<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, 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 October 31, 1999: 156,392,000 shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(In thousands, except share data) 1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,485,739 $ 1,773,100 $ 1,364,063
Short-term investments 188,027 109,640 129,057
Investment securities available
for sale 2,125,613 2,712,165 3,108,120
Commercial loans 20,023,564 19,086,541 17,361,281
International loans 2,575,318 2,713,259 2,524,159
Real estate construction loans 1,545,168 1,079,614 1,037,284
Commercial mortgage loans 4,513,685 4,179,271 3,927,689
Residential mortgage loans 878,223 1,037,941 1,136,195
Consumer loans 1,823,635 1,861,630 1,882,347
Lease financing 718,347 646,607 598,259
----------- ----------- -----------
Total loans 32,077,940 30,604,863 28,467,214
Less allowance for credit losses (463,451) (452,409) (438,929)
----------- ----------- -----------
Net loans 31,614,489 30,152,454 28,028,285
Premises and equipment 336,410 352,650 361,171
Customers' liability on
acceptances outstanding 25,960 12,335 12,945
Accrued income and other assets 1,508,752 1,488,487 1,372,573
----------- ----------- -----------
TOTAL ASSETS $37,284,990 $36,600,831 $34,376,214
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 6,430,126 $ 6,999,337 $ 6,740,407
Interest-bearing deposits 16,470,174 17,313,796 15,493,005
----------- ----------- -----------
Total deposits 22,900,300 24,313,133 22,233,412
Federal funds purchased and
securities sold under
agreements to repurchase 956,993 3,108,985 2,147,048
Other borrowed funds 1,254,976 471,168 1,182,122
Acceptances outstanding 25,960 12,335 12,945
Accrued expenses and other
liabilities 427,728 366,338 227,983
Medium- and long-term debt 8,355,771 5,282,259 5,632,697
----------- ----------- -----------
Total liabilities 33,921,728 33,554,218 31,436,207
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
9/30/99, 12/31/98 and 9/30/98 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued-157,233,107 shares at
9/30/99, 157,233,088 shares at
12/31/98 and 157,187,518 shares
at 9/30/98 786,166 786,165 785,938
Capital surplus 32,452 24,649 16,713
Accumulated nonowner changes
in equity (22,096) (6,455) 2,676
Retained earnings 2,379,372 2,086,589 1,999,197
Deferred compensation (3,517) (5,202) (3,110)
Less cost of common stock in
treasury- 896,861 shares at
9/30/99, 1,351,997 shares at
at 12/31/98 and 1,689,201 shares
at 9/30/98 (59,115) (89,133) (111,407)
----------- ----------- -----------
Total shareholders' equity 3,363,262 3,046,613 2,940,007
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $37,284,990 $36,600,831 $34,376,214
=========== =========== ===========
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
(In thousands, except per share data) 1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Interest and fees on loans $631,796 $583,747 $1,818,483 $1,781,164
Interest on investment securities:
Taxable 36,849 51,968 114,472 170,856
Exempt from federal income tax 1,108 1,754 3,744 5,774
-------- -------- ---------- ----------
Total interest on investment
securities 37,957 53,722 118,216 176,630
Interest on short-term investments 2,183 2,093 6,173 6,859
-------- -------- ---------- ----------
Total interest income 671,936 639,562 1,942,872 1,964,653
INTEREST EXPENSE
Interest on deposits 147,147 156,289 436,628 484,353
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 35,793 35,453 112,711 93,655
Other borrowed funds 9,803 10,724 21,663 41,536
Interest on medium- and long-term debt 102,669 86,079 283,383 289,786
Net interest rate swap income (13,868) (9,418) (50,379) (35,198)
-------- -------- ---------- ----------
Total interest expense 281,544 279,127 804,006 874,132
-------- -------- ---------- ----------
Net interest income 390,392 360,435 1,138,866 1,090,521
Provision for credit losses 21,000 21,000 69,000 77,000
-------- -------- ---------- ----------
Net interest income after
provision for credit losses 369,392 339,435 1,069,866 1,013,521
NONINTEREST INCOME
Fiduciary and investment management
income 60,493 49,791 175,275 132,535
Service charges on deposit accounts 43,162 39,316 127,380 117,283
Commercial lending fees 14,001 10,701 35,212 27,850
Letter of credit fees 10,321 7,818 27,832 23,160
Securities gains 49 174 1,941 35
Other noninterest income 42,449 44,314 154,380 134,898
-------- -------- ---------- ----------
Total noninterest income 170,475 152,114 522,020 435,761
NONINTEREST EXPENSES
Salaries and employee benefits 159,932 142,252 474,982 415,013
Net occupancy expense 24,648 22,533 71,717 66,873
Equipment expense 15,320 14,959 45,613 45,250
Outside processing fee expense 11,329 10,627 36,524 31,654
Other noninterest expenses 65,621 63,450 200,308 198,203
-------- -------- --------- ----------
Total noninterest expenses 276,850 253,821 829,144 756,993
-------- -------- --------- ----------
Income before income taxes 263,017 237,728 762,742 692,289
Provision for income taxes 92,603 83,238 265,834 243,033
-------- -------- ---------- ----------
NET INCOME $170,414 $154,490 $ 496,908 $ 449,256
======== ======== ========== ==========
Net income applicable to common stock $166,139 $150,215 $ 484,083 $ 436,431
======== ======== ========== ==========
Basic net income per common share $ 1.06 $ 0.97 $ 3.10 $ 2.80
Diluted net income per common share $ 1.05 $ 0.95 $ 3.06 $ 2.75
Cash dividends declared on common stock $ 56,226 $ 49,650 $ 168,556 $ 149,615
Dividends per common share $ 0.36 $ 0.32 $ 1.08 $ 0.96
</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 - - - - 449,256 - - 449,256
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)
Net 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
======== ======== ========= ========= ========== ========= ========= ==========
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 - - - - 496,908 - - 496,908
Nonowner changes in equity,
net of tax - - - (15,641) - - - (15,641)
----------
Net income and nonowner
changes in equity - - - - - - - 481,267
Cash dividends declared:
Preferred stock - - - - (12,825) - - (12,825)
Common stock - - - - (168,556) - - (168,556)
Purchase of 43,992 shares
of common stock - - - - - - (2,885) (2,885)
Net issuance of common stock
under employee stock plans - 1 7,803 - (22,744) 4 32,903 17,967
Amortization of deferred
compensation - - - - - 1,681 - 1,681
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT SEPTEMBER 30, 1999 $250,000 $786,166 $ 32,452 $ (22,096) $2,379,372 $ (3,517) $ (59,115) $3,363,262
======== ======== ========= ========= ========== ========= ========= ==========
</TABLE>
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------------
(in thousands) 1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 496,908 $ 449,256
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 69,000 77,000
Depreciation 42,556 42,997
Restructuring charge - (14,957)
Net decrease in trading
account securities 1,925 2,968
Net (increase) decrease in assets held
for sale 24,862 (6,857)
Net increase in accrued income
receivable (28,563) (4,514)
Net increase (decrease) in accrued expenses 60,651 (161,337)
Net amortization of intangibles 25,417 21,930
Other, net 39,850 48,576
------------ ------------
Total adjustments 235,698 5,806
------------ ------------
Net cash provided by operating
activities 732,606 455,062
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits
with banks (32,332) (11,869)
Net (increase) decrease in federal funds sold
and securities purchased under agreements
to resell (72,842) 89,658
Proceeds from sale of investment securities
available for sale 3,588 44,364
Proceeds from maturity of investment
securities available for sale 603,066 876,576
Purchases of investment securities
available for sale (96,633) (108,428)
Net increase in loans (other
than purchased loans) (1,531,035) (1,608,051)
Purchase of loans - (1,115)
Proceeds from sale of consumer businesses - 1,878,907
Fixed assets, net (26,316) (29,494)
Net (increase) decrease in customers' liability
on acceptances outstanding (13,625) 5,447
------------ ------------
Net cash provided by (used in)
investing activities (1,166,129) 1,135,995
FINANCING ACTIVITIES:
Net decrease in deposits (1,412,833) (352,905)
Net increase (decrease) in short-term
borrowings (1,368,184) 136,269
Net increase (decrease) in acceptances
outstanding 13,625 (5,447)
Proceeds from issuance of medium- and
long-term debt 5,400,000 2,500,000
Repayments and purchases of medium- and
long-term debt (2,326,488) (4,162,060)
Proceeds from issuance of common stock
and other capital transactions 17,963 32,681
Purchase of common stock for treasury
and retirement (2,885) (144,552)
Dividends paid (175,036) (158,067)
------------ ------------
Net cash provided by (used in)
financing activities 146,162 (2,154,081)
------------ ------------
Net decrease in cash and due from banks (287,361) (563,024)
Cash and due from banks at beginning of year 1,773,100 1,927,087
------------ ------------
Cash and due from banks at end of period $ 1,485,739 $ 1,364,063
============ ============
Interest paid $ 794,391 $ 900,964
============ ============
Income taxes paid $ 203,862 $ 214,738
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 4,334 $ 5,629
============ ============
</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 nine months ended September 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 hedges
must be adjusted to fair value through income. If the derivative is a hedge,
<PAGE> 7
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
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 September 30, 1999, investment securities having a carrying value of
$1.4 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 $47 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) 1999 1998
--------- ---------
<S> <C> <C>
Balance at January 1 $ 452,409 $ 424,147
Charge-offs (76,350) (95,881)
Recoveries 18,368 33,663
--------- ---------
Net charge-offs (57,982) (62,218)
Provision for credit losses 69,000 77,000
Foreign currency translation
adjustment 24 -
--------- ---------
Balance at September 30 $ 463,451 $ 438,929
========= =========
</TABLE>
<PAGE> 8
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Credit Losses (continued)
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
$156 million and $141 million for the quarter and nine months ended September
30, 1999, compared to $93 million and $80 million for the comparable periods
last year. The following are period-end balances:
<TABLE>
<CAPTION>
(in thousands) September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Total impaired loans $150,513 $101,417
Impaired loans requiring
an allowance 146,971 87,494
Impairment allowance 60,245 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 September 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
(in thousands) September 30, 1999 December 31, 1998
------------------ ----------------
<S> <C> <C>
Parent Company
9.75% subordinated notes due 1999 $ - $ 74,970
7.25% subordinated notes due 2007 158,827 159,669
---------- ----------
Total parent company 158,827 234,639
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 198,451 198,301
7.875% subordinated notes due 2026 173,436 174,086
8.375% subordinated notes due 2024 155,342 155,502
7.25% subordinated notes due 2002 149,521 149,404
6.875% subordinated notes due 2008 103,845 104,186
7.125% subordinated notes due 2013 154,921 155,181
6.00% subordinated notes due 2008 247,952 247,798
---------- ----------
Total subordinated notes 1,183,468 1,184,458
Medium-term notes:
Floating rate based on Treasury indices 37,000 37,000
Floating rate based on Prime indices 1,224,988 -
Floating rate based on LIBOR indices 5,537,302 3,612,076
Fixed rate notes with interest rate
of 6.65% 199,910 199,810
---------- ----------
Total medium-term notes 6,999,200 3,848,886
Notes payable 14,276 14,276
---------- ----------
Total subsidiaries 8,196,944 5,047,620
---------- ----------
Total medium- and long-term debt $8,355,771 $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 income on
bank-owned life insurance and 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>
September 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) $ 8,515 $ 35 $ (96) $ (61) $ 6,869 $152 $ (6) $ 146
Caps and floors purchased - - - - 15 - - -
Foreign exchange contracts
Spot, forward and options 1,110 27 (14) 13 782 32 (29) 3
Swaps 152 1 (1) - 131 12 - 12
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 9,777 63 (111) (48) 7,797 196 (35) 161
Customer Initiated and Other
Interest rate contracts
Caps and floors written 248 - (1) (1) 241 - (1) (1)
Caps and floors purchased 225 1 - 1 176 1 - 1
Swaps 256 1 (1) - 264 7 (6) 1
Foreign exchange contracts
Spot, forward and options 1,038 16 (15) 1 673 20 (13) 7
Swaps 35 2 - 2 - - - -
------- ---- ----- ----- ------- ---- ----- -----
Total customer initiated
and other 1,802 20 (17) 3 1,354 28 (20) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange contracts $11,579 $ 83 $(128) $ (45) $ 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 $176 million and
$2,180 million at September 30, 1999 and December 31, 1998, respectively. These
swaps had net unrealized losses of less than $1 million at September 30, 1999,
versus $15 million of unrealized gains at December 31, 1998. As of September 30,
1999, index amortizing swaps had an average expected life of approximately 9
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 September
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:
(dollar amounts 2004- Dec. 31,
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 20 146 - 3 - - 169 2,169
Weighted average: (1)
Receive rate 5.86% 6.34% 5.68% 7.14% -% -% 6.36% 6.01%
Pay rate 5.42% 5.49% 5.42% 6.85% -% -% 6.01% 5.30%
Fixed rate asset
designation:
Pay fixed swaps
Generic $ 2 $ - $ - $ - $ - $ - $ 2 $ 2
Index amortizing 1 6 - - - - 7 11
Weighted average: (1)
Receive rate 5.41% 5.38% -% -% -% -% 5.39% 5.54%
Pay rate 7.95% 5.34% -% -% -% -% 6.21% 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 -% 5.50% -% 5.04% -% 5.48% 5.44% 5.28%
Floating/floating
swaps $ - $ 37 $ - $ - $ - $ - $ 37 $ 37
Weighted average: (2)
Receive rate -% 5.47% -% -% -% -% 5.47% 4.98%
Pay rate -% 5.30% -% -% -% -% 5.30% 5.19%
Total notional amount $ 23 $1,089 $3,250 $3,003 $ - $1,150 $8,515 $6,869
</TABLE>
- --------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR or prime rates paid or received at
September 30, 1999.
(2) Variable rates paid are based on LIBOR at September 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
swaps at time of termination.
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. Commitments
to purchase U.S. government and agency securities for the Corporation's
available-for-sale investment security portfolio totaled $200 million at
September 30, 1999. No such commitments were outstanding at year-end 1998. At
September 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 $22 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 nine-month period ended September 30, 1999
and for the year ended December 31, 1998.
<PAGE> 14
Notes to Consolidated Financial Statements
Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
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 fair values and income
from this activity were not material for the nine-month period ended September
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
September 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 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, 1998 $ 6,884 $ 913 $ 681 $ 673
Additions 3,653 7,962 83 20,297
Maturities/amortizations (646) (7,613) (35) (19,897)
Terminations (1,376) - - -
------ ------ ------ -------
Balances at September 30, 1999 $ 8,515 $ 1,262 $ 729 $ 1,073
====== ====== ====== =======
</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 nine months ended September 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.
Nine Months Ended September 30
<TABLE>
<CAPTION>
Business Individual Investment
(in millions) Bank Bank** Bank*
- ----------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average assets $25,751 $22,277 $7,006 $7,916 $ 27 $ 34
Total revenues (FTE) 766 650 740 743 97 88
Net income 263 242 186 208 4 4
Return on average
assets 1.36% 1.45% 1.38% 1.54% 9.29% 8.76%
Return on average
common equity 22.47% 24.89% 35.08% 36.95% 20.00% 21.07%
<CAPTION>
Finance Other Total
- ----------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average assets $ 3,739 $ 4,427 $ 21 $ 179 $36,544 $34,833
Total revenues (FTE) 20 41 42 10 1,665 1,532
Net income 12 25 32 (30) 497 449
Return on average
assets 0.12% 0.29% N/M N/M 1.81% 1.72%
Return on average
common equity 4.82% 10.14% N/M N/M 21.95% 22.56%
</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 $7 million and $9 million and
return on average common equity would have been 33.63% and 44.14%, 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> 16
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 nine months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Nine 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 (24,272) 11,938
Less: Reclassification adjustment for
gains (losses) included in net income 1,941 35
-------- -------
Change in net unrealized gains (losses)
before income taxes (26,213) 11,903
Provision for income taxes (9,705) 6,541
-------- -------
Change in net unrealized gains (losses)
on investment securities available
for sale, net of tax (16,508) 5,362
-------- -------
Balance at September 30 $(24,196) $ 4,392
Accumulated foreign currency translation adjustment:
Balance at beginning of year $ 1,233 $ (967)
Net translation gains (losses) arising
during the period 867 (749)
Less: Reclassification adjustment for
gains (losses) included in net income - -
-------- -------
Change in translation adjustment before
income taxes 867 (749)
Provision for income taxes - -
-------- -------
Change in foreign currency translation
adjustment, net of tax 867 (749)
-------- -------
Balance at September 30 $ 2,100 $(1,716)
-------- -------
Total accumulated nonowner changes in
equity, net of taxes, at September 30 $(22,096) $ 2,676
======== =======
<CAPTION>
Three Months Ended
-------------------
(in thousands) 1999 1998
-------- --------
<S> <C> <C>
Net income and nonowner changes
in equity $174,376 $162,376
======== ========
</TABLE>
<PAGE> 17
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net income for the quarter ended September 30, 1999, was $170 million,
up $16 million, or 10 percent, from $154 million reported for the third quarter
of 1998. Diluted net income per share increased 11 percent to $1.05 from $0.95 a
year ago. Return on average common shareholders' equity was 21.89 percent and
return on average assets was 1.85 percent, compared to 23.02 percent and 1.82
percent, respectively, for the comparable quarter last year.
Net income for the first nine months of 1999 was $3.06 per share or
$497 million, compared to $2.75 or $449 million for the same period in 1998,
both increases of 11 percent. Return on average common shareholders' equity was
21.95 percent and return on average assets was 1.81 percent for the first nine
months of 1999, compared to 22.56 percent and 1.72 percent, respectively, for
the first nine 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 September 30, 1999. On a FTE basis, net interest income was $391
million for the three months ended September 30, 1999, an increase of $29
million, or 8 percent, from the comparable quarter in 1998. The increase in net
interest income was primarily due to an 18 percent increase in average
commercial loans and an increase in the level of noninterest-bearing sources of
funds. The net interest margin for the three months ended September 30, 1999 was
4.56 percent, a decrease of 7 basis points from 4.63 percent for the third
quarter of 1998.
Table II provides an analysis of net interest income for the first nine
months of 1999. On a FTE basis, net interest income for the nine months ended
September 30, 1999, was $1,143 million compared to $1,096 million for the same
period in 1998. The increase of $47 million over the prior year is primarily
attributed to the factors cited in the quarterly discussion. The net interest
<PAGE> 18
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
<TABLE>
<CAPTION>
Three Months Ended
- ----------------------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $31,727 $632 7.91% $27,775 $584 8.36%
Investment securities 2,211 39 6.85 3,209 55 6.81
Other earning assets 113 2 7.73 128 2 6.43
- ----------------------------------------------------------------------------------------------
Total earning assets 34,051 673 7.84 31,112 641 8.19
Interest-bearing deposits 16,311 147 3.58 15,605 156 3.97
Short-term borrowings 3,404 46 5.31 3,273 46 5.60
Medium- and long-term debt 7,298 103 5.59 5,652 86 6.05
Net interest rate swap (income)/
expense (1) - (14) - - (9) -
- ----------------------------------------------------------------------------------------------
Total interest-bearing
sources $27,013 282 4.14 $24,530 279 4.52
-------------- ---------------
Net interest income/
Rate spread (FTE) $391 3.70 $362 3.67
==== ====
FTE adjustment $ 1 $ 2
==== ====
Impact of net noninterest-bearing
sources of funds 0.86 0.96
- ----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.56% 4.63%
==============================================================================================
</TABLE>
(1) After allocation of the income or expense generated by interest rate swaps
for the three months ended September 30, 1999, to the related assets and
liabilities, the average yield on total loans was 8.02 percent as of September
30, 1999, compared to 8.43 percent a year ago. The average cost of funds for
medium- and long-term debt was 5.28 percent as of September 30, 1999, compared
to 5.77 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 $(30) $ 78 $ 48
Investment securities 1 (17) (16)
Other earning assets 1 (1) -
- ---------------------------------------------------------------------------
Total earning assets (28) 60 32
Interest-bearing deposits (18) 9 (9)
Short-term borrowings (2) 2 -
Medium- and long-term debt (6) 23 17
Net interest rate swap (income)/expense (5) - (5)
- ---------------------------------------------------------------------------
Total interest-bearing sources (31) 34 3
- ---------------------------------------------------------------------------
Net interest income/Rate spread (FTE) $ 3 $ 26 $ 29
=================================
</TABLE>
* Rate/Volume variances are allocated to variances due to volume.
<PAGE> 19
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
<TABLE>
<CAPTION>
Nine Months Ended
- ----------------------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
---------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $31,177 $1,820 7.80% $28,276 $1,783 8.43%
Investment securities 2,383 120 6.68 3,516 180 6.82
Other earning assets 108 7 7.70 152 7 6.09
- ---------------------------------------------------------------------------------------------
Total earning assets 33,668 1,947 7.72 31,944 1,970 8.24
Interest-bearing deposits 16,244 437 3.59 15,944 484 4.06
Short-term borrowings 3,605 134 4.98 3,234 135 5.59
Medium- and long-term debt 6,869 283 5.51 6,293 290 6.15
Net interest rate swap (income)/
expense (1) - (50) - - (35) -
- ---------------------------------------------------------------------------------------------
Total interest-bearing
sources $26,718 804 4.02 $25,471 874 4.59
--------------- ---------------
Net interest income/
Rate spread (FTE) $1,143 3.70 $1,096 3.65
====== ======
FTE adjustment $ 4 $ 6
====== ======
Impact of net noninterest-bearing
sources of funds 0.83 0.93
- ---------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.53% 4.58%
=============================================================================================
</TABLE>
(1) After allocation of the income or expense generated by interest rate swaps
for the nine months ended September 30, 1999, to the related assets and
liabilities, the average yield on total loans was 7.96 percent as of September
30, 1999, compared to 8.52 percent a year ago. The average cost of funds for
medium- and long-term debt was 5.23 percent as of September 30, 1999, compared
to 5.78 percent as of September 30, 1998.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
(in millions) Rate Volume* (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Loans $(114) $ 151 $ 37
Investment securities (3) (57) (60)
Other earning assets 2 (2) -
- ----------------------------------------------------------------------------
Total earning assets (115) 92 (23)
Interest-bearing deposits (58) 11 (47)
Short-term borrowings (15) 14 (1)
Medium- and long-term debt (30) 23 (7)
Net interest rate swap (income)/expense (15) - (15)
- ----------------------------------------------------------------------------
Total interest-bearing sources (118) 48 (70)
- ----------------------------------------------------------------------------
Net interest income/Rate spread (FTE) $ 3 $ 44 $ 47
==================================
</TABLE>
* Rate/Volume variances are allocated to variances due to volume.
<PAGE> 20
margin for the nine months ended September 30, 1999, was 4.53 percent compared
to 4.58 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 September 30, 1999, the Corporation was in an asset
sensitive position of $465 million (on an elasticity adjusted basis), or 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 September 30, 1999, for a
200 basis point decline in short-term interest rates identified approximately
$79 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 $40 million, or 2 percent. The results of
these simulations are within established corporate policy guidelines.
Provision for Credit Losses
The provision for credit losses was $21 million for the third quarter of
1999 and 1998. The provision for the first nine months of 1999 was $69 million
compared to $77 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."
<PAGE> 21
Noninterest Income
Noninterest income was $170 million for the three months ended September 30,
1999, an increase of $18 million, or 12 percent, over the same period in 1998.
This increase was due primarily to growth in fiduciary, investment management
and commercial fees. For the first nine months of 1999, noninterest income was
$522 million, an increase of $86 million, or 20 percent, from the first nine
months of 1998.
Excluding the effect of large nonrecurring items, acquisitions and
divestitures in both periods, noninterest income increased 13 percent in the
first nine months of 1999, when compared to the same period in 1998. Large
nonrecurring items include a $21 million gain on the sale of Comerica's
ownership in an ATM network provider in 1999, and a $9 million gain on the sale
of consumer loans and the mortgage servicing business in 1998.
Noninterest Expenses
Noninterest expenses were $277 million for the third quarter ended September
30, 1999, an increase of $23 million, or 9 percent, from the third quarter of
1998. Salaries and benefits expense increased $18 million in the third quarter
of 1999 over the third quarter of 1998, due primarily to annual merit increases
and higher levels of revenue-related incentives. For the first nine months of
1999, noninterest expenses were $829 million, an increase of $72 million, or 10
percent, from the first nine months of 1998.
Excluding the effect of large nonrecurring items, acquisitions and
divestitures in both periods, noninterest expenses increased 7 percent in the
first nine months of 1999, when compared to the same period in 1998. This
increase was primarily due to an increase in salaries and benefits expense for
the reasons cited above.
Provision for Income Taxes
The provision for income taxes for the third quarter of 1999 totaled $93
million, an increase of 11 percent compared to $83 million reported for the same
period a year ago. The provision for the first nine months of 1999 was $266
<PAGE> 22
million compared to $243 million for the same period in 1998. The effective tax
rate was 35 percent for the third quarter and the first nine months of 1999 and
1998.
Financial Condition
Total assets were $37.3 billion at September 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 $937 million, or 5 percent, real estate construction loans
have increased $466 million, or 43 percent, and commercial mortgage loans have
increased $334 million, or 8 percent. These increases were partially funded by
runoff of investment securities, which declined $587 million, or 22 percent,
since December 31, 1998.
Total liabilities increased $368 million, or 1 percent, to $33.9 billion
since December 31, 1998. Total deposits and total short-term borrowings each
decreased $1.4 billion since year-end 1998. Of the $1.4 billion decrease in
deposits, $0.4 billion was attributable to a decline in foreign office time
deposits. Medium- and long-term debt increased $3.1 billion, or 58 percent,
offsetting these declines and supporting the growth in commercial loans.
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 based on past history 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
<PAGE> 23
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. The allocated reserve increased $55 million from year-end
1998, to $282 million at September 30, 1999. The credit quality of the
Corporation's international and health care portfolios and the imprecision of
the risk rating on a large commercial credit contributed to this increase.
Actual loss ratios experienced in the future could vary from those
projected. This uncertainty occurs because other factors affecting the
determination of probable losses inherent in the loan portfolio may exist which
are not necessarily captured by the application of historical loss ratios. 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.
<PAGE> 24
The unallocated allowance was $181 million at September 30, 1999, down $44
million from December 31, 1998. This decrease in the unallocated allowance was
primarily due to reductions in loan balances to sub-prime lending and hedge
fund customers.
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 September 30, 1999, the allowance for credit losses was $463 million, an
increase of $11 million since December 31, 1998. The allowance as a percentage
of total loans was 1.44 percent, compared to 1.48 percent at December 31, 1998.
As a percentage of nonperforming assets, the allowance was 275 percent at
September 30, 1999, versus 375 percent at year-end 1998.
Net charge-offs for the third quarter of 1999 were $18 million, or 0.23
percent of average total loans, compared with $21 million, or 0.30 percent, for
the year-earlier quarter. Net charge-offs for the first nine months of 1999 were
$58 million, or 0.25 percent of average total loans, compared to $62 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 year-end 1998 consolidated financial
statements.
Nonperforming assets increased $48 million, or 40 percent, since December
31, 1998, and were categorized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
------------- ------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 100,899 $ 77,175
International 45,129 20,350
Real estate construction 249 452
Commercial mortgage 10,797 6,788
Residential mortgage 792 3,468
------------- ------------
Total nonaccrual loans 157,866 108,233
Reduced-rate loans 7,379 7,464
------------- ------------
Total nonperforming loans 165,245 115,697
Other real estate 3,471 4,956
------------- ------------
Total nonperforming assets $ 168,716 $ 120,653
============= ============
Loans past due 90 days or more $ 60,959 $ 40,209
============= ============
</TABLE>
<PAGE> 25
The increase in international nonaccrual loans from December 31, 1998,
was primarily related to Indonesian and two Canadian customers. The increase in
loans past due 90 days or more from year-end 1998 was primarily attributable to
the energy industry. Nonperforming assets as a percentage of total loans and
other real estate were 0.53 percent at September 30, 1999 and 0.39 percent at
December 31, 1998.
Capital
Common shareholders' equity was up $332 million from December 31, 1998
to September 30, 1999, excluding nonowner changes in equity. The increase was
primarily due to the retention of $316 million in earnings and an $18 million
increase related to employee stock option activity.
Capital ratios exceed minimum regulatory requirements as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Leverage ratio (3.00 - minimum) 8.35% 7.68%
Tier 1 risk-based capital ratio (4.0 - minimum) 6.91 6.26
Total risk-based capital ratio (8.0 - minimum) 10.86 10.28
</TABLE>
At September 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.
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 has assessed
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
<PAGE> 26
their year 2000 issues or that there will be no disruptions due to unpredictable
public reaction.
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 included the active involvement of senior
executives as well as seasoned project managers and business unit liaisons from
throughout the Corporation. 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 was 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 September 30, 1999, 100 percent of Comerica's mission critical applications
and services are year 2000 ready and 99 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 applications completed 100 percent of
the testing with no reported year 2000 related problems. A rigorous process
<PAGE> 27
was 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 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 year 2000
project cost, both internal and external, will total approximately $50 million,
of which the Corporation incurred approximately $45 million in 1996, 1997, 1998,
and the first nine months of 1999. Of the $45 million incurred to date, $11
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 was staffed with external
<PAGE> 28
resources as well as internal staff redeployed from less time-sensitive
assignments. The redeployment of existing staff did not have a material adverse
effect on the Corporation's business, results of operations or financial
position. Approximately $1 million of the remaining cost is for capital assets
which will be expensed over their useful lives.
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 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
<PAGE> 29
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, unpredictable public reaction related to the
millennium change and economic conditions.
<PAGE> 30
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 September 30, 1999.
<PAGE> 31
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: November 12, 1999
<PAGE> 32
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Statement Re: Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<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
------------------ -------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Average shares outstanding 156,154 155,278 156,033 155,990
======== ======== ======== ========
Net income $170,414 $154,490 $496,908 $449,256
Less preferred stock dividends 4,275 4,275 12,825 12,825
-------- -------- -------- --------
Net income applicable to common
stock $166,139 $150,215 $484,083 $436,431
======== ======== ======== ========
Basic net income per share $ 1.06 $ 0.97 $ 3,10 $ 2.80
Diluted:
Average shares outstanding 156,154 155,278 156,033 155,990
Nonvested stock 164 177 169 192
Common stock equivalent:
Net effect of the assumed
exercise of stock options 1,993 2,635 2,215 2,770
-------- -------- -------- --------
Diluted average shares 158,311 158,090 158,417 158,952
======== ======== ======== ========
Net income $170,414 $154,490 $496,908 $449,256
Less preferred stock dividends 4,275 4,275 12,825 12,825
-------- -------- -------- --------
Net income applicable to common
stock $166,139 $150,215 $484,083 $436,431
======== ======== ======== ========
Diluted net income per share $ 1.05 $ 0.95 $ 3.06 $ 2.75
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,485,739
<INT-BEARING-DEPOSITS> 36,835
<FED-FUNDS-SOLD> 119,157
<TRADING-ASSETS> 4,381
<INVESTMENTS-HELD-FOR-SALE> 2,125,613
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 32,077,940
<ALLOWANCE> 463,451
<TOTAL-ASSETS> 37,284,990
<DEPOSITS> 22,900,300
<SHORT-TERM> 2,211,969
<LIABILITIES-OTHER> 453,688
<LONG-TERM> 8,355,771
0
250,000
<COMMON> 786,166
<OTHER-SE> 2,327,096
<TOTAL-LIABILITIES-AND-EQUITY> 37,284,990
<INTEREST-LOAN> 1,818,483
<INTEREST-INVEST> 118,216
<INTEREST-OTHER> 6,173
<INTEREST-TOTAL> 1,942,872
<INTEREST-DEPOSIT> 436,628
<INTEREST-EXPENSE> 804,006
<INTEREST-INCOME-NET> 1,138,866
<LOAN-LOSSES> 69,000
<SECURITIES-GAINS> 1,941
<EXPENSE-OTHER> 829,144
<INCOME-PRETAX> 762,742
<INCOME-PRE-EXTRAORDINARY> 496,908
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 496,908
<EPS-BASIC> 3.10
<EPS-DILUTED> 3.06
<YIELD-ACTUAL> 4.53
<LOANS-NON> 157,866
<LOANS-PAST> 60,959
<LOANS-TROUBLED> 7,379
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 452,409
<CHARGE-OFFS> 76,350
<RECOVERIES> 18,368
<ALLOWANCE-CLOSE> 463,451
<ALLOWANCE-DOMESTIC> 251,893
<ALLOWANCE-FOREIGN> 29,910
<ALLOWANCE-UNALLOCATED> 181,648
</TABLE>
