------------------------------------------------------------
Prepaid postretirement benefit $65,954 $66,060
======================================================================
Actuarial assumptions were as follows:
1997 1996 1995
- ---------------------------------------------------------------------------------------------
Discount rate used in determining
accumulated postretirement
benefit obligation 7% 7.5% 7.5%
Long-term rate of return on assets 6.7% 6.7% 6.7%
=============================================================================================
A 7 percent health care cost trend rate was projected for 1997 and is assumed
to decrease gradually to 5 percent by 1999, remaining constant thereafter.
Increasing each health care rate by one percentage point would increase the
accumulated postretirement benefit obligation by $6 million at December 31,
1997, and the aggregate of the service and interest cost components by $384
thousand for the year ended December 31, 1997.
Comerica Incorporated 49
33
14
INCOME TAXES
The current and deferred components of income taxes were as follows:
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------
Currently payable
Federal $239,680 $225,863 $192,899
Foreign 30,723 5,912 1,015
State and local 15,584 11,039 7,595
- -----------------------------------------------------------------------
285,987 242,814 201,509
Deferred federal, state and local 279 (13,769) 10,819
- -----------------------------------------------------------------------
Total $286,266 $229,045 $212,328
=======================================================================
There were $2.0 million, $4.8 million and $4.1 million of income taxes provided
on securities transactions in 1997, 1996 and 1995, respectively.
The principal components of deferred tax (assets) liabilities at December 31
were as follows:
(in thousands) 1997 1996
- ------------------------------------------------------------------------
Allowance for loan losses $(132,990) $(116,816)
Lease financing transactions 122,127 105,805
Allowance for depreciation 15,567 18,972
Deferred loan origination fees and costs (20,088) (11,408)
Investment securities available for sale (149) (11,562)
Employee benefits (7,625) (3,132)
Restructuring charge (10,150) (15,178)
Other temporary differences, net (34,440) (35,825)
- ------------------------------------------------------------------------
Total $ (67,748) $ (69,144)
========================================================================
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) 1997 1996 1995
- -------------------------------------------------------------------------------------
Tax based on federal statutory rate $285,860 $226,172 $218,993
Effect of tax-exempt interest income (5,687) (8,842) (12,538)
Other 6,093 11,715 5,873
- -------------------------------------------------------------------------------------
Provision for income taxes $286,266 $229,045 $212,328
=====================================================================================
15
RESTRUCTURING
The Corporation recorded a restructuring charge of $90 million in 1996 in
connection with a program to improve efficiency, revenue and customer service.
The charge only includes direct and incremental costs associated with the
program. The following table provides details on the restructuring-related
reserve as of December 31:
Occupancy
Employee and
(in thousands) Termination Equipment Other Total
---------------------------------------------------------------
Balances at 12/31/96 $48,000 $21,000 $21,000 $90,000
Activity (38,000) (10,000) (13,000) (61,000)
---------------------------------------------------------------
Balances at 12/31/97 $10,000 $11,000 $ 8,000 $29,000
===============================================================
Termination benefits primarily include severance payments. The occupancy and
equipment portion consists of lease termination costs, space consolidation and
estimated losses on the disposal of vacated properties. Other charges consist
primarily of the project costs incurred during the assessment phase of the
program.
16
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, 1997, approximated $138 million at the beginning and $226
million at the end of 1997. During 1997, new loans to related parties
aggregated $124 million and repayments totaled $36 million.
50 Comerica Incorporated
34
17
REGULATORY CAPITAL AND BANKING SUBSIDIARIES
Banking regulations limit the transfer of assets in the form
of dividends, loans or advances from the bank subsidiaries
to the Corporation. Under the most restrictive of these regulations, the
aggregate amount of dividends which can be paid to the Corporation without
obtaining prior approval from bank regulatory agencies approximated $361
million at January 1, 1998, 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 $354
million in 1997, $322 million in 1996 and $184 million in 1995.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios of Tier 1 and total capital (as
defined in the regulations) to average and risk-weighted assets. At December
31, 1997, the Corporation and all of its banking subsidiaries exceeded the
ratios required for an institution to be considered "well capitalized" (total
capital ratio greater than 10 percent). The following is a summary of the
capital position of the Corporation and its significant banking subsidiaries:
Comerica Inc. Comerica Comerica Bank- Comerica Bank-
(in thousands) (Consolidated) Bank Texas California
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997
Tier 1 capital $2,513,820 $2,037,217 $325,394 $329,963
Total capital 3,961,243 3,243,206 359,674 370,531
Tier 1 capital to average assets
(minimum-3.0%) 7.09% 7.15% 8.92% 9.07%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 7.07 6.85 9.59 9.20
Total capital to risk-weighted assets
(minimum-8.0%) 11.14 10.90 10.60 10.33
December 31, 1996
Tier 1 capital $2,366,342 $1,930,830 $275,895 $282,108
Total capital 3,617,961 2,914,832 309,627 319,109
Tier 1 capital to average assets
(minimum-3.0%) 7.07% 7.23% 8.42% 7.40%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 7.18 7.12 9.49 8.95
Total capital to risk-weighted assets
(minimum-8.0%) 10.99 10.75 10.65 10.12
=====================================================================================================================
18
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Corporation enters into various
off-balance sheet transactions involving derivative financial instruments,
foreign exchange contracts and credit-related financial instruments to manage
exposure to fluctuations in interest rate, foreign currency and other market
risks and to meet the financing needs of customers. These financial instruments
involve, to varying degrees, elements of credit and market risk in excess of
the amount reflected in the consolidated balance sheets.
Credit risk is the possible loss that may occur in the event of nonperformance
by the counterparty to a financial instrument. The Corporation attempts to
minimize credit risk arising from off-balance sheet financial instruments by
evaluating the creditworthiness of each counterparty adhering to the same
credit approval process used for traditional lending activities. Counterparty
risk limits and monitoring procedures have also been established to facilitate
the management of credit risk. Collateral is obtained, if deemed necessary,
based on the results of management's credit evaluation. Collateral varies, but
may include cash, investment securities, accounts receivable, inventory,
property, plant and equipment or real estate.
Derivative financial instruments and foreign exchange contracts are traded over
an organized exchange or negotiated over-the-counter. Credit risk associated
with exchange-traded contracts is typically assumed by the organized exchange.
Over-the-counter contracts are tailored to meet the needs of the counterparties
involved and, therefore, contain a greater degree of credit risk and liquidity
risk than exchange-traded contracts which have standardized terms and readily
available
Comerica Incorporated 51
35
18
FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
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
counterparty and monetary exposure limits and monitoring compliance with those
limits. Market risk arising from derivative and foreign exchange positions
entered into on behalf of customers is reflected in the consolidated financial
statements and may be mitigated by entering into offsetting transactions.
Market risk inherent in off-balance sheet derivative and foreign exchange
contracts held or issued for risk management purposes is generally offset by
changes in the value of rate sensitive on-balance sheet assets or liabilities.
Termination of derivative contracts, other than by a counterparty, is unlikely
as a particular instrument can be offset by entering into an opposite-effect
derivative product to facilitate risk management strategies.
DERIVATIVE FINANCIAL INSTRUMENTS AND
FOREIGN EXCHANGE CONTRACTS
The Corporation, as an end-user, employs a variety of off-balance sheet
financial instruments for risk management purposes. Activity related to these
instruments is centered predominantly in the interest rate markets and mainly
involves interest rate swaps. Various other types of instruments are also used
to manage exposures to market risks, including interest rate caps and floors,
total return swaps, foreign exchange forward contracts and foreign exchange
swap agreements. Refer to the section entitled "Risk Management Derivative
Financial Instruments and Foreign Exchange Contracts" in the financial review
on page 33 for further information about the Corporation's objectives for using
such instruments.
The following table presents the composition of off-balance sheet derivative
financial instruments and foreign exchange contracts, excluding commitments,
held or issued for risk management purposes at December 31, 1997 and 1996.
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.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
- ------------------------------------------------------------------------------------------------
December 31, 1997
Risk management
Interest rate contracts:
Swaps $8,515 $137 $(14) $123
Options, caps and
floors purchased 52 -- -- --
Caps written -- -- -- --
- ------------------------------------------------------------------------------------------------
Total interest rate
contracts 8,567 137 (14) 123
Foreign exchange
contracts:
Spot and forwards 445 12 (9) 3
Swaps 154 5 -- 5
- ------------------------------------------------------------------------------------------------
Total foreign
exchange contracts 599 17 (9) 8
- ------------------------------------------------------------------------------------------------
Total risk management $9,166 $154 $(23) $131
================================================================================================
December 31, 1996
Risk management
Interest rate contracts:
Swaps $8,015 $ 42 $(97) $ (55)
Options, caps and
floors purchased 53 -- -- --
Caps written 152 -- -- --
- ------------------------------------------------------------------------------------------------
Total interest rate
contracts 8,220 42 (97) (55)
Foreign exchange
contracts:
Spot and forwards 444 26 (4) 22
Swaps 38 -- (1) (1)
- ------------------------------------------------------------------------------------------------
Total foreign
exchange contracts 482 26 (5) 21
- ------------------------------------------------------------------------------------------------
Total risk management $8,702 $68 $(102) $ (34)
================================================================================================
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 93 percent of the
notional amount of interest rate derivative contracts at December 31, 1997 and
1996. 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, 1997, 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 credit losses associated with derivative or foreign exchange contracts.
52 Comerica Incorporated
36
18
FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
On a limited scale, fee income is earned from entering into various
transactions, principally foreign exchange contracts and interest rate caps, at
the request of customers. The Corporation does not speculate in derivative
financial instruments for the purpose of profiting in the short-term from
favorable movements in market rates.
Fair values for customer-initiated and other derivative and foreign exchange
contracts represent the net unrealized gains or losses on such contracts and
are recorded in the consolidated balance sheets. Changes in fair value are
recognized in the consolidated income statements. For the year ended December
31, 1997, unrealized gains and unrealized losses on customer-initiated and
other foreign exchange contracts averaged $23 million and $18 million,
respectively. For the year ended December 31, 1996, unrealized gains and
unrealized losses averaged $10 million and $9 million, respectively. These
contracts also generated $7 million of noninterest income for both years ended
December 31, 1997 and 1996. Average positive and negative fair values and
income related to customer-initiated and other interest rate contracts were not
material for 1997 and 1996.
The following table presents the composition of off-balance sheet derivative
financial instruments and foreign exchange contracts held or issued in
connection with customer-initiated and other activities at December 31, 1997
and 1996.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
- -----------------------------------------------------------------------------
December 31, 1997
Customer-initiated and other
Interest rate contracts:
Caps written $ 314 $-- $ -- $--
Floors purchased 32 -- -- --
Swaps 150 6 (6) --
- -----------------------------------------------------------------------------
Total interest rate
contracts 496 6 (6) --
Foreign exchange
contracts:
Spot, forwards, futures
and options 1,837 37 (33) 4
- -----------------------------------------------------------------------------
Total customer-
initiated and other $2,333 $43 $(39) $ 4
=============================================================================
December 31, 1996
Customer-initiated and other
Interest rate contracts:
Caps written $ 358 $-- $ -- $--
Floors purchased 2 -- -- --
Swaps 30 5 (5) --
- -----------------------------------------------------------------------------
Total interest rate
contracts 390 5 (5) --
Foreign exchange
contracts:
Spot, forwards, futures
and options 644 19 (18) 1
- -----------------------------------------------------------------------------
Total customer-
initiated and other $1,034 $24 $(23) $ 1
=============================================================================
Detailed discussions of each class of derivative financial instrument and
foreign exchange contract held or issued by the Corporation for both risk
management and customer-initiated and other activities are provided below.
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. In some
cases, the payments may be based on the change in the value of an underlying
security. The Corporation's swap agreements are structured such that variable
payments are primarily based on one-month and 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.
Comerica Incorporated 53
37
18
FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
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, 1997 and 1996.
Commitments to purchase investment securities are executed to secure certain
rates on primarily U.S. government and agency securities. No such commitments
were outstanding at year-end 1997, while $50 million were outstanding at
year-end 1996. Commitments to purchase and sell U.S. Treasury and municipal
bond securities related to the Corporation's trading account totaled $2 million
and $18 million at December 31, 1997 and 1996, respectively. At December 31,
1997 and 1996, $30 million and $23 million, respectively, of commitments with
settlement terms of up to 120 days had been initiated to reduce interest rate
risk on fixed rate residential mortgage loans originated or held for sale.
Outstanding commitments expose the Corporation to both credit risk and market
risk.
Available credit lines on fixed rate credit card and check product accounts,
which have characteristics similar to option contracts, totaled $1.8 billion
and $2.0 billion at December 31, 1997 and 1996, respectively. These commitments
expose the Corporation to the risk of a reduction in net interest income as
interest rates increase. Market risk exposure arising from fixed rate revolving
credit commitments is very limited, however, since it is unlikely that a
significant number of customers with these accounts will simultaneously borrow
up to their maximum available credit lines. Additional information concerning
unused commitments to extend credit is provided in the "Credit-Related
Financial Instruments" section below.
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) 1997 1996
- --------------------------------------------------------------------
Unused commitments to extend credit $27,528 $22,118
Standby letters of credit and financial guarantees 3,088 2,684
Commercial letters of credit 449 335
====================================================================
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 at December 31, 1997 and 1996,
included $4 billion of variable and fixed rate revolving credit commitments.
Other unused loan commitments, primarily variable rate, totaled $24 billion at
December 31, 1997, and $18 billion at December 31, 1996.
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
$1,309 million and $1,192 million at December 31, 1997 and 1996, respectively.
The remaining standby letters of credit and financial guarantees, which mature
within one year, totaled $1,779 million and $1,492 million at December 31, 1997
and 1996, respectively. Commercial letters of credit are issued to finance
foreign or domestic trade transactions.
19
CONTINGENT LIABILITIES
The Corporation and its subsidiaries are parties to litigation and claims
arising in the normal course of their activities. Although the amount of
ultimate liability, if any, with respect to such matters 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 materially adverse effect on the Corporation's consolidated
financial position or results of operations.
54 Comerica Incorporated
38
20
USAGE RESTRICTIONS
Included in cash and due from banks are 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. At December 31,
1997 and 1996, the Federal Reserve balances were $587 million and $534 million,
respectively.
21
ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair values of financial instruments, which differ
from carrying values, often requires the use of estimates. In cases where
quoted market values are not available, the Corporation uses present value
techniques and other valuation methods to estimate the fair values of its
financial instruments. These valuation methods require considerable judgment,
and the resulting estimates of fair value can be significantly affected by the
assumptions made and methods used. Accordingly, the estimates provided herein
do not necessarily indicate amounts which could be realized in a current
exchange. Furthermore, as the Corporation normally intends to hold the majority
of its financial instruments until maturity, it does not expect to realize many
of the estimated amounts disclosed. The disclosures also do not include
estimated fair value amounts for items which are not defined as financial
instruments, but which have significant value. These include such items as core
deposit intangibles, the future earnings potential of significant customer
relationships and the value of trust operations and other fee generating
businesses. The Corporation does not believe that it would be practicable to
estimate a representational fair value for these types of items.
The Corporation used the following methods and assumptions:
Cash and short-term investments: The carrying amount approximates the estimated
fair value of these instruments, which consist of cash and due from banks,
interest-bearing deposits with banks and federal funds sold.
Trading account securities: These securities are carried at quoted market value
or the market value for comparable securities, which represents estimated fair
value.
Loans held for sale: The market value of these loans represents estimated fair
value. 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 commercial loans: These consist of commercial, real estate
construction, commercial mortgage and equipment lease financing loans. The
estimated fair value of the Corporation's variable rate commercial loans is
represented by their carrying value, adjusted by an amount which estimates the
change in fair value caused by changes in the credit quality of borrowers since
the loans were originated. The estimated fair value of fixed rate commercial
loans is calculated by discounting the contractual cash flows of the loans
using year-end origination rates derived from the Treasury yield curve or other
representative bases. The resulting amounts are adjusted to estimate the effect
of changes in the credit quality of borrowers since the loans were originated.
International loans: The estimated fair value of the Corporation's short-term
international loans which consist of trade-related loans, or loans which have
no cross-border risk due to the existence of domestic guarantors or liquid
collateral, is represented by their carrying value, adjusted by an amount which
estimates the effect on fair value of changes in the credit quality of
borrowers or guarantors. The estimated fair value of long-term international
loans is based on the quoted market values of these loans or on the market
values of international loans with similar characteristics.
Retail loans: This category consists of residential mortgage, consumer and auto
lease financing loans. The estimated fair value of residential mortgage loans
is based on discounted contractual cash flows or market values of similar loans
sold in conjunction with securitized transactions. For consumer loans, the
estimated fair values are calculated by discounting the contractual cash flows
of the loans using rates representative of year-end origination rates. The
resulting amounts are adjusted to estimate the effect of changes in the credit
quality of borrowers since the loans were originated.
Customers' liability on acceptances outstanding: The carrying amount
approximates the estimated fair value.
Loan servicing rights: The estimated fair value represents those servicing
rights recorded under SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Fair value is computed
using discounted cash flow analyses, using interest rates and prepayment speed
assumptions currently quoted for comparable instruments.
Comerica Incorporated 55
39
21
ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposit liabilities: The estimated fair value of demand deposits, consisting of
checking, savings and certain money market deposit accounts, is represented by
the amounts payable on demand. The carrying amount of deposits in foreign
offices approximates their estimated fair value, while the estimated fair value
of term deposits is calculated by discounting the scheduled cash flows using
the year-end rates offered on these instruments.
Short-term borrowings: The carrying amount of federal funds purchased,
securities sold under agreements to repurchase and other borrowings
approximates estimated fair value.
Acceptances outstanding: The carrying amount approximates the estimated fair
value.
Medium- and long-term debt: The estimated fair value of the Corporation's
variable rate medium- and long-term debt is represented by its carrying value.
The estimated fair value of the fixed rate medium- and long-term debt is based
on quoted market values. If quoted market values are not available, the
estimated fair value is based on the market values of debt with similar
characteristics.
Derivative financial instruments and foreign exchange contracts: The estimated
fair value of interest rate swaps represents the amount the Corporation would
receive or pay to terminate or otherwise settle the contracts at the balance
sheet date, taking into 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 are
based on quoted market prices. The estimated fair value of interest rate and
foreign currency options (including interest rate caps and floors) are
determined using option pricing models.
Credit-related financial instruments: The estimated fair value of unused
commitments to extend credit and standby and commercial letters of credit is
represented by the estimated cost to terminate or otherwise settle the
obligations with the counterparties. This amount is approximated by the fees
currently charged to enter into similar arrangements, considering the remaining
terms of the agreements and any changes in the credit quality of counterparties
since the agreements were entered into. This estimate of fair value does not
take into account the significant value of the customer relationships and the
future earnings potential involved in such arrangements as the Corporation does
not believe that it would be practicable to estimate a representational fair
value for these items.
The estimated fair values of the Corporation's financial instruments at
December 31, 1997 and 1996 are as follows:
1997 1996
- -----------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(in millions) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term
investments $ 2,080 $ 2,080 $ 1,961 $ 1,961
Trading account securities 9 9 6 6
Loans held for sale 41 41 38 38
Investment securities
available for sale 4,006 4,006 4,800 4,800
Commercial loans 15,805 15,743 13,520 13,445
International loans 2,085 2,080 1,706 1,704
Real estate construction
loans 941 933 751 744
Commercial mortgage
loans 3,634 3,617 3,446 3,413
Residential mortgage
loans 1,565 1,608 1,744 1,771
Consumer loans 4,348 4,231 4,634 4,498
Lease financing 517 518 406 406
- -----------------------------------------------------------------------------------------------------------
Total loans 28,895 28,730 26,207 25,981
Less allowance for
loan losses (424) -- (367) --
- -----------------------------------------------------------------------------------------------------------
Net loans 28,471 28,730 25,840 25,981
Customers' liability on
acceptances outstanding 18 18 33 33
Loan servicing rights 28 31 23 25
LIABILITIES
Demand deposits
(noninterest-bearing) 6,761 6,761 6,713 6,713
Interest-bearing deposits 15,825 15,840 15,654 15,664
- -----------------------------------------------------------------------------------------------------------
Total deposits 22,586 22,601 22,367 22,377
Short-term borrowings 3,193 3,193 4,489 4,489
Acceptances outstanding 18 18 33 33
Medium- and
long-term debt 7,286 7,395 4,242 4,268
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
Derivative financial
instruments and foreign
exchange contracts
Risk management:
Unrealized gains -- 154 -- 68
Unrealized losses -- (23) -- (102)
Customer-initiated
and other:
Unrealized gains 43 43 24 24
Unrealized losses (39) (39) (23) (23)
Credit-related financial
instruments -- (13) -- (10)
===========================================================================================================
56 Comerica Incorporated
40
22
PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS--Comerica Incorporated
December 31 (in thousands, except share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 372 $ 263
Time deposits with subsidiary bank 80,400 105,700
Investment securities available for sale 20,822 17,074
Investment in subsidiaries, principally banks 3,017,058 2,829,906
Receivables from subsidiaries 375 --
Premises and equipment 6,566 53,347
Other assets 39,634 31,345
- --------------------------------------------------------------------------------------------------------------
Total assets $ 3,165,227 $ 3,037,635
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 298,351 $ 298,210
Other borrowed funds -- 842
Advances from nonbanking subsidiaries 4,054 236
Other liabilities 101,046 122,778
- --------------------------------------------------------------------------------------------------------------
Total liabilities 403,451 422,066
Nonredeemable preferred stock--$50 stated value
Authorized--5,000,000 shares
Issued--5,000,000 shares in 1997 and 1996 250,000 250,000
Common stock--$5 par value
Authorized--250,000,000 shares
Issued--156,815,367 shares in 1997 and 107,297,345 shares in 1996 784,077 536,487
Capital surplus -- --
Unrealized gains and losses on investment securities available for sale (1,937) (22,789)
Retained earnings 1,731,419 1,854,116
Deferred compensation (1,783) (2,245)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,761,776 2,615,569
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,165,227 $ 3,037,635
==============================================================================================================
STATEMENTS OF INCOME--Comerica Incorporated
Year Ended December 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
INCOME
Income from subsidiaries
Dividends from subsidiaries $ 353,500 $ 322,000 $ 183,700
Other interest income 3,626 3,372 7,113
Intercompany management fees 166,952 264,368 293,292
Other interest income 559 1,773 --
Other noninterest income 2,070 5,278 2,680
- --------------------------------------------------------------------------------------------------------------
Total income 526,707 596,791 486,785
EXPENSES
Interest on long-term debt and other borrowed funds 26,129 26,328 19,948
Net interest rate swap income (2,818) (2,794) (785)
Interest on advances from subsidiaries 18 86 243
Salaries and employee benefits 65,766 123,271 127,261
Occupancy expense 9,373 22,483 22,778
Equipment expense 2,053 24,806 25,600
Restructuring charge -- 27,000 --
Other noninterest expenses 54,244 63,224 76,319
- --------------------------------------------------------------------------------------------------------------
Total expenses 154,765 284,404 271,364
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed net income of subsidiaries 371,942 312,387 215,421
Income tax expense (credit) 6,111 (1,931) 10,705
- --------------------------------------------------------------------------------------------------------------
365,831 314,318 204,716
Equity in undistributed net income of
subsidiaries, principally banks 164,645 102,843 208,650
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 530,476 $ 417,161 $ 413,366
==============================================================================================================
Comerica Incorporated 57
41
22
PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS--Comerica Incorporated
Year Ended December 31 (in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 530,476 $ 417,161 $ 413,366
Adjustments to reconcile net income to
net cash provided by operating activities
Undistributed earnings of
subsidiaries, principally banks (164,645) (102,843) (208,650)
Depreciation 1,800 20,595 20,447
Restructuring charge (20,992) 27,000 (6,078)
Other, net 20,928 23,091 16,694
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments (162,909) (32,157) (177,587)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 367,567 385,004 235,779
INVESTING ACTIVITIES
Purchase of investment securities available for sale (4,092) (4,820) (6,097)
Proceeds from sale of investment securities available for sale 427 -- --
Proceeds from sales of fixed assets and other real estate 28,958 603 3,439
Purchases of fixed assets (1,424) (20,345) (16,413)
Net (increase) decrease in bank time deposits 25,300 25,100 (41,200)
Net (increase) in receivables from subsidiaries (375) -- --
Capital transactions with subsidiaries (3,283) 131,871 (1,400)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 45,511 132,409 (61,671)
FINANCING ACTIVITIES
Net increase (decrease) in advances from subsidiaries 3,818 (3,523) (4,064)
Proceeds from issuance of long-term debt -- -- 210,000
Repayments and purchases of long-term debt 141 (259) (59,147)
Net decrease in short-term borrowings (842) -- --
Proceeds from issuance of preferred stock -- 246,744 --
Proceeds from issuance of common stock 22,584 35,206 11,736
Purchase of common stock for treasury and retirement (243,258) (622,196) (178,656)
Dividends paid (195,412) (173,414) (155,726)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (412,969) (517,442) (175,857)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash on deposit at bank subsidiary 109 (29) (1,749)
Cash on deposit at bank subsidiary at beginning of year 263 292 2,041
- -------------------------------------------------------------------------------------------------------------------------
Cash on deposit at bank subsidiary at end of year $ 372 $ 263 $ 292
=========================================================================================================================
Interest paid $ 25,799 $ 25,942 $ 15,623
=========================================================================================================================
Income taxes recovered (paid) $ (1,145) $ 11,150 $ 3,275
=========================================================================================================================
Noncash investing and financing activities
Stock issued for acquisitions $ -- $ 128,938 $ 77,100
=========================================================================================================================
The preceding parent company financial statements reflect the sale of the
Corporation's information services, transaction processing and operations
services departments to a subsidiary, Comerica Bank, on January 1, 1997.
58 Comerica Incorporated
42
23
SUMMARY OF QUARTERLY FINANCIAL INFORMATION
The following quarterly information is unaudited. However,
in the opinion of management, the information relects all adjustments which are
necessary for the fair presentation of the results of operations for the periods
presented.
1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 682,163 $ 674,671 $ 663,326 $ 627,243
Interest expense 316,281 313,090 299,798 275,458
Net interest income 365,882 361,581 363,528 351,785
Provision for loan losses 37,000 34,000 34,000 41,000
Securities gains/(losses) 5,836 1,096 (1,359) 122
Noninterest income
(excluding securities gains) 134,928 135,251 122,806 129,272
Noninterest expenses 257,368 252,622 249,259 248,737
Net income 139,927 137,067 129,710 123,772
Basic net income per share $ 0.86 $ 0.84 $ 0.79 $ 0.75
Diluted net income per share 0.85 0.83 0.78 0.74
1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 632,737 $ 633,421 $ 642,192 $ 654,430
Interest expense 279,476 280,154 285,703 305,169
Net interest income 353,261 353,267 356,489 349,261
Provision for loan losses 32,000 28,500 25,000 28,500
Securities gains/(losses) 10,194 (276) 3,310 360
Noninterest income
(excluding securities gains) 122,214 116,604 117,480 137,068
Restructuring charge 90,000 -- -- --
Noninterest expenses
(excluding restructuring charge) 266,220 253,635 270,196 278,975
Net income 60,816 121,518 118,221 116,606
Basic net income per share $ 0.35 $ 0.71 $ 0.68 $ 0.66
Diluted net income per share 0.35 0.70 0.67 0.66
====================================================================================================================================
Comerica Incorporated 59
43
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 generally accepted accounting principles 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 generally accepted auditing standards.
The Corporation's Board of Directors oversees management's internal control and
financial reporting responsibilities through its Audit Committee as well as
various other committees. The Audit 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.
Eugene A. Miller
Chairman and Chief Executive Officer
Ralph W. Babb Jr.
Executive Vice President and Chief Financial Officer
Marvin J. Elenbaas
First 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, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Comerica
Incorporated and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Detroit, Michigan
January 20, 1998
60 Comerica Incorporated
44
HISTORICAL REVIEW-AVERAGE BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information
(in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,686 $ 1,576 $ 1,500 $ 1,532 $ 1,490
Short-term investments 129 195 351 823 1,193
Investment securities 4,687 5,823 7,625 8,004 5,512
Commercial loans 14,234 12,686 11,302 9,598 8,473
International loans 1,953 1,541 1,257 1,107 897
Real estate construction loans 866 707 541 403 441
Commercial mortgage loans 3,547 3,483 3,157 2,916 2,629
Residential mortgage loans 1,676 1,960 2,450 2,175 1,979
Consumer loans 4,486 4,624 4,569 3,795 3,697
Lease financing 447 351 285 217 191
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 27,209 25,352 23,561 20,211 18,307
Less allowance for loan losses (402) (361) (340) (322) (311)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 26,807 24,991 23,221 19,889 17,996
Accrued income and other assets 1,560 1,610 1,432 1,203 1,045
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 34,869 $ 34,195 $34,129 $31,451 $ 27,236
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-bearing) $ 5,815 $ 5,589 $ 4,767 $ 4,700 $ 4,380
Interest-bearing deposits 15,326 15,826 15,046 14,809 15,035
Deposits in foreign offices 805 843 1,842 1,816 1,306
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 21,946 22,258 21,655 21,325 20,721
Federal funds purchased and securities sold
under agreements to repurchase 2,017 2,106 2,816 2,817 1,586
Other borrowed funds 1,801 1,999 2,313 2,002 1,432
Accrued expenses and other liabilities 467 400 324 286 274
Medium- and long-term debt 5,980 4,745 4,510 2,708 1,087
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 32,211 31,508 31,618 29,138 25,100
Shareholders' equity 2,658 2,687 2,511 2,313 2,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 34,869 $ 34,195 $34,129 $31,451 $ 27,236
====================================================================================================================================
Comerica Incorporated 61
45
HISTORICAL REVIEW-STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information
(in millions, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,318 $ 2,161 $2,091 $1,577 $ 1,388
Interest on investment securities
Taxable 310 372 474 446 307
Exempt from federal income tax 11 18 26 31 40
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest on investment securities 321 390 500 477 347
Interest on short-term investments 9 12 23 38 48
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,648 2,563 2,614 2,092 1,783
INTEREST EXPENSE
Interest on deposits 673 686 721 543 530
Interest on short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 111 112 166 121 47
Other borrowed funds 98 107 136 79 41
Interest on medium- and long-term debt 374 295 289 148 63
Net interest rate swap (income)/expense (51) (49) 2 (29) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,205 1,151 1,314 862 649
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,443 1,412 1,300 1,230 1,134
Provision for loan losses 146 114 87 56 69
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,297 1,298 1,213 1,174 1,065
NONINTEREST INCOME
Income from fiduciary activities 147 133 125 122 122
Service charges on deposit accounts 141 140 130 124 120
Customhouse broker fees -- 11 36 41 40
Revolving credit fees 20 23 36 24 23
Securities gains 6 14 12 3 2
Other noninterest income 214 186 160 136 142
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 528 507 499 450 449
NONINTEREST EXPENSES
Salaries and employee benefits 539 561 562 549 529
Net occupancy expense 89 99 99 99 96
Equipment expense 62 69 68 68 62
FDIC insurance expense 3 8 24 44 44
Telecommunications expense 28 29 29 27 21
Restructuring charge -- 90 -- 7 22
Other noninterest expenses 287 303 304 248 251
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,008 1,159 1,086 1,042 1,025
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 817 646 626 582 489
Provision for income taxes 287 229 213 195 148
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 530 $ 417 $ 413 $ 387 $ 341
====================================================================================================================================
Net income applicable to common stock $ 513 $ 408 $ 413 $ 387 $ 341
====================================================================================================================================
Basic net income per common share $ 3.24 $ 2.41 $ 2.38 $ 2.20 $ 1.92
Diluted net income per common share 3.19 2.38 2.37 2.19 1.90
Cash dividends declared on common stock $ 181 $ 170 $ 158 $ 145 $ 125
Dividends per common share $ 1.15 $ 1.01 $ 0.91 $ 0.83 $ 0.71
- ------------------------------------------------------------------------------------------------------------------------------------
62 Comerica Incorporated
46
HISTORICAL REVIEW-STATISTICAL DATA
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE RATES (FULLY TAXABLE EQUIVALENT BASIS)
Short-term investments 6.59% 6.23% 6.61% 4.57% 3.97%
Investment securities 6.94 6.79 6.72 6.15 6.70
Commercial loans 8.25 8.21 8.75 7.38 6.56
International loans 7.07 6.64 7.06 5.58 5.04
Real estate construction loans 9.38 9.22 9.52 7.85 6.63
Commercial mortgage loans 9.08 9.29 9.40 8.52 8.10
Residential mortgage loans 7.90 7.83 7.80 7.46 8.57
Consumer loans 9.81 9.88 10.10 9.44 9.98
Lease financing 7.48 6.82 6.65 6.48 7.34
- ------------------------------------------------------------------------------------------------------------------------
Total loans 8.53 8.54 8.90 7.84 7.62
- ------------------------------------------------------------------------------------------------------------------------
Interest income as a percent of earning assets 8.29 8.20 8.35 7.28 7.25
Domestic deposits 4.09 4.04 4.05 3.14 3.24
Deposits in foreign offices 5.68 5.46 6.07 4.28 3.29
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4.17 4.11 4.27 3.26 3.24
Federal funds purchased and securities sold
under agreements to repurchase 5.49 5.31 5.88 4.31 3.01
Other borrowed funds 5.45 5.36 5.87 3.92 2.88
Medium- and long-term debt 6.26 6.22 6.41 5.46 5.77
- ------------------------------------------------------------------------------------------------------------------------
Interest expense as a percent of
interest-bearing sources 4.65 4.51 4.95 3.57 3.18
- ------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.64 3.69 3.40 3.71 4.07
Impact of net noninterest-bearing
sources of funds 0.89 0.85 0.79 0.61 0.58
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin as a percent of
earning assets 4.53 4.54 4.19 4.32 4.65
RETURN ON AVERAGE COMMON
SHAREHOLDERS' EQUITY 21.32 15.98 16.46 16.74 15.94
RETURN ON AVERAGE ASSETS 1.52 1.22 1.21 1.23 1.25
EFFICIENCY RATIO 51.05 60.36 60.09 61.28 63.68
PER SHARE DATA
Book value at year-end $16.02 $ 14.70 $ 15.17 $ 13.64 $ 12.66
Market value at year-end 60.17 34.92 26.67 16.25 17.75
Market value--high and low for year 62-34 39-24 29-16 21-16 23-17
OTHER DATA
Number of banking offices 350 358 395 398 385
Number of employees (full-time equivalent) 9,960 11,079 12,876 13,077 12,670
- ------------------------------------------------------------------------------------------------------------------------
Comerica Incorporated 63
47
ECONOMIC OUTLOOK FOR 1998
Much will be said about the past seven years of American prosperity. But even
more notable will be the date next year when this current period of
wealth-building pierces the all- time record economic expansion of 106
consecutive months achieved between 1961 and 1969.
By the end of the first quarter of 1999, the current business expansion will
have extended beyond all others known in U.S. economic history. Comerica's
finest forecasting tool, the Recession Watch Index, assigns a 70 percent
probability to achieving record longevity for this economic cycle.
This economic expansion has durability:
- - Real Gross Domestic Product (GDP) growth rates continue to exceed broadly
measured inflation rates.
- - Productivity gains remain impressive, due to robust capital goods outlays
by businesses.
- - Federal spending growth rates have decelerated sharply, lowering the
annual budget deficits.
- - Embracing freer trade has strengthened the dollar and
lowered costs and prices.
- - Financial markets grow stronger with disinflation and engender more
prudent behavior.
- - Major regions of the U.S. economy, which have under-
performed heretofore, are now accelerating.
Nevertheless, these factors are likely to detract from growth prospects through
1998:
- - Households entered 1998 rather fully extended with regard to credit
burdens.
- - Decelerating economies of our trading partners, particularly in Asia, will
clip U.S. exports.
- - New waves of company downsizings will lead to slower employment and income
gains.
COMPARABLE ECONOMIC HISTORY
Many observers have been startled by the coexistence of declining inflation
rates and falling unemployment rates in the United States over the past two
years. This blessed event is no coincidence. It is not accidental that strong
business spending on computers and new productivity-augmenting plants and
equipment are raising productivity throughout the private sector of the U.S.
economy. It is no accident that the sharp reduction in the U.S. budget deficit
coincides with the newfound spending restraint exercised by Washington over the
past six years. Since fiscal year 1993, the average growth in federal spending
has been 3 percent, and the incremental growth last year was only 2.7 percent.
Together, higher productivity and reduced rates of issuance of new federal debt
cause inflation and interest rates to move lower at the same time real GDP and
employment move higher. Furthermore, lower inflation improves the quality of
profits and the purchasing power of household income.
The past three years of economic prosperity in the U.S. are reminiscent of the
very positive economic developments from the decades that preceded 1900. A
century ago, the U.S. was the world's showcase for productivity gains and
industrial innovation. Consequently, the U.S. ran huge trade deficits and
attracted monumental amounts of capital from abroad--direct investments from
Europe and elsewhere. A similar scenario has unfolded today.
ANOTHER GOOD YEAR
Average annual GDP growth for the past seven-year expansion has been 2.7
percent. For 1998, we are forecasting real economic growth at 3.0 percent, down
from 3.8 percent in 1997. Although slower real GDP growth implies some 200,000
fewer auto and truck sales and a slightly less robust housing year,
deceleration on the goods side of the economy will be matched by further
deceleration in inflation and borrowing costs.
We predict 1998 through the first quarter 1999 to be recession-free, with
inflation and unemployment rates reaching their lowest points for the current
business cycle expansion. The Federal Reserve Board will have little reason to
loosen or tighten monetary policy, so it is likely that short-term interest
rates will remain largely unchanged during the year. The implosion of some
Asian financial markets and deceleration of most economies in
non-English-speaking nations across the globe suggest considerably tougher
sledding for U.S. exports in the year ahead. Because export growth had been a
mainstay of economic growth in the U.S. over the past three years, the loss of
export strength will slow real GDP in 1998 and possibly give rise to
protectionist sentiment.
1998 forecast 1997 actual
-----------------------------------------------------
GDP growth 3.0% 3.8%
Inflation (CPI) 1.7% 2.3%
Vehicle sales 14.7 14.9
(cars/light trucks) million units million units
Federal funds rate 5.5% 5.5%
Unemployment rate 4.7% 4.9%
Current account deficit $170 billion $151 billion
-----------------------------------------------------
BEYOND 1998
The U.S. economy is doing well because fiscal and monetary policies have become
more disciplined, especially since 1994. The greatest threats to domestic
economic health over the next several years stem chiefly from the possible
imposition of government regulations that have not been cost-justified.
Specifically, there is no scientific consensus as to whether the earth is
cooling, warming or staying within the normal temperature ranges of the past
several centuries. Whatever environmental threats emerge, they are best handled
by economic systems that are free, market-oriented, rich and growing wealthier.
Wealth and innovation serve as the facilitators for a cleaner, safer
environment. The key to continued prosperity beyond 1998 will be the avoidance
of myopic policies that sacrifice economic growth on the political altar of
income redistribution.
64 Comerica Incorporated
48
INTEREST RATE FORECASTS
1 Month
Fed Prime 3 Month Commercial Treasury Bills
Funds Rate LIBOR Paper 3 Month 6 Months 1 Year
- ---------------------------------------------------------------------------------------
2nd Quarter 1998 5.50% 8.50% 5.80% 5.75% 5.15% 5.25% 5.30%
3rd Quarter 1998 5.50 8.50 5.90 5.85 5.20 5.30 5.35
4th Quarter 1998 5.50 8.50 6.10 6.05 5.25 5.35 5.40
1st Quarter 1999 5.50 8.50 6.30 6.25 5.35 5.45 5.50
- ---------------------------------------------------------------------------------------
Treasury Notes Treasury Bonds Corp Aaa A Utility
2 Year 3 Year 5 Year 10 Year 30 Year Bonds Bonds
- ---------------------------------------------------------------------------------------
2nd Quarter 1998 5.40% 5.45% 5.60% 5.85% 6.00% 7.30% 7.40%
3rd Quarter 1998 5.45 5.50 5.70 5.80 6.10 7.40 7.50
4th Quarter 1998 5.50 5.60 5.90 6.10 6.30 7.60 7.70
1st Quarter 1999 5.60 5.70 6.00 6.25 6.50 7.80 7.90
- ---------------------------------------------------------------------------------------
Home Federal Reserve Annualized Percent Changes
Mortgage Rates Trade-Weighted Real GDP
FHLMC Dollar Index GDP Deflator CPI
- ---------------------------------------------------------------------------------------
2nd Quarter 1998 7.20% 110.0% 2.8% 1.5% 1.8%
3rd Quarter 1998 7.30 110.0 3.0 1.6 1.8
4th Quarter 1998 7.50 108.0 3.0 1.8 2.2
1st Quarter 1999 7.70 105.0 3.0 2.2 2.4
- ---------------------------------------------------------------------------------------
COMERICA MARKETS
An eighth consecutive year of general economic expansion in 1998 should
generate ample growth within Comerica's principal markets of Michigan,
California, Texas and Florida.
MICHIGAN
Housing prices and unemployment rates speak volumes to the growth trajectory of
Michigan's economy over the past few years. For a second straight year,
Michigan's average increase in home prices led the nation with an appreciation
of 7.2 percent, versus 4.5 percent for the U.S. Michigan's unemployment rate
averaged nearly one full percentage point below the U.S. average of 4.9
percent. Motor vehicle output expanded 2.5 percent in 1997, with Michigan truck
production up nearly 6 percent. Perhaps the greatest challenge confronting the
Michigan economy in 1998 will be its severe labor constraints. In 1997,
shortages of skilled labor, particularly in the building trades, reduced the
volume of new housing activity from 1996 levels. The likelihood of continued
low inflation and financing rates in 1998 will augment affordability of
automobiles and contribute to state growth.
CALIFORNIA
No state made greater economic progress in 1997 than California. An
illustration of this is the decline of unemployment rates from 7.1 to 6.2
percent between the third quarters of 1996 and 1997. New housing permit
activity rose 23 percent in California during 1997, versus 9 percent for the
nation, and average housing prices appreciated by 4.7 percent, compared with
4.5 percent for the U.S. California total employment grew 2.7 percent, far
outstripping the 1.8 percent average for all states. Continued economic
expansion and business profitability during 1998 is strongly suggested by the
1997 performance of California-based stocks, which rose nearly 50 percent.
California's greatest challenge will be reduced exports to Pacific Asia. This
will be partially offset by the burgeoning volume of import business related to
the stronger dollar and lower costs of outsourced labor and materials as inputs
to businesses.
TEXAS
As long as the U.S. economy continues to expand in 1998, the economy of Texas
should be able to run ahead by approximately 0.5 percent. This implies 3 to 3.5
percent growth in real gross state product in 1998. Employment growth in 1997,
at 2.5 percent, exceeded the U.S. average of 1.8 percent, with strong
performance in the business-service jobs sector. Improvement in the Mexican
economy and resultant growth in trade flows were especially significant forces
in the expansion of the state's economy last year. Texas-based stocks
experienced one of the more dynamic gains of any state in 1997, up nearly 70
percent. This strong equity performance often foreshadows business expansion,
profitability and employment gains in the subsequent year. The chief threat
would be another period of weakness or readjustment in the Mexican economy, due
to rising inflation and remedial monetary policies.
FLORIDA
Florida hit its stride in 1997, besting the national average unemployment rate
(4.8 percent versus 4.9 percent) and far outperforming the U.S. average with
respect to housing permit activity (up 22 percent versus 9 percent) and overall
job growth (3.5 percent versus 1.8 percent). South Florida, which once acted as
the senior partner in growth, is now sharing that role with the booming
central, northern and panhandle regions. Florida is now the fourth most
populous state, with the fastest population growth among the top four from
1990-96. The state's population growth between 1990-96 doubled the U.S. rate.
Florida's chief economic challenges in 1998 include decelerating Latin American
economies, the stronger dollar's impact on tourism and continued downsizing in
military staffing and budgets. Otherwise, population and business gains will
guarantee a diversified and balanced-growth economy.
David L. Littmann and William T. Wilson, Ph.D
Comerica Economics Department
Comerica Incorporated 65
49
SHAREHOLDER INFORMATION
STOCK
Comerica's stock trades on the New York Stock Exchange (NYSE) under the symbol
CMA.
SHAREHOLDER ASSISTANCE
Inquiries related to shareholder records, change of name, address or ownership
of stock, and lost or stolen stock certificates should be directed to the
transfer agent and registrar:
Norwest Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
1-800-468-9716
ELIMINATION OF DUPLICATE MATERIALS
If you receive duplicate mailings at one address, you may have multiple
shareholder accounts. You can consolidate your multiple accounts into a single,
more convenient account by contacting the transfer agent shown above. In
addition, if more than one member of your household is receiving shareholder
materials, you can eliminate the duplicate mailings by contacting the transfer
agent.
DIVIDEND REINVESTMENT PLAN
Comerica offers a dividend reinvestment plan which permits
participating shareholders of record to reinvest dividends in Comerica common
stock without paying brokerage commissions or service charges. Participating
shareholders also may invest up to $3,000 in additional funds each quarter for
the purchase of additional shares. A brochure describing the plan in detail and
an authorization form can be requested from the transfer agent shown above.
DIVIDEND DIRECT DEPOSIT
Common shareholders of Comerica may have their dividends deposited into their
savings or checking account at any bank that is a member of the National
Automated Clearing House (ACH) system. Information describing this service and
an authorization form can be requested from the transfer agent shown above.
DIVIDEND PAYMENTS
Subject to approval of the board of directors, dividends customarily are paid
on Comerica's common stock on or about April 1, July 1, October 1 and January
1.
ANNUAL MEETING
The Annual Meeting of Shareholders of Comerica Incorporated will be held on
Friday, May 15, 1998, at 9:30 a.m. in the Renaissance Conference Center, Level
2, Tower 300 of the Renaissance Center, Detroit, Michigan.
FORM 10-K
A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE SECRETARY OF THE CORPORATION AT THE ADDRESS LISTED UNDER
CORPORATE INFORMATION.
STOCK PRICES, DIVIDENDS AND YIELDS
(adjusted for stock split)
Dividend Dividend*
Quarter High Low Per Share Yield
------------------------------------------------------
1997
Fourth $61.875 $50.167 $0.29 2.1%
Third 53.250 45.042 0.29 2.4
Second 46.750 35.917 0.29 2.8
First 42.083 34.167 0.29 3.0
------------------------------------------------------
1996
Fourth $39.583 $33.500 $0.26 2.8%
Third 36.000 26.750 0.26 3.3
Second 29.917 26.833 0.26 3.7
First 27.917 24.166 0.23 3.5
------------------------------------------------------
* Dividend yield is calculated by annualizing the quarterly dividend per share
and dividing by an average of the high and low price in the quarter.
At January 31, 1998, there were approximately 16,306
holders of record of the Corporation's common stock.
CORPORATE INFORMATION
Comerica Incorporated
Comerica Tower at Detroit Center, MC 3391
500 Woodward Avenue
Detroit, Michigan 48226
1-800-521-1190
Internet: www.comerica.com
PRODUCT INFORMATION CENTER
If you have any questions about Comerica's products and
services, please contact our Product Information Center at
1-800-292-1300.
COMMUNITY REINVESTMENT ACT (CRA) PERFORMANCE
Comerica is committed to meeting the credit needs of the communities it serves.
Following are the most recent CRA
ratings for Comerica subsidiaries:
Comerica Bank (Michigan) Outstanding
Comerica Bank-Texas Outstanding
Comerica Bank & Trust, FSB (Florida) Outstanding
Comerica Bank-California Satisfactory
Comerica Bank-Midwest Satisfactory
EQUAL EMPLOYMENT OPPORTUNITY
Comerica is committed to its affirmative action program and practices which
ensure uniform treatment of employees without regard to race, creed, color,
age, national origin, religion, handicap, marital status, veteran status,
weight, height or sex.
INVESTOR CONTACT
Allison T. McFerren
313-222-6317
MEDIA CONTACT
Sharon R. McMurray
313-222-4881
66 Comerica Incorporated
50
IN MEMORY
Stanley R. Pijanowski III
Assistant Vice President
and Branch Manager
James L. Isom
Retail Service Representative
51
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL
PAGE
NUMBER GRAPHIC MATERIAL
------ ----------------
20 Bar graph depicting the Corporation's return on average assets (in percentages) from
1993 to 1997 compared to an industry average comprised of the 50 largest U.S. bank
holding companies.
1993 1994 1995 1996 1997
---------------------------------------------------------------
Comerica 1.25 1.23 1.21 1.22 1.52
Excluding Restructuring Charge 1.40
Industry Average 1.15 1.11 1.12 1.26 1.31
20 Bar graph depicting the Corporation's net interest income-FTE
(in millions), with a line showing net interest margin-FTE
(percent of earning assets), from 1993 to 1997.
1993 1994 1995 1996 1997
---------------------------------------------------------------
Net Interest Income(FTE) 1,163 1,254 1,321 1,427 1,452
Net Interest Margin (FTE) 4.65 4.32 4.19 4.54 4.53
23 Bar graph depicting the Corporation's net loans charged off to
average loans (in percentages) from 1993 to 1997 compared to an
industry average comprised of the 50 largest U.S. bank holding
companies.
1993 1994 1995 1996 1997
---------------------------------------------------------------
Comerica 0.43 0.24 0.32 0.33 0.33
Industry Average 0.96 0.51 0.53 0.51 0.56
25 Bar graph depicting the Corporation's noninterest income (in millions) from 1993
to 1997.
1993 1994 1995 1996 1997
---------------------------------------------------------------
449 450 499 507 528
26 Bar graph depicting the Corporation's noninterest expenses (in millions) from 1993
to 1997.
1993 1994 1995 1996 1997
---------------------------------------------------------------
Excluding Restructuring Charge 1,025 1,042 1,086 1,069 1,008
Restructuring Charge 90
30 Bar graph depicting the Corporation's nonperforming assets to loans and other real
estate (in percentages) from 1993 to 1997 compared to an industry average comprised
of the 50 largest U.S. bank holding companies.
1993 1994 1995 1996 1997
---------------------------------------------------------------
Comerica 1.09 0.92 0.67 0.53 0.36
Industry Average 2.81 1.67 1.23 0.79 0.71