<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10706
Comerica Incorporated
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(313) 222-3300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
$5 par value common stock:
outstanding as of October 31, 1998: 155,542,000 shares
<PAGE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
<CAPTION>
September 30, December 31, September 30,
(In thousands, except share data) 1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,364,063 $ 1,927,087 $ 1,886,293
Short-term investments 129,057 202,957 92,969
Investment securities available
for sale 3,108,120 4,005,962 4,716,940
Commercial loans 17,361,281 15,805,549 14,865,246
International loans 2,524,159 2,085,090 2,110,663
Real estate construction loans 1,037,284 940,910 974,779
Commercial mortgage loans 3,927,689 3,633,785 3,574,011
Residential mortgage loans 1,136,195 1,565,445 1,642,226
Consumer loans 1,882,347 4,347,665 4,432,242
Lease financing 598,259 516,600 496,825
----------- ----------- -----------
Total loans 28,467,214 28,895,044 28,095,992
Less allowance for credit losses (438,929) (424,147) (412,582)
----------- ----------- -----------
Net loans 28,028,285 28,470,897 27,683,410
Premises and equipment 361,171 380,157 384,202
Customers' liability on acceptances
outstanding 12,945 18,392 26,237
Accrued income and other assets 1,372,573 1,286,946 1,114,832
----------- ----------- -----------
TOTAL ASSETS $34,376,214 $36,292,398 $35,904,883
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,740,407 $ 6,761,202 $ 6,420,063
Interest-bearing deposits 15,493,005 15,825,115 15,638,241
----------- ----------- -----------
Total deposits 22,233,412 22,586,317 22,058,304
Federal funds purchased and
securities sold under
agreements to repurchase 2,147,048 592,860 625,469
Other borrowed funds 1,182,122 2,600,041 3,465,473
Acceptances outstanding 12,945 18,392 26,237
Accrued expenses and other
liabilities 227,983 446,625 369,597
Medium- and long-term debt 5,632,697 7,286,387 6,615,449
----------- ----------- -----------
Total liabilities 31,436,207 33,530,622 33,160,529
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
9/30/98, 12/31/97 and 9/30/97 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued-157,187,518 shares at
9/30/98, 156,815,367 shares at
12/31/97 and 105,239,666 shares
at 9/30/97 785,938 784,077 526,198
Capital surplus 16,713 - -
Unrealized gains and losses on
investment securities available
for sale 2,676 (1,937) 7,606
Retained earnings 1,999,197 1,731,419 1,962,568
Deferred compensation (3,110) (1,783) (2,018)
Less cost of common stock in
treasury- 1,689,201 shares at
9/30/98 (111,407) - -
----------- ----------- -----------
Total shareholders' equity 2,940,007 2,761,776 2,744,354
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $34,376,214 $36,292,398 $35,904,883
=========== =========== ===========
/TABLE
<PAGE>
<PAGE> 3
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ------------------------
(In thousands, except per share data) 1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $583,747 $590,198 $1,781,164 $1,714,211
Interest on investment securities:
Taxable 51,968 80,265 170,856 236,282
Exempt from federal income tax 1,754 2,486 5,774 8,478
-------- -------- ---------- ----------
Total interest on investment
securities 53,722 82,751 176,630 244,760
Interest on short-term investments 2,093 1,722 6,859 6,269
-------- -------- ---------- ----------
Total interest income 639,562 674,671 1,964,653 1,965,240
INTEREST EXPENSE
Interest on deposits 156,289 173,193 484,353 502,664
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 35,453 27,276 93,655 82,794
Other borrowed funds 10,724 22,813 41,536 79,399
Interest on medium- and long-term debt 86,079 101,613 289,786 263,795
Net interest rate swap income (9,418) (11,805) (35,198) (40,306)
-------- -------- ---------- ----------
Total interest expense 279,127 313,090 874,132 888,346
-------- -------- ---------- ----------
Net interest income 360,435 361,581 1,090,521 1,076,894
Provision for credit losses 21,000 34,000 77,000 109,000
-------- -------- ---------- ----------
Net interest income after
provision for credit losses 339,435 327,581 1,013,521 967,894
NONINTEREST INCOME
Income from fiduciary activities 40,888 37,622 123,632 106,871
Service charges on deposit accounts 39,316 35,036 117,283 104,985
Securities gains 174 1,096 35 1,359
Other noninterest income 71,736 62,593 194,811 173,973
-------- -------- ---------- ----------
Total noninterest income 152,114 136,347 435,761 387,188
NONINTEREST EXPENSES
Salaries and employee benefits 142,252 135,311 415,013 403,669
Net occupancy expense 22,533 22,311 66,873 67,699
Equipment expense 14,959 15,055 45,250 46,288
Telecommunications expense 7,207 6,894 20,190 20,965
Other noninterest expenses 66,870 73,051 209,667 211,997
-------- -------- ---------- ----------
Total noninterest expenses 253,821 252,622 756,993 750,618
-------- -------- ---------- ----------
Income before income taxes 237,728 211,306 692,289 604,464
Provision for income taxes 83,238 74,239 243,033 213,915
-------- -------- ---------- ----------
NET INCOME $154,490 $137,067 $ 449,256 $ 390,549
======== ======== ========== ==========
Net income applicable to common stock $150,215 $132,792 $ 436,431 $ 377,724
======== ======== ========== ==========
Basic net income per common share $0.97 $0.84 $2.80 $2.38
Diluted net income per common share $0.95 $0.83 $2.75 $2.34
Cash dividends declared on common stock $49,650 $45,253 $149,615 $136,276
Dividends per common share $0.32 $0.29 $0.96 $0.86
</TABLE>
<PAGE>
<PAGE> 4
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
<CAPTION>
Nonredeem-
able Unrealized Total
Preferred Common Capital Gains/ Retained Deferred Treasury Shareholders'
(in thousands) Stock Stock Surplus (Losses) Earnings Compensation Stock Equity
--------- --------- --------- ---------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1997 $250,000 $536,487 $ - $ (22,789) $1,854,116 $ (2,245) $ - $2,615,569
Net income for 1997 - - - - 390,549 - - 390,549
Nonowner changes in equity:
Unrealized holding
gains/(losses) arising
during the period - - - 48,121 - - - 48,121
Less: Reclassification
adjustment for gains/
(losses) included in
net income - - - 1,359 - - - 1,359
Nonowner changes in equity
before income taxes - - - 46,762 - - - 46,762
Provision for income taxes
related to nonowner changes
in equity - - - 16,367 - - - 16,367
Nonowner changes in equity,
net of tax - - - 30,395 - - - 30,395
Net income and nonowner changes
in equity - - - - - - - 420,944
Cash dividends declared:
Preferred stock - - - - (12,825) - - (12,825)
Common stock - - - - (136,276) - - (136,276)
Purchase and retirement of
2,772,227 shares of common
stock - (13,861) (24,860) - (133,005) - - (171,726)
Issuance of common stock under
employee stock plans - 3,572 24,860 - 9 (531) - 27,910
Amortization of deferred
compensation - - - - - 758 - 758
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT SEPTEMBER 30, 1997 $250,000 $526,198 $ - $ 7,606 $1,962,568 $ (2,018) $ - $2,744,354
======== ======== ========= ========= ========== ========= ========= ==========
BALANCES AT JANUARY 1, 1998 $250,000 $784,077 $ - $ (1,937) $1,731,419 $ (1,783) $ - $2,761,776
Net income for 1998 - - - - 449,256 - - 449,256
Nonowner changes in equity:
Unrealized holding gains/
(losses) arising during
the period - - - 7,132 - - - 7,132
Less: Reclassification
adjustment for gains/
(losses) included in net
income - - - 35 - - - 35
Nonowner changes in equity
before income taxes - - - 7,097 - - - 7,097
Provision for income taxes
related to nonowner changes
in equity - - - 2,484 - - - 2,484
Nonowner changes in equity,
net of tax - - - 4,613 - - - 4,613
Net income and nonowner changes
in equity - - - - - - - 453,869
Cash dividends declared:
Preferred stock - - - - (12,825) - - (12,825)
Common stock - - - - (149,615) - - (149,615)
Purchase of 2,136,450 shares
of common stock - - - - - - (141,070) (141,070)
Purchase and retirement of
60,000 shares of common stock - (300) (3,182) - - - - (3,482)
Issuance of common stock under
employee stock plans - 2,161 19,895 - (19,038) (2,085) 29,663 30,596
Amortization of deferred
compensation - - - - - 758 - 758
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT SEPTEMBER 30, 1998 $250,000 $785,938 $ 16,713 $ 2,676 $1,999,197 $ (3,110) $(111,407) $2,940,007
======== ======== ========= ========= ========== ========== ========= ==========
/TABLE
<PAGE>
<PAGE> 5
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
<CAPTION>
Nine Months Ended
September 30
---------------------------
(in thousands) 1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 449,256 $ 390,549
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 77,000 109,000
Depreciation 42,997 44,344
Restructuring charge (14,957) (40,837)
Net decrease in trading account securities 2,968 291
Net increase in assets held for sale (6,857) (4,676)
Net increase in accrued income receivable (4,514) (24,031)
Net increase (decrease) in accrued expenses (161,337) 8,037
Net amortization of intangibles 21,930 21,132
Other, net 48,576 42,946
------------ ------------
Total adjustments 5,806 156,206
------------ ------------
Net cash provided by operating
activities 455,062 546,755
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks (11,869) 24,181
Net (increase) decrease in federal funds sold
and securities purchased under agreements
to resell 89,658 (9,158)
Proceeds from sale of investment securities
available for sale 44,364 175,782
Proceeds from maturity of investment
securities available for sale 876,576 768,755
Purchases of investment securities
available for sale (108,428) (880,174)
Net increase in loans (other
than purchased loans) (1,608,051) (1,902,362)
Purchase of loans (1,115) (50,505)
Net proceeds provided by acquisitions/sales 1,878,907 -
Fixed assets, net (29,494) (20,883)
Net decrease in customers' liability on
acceptances outstanding 5,447 6,865
------------ ------------
Net cash provided by (used in)
investing activities 1,135,995 (1,887,499)
FINANCING ACTIVITIES:
Net decrease in deposits (352,905) (308,869)
Net increase (decrease) in short-term
borrowings 136,269 (398,249)
Net decrease in acceptances outstanding (5,447) (6,865)
Proceeds from issuance of medium- and
long-term debt 2,500,000 4,525,000
Repayments and purchases of medium- and
long-term debt (4,162,060) (2,151,320)
Proceeds from issuance of common stock
and other capital transactions 32,681 28,441
Purchase of common stock for treasury
and retirement (144,552) (171,726)
Dividends paid (158,067) (191,135)
------------ ------------
Net cash provided by (used in)
financing activities (2,154,081) 1,325,277
------------ ------------
Net decrease in cash and due from banks (563,024) (15,467)
Cash and due from banks at beginning of year 1,927,087 1,901,760
------------ ------------
Cash and due from banks at end of period $ 1,364,063 $ 1,886,293
============ ============
Interest paid $ 900,964 $ 874,178
============ ============
Income taxes paid $ 214,738 $ 215,349
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 5,629 $ 6,031
============ ============
</TABLE> <PAGE>
<PAGE> 6
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, the statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
annual report of Comerica Incorporated and Subsidiaries (the
"Corporation") on Form 10-K for the year ended December 31, 1997.
The Corporation may use derivative financial instruments, including
foreign exchange contracts, to manage the Corporation's exposure to
interest rate and foreign currency risks. These instruments are treated
as hedges, and 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 on a mark-to-market basis. Derivative
financial instruments executed as a service to customers are accounted for
on a mark-to-market basis. For further information, refer to the
Accounting Policies footnote in the Corporation's 1997 annual report.
In June 1998, the Financial Accounting Standards Board issued
Statement 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
<PAGE>
<PAGE> 7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
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
the 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 Statement 133 will
be on the earnings and financial position of the Corporation.
Note 2 - Investment Securities
At September 30, 1998, investment securities having a carrying value
of $2.2 billion were pledged where permitted or required by law to secure
liabilities and public and other deposits, including deposits of the State
of Michigan of $45 million.
Note 3 - Allowance for Credit Losses
The following analyzes the changes in the allowance for credit
losses included in the consolidated balance sheets:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
--------- ---------
<S> <C> <C>
Balance at January 1 $ 424,147 $ 367,165
Charge offs (95,881) (93,462)
Recoveries 33,663 29,879
--------- ---------
Net charge offs (62,218) (63,583)
Provision for credit losses 77,000 109,000
--------- ---------
Balance at September 30 $ 438,929 $ 412,582
========= =========
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," considers a loan
impaired when it is probable that interest and principal payments will not
be made in accordance with the contractual terms of the loan agreement.
Consistent with this definition, all nonaccrual and reduced-rate loans
(with the exception of residential mortgage and consumer loans) are <PAGE>
<PAGE> 8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Credit Losses (continued)
impaired. Impaired loans averaged $93 million and $80 million for the
quarter and nine months ended September 30, 1998, compared to $84 million
and $71 million for the comparable periods last year. The following are
period-end balances:
<TABLE>
<CAPTION>
(in thousands) September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Total impaired loans $99,700 $70,470
Impaired loans requiring
an allowance 77,645 60,376
Impairment allowance 21,634 20,358
</TABLE>
Those impaired loans not requiring an allowance represent loans for which
the fair value exceeded the recorded investment in the loan.<PAGE>
<PAGE> 9
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at September
30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
(in thousands) September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Parent Company
9.75% subordinated notes
due 1999 $ 74,946 $ 74,877
10.125% subordinated debentures
due 1998 - 74,965
7.25% subordinated notes due
2007 159,953 148,509
---------- ----------
Total parent company 234,899 298,351
Subsidiaries
Subordinated notes:
7.25% subordinated notes due
2007 198,250 198,100
7.875% subordinated notes due
2026 174,305 146,914
8.375% subordinated notes due
2024 155,557 147,938
7.25% subordinated notes due
2002 149,364 149,246
6.875% subordinated notes due
2008 104,301 99,220
7.125% subordinated notes due
2013 155,269 148,224
6.00% subordinated notes due
2008 247,845 -
---------- ----------
Total subordinated notes 1,184,891 889,642
Medium-term notes:
Floating rate based on Treasury
bill indices 486,999 487,000
Floating rate based on Prime
indices - 1,100,007
Floating rate based on LIBOR
indices 3,315,274 2,811,793
Floating rate based on Federal
Funds indices - 349,998
Fixed rate notes with interest
rates ranging from 5.97%
to 6.65% 410,634 1,349,596
---------- ----------
Total medium-term notes 4,212,907 6,098,394
Total subsidiaries 5,397,798 6,988,036
---------- ----------
Total medium- and long-term
debt $5,632,697 $7,286,387
========== ==========
</TABLE>
<PAGE>
<PAGE> 10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory
federal income tax rates to income before income taxes as reported in the
financial statements after deducting non-taxable items, principally
interest income on state and municipal securities. State and foreign
taxes are then added to the federal provision.<PAGE>
<PAGE> 11
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
Amount Gains Losses Value Amount Gains Losses Value
(in millions) (1) (2) (3) (1) (2) (3)
------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk Management
Interest rate contracts
Swaps (4) $ 7,077 $212 $ (1) $ 211 $ 8,515 $137 $ (14) $ 123
Caps and floors
purchased 50 - - - 52 - - -
Foreign exchange contracts
Spot and forward 665 16 (6) 10 445 12 (9) 3
Swaps 126 13 - 13 154 5 - 5
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 7,918 241 (7) 234 9,166 154 (23) 131
Customer Initiated and
Other
Interest rate contracts
Caps and floors
written 226 - (1) (1) 314 - - -
Caps and floors
purchased 160 1 - 1 32 - - -
Swaps 167 7 (7) - 150 6 (6) -
Foreign exchange contracts
Spot, forward and
options 1,309 24 (17) 7 1,837 37 (33) 4
------- ---- ----- ----- ------- ---- ----- -----
Total customer
initiated and other 1,862 32 (25) 7 2,333 43 (39) 4
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange
contracts $ 9,780 $273 $ (32) $ 241 $11,499 $197 $ (62) $ 135
======= ==== ===== ===== ======= ==== ===== =====
(1) Notional or contract amounts, which represent the extent of involvement in the
derivatives market, are generally used to determine the contractual cash flows required in
accordance with the terms of the agreement. These amounts are typically not exchanged,
significantly exceed amounts subject to credit or market risk, and are not reflected in the
consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current market
rates, contracts in a profitable position. Credit risk is calculated before consideration
is given to bilateral collateral agreements or master netting arrangements that effectively
reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally represent the
estimated amounts the Corporation would receive or pay to terminate or otherwise settle the
contracts at the balance sheet date. The fair values of customer initiated and other
derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
Futures contracts are subject to daily cash settlements; therefore, the fair value of these
instruments is zero.
(4) Includes index amortizing swaps with a notional amount of $2,563 million and $3,521
million at September 30, 1998 and December 31, 1997, respectively. These swaps had net
unrealized gains of $26 million and net unrealized losses of $4 million at September 30, 1998
and December 31, 1997, respectively. As of September 30, 1998 index amortizing swaps had an
average expected life of approximately 1 year with a stated maturity that averaged 3 years.
/TABLE
<PAGE>
<PAGE> 12
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
Risk Management
- ---------------
Interest rate risk arises in the normal course of business to the
extent there is a difference between the repricing and maturity
characteristics of interest-earning assets and interest-bearing
liabilities. This gap in the balance sheet structure reflects the
sensitivity of the Corporation's net interest income to a change in
interest rates. Foreign exchange rate risk arises from changes in the
value of certain assets and liabilities denominated in foreign currencies.
The Corporation employs on-balance sheet instruments such as investment
securities, as well as off-balance sheet derivative financial instruments
and foreign exchange contracts, to manage exposure to these and other
risks, including liquidity risk.
As an end-user, the Corporation mainly accesses the interest rate
markets to obtain off-balance sheet derivatives instruments for use
principally in connection with asset and liability management activities.
The Corporation principally utilizes interest rate swaps with the
objective of managing the sensitivity of net interest income to interest
rate fluctuations. To accomplish this objective, the Corporation
primarily uses interest rate swaps to modify the interest rate
characteristics of certain assets and liabilities (for example, from a
floating rate to a fixed rate, a fixed rate to a floating rate or from one
floating rate index to another). Management believes this strategy
achieves an optimal match between the rate maturities of assets and their
funding sources which, in turn, reduces the overall exposure of net
interest income to interest rate risk, although there can be no assurance
that such a strategy will be successful.
The following table summarizes the expected maturity distribution of
the notional amount of interest rate swaps used for risk management
purposes. The table also indicates the weighted average interest rates
associated with amounts to be received or paid on interest rate swap
agreements as of September 30, 1998. The swaps are grouped by the assets
or liabilities to which they have been designated.<PAGE>
<PAGE> 13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
2003- Dec. 31,
(dollar amounts in millions) 1998 1999 2000 2001 2002 2026 Total 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ - $ 700 $2,425 $ - $ - $3,125 $ 700
Amortizing - - - - - - - 100
Index amortizing 390 1,177 587 150 187 60 2,551 3,504
Weighted average: (1)
Receive rate 6.36% 6.35% 6.35% 5.96% 6.49% 6.14% 6.18% 6.33%
Pay rate 5.64% 5.64% 5.57% 5.65% 5.58% 5.51% 5.63% 5.90%
Floating/floating swaps $ - $ - $ - $ - $ - $ - $ - $ 55
Fixed rate asset designation:
Pay fixed swaps
Generic $ - $ 2 $ - $ - $ - $ - $ 2 $ 2
Index amortizing 2 3 7 - - - 12 17
Weighted average: (1)
Receive rate 5.59% 5.65% 5.59% -% -% -% 5.61% 5.97%
Pay rate 5.34% 6.70% 5.34% -% -% -% 5.82% 5.85%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ 200 $ - $ 200 $ - $150 $ 350 $ 900 $2,200
Weighted average: (1)
Receive rate 5.97% -% 6.91% -% 7.37% 7.56% 7.03% 6.84%
Pay rate 5.55% -% 5.69% -% 5.69% 5.75% 5.68% 5.83%
Floating/floating swaps $ 450 $ - $ 37 $ - $ - $ - $ 487 $1,937
Weighted average: (2)
Receive rate 5.52% -% 5.47% -% -% -% 5.52% 5.73%
Pay rate 5.58% -% 5.68% -% -% -% 5.59% 5.77%
Total notional amount $1,042 $1,182 $1,531 $2,575 $337 $ 410 $7,077 $8,515
- -----------------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR rates paid or received at September 30, 1998.
(2) Variable rates paid are based on LIBOR at September 30, 1998, while variable rates
received are based on prime.
- -----------------------------------------------------------------------------------------
/TABLE
<PAGE>
<PAGE> 14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
The Corporation also uses various other types of off-balance sheet
financial instruments to manage interest rate and foreign currency risks
associated with specific assets or liabilities, including interest rate
caps and floors, forward and futures interest and foreign exchange rate
contracts, and foreign exchange rate swaps, which are reflected in the
table above. At September 30, 1998 and December 31, 1997, the notional
amounts of commitments to purchase and sell U.S. Treasury and municipal
bond securities related to the Corporation's trading account totaled $81
million and $2 million, respectively. The notional amounts of commitments
to sell mortgage loans totaled $30 million at December 31, 1997. No such
commitments were outstanding at September 30, 1998. These commitments,
which are similar in nature to forward contracts, are not reflected in the
above table due to the immaterial impact they have on the financial
statements.
Customer Initiated and Other
- -----------------------------
The Corporation earns additional income by executing various
transactions, primarily foreign exchange contracts, interest rate caps and
forward rate agreements, at the request of customers. The Corporation
minimizes market risk arising from customer initiated foreign exchange
contracts and forward rate agreements by entering into offsetting
transactions. Average fair values and income from customer initiated and
other foreign exchange contracts were not material for the nine-month
period ended September 30, 1998 and for the year ended December 31, 1997.
Customer initiated interest rate caps generally are not offset by
other on- or off-balance sheet financial instruments; however, the
Corporation has established authority limits for engaging in these
transactions in order to minimize risk exposure. As a result, average
fair values and income from this activity were not material for the nine-
month period ended September 30, 1998 and for the year ended December 31,
1997.
<PAGE>
<PAGE> 15
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
Available credit lines on fixed rate credit card and check product
accounts, which expose the Corporation to the risk of a reduction in net
interest income as rates increase, totaled approximately $1.6 billion at
September 30, 1998 and $1.8 billion at December 31, 1997. Management
believes that market risk exposure arising from these 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.
Off-Balance Sheet Derivative and Foreign Exchange Activity
- ----------------------------------------------------------
The following table provides a reconciliation of the beginning and
ending notional amounts for interest rate derivatives and foreign exchange
contracts.
<TABLE>
<CAPTION>
Customer Initiated
Risk Management and Other
--------------------- ---------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
(in millions) Contracts Contracts Contracts Contracts
--------------------- ---------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $ 8,567 $ 599 $ 496 $ 1,837
Additions 2,577 5,166 288 28,198
Maturities/amortizations (3,262) (4,974) (231) (28,726)
Terminations (755) - - -
------- ------- ----- --------
Balances at September 30, 1998 $ 7,127 $ 791 $ 553 $ 1,309
======= ======= ===== ========
</TABLE>
Additional information regarding the nature, terms and associated
risks of the above off-balance sheet derivatives and foreign exchange
contracts, along with information on derivative accounting policies, can
be found in the Corporation's 1997 annual report on page 33 and in Notes
1 and 18 to the consolidated financial statements.
<PAGE>
<PAGE> 16
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
-----------------------
Results of Operations
- ---------------------
Net income for the third quarter ended September 30, 1998 was $154
million, up $17 million, or 13 percent, from $137 million reported for the
third quarter of 1997. Diluted net income per share increased 14 percent
to $0.95 from $0.83 a year ago. Return on average common shareholders'
equity was 23.02 percent and return on average assets was 1.82 percent,
compared to 21.86 percent and 1.56 percent, respectively, for the
comparable quarter last year.
Net income for the first nine months of 1998 was $2.75 per share or
$449 million, compared to $2.34 or $391 million for the same period in
1997, increases of 18 percent and 15 percent, respectively. Return on
average common shareholders' equity was 22.56 percent and return on assets
was 1.72 percent for the first nine months of 1998, compared to 21.20
percent and 1.50 percent, respectively, for the first nine months of 1997.
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 on April 1, 1998, as well as increased the quarterly cash
dividend 12 percent to $0.32 per share. All per share data included in
the financial statements and managements discussion and analysis have been
retroactively adjusted to reflect the split.
Net Interest Income
- -------------------
The rate-volume analysis in Table I details the components of the
change in net interest income on a fully taxable equivalent (FTE) basis
for the quarter ended September 30, 1998. On a FTE basis, net interest
income was $362 million for the three months ended September 30, 1998, a
decrease of $2 million from the comparable quarter in 1997. Net interest
income and the net interest margin were both affected by the sale of $2.0
billion of indirect consumer loans and non-relationship credit card
receivables. Excluding the impact of the consumer sale, net interest
income would have increased 5 percent, primarily due to a 17 percent
increase in average commercial loans. The net interest margin for the
<PAGE>
<PAGE> 17
three months ended September 30, 1998, was 4.63 percent, an increase of 15
basis points from 4.48 percent for the third quarter of 1997.
Table II provides an analysis of net interest income for the first
nine months of 1998. On a FTE basis, net interest income for the nine
months ended September 30, 1998, was $1,096 million compared to $1,084
million for the same period in 1997. This increase is primarily
attributed to the growth in commercial loans cited in the quarterly
discussion. The net interest margin for the nine months ended September
30, 1998, was 4.58 percent compared to 4.55 percent for the same period in
1997.
Net income generated by the risk management interest rate swap
portfolio resulted in a contribution of 12 basis points to the net
interest margin in the third quarter of 1998, compared to a 15 basis-point
contribution in the year-earlier quarter. The contribution for the first
nine months of 1998 was 15 basis points compared to a 17 basis-point
contribution in 1997. Interest rate swaps permit management to control
the sensitivity of net interest income to fluctuations in interest rates
in a manner similar to on-balance sheet investment securities but without
significant impact to capital or liquidity. These instruments are
designated against certain assets and liabilities, therefore, their impact
on net interest income is generally offset by and should be considered in
relation to the level of net interest income generated by the related on-
balance sheet assets and liabilities.
In addition to using interest rate swaps and other off-balance sheet
instruments to control the Corporation's exposure to interest rate risk,
management attempts to monitor the effect of movements in interest rates
on net interest income by regularly performing interest sensitivity gap
and earnings simulation analyses. At September 30, 1998, the Corporation
was in an asset sensitive position of $2.5 billion (on an elasticity
adjusted basis), or 8 percent of earning assets. The earnings simulation
analysis performed at the end of the quarter reflects changes to both
interest rates and loan, investment and deposit volumes. The measurement
<PAGE>
<PAGE> 18
of risk exposure at September 30, 1998 for a 200 basis-point decline in
short-term interest rates identified approximately $67 million, or 4.49
percent, of net interest income at risk during the next 12 months. If
short-term interest rates rise 200 basis points, net interest income would
be enhanced by approximately $2 million, or 0.10 percent. The results of
these simulations are within established corporate policy guidelines.
<PAGE>
<PAGE> 19
<TABLE>
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30, 1998 September 30, 1997
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $27,775 $584 8.36% $27,435 $591 8.56%
Investment securities 3,209 55 6.81 4,754 84 7.05
Other earning assets 128 2 6.43 95 2 7.35
- ----------------------------------------------------------------------------------------------
Total earning assets 31,112 641 8.19 32,284 677 8.33
Interest-bearing deposits 15,605 156 3.97 16,194 173 4.24
Short-term borrowings 3,273 46 5.60 3,559 50 5.58
Medium- and long-term debt 5,652 86 6.05 6,464 102 6.25
Net interest rate swap (income)/
expense (1) - (9) - - (12) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $24,530 279 4.52 $26,217 313 4.74
-------------- ---------------
Net interest income/
Rate spread (FTE) $362 3.67 $364 3.59
==== ====
FTE adjustment $ 2 $ 2
==== ====
Impact of net noninterest-bearing
sources of funds 0.96 0.89
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.63% 4.48%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended September 30, 1998, to the related assets and liabilities, the average yield on total
loans was 8.43 percent as of September 30, 1998, compared to 8.64 percent a year ago. The average
cost of funds for medium- and long-term debt was 5.77 percent as of September 30, 1998, compared
to 5.86 percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ (1) $ (6) $ (7)
Investment securities (3) (26) (29)
Other earning assets - - -
------------------------------
Total earning assets (4) (32) (36)
Interest-bearing deposits (1) (16) (17)
Short-term borrowings - (4) (4)
Medium- and long-term debt (3) (13) (16)
Net interest rate swap
(income)/expense 3 - 3
------------------------------
Total interest-bearing sources (1) (33) (34)
------------------------------
Net interest income/Rate spread (FTE) $ (3) $ 1 $ (2)
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
<PAGE>
<PAGE> 20
<TABLE>
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
<CAPTION>
Nine Months Ended
-------------------------------------------------------------
September 30, 1998 September 30, 1997
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $28,276 $1,783 8.43% $26,908 $1,717 8.53%
Investment securities 3,516 180 6.82 4,768 249 6.92
Other earning assets 152 7 6.09 131 6 6.48
- ----------------------------------------------------------------------------------------------
Total earning assets 31,944 1,970 8.24 31,807 1,972 8.28
Interest-bearing deposits 15,944 484 4.06 16,189 502 4.15
Short-term borrowings 3,234 135 5.59 3,980 162 5.45
Medium- and long-term debt 6,293 290 6.15 5,619 264 6.27
Net interest rate swap
(income)/expense (1) - (35) - - (40) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,471 874 4.59 $25,788 888 4.60
----------------- ------------------
Net interest income/
Rate spread (FTE) $1,096 3.65 $1,084 3.68
====== ======
FTE adjustment $ 6 $ 7
====== ======
Impact of net noninterest-bearing
sources of funds 0.93 0.87
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.58% 4.55%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the nine months
ended September 30, 1998, to the related assets and liabilities, the average yield on total loans
was 8.52 percent as of September 30, 1998, compared to 8.63 percent a year ago. The average cost
of funds for medium- and long-term debt was 5.78 percent as of September 30, 1998, compared to 5.81
percent a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 7 $ 59 $ 66
Investment securities (5) (64) (69)
Other earning assets - 1 1
------------------------------
Total earning assets 2 (4) (2)
Interest-bearing deposits (1) (17) (18)
Short-term borrowings 3 (30) (27)
Medium- and long-term debt (5) 31 26
Net interest rate swap
(income)/expense 5 - 5
------------------------------
Total interest-bearing sources 2 (16) (14)
------------------------------
Net interest income/Rate spread (FTE) $ - $ 12 $ 12
==============================
* Rate/Volume variances are allocated to variances due to volume.
/TABLE
<PAGE>
<PAGE> 21
Provision for Credit Losses
- ---------------------------
The provision for credit losses for the third quarter of 1998 was $21
million, a decrease of $13 million from the third quarter of 1997. The
provision for the first nine months of 1998 was $77 million compared to $109
million for the same period in 1997. The Corporation establishes this
provision to maintain an adequate allowance for credit losses, which is
discussed in the section entitled "Allowance for Credit Losses and
Nonperforming Assets."
Noninterest Income
- ------------------
Noninterest income was $152 million for the three months ended September
30, 1998, an increase of $16 million, or 12 percent over the same period in
1997. Third quarter 1998 noninterest income reflects the consolidated
financial results of Munder Capital Management, an investment advisory
subsidiary in which a majority interest was obtained during July, 1998. The
Corporation's minority interest in prior periods had been accounted for under
the equity method. Excluding the effect of certain nonrecurring items,
acquisitions and divestitures in both periods, noninterest income increased 12
percent in the third quarter of 1998 compared to the third quarter of 1997.
Accounting for the majority of this increase were higher levels of fiduciary
income, service charges and commercial fee income. Included in the large
nonrecurring items in other noninterest income for the third quarter of 1997
is a $6 million pre-tax gain related to the final settlement from the sale of
the Corporation's bond indenture services business. For the first nine months
of 1998, noninterest income was $436 million, an increase of $49 million, or
13 percent, from the first nine months of 1997.
Noninterest Expenses
- --------------------
Noninterest expenses were $254 million for the third quarter ended
September 30, 1998, an increase of $1 million, or less than 1 percent, from
the third quarter of 1997. Salaries and employee benefits increased $7
million, or 5 percent, in the third quarter of 1998 from the comparable period
<PAGE> 22
in 1997, primarily from the consolidation of Munder Capital Management. Other
noninterest expenses decreased $6 million in the third quarter of 1998 from
the same period last year, primarily due to $6 million in litigation accruals
included in 1997. For the first nine months of 1998, noninterest expenses
were $757 million, an increase of $6 million, or 1 percent, from the first
nine months of 1997.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the third quarter of 1998 totaled $83
million, an increase of 12 percent compared to $74 million reported for the
same period a year ago. The provision for the first nine months of 1998 was
$243 million compared to $214 million for the same period in 1997. The
effective tax rate was 35 percent for the third quarter and the first nine
months of 1998 and for the comparable periods in 1997.
Strategic Lines of Business
- ---------------------------
The Corporation has strategically aligned its operations into three
major lines of business: the Business Bank, the Individual Bank and the
Investment Bank. Table III presents the financial results of these business
lines for the nine months ended September 30, 1998 and 1997. For a
description of the business activities of each line of business and the
methodologies which form the basis for these results, refer to the discussion
entitled "Strategic Lines of Business" on page 26 of the Corporation's 1997
annual report.
Financial Condition
- -------------------
Total assets were $34.4 billion at September 30, 1998, compared with
$36.3 billion at December 31, 1997. The Corporation has continued to generate
commercial loan growth in 1998. Since December 31, 1997, commercial loans
have increased $1.6 billion, or 10 percent and international loans have
<PAGE>
<PAGE> 23
<TABLE>
Table III - Strategic Lines of Business Financial Results
<CAPTION>
Nine Months Ended September 30
Business Individual Investment
Bank Bank Bank* Other Total
- -----------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1998** 1997 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average assets $22,328 $19,522 $7,865 $9,526 $ 34 $ 26 $4,606 $5,544 $34,833 $34,618
Total revenues (FTE) 651 592 742 767 87 79 52 33 1,532 1,471
Net income 242 239 210 177 2 2 (5) (27) 449 391
Return on average
assets 1.45% 1.63% 1.56% 1.32% 4.75% 3.07% -0.06% -0.31% 1.72% 1.50%
Return on average
common equity 24.87% 30.55% 37.58% 30.57% 11.26% 10.96% -1.32% -4.50% 22.56% 21.20%
* Net income was reduced by charges for fees internally transferred to other lines of business for referrals to
the Investment Bank. If excluded, Investment Bank net income would have been $6 million and $4 million, and
return on average common equity would have been 30.31% and 26.32%, in 1998 and 1997, respectively.
** Financial results for the Individual Bank for 1998 were affected by the sale of $2.0 billion of indirect
consumer loans and non-relationship credit card receivables and the mortgage servicing business. Net income
for the Individual Bank includes a $9 million gain and reflects the reduction of the Individual Bank's
allowance for credit losses as a result of the sale.<PAGE>
<PAGE> 24
increased $439 million, or 21 percent. Total loans decreased $428
million, or 1 percent, since year-end 1997 as a result of the sale of
$2.0 billion of indirect consumer loans and certain credit card
receivables. The increase in commercial loans was partially funded by
runoff of investment securities, which declined $898 million, or 22
percent, since December 31, 1997.
Total liabilities decreased $2.1 billion, or 6 percent, to $31.4 billion
since December 31, 1997. Medium- and long-term debt decreased $1.7 billion,
or 23 percent, primarily as a result of the consumer loan sales. This
decrease was partially offset by a $136 million increase in short-term
borrowings.
Allowance for Credit Losses and Nonperforming Assets
- ----------------------------------------------------
The Corporation maintains the allowance for credit losses at a level
that in management's judgement is adequate to provide for estimated probable
credit losses inherent in on- and off-balance sheet credit exposure. The
allowance for credit losses attributable to off-balance sheet exposure is not
material. Management determines the adequacy of the allowance for credit
losses by applying projected loss ratios to the risk-ratings of loans, both
individually and by category. The projected loss ratios incorporate such
factors as recent credit loss experience, current economic conditions and
trends, geographic dispersion of borrowers, trends in past due and nonaccrual
amounts, risk characteristics of various categories and concentrations of
loans, and transfer risks. However, the Corporation cannot assure that the
actual loss ratios will not vary from those projected.
At September 30, 1998, the allowance for credit losses was $439 million,
an increase of $15 million, or 3 percent, since December 31, 1997. The
allowance as a percentage of total loans increased to 1.54 percent, compared
to 1.47 percent at December 31, 1997. As a percentage of total nonperforming
assets, the allowance decreased from 413 percent at year-end 1997 to 360
percent at September 30, 1998.
<PAGE>
<PAGE> 25
Net charge-offs for the third quarter of 1998 were $21 million, or 0.30
percent of average total loans, compared with $26 million, or 0.38 percent,
for the year-earlier quarter. Net charge-offs for the first nine months of
1998 were $62 million, or 0.29 percent of average total loans, compared with
$64 million, or 0.32 percent, for the same period last year. An analysis of
the allowance for credit losses is presented in note 5 to the consolidated
financial statements.
Nonperforming assets increased $19 million, or 19 percent, since
December 31, 1997, and were categorized as follows:
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1998 1997
------------- ------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 88,011 $ 58,914
International 7,689 1,000
Real estate construction 1,897 3,438
Commercial mortgage 6,985 11,088
Residential mortgage 2,297 3,719
------------- ------------
Total nonaccrual loans 106,879 78,159
Reduced-rate loans 7,615 7,583
------------- ------------
Total nonperforming loans 114,494 85,742
Other real estate 7,563 17,046
------------- ------------
Total nonperforming assets $ 122,057 $ 102,788
============= ============
Loans past due 90 days or more $ 28,438 $ 52,805
============= ============
</TABLE>
Nonperforming assets as a percentage of total loans and other real
estate at September 30, 1998 and December 31, 1997, were 0.43 percent and 0.36
percent, respectively.
Capital
- -------
Common shareholders' equity was up $174 million from December 31, 1997
to September 30, 1998, excluding the change in unrealized gains/(losses) on
investment securities available for sale. The increase was primarily due to
the retention of $287 million in earnings, offset by the repurchase of 2.2
million shares of common stock under various corporate programs.<PAGE>
<PAGE> 26
Capital ratios exceed minimum regulatory requirements. Risk-based
capital ratios at December 31, 1997 have been revised as a result of
corrections to the data used to determine risk-based assets. Capital ratios
at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Leverage ratio (3.00 - minimum) 7.64% 7.09%
Tier 1 risk-based capital ratio
(4.0 - minimum) 6.38 6.28
Total risk-based capital ratio
(8.0 - minimum) 10.66 9.90
</TABLE>
At September 30, 1998, the capital ratios of all the Corporation's
banking subsidiaries exceeded the minimum ratios required of a "well
capitalized" institution as defined in the final rule under FDICIA.
Other Matters
- -------------
On January 1, 1999, more than two-thirds of the member countries of the
European Union are scheduled to establish fixed conversion rates between their
existing sovereign currencies and a common currency, the "euro." The
Corporation has completed an internal analysis of all activities which may be
impacted by this conversion, and has taken steps to ensure readiness. The
euro conversion is not expected to have a material impact on the Corporation's
business or financial condition.
The Corporation initiated a company-wide project to prepare its computer
systems, applications and infrastructure for Year 2000 compliance. 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
including the continued availability of internal and external resources,
<PAGE>
<PAGE> 27
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 telecommunications providers, will
adequately address their Year 2000 issues.
Readiness Preparation
In 1996, management determined that many of the Corporation's critical
processes might not be ready to operate normally in the year 2000 and beyond
without remediation. Since then, the Corporation completed an assessment of
the issue and has undertaken a project to correct and validate compliance. In
1997, the Corporation alerted its business customers and suppliers of the Year
2000 problem and is now assessing the readiness preparations of its major
customers and suppliers. Resolution of the Year 2000 problem is among the
Corporation's highest priorities, evidence of which was the establishment of a
comprehensive program to address its many aspects.
The Corporation prepared a project plan, identified its major
application and processing systems, and is using internal and external
resources to modify or replace non-ready systems. Testing systems for
readiness is part of this process. In addition, customers and vendors who
have significant relationships with the Corporation are being 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.
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.
<PAGE>
<PAGE> 28
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.
The Corporation intends to have business critical applications and services
Year 2000 ready by December 31, 1998, with the remaining systems planned for
completion by June 30, 1999. As of this date, 55 percent of remediation
effort and 35 percent of testing have been completed. The Corporation has in
place what it believes to be an extensive testing methodology, validation and
verification process. 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 help 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.
The Corporation relies on suppliers and customers for certain
information processing services, and is addressing Year 2000 issues with both
groups. As of September 30, 1998, management has identified critical vendors
and is inquiring as to their Year 2000 readiness plans and status. The
Corporation will complete written risk assessments on each and will ask those
found to pose a significant risk to demonstrate how risks will be addressed.
Measures to minimize risk will be undertaken with those that appear to pose a
significant risk. The Corporation expects to complete risk assessments on the
critical vendors by year-end 1998, and replace vendors as necessary. There
may be certain business critical third parties, such as utilities or
telecommunication companies, where alternative arrangements or sources are
limited or unavailable.
<PAGE>
<PAGE> 29
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. Approximately 6,000 borrowers, capital market counter
parties, funding sources, and large depositors have been identified as having
financial volumes sufficiently large to warrant inquiry as to Year 2000
preparation. These inquiries are presently underway and written risk
assessments will be completed on each. Management has substantially completed
an initial assessment of risk based on these reports as of September 30, 1998.
Customers found to have a significant risk of not being ready for Year 2000
are encouraged to make the necessary effort. Measures are being undertaken
to minimize risk with those that appear to pose a significant risk.
The Corporation's Year 2000 change program includes the active
involvement of senior executives as well as seasoned project managers from
throughout the company. Senior executives, the board of directors and a
project steering committee regularly review the overall program. The federal
and state agencies that regulate the banking industry also monitor the
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 $45 million, of which approximately
$17 million was incurred in 1996, 1997 and during the first nine months of
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 $17 million incurred to date, $4
million was for capital assets which the Corporation is expensing over the
useful lives. The Corporation will fund the remaining Year 2000 costs yet to
<PAGE>
<PAGE> 30
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 $6 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 counter parties 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. It is not possible to accurately estimate the likelihood, or
potential impact, of significant disruptions among the Corporation's funding
sources and obligors at this time.
<PAGE> 31
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.
Included in this report are forward-looking statements based on
management's current expectations and/or the assumptions made in the earnings
simulation analyses, but numerous factors could cause variances in these
projections, and their underlying assumptions, such as changes in interest
rates, the industries where the Corporation has a concentration of loans,
changes in the level of fee income, economic conditions and continuing
consolidations in the banking industry.
<PAGE>
<PAGE> 32
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(10.12) Amendment to Severance Agreement with Michael T. Monahan
(11) Statement re: Computation of Earnings Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the nine
months ended September 30, 1998.
<PAGE>
<PAGE> 33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMERICA INCORPORATED
--------------------------------------
(Registrant)
/s/Ralph W. Babb, Jr.
--------------------------------------
Ralph W. Babb Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/Marvin J. Elenbaas
--------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 1998<PAGE>
<PAGE> 1
Exhibit (10.12) - Amendment to Severance Agreement with Michael T.
Monahan
AMENDMENT TO SEVERANCE AGREEMENT
This Amendment dated August 17, 1998 (the "Amendment") between Comerica
Incorporated, a Delaware corporation (together with its subsidiaries and
affiliated being hereinafter referred to as the "Company"), and Michael T.
Monahan ("Executive") amends that certain Severance Agreement dated as of
the 21st day of December, 1995 (the "Severance Agreement") between the
Company and Executive.
Recitals
--------
1. The Company and Executive entered into the Severance Agreement for the
purpose of inducing Executive to continue his employment with the Company
until February 1, 1999.
2. The Company and the Executive clarified certain provisions in a letter
dated December 21, 1995 (the "December Letter").
3. The Company and the Executive have agreed to extend Executive's
employment with the Company to June 1, 1999 and to include in this
amendment certain provisions contained the December Letter but not in the
Severance Agreement.
Agreement
---------
The Company and Executive agree:
1. The Severance Agreement, effective as of the date first written above,
is hereby amended as follows:
(a) All references to "February 1, 1999" in the Severance Agreement
are hereby changed to "June 1, 1999."
(b) All references to "February, 1999" in the Severance Agreement are
hereby changed to "June 1, 1999."
(c) Section III.1 is hereby deleted in its entirety and the following
Section 111.1 is hereby inserted:
"1. If the Executive voluntarily retires or voluntarily
terminates from the Company before June 1, 1999, he shall
receive (i) the Severance Payment, (ii) Insurances Coverages
and (iii) Medical Benefits. In addition, Executive's
entitlement to the Stock Award and any Outstanding Options
will be determined by the specific agreements relating to
such benefits and not by this Severance Agreement."
2. The December Letter is superseded by this Amendment and is no longer
in effect.
3. On and after the effective date of this Amendment, each reference in
the Severance Agreement to "this Agreement," "hereunder," "hereof," or
words of like import shall mean and be a reference to the Severance
Agreement as amended by this Amendment. The Severance Agreement, as
amended by this Amendment, is and shall continue to be in full force and
effect and is hereby in all respects ratified and confirmed.<PAGE>
<PAGE> 2
4. This Amendment may be executed in any number of counterparts, each of
which counterparts shall be an original and all of which taken together
shall constitute one and the same Amendment.
The Company and the Executive have entered into this Amendment as of the
date first written above.
COMERICA INCORPORATED
By: /s/ Richard S. Collister
-------------------------
Its: Executive Vice President
-------------------------
/s/ Michael T. Monahan
- -----------------------------------
MICHAEL T. MONAHAN
<PAGE> 1
Exhibit (11) - Statement Re: Computation of Earnings Per Share
<TABLE>
COMPUTATION OF EARNINGS PER SHARE
Comerica Incorporated and Subsidiaries
<CAPTION>
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Average shares outstanding 155,278 157,971 155,990 158,714
======== ======== ======== ========
Net income $154,490 $137,067 $449,256 $390,549
Less preferred stock dividends 4,275 4,275 12,825 12,825
-------- -------- -------- --------
Net income applicable to common
stock $150,215 $132,792 $436,431 $377,724
======== ======== ======== ========
Basic net income per share $0.97 $0.84 $2.80 $2.38
Diluted:
Average shares outstanding 155,278 157,971 155,990 158,714
Noninvested stock 177 202 192 205
Common stock equivalent:
Net effect of the assumed
exercise of stock options 2,635 2,627 2,770 2,376
-------- -------- -------- --------
Diluted average shares 158,090 160,800 158,952 161,295
======== ======== ======== ========
Net income $154,490 $137,067 $449,256 $390,549
Less preferred stock dividends 4,275 4,275 12,825 12,825
-------- -------- -------- --------
Net income applicable to common
stock $150,215 $132,792 $436,431 $377,724
======== ======== ======== ========
Diluted net income per share $0.95 $0.83 $2.75 $2.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SEPTEMBER 1998 FORM 10-Q FOR COMERICA INCORPORATED AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,364,063
<INT-BEARING-DEPOSITS> 15,188
<FED-FUNDS-SOLD> 60,143
<TRADING-ASSETS> 6,134
<INVESTMENTS-HELD-FOR-SALE> 3,108,120
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 28,467,214
<ALLOWANCE> 438,929
<TOTAL-ASSETS> 34,376,214
<DEPOSITS> 22,233,412
<SHORT-TERM> 3,329,170
<LIABILITIES-OTHER> 240,928
<LONG-TERM> 5,632,697
<COMMON> 785,938
0
250,000
<OTHER-SE> 1,904,069
<TOTAL-LIABILITIES-AND-EQUITY> 34,376,214
<INTEREST-LOAN> 1,781,164
<INTEREST-INVEST> 176,630
<INTEREST-OTHER> 6,859
<INTEREST-TOTAL> 1,964,653
<INTEREST-DEPOSIT> 484,353
<INTEREST-EXPENSE> 874,132
<INTEREST-INCOME-NET> 1,090,521
<LOAN-LOSSES> 77,000
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 756,993
<INCOME-PRETAX> 692,289
<INCOME-PRE-EXTRAORDINARY> 449,256
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 449,256
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.75
<YIELD-ACTUAL> 4.58
<LOANS-NON> 106,879
<LOANS-PAST> 28,438
<LOANS-TROUBLED> 7,615
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 429,648
<CHARGE-OFFS> 95,881
<RECOVERIES> 33,663
<ALLOWANCE-CLOSE> 438,929
<ALLOWANCE-DOMESTIC> 216,328
<ALLOWANCE-FOREIGN> 4,369
<ALLOWANCE-UNALLOCATED> 218,232
</TABLE>
