<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 June 30, 1999
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 July 31, 1999: 156,313,000 shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(In thousands, except share data) 1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,535,721 $ 1,773,100 $ 2,222,463
Short-term investments 85,182 109,640 264,777
Investment securities available
for sale 2,345,236 2,712,165 3,396,952
Commercial loans 19,647,781 19,086,541 16,891,406
International loans 2,629,303 2,713,259 2,389,783
Real estate construction loans 1,377,101 1,079,614 981,975
Commercial mortgage loans 4,536,512 4,179,271 3,788,052
Residential mortgage loans 903,189 1,037,941 1,360,363
Consumer loans 1,800,840 1,861,630 1,999,634
Lease financing 671,525 646,607 591,418
------------ ------------ ------------
Total loans 31,566,251 30,604,863 28,002,631
Less allowance for credit losses (460,397) (452,409) (438,875)
------------ ------------ ------------
Net loans 31,105,854 30,152,454 27,563,756
Premises and equipment 345,298 352,650 361,003
Customers' liability on acceptances
outstanding 15,164 12,335 26,252
Accrued income and other assets 1,518,032 1,488,487 1,214,802
------------ ------------ ------------
TOTAL ASSETS $ 36,950,487 $ 36,600,831 $ 35,050,005
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,515,942 $ 6,999,337 $ 6,392,257
Interest-bearing deposits 15,837,640 17,313,796 16,226,376
------------ ------------ ------------
Total deposits 22,353,582 24,313,133 22,618,633
Federal funds purchased and
securities sold under
agreements to repurchase 2,833,235 3,108,985 1,049,308
Other borrowed funds 912,330 471,168 2,542,210
Acceptances outstanding 15,164 12,335 26,252
Accrued expenses and other
liabilities 357,712 366,338 324,618
Medium- and long-term debt 7,231,275 5,282,259 5,662,180
------------ ------------ ------------
Total liabilities 33,703,298 33,554,218 32,223,201
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
6/30/99, 12/31/98 and 6/30/98 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued-157,233,107 shares at
6/30/99, 157,233,088 shares at
12/31/98 and 157,187,518 shares
at 6/30/98 786,166 786,165 785,938
Capital surplus 31,946 24,649 14,889
Accumulated nonowner changes
in equity (26,058) (6,455) (5,206)
Retained earnings 2,271,378 2,086,589 1,904,223
Deferred compensation (4,107) (5,202) (3,071)
Less cost of common stock in
treasury- 942,715 shares at
6/30/99, 1,351,997 shares at
at 12/31/98 and 1,818,965 shares
at 6/30/98 (62,136) (89,133) (119,969)
------------ ------------ ------------
Total shareholders' equity 3,247,189 3,046,613 2,826,804
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 36,950,487 $ 36,600,831 $ 35,050,005
============ ============ ============
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- -----------------------------
(In thousands, except per share data) 1999 1998 1999 1998
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 600,325 $ 590,427 $ 1,186,687 $ 1,197,417
Interest on investment securities:
Taxable 37,906 56,582 77,623 118,888
Exempt from federal income tax 1,261 1,927 2,636 4,020
--------- --------- ----------- -----------
Total interest on investment
securities 39,167 58,509 80,259 122,908
Interest on short-term investments 2,009 2,294 3,990 4,766
--------- --------- ----------- -----------
Total interest income 641,501 651,230 1,270,936 1,325,091
INTEREST EXPENSE
Interest on deposits 139,807 160,927 289,481 328,064
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 36,967 27,605 76,918 58,202
Other borrowed funds 6,439 17,563 11,860 30,812
Interest on medium- and long-term debt 96,283 93,879 180,714 203,707
Net interest rate swap income (17,637) (13,222) (36,511) (25,780)
--------- --------- ----------- -----------
Total interest expense 261,859 286,752 522,462 595,005
--------- --------- ----------- -----------
Net interest income 379,642 364,478 748,474 730,086
Provision for credit losses 28,000 28,000 48,000 56,000
--------- --------- ----------- -----------
Net interest income after
provision for credit losses 351,642 336,478 700,474 674,086
NONINTEREST INCOME
Fiduciary and investment management
income 59,839 42,009 114,782 82,744
Service charges on deposit accounts 42,520 39,517 84,218 77,967
Commercial lending fees 11,315 9,019 21,211 17,149
Securities gains/(losses) 690 11 1,892 (139)
Other noninterest income 80,287 58,239 129,442 105,926
--------- --------- ----------- -----------
Total noninterest income 194,651 148,795 351,545 283,647
NONINTEREST EXPENSES
Salaries and employee benefits 162,567 137,994 315,050 272,761
Net occupancy expense 23,975 21,579 47,069 44,340
Equipment expense 15,442 15,167 30,293 30,291
Outside processing fee expense 12,341 11,291 25,195 21,027
Other noninterest expenses 74,555 67,268 134,687 134,753
--------- --------- ----------- -----------
Total noninterest expenses 288,880 253,299 552,294 503,172
--------- --------- ----------- -----------
Income before income taxes 257,413 231,974 499,725 454,561
Provision for income taxes 90,031 81,591 173,231 159,795
--------- --------- ----------- -----------
NET INCOME $ 167,382 $ 150,383 $ 326,494 $ 294,766
========= ========= =========== ===========
Net income applicable to common stock $ 163,107 $ 146,108 $ 317,944 $ 286,216
========= ========= =========== ===========
Basic net income per common share $ 1.04 $ 0.94 $ 2.04 $ 1.83
Diluted net income per common share $ 1.03 $ 0.92 $ 2.01 $ 1.80
Cash dividends declared on common stock $ 56,181 $ 49,792 $ 112,330 $ 99,965
Dividends per common share $ 0.36 $ 0.32 $ 0.72 $ 0.64
</TABLE>
<PAGE> 4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Nonredeem- Accumulated
able Nonowner Total
Preferred Common Capital Changes Retained Deferred Treasury Shareholders'
(in thousands) Stock Stock Surplus in Equity Earnings Compensation Stock Equity
--------- --------- --------- ----------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1998 $ 250,000 $ 784,077 $ - $ (1,937) $1,731,419 $ (1,783) $ - $2,761,776
Net income for 1998 - - - - 294,766 - - 294,766
Nonowner changes in equity,
net of tax - - - (3,269) - - - (3,269)
----------
Net income and nonowner
changes in equity - - - - - - - 291,497
Cash dividends declared:
Preferred stock - - - - (8,550) - - (8,550)
Common stock - - - - (99,965) - - (99,965)
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)
Net issuance of common stock
under employee stock plans - 2,161 18,071 - (13,447) (1,794) 21,101 26,092
Amortization of deferred
compensation - - - - - 506 - 506
--------- -------- --------- ----------- ---------- ------------ --------- ----------
BALANCES AT JUNE 30, 1998 $ 250,000 $785,938 $ 14,889 $ (5,206) $1,904,223 $ (3,071) $(119,969) $2,826,804
========= ======== ========= =========== ========== ============ ========= ==========
BALANCES AT JANUARY 1, 1999 $ 250,000 $786,165 $ 24,649 $ (6,455) $2,086,589 $ (5,202) $ (89,133) $3,046,613
Net income for 1999 - - - - 326,494 - - 326,494
Nonowner changes in equity,
net of tax - - - (19,603) - - - (19,603)
----------
Net income and nonowner
changes in equity - - - - - - - 306,891
Cash dividends declared:
Preferred stock - - - - (8,550) - - (8,550)
Common stock - - - - (112,330) - - (112,330)
Purchase of 43,992 shares
of common stock - - - - - - (2,885) (2,885)
Net issuance of common stock
under employee stock plans - 1 7,297 - (20,825) (44) 29,882 16,311
Amortization of deferred
compensation - - - - - 1,139 - 1,139
--------- -------- --------- ----------- ---------- ------------ --------- ----------
BALANCES AT JUNE 30, 1999 $ 250,000 $786,166 $ 31,946 $ (26,058) $2,271,378 $ (4,107) $ (62,136) $3,247,189
========= ======== ========= =========== ========== ============ ========= ==========
</TABLE>
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------------
(in thousands) 1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 326,494 $ 294,766
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 48,000 56,000
Depreciation 28,340 28,332
Restructuring charge - (13,974)
Net (increase) decrease in trading
account securities (1,031) 3,979
Net (increase) decrease in assets held
for sale 24,705 (22,464)
Net (increase) decrease in accrued income
receivable (27,023) 19,127
Net decrease in accrued expenses (2,083) (194,383)
Net amortization of intangibles 16,937 13,464
Other, net (22,964) 154,485
----------- -----------
Total adjustments 64,881 44,566
----------- -----------
Net cash provided by
operating activities 391,375 339,332
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits
with banks (13,484) (20,473)
Net (increase) decrease in federal funds sold
and securities purchased under agreements
to resell 14,268 (22,862)
Proceeds from sale of investment securities
available for sale 3,539 36,295
Proceeds from maturity of investment
securities available for sale 418,262 611,325
Purchases of investment securities
available for sale (82,769) (100,105)
Net increase in loans (other
than purchased loans) (1,001,400) (1,122,522)
Purchase of loans - (1,115)
Proceeds from sale of consumer businesses - 2,006,091
Fixed assets, net (20,988) (16,776)
Net increase in customers' liability on
acceptances outstanding (2,829) (7,860)
----------- -----------
Net cash provided by (used in)
investing activities (685,401) 1,361,998
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,959,551) 32,316
Net increase in short-term borrowings 165,412 398,617
Net increase in acceptances outstanding 2,829 7,860
Proceeds from issuance of medium- and
long-term debt 3,525,000 1,500,000
Repayments and purchases of medium- and
long-term debt (1,575,984) (3,124,207)
Proceeds from issuance of common stock
and other capital transactions 16,355 27,886
Purchase of common stock for treasury
and retirement (2,885) (144,552)
Dividends paid (114,529) (103,874)
----------- -----------
Net cash provided by (used in)
financing activities 56,647 (1,405,954)
----------- -----------
Net increase (decrease) in cash and due
from banks (237,379) 295,376
Cash and due from banks at beginning of year 1,773,100 1,927,087
----------- -----------
Cash and due from banks at end of period $ 1,535,721 $ 2,222,463
=========== ===========
Interest paid $ 525,878 $ 658,920
=========== ===========
Income taxes paid $ 148,621 $ 150,107
=========== ===========
Noncash investing and financing activities:
Loan transfers to other real estate $ 3,643 $ 2,355
=========== ===========
</TABLE>
<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 six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain items in prior periods have been reclassified to
conform to the current presentation. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report of Comerica Incorporated and Subsidiaries (the "Corporation") on Form
10-K for the year ended December 31, 1998.
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 1998 annual
report.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement will require the Corporation to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
<PAGE> 7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
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
accumulated nonowner changes in equity 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.
In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." Statement 137 amended the required effective date of
Statement 133, requiring adoption of Statement 133 in years beginning after June
15, 2000. The Corporation expects to adopt Statement 133 effective January 1,
2001. 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 June 30, 1999, investment securities having a carrying value of $1.6
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
$18 million.
<PAGE> 8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
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) 1999 1998
--------- ---------
<S> <C> <C>
Balance at January 1 $ 452,409 $ 424,147
Charge-offs (52,127) (66,630)
Recoveries 12,089 25,358
--------- ---------
Net charge-offs (40,038) (41,272)
Provision for credit losses 48,000 56,000
Foreign currency translation
adjustment 26 -
--------- ---------
Balance at June 30 $ 460,397 $ 438,875
========= =========
</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 impaired. Impaired loans averaged
$137 million and $134 million for the quarter and six months ended June 30,
1999, compared to $79 million and $74 million for the comparable periods last
year. The following are period-end balances:
<TABLE>
<CAPTION>
(in thousands) June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Total impaired loans $ 124,215 $ 101,417
Impaired loans requiring
an allowance 115,248 87,494
Impairment allowance 41,811 21,951
</TABLE>
Those impaired loans not requiring an allowance represent loans for which the
fair value exceeded the recorded investment in the loan.
<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 June 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
(in thousands) June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
9.75% subordinated notes due 1999 $ - $ 74,970
7.25% subordinated notes due 2007 159,111 159,669
---------- ----------
Total parent company 159,111 234,639
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 198,401 198,301
7.875% subordinated notes due 2026 173,655 174,086
8.375% subordinated notes due 2024 155,396 155,502
7.25% subordinated notes due 2002 149,481 149,404
6.875% subordinated notes due 2008 103,959 104,186
7.125% subordinated notes due 2013 155,009 155,181
6.00% subordinated notes due 2008 247,895 247,798
---------- ----------
Total subordinated notes 1,183,796 1,184,458
Medium-term notes:
Floating rate based on Treasury
indices 37,000 37,000
Floating rate based on Prime indices 1,224,982 -
Floating rate based on LIBOR indices 4,412,233 3,612,076
Fixed rate notes with interest rate
of 6.65% 199,877 199,810
---------- ----------
Total medium-term notes 5,874,092 3,848,886
Notes payable 14,276 14,276
---------- ----------
Total subsidiaries 7,072,164 5,047,620
---------- ----------
Total medium- and long-term debt $7,231,275 $5,282,259
========== ==========
</TABLE>
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> 10
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------ ------------------------------
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) $ 8,543 $ 50 $ (78) $ (28) $ 6,869 $ 152 $ (6) $ 146
Caps and floors purchased - - - - 15 - - -
Foreign exchange contracts
Spot and forward 889 16 (17) (1) 782 32 (29) 3
Swaps 124 - (3) (3) 131 12 - 12
------- ----- ----- ------ ------- ----- ----- ------
Total risk management 9,556 66 (98) (32) 7,797 196 (35) 161
Customer Initiated and Other
Interest rate contracts
Caps and floors written 241 - (1) (1) 241 - (1) (1)
Caps and floors purchased 188 - - - 176 1 - 1
Swaps 257 2 (1) 1 264 7 (6) 1
Foreign exchange contracts
Spot, forward and options 853 17 (16) 1 673 20 (13) 7
Swaps 8 1 - 1 - - - -
------- ----- ----- ------ ------- ----- ----- ------
Total customer initiated
and other 1,547 20 (18) 2 1,354 28 (20) 8
------- ----- ----- ------ ------- ----- ----- ------
Total derivatives and
foreign exchange contracts $11,103 $ 86 $(116) $ (30) $ 9,151 $ 224 $ (55) $ 169
======= ===== ===== ===== ======= ===== ===== ======
</TABLE>
(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 $202 million and
$2,180 million at June 30, 1999 and December 31, 1998, respectively. These swaps
had net unrealized losses of less than $1 million at June 30, 1999, versus $15
million of unrealized gains at December 31, 1998. As of June 30, 1999, index
amortizing swaps had an average expected life of approximately 10 months with a
stated maturity that averaged 1 year.
<PAGE> 11
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 derivative 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 June 30,
1999. The swaps are grouped by the assets or liabilities to which they have been
designated.
<PAGE> 12
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:
2004- Dec. 31,
(dollar amounts in millions) 1999 2000 2001 2002 2003 2026 Total 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ 700 $3,250 $2,850 $ - $ - $ 6,800 $3,950
Index amortizing 48 146 - - - - 194 2,169
Weighted average: (1)
Receive rate 5.90% 6.34% 5.68% 7.14% -% -% 6.36% 6.01%
Pay rate 5.18% 5.15% 5.05% 6.56% -% -% 5.68% 5.30%
Fixed rate asset designation:
Pay fixed swaps
Generic $ 4 $ - $ - $ - $ - $ - $ 4 $ 2
Index amortizing 1 7 - - - - 8 11
Weighted average: (1)
Receive rate 5.05% 5.09% -% -% -% -% 5.08% 5.54%
Pay rate 6.47% 5.34% -% -% -% -% 5.81% 5.88%
Medium- and long-term
debt designation:
Generic receive fixed swaps $ - $ 200 $ - $ 150 $ - $1,150 $ 1,500 $ 700
Weighted average: (1)
Receive rate -% 6.91% -% 7.37% -% 6.79% 6.86% 7.33%
Pay rate -% 5.05% -% 5.04% -% 5.14% 5.12% 5.28%
Floating/floating swaps $ - $ 37 $ - $ - $ - $ - $ 37 $ 37
Weighted average: (2)
Receive rate -% 5.00% -% -% -% -% 5.00% 4.98%
Pay rate -% 4.99% -% -% -% -% 4.99% 5.19%
Total notional amount $ 53 $1,090 $3,250 $3,000 $ - $1,150 $ 8,543 $6,869
</TABLE>
- --------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR or prime rates paid or received at June
30, 1999.
(2) Variable rates paid are based on LIBOR at June 30, 1999, while variable
rates received are based on prime.
- --------------------------------------------------------------------------------
<PAGE> 13
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
During the first quarter of 1999, the Corporation terminated a portion
of its portfolio of index amortizing interest rate swaps. The notional amount of
these swaps totaled $1,376 million. The gain resulting from early termination
was deferred and is being amortized over the remaining expected life of the
terminated swaps.
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 June 30,
1999 and December 31, 1998, the notional amounts of commitments to purchase and
sell U.S. Treasury and municipal bond securities related to the Corporation's
trading account totaled $48 million and $17 million, respectively. 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
floors 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 six-month period ended June 30, 1999 and for
the year ended December 31, 1998.
Customer initiated interest rate caps and floors 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
<PAGE> 14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
fair values and income from this activity were not material for the six-month
period ended June 30, 1999 and for the year ended December 31, 1998.
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 $1.2 billion at
June 30, 1999 and $1.6 billion at December 31, 1998. 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 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, 1998 $ 6,884 $ 913 $ 681 $ 673
Additions 3,652 4,938 41 11,365
Maturities/amortizations (617) (4,838) (36) (11,177)
Terminations (1,376) - - -
-------- -------- -------- --------
Balances at June 30, 1999 $ 8,543 $ 1,013 $ 686 $ 861
======== ======== ======== ========
</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 1998 annual report on page 37 and in Notes 1 and 18 to the
consolidated financial statements.
<PAGE> 15
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 7 - Business Segment Information
The Corporation has strategically aligned its operations into three
major lines of business: the Business Bank, the Individual Bank and the
Investment Bank. These lines of business are differentiated based on the
products and services provided. In addition to the three major lines of
business, the Finance Division is also reported as a segment. Lines of business
results are produced by the Corporation's internal management accounting system.
This system measures financial results based on the internal organizational
structure of the Corporation; information presented is not necessarily
comparable with any other financial institution. Lines of business/segment
financial results for the six months ended June 30, 1999 and 1998 are presented
below. For a description of the business activities of each line of business and
the methodologies which form the basis for these results, refer to note 22 to
the consolidated financial statements.
<PAGE> 16
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 7 - Business Segment Information (continued)
Six Months Ended June 30
<TABLE>
<CAPTION>
Business Individual Investment
Bank Bank** Bank*
- ----------------------------------------------------------------------------
(in millions) 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average assets $25,538 $22,126 $6,923 $8,320 $ 27 $ 41
Total revenues (FTE) 503 431 489 502 65 61
Net income 181 175 125 143 2 3
Return on average
assets 1.42% 1.58% 1.39% 1.58% 4.82% 5.35%
Return on average
common equity 23.73% 27.41% 35.98% 37.01% 11.25% 21.42%
<CAPTION>
Finance Other Total
- ----------------------------------------------------------------------------
(in millions) 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average assets $ 3,866 $ 4,545 $ 1 $ 238 $36,355 $35,270
Total revenues (FTE) 20 24 26 - 1,103 1,018
Net income 11 14 7 (40) 326 295
Return on average
assets 0.18% 0.24% N/M N/M 1.80% 1.67%
Return on average
common equity 7.01% 8.57% N/M N/M 21.99% 22.33%
</TABLE>
* 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 $4 million and $6 million, and
return on average common equity would have been 31.56% and 42.77%, in 1999
and 1998, respectively.
** Financial results for the Individual Bank for 1998 were affected by the
sale of the mortgage servicing business and $2.0 billion of indirect
consumer loans and non-relationship credit card receivables in the second
quarter of 1998.
N/M - Not Meaningful
<PAGE> 17
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 8 - Nonowner Changes in Equity
Nonowner changes in equity include the change in unrealized gains and
losses on investment securities available for sale and the change in the
accumulated foreign currency translation adjustment. The Consolidated Statements
of Changes in Shareholders' Equity include only the combined, net of tax,
nonowner changes in equity. The following presents reconciliations of the
components of accumulated nonowner changes in equity for the six months ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
(in thousands) 1999 1998
-------- -------
<S> <C> <C>
Net unrealized gains (losses) on investment securities available for sale:
Balance at beginning of year $ (7,688) $ (970)
Net unrealized holding gains (losses)
arising during the period (28,769) (289)
Less: Reclassification adjustment for
gains (losses) included in net income 1,892 (139)
-------- -------
Change in net unrealized gains (losses)
before income taxes (30,661) (150)
Provision for income taxes (11,231) 633
-------- -------
Change in net unrealized gains (losses)
on investment securities available
for sale, net of tax (19,430) (783)
-------- -------
Balance at June 30 $(27,118) $(1,753)
Accumulated foreign currency translation adjustment:
Balance at beginning of year $ 1,233 $ (967)
Net translation gains (losses) arising
during the period (173) (2,486)
Less: Reclassification adjustment for
gains (losses) included in net income - -
-------- -------
Change in translation adjustment before
income taxes (173) (2,486)
Provision for income taxes - -
-------- -------
Change in foreign currency translation
adjustment, net of tax (173) (2,486)
-------- -------
Balance at June 30 $ 1,060 $(3,453)
-------- -------
Total accumulated nonowner changes in
equity, net of taxes, at June 30 $(26,058) $(5,206)
======== =======
</TABLE>
<PAGE> 18
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
-----------------------
Results of Operations
- ---------------------
Net income for the quarter ended June 30, 1999, was $167 million, up
$17 million, or 11 percent, from $150 million reported for the second quarter of
1998. Diluted net income per share increased 12 percent to $1.03 from $0.92 a
year ago. Return on average common shareholders' equity was 22.08 percent and
return on average assets was 1.83 percent, compared to 22.57 percent and 1.74
percent, respectively, for the comparable quarter last year.
Net income for the first six months of 1999 was $2.01 per share or $326
million, compared to $1.80 or $295 million for the same period in 1998,
increases of 12 percent and 11 percent, respectively. Return on average common
shareholders' equity was 21.99 percent and return on average assets was 1.80
percent for the first six months of 1999, compared to 22.33 percent and 1.67
percent, respectively, for the first six months of 1998.
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 June 30, 1999. On a FTE basis, net interest income was $381
million for the three months ended June 30, 1999, an increase of $15 million, or
4 percent, from the comparable quarter in 1998. Net interest income and the net
interest margin were both affected by the sale of $2.0 billion of indirect
consumer loans and nonrelationship credit card receivables during the second
quarter of 1998. Excluding the impact of the consumer sale, net interest income
would have increased 5 percent. The increase in net interest income was
primarily due to a 15 percent increase in average commercial loans and an
increase in the level of noninterest-bearing sources of funds. The net interest
margin for the
<PAGE> 19
three months ended June 30, 1999 was 4.53 percent, a decrease of 9 basis points
from 4.62 percent for the second quarter of 1998.
Table II provides an analysis of net interest income for the first six
months of 1999. On an FTE basis, net interest income for the six months ended
June 30, 1999, was $751 million compared to $734 million for the same period in
1998. This increase is primarily attributed to the factors cited in the
quarterly discussion. The net interest margin for the six months ended June 30,
1999, was 4.52 percent compared to 4.56 percent for the same period in 1998.
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 June 30, 1999, the Corporation was in an asset sensitive
position of $159 million (on an elasticity adjusted basis), or less than 1
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 of risk exposure at June 30, 1999, for a 200
basis point decline in short-term interest rates identified approximately $81
million, or 5 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 $34 million, or 2 percent. The results of these
simulations are within established corporate policy guidelines.
<PAGE> 20
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
June 30, 1999 June 30, 1998
----------------------------- ----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $31,208 $601 7.72% $28,143 $591 8.42%
Investment securities 2,397 40 6.63 3,500 60 6.81
Other earning assets 112 2 7.23 160 2 5.92
- ---------------------------------------------------------------------------------------------
Total earning assets 33,717 643 7.64 31,803 653 8.23
Interest-bearing deposits 15,930 140 3.52 15,931 161 4.05
Short-term borrowings 3,646 44 4.77 3,223 45 5.62
Medium- and long-term debt 7,193 96 5.37 6,087 94 6.18
Net interest rate swap (income)/
expense (1) - (18) - - (13) -
- ---------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,769 262 3.92 $25,241 287 4.56
-------------- --------------
Net interest income/
Rate spread (FTE) $381 3.72 $366 3.67
==== ====
FTE adjustment $ 1 $ 2
==== ====
Impact of net noninterest-bearing
sources of funds 0.81 0.95
- ---------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.53% 4.62%
=============================================================================================
</TABLE>
(1) After allocation of the income or expense generated by interest rate swaps
for the three months ended June 30, 1999, to the related assets and liabilities,
the average yield on total loans was 7.88 percent as of June 30, 1999, compared
to 8.52 percent a year ago. The average cost of funds for medium- and long-term
debt was 5.08 percent as of June 30, 1999, compared to 5.73 percent a year
earlier.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Loans $ (46) $ 56 $ 10
Investment securities (1) (19) (20)
Other earning assets - - -
--------------------------------
Total earning assets (47) 37 (10)
Interest-bearing deposits (21) - (21)
Short-term borrowings (6) 5 (1)
Medium- and long-term debt (13) 15 2
Net interest rate swap
(income)/expense (5) - (5)
------------------------------
Total interest-bearing sources (45) 20 (25)
------------------------------
Net interest income/Rate spread (FTE) $ (2) $ 17 $ 15
==============================
</TABLE>
* Rate/Volume variances are allocated to variances due to volume.
<PAGE> 21
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------------------------
June 30, 1999 June 30, 1998
----------------------------- ----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $30,896 $1,188 7.75% $28,530 $1,199 8.46%
Investment securities 2,471 82 6.59 3,673 125 6.83
Other earning assets 106 4 7.69 164 5 5.94
- ---------------------------------------------------------------------------------------------
Total earning assets 33,473 1,274 7.66 32,367 1,329 8.27
Interest-bearing deposits 16,211 290 3.60 16,116 328 4.11
Short-term borrowings 3,707 89 4.83 3,214 89 5.58
Medium- and long-term debt 6,651 181 5.47 6,618 204 6.20
Net interest rate swap
(income)/expense (1) - (37) - - (26) -
- ---------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,569 523 3.96 $25,948 595 4.62
---------------- ----------------
Net interest income/
Rate spread (FTE) $ 751 3.70 $ 734 3.65
====== ======
FTE adjustment $ 3 $ 4
====== ======
Impact of net noninterest-bearing
sources of funds 0.82 0.91
- ---------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.52% 4.56%
=============================================================================================
</TABLE>
(1) After allocation of the income or expense generated by interest rate swaps
for the six months ended June 30, 1999, to the related assets and liabilities,
the average yield on total loans was 7.93 percent as of June 30, 1999, compared
to 8.55 percent a year ago. The average cost of funds for medium- and long-term
debt was 5.19 percent as of June 30, 1999, compared to 5.79 percent as of June
30, 1998.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Loans $ (84) $ 73 $(11)
Investment securities (3) (40) (43)
Other earning assets 1 (2) (1)
--------------------------------
Total earning assets (86) 31 (55)
Interest-bearing deposits (39) 1 (38)
Short-term borrowings (12) 12 -
Medium- and long-term debt (24) 1 (23)
Net interest rate swap (income)/expense (11) - (11)
--------------------------------
Total interest-bearing sources (86) 14 (72)
--------------------------------
Net interest income/Rate spread (FTE) $ - $ 17 $ 17
================================
</TABLE>
* Rate/Volume variances are allocated to variances due to volume.
<PAGE> 22
Provision for Credit Losses
- ---------------------------
The provision for credit losses was $28 million for the second quarter
of 1999 and 1998. The provision for the first six months of 1999 was $48 million
compared to $56 million for the same period in 1998. 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 $195 million for the three months ended June 30,
1999, an increase of $46 million, or 31 percent, over the same period in 1998.
Second quarter 1999 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 Munder in prior periods was accounted for under the equity method.
Included in second quarter 1999 noninterest income was a $21 million gain on the
sale of Comerica's ownership in an ATM network provider. Growth in fiduciary,
investment management and commercial fees, excluding the effect of large
nonrecurring items, acquisitions and divestitures in both periods, supported a
16 percent noninterest income increase in the second quarter of 1999, compared
to the second quarter of 1998. For the first six months of 1999, noninterest
income was $352 million, an increase of $68 million, or 24 percent, from the
first six months of 1998.
Noninterest Expenses
- --------------------
Noninterest expenses were $289 million for the second quarter ended
June 30, 1999, an increase of $36 million, or 14 percent, from the second
quarter of 1998. Second quarter 1999 noninterest expenses were impacted by the
Munder acquisition described above. Excluding the effect of large
<PAGE> 23
nonrecurring items, including a $5 million contribution to Comerica's charitable
foundation, acquisitions and divestitures in both periods, noninterest expenses
increased 11 percent in the second quarter of 1999, compared to the second
quarter of 1998. Approximately one-half of this increase was directly
attributable to year 2000 initiatives and revenue- related incentives. For the
first six months of 1999, noninterest expenses were $552 million, an increase of
$49 million, or 10 percent, from the first six months of 1998.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the second quarter of 1999 totaled
$90 million, an increase of 10 percent compared to $82 million reported for the
same period a year ago. The provision for the first six months of 1999 was $173
million compared to $160 million for the same period in 1998. The effective tax
rate was 35 percent for the second quarter and the first six months of 1999 and
1998.
Financial Condition
- -------------------
Total assets were $37.0 billion at June 30, 1999, compared with $36.6
billion at December 31, 1998. The Corporation has continued to generate
commercial loan growth in 1999. Since December 31, 1998, domestic commercial
loans have increased $561 million, or 3 percent, and commercial mortgage loans
have increased $357 million, or 9 percent. The increase in commercial loans was
partially funded by runoff of investment securities, which declined $367
million, or 14 percent, since December 31, 1998.
Total liabilities increased $149 million, or less than 1 percent, to
$33.7 billion since December 31, 1998. Total deposits decreased $2.0 billion, or
8 percent, since year-end 1998. Of this $2.0 billion decrease, nearly $1.0
billion was attributable to a decline in foreign office time deposits. The
decline in total deposits was offset by an increase in medium- and long-term
debt of $1.9 billion, or 37 percent.
<PAGE> 24
Allowance for Credit Losses and Nonperforming Assets
- ----------------------------------------------------
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 allowance provides for probable losses that have been
identified with specific customer relationships and for probable losses believed
to be inherent but that have not been specifically identified. The Corporation
allocates the allowance for credit losses to each loan category based on a
defined methodology which has been in use, without material change, for several
years. Internal risk ratings are assigned to each corporate loan at the time of
approval and are subject to subsequent periodic reviews by the senior management
of the Credit Policy Group. 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"). A detailed
credit quality review is performed quarterly on large corporate loans which have
deteriorated below certain levels of credit risk. A specific portion of the
allowance is allocated to such loans based upon this review. The portion of the
allowance allocated to the remaining corporate loans is determined by applying
projected loss ratios to each risk rating based on numerous factors identified
below. The portion of the allowance allocated to consumer loans is determined by
applying projected loss ratios to various segments of the loan portfolio.
Projected loss ratios incorporate factors such as recent loan loss experience,
current economic conditions and trends, geographic dispersion of borrowers, and
trends with respect to past due and nonaccrual amounts. However, actual loss
ratios experienced in the future could vary from those projected. This
uncertainty occurs because other factors affecting the determination of probable
losses inherent in the loan portfolio may
<PAGE> 25
exist which are not necessarily captured by the application of historical loss
ratios. The allocated allowance was $241 million at June 30, 1999. To ensure a
higher degree of confidence, an unallocated allowance is also maintained. The
unallocated portion of the loss reserve reflects management's view that the
reserve should have a margin that recognizes the imprecision underlying the
process of estimating expected credit losses. Determination of the probable
losses inherent in the portfolio, which are not necessarily captured by the
allocated methodology discussed above, involves the exercise of judgement.
Factors which were considered in the evaluation of the adequacy of the
Corporation's unallocated reserve include portfolio exposures in the areas of
sub-prime lending, healthcare, high technology, energy and hedge funds, as well
as Indonesian and Latin American transfer risks and new business migration risk.
The unallocated allowance was $219 million at June 30, 1999, a decrease of only
$6 million from December 31, 1998. Management also considers industry norms and
the expectations from rating agencies and banking regulators in determining the
adequacy of the allowance. The total allowance, including the unallocated
amount, is available to absorb losses from any segment of the portfolio.
At June 30, 1999, the allowance for credit losses was $460 million, an
increase of $8 million since December 31, 1998. The allowance as a percentage of
total loans decreased to 1.46 percent, compared to 1.48 percent at December 31,
1998. As a percentage of nonperforming assets, the allowance decreased to 319
percent at June 30, 1999 from 375 percent at year-end 1998.
Net charge-offs for the second quarter of 1999 were $21 million, or
0.26 percent of average total loans, compared with $19 million, or 0.27 percent,
for the year-earlier quarter. Net charge-offs for the first six months of 1999
were $40 million, or 0.26 percent of average total loans, compared to $41
million, or 0.29 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.
<PAGE> 26
Nonperforming assets increased $23 million, or 20 percent, since
December 31, 1998, and were categorized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1999 1998
------------ ------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 73,294 $ 77,175
International 47,573 20,350
Real estate construction 255 452
Commercial mortgage 9,870 6,788
Residential mortgage 1,008 3,468
------------ ----------
Total nonaccrual loans 132,000 108,233
Reduced-rate loans 7,342 7,464
------------ ----------
Total nonperforming loans 139,342 115,697
Other real estate 5,056 4,956
------------ ----------
Total nonperforming assets $ 144,398 $ 120,653
============ ==========
Loans past due 90 days or more $ 54,747 $ 40,209
============ ==========
</TABLE>
The increase in international nonaccrual loans from December 31, 1998,
was primarily related to Canadian and Indonesian customers. Nonperforming assets
as a percentage of total loans and other real estate were 0.46 percent at June
30, 1999 and 0.39 percent at December 31, 1998.
Capital
- -------
Common shareholders' equity was up $220 million from December 31, 1998
to June 30, 1999, excluding nonowner changes in equity. The increase was
primarily due to the retention of $206 million in earnings and a $16 million
increase related to employee stock option activity.
<PAGE> 27
Capital ratios exceed minimum regulatory requirements as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Leverage ratio (3.00 - minimum) 8.08% 7.68%
Tier 1 risk-based capital ratio
(4.0 - minimum) 6.71 6.26
Total risk-based capital ratio
(8.0 - minimum) 10.69 10.28
</TABLE>
At June 30, 1999, the capital ratios of all the Corporation's banking
subsidiaries exceeded the minimum ratios required of "well capitalized"
institutions as defined in the final rule under FDICIA.
Other Matters
- -------------
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.
<PAGE> 28
Readiness Preparation
Comerica is 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 continues to evaluate and monitor the
year 2000 readiness of vendors, customers and third party processors. Completing
a successful year 2000 program is a top priority so that the arrival of the 21st
century will be noted by a continuation of quality customer service. Many
factors can affect a company's ability to deliver quality services at any given
time. While Comerica is "ready" to do business in the year 2000, there can be no
guarantee that services will be uninterrupted due to the century date change or
otherwise. To emphasize the importance of being available for customers during
the millennium change, the Corporation has implemented a no-vacation policy for
the entire organization from December 27, 1999, through January 31, 2000.
Specific business units have adopted additional vacation guidelines including
dates prior and post the transition period.
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. As of June
30, 1999, 100 percent of Comerica's mission critical applications and services
are year 2000 ready and 98 percent of the Corporation's total systems and
components have been remediated, validated and placed back into production.
The year 2000 program utilized an extensive testing methodology and
verification process. In May 1999, the Corporation conducted an off-site test of
25 of its most complex business systems and applications. The results of this
testing confirmed that the Corporation's year 2000 remediation, testing and
validation processes were thorough. All 25
<PAGE> 29
applications completed 100 percent of the testing with no reported year 2000
related problems. A rigorous process has been implemented to reduce risks
associated with changes or the introduction of new components. This process will
limit, eliminate or defer the introduction of change to systems and components
certified as year 2000 ready. Furthermore, the Corporation is enhancing
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. Since some building systems and components are
controlled with embedded technology, facilities were reviewed and verified for
year 2000 readiness.
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
has been 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.
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 the 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
<PAGE> 30
internal and external, will total approximately $50 million, of which the
Corporation incurred approximately $41 million in 1996, 1997, 1998, and the
first six months of 1999. Of the $41 million incurred to date, $10 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 $3 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 has made
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. Our research through public disclosures
along with our own inquiries regarding their state of readiness indicates that
basic services will not result in significant disruptions, however, the
Corporation has contingency plans in
<PAGE> 31
the event of sustained disruptions.
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. At this time, any
"high risk" areas are being closely monitored and reviewed to minimize the
impact to the Corporation.
Contingency Plans
The Corporation initiated an event planning team responsible to develop
and implement strategies to prepare for various year 2000 scenarios through
enhancing existing business resumption contingency plans. 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. While Comerica does not expect major year 2000 problems, the
Corporation believes it is sound judgement to anticipate and prepare for
potential problems. Plans will be verified to ensure that they are reasonable,
coordinated, comprehensive and functional.
This report 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 industry where
the Corporation has a concentration of loans, changes in the level of fee
income, year 2000 expenses and economic conditions.
<PAGE> 32
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(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 three
months ended June 30, 1999.
<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.
Vice Chairman of Finance &
Administration and Chief Financial
Officer
(Principal Financial Officer)
/s/Marvin J. Elenbaas
--------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: August 13, 1999
<PAGE> 34
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
11 Statement Re: Computation of Earnings Per
Share
27 Financial Data Schedule
<PAGE> 1
Exhibit (11) - Statement Re: Computation of Earnings Per Share
COMPUTATION OF EARNINGS PER SHARE
Comerica Incorporated and Subsidiaries
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Basic:
Average shares outstanding 156,086 155,992 155,972 156,353
======== ======== ======== ========
Net income $167,382 $150,383 $326,494 $294,766
Less preferred stock dividends 4,275 4,275 8,550 8,550
-------- -------- -------- --------
Net income applicable to common
stock $163,107 $146,108 $317,944 $286,216
======== ======== ======== ========
Basic net income per share $ 1.04 $ 0.94 $ 2.04 $ 1.83
Diluted:
Average shares outstanding 156,086 155,992 155,972 156,353
Nonvested stock 166 209 171 199
Common stock equivalent:
Net effect of the assumed
exercise of stock options 2,324 2,812 2,320 2,839
-------- -------- -------- --------
Diluted average shares 158,576 159,013 158,463 159,391
======== ======== ======== ========
Net income $167,382 $150,383 $326,494 $294,766
Less preferred stock dividends 4,275 4,275 8,550 8,550
-------- -------- -------- --------
Net income applicable to common
stock $163,107 $146,108 $317,944 $286,216
======== ======== ======== ========
Diluted net income per share $ 1.03 $ 0.92 $ 2.01 $ 1.80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,535,721
<INT-BEARING-DEPOSITS> 17,987
<FED-FUNDS-SOLD> 32,558
<TRADING-ASSETS> 7,337
<INVESTMENTS-HELD-FOR-SALE> 2,345,236
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 31,566,251
<ALLOWANCE> 460,397
<TOTAL-ASSETS> 36,950,487
<DEPOSITS> 22,353,582
<SHORT-TERM> 3,745,565
<LIABILITIES-OTHER> 372,876
<LONG-TERM> 7,231,275
0
250,000
<COMMON> 786,166
<OTHER-SE> 2,211,023
<TOTAL-LIABILITIES-AND-EQUITY> 36,950,487
<INTEREST-LOAN> 1,186,687
<INTEREST-INVEST> 80,259
<INTEREST-OTHER> 3,990
<INTEREST-TOTAL> 1,270,936
<INTEREST-DEPOSIT> 289,481
<INTEREST-EXPENSE> 522,462
<INTEREST-INCOME-NET> 748,474
<LOAN-LOSSES> 48,000
<SECURITIES-GAINS> 1,892
<EXPENSE-OTHER> 552,294
<INCOME-PRETAX> 499,725
<INCOME-PRE-EXTRAORDINARY> 326,494
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326,494
<EPS-BASIC> 2.04
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 4.52
<LOANS-NON> 132,000
<LOANS-PAST> 54,747
<LOANS-TROUBLED> 7,342
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 452,409
<CHARGE-OFFS> 52,127
<RECOVERIES> 12,089
<ALLOWANCE-CLOSE> 460,397
<ALLOWANCE-DOMESTIC> 211,517
<ALLOWANCE-FOREIGN> 30,317
<ALLOWANCE-UNALLOCATED> 218,563
</TABLE>
