EXHIBIT 13
Financial Review and Reports 22
1998 Financial Highlights 24
Earnings Performance 24
Strategic Lines of Business 30
Balance Sheet and Capital Funds Analysis 31
Risk Management 34
Consolidated Financial Statements 43
Notes to Consolidated Financial Statements 47
Report of Management 68
Report of Independent Auditors 68
Historical Review 69
FINANCIAL HIGHLIGHTS
Year Ended December 31 Change
(dollar amounts in millions, except per share data) 1998 1997 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 1,461 $ 1,443 $ 18 1%
Net income 607 530 77 14
Basic net income per common share 3.79 3.24 .55 17
Diluted net income per common share 3.72 3.19 .53 17
Cash dividends per common share 1.28 1.15 .13 11
Book value per common share 17.94 16.02 1.92 12
Market value per share 68.19 60.17 8.02 13
RATIOS
Return on average common shareholders' equity 22.54% 21.32%
Return on average assets 1.74 1.52
Average common shareholders' equity as a percentage
of average assets 7.48 6.91
BALANCE SHEET (AT DECEMBER 31)
Total assets $36,601 $36,292 $ 309 1%
Total earning assets 33,427 33,104 323 1
Loans 30,605 28,895 1,710 6
Deposits 24,313 22,586 1,727 8
Common shareholders' equity 2,797 2,512 285 11
==========================================================================================================================
Diluted Net Income
Per Common Share [Graph Appears Here]
(in dollars)
-------------------
1994 $2.19
1995 2.37
1996 2.38 ($2.72 Excluding restructuring charge)
1997 3.19
1998 3.72
Net Income
(in millions) [Graph Appears Here]
---------------
1994 $387
1995 413
1996 417 ($477 Excluding restructuring charge)
1997 530
1998 607
Table 1: Selected Financial Data
Year Ended December 31
(dollar amounts in millions, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Total interest income $ 2,617 $ 2,648 $ 2,563 $ 2,614 $ 2,092
Net interest income 1,461 1,443 1,412 1,300 1,230
Provision for credit losses 113 146 114 87 56
Securities gains 6 5 14 12 3
Noninterest income
(excluding securities gains) 597 523 493 487 447
Restructuring charge (7) -- 90 -- 7
Noninterest expenses
(excluding restructuring charge) 1,027 1,008 1,069 1,086 1,035
Net income 607 530 417 413 387
PER SHARE OF COMMON STOCK
Basic net income $ 3.79 $ 3.24 $ 2.41 $ 2.38 $ 2.20
Diluted net income 3.72 3.19 2.38 2.37 2.19
Cash dividends declared 1.28 1.15 1.01 0.91 0.83
Common shareholders' equity 17.94 16.02 14.70 15.17 13.64
Market value 68.19 60.17 34.92 26.67 16.25
YEAR-END BALANCES
Total assets $36,601 $ 36,292 $34,206 $35,470 $ 33,430
Total earning assets 33,427 33,104 31,110 32,051 30,606
Total loans 30,605 28,895 26,207 24,442 22,209
Total deposits 24,313 22,586 22,367 23,167 22,432
Total borrowings 8,862 10,479 8,731 9,319 8,303
Medium- and long-term debt 5,282 7,286 4,242 4,644 4,098
Common shareholders' equity 2,797 2,512 2,366 2,608 2,392
DAILY AVERAGE BALANCES
Total assets $34,987 $ 34,869 $34,195 $34,129 $ 31,451
Total earning assets 32,113 32,025 31,370 31,537 29,038
Total loans 28,599 27,209 25,352 23,561 20,211
Total deposits 22,253 21,946 22,258 21,655 21,325
Total borrowings 9,452 9,798 8,850 9,639 7,527
Medium- and long-term debt 6,032 5,980 4,745 4,510 2,708
Common shareholders' equity 2,617 2,408 2,554 2,511 2,313
RATIOS
Return on average assets 1.74% 1.52% 1.22% 1.21% 1.23%
Return on average common shareholders' equity 22.54 21.32 15.98 16.46 16.74
Efficiency ratio 49.39 51.04 60.36 60.09 61.28
Dividend payout ratio 34 36 42 38 38
Common shareholders' equity as
a percent of average assets 7.48 6.91 7.47 7.36 7.35
=================================================================================================================================
1998 Financial Highlights
Focused on Performance
. Earned 22.54 percent on average common shareholders' equity, compared to
21.32 percent in 1997.
. Returned 1.74 percent on average assets, compared to 1.52 percent in 1997.
Reported Record Earnings
. Reported net income of $607 million, or $3.72 per share, compared with $530
million, or $3.19 per share in 1997.
Sustained Growth
. Averaged $35 billion in total assets in both 1998 and 1997 (increased 6
percent excluding the sale of $2.0 billion of consumer assets).
. Reached $25 billion in average business loans, a 17 percent increase.
. Averaged $22 billion in total deposits in both 1998 and 1997.
. Increased average shareholders' equity to $2.9 billion.
Enhanced Shareholders' Return
. Raised the quarterly cash dividend 12 percent to $0.32 per share.
. Declared annual cash dividends of $1.28 per share.
. Repurchased 2.3 million shares in 1998.
Implemented Key Strategies
. Divested the mortgage servicing business and $2.0 billion of indirect
consumer loans and non-relationship credit card receivables and recorded an
$11 million pre-tax gain.
. Invested technology in targeted strategic businesses.
. Upgraded and/or remediated most major systems as part of a plan to achieve
year 2000 readiness.
. Opened a Canadian commercial banking subsidiary, Comerica Bank-Canada.
Return on Average Assets
(in percentages)
[Graph Appears Here]
Excluding Industry Avg.
Restructuring (Based on 50 Largest U.S.
Comerica Charge Bank Holding Companies)
-------- ------------- -------------------------
1994 1.23 1.11
1995 1.21 1.12
1996 1.22 1.40 1.26
1997 1.52 1.31
1998 1.74 1.22
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 71 percent of net
revenues in 1998, compared to 73 percent in 1997 and 74 percent in 1996. The
sale of $2.0 billion of indirect consumer loans and non-relationship credit card
receivables in the second quarter affected net interest income and the net
interest margin for 1998.
Net Interest Income
[Graph Appears Here]
Net Interest Income Net Interest Margin
(FTE)(In Millions) (FTE) (Percent of Earnings Assets)
------------------- ---------------------------------
1994 1,254 4.32
1995 1,321 4.19
1996 1,427 4.54
1997 1,452 4.53
1998 1,468 4.57
Table 2: Analysis of Net Interest Income-Fully Taxable Equivalent
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollar amounts in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 16,973 $ 1,365 8.04% $14,234 $ 1,174 8.25% $12,686 $1,041 8.21%
International loans 2,342 187 7.97 1,953 138 7.07 1,541 102 6.64
Real estate construction loans 989 91 9.24 866 81 9.38 707 65 9.22
Commercial mortgage loans 3,819 334 8.74 3,547 322 9.08 3,483 324 9.29
Residential mortgage loans 1,325 102 7.69 1,676 133 7.90 1,960 153 7.83
Consumer loans 2,575 263 10.20 4,486 440 9.81 4,624 457 9.88
Lease financing 576 44 7.65 447 33 7.48 351 24 6.82
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans (1) 28,599 2,386 8.34 27,209 2,321 8.53 25,352 2,166 8.54
Taxable securities 3,232 217 6.72 4,490 309 6.84 5,528 371 6.63
Securities exempt from
federal income taxes 139 12 9.16 197 18 9.32 295 28 9.96
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 3,371 229 6.81 4,687 327 6.94 5,823 399 6.79
Short-term investments 143 9 6.25 129 9 6.59 195 13 6.23
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 32,113 2,624 8.17 32,025 2,657 8.29 31,370 2,578 8.20
Cash and due from banks 1,622 1,686 1,576
Allowance for credit losses (440) (402) (361)
Accrued income and other assets 1,692 1,560 1,610
- ---------------------------------------- ------ -------
Total assets $ 34,987 $ 34,869 $ 34,195
======================================== ====== =======
Money market and NOW accounts $ 7,346 231 3.15 $ 6,926 232 3.35 $ 6,913 231 3.33
Savings deposits 1,584 28 1.79 1,701 34 2.02 2,026 44 2.18
Certicates of deposit 6,521 345 5.29 6,699 361 5.39 6,887 365 5.30
Foreign office deposits (2) 651 44 6.71 805 46 5.68 843 46 5.46
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 16,102 648 4.02 16,131 673 4.17 16,669 686 4.11
Federal funds purchased and
securities sold under
agreements to repurchase 2,510 137 5.44 2,017 111 5.49 2,106 112 5.31
Other borrowed funds 910 49 5.40 1,801 98 5.45 1,999 107 5.36
Medium- and long-term debt 6,032 368 6.10 5,980 374 6.26 4,745 295 6.22
Other (3) -- (46) -- -- (51) -- -- (49) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing sources 25,554 1,156 4.52 25,929 1,205 4.65 25,519 1,151 4.51
Noninterest-bearing deposits 6,151 5,815 5,589
Accrued expenses and other
liabilities 415 467 400
Preferred stock 250 250 133
Common shareholders' equity 2,617 2,408 2,554
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 34,987 $ 34,869 $ 34,195
======================================== ====== =======
Net interest income/rate spread (FTE) $ 1,468 3.65 $ 1,452 3.64 $1,427 3.69
======= ======= ======
FTE adjustment (4) $ 7 $ 9 $ 15
======= ======= ======
Impact of net noninterest-bearing
sources of funds 0.92 0.89 0.85
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin (as a percent of
average earning assets) (FTE) 4.57% 4.53% 4.54%
====================================================================================================================================
(1) Nonaccrual loans are included in average balances reported and are used
to calculate rates.
(2) Includes substantially all deposits by foreign depositors; deposits are
primarily in excess of $100,000.
(3) Net interest rate swap income. If swap income were allocated, average
rates on total loans would have been 8.40% in 1998, 8.63% in 1997 and 8.66%
in 1996; average rates on medium- and long-term debt would have been 5.77% in
1998, 5.85% in 1997 and 5.80% in 1996.
(4) The FTE adjustment is computed using a federal income tax rate of 35%.
Table 3: Rate-Volume Analysis-Fully Taxable Equivalent
1998 / 1997 1997 / 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ (29) $ 220 $ 191 $ 5 $ 128 $ 133
International loans 17 32 49 7 29 36
Real estate construction loans (1) 11 10 1 15 16
Commercial mortgage loans (12) 24 12 (7) 5 (2)
Residential mortgage loans (4) (27) (31) 2 (22) (20)
Consumer loans 18 (195) (177) (3) (14) (17)
Lease Financing 1 10 11 2 7 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans (10) 75 65 7 148 155
Taxable securities (7) (85) (92) 10 (72) (62)
Securities exempt from
federal income taxes (1) (5) (6) (1) (9) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities (8) (90) (98) 9 (81) (72)
Short-term investments -- -- -- 1 (5) (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income (FTE) (18) (15) (33) 17 62 79
Interest expense
Money market and
NOW accounts (14) 13 (1) 1 -- 1
Savings deposits (4) (2) (6) (3) (7) (10)
Certicates of deposit (6) (10) (16) 6 (10) (4)
Foreign office deposits 8 (10) (2) 2 (2) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (16) (9) (25) 6 (19) (13)
Federal funds purchased and
securities sold under
agreements to repurchase (1) 27 26 4 (5) (1)
Other borrowed funds (1) (48) (49) 2 (11) (9)
Medium- and long-term debt (9) 3 (6) 2 77 79
Other (1) 5 -- 5 (2) -- (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (22) (27) (49) 12 42 54
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) $ 4 $ 12 $ 16 $ 5 $ 20 $ 25
====================================================================================================================================
*Rate/volume variances are allocated to variances due to volume.
(1) Net interest rate swap income.
Net interest income (FTE) rose 1 percent to $1,468 million in 1998. This
increase was primarily due to a 5 percent increase in average total loans. A
significant increase of 19 percent in average commercial loans was offset by the
consumer loan divestitures cited previously and sales and runoff of investment
securities.
The net interest margin for 1998 increased slightly to 4.57 percent from 4.53
percent last year. The increase in the net interest margin was primarily due to
an increase in the level of noninterest-bearing sources of funds, the consumer
loan divestitures and a reduced emphasis on investment securities in the mix of
earning assets.
Comerica (the "Corporation") applied various asset and liability management
strategies in 1998 to minimize exposure to net interest margin risk. Net
interest margin risk 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 swap contracts entered
into in 1998 effectively fixed the yields on certain variable rate loans and
altered the interest rate characteristics of debt issued throughout the year.
Refer to the Interest Rate Risk discussion on page 36 of this financial review
for additional information regarding the Corporation's asset and liability
management policies.
In 1997, net interest income (FTE) increased 2 percent over 1996, benefiting
from strong growth in average earning assets, primarily commercial loans. The
net interest margin for 1997 declined 1 basis point from 1996, principally due
to higher funding costs from 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.
Provision and Allowance for Credit Losses
The provision for credit losses reflects management's evaluation of the adequacy
of the allowance for credit losses. The allowance for credit losses represents
management's assessment of possible losses inherent in the Corporation's on- and
off-balance sheet credit portfolio. The amount attributable to the off-balance
sheet credit portfolio is not material. The Corporation allocates the allowance
for credit losses to each loan category based on a defined methodology, which
has been in use, without material change, for several years. First, an internal
risk rating is assigned to each commercial loan. Included in that risk rating is
management's assessment of the potential failure of a customer to be adequately
prepared for the year 2000, but only in those instances where management has
significant information indicating a customer may not be adequately prepared
(for more information on year 2000, see the section entitled "Other Matters").
Management then assigns a projected loss ratio to each risk rating based on
numerous factors identified below. A detailed credit quality review is performed
quarterly on certain commercial loans which have deteriorated below certain
levels of credit risk, resulting in an additional allocation of a specific
portion of the allowance to such loans. The portion of the allowance allocated
to consumer loans is determined by applying projected loss ratios to various
segments of the loan portfolio. Projected loss ratios incorporate factors such
as recent loan loss experience, current economic conditions and trends,
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, actual loss ratios
experienced in the future could vary from those projected. This uncertainty
occurs because a loan's performance depends not only on economic factors but
also other factors unique to each customer. In addition, the significant
diversity in size of corporate loans means that even if the projected number of
loans deteriorate, the dollar exposure could significantly vary from estimated
amounts. Furthermore, for many economic events which have occurred, the impact
on individual customers may be, as yet, unknown. Such events include, for
example, the impact of the Asian economic problems both on assets in that region
as well as domestic companies exporting to that region or doing business through
subsidiaries in that region; depressed oil prices in the energy sector; and high
real estate vacancy rates in selected markets. To ensure adequacy to a higher
degree of confidence, an unallocated allowance is maintained. Management also
considers industry norms and the expectations and input from rating agencies and
banking regulators in determining the adequacy of the allowance. The allocation
of the allowance for credit losses provided in Table 8 on page 32 is done for
analytical purposes. The total allowance, including the unallocated amount, is
available to absorb losses from any segment of the portfolio.
The provision for credit losses was $113 million in 1998, compared to $146
million in 1997 and $114 million in 1996. The decrease in 1998 was primarily due
to the consumer loan sale mentioned earlier.
Net Loans Charged Off to Average Loans
(in percentages)
[Graph Appears Here]
Industry Avg.
(Based on 50 Largest U.S.
Comerica Bank Holding Companies)
--------- -------------------------
1994 0.24 0.51
1995 0.32 0.53
1996 0.33 0.51
1997 0.33 0.56
1998 0.30 0.48
Table 4: Analysis of the Allowance for Credit Losses
Year Ended December 31
(dollar amounts in millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Balance at beginning of period $ 424 $ 367 $ 341 $ 326 $ 299
Allowance of institutions purchased/sold -- -- (3) 4 19
Loans charged off
Domestic
Commercial 49 33 33 33 25
Real estate construction -- 1 1 3 1
Commercial mortgage 1 4 5 8 17
Residential mortgage -- -- 1 2 --
Consumer 65 92 86 73 40
Lease financing 4 -- -- -- --
International 7 1 -- -- --
- -------------------------------------------------------------------------------
Total loans charged off 126 131 126 119 83
Recoveries
Domestic
Commercial 19 19 18 19 15
Real estate construction -- 1 1 3 --
Commercial mortgage 9 10 9 8 5
Consumer 13 12 13 13 14
International -- -- -- -- 1
- -------------------------------------------------------------------------------
Total recoveries 41 42 41 43 35
- -------------------------------------------------------------------------------
Net loans charged off 85 89 85 76 48
Provision for credit losses 113 146 114 87 56
- -------------------------------------------------------------------------------
Balance at end of period $ 452 $ 424 $ 367 $ 341 $ 326
===============================================================================
Ratio of allowance for credit losses to total
loans at end of period 1.48% 1.47% 1.40% 1.40% 1.47%
Ratio of net loans charged off during the
period to average loans outstanding during
the period 0.30% 0.33% 0.33% 0.32% 0.24%
===============================================================================
Total net charge-offs decreased to $85 million in 1998, compared to $89 million
in 1997 and $85 million in 1996. The ratio of net loans charged off to average
total loans was 0.30 percent in 1998 and 0.33 percent in 1997. Commercial loan
net charge-offs as a percentage of average commercial loans were 0.18 percent
for 1998 and 0.10 percent for 1997. Consumer loan net charge-offs as a
percentage of average consumer loans were 2.03 percent for 1998 and 1.79 percent
for 1997. Consumer loan net charge-offs declined $28 million, primarily as a
result of the consumer loan divestitures discussed previously.
At December 31, 1998, the allowance for credit losses was $452 million, an
increase of $28 million since year-end 1997. The allowance as a percentage of
total loans increased to 1.48 percent from 1.47 percent at December 31, 1997.
The allowance as a percentage of total nonperforming assets decreased to 375
percent at December 31, 1998, from 413 percent at year-end 1997.
Noninterest Income
Year Ended December 31
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Fiduciary and investment management income $ 184 $ 147 $ 126
Service charges on deposit accounts 158 141 140
Commercial lending fees 43 32 23
Securities gains 6 5 14
Other 198 176 163
- ----------------------------------------------------------------------------------------------------------
Subtotal 589 501 466
Consumer businesses sold 14 4 4
Bond indenture income -- 23 7
Customhouse broker fees -- -- 11
Other significant nonrecurring items -- -- 19
- ----------------------------------------------------------------------------------------------------------
Total noninterest income $ 603 $ 528 $ 507
==========================================================================================================
Noninterest income increased $75 million, or 14 percent, to $603 million in
1998, compared to $528 million in 1997 and $507 million in 1996. Noninterest
income and noninterest expenses in the second half of 1998 include the
consolidated financial results of Munder Capital Management ("Munder"), an
investment advisory subsidiary in which a majority interest was obtained by the
Corporation in July 1998. The Corporation accounted for its minority interest in
periods prior to the third quarter of 1998 under the equity method. After
adjusting for acquisitions, divestitures, securities gains and the large
nonrecurring items discussed below, noninterest income rose $71 million, or 14
percent, in 1998.
Fiduciary and investment management income increased $37 million, or 25 percent,
in 1998 compared to an increase of $21 million, or 16 percent, in 1997 (after
excluding bond indenture income). Excluding the net additional revenues from
Munder of $18 million, the increase of 13 percent in 1998 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 $137 billion at December 31, 1998,
from $117 billion at year-end 1997. Discretionary funds, which represent trust
assets over which the Corporation has investment management authority, increased
to $50 billion from $30 billion in 1997. The consolidation of Munder contributed
$14 billion of trust assets.
Service charges on deposit accounts increased $17 million, or 12 percent, in
1998 compared to an increase of $1 million, or 1 percent, in 1997. The majority
of the 1998 increase related to revisions of the commercial account fee
structure, growth in demand deposit activity and lower earnings credit
allowances.
Commercial lending fees increased $11 million, or 38 percent, in 1998 compared
to an increase of $9 million, or 35 percent, in 1997. Continued strong
commercial loan growth contributed to increases in commercial loan service
charges and fees on unfunded commitments in 1998. Commercial loan syndication
fees increased $6 million in 1998.
Income from securities gains was essentially unchanged from the prior year,
totaling $6 million in 1998 and $5 million in 1997.
[Graph Appears Here]
Non-Interest Income
(In Millions)
1994 $ 450
1995 499
1996 507
1997 528
1998 603
Other noninterest income increased $9 million, or 4 percent, in 1998. Higher
levels of foreign exchange income, brokerage service fees and automated teller
machine surcharges accounted for the majority of this increase. Excluding the
impact of acquisitions, divestitures and large nonrecurring items in both
periods, other noninterest income increased 13 percent. Significant nonrecurring
items in other noninterest income include an $11 million net gain on the sale of
the mortgage servicing business and consumer loans discussed previously in 1998,
and a $23 million gain on the sale of the Corporation's bond indenture 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, Incorporated.
Noninterest Expenses
Year Ended December 31
(in millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Salaries $ 500 $ 464 $ 475
Employee benefits 65 75 86
- ------------------------------------------------------------------------------
Total salaries and
employee benefits 565 539 561
Net occupancy expense 90 89 99
Equipment expense 60 62 69
Outside processing fee expense 43 42 42
Other 269 271 280
- ------------------------------------------------------------------------------
Subtotal 1,027 1,003 1,051
Restructuring charge (7) -- 90
Other significant nonrecurring items -- 5 18
- ------------------------------------------------------------------------------
Total noninterest expenses $1,020 $1,008 $1,159
==============================================================================
Noninterest expenses increased 1 percent to $1,020 million in 1998, compared to
$1,008 million in 1997 and $1,159 million ($1,069 million, excluding the
restructuring charge) in 1996. Excluding the effect of acquisitions,
divestitures and the large nonrecurring items discussed below, noninterest
expenses increased $25 million, or 3 percent, in 1998.
Total salaries expense increased $36 million, or 8 percent, in 1998 versus a
decrease of $11 million, or 2 percent, in 1997. The increase in 1998 was
primarily from the consolidation of Munder, annual merit increases and increased
incentives tied to performance. The number of full-time equivalent employees
increased 174, or 2 percent, from year-end 1997, primarily due to Munder.
Employee benefits expense decreased $10 million, or 13 percent, in 1998
versus a decrease of $11 million, or 12 percent, in 1997. The reduction in
1998 was primarily due to reduced pension expense as a result of benefits
from reduced staff levels related to the Direction 2000 program and the
consumer loan and mortgage servicing divestitures mentioned earlier, as well
as higher levels of benefits from company-owned life insurance policies.
Excluding the effect of acquisitions and divestitures, salaries and benefits
increased 4 percent in 1998.
Net occupancy and equipment expenses, on a combined basis, decreased $1 million,
or 1 percent, in 1998 versus a decrease of $17 million, or 10 percent, in 1997.
After adjusting for acquisitions and divestitures, net occupancy and equipment
expenses declined 2 percent in 1998.
Outside processing fees were essentially unchanged from the prior year, totaling
$43 million in 1998 and $42 million in 1997.
Other noninterest expenses decreased $7 million in 1998, compared to a $22
million decrease in 1997. Other noninterest expenses included $5 million of
litigation accruals in 1997 and a loss of $18 million in 1996 on the sale of a
portion of the bankcard portfolio. Loss-sharing provisions in that bankcard
sales agreement expose the Corporation to maximum additional losses of $14
million over the last six months of the agreement. Management does not expect to
incur significant additional losses as a result of these provisions. Excluding
acquisitions, divestitures and the large nonrecurring items described above,
other noninterest expenses increased $4 million, or less than 2 percent. The
minimal increase reflects management's continued efforts to control expenses.
The Corporation recorded a pre-tax restructuring charge of $90 million in 1996
in connection with a major program (Direction 2000) 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) were anticipated from the
program. The Corporation completed implementation during the first quarter of
1998. Full annual realization of the estimated benefits of the plan will not
occur until 1999. As a result of the program, the Corporation eliminated 1,890
employee positions, about 15 percent of total positions at year-end 1996.
Reinvestment opportunities during the implementation phase created 300 new
positions. During 1998, the Corporation incurred $22 million of termination
benefits, occupancy and equipment write-offs and other costs which it charged
against the restructuring reserve, compared to $61 million in 1997. A reduction
of $7 million, netted against other noninterest expenses, was made to eliminate
the restructuring liability in 1998. Additional information regarding the
Corporation's restructuring reserve can be found in Note 15 on page 56.
[Graph Appears Here]
Excluding
Non-Interest Expenses Restructuring
(In Millions) Charge
------------ ------
1994 1,042
1995 1,086
1996 1,159 1,069
1997 1,008
1998 1,020
The Corporation's efficiency ratio is defined as total noninterest expenses
divided by the sum of net interest revenue (FTE) and noninterest income,
excluding securities gains. The ratio was 49.39 percent in 1998, compared to
51.04 percent in 1997 and 60.36 percent in 1996 (55.67 percent excluding the
restructuring charge).
Income Taxes
The provision for income taxes was $324 million in 1998, compared to $287
million in 1997 and $229 million in 1996. The effective tax rate, computed by
dividing the provision for income taxes by income before taxes, was 34.8 percent
in 1998, 35.0 percent 1997 and 35.4 percent in 1996.
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. In
addition to the three major lines of business the Finance Division is also
reported as a segment. The Corporation's investment securities portfolio is
included in the total assets of the Finance Division. Note 22 on page 63
describes how these segments were identified and presents the financial results
of these business lines for the years ended December 31, 1998, 1997 and 1996.
Business Bank net income increased $11 million, or 3 percent, in 1998,
principally due to additional net interest income resulting from 18 percent
average loan growth and a $26 million increase in noninterest income. This was
partially offset by a higher provision for credit losses resulting from loan
growth.
Individual Bank net income increased $42 million, or 19 percent, in 1998.
Financial results for the Individual Bank for 1998 were affected by the sale of
the mortgage servicing business and the sale of $2.0 billion of consumer assets.
Net interest income declined $75 million, or 10 percent, from 1997, while the
provision for credit losses decreased $96 million, reflecting the results of the
sale. Noninterest income in 1998 includes an $11 million net gain related to the
sale. Noninterest income in 1996 includes a $13 million gain on the sale of the
merchant services business.
Net income for the Investment Bank increased $1 million in 1998, principally due
to higher levels of institutional trust fees, discount brokerage fees and the
consolidation of Munder.
Net income for Finance increased $7 million in 1998, primarily due to a $6
million increase in net interest income. This increase was due to the favorable
impact of managing the Corporation's exposure to interest rate risk. This
increase in swap income was partially offset by a reduction in interest income
due to investment security runoff.
Net loss for Other decreased $16 million in 1998, primarily due to a decline in
the allowance for credit losses not assigned to specific business lines. An
adjustment of $7 million, netted against noninterest expenses, was made to
eliminate the restructuring liability in 1998. Included in noninterest income
for 1997 is 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 in connection with Direction 2000.
TABLE 5: ANALYSIS OF INVESTMENT SECURITIES AND LOANS
December 31
(in millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale
U.S. government and agency securities $ 2,206 $ 3,239 $ 3,968 $ 6,038 $ 2,674
State and municipal securities 115 170 228 371 --
Other securities 391 597 604 450 232
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 2,712 4,006 4,800 6,859 2,906
Investment securities held to maturity
U.S. government and agency securities -- -- -- -- 4,462
State and municipal securities -- -- -- -- 422
Other securities -- -- -- -- 86
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity -- -- -- -- 4,970
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 2,712 $ 4,006 $ 4,800 $ 6,859 $ 7,876
===========================================================================================================================
Commercial loans $19,086 $15,805 $13,520 $12,041 $10,634
International loans
Government and official institutions 12 6 11 6 18
Banks and other financial institutions 433 339 323 583 660
Other 2,268 1,740 1,372 796 517
- ---------------------------------------------------------------------------------------------------------------------------
Total international loans 2,713 2,085 1,706 1,385 1,195
Real estate construction loans 1,080 941 751 641 414
Commercial mortgage loans 4,179 3,634 3,446 3,254 3,056
Residential mortgage loans 1,038 1,565 1,744 2,221 2,436
Consumer loans 1,862 4,348 4,634 4,570 4,215
Lease financing 647 517 406 330 259
- ---------------------------------------------------------------------------------------------------------------------------
Total loans $30,605 $28,895 $26,207 $24,442 $22,209
===========================================================================================================================
BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
Total assets were $36.6 billion at year-end 1998, representing a $0.3 billion
increase from $36.3 billion on December 31, 1997. On an average basis, total
assets remained relatively flat, with $35.0 billion in 1998, compared to $34.9
billion in 1997.
Earning Assets
Total earning assets were $33.4 billion at year-end 1998, representing a $0.3
billion increase from $33.1 billion at December 31, 1997. On an average basis,
total earning assets were $32.1 billion in 1998, compared to $32.0 billion in
1997. The average balance of commercial and commercial mortgage loans increased
$3.0 billion, or 17 percent, from 1997. Real estate construction loans rose an
average $123 million, or 14 percent in 1998. 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 5
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 $389 million, consisting largely of loans
originated to facilitate trade with limited cross-border risk. This growth
reflects the increasing global activity of the Corporation's traditional
customer base and an increased international presence. The Corporation
undertakes risk management practices to minimize risk inherent in international
lending arrangements. These practices 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
$576 million, or 1.57 percent of assets and Canadian cross-border risk of $380
million, or 1.04 percent of assets, were the only countries with exposure
exceeding 1.00 percent of assets at December 31, 1998. There were no countries
with exposure between 0.75 percent and 1.00 percent of total assets at year-end
1998. Canadian cross-border risk at year-end 1998 includes a $14 million loan on
nonaccrual status. Table 6 on page 32 provides additional information on the
Corporation's Mexican and Canadian cross-border risk.
Table 6: Mexican and Canadian Cross-Border Risk
Governments Banks and
December 31 and Official Other Financial Commercial
(in millions) Institutions Institutions and Industrial Total
- --------------------------------------------------------------------------------
Mexico 1998 $ 15 $214 $347 $576
1997 41 78 295 414
1996 192 26 50 268
- --------------------------------------------------------------------------------
Canada 1998 -- -- 380 380
1997 -- -- 256 256
1996 -- -- 128 128
- --------------------------------------------------------------------------------
Table 7: Loan Maturities and Interest Rate Sensitivity
After One
December 31, 1998 Within But Within After
(in millions) One Year* Five Years Five Years Total
- --------------------------------------------------------------------------------
Commercial loans $14,647 $3,518 $ 921 $19,086
Commercial mortgage loans 1,286 1,961 932 4,179
International loans 2,516 172 25 2,713
Real estate construction loans 730 267 83 1,080
- --------------------------------------------------------------------------------
Total $19,179 $5,918 $1,961 $27,058
================================================================================
Loans maturing after one year
Predetermined interest rates $2,735 $1,521
Floating interest rates 3,183 440
- --------------------------------------------------------------------------------
Total $5,918 $1,961
================================================================================
*Includes demand loans, loans having no stated repayment schedule or maturity
and overdrafts.
Table 8: Allocation of the Allowance for Credit Losses
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
December 31 Allocated of Total Allocated of Total Allocated of Total Allocated of Total Allocated of Total
(in millions) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic
Commercial $131 62% $ 94 55% $98 52% $118 49% $119 48%
Real estate
construction 4 4 7 3 6 3 5 3 6 2
Commercial
mortgage 21 14 18 13 27 13 33 13 35 14
Residential
mortgage -- 3 1 5 2 7 2 9 2 11
Consumer 48 6 116 15 120 18 84 19 60 19
Lease financing 6 2 1 2 1 1 1 1 1 1
International 17 9 5 7 3 6 2 6 3 5
Unallocated 225 -- 182 -- 110 -- 96 -- 100 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $452 100% $424 100% $367 100% $341 100% $326 100%
====================================================================================================================================
Average residential mortgage loans decreased $351 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 $1.9 billion, primarily as a result of the sale of $2.0
billion of indirect consumer loans and non-relationship bankcard receivables.
Average installment, revolving credit and bankcard loans decreased $1,611
million, $75 million and $225 million, respectively, during the period.
Average investment securities declined to $3.4 billion in 1998, compared to
$4.7 billion in 1997. This decline reflects 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
$955 million and average state and municipal securities decreased $58
million, while average other securities decreased $303 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 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.
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. Average short-term investments increased slightly to $143
million during 1998, from $129 million during 1997.
Table 9: Maturity Distribution of Domestic Certificates
of Deposit of $100,000 and Over
December 31
(in millions) 1998
- ---------------------------------------------------------------
Three months or less $1,619
Over three months to six months 323
Over six months to twelve months 324
Over twelve months 179
- ---------------------------------------------------------------
Total $2,445
===============================================================
DEPOSITS AND BORROWED FUNDS
Average deposits increased $307 million, or 1 percent, from 1997. Average
noninterest-bearing deposits grew $336 million, or 6 percent, from 1997,
largely due to the growth in related commercial loan business. Average
interest-bearing transaction, savings and money market deposits increased 4
percent during 1998, to $8.9 billion. Average certificates of deposit
decreased $332 million, or 4 percent, from 1997.
Average federal funds purchased and securities sold under agreements to
repurchase increased $493 million, or 24 percent, from 1997.
The Corporation uses 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 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. Medium-term debt decreased $2.2 billion, representing the
net result of the issuance of $3.0 billion and the maturity of $5.2 billion
of notes, during 1998. Long-term debt increased $231 million during 1998,
primarily from the issuance of $250 million of subordinated notes offset by
the maturity of $75 million of subordinated debentures. Further information
on medium- and long-term debt is included in Note 9 of the consolidated
financial statements on page 52.
The increases in average deposits, federal funds purchased and securities
sold under agreements to repurchase, and medium- and long-term debt balances
were offset by a decline of $891 million, or 49 percent, in other borrowed
funds. The decline in other borrowed funds was attributable to more
attractive short-term funding alternatives, such as federal funds purchased,
and the reduced availability of treasury tax and loan deposits.
CAPITAL
Shareholders' equity was $3.0 billion at December 31, 1998. Comerica
repurchased 2.3 million shares equaling $149 million of capital during 1998.
At December 31, 1998, the Corporation had remaining authorization to purchase
20 million shares of common stock.
Excluding share repurchases, the remaining change in capital is the net
effect of increases in capital from retained earnings of $391 million and $47
million of common stock issued for employee stock plans and a decrease of $5
million in nonowner equity, principally a change in value of
available-for-sale securities.
The Corporation declared common dividends totaling $199 million on net income
applicable to common stock of $590 million, representing a dividend payout
ratio of 34 percent. The payout ratio in 1997 was 36 percent. The Corporation
targeted a payout ratio between 30 to 40 percent, although the board of
directors constantly reassesses this target 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 paid April 1, 1998, as well as increased the quarterly cash dividend
12 percent to $0.32 per common share.
At December 31, 1998, 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 57 for the capital ratios.
RISK MANAGEMENT
The Corporation assumes various types of risk in the normal course of
business. The most significant risk exposures are credit, interest rate and
liquidity risk. In addition, like other large corporations, the Corporation
is exposed to operating risk. The Corporation employs risk management
processes to identify, measure, monitor and control these risks.
Credit Risk
Credit risk represents the risk that a customer or counterparty may not perform
in accordance with contractual terms. Credit risk is inherent in the financial
services business and results from extending credit to customers, purchasing
securities and entering into off-balance sheet financial derivative instruments.
Policies and procedures for measuring and managing this risk are formulated,
approved and communicated throughout the Corporation. Credit executives are
involved in the origination and underwriting process to ensure adherence to risk
policies and underwriting standards. The Corporation also manages credit risk
through diversification, limiting exposure to any single industry or customer,
selling participations to third parties and requiring collateral.
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, 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 to Loans and Other Real Estate
(in percentages)
[Graph Appears Here]
Industry Average
(Based on 50 Largest
Comerica U.S. Bank Holding Companies)
-------- ---------------------------
1994 0.92 1.67
1995 0.67 1.23
1996 0.53 0.79
1997 0.36 0.71
1998 0.39 0.73
Nonperforming assets as a percent of total loans and other real estate were
0.39 percent and 0.36 percent at year-end 1998 and 1997, respectively.
Nonaccrual loans at December 31, 1998, increased 38 percent to $108 million from
an unusually low amount of $78 million at year-end 1997.
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 $5 million, primarily due to the
sale of one large property.
Nonaccrual Loans
December 31
(dollar amounts in millions) 1998 1997
- --------------------------------------------------------------
Carrying value $108 $ 78
Contractual value 159 119
Carrying value as a percentage
of contractual value 68% 66%
==============================================================
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, 1998. These loans totaled
$4.6 billion, or 15 percent of total loans at December 31, 1998, versus $4.3
billion, or 15 percent, at December 31, 1997.
Table 10: 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, 1998 ------------------------------------------------------------------------------------- Maturity
(dollar amounts in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Yrs./Mos.
- ---------------------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 41 5.66% $ 21 5.40% $ -- --% $ -- --% $ 62 5.57% 1/0
U.S. government
and agency 31 6.58 74 7.63 809 6.21 1,230 6.53 2,144 6.45% 10/2
State and municipal
securities 32 6.39 56 6.45 21 6.11 6 6.38 115 6.37 3/1
Other bonds, notes
and debentures 15 12.84 168 8.22 74 8.05 48 8.18 305 8.41 6/2
Federal Reserve
Bank stock and
other investments* -- -- -- -- -- -- -- -- 86 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment
securities available
for sale $ 119 6.88% $ 319 7.59% $ 904 6.36% $1,284 6.59% $2,712 6.65% 9/2
=================================================================================================================================
*Balances are excluded in the calculation of total yield.
+Based on final contractual maturity.
Table 11: Summary of Nonperforming Assets and Past Due Loans
December 31
(dollar amounts in millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets
Nonaccrual loans
Commercial loans $ 77 $ 59 $ 72 $ 87 $ 89
International loans 20 1 -- -- --
Real estate construction loans 1 3 3 7 17
Real estate mortgage loans (principally commercial) 10 15 28 37 56
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 108 78 103 131 162
Reduced-rate loans 8 8 8 3 2
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 116 86 111 134 164
Other real estate 5 17 29 29 40
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 121 $ 103 $ 140 $ 163 $ 204
=================================================================================================================================
Nonperforming loans as a percentage of total loans 0.38% 0.30% 0.42% 0.55% 0.74%
Nonperforming assets as a percentage of total loans
and other real estate 0.39% 0.36% 0.53% 0.67% 0.92%
Allowance for credit losses as a percentage of total
nonperforming assets 375% 413% 263% 209% 160%
Loans past due 90 days or more and still accruing $ 40 $ 53 $ 52 $ 57 $ 39
=================================================================================================================================
These totals include floor plan loans to automobile dealers of $1,454 million
and $1,408 million at December 31, 1998 and 1997, respectively. All other
industry concentrations individually represented less than 5 percent of total
loans at year-end 1998.
The Corporation has successfully operated in the Michigan economy in spite of
a loan concentration and several downturns in the auto industry. The largest
automotive industry loan on nonaccrual status at December 31, 1998, was $13
million. There were no other automotive industry-related loans larger than $3
million on nonaccrual status as of year-end 1998. The Corporation incurred $6
million of automotive industry-related charge-offs during 1998.
Commercial Real Estate Lending
The real estate construction loan portfolio contains loans primarily made to
customers with satisfactory project completion experience. The portfolio has
approximately 1,069 loans, of which 74 percent have balances of less than $1
million. The largest real estate construction loan has a balance of
approximately $20 million.
The commercial mortgage loan portfolio, 56 percent of which relates to
owner-occupied properties, also consists primarily of loans to long-time
customers. Of the approximately 7,071 loans in the portfolio, 87 percent have
balances under $1 million and the largest loan has a balance of approximately
$30 million. Additionally, the Corporation's policy requires a 75 percent or
less loan-to-value 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 factor in evaluating credit
risk. The following table indicates the diversification of the portfolios
throughout the markets served by the Corporation.
Geographic Distribution
December 31, 1998 Real Estate Commercial
(in millions) Construction Mortgage
- --------------------------------------------------------------------
Michigan $ 460 $2,540
California 170 706
Texas 328 440
Florida 66 150
Other 56 343
- --------------------------------------------------------------------
Total $1,080 $4,179
====================================================================
Interest Rate Risk
Interest rate risk arises primarily through the Corporation's core business
activities of extending loans and taking deposits. The Corporation actively
manages its material exposure to interest rate risk. The principal objective of
asset and liability management is to maximize net interest income while
operating within acceptable limits established for interest rate risk and
maintaining adequate levels of funding and liquidity. The Corporation utilizes
various on- and off-balance sheet financial instruments to manage the extent to
which net interest income may be affected by fluctuations in interest rates. The
Asset Liability Policy Committee (ALPC) establishes and the board of directors
approve corporate policies and risk limits pertaining to asset and liability
management activities. The ALPC monitors compliance with these policies, and is
comprised of executive and senior management from various areas of the
Corporation, including finance, lending, investments and deposit gathering. The
ALPC meets regularly to discuss 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 ALPC regularly reviews the results of these interest rate risk
measurements.
The Corporation frequently evaluates net interest income under various balance
sheet and interest rate scenarios. The results of these analyses provide the
information needed to assess the proper balance sheet structure. An unexpected
change in 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 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 1998
for a 200-basis-point decline in short-term interest rates identified
approximately $72 million of net interest income at risk during 1999. If short-
term interest rates rise 200 basis points, the Corporation would have
approximately $49 million of net interest income benefit. Year-end 1997 net
interest income at risk was measured at $35 million for a 200-basis-point
decline in interest rates and $22 million for a 200-basis-point 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, anticipated
interest rate levels and yield curve differences create faster amortization on
certain loans, securities and interest rate swaps in the 1998 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.
Most assets and liabilities reprice either at maturity or in accordance with
their contractual terms. However, several balance sheet components demonstrate
characteristics that require adjustments to more accurately reflect repricing
and cash flow behavior. Assumptions based on historical pricing relationships
and anticipated market reactions are made to certain core deposit categories to
reflect the elasticity of the changes in the related interest rates relative to
changes in market interest rates. In addition, estimates are made concerning
early loan and security repayments. Prepayment assumptions are based on the
expertise of portfolio managers along with input from financial markets.
Consideration is given to current and future interest rate levels. While
management recognizes the limited ability of a traditional gap schedule to
accurately portray interest rate risk, adjustments are made to provide a more
accurate picture of the Corporation's interest rate risk profile. This
additional interest rate risk measurement tool provides a directional outlook on
the impact of changes in interest rates.
As market rates approach expected turning points, management adjusts the
interest rate sensitivity. 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 38 shows the interest sensitivity gap as of year-end 1998
and 1997. 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 $540 million of rate sensitivity to the 1998
year-end gap. In addition, the schedule identifies the adjustment for the
price elasticity on certain core deposits.
The Corporation remained asset sensitive throughout 1998, as asset
sensitivity generated by the consumer divestitures cited previously and
continued investment security amortization was primarily hedged through the
use of interest rate swaps. The Corporation had a one-year asset sensitive
gap of $2,111 million, or 6 percent of earning assets, as of December 31,
1998. This compares to a $1,156 million asset sensitive gap, or 3 percent of
earning assets, on December 31, 1997. Management anticipates continued
material growth in asset sensitivity throughout 1999, and will analyze 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 objective of managing the
sensitivity of net interest income to changes in interest rates. To
accomplish this objective, the Corporation uses interest rate swaps primarily
to modify the interest rate characteristics of certain assets and liabilities
(e.g., from a floating rate to a fixed rate, 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.
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, 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
Additions 3,402 7,218 10,620
Maturities/amortizations (4,330) (6,904) (11,234)
Terminations (755) -- (755)
- -----------------------------------------------------------------
Balances at December 31, 1998 $ 6,884 $ 913 $ 7,797
=================================================================
The notional amount of risk management interest rate swaps totaled $6,869
million at December 31, 1998, and $8,515 million at December 31, 1997. The fair
value of risk management interest rate swaps at December 31, 1998, was a
positive $146 million, compared to a positive $123 million at December 31, 1997.
For the year ended December 31, 1998, risk management interest rate swaps
generated $46 million in net interest income, compared to $51 million in net
interest income for the year ended December 31, 1997. These off-balance sheet
instruments represented 75 percent of total derivative financial instruments and
foreign exchange contracts, including commitments, at year-end 1998 and 74
percent at year-end 1997.
The table on page 39 summarizes the expected maturity distribution of the
notional amount of risk management interest rate swaps and provides the weighted
average interest rates associated with amounts to be received or paid as of
December 31, 1998. The swaps have been grouped by the assets and liabilities to
which they have been designated.
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 and mortgages held for sale). 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, 1998 and 1997, were $928
million and $651 million, respectively.
Further information regarding risk management financial instruments and
foreign currency exchange contracts is provided in Notes 1, 9, 18 and 25.
Table 12: Schedule of Rate Sensitive Assets and Liabilities
December 31, 1998 December 31, 1997
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 $ -- $ 1,773 $ 1,773 $ -- $ 1,927 $ 1,927
Short-term investments 103 7 110 196 7 203
Investment securities 881 1,831 2,712 1,223 2,783 4,006
Commercial loans
(including lease financing) 17,555 2,178 19,733 14,742 1,580 16,322
International loans 2,713 -- 2,713 2,085 -- 2,085
Real estate related loans 3,856 2,441 6,297 3,907 2,233 6,140
Consumer loans 1,044 818 1,862 2,100 2,248 4,348
- --------------------------------------------------------------------------------------------------
Total loans 25,168 5,437 30,605 22,834 6,061 28,895
Other assets 618 783 1,401 742 519 1,261
- --------------------------------------------------------------------------------------------------
Total assets $26,770 $ 9,831 $36,601 $24,995 $11,297 $36,292
==================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $ 1,451 $ 5,548 $ 6,999 $ 459 $ 6,302 $ 6,761
Savings -- 1,533 1,533 -- 1,601 1,601
Money market and NOW 5,991 1,901 7,892 5,570 1,724 7,294
Certificates of deposit 5,275 1,232 6,507 5,562 1,059 6,621
Foreign office 1,382 -- 1,382 309 -- 309
- --------------------------------------------------------------------------------------------------
Total deposits 14,099 10,214 24,313 11,900 10,686 22,586
Short-term borrowings 3,580 -- 3,580 3,193 -- 3,193
Medium- and long-term debt 3,771 1,511 5,282 5,961 1,325 7,286
Other liabilities 64 315 379 149 316 465
- --------------------------------------------------------------------------------------------------
Total liabilities 21,514 12,040 33,554 21,203 12,327 33,530
Shareholders' equity (8) 3,055 3,047 (1) 2,763 2,762
- --------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $21,506 $15,095 $36,601 $21,202 $15,090 $36,292
==================================================================================================
Sensitivity impact of interest
rate swaps (5,549) 5,549 -- (4,377) 4,377 --
- --------------------------------------------------------------------------------------------------
Interest sensitivity gap (285) 285 -- (584) 584 --
Gap as a percentage of earning
assets (1)% 1% -- (2)% 2% --
Sensitivity impact from
elasticity adjustments (1) 2,396 (2,396) -- 1,740 (1,740) --
- --------------------------------------------------------------------------------------------------
Interest sensitivity gap with
elasticity adjustments $ 2,111 $(2,111) -- $ 1,156 $(1,156) --
Gap as a percentage of earning
assets 6% (6)% -- 3% (3)% --
==================================================================================================
(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.
Table 13: Remaining Expected Maturity of Risk Management Interest Rate Swaps
2004- Dec. 31
(dollar amounts in millions) 1999 2000 2001 2002 2003 2026 Total 1997
- -----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET DESIGNATION:
Receive fixed swaps
Generic $ -- $ 700 $ 3,250 $ -- $ -- $ -- $ 3,950 $ 700
Amortizing -- -- -- -- -- -- -- 100
Index amortizing 1,221 573 133 182 60 -- 2,169 3,504
Weighted average: (1)
Receive rate 6.35% 6.35% 5.72% 6.49% 6.14% --% 6.01% 6.33%
Pay rate 5.34% 5.33% 5.26% 5.52% 5.58% --% 5.30% 5.90%
Floating/floating swaps $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 55
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE ASSET DESIGNATION:
Pay fixed swaps
Generic $ 2 $ -- $ -- $ -- $ -- $ -- $ 2 $ 2
Index amortizing 4 7 -- -- -- -- 11 17
Weighted average: (1)
Receive rate 5.44% 5.62% --% --% --% --% 5.54% 5.97%
Pay rate 6.55% 5.34% --% --% --% --% 5.88% 5.85%
- -----------------------------------------------------------------------------------------------------------------------------------
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive fixed swaps $ -- $ 200 $ -- $ 150 $ -- $ 350 $ 700 $2,200
Weighted average: (1)
Receive rate --% 6.91% --% 7.37% --% 7.56% 7.33% 6.84%
Pay rate --% 5.26% --% 5.16% --% 5.34% 5.28% 5.83%
Floating/floating swaps $ -- $ 37 $ -- $ -- $ -- $ -- $ 37 $1,937
Weighted average: (2)
Receive rate --% 4.98% --% --% --% --% 4.98% 5.73%
Pay rate --% 5.19% --% --% --% --% 5.19% 5.77%
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $1,227 $ 1,517 $3,383 $ 332 $ 60 $ 350 $ 6,869 $8,515
===================================================================================================================================
(1) Variable rates paid or received are based primarily on one-month and
three-month LIBOR rates paid or received at December 31, 1998.
(2) Variable rates paid are based on LIBOR at December 31, 1998, while variable
rates received are based on prime.
Customer-Initiated and Other Derivative Financial
Instruments and Foreign Exchange Contracts
Customer-Initiated and Other Notional Activity
Interest Foreign
Rate Exchange
(in millions) Contracts Contracts Totals
- ----------------------------------------------------------------------------
Balances at December 31, 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
Additions 417 36,171 36,588
Maturities/amortizations (232) (37,335) (37,567)
- ----------------------------------------------------------------------------
Balances at December 31, 1998 $ 681 $ 673 $ 1,354
============================================================================
On a limited basis, the Corporation writes interest rate caps and enters into
foreign exchange contracts and interest rate swaps to accommodate the needs of
customers requesting such services. At December 31, 1998 and 1997, customer-
initiated activity represented 15 percent and 20 percent, respectively, of total
derivative and foreign exchange contracts, including commitments. Refer to Note
18 on page 57 for further information regarding customer-initiated and other
derivative financial instruments and foreign exchange contracts.
Liquidity Risk
Liquidity is the ability to meet financial obligations through the maturity
or sale of existing assets or acquisition of additional funds. Liquidity
requirements are satisfied with various funding sources, including a $7.5
billion medium-term note program which allows the Michigan, California and
Texas banks to issue debt with maturities between one month and 15 years. The
Michigan bank has an additional $2 billion European note program. At year-end
1998, unissued debt related to the two programs totaled $5.7 billion. In
addition, liquid assets totaled $4.6 billion, at December 31, 1998. The
Corporation also had available $1.9 billion from a collateralized borrowing
account with the Federal Reserve Bank at year-end 1998. Purchased funds at
December 31, 1998, excluding certificates of deposit with maturities beyond
one year and medium- and long-term debt, approximated $7.2 billion.
The parent company had available a $250 million commercial paper facility at
December 31, 1998, all of which was unused. Another source of liquidity for
the parent company is dividends from its subsidiaries. As discussed in Note
17 on page 57, subsidiary banks are subject to regulation and may be limited
in their ability to pay dividends or transfer funds to the holding company.
During 1999, the subsidiary banks can pay dividends up to $543 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, 1998, the ratio
was 108 percent.
Operational Risk
Operational risk is the risk of unexpected losses attributable to human
error, system failures, fraud, unauthorized transactions and inadequate
internal controls and procedures. The Corporation mitigates this risk through
a system of internal controls that are designed to keep operating risks at
appropriate levels. The Corporation's internal audit staff monitors and
assesses the overall effectiveness of the system of internal controls on an
ongoing basis and provides an opinion on the environment to management and
the Audit Committee. Companies experience operational losses which are
routinely incurred in business operations.
Comerica has established an Operational Risk Committee comprised of
executives from several disciplines. This group is charged with surfacing
significant operational risks which may impact customer service, reputation
or result in financial loss if not adequately addressed.
The internal audit staff independently supports an active Audit Committee
oversight process. The Audit Committee serves as an independent extension of
the Board of Directors. Routine and special meetings are scheduled
periodically to provide detail on relevant operational risks.
Other Matters
The Corporation initiated a company-wide project to prepare its computer
systems, applications and infrastructure for year 2000 readiness. The
following discussion of the implications of the year 2000 issue for the
Corporation contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the planned date to
complete the internal year 2000 modifications are based on management's best
estimates, derived utilizing a number of assumptions of future events such as
the continued availability of internal and external resources, including
employees, third party modifications and other factors. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ.
In addition, the Corporation places a high degree of reliance on the computer
systems of third parties, such as customers, suppliers, and other financial
and governmental institutions. Although the Corporation is assessing the
readiness of these third parties and has prepared contingency plans, there
can be no guarantee that business-critical third party vendors or other
significant third parties, such as public utilities, will adequately address
their year 2000 issues.
Readiness Preparation
Comerica will be ready to conduct business in the year 2000. The Corporation
established an extensive enterprise-wide and centrally managed year 2000 program
in early 1996. The year 2000 team includes the active involvement of senior
executives as well as seasoned project managers and business unit liaisons from
throughout the company. The Corporation is evaluating and monitoring the year
2000 readiness of vendors, customers and third party processors. At Comerica,
completing a successful year 2000 program is our top priority so that the
arrival of the 21st century will be a celebration of quality customer service.
Many factors can affect a company's ability to deliver quality services at any
given time. While we will be "ready" to do business in the year 2000, we of
course cannot guarantee that our services will be uninterrupted due to the
century date change or otherwise. To minimize customer service disruptions, the
Corporation has implemented a no-vacation policy for the entire organization
from December 27, 1999, through January 31, 2000. Additional guidelines are
being implemented within business units prior- and post-event as required.
The Corporation's year 2000 program is comprised of numerous individual projects
which address the following broad areas: data processing systems,
telecommunications and data networks, building facilities and security systems,
vendor risk, customer risk, contingency planning and communications. All mission
critical applications and services were significantly year 2000 ready as of
December 31, 1998, with the remaining systems planned for completion prior to
the end of 1999. As of December 31, 1998, the Corporation has completed 75
percent of remediation effort and 45 percent of testing.
The Corporation has a major focus on completing testing for all components,
having in place what is believed to be an extensive testing methodology,
validation and verification process. To alleviate disruptions due to errors,
state of the art data aging and testing tools are being utilized to validate
year 2000 readiness for applications. The year 2000 program utilizes Comerica's
Year 2000 Testing and Clean Management Guidelines for all components. The
Corporation plans to conduct a complete systems test in the second quarter of
1999 to validate its findings. Furthermore, the Corporation is documenting
contingency plans for all business critical applications to minimize any
disruptions to customer service caused by year 2000 issues.
The Corporation does not significantly rely on embedded technology in its
critical processes. Embedded technology does control some building security and
operations such as power management, ventilation and elevator control. Building
facilities are presently being evaluated, and it is management's plan to confirm
year 2000 readiness or replace the embedded technology by approximately June 30,
1999.
Customers and vendors who have significant relationships with the Corporation
continue to be evaluated to determine their preparation and readiness for the
year 2000. The potential failure of those customers to be adequately prepared
for year 2000 is included in management's credit and review process used to
establish loss reserves. A high level risk reduction strategy is being
implemented to manage and mitigate risks to our asset/liability position. There
can be no guarantee that the remediation of the systems of the Corporation's
vendors or customers will be completed on a timely basis.
The Corporation relies on suppliers and customers for certain information
processing services, and is addressing year 2000 issues with both groups.
Management has identified critical vendors and inquired as to their year 2000
readiness plans and status. The Corporation has completed written risk
assessments on each and has asked those found to pose a significant risk to
demonstrate how risks will be addressed. Measures to minimize risk are being
undertaken with those that appear to pose a significant risk. There may be
certain business-critical third parties, such as utilities or telecommunication
companies, where alternative arrangements or sources are limited or unavailable.
The Corporation is also reliant on its customers to make the necessary
preparations for year 2000 so that their business operations will not be
interrupted, as an interruption could threaten their ability to honor financial
commitments. The Corporation identified borrowers, capital market
counterparties, funding sources and large depositors having financial volumes
sufficiently large to warrant inquiry as to year 2000 preparation. Written risk
assessments have been completed on each. Customers found to have a significant
risk of not being ready for year 2000 are encouraged to make the necessary
effort. The Corporation is undertaking measures to minimize risk with those that
appear to pose a significant risk.
Comerica's senior executives, the board of directors and a project steering
committee regularly review the year 2000 program and its progress. In addition,
the federal and state agencies that regulate the banking industry regularly
monitor our year 2000 program.
Cost
Included in the Corporation's estimate of year 2000 project cost are internal
and external development costs, asset impairment write-offs and the cost of
software and hardware for systems that are not ready, or would not have been
ready by the new century as a result of normal replacement. The Corporation's
current estimate is that year 2000 project cost, both internal and external,
will total approximately $50 million, of which the Corporation incurred
approximately $21 million in 1996, 1997 and 1998. The increase in the total
estimate from previously reported numbers relates primarily to costs, not yet
incurred, associated with expansion of the scope for personal computers and
recently approved enhancements to the year 2000 retention incentive plan. Of
the $21 million incurred to date, $5 million was for capital assets which the
Corporation is expensing over their useful lives. The Corporation will fund
the remaining year 2000 costs yet to be incurred by normal operating cash
flow. The project is staffed with external resources as well as internal
staff redeployed from less time-sensitive assignments. The Corporation does
not believe the redeployment of existing staff will have a material adverse
effect on its business, results of operations or financial position.
Approximately $8 million of the remaining cost is for capital assets which
will be expensed over their useful lives. Estimated total project cost could
change further as efforts continue.
Risks
The Corporation has grouped the principal risks associated with the year 2000
problem into three categories. The first is the risk that the Corporation does
not successfully ready operations for the year 2000. The Corporation, like other
financial institutions, is heavily dependent on computer systems. The complexity
of these systems and dependence on one another makes it impossible to switch to
other systems immediately as would be required if necessary corrections were not
made in advance. Management believes it will be able to make the necessary
corrections in advance.
Computer failure of third parties may jeopardize the Corporation's operations,
but how seriously depends on the nature and duration of such failures. The most
serious impact on the Corporation's operations from suppliers would result if
basic services such as telecommunications, electric power suppliers, and
services provided by other financial institutions and governmental agencies were
disrupted. Significant public disclosure of the state of readiness among basic
infrastructure and other suppliers has not generally been available. Although
inquiries are underway, the Corporation does not yet have sufficient information
to estimate the likelihood of significant disruptions among its suppliers.
Operational failures among the Corporation's sources of major funding, larger
borrowers and capital market counterparties could affect their ability to
continue to provide funding or meet obligations when due. Similar to the
situation outlined above with suppliers, public information has not generally
been available. At this time, it is not possible to accurately estimate the
likelihood, or potential impact, of significant disruptions among the
Corporation's funding sources and obligors.
Contingency Plans
The Corporation is developing remediation contingency plans and business
resumption contingency plans specific to the year 2000. Remediation contingency
plans address the actions to be taken if the current approach to remediating a
system is falling behind schedule or otherwise appears in jeopardy of failing to
deliver a year 2000 ready system when needed. Business resumption contingency
plans address the actions that would be taken if critical business functions can
not be carried out in the normal manner due to system or supplier failure.
The Corporation developed remediation contingency plans with trigger dates for
review and implementation for critical data systems. The Corporation is also
enhancing its existing business resumption plans to reflect year 2000 issues and
is developing plans designed to coordinate the efforts of its personnel and
resources in addressing any year 2000 problems that become known after December
31, 1999.
This annual report to shareholders includes forward-looking statements based on
management's current expectations and/or the assumptions made in the earnings
simulation analysis. Numerous factors could cause variances in these
projections, and their underlying assumptions, such as changes in interest
rates, the industries where the Corporation has a concentration of loans,
changes in the level of fee income, year 2000 expenses, economic conditions and
continuing consolidation in the banking industry.
Consolidated Balance Sheets
Comerica Incorporated and Subsidiaries
December 31
(in thousands, except share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,773,100 $ 1,927,087
Short-term investments 109,640 202,957
Investment securities available for sale 2,712,165 4,005,962
Commercial loans 19,086,541 15,805,549
International loans 2,713,259 2,085,090
Real estate construction loans 1,079,614 940,910
Commercial mortgage loans 4,179,271 3,633,785
Residential mortgage loans 1,037,941 1,565,445
Consumer loans 1,861,630 4,347,665
Lease financing 646,607 516,600
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 30,604,863 28,895,044
Less allowance for credit losses (452,409) (424,147)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 30,152,454 28,470,897
Premises and equipment 352,650 380,157
Customers' liability on acceptances outstanding 12,335 18,392
Accrued income and other assets 1,488,487 1,286,946
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 36,600,831 $ 36,292,398
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,999,337 $ 6,761,202
Interest-bearing deposits 17,313,796 15,825,115
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 24,313,133 22,586,317
Federal funds purchased and securities sold
under agreements to repurchase 3,108,985 592,860
Other borrowed funds 471,168 2,600,041
Acceptances outstanding 12,335 18,392
Accrued expenses and other liabilities 366,338 446,625
Medium- and long-term debt 5,282,259 7,286,387
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 33,554,218 33,530,622
Nonredeemable preferred stock--$50 stated value
Authorized--5,000,000 shares
Issued--5,000,000 shares in 1998 and 1997 250,000 250,000
Common stock--$5 par value
Authorized--325,000,000 shares
Issued--157,233,088 shares in 1998 and 156,815,367 shares in 1997 786,165 784,077
Capital surplus 24,649 --
Unrealized net losses on investment securities available for sale (6,455) (1,937)
Retained earnings 2,086,589 1,731,419
Deferred compensation (5,202) (1,783)
Less cost of common stock in treasury--1,351,997 shares in 1998 (89,133) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,046,613 2,761,776
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 36,600,831 $ 36,292,398
====================================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31
(in thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $2,382,329 $2,317,844 $ 2,160,981
Interest on investment securities
Taxable 218,378 310,399 372,331
Exempt from federal income tax 7,252 10,797 17,443
- -------------------------------------------------------------------------------------------------------------------------
Total interest on investment securities 225,630 321,196 389,774
Interest on short-term investments 8,815 8,363 12,025
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 2,616,774 2,647,403 2,562,780
INTEREST EXPENSE
Interest on deposits 647,825 673,265 685,539
Interest on short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 136,616 110,752 111,729
Other borrowed funds 49,095 98,258 107,155
Interest on medium- and long-term debt 367,777 374,022 294,990
Net interest rate swap income (45,810) (51,670) (48,911)
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,155,503 1,204,627 1,150,502
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 1,461,271 1,442,776 1,412,278
Provision for credit losses 113,000 146,000 114,000
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit
losses 1,348,271 1,296,776 1,298,278
NONINTEREST INCOME
Fiduciary and investment management income 184,354 147,336 133,482
Service charges on deposit accounts 157,416 141,078 140,436
Commercial lending fees 43,326 31,342 23,249
Securities gains 6,116 5,195 13,588
Other noninterest income 211,936 203,001 196,199
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 603,148 527,952 506,954
NONINTEREST EXPENSES
Salaries and employee benefits 565,303 538,926 560,784
Net occupancy expense 89,911 89,380 99,211
Equipment expense 60,147 61,759 68,827
Outside processing fee expense 42,785 41,683 42,481
Restructuring charge (6,840) -- 90,000
Other noninterest expenses 268,738 276,238 297,723
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,020,044 1,007,986 1,159,026
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 931,375 816,742 646,206
Provision for income taxes 324,299 286,266 229,045
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 607,076 $ 530,476 $ 417,161
=========================================================================================================================
Net income applicable to common stock $ 589,976 $ 513,376 $ 408,136
=========================================================================================================================
Basic net income per common share $3.79 $3.24 $2.41
Diluted net income per common share 3.72 3.19 2.38
Cash dividends declared on common stock $ 199,403 $ 181,272 $ 170,067
Dividends per common share $1.28 $1.15 $1.01
- -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMERICA INCORPORATED AND SUBSIDIARIES
Unrealized
Gains and
(Losses) on
Non- Investment
redeemable Securities
Preferred Common Capital Available Retained Deferred
(in thousands, except share data) Stock Stock Surplus for Sale Earnings Compensation
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 1996 $ -- $ 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 -- -- -- 37,275 -- --
Less: Reclassification
adjustment for
gains/(losses) included
in net income -- -- -- 5,195 -- --
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 -- -- -- -- (181,272) --
Purchase and retirement of
3,618,479 shares of
common stock -- (18,092) (30,750) -- (193,451) --
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)
Net income for 1998 -- -- -- -- 607,076 --
Nonowner changes in equity:
Unrealized holding
gains/(losses) arising
during the period -- -- -- (835) -- --
Less: Reclassification
adjustment for
gains/(losses) included
in net income -- -- -- 6,116 -- --
Nonowner changes in equity -------
before income taxes -- -- -- (6,951) -- --
Provision for income taxes
related to nonowner changes
in equity -- -- -- (2,433) -- --
Nonowner changes in equity, -------
net of tax -- -- -- (4,518) -- --
Net income and nonowner
changes in equity -- -- -- -- -- --
Cash dividends declared:
Preferred stock -- -- -- -- (17,100) --
Common stock -- -- -- -- (199,403) --
Purchase and retirement of
60,000 shares of common stock -- (300) (3,182) -- -- --
Purchase of 2,199,650 shares
of common stock -- -- -- -- -- --
Issuance of common stock
under employee stock plans -- 2,388 27,831 -- (35,403) (4,604)
Amortization of deferred
compensation -- -- -- -- -- 1,185
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 $ 250,000 $ 786,165 $ 24,649 $ (6,455) $ 2,086,589 $ (5,202)
============================================================================================================================
Total
Treasury Shareholders'
Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 1996 $ (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 -- 37,275
Less: Reclassification
adjustment for
gains/(losses) included
in net income -- 5,195
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 -- (181,272)
Purchase and retirement of 3,618,479
shares of common stock -- (242,293)
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
Net income for 1998 -- 607,076
Nonowner changes in equity:
Unrealized holding
gains/(losses) arising
during the period -- (835)
Less: Reclassification
adjustment for
gains/(losses) included
in net income -- 6,116
Nonowner changes in
equity before income taxes -- (6,951)
Provision for income taxes
related to nonowner changes in equity -- (2,433)
Nonowner changes in equity, ---------
net of tax -- (4,518)
---------
Net income and nonowner changes in equity -- 602,558
Cash dividends declared:
Preferred stock -- (17,100)
Common stock -- (199,403)
Purchase and retirement of 60,000
shares of common stock -- (3,482)
Purchase of 2,199,650 shares (145,202) (145,202)
of common stock
Issuance of common stock
under employee stock plans 56,069 46,281
Amortization of deferred compensation -- 1,185
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 $ (89,133) $3,046,613
============================================================================================================================
( ) Indicates deduction.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 607,076 $ 530,476 $ 417,161
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 113,000 146,000 114,000
Depreciation 57,633 58,529 66,776
Restructuring charge (21,923) (61,237) 90,000
Net (increase) decrease in trading account securities 2,796 (3,093) 4,659
Net (increase) decrease in loans held for sale (5,236) (2,666) 473,493
Net (increase) decrease in accrued income receivable 19,487 (23,730) 924
Net increase (decrease) in accrued expenses 2,973 54,330 (39,720)
Net amortization of intangibles 30,414 28,375 30,803
Funding for employee benefit plans -- -- (25,000)
Other, net (116,295) (134,982) 187,438
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 82,849 61,526 903,373
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 689,925 592,002 1,320,534
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks (1,184) 24,010 (3,705)
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell 96,941 (117,601) 4,898
Proceeds from sale of investment securities available for sale 111,511 238,506 1,211,250
Proceeds from maturity of investment securities available for sale 1,209,291 1,456,447 1,531,012
Purchases of investment securities available for sale (126,239) (924,509) (643,796)
Net increase in loans (other than loans purchased) (3,768,220) (2,615,226) (1,852,199)
Purchase of loans (1,115) (162,128) (77,805)
Fixed assets, net (35,609) (31,023) (46,038)
Net (increase) decrease in customers' liability on acceptances outstanding 6,057 14,710 (12,341)
Net cash provided by acquisitions/sales 1,878,907 -- 200,459
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (629,660) (2,116,814) 311,735
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,726,816 219,144 (825,859)
Net increase (decrease) in short-term borrowings 387,252 (1,296,290) (129,056)
Net increase (decrease) in acceptances outstanding (6,057) (14,710) 12,341
Proceeds from issuance of medium- and long-term debt 3,200,000 5,600,000 2,251,000
Repayments and purchases of medium- and long-term debt (5,212,498) (2,555,382) (2,553,650)
Proceeds from issuance of preferred stock -- -- 246,744
Proceeds from issuance of common stock 50,885 35,082 35,206
Purchase of common stock for treasury and retirement (148,684) (242,293) (622,196)
Dividends paid (211,966) (195,412) (173,414)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (214,252) 1,550,139 (1,758,884)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (153,987) 25,327 (126,615)
Cash and due from banks at beginning of year 1,927,087 1,901,760 2,028,375
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,773,100 $ 1,927,087 $ 1,901,760
========================================================================================================================
Interest paid $ 1,188,599 $ 1,161,812 $ 1,201,146
========================================================================================================================
Income taxes paid $ 256,880 $ 266,428 $ 212,530
========================================================================================================================
Noncash investing and financing activities
Loan transfers to other real estate $ 5,084 $ 7,076 $ 10,534
========================================================================================================================
Stock issued for acquisitions $ -- $ -- $ 128,938
========================================================================================================================
See notes to consolidated financial statements.
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 18
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 CREDIT LOSSES
The allowance for credit losses reflects management's assessment of possible
losses inherent in the Corporation's on- and off-balance sheet credit portfolio.
The allowance for credit losses attributable to the off-balance sheet credit
portfolio is not material. The allowance for credit losses is allocated to each
loan category based on a defined methodology, which has been in use, without
material change, for several years. First, an internal risk rating is assigned
to each commercial loan. Included in that risk rating is management's assessment
of the potential failure of a customer to be adequately prepared for the year
2000, but only in those instances where management has significant information
that a customer may not be adequately prepared. Management then assigns a
projected loss ratio to each risk rating based on numerous factors identified
below. A detailed credit quality review is performed quarterly on certain
commercial loans which have deteriorated below certain levels of credit risk,
resulting in an additional allocation of a specific portion of the allowance to
such loans. The portion of the allowance allocated to consumer loans is
determined by applying projected loss ratios to various segments of the loan
portfolio. Projected loss ratios incorporate factors such as recent loan loss
experience, current economic conditions and trends, 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, actual loss ratios experienced in the future could vary from
those projected. This uncertainty occurs because a loan's performance depends,
not only on economic factors, but also other factors unique to each customer. In
addition, the significant diversity in size of corporate loans means that even
if the projected number of loans deteriorate, the dollar exposure could
significantly vary from estimated amounts. Management also considers industry
norms, and the expectations and input from rating agencies and banking
regulators in determining the adequacy of the allowance. Loans which are deemed
uncollectible are charged off and deducted from the allowance. The provision for
credit losses and recoveries on loans previously charged off are added to the
allowance.
- --------------------------------------------------------------------------------
1 ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the terms have been renegotiated to less
than market rates due to a serious weakening of the borrower's financial
condition and other real estate which has been acquired primarily through
foreclosure and is awaiting disposition.
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. Other real estate acquired is carried at the lower of
cost or fair value, minus estimated costs to sell. When the property is acquired
through foreclosure, any excess of the related loan balance over fair value is
charged to the allowance for credit losses. Subsequent write-downs, operating
expenses and losses upon sale, if any, are charged to noninterest expenses.
STOCK-BASED COMPENSATION
The Corporation elected to continue to apply Accounting Principles Board 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 Statement on Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-based Compensation." 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 noninterest 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 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 45. The caption "Net income and nonowner changes in
equity," represents total comprehensive income as defined in the statement.
- --------------------------------------------------------------------------------
2 ACQUISITIONS
- --------------------------------------------------------------------------------
During 1998, Comerica obtained a majority interest in Munder Capital Management,
an investment advisory firm. Net income for the third and fourth quarter of 1998
includes the consolidated financial results of Munder. The Corporation's
minority interest in periods prior to the third quarter of 1998 was accounted
for under the equity method. Intangible assets increased $133 million as a
result of the consolidation. The fair market value of total assets acquired and
total liabilities assumed was not material.
During 1996, Comerica acquired Metrobank, which was accounted for as a purchase.
The fair market value of both total assets acquired and total liabilities
assumed was $1 billion. The purchase price of the transaction totaled $125
million. Intangible assets recorded were $62 million.
- --------------------------------------------------------------------------------
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, 1998
U.S. government
and agency
securities $ 2,196,736 $ 13,463 $ 3,993 $ 2,206,206
State and municipal
securities 110,711 4,587 48 115,250
Other securities 415,901 2,129 27,321 390,709
- --------------------------------------------------------------------------------
Total securities
available
for sale $ 2,723,348 $ 20,179 $ 31,362 $ 2,712,165
================================================================================
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
================================================================================
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, 1998 Estimated
(in thousands) Cost Fair Value
- --------------------------------------------------------------------------------
Contractual maturity
Within one year $ 86,471 $ 86,698
Over one year to
five years 229,832 232,735
Over five years to
ten years 104,535 94,834
Over ten years 58,508 44,343
- --------------------------------------------------------------------------------
Subtotal securities 479,346 458,610
Mortgage-backed
securities 2,158,400 2,167,837
Equity and other
nondebt securities 85,602 85,718
- --------------------------------------------------------------------------------
Total securities
available for sale $ 2,723,348 $ 2,712,165
================================================================================
Sales and calls of investment securities available for sale resulted in realized
gains and losses as follows:
Year Ended December 31
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Securities gains $ 7,629 $ 6,890
Securities losses (1,513) (1,695)
- --------------------------------------------------------------------------------
Total $ 6,116 $ 5,195
================================================================================
Assets, principally securities, carried at approximately $1.9 billion at
December 31, 1998, were pledged to secure public deposits (including State of
Michigan deposits of $39 million at December 31, 1998) and for other purposes as
required by law.
- --------------------------------------------------------------------------------
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) 1998 1997
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial loans $ 77,175 $ 58,914
International loans 20,350 1,000
Real estate construction loans 452 3,438
Commercial mortgage loans 6,788 11,088
Residential mortgage loans 3,468 3,719
- --------------------------------------------------------------------------------
Total 108,233 78,159
Reduced-rate loans 7,464 7,583
- --------------------------------------------------------------------------------
Total nonperforming loans 115,697 85,742
Other real estate 4,956 17,046
- --------------------------------------------------------------------------------
Total nonperforming assets $ 120,653 $ 102,788
================================================================================
Loans past due 90 days and still accruing $ 40,209 $ 52,805
================================================================================
Gross interest income that would
have been recorded had the
nonaccrual and reduced-rate
loans performed in accordance
with original terms $ 13,674 $ 10,088
================================================================================
Interest income recognized $ 3,899 $ 2,399
================================================================================
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) 1998 1997 1996
- --------------------------------------------------------------------------------
Average impaired loans for the year $ 85,500 $73,502 $114,253
Total period-end impaired loans 101,417 70,470 98,050
Period-end impaired loans
requiring an allowance 87,494 60,376 59,960
Impairment allowance 21,951 20,358 19,528
Those impaired loans not requiring an allowance represent loans for which the
fair value exceeded the recorded investment in the loan. Eighty-one percent of
the total impaired loans at December 31, 1998, are evaluated based on fair value
of related collateral. Remaining loan impairment is based on the present value
of expected future cash flows discounted at the loan's effective interest rate.
- --------------------------------------------------------------------------------
5 ALLOWANCE FOR CREDIT LOSS
- --------------------------------------------------------------------------------
An analysis of changes in the allowance for credit losses follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at January 1 $ 424,147 $ 367,165 $ 341,344
Allowance of institutions
purchased/sold -- -- (3,630)
Loans charged off (125,627) (131,140) (125,912)
Recoveries on loans previously
charged off 40,889 42,122 41,363
- --------------------------------------------------------------------------------
Net loans charged off (84,738) (89,018) (84,549)
Provision for credit losses 113,000 146,000 114,000
- --------------------------------------------------------------------------------
Balance at December 31 $ 452,409 $ 424,147 $ 367,165
================================================================================
As a percent of total loans 1.48% 1.47% 1.40%
================================================================================
- --------------------------------------------------------------------------------
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, 1998 and 1997, exposure from loan commitments and guarantees to
companies related to the automotive industry totaled $9.0 billion and $8.3
billion, respectively. Additionally, commercial real estate loans, including
commercial mortgages and construction loans, totaled $5.3 billion in 1998 and
$4.6 billion in 1997. Approximately $2.4 billion of commercial real estate loans
at December 31, 1998, 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 AND OTHER NONCANCELABLE OBLIGATIONS
- --------------------------------------------------------------------------------
A summary of premises and equipment at December 31 by major category follows:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Land $ 49,356 $ 52,934
Buildings and improvements 341,260 353,308
Furniture and equipment 327,498 344,681
- --------------------------------------------------------------------------------
Total cost 718,114 750,923
Less accumulated depreciation and amortization (365,464) (370,766)
- --------------------------------------------------------------------------------
Net book value $ 352,650 $ 380,157
================================================================================
Rental expense for leased properties and equipment amounted to $41 million in
1998 and 1997, and $44 million in 1996. Future minimum payments under
noncancelable obligations are as follows:
(in thousands)
- -------------------------------------------------------------------
1999 $ 44,466
2000 44,113
2001 40,723
2002 36,497
2003 32,764
2004 and later 283,234
===================================================================
- --------------------------------------------------------------------------------
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, 1998 and 1997:
Federal Funds Purchased
and Securities Sold Other
Under Agreements Borrowed
(in thousands) to Repurchase Funds
- ----------------------------------------------------------------------
December 31, 1998
Amount outstanding at
year-end $ 3,108,985 $ 471,168
Weighted average
interest rate at year-end 4.83% 3.91%
December 31, 1997
Amount outstanding
at year-end $ 592,860 $ 2,600,041
Weighted average
interest rate at year-end 5.26% 5.30%
======================================================================
At December 31, 1998, the parent company had available a $250 million commercial
paper facility. This facility is supported by a $250 million line of credit
agreement, all of which was unused. Under the current agreement the line will
expire in May of 1999.
- --------------------------------------------------------------------------------
9 MEDIUM AND LONG-TERM DEBT
- --------------------------------------------------------------------------------
Medium- and long-term debt consisted of the following at December 31:
December 31:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Parent Company
7.25% subordinated notes due 2007 $ 159,669 $ 148,509
9.75% subordinated notes due 1999 74,970 74,877
10.125% subordinated debentures due 1998 -- 74,965
- --------------------------------------------------------------------------------
Total parent company 234,639 298,351
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 198,301 198,100
8.375% subordinated notes due 2024 155,502 147,938
7.25% subordinated notes due 2002 149,404 149,246
6.875% subordinated notes due 2008 104,186 99,220
7.125% subordinated notes due 2013 155,181 148,224
7.875% subordinated notes due 2026 174,086 146,914
6.00% subordinated notes due 2008 247,798 --
- --------------------------------------------------------------------------------
Total subordinated notes 1,184,458 889,642
Medium-term notes:
Floating rate based on LIBOR indices 3,612,076 2,811,793
Floating rate based on Treasury indices 37,000 487,000
Floating rate based on Prime indices -- 1,100,007
Floating rate based on Federal Funds indices -- 349,998
Fixed rate notes with interest rate of 6.65% 199,810 1,349,596
- --------------------------------------------------------------------------------
Total medium-term notes 3,848,886 6,098,394
Notes payable 14,276 --
- --------------------------------------------------------------------------------
Total subsidiaries 5,047,620 6,988,036
- --------------------------------------------------------------------------------
Total medium- and long-term debt $5,282,259 $7,286,387
================================================================================
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 12/31/98
- --------------------------------------------------------------------------------
Subsidiaries
Subordinated notes:
7.25% subordinated notes $200,000 6-month LIBOR 5.16%
7.25% subordinated notes 150,000 6-month LIBOR 5.16
Medium-term notes:
Floating rate based on LIBOR indices 108,000 3-month LIBOR 5.28
Floating rate based on Treasury indices 37,000 3-month LIBOR 5.28
Fixed rate notes with interest rate of 6.65% 200,000 3-month LIBOR 5.28
================================================================================
All subordinated notes and debentures with maturities greater than one year
qualify as Tier 2 capital.
During 1998, the Corporation terminated certain swaps that hedged the fixed
interest rate exposure of several debt instruments. In accordance with policy,
the gain resulting from early termination was deferred and is being amortized
over the remaining life of the debt. The unamortized balance is included in the
carrying value of debt outstanding.
The Corporation currently has two medium-term note programs: a senior note
program and a European note program. Under these programs, certain bank
subsidiaries may offer an aggregate principal amount of up to $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 1999 to 2002. The interest rate on the
floating rate medium-term notes based on U.S. Treasury indices is equal to the
two-year Constant Treasury Maturity Rate plus 0.01%. The notes are due in 2000.
The fixed rate notes mature in 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)
- --------------------------------------------------------------------------------
1999 $ 2,826,907
2000 469,043
2001 316,517
2002 485,422
2003 2,587
2004 and later 1,181,783
================================================================================
- --------------------------------------------------------------------------------
10 SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The board of directors authorized the repurchase of up to 40.5 million shares of
Comerica Incorporated common stock for general corporate purposes, acquisitions
and employee benefit plans. At December 31, 1998, 20.5 million shares had been
repurchased under this program.
At December 31, 1998, the Corporation had reserved 8.4 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 paid April 1, 1998. All per share
data included in the consolidated financial statements and in the related notes
have been retroactively adjusted to reflect the split.
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
- --------------------------------------------------------------------------------
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:
Year Ended December 31
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Basic
Average shares outstanding 155,859 158,333 169,076
================================================================================
Net income $607,076 $530,476 $417,161
Less preferred stock dividends 17,100 17,100 9,025
- --------------------------------------------------------------------------------
Net income applicable to
common stock $589,976 $513,376 $408,136
================================================================================
Basic net income per
common share $3.79 $3.24 $2.41
================================================================================
Diluted
Average shares outstanding 155,859 158,333 169,076
Nonvested stock 191 204 195
Common stock equivalents
Net effect of the assumed
exercise of stock options 2,707 2,503 1,956
- --------------------------------------------------------------------------------
Diluted average shares 158,757 161,040 171,227
================================================================================
Net income $607,076 $530,476 $417,161
Less preferred stock dividends 17,100 17,100 9,025
- --------------------------------------------------------------------------------
Net income applicable to
common stock $589,976 $513,376 $408,136
================================================================================
Diluted net income per
common share $3.72 $3.19 $2.38
================================================================================
- --------------------------------------------------------------------------------
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 Corporation has elected to follow Accounting Principles Board
opinion No. 25, "Accounting For Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee and director stock options. Under
APB 25, no compensation expense is recognized because the exercise price of the
Corporation's employee and director stock options equals the market price of the
underlying stock on the date of grant. The maturity of each option is determined
at the date of grant; however, no options may be exercised later than ten years
from the date of grant. The options may have restrictions regarding
exercisability.
Pro forma information regarding net income and earnings per share is required
under SFAS No. 123, "Accounting for Stock-Based Compensation," and has been
determined as if the Corporation had accounted for its employee and director
stock options under the fair value method of that Statement. The fair value of
options was estimated at the date of grant using a Black-Scholes option pricing
model. The Black-Scholes model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The Black-
Scholes model may not necessarily provide a reliable single measure of the fair
value of employee and director stock options. The Corporation's employee and
director stock options have characteristics significantly different from those
of traded options and changes in the subjective input assumptions can materially
affect the fair value estimate.
The fair value of the options was estimated using a Black-Scholes option
valuation model with the following weighted-average assumptions for 1998, 1997
and 1996, respectively: risk-free interest rates of 5.54%, 6.49% and 6.07%;
expected dividend yields of 3.45%, 3.77% and 4.00%; expected volatility factors
of the market price of Comerica Common Stock of 21%, 20% and 21%; and an
expected life of the options of 4.3, 4.4 and 5.0 years. For purposes of pro
forma disclosures, the estimated fair value of the options granted in 1995 and
thereafter is amortized to expense over the options' vesting period. Since the
Corporation's options generally vest over a four-year period, the pro forma
disclosures are not indicative of future amounts until SFAS No. 123 is applied
to all outstanding nonvested options.
Had compensation cost for the Corporation's stock-based compensation plans been
determined in accordance with the fair value provisions of SFAS No. 123, net
income and earnings per share would have been as follows:
(in thousands,
except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Pro forma net income $578,335 $ 506,875 $404,121
Pro forma earnings per share:
Basic $ 3.71 $ 3.20 $ 2.39
Diluted 3.64 3.15 2.36
================================================================================
Average per Share
- --------------------------------------------------------------------------------
Exercise Market
Number Price Price
- --------------------------------------------------------------------------------
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
Granted 2,058,542 71.37 71.37
Cancelled (232,617) 42.92 64.33
Exercised (1,213,818) 21.33 64.07
Expired --
- --------------------------------------------------------------------------------
Outstanding--December 31, 1998 8,249,450 $36.39 $ 68.19
================================================================================
Exercisable--December 31, 1998 4,173,748
Available for grant--
December 31, 1998 104,458
================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1998:
Outstanding Exercisable
- -------------------------------------------------------------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (a) Price Shares Price
- -------------------------------------------------------------------------------
$ 8.59 - $18.00 1,264,438 3.3 $ 13.70 1,263,912 $ 13.70
18.59 - 21.00 1,453,242 5.4 19.01 1,147,004 19.11
21.59 - 25.42 1,817,533 6.3 24.43 1,073,750 23.75
28.33 - 52.67 1,719,856 8.1 39.86 689,082 39.30
65.13 - 71.58 1,994,381 9.2 71.37 -- --
- --------------------------------------------------------------------------------
Total 8,249,450 6.8 $ 36.39 4,173,748 $ 22.00
================================================================================
(a) Average contractual life remaining in years.
- --------------------------------------------------------------------------------
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 $3.0 million in 1998,
$0.3 million in 1997 and $1.4 million in 1996 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.
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.
The following tables set forth reconciliations of the Corporation's pension and
postretirement plan obligations and plan assets:
Defined Benefit Postretirement
Pension Plan Benefit Plan
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at January 1 $525,329 $462,776 $81,584 $76,420
Service cost 13,924 12,400 262 273
Interest cost 36,039 33,823 5,509 5,710
Curtailment (5,518) -- -- --
Actuarial (gain)/loss (3,631) 39,720 (423) 5,979
Benefits paid (23,202) (23,390) (6,222) (6,798)
- --------------------------------------------------------------------------------
Benefit obligation
at December 31 $542,941 $525,329 $80,710 $81,584
===============================================================================
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
January 1 $585,215 $515,164 $86,727 $80,547
Actual return on plan assets 66,181 89,527 4,226 7,941
Employer contributions -- 3,914 3,581 5,037
Benefits paid (23,202) (23,390) (6,222) (6,798)
- --------------------------------------------------------------------------------
Fair value of plan assets at
December 31 $628,194 $585,215 $88,312 $86,727
================================================================================
The following table sets forth the funded status of the defined benefit pension
and postretirement plan and amounts recognized on the Corporation's balance
sheet:
Defined Benefit Postretirement
Pension Plan Benefit Plan
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Funded status at December 31 $ 85,253 $ 59,886 $ 7,602 $ 5,143
Unrecognized net gain (44,829) (22,834) (7,115) (8,294)
Unrecognized net transition
(asset)/obligation (10,524) (15,358) 64,477 69,105
Unrecognized prior service cost (2,394) (2,956) -- --
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 27,506 $ 18,738 $ 64,964 $65,954
================================================================================
Components of net periodic benefit cost/(income):
Defined Benefit Pension Plan
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 13,924 $ 12,400 $ 11,675
Interest cost 36,039 33,823 31,572
Expected return on plan assets (48,887) (42,313) (39,654)
Amortization of unrecognized
transition asset (4,834) (4,834) (4,834)
Amortization of unrecognized
prior service cost (331) (353) (338)
Amortization of unrecognized net loss 1,071 978 188
- --------------------------------------------------------------------------------
Net periodic benefit income $ (3,018) $ (299) $ (1,391)
================================================================================
Postretirement Benefit Plan
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 262 $ 273 $ 402
Interest cost 5,509 5,710 5,597
Expected return on plan assets (5,829) (5,413) (5,205)
Amortization of unrecognized
transition obligation 4,628 4,628 4,628
Amortization of unrecognized net gain -- (56) (377)
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 4,570 $ 5,142 $ 5,045
================================================================================
Actuarial assumptions were as follows:
Defined Benefit Pension Plan 1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate used in determining benefit
obligation 7.0% 7.0% 7.5%
Long-term rate of return on assets 9.0% 9.0% 9.0%
Rate of compensation increase 5.0% 5.0% 5.0%
================================================================================
Postretirement Benefit Plan 1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate used in determining benefit
obligation 7.0% 7.0% 7.5%
Long-term rate of return on assets 6.7% 6.7% 6.7%
================================================================================
A 6 percent health care cost trend rate was projected for 1998 and is assumed to
decrease gradually to 5 percent during 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,
1998, and the aggregate of the service and interest cost components by $392
thousand for the year ended December 31, 1998. Decreasing each health care rate
by one percentage point would decrease the accumulated postretirement benefit
obligation by $5 million at December 31, 1998, and the aggregate of the service
and interest cost components by $341 thousand for the year ended December 31,
1998.
The Corporation also maintains defined contribution plans (including 401(k)
plans) for various groups of its employees. All of the Corporation's salaried
and regular part-time employees are eligible to participate in one or more of
the plans. The Corporation makes matching contributions, most of which are based
on a declining percentage of employee contributions (currently, maximum per
employee is $1,000) as well as a performance-based matching contribution based
on the Corporation's financial performance. Staff expense includes expense of
$10.3 million in 1998, $9.7 million in 1997 and $10.4 million in 1996 for the
plans.
- --------------------------------------------------------------------------------
14 INCOME TAXES
- --------------------------------------------------------------------------------
The current and deferred components of income taxes were as follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Currently payable
Federal $245,486 $239,680 $225,863
Foreign 27,263 30,723 5,912
State and local 13,847 15,584 11,039
- --------------------------------------------------------------------------------
286,596 285,987 242,814
Deferred federal, state and local 37,703 279 (13,769)
- --------------------------------------------------------------------------------
Total $324,299 $286,266 $229,045
================================================================================
There were $2.1 million, $1.8 million and $4.8 million of income taxes provided
on securities transactions in 1998, 1997 and 1996, respectively.
The principal components of deferred tax (assets) liabilities at
December 31 were as follows:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Allowance for credit losses $(142,889) $(132,990)
Lease financing transactions 165,974 122,127
Allowance for depreciation 10,899 15,567
Deferred loan origination fees and costs (25,554) (20,088)
Investment securities available for sale (3,507) (149)
Employee benefits (6,824) (7,625)
Restructuring charge -- (10,150)
Other temporary differences, net (35,563) (34,440)
- --------------------------------------------------------------------------------
Total $ (37,464) $ (67,748)
================================================================================
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) 1998 1997 1996
- --------------------------------------------------------------------------------
Tax based on federal statutory rate $325,981 $285,860 $226,172
Effect of tax-exempt interest income (4,039) (5,687) (8,842)
Other 2,357 6,093 11,715
- --------------------------------------------------------------------------------
Provision for income taxes $324,299 $286,266 $229,045
================================================================================
- --------------------------------------------------------------------------------
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 table at right provides details on the restructuring-related
reserve which was eliminated in 1998.
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.
An adjustment of $7 million, netted against noninterest expenses, was made to
eliminate the restructuring liability in 1998.
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
Activity (10,000) (6,000) (6,000) (22,000)
Adjustment -- (5,000) (2,000) (7,000)
- --------------------------------------------------------------------------------
Balances at 12/31/98 $ -- $ -- $ -- $ --
================================================================================
- --------------------------------------------------------------------------------
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, 1998, approximated $177 million at the beginning and $309 million
at the end of 1998. During 1998, new loans to related parties aggregated $304
million and repayments totaled $172 million.
- --------------------------------------------------------------------------------
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 $543 million at January 1, 1999, 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 $442
million in 1998, $354 million in 1997 and $322 million in 1996.
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,
1998, 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). At December 31, 1997, the Corporation and its
Comerica Bank subsidiary exceeded the ratios required to be considered
"adequately capitalized" (total capital ratio greater than 8 percent). Comerica
Bank-Texas and Comerica Bank-California exceeded the ratios required to be "well
capitalized" at year-end 1997. 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, 1998
Tier 1 capital $2,699,143 $2,263,522 $310,743 $330,998
Total capital 4,435,977 3,740,843 407,268 453,387
Tier 1 capital to average assets
(minimum-3.0%) 7.68% 8.02% 8.12% 8.04%
Tier 1 capital to risk-weighted assets
(minimum-4.0%) 6.26 6.42 8.07 7.35
Total capital to risk-weighted assets
(minimum-8.0%) 10.28 10.60 10.58 10.07
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%) 6.28 6.20 9.43 9.03
Total capital to risk-weighted assets
(minimum-8.0%) 9.90 9.87 10.42 10.14
- -----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 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.
- -------------------------------------------------------------------------------
18 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
- -------------------------------------------------------------------------------
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 37
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, 1998 and 1997.
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.
During 1998, the Corporation terminated its portfolio of zero-coupon interest
rate swaps. The notional amount of these swaps totaled $700 million. A portion
of these swaps were replaced with paying swaps. The Corporation also terminated
its portfolio of principal only total return swaps in conjunction with divesting
the mortgage servicing business. The notional amount of these swaps was $55
million.
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.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
- --------------------------------------------------------------------------------
December 31, 1998
Risk management
Interest rate contracts:
Swaps $6,869 $152 $ (6) $146
Options, caps and
floors purchased 15 -- -- --
Caps written -- -- -- --
- --------------------------------------------------------------------------------
Total interest
rate contracts 6,884 152 (6) 146
Foreign exchange
contracts:
Spot and forwards 782 32 (29) 3
Swaps 131 12 -- 12
- --------------------------------------------------------------------------------
Total foreign
exchange contracts 913 44 (29) 15
- --------------------------------------------------------------------------------
Total risk
management $7,797 $196 $(35) $161
================================================================================
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
================================================================================
Bilateral collateral agreements with counterparties covered 94 percent and 93
percent of the notional amount of interest rate derivative contracts at December
31, 1998 and 1997, respectively. These agreements reduce credit risk by
providing for the exchange of marketable investment securities to secure amounts
due on contracts in an unrealized gain position. In addition, at December 31,
1998, master netting arrangements had been established with all interest rate
swap counterparties and certain foreign exchange counterparties. These
arrangements effectively reduce credit risk by permitting settlement, on a net
basis, of contracts entered into with the same counterparty. The Corporation has
not experienced any material credit losses associated with derivative or foreign
exchange contracts.
- --------------------------------------------------------------------------------
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, 1998, unrealized gains and unrealized losses on customer-initiated and other
foreign exchange contracts averaged $14 million and $9 million, respectively.
For the year ended December 31, 1997, unrealized gains and unrealized losses
averaged $23 million and $18 million, respectively. These contracts also
generated noninterest income of $9 million in 1998 and $7 million in 1997.
Average positive and negative fair values and income related to
customer-initiated and other interest rate contracts were not material for 1998
and 1997.
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, 1998 and
1997.
Notional/
Contract Unrealized Unrealized Fair
(in millions) Amount Gains Losses Value
- --------------------------------------------------------------------------------
December 31, 1998
Customer-initiated and other
Interest rate contracts:
Caps and floors written $ 241 $-- $ (1) $ (1)
Caps and floors purchased 176 1 -- 1
Swaps 264 7 (6) 1
- --------------------------------------------------------------------------------
Total interest rate
contracts 681 8 (7) 1
Foreign exchange
contracts:
Spot, forwards, futures
and options 673 20 (13) 7
- --------------------------------------------------------------------------------
Total customer-initiated
and other $1,354 $28 $(20) $ 8
================================================================================
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
================================================================================
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.
- --------------------------------------------------------------------------------
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, 1998 and 1997. Commitments to
purchase and sell U.S. Treasury and municipal bond securities related to the
Corporation's trading account totaled $17 million and $2 million at December 31,
1998 and 1997, respectively. At December 31, 1997, $30 million 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.
No such commitments were outstanding at year-end 1998. Outstanding commitments
expose the Corporation to both credit and market risk.
Available credit lines on fixed rate credit card and check product accounts,
which have characteristics similar to option contracts, totaled $1.6 billion and
$1.8 billion at December 31, 1998 and 1997, 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) 1998 1997
- -----------------------------------------------------------------------------
Unused commitments to extend credit $28,393 $27,528
Standby letters of credit and financial guarantees 3,632 3,088
Commercial letters of credit 328 449
Credit default swaps 44 26
=============================================================================
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, 1998 and 1997,
included $3 billion and $4 billion, respectively, of variable and fixed rate
revolving credit commitments. Other unused loan commitments, primarily variable
rate, totaled $25 billion at December 31, 1998, and $24 billion at December 31,
1997.
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
$1,432 million and $1,309 million at December 31, 1998 and 1997, respectively.
The remaining standby letters of credit and financial guarantees, which mature
within one year, totaled $2,200 million and $1,779 million at December 31, 1998
and 1997, respectively. Commercial letters of credit are issued to finance
foreign or domestic trade transactions.
CREDIT DEFAULT SWAPS
Credit default swaps allow the Corporation to diversify its loan portfolio by
assuming credit exposure from different borrowers or industries without actually
extending credit in the form of a loan. Credit risk associated with credit
default swaps was $44 million at December 31, 1998 and $26 million at December
31, 1997.
- --------------------------------------------------------------------------------
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 material adverse effect on the Corporation's consolidated financial
position.
In addition, management cannot predict with reasonable certainty the likelihood,
or the impact, of any future claims that may be brought against the Corporation.
For example, although the Corporation is not currently a named defendant in any
lawsuits involving year 2000 readiness, it is impossible to know whether any
claims in connection with the year 2000 will be asserted in the future, and the
potential liability, if any, that may arise from such claims.
- --------------------------------------------------------------------------------
20 USAGE RESTRICTIONS
- --------------------------------------------------------------------------------
Cash and due from banks may include amounts required to be deposited with the
Federal Reserve Bank. These reserve balances vary, depending on the level of
customer deposits in the Corporation's subsidiary banks. At December 31, 1998
and 1997, the Federal Reserve balances were $269 million and $587 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.
- --------------------------------------------------------------------------------
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, 1998 and 1997 are as follows:
1998 1997
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(in millions) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
ASSETS
Cash and short-term
investments $ 1,830 $ 1,830 $ 2,080 $ 2,080
Trading account
securities 6 6 9 9
Loans held for sale 46 46 41 41
Investment securities
available for sale 2,712 2,712 4,006 4,006
Commercial loans 19,086 19,016 15,805 15,743
International loans 2,713 2,696 2,085 2,080
Real estate construction
loans 1,080 1,075 941 933
Commercial mortgage
loans 4,179 4,216 3,634 3,617
Residential mortgage
loans 1,038 1,071 1,565 1,608
Consumer loans 1,862 1,807 4,348 4,231
Lease financing 647 648 517 518
- --------------------------------------------------------------------------------
Total loans 30,605 30,529 28,895 28,730
Less allowance for
credit losses (452) -- (424) --
- --------------------------------------------------------------------------------
Net loans 30,153 30,529 28,471 28,730
Customers' liability on
acceptances
outstanding 12 12 18 18
Loan servicing rights 4 4 28 31
LIABILITIES
Demand deposits
(noninterest-bearing) 6,999 6,999 6,761 6,761
Interest-bearing
deposits 17,314 17,340 15,825 15,840
- --------------------------------------------------------------------------------
Total deposits 24,313 24,339 22,586 22,601
Short-term borrowings 3,580 3,580 3,193 3,193
Acceptances
outstanding 12 12 18 18
Medium- and
long-term debt 5,282 5,355 7,286 7,395
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
Derivative financial
instruments and
foreign exchange
contracts
Risk management:
Unrealized
gains -- 196 -- 154
Unrealized
losses -- (35) -- (23)
Customer-initiated
and other:
Unrealized
gains 28 28 43 43
Unrealized
losses (20) (20) (39) (39)
Credit-related financial
instruments -- (13) -- (13)
================================================================================
- --------------------------------------------------------------------------------
22 BUSINESS SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Corporation has strategically aligned its operations into three major lines
of business: the Business Bank, the Individual Bank and the Investment Bank.
These lines of business are differentiated based on the products and services
provided. Lines of business results are produced by the Corporation's internal
management accounting system. This system measures financial results based on
the internal organizational structure of the Corporation; information presented
is not necessarily comparable with similar information for any other financial
institution. The management accounting system assigns balance sheet and income
statement items to each line of business using certain methodologies which are
constantly being refined. For comparability purposes, amounts in all periods are
based on methodologies in effect at December 31, 1998. These methodologies,
which are briefly summarized in the following paragraph, may be modified as
management accounting systems are enhanced and changes occur in the
organizational structure or product lines. In addition to the three major lines
of business, the Finance Division is also reported as a segment.
The Corporation's internal funds transfer pricing system records cost of funds
or credit for funds using a combination of matched maturity funding for certain
assets and liabilities and a blended rate based on various maturities for the
remaining assets and liabilities. The credit loss provision is assigned based on
the amount necessary to maintain an allowance for credit losses adequate for
that line of business. Noninterest income and expenses directly attributable to
a line of business are assigned to that business. Direct expenses incurred by
areas whose services support the overall Corporation are allocated to the
business lines as follows: Product processing expenditures are allocated based
on standard unit costs applied to actual volume measurements; administrative
expenses are allocated based on estimated time expended; and corporate overhead
is assigned based on the ratio of a line of business' noninterest expenses to
total noninterest expenses incurred by all business lines. Common equity is
allocated based on credit, operational and business risks.
The following discussion provides information about the activities of each line
of business. A discussion of the financial results and the factors impacting
1998 performance can be found in the section entitled "Strategic Lines of
Business" in the financial review on page 30.
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.
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).
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.
The Finance segment includes the Corporation's securities portfolio and asset
and liability management activities. This segment is responsible for managing
the Corporation's funding, liquidity and capital needs, performing interest
sensitivity gap and earnings simulation analysis and executing various
strategies to manage the Corporation's exposure to interest rate risk.
The Other category includes divested business lines, the income and expense
impact of cash and credit loss reserves not assigned to specific business lines,
miscellaneous other items of a corporate nature and certain direct expenses not
allocated to business lines.
Information in this note complies with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" as of December 31, 1998, which
established standards for the way public business enterprises report information
about operating segments in annual financial statements and interim financial
reports issued to shareholders.
- --------------------------------------------------------------------------------
22 BUSINESS SEGMENT INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
Lines of business/segment financial results were as follows:
Business Bank Individual Bank Investment Bank*
- ------------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net interest income (FTE) $ 746 $ 658 $ 621 $ 679 $ 754 $ 776 $ (3) $ (2) $ (1)
Provision for credit losses 79 (11) 2 (14) 82 109 -- -- --
Noninterest income 154 128 122 300 269 277 122 107 94
Noninterest expenses 308 299 294 586 598 659 113 101 90
Restructuring charge -- -- -- -- -- -- -- -- --
Provision for income taxes 185 181 163 142 120 101 2 1 1
Net income (loss) 328 317 284 265 223 184 4 3 2
SELECTED AVERAGE BALANCES
Assets $22,908 $19,884 $17,397 $ 7,651 $ 9,534 $ 9,881 $ 33 $ 28 $ 22
Loans 21,555 18,276 16,156 7,076 8,936 9,201 1 -- --
Deposits 4,332 3,929 3,914 17,213 17,055 17,262 34 41 48
Common equity 1,340 1,062 941 736 769 707 27 23 17
STATISTICAL DATA
Return on average assets 1.43% 1.60% 1.63% 1.47% 1.24% 1.02% 5.62% 4.15% 2.67%
Return on average common equity 24.49 29.93 30.18 35.98 28.95 26.09 14.29 12.84 11.01
Efficiency ratio 34.51 38.35 39.74 59.82 58.39 62.73 n/m n/m n/m
Finance Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net interest income (FTE) $ 46 $ 40 $ 27 $ -- $ 2 $ 4 $ 1,468 $ 1,452 $ 1,427
Provision for credit losses -- -- -- 48 75 3 113 146 114
Noninterest income 8 4 6 19 20 8 603 528 507
Noninterest expenses 3 3 3 17 7 23 1,027 1,008 1,069
Restructuring charge -- -- -- (7) -- 90 (7) -- 90
Provision for income taxes 18 15 10 (16) (21) (31) 331 296 244
Net income (loss) 33 26 20 (23) (39) (73) 607 530 417
SELECTED AVERAGE BALANCES
Assets $ 4,320 $ 5,152 $ 7,375 $ 75 $ 271 $ (480) $34,987 $34,869 $34,195
Loans 280 70 224 (313) (73) (229) 28,599 27,209 25,352
Deposits 704 902 931 (30) 19 103 22,253 21,946 22,258
Common equity 333 294 364 181 260 525 2,617 2,408 2,554
STATISTICAL DATA
Return on average assets 0.28% 0.22% 0.17% n/m% n/m% n/m% 1.74% 1.52% 1.22%
Return on average common
equity 10.01 8.99 5.39 n/m n/m n/m 22.54 21.32 15.98
Efficiency ratio n/m n/m n/m n/m n/m n/m 49.39 51.04 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 $8 million in 1998, $6 million in 1997 and $2
million in 1996. Return on average common equity would have been 31.49% in
1998, 27.89% in 1997 and 11.01% in 1996.
n/m - not meaningful
- --------------------------------------------------------------------------------
23 PARENT COMPANY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BALANCE SHEETS--Comerica Incorporated
December 31 (in thousands, except share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,728 $ 372
Time deposits with banks 22,600 80,400
Investment securities available for sale 22,392 20,822
Investment in subsidiaries, principally banks 3,280,384 3,017,058
Premises and equipment 5,855 6,566
Other assets 57,235 40,009
- --------------------------------------------------------------------------------------------------------------
Total assets $3,391,194 $3,165,227
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 234,639 $ 298,351
Other liabilities 109,942 105,100
- --------------------------------------------------------------------------------------------------------------
Total liabilities 344,581 403,451
Nonredeemable preferred stock--$50 stated value
Authorized--5,000,000 shares
Issued--5,000,000 shares in 1998 and 1997 250,000 250,000
Common stock--$5 par value
Authorized--325,000,000 shares
Issued--157,233,088 shares in 1998 and 156,815,367 shares in 1997 786,165 784,077
Capital surplus 24,649 --
Unrealized net losses on investment securities available for sale (6,455) (1,937)
Retained earnings 2,086,589 1,731,419
Deferred compensation (5,202) (1,783)
Less cost of common stock in treasury--1,351,997 shares in 1998 (89,133) --
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,046,613 2,761,776
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,391,194 $3,165,227
==============================================================================================================
STATEMENTS OF INCOME--Comerica Incorporated
Year Ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
INCOME
Income from subsidiaries
Dividends from subsidiaries $ 442,495 $ 353,500 $ 322,000
Other interest income 3,899 3,626 3,372
Intercompany management fees 157,393 166,952 264,368
Other interest income 545 559 1,773
Other noninterest income 2,628 2,070 5,278
- --------------------------------------------------------------------------------------------------------------
Total income 606,960 526,707 596,791
EXPENSES
Interest on long-term debt and other borrowed funds 22,214 26,129 26,328
Net interest rate swap income (1,648) (2,818) (2,794)
Salaries and employee benefits 61,583 65,766 123,271
Occupancy expense 6,630 9,373 22,483
Equipment expense 1,873 2,053 24,806
Restructuring charge 100 -- 27,000
Other noninterest expenses 36,002 54,262 63,310
- --------------------------------------------------------------------------------------------------------------
Total expenses 126,754 154,765 284,404
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed net income of subsidiaries 480,206 371,942 312,387
Income tax expense (credit) 13,279 6,111 (1,931)
- --------------------------------------------------------------------------------------------------------------
466,927 365,831 314,318
Equity in undistributed net income of
subsidiaries, principally banks 140,149 164,645 102,843
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 607,076 $ 530,476 $ 417,161
==============================================================================================================
- --------------------------------------------------------------------------------
23 PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS--Comerica Incorporated
Year Ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 607,076 $ 530,476 $ 417,161
Adjustments to reconcile net income to
net cash provided by operating activities
Undistributed earnings of
subsidiaries, principally banks (140,149) (164,645) (102,843)
Depreciation 1,755 1,800 20,595
Restructuring charge (6,008) (20,992) 27,000
Other, net 4,908 7,465 23,091
- --------------------------------------------------------------------------------------------------------------
Total adjustments (139,494) (176,372) (32,157)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 467,582 354,104 385,004
INVESTING ACTIVITIES
Purchase of investment securities available for sale (11,640) (4,092) (4,820)
Proceeds from sale of investment securities available for sale 1,983 427 --
Proceeds from sales of fixed assets and other real estate 136 28,958 603
Purchases of fixed assets (1,222) (1,424) (20,345)
Net decrease in bank time deposits 57,800 25,300 25,100
Net increase in receivables from subsidiaries -- (375) --
Capital transactions with subsidiaries (134,752) (3,283) 131,871
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (87,695) 45,511 132,409
FINANCING ACTIVITIES
Net increase (decrease) in advances from subsidiaries (4,054) 3,818 (3,523)
Repayments and purchases of long-term debt (63,712) 141 (259)
Net decrease in short-term borrowings -- (842) --
Proceeds from issuance of preferred stock -- -- 246,744
Proceeds from issuance of common stock 50,885 35,082 35,206
Purchase of common stock for treasury and retirement (148,684) (242,293) (622,196)
Dividends paid (211,966) (195,412) (173,414)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (377,531) (399,506) (517,442)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash on deposit at bank subsidiary 2,356 109 (29)
Cash on deposit at bank subsidiary at beginning of year 372 263 292
- --------------------------------------------------------------------------------------------------------------
Cash on deposit at bank subsidiary at end of year $ 2,728 $ 372 $ 263
==============================================================================================================
Interest paid $ 15,290 $ 25,799 $ 25,942
==============================================================================================================
Income taxes recovered (paid) $ 975 $ (1,145) $ 11,150
==============================================================================================================
Noncash investing and financing activities
Stock issued for acquisitions $ -- $ -- $ 128,938
==============================================================================================================
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.
- --------------------------------------------------------------------------------
24 SUMMARY OF QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The following quarterly information is unaudited. However, in the opinion of
management, the information reflects all adjustments which are necessary for the
fair presentation of the results of operations for the periods presented.
1998
- --------------------------------------------------------------------------------
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $652,121 $639,562 $651,230 $673,861
Interest expense 281,371 279,127 286,752 308,253
Net interest income 370,750 360,435 364,478 365,608
Provision for credit losses 36,000 21,000 28,000 28,000
Securities gains/(losses) 6,081 174 11 (150)
Noninterest income
(excluding securities gains) 161,306 151,940 148,784 135,002
Noninterest expenses 263,051 253,821 253,299 249,873
Net income 157,820 154,490 150,383 144,383
Basic net income per common share $ 0.99 $ 0.97 $ 0.94 $ 0.89
Diluted net income per common share 0.97 0.95 0.92 0.88
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 credit losses 37,000 34,000 34,000 41,000
Securities gains/(losses) 3,836 1,096 (234) 497
Noninterest income
(excluding securities gains) 136,928 135,251 121,681 128,897
Noninterest expenses 257,368 252,622 249,259 248,737
Net income 139,927 137,067 129,710 123,772
Basic net income per common share $ 0.86 $ 0.84 $ 0.79 $ 0.75
Diluted net income per common share 0.85 0.83 0.78 0.74
================================================================================
- --------------------------------------------------------------------------------
25 PENDING ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter. The
Corporation expects to adopt the new Statement effective January 1, 2000. The
Statement will require the Corporation to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Corporation has
not yet determined what the effect of SFAS No. 133 will be on the earnings and
financial position of the Corporation.
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.
/s/ Eugene A. Miller
Eugene A. Miller
Chairman and Chief Executive Officer
/s/ Ralph W. Babb Jr.
Ralph W. Babb Jr.
Executive Vice President and Chief Financial Officer
/s/ Marvin J. Elenbaas
Marvin J. Elenbaas
Senior Vice President and Controller
Report of Independent Auditors
Board of Directors,
Comerica Incorporated
We have audited the accompanying consolidated balance sheets of Comerica
Incorporated and subsidiaries as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
January 19, 1999
HISTORICAL REVIEW--AVERAGE BALANCE SHEETS
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information
(in millions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,622 $ 1,686 $ 1,576 $ 1,500 $ 1,532
Short-term investments 143 129 195 351 823
Investment securities 3,371 4,687 5,823 7,625 8,004
Commercial loans 16,973 14,234 12,686 11,302 9,598
International loans 2,342 1,953 1,541 1,257 1,107
Real estate construction loans 989 866 707 541 403
Commercial mortgage loans 3,819 3,547 3,483 3,157 2,916
Residential mortgage loans 1,325 1,676 1,960 2,450 2,175
Consumer loans 2,575 4,486 4,624 4,569 3,795
Lease financing 576 447 351 285 217
- -----------------------------------------------------------------------------------------------------------------
Total loans 28,599 27,209 25,352 23,561 20,211
Less allowance for credit losses (440) (402) (361) (340) (322)
- -----------------------------------------------------------------------------------------------------------------
Net loans 28,159 26,807 24,991 23,221 19,889
Accrued income and other assets 1,692 1,560 1,610 1,432 1,203
- -----------------------------------------------------------------------------------------------------------------
Total assets $34,987 $34,869 $34,195 $34,129 $31,451
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,151 $ 5,815 $ 5,589 $ 4,767 $ 4,700
Interest-bearing deposits 16,102 16,131 16,669 16,888 16,625
- -----------------------------------------------------------------------------------------------------------------
Total deposits 22,253 21,946 22,258 21,655 21,325
Federal funds purchased and securities sold
under agreements to repurchase 2,510 2,017 2,106 2,816 2,817
Other borrowed funds 910 1,801 1,999 2,313 2,002
Accrued expenses and other liabilities 415 467 400 324 286
Medium- and long-term debt 6,032 5,980 4,745 4,510 2,708
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 32,120 32,211 31,508 31,618 29,138
Shareholders' equity 2,867 2,658 2,687 2,511 2,313
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $34,987 $34,869 $34,195 $34,129 $31,451
=================================================================================================================
HISTORICAL REVIEW--STATEMENTS OF INCOME
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information
(in millions, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,382 $ 2,318 $ 2,161 $ 2,091 $ 1,577
Interest on investment securities
Taxable 219 310 372 474 446
Exempt from federal income tax 7 11 18 26 31
- -----------------------------------------------------------------------------------------------------------------
Total interest on investment securities 226 321 390 500 477
Interest on short-term investments 9 9 12 23 38
- -----------------------------------------------------------------------------------------------------------------
Total interest income 2,617 2,648 2,563 2,614 2,092
INTEREST EXPENSE
Interest on deposits 648 673 686 721 543
Interest on short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 137 111 112 166 121
Other borrowed funds 49 98 107 136 79
Interest on medium- and long-term debt 368 374 295 289 148
Net interest rate swap (income)/expense (46) (51) (49) 2 (29)
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 1,156 1,205 1,151 1,314 862
- -----------------------------------------------------------------------------------------------------------------
Net interest income 1,461 1,443 1,412 1,300 1,230
Provision for credit losses 113 146 114 87 56
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 1,348 1,297 1,298 1,213 1,174
NONINTEREST INCOME
Fiduciary and investment management income 184 147 133 125 122
Service charges on deposit accounts 158 141 140 130 124
Commercial lending fees 43 32 23 21 20
Securities gains 6 5 14 12 3
Other noninterest income 212 203 197 211 181
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income 603 528 507 499 450
NONINTEREST EXPENSES
Salaries and employee benefits 565 539 561 562 549
Net occupancy expense 90 89 99 99 99
Equipment expense 60 62 69 68 68
Outside processing fee expense 43 42 42 49 46
Restructuring charge (7) -- 90 -- 7
Other noninterest expenses 269 276 298 308 273
- -----------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,020 1,008 1,159 1,086 1,042
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 931 817 646 626 582
Provision for income taxes 324 287 229 213 195
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 607 $ 530 $ 417 $ 413 $ 387
=================================================================================================================
Net income applicable to common stock $ 590 $ 513 $ 408 $ 413 $ 387
=================================================================================================================
Basic net income per common share $ 3.79 $ 3.24 $ 2.41 $ 2.38 $ 2.20
Diluted net income per common share 3.72 3.19 2.38 2.37 2.19
Cash dividends declared on common stock $ 199 $ 181 $ 170 $ 158 $ 145
Dividends per common share $ 1.28 $ 1.15 $ 1.01 $ 0.91 $ 0.83
- -----------------------------------------------------------------------------------------------------------------
HISTORICAL REVIEW--STATISTICAL DATA
COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
AVERAGE RATES (FULLY TAXABLE EQUIVALENT BASIS)
Short-term investments 6.25% 6.59% 6.23% 6.61% 4.57%
Investment securities 6.81 6.94 6.79 6.72 6.15
Commercial loans 8.04 8.25 8.21 8.75 7.38
International loans 7.97 7.07 6.64 7.06 5.58
Real estate construction loans 9.24 9.38 9.22 9.52 7.85
Commercial mortgage loans 8.74 9.08 9.29 9.40 8.52
Residential mortgage loans 7.69 7.90 7.83 7.80 7.46
Consumer loans 10.20 9.81 9.88 10.10 9.44
Lease financing 7.65 7.48 6.82 6.65 6.48
- -----------------------------------------------------------------------------------------------------------------
Total loans 8.34 8.53 8.54 8.90 7.84
- -----------------------------------------------------------------------------------------------------------------
Interest income as a percent of earning assets 8.17 8.29 8.20 8.35 7.28
Domestic deposits 3.91 4.09 4.04 4.05 3.14
Deposits in foreign offices 6.71 5.68 5.46 6.07 4.28
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4.02 4.17 4.11 4.27 3.26
Federal funds purchased and securities sold
under agreements to repurchase 5.44 5.49 5.31 5.88 4.31
Other borrowed funds 5.40 5.45 5.36 5.87 3.92
Medium- and long-term debt 6.10 6.26 6.22 6.41 5.46
- -----------------------------------------------------------------------------------------------------------------
Interest expense as a percent of
interest-bearing sources 4.52 4.65 4.51 4.95 3.57
- -----------------------------------------------------------------------------------------------------------------
Interest rate spread 3.65 3.64 3.69 3.40 3.71
Impact of net noninterest-bearing
sources of funds 0.92 0.89 0.85 0.79 0.61
- -----------------------------------------------------------------------------------------------------------------
Net interest margin as a percent of
earning assets 4.57 4.53 4.54 4.19 4.32
RETURN ON AVERAGE COMMON
SHAREHOLDERS' EQUITY 22.54 21.32 15.98 16.46 16.74
RETURN ON AVERAGE ASSETS 1.74 1.52 1.22 1.21 1.23
EFFICIENCY RATIO 49.39 51.04 60.36 60.09 61.28
PER SHARE DATA
Book value at year-end $ 17.94 $ 16.02 $ 14.70 $ 15.17 $ 13.64
Market value at year-end 68.19 60.17 34.92 26.67 16.25
Market value--high and low for year 73-47 62-34 39-24 29-16 21-16
OTHER DATA
Number of banking offices 334 350 358 395 398
Number of employees (full-time equivalent) 10,134 9,960 11,079 12,876 13,077
- -----------------------------------------------------------------------------------------------------------------
Economic Outlook
At year-end 1998, the current U.S. economic expansion broke a record for
peacetime longevity, a record that dates back to 1854. The economy now is well
on its way to breaking the all-time record of 106 months for an unbroken period
of economic expansion--during peace or war. February of 2000 would mark the
107th month.
Can we sustain this growth mode for one more year and make economic history?
Comerica has two gauges to address this question. One such measure is the
Recession Watch Index, which forecasts the chance of a recession occurring in
the next 12 months. The other gauge is Comerica's Economic Vulnerability
Sentinel, which tells us how healthy, or recession-resistant, the current
expansion happens to be.
A SEESAW YEAR
During the first half of 1998, both of Comerica's forecasting indices were
giving strong signals for a favorable year ahead: Chances for a recession were
only 28 percent through mid-year 1999, and the current expansion was shown to be
the most durable since the good economic growth of the early and mid-1960s.
Then came the third quarter, with a combination of major strike activity in the
airline and auto industries, growing distress in Asian and Latin financial
markets, and accompanying contraction in U.S. equities markets. These events
caused the Recession Watch Index to rise to 39 percent probability of recession
for the coming year. Fortunately for 1999's prospects, this index must exhibit
readings in excess of 50 percent for at least a quarter before it makes the
recession call. Even more encouraging, the latest index readings have moved the
index toward even safer levels.
As for the Economic Vulnerability Sentinel, this measure of economic health is
constantly taking the pulse of the economy's real growth rate versus inflation.
As long as real GDP growth is out-pacing the inflation rate by a comfortable
margin, there is both continuing strength and resilience in the recovery.
GDP VS. INFLATION
For example, during the first quarter of 1998, real GDP growth was 5.5 percent.
This covered the inflation rate--listed at 0.9 percent--by six-to-one. In the
second quarter, real GDP growth slipped badly to only 1.8 percent, but happily,
the inflation rate remained at 0.9, yielding two-to-one coverage of inflation by
real GDP.
The third quarter was even more impressive, despite stock market volatility and
interruptions to output due to work stoppages. Real GDP was up 3.7 percent, and
inflation inched up to 1.0 percent--still better than three-to-one coverage. The
best performance was saved for the fourth quarter: 6.1 percent real growth and
0.7 percent inflation, an eight-to-one multiple.
What's the bottom line on these faithful monitors of U.S. economic health? The
Economic Vulnerability Sentinel cannot tolerate rising inflation, and the
Recession Watch Index cannot bear rising expectations of inflation. Chances are
the U.S. economy will continue being the envy of the world and will remain on an
expansion track as long as business plans and consumer indebtedness are not
thrown off course by the distorted and misleading signals of accelerating
inflation.
ECONOMIC ENEMY #1
Contrary to 1998's conventional wisdom, the greatest threat to the continuity of
the current eight-year expansion does not emanate from the so-called Asian
implosion, the tortured markets of Latin nations, the European slowdown, or
computer glitches associated with the "Y2K" situation. The biggest threat always
remains the monetary danger of rising inflation.
Inflation is always and everywhere a monetary phenomenon. It typically is caused
by a nation's central bank (in the U.S., the Federal Reserve system). For the
past two years, the Alan Greenspan Federal Reserve has been warning our
financial markets about the dangers of "irrational exuberance" as a reason why
the Fed might feel compelled to raise interest rates and slow the GDP. Instead,
the Fed did precisely the opposite last year. They lowered short-term interest
rates by three-quarter percent and exceeded nearly every targeted growth range
they themselves had set for safe money growth.
AN EXUBERANT FED
In fact, the expansion rate for new money has exceeded growth of real GDP by a
factor of three and four times. This means that for the better part of 16
months, the Fed has been creating too much money chasing too few goods. This is
a classic precursor of rising inflation if it is left unchecked.
The Fed evidently felt compelled by the on-going weakness abroad and a high-
profile failure at home related to hedge fund activity to provide "insurance" in
the form of extra money stimulation to the very same financial markets it had
six months earlier warned of exuberance. By November, the stock market was back
in record territory.
GDP
growth
Inflation
(CPI)
Car/light truck sales
(in millions)
[GRAPH APPEARS HERE]
Federal funds rate
(year-end)
U.S. unemployment
rate
Current account deficit
(in billions)
1998 actual
1999 forecast
INTEREST RATE FORECASTS
1 Month
Fed Prime 3 Month Commercial Treasury Bills
Funds Rate LIBOR Paper 3 Month 6 Month 1 Year
- ---------------------------------------------------------------------------------------------------------------------
2nd Quarter 1999 4.75% 7.75% 5.25% 5.33% 4.70% 4.75% 4.80%
3rd Quarter 1999 4.75 7.75 5.30 5.40 4.80 4.85 4.90
4th Quarter 1999 4.75 7.75 5.35 5.45 4.90 4.95 5.00
1st Quarter 2000 5.00 8.00 5.40 5.55 5.00 5.05 5.10
2nd Quarter 2000 5.25 8.25 5.45 5.60 5.10 5.15 5.20
- ---------------------------------------------------------------------------------------------------------------------
Treasury Notes Treasury Bonds Corp Aaa A Utility
2 Year 3 Year 5 Year 10 Year 30 Year Bonds Bonds
- ---------------------------------------------------------------------------------------------------------------------
2nd Quarter 1999 4.85% 4.90% 4.95% 5.15% 5.65% 6.30% 6.60%
3rd Quarter 1999 4.95 5.00 5.05 5.25 5.75 6.40 6.60
4th Quarter 1999 5.10 5.15 5.20 5.40 5.90 6.55 6.80
1st Quarter 2000 5.25 5.35 5.40 5.60 6.10 6.70 7.30
2nd Quarter 2000 5.35 5.45 5.50 5.70 6.20 6.90 7.50
- ---------------------------------------------------------------------------------------------------------------------
Home Federal Reserve Annualized Percent Changes
Mortgage Rates Trade-Weighted Real GDP
FHLMC Dollar Index GDP Deflator CPI
- ---------------------------------------------------------------------------------------------------------------------
2nd Quarter 1999 6.70% 90.0% 3.2% 1.0% 1.2%
3rd Quarter 1999 6.80 85.5 2.7 1.4 1.6
4th Quarter 1999 7.00 85.5 3.0 1.7 2.0
1st Quarter 2000 7.30 90.0 2.5 2.0 2.5
2nd Quarter 2000 7.50 92.0 2.0 2.2 2.5
- ---------------------------------------------------------------------------------------------------------------------
Indeed, another such policy reversal could occur in 1999. The Fed at some point
around mid-year 1999 could determine that the greater threat is not recession,
but rising inflation. After all, a dynamic U.S. economy has thus far shrugged
off most economic problems of foreign origin. This is not surprising, given that
foreign trade constitutes only 13 to 15 percent of U.S. GDP.
WATCH THE DOLLAR
Another worrisome facet to Fed exuberance is that as monetary stimulation causes
short-term interest rates to fall, the dollar weakens against foreign
currencies, leading to the rise in import prices. Once import prices begin
rising, it becomes considerably easier for U.S. retailers to raise prices. If
domestic firms raise prices and financing rates, then the purchasing power of
households will shrink, leading to a pronounced slowdown of the economy. The
parade of good consumer news about the falling cost of vehicles, gas, oil, food,
clothing, credit and electronic equipment would end.
Fed stimulation already has sown the seeds of rising inflation in late 1999. As
a consequence, the environment of lower interest rates will be limited to the
first half of 1999. By year-end, long-term interest rates will be on the uptick.
For the year, the economy will slow to 3.4 percent GDP growth, down from 3.9
percent in 1998.
COMERICA MARKETS
Here's how Comerica's primary domestic regional markets of Michigan, California,
Texas and Florida are expected to fare in 1999, along with Canada and Mexico:
* Michigan's interest-rate sensitive economy, already constrained by
exceptionally tight labor markets, should remain in growth mode during
1999, albeit lagging the national growth rate.
* California's economy seems to be quite balanced in its expansion and has
prospered from the boom in imports. This has offset some declining demand for
exports from the beleaguered nations in Asia and Latin America.
* Texas has a rapidly expanding labor market and an increasingly vibrant
construction sector. However, Latin economic recessions will temper growth
this year.
* Florida's labor markets are expanding, and more growth is expected in
technology, tourism and construction.
* Canada's ongoing fiscal reforms are driving unemployment rates lower and
keeping inflation rates below U.S. rates. Lower interest rates and stability
in world commodity prices will accelerate Canada's GDP in 1999.
* Mexico will experience the adverse impact of Latin economic weakness and
Brazilian recession in 1999, and the peso will weaken. Fortunately, U.S.
economic growth and Canadian acceleration will expand Mexican exports.
* * *
So, can we keep the economic party going strong? Prospects for economic
stability in the years ahead depend upon a more proper and logically consistent
mix of policies from Washington. If policy makers truly want to guard against
the twin evils of inflation and recession, then, in stark contrast to recent
initiatives, they would lower tax rates and curb monetary stimulation.
David L. Littmann and William T. Wilson, Ph.D.
Comerica Economics Department
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 January 1, April 1, July 1 and October 1.
ANNUAL MEETING
The Annual Meeting of Shareholders of Comerica Incorporated will be held on
Friday, May 21, 1999, at 9:30 a.m. at the Detroit Institute of Arts, 5200
Woodward Avenue, 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
- -----------------------------------------------------------------------
1998
Fourth $69.00 $46.50 $0.32 2.2%
Third 71.94 51.00 0.32 2.1
Second 73.00 61.94 0.32 1.9
First 72.13 54.33 0.32 2.0
- -----------------------------------------------------------------------
1997
Fourth $61.88 $50.17 $0.29 2.1%
Third 53.25 45.04 0.29 2.4
Second 46.75 35.92 0.29 2.8
First 42.08 34.17 0.29 3.0
- -----------------------------------------------------------------------
*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, 1999, there were approximately 17,030 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
1-248-371-5000 (metro Detroit)
1-800-521-1190 (outside Detroit area)
www.comerica.com
INVESTOR RELATIONS ON THE INTERNET
Go to www.comerica.com to find the latest investor relations information about
Comerica, including stock quotes, news releases and customized financial data.
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.
YEAR 2000 UPDATES
Call 1-877-789-2573 or go to www.comerica.com for the latest information about
Comerica's year 2000 program.
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-California Satisfactory
Comerica Bank, N.A. 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.
MEDIA CONTACT INVESTOR CONTACT
Sharon R. McMurray Allison T. McFerren
313-222-4881 313-222-6317